e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-50633
CYTOKINETICS, INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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94-3291317
(I.R.S. Employer
Identification Number) |
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280 East Grand Avenue
South San Francisco, California
(Address of principal executive offices)
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94080
(Zip Code) |
Registrants telephone number, including area code: (650) 624-3000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated file o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
Number of shares of common stock, $0.001 par value, outstanding as of April 28, 2006:
36,438,825
CYTOKINETICS, INCORPORATED
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOKINETICS, INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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March 31, |
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December 31, |
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2006 |
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2005 (1) |
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Assets |
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|
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Current assets: |
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|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
73,111 |
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$ |
13,515 |
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Short-term investments |
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28,150 |
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62,697 |
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Related party accounts receivable |
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50 |
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|
|
576 |
|
Related party notes receivable short-term portion |
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|
151 |
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|
151 |
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Prepaid and other current assets |
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|
1,645 |
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|
1,925 |
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|
|
|
|
|
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Total current assets |
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103,107 |
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78,864 |
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Property and equipment, net |
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5,949 |
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|
6,178 |
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Related party notes receivable long-term portion |
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|
451 |
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|
|
451 |
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Restricted cash |
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4,546 |
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5,172 |
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Other assets |
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|
615 |
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|
796 |
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|
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Total assets |
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$ |
114,668 |
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$ |
91,461 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
1,617 |
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$ |
2,352 |
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Accrued liabilities |
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4,215 |
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|
4,137 |
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Related party payables and accrued liabilities |
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|
390 |
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|
649 |
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Short-term portion of equipment financing lines |
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2,763 |
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2,726 |
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Deferred revenue |
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700 |
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1,400 |
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Total current liabilities |
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9,685 |
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11,264 |
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Long-term portion of equipment financing lines |
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5,933 |
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6,636 |
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Total liabilities |
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15,618 |
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17,900 |
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Stockholders equity: |
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Convertible preferred stock, $0.001 par value: |
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Authorized: 10,000,000 shares; Issued and outstanding: none |
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Common stock, $0.001 par value: |
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Authorized: 120,000,000 shares; Issued and
outstanding: 35,595,682 shares in 2006 and 29,710,895 shares in 2005 |
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36 |
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30 |
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Additional paid-in capital |
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287,074 |
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249,521 |
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Deferred stock-based compensation |
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(2,073 |
) |
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(2,452 |
) |
Accumulated other comprehensive loss |
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(14 |
) |
Deficit accumulated during the development stage |
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(185,987 |
) |
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(173,524 |
) |
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Total stockholders equity |
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99,050 |
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73,561 |
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Total liabilities and stockholders equity |
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$ |
114,668 |
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$ |
91,461 |
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(1) |
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The condensed balance sheet at December 31, 2005 has been derived from the audited financial
statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete
financial statements. |
The accompanying notes are an integral part of these financial statements.
3
CYTOKINETICS, INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Period from |
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Three Months Ended |
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August 5, 1997 |
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(date of inception) |
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March 31, |
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March 31, |
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to March 31, |
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2006 |
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2005 |
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2006 |
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Revenues: |
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Research and development revenues from related party |
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$ |
718 |
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$ |
1,572 |
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$ |
37,960 |
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Research and development, grant and other revenues |
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2 |
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300 |
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2,953 |
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License revenues from related party |
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700 |
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700 |
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13,300 |
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Total revenues |
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1,420 |
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2,572 |
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54,213 |
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Operating expenses: |
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Research and development (1) |
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11,266 |
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10,537 |
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192,141 |
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General and administrative (1) |
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3,622 |
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3,143 |
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57,121 |
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Total operating expenses |
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14,888 |
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13,680 |
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249,262 |
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Operating loss |
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(13,468 |
) |
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(11,108 |
) |
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(195,049 |
) |
Interest and other income |
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1,128 |
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|
712 |
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|
12,834 |
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Interest and other expense |
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|
(124 |
) |
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|
(134 |
) |
|
|
(3,772 |
) |
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|
|
|
|
|
|
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|
Net loss |
|
$ |
(12,464 |
) |
|
$ |
(10,530 |
) |
|
$ |
(185,987 |
) |
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|
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|
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|
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Net loss per common share basic and diluted |
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$ |
(0.36 |
) |
|
$ |
(0.37 |
) |
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Weighted-average number of shares used in computing
net loss per common share basic and diluted |
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34,247 |
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28,382 |
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(1) Includes the following stock-based compensation charges: |
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Research and development |
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$ |
556 |
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|
$ |
229 |
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$ |
3,404 |
|
General and administrative |
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|
382 |
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|
173 |
|
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|
2,086 |
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|
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|
|
|
|
|
|
|
|
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|
$ |
938 |
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$ |
402 |
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$ |
5,490 |
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|
The accompanying notes are an integral part of these financial statements.
4
CYTOKINETICS, INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Period from |
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Three Months Ended |
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August 5, 1997 |
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(date of inception) |
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March 31, |
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March 31, |
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to March 31, |
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2006 |
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2005 |
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|
2006 |
|
Cash flows from operating activities: |
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|
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Net loss |
|
$ |
(12,464 |
) |
|
$ |
(10,530 |
) |
|
$ |
(185,987 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
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|
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|
|
|
|
|
|
Depreciation and amortization of property and equipment |
|
|
751 |
|
|
|
788 |
|
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|
15,984 |
|
Loss on disposal of property and equipment |
|
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|
|
|
|
|
|
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|
342 |
|
Gain on sale of investments |
|
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|
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|
(84 |
) |
Allowance for doubtful accounts |
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|
|
|
|
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|
191 |
|
Non-cash expense related to warrants issued for equipment financing
lines and facility lease |
|
|
|
|
|
|
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|
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|
41 |
|
Non-cash interest expense |
|
|
23 |
|
|
|
23 |
|
|
|
266 |
|
Non-cash expense for acceleration of options |
|
|
|
|
|
|
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|
20 |
|
Non-cash forgiveness of loan to officer |
|
|
|
|
|
|
|
|
|
|
146 |
|
Stock-based compensation |
|
|
938 |
|
|
|
402 |
|
|
|
5,490 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Related party accounts receivable |
|
|
526 |
|
|
|
(78 |
) |
|
|
(349 |
) |
Prepaid and other assets |
|
|
438 |
|
|
|
142 |
|
|
|
(2,050 |
) |
Accounts payable |
|
|
(332 |
) |
|
|
(513 |
) |
|
|
1,180 |
|
Accrued liabilities |
|
|
90 |
|
|
|
117 |
|
|
|
4,187 |
|
Related party payables and accrued liabilities |
|
|
(259 |
) |
|
|
249 |
|
|
|
390 |
|
Deferred revenue |
|
|
(700 |
) |
|
|
799 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(10,989 |
) |
|
|
(8,601 |
) |
|
|
(159,533 |
) |
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
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Purchases of investments |
|
|
(35,800 |
) |
|
|
(14,300 |
) |
|
|
(485,958 |
) |
Proceeds from sales and maturities of investments |
|
|
70,361 |
|
|
|
24,690 |
|
|
|
457,893 |
|
Purchases of property and equipment |
|
|
(925 |
) |
|
|
(473 |
) |
|
|
(21,884 |
) |
Proceeds from sale of property and equipment |
|
|
|
|
|
|
|
|
|
|
44 |
|
(Increase) decrease in restricted cash |
|
|
626 |
|
|
|
844 |
|
|
|
(4,546 |
) |
Issuance of related party notes receivable |
|
|
|
|
|
|
|
|
|
|
(1,146 |
) |
Proceeds from payments of related party notes receivable |
|
|
|
|
|
|
100 |
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
34,262 |
|
|
|
10,861 |
|
|
|
(55,090 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs |
|
|
|
|
|
|
|
|
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|
94,004 |
|
Proceeds from sale of common stock to related party |
|
|
|
|
|
|
|
|
|
|
7,000 |
|
Proceeds from registered direct offering, net of issuance costs |
|
|
31,993 |
|
|
|
|
|
|
|
31,993 |
|
Proceeds from draw down of Committed Equity Financing Facility |
|
|
4,944 |
|
|
|
|
|
|
|
10,491 |
|
Proceeds from other issuances of common stock |
|
|
52 |
|
|
|
98 |
|
|
|
2,919 |
|
Proceeds from issuance of preferred stock, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
133,172 |
|
Repurchase of common stock |
|
|
|
|
|
|
(22 |
) |
|
|
(66 |
) |
Proceeds from equipment financing lines |
|
|
|
|
|
|
|
|
|
|
17,607 |
|
Repayment of equipment financing lines |
|
|
(666 |
) |
|
|
(581 |
) |
|
|
(9,386 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
36,323 |
|
|
|
(505 |
) |
|
|
287,734 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
59,596 |
|
|
|
1,755 |
|
|
|
73,111 |
|
|
Cash and cash equivalents, beginning of period |
|
|
13,515 |
|
|
|
13,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
73,111 |
|
|
$ |
14,816 |
|
|
$ |
73,111 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
5
CYTOKINETICS, INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Overview
Cytokinetics, Incorporated (the Company, we or our) was incorporated under the laws of
the state of Delaware on August 5, 1997 to discover, develop and commercialize novel small molecule
drugs specifically targeting the cytoskeleton. The Company has been primarily engaged in conducting
research, developing drug candidates and product technologies, and raising capital.
The Company has funded its operations primarily through sales of common stock and convertible
preferred stock, contract payments under its collaboration agreements, debt financing arrangements,
government grants and interest income.
The Companys registration statement for its initial public offering was declared effective by
the Securities and Exchange Commission on April 29, 2004. The Companys common stock commenced
trading on the Nasdaq National Market on April 29, 2004 under the trading symbol CYTK.
Prior to achieving profitable operations, the Company intends to continue to fund operations
through the additional sale of equity securities, payments from strategic collaborations,
government grant awards, debt financing and interest income.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements include all adjustments
(consisting only of normal recurring adjustments) that management believes are necessary for fair
statement of the balances and results for the periods presented. These interim financial statement
results are not necessarily indicative of results to be expected for the full fiscal year or any
future interim period.
The balance sheet at December 31, 2005 has been derived from the audited financial statements
at that date. The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial statements have read or have access to the audited
financial statements for the preceding fiscal year. Accordingly, these financial statements should
be read in conjunction with the audited financial statements and notes thereto contained in the
Companys Form 10-K for the year ended December 31, 2005.
Comprehensive Loss
Comprehensive loss consists of net loss and other comprehensive gain (loss). Other
comprehensive gain (loss) includes certain changes in stockholders equity that are excluded from
net loss. Comprehensive loss and its components for the three months ended March 31, 2006 and 2005
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net loss |
|
$ |
(12,464 |
) |
|
$ |
(10,530 |
) |
Change in unrealized gain (loss) on investments |
|
|
14 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(12,450 |
) |
|
$ |
(10,523 |
) |
|
|
|
|
|
|
|
6
Restricted Cash
In accordance with the terms of the Companys line of credit agreements with General Electric
Capital Corporation (GE Capital), the Company is obligated to maintain a certificate of deposit
with the lender. The balance of the certificate of deposit was $4.5 million and $5.2 million at
March 31, 2006 and December 31, 2005, respectively, and was classified as restricted cash.
Stock-based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123R, Share-Based Payment, which establishes accounting for
share-based payment awards made to employees and directors including employee stock options and
employee stock purchases. Under the provisions of this statement, stock-based compensation cost is
measured at the grant date based on the calculated fair value of the award, and is recognized as an
expense on a straight-line basis over the employees requisite service period, generally the
vesting period of the award. The Company elected the modified prospective transition method for
awards granted subsequent to April 29, 2004, the date of its initial public offering (IPO), and
the prospective transition method for awards granted prior to its IPO. Prior periods are not
revised for comparative purposes under either transition method. The following table summarizes
stock-based compensation related to employee stock options and employee stock purchases under SFAS
No. 123R for the three months ended March 31, 2006, which was allocated as follows (in thousands):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
Research and development |
|
$ |
556 |
|
General and administrative |
|
|
382 |
|
|
|
|
|
Stock-based compensation included in operating expenses |
|
$ |
938 |
|
Stock-based compensation related to employee stock options and employee stock purchases |
|
|
938 |
|
The Company uses the Black-Scholes option pricing model to determine the fair value of stock
options and employee stock purchase plan shares. The key input assumptions used to estimate fair
value of these awards include the exercise price of the award, the expected option term, the
expected volatility of the Companys stock over the options expected term, the risk-free interest
rate over the options expected term and the Companys expected dividend yield, if any.
The fair value of stock options and employee stock purchase plan shares was estimated on grant
date using the Black-Scholes option pricing model based on the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase |
|
|
Employee Stock Options |
|
Plan |
|
|
Three Months Ended |
|
Three Months ended |
|
|
March 31, 2006 |
|
March 31, 2006 |
Risk-free interest rate |
|
|
4.66 |
% |
|
|
3.47 |
% |
Volatility |
|
|
74 |
% |
|
|
79 |
% |
Expected life (in years) |
|
|
6.25 |
|
|
|
1.25 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Company estimates the expected term of options granted by taking the average of the
vesting term and the contractual term of the options, as illustrated in Staff Accounting Bulletin
(SAB) No. 107, Share-Based Payment. The Company estimates the volatility of our common stock by
using an average of historical stock price volatility of comparable companies. The risk-free
interest rate that the Company uses in the option pricing model is based on the U.S. Treasury
zero-coupon issues with remaining terms similar to the expected terms on the options. The Company
does not anticipate paying dividends in the foreseeable future and therefore uses an expected
dividend yield of zero in the option pricing model. The Company is required to estimate forfeitures
at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. Historical data is used to estimate pre-vesting option forfeitures and
record stock-based compensation expense only on those awards that are expected to vest.
As a result of adopting SFAS No. 123R on January 1, 2006, the Companys net loss for the
quarter ended March 31, 2006 was $616,000 lower than if it had continued to account for stock-based
compensation under APB No. 25. Basic and diluted net loss per share for the quarter ended March 31,
2006 would have been $0.35 if the Company had not adopted SFAS No. 123R compared to reported basic
and diluted loss per share of $0.36. As of March 31, 2006, there was $8.5 million of total
unrecognized compensation cost related to non-vested stock-based compensation arrangements granted
under the Companys stock option plans, which is expected to be recognized over a weighted-average
period of 3.4 years.
7
The Company amortizes deferred stock-based compensation recorded prior to adoption of SFAS No.
123R for stock options granted prior to our IPO. Fair value of these awards has been calculated at
grant date using the intrinsic value method as prescribed in Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. At March 31, 2006, the balance of
deferred stock based compensation was $2.1 million. The remaining balance of deferred employee
stock-based compensation will be amortized in future years as follows, assuming no cancellations of
the related stock options: $900,000 in the remainder of 2006, $800,000 in 2007 and $400,000 in
2008.
Prior to January 1, 2006, the Company accounted for stock-based compensation to employees in
accordance with APB No. 25 and related interpretations. The Company also followed the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, and complied with the
disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure: an Amendment of FASB Statement No. 123. The following table illustrates the effects on
net loss and earnings per share for the three months ended March 31, 2005 as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee awards
except for those options granted prior to the Companys IPO in April 2004, which were valued for
proforma disclosure purposes using the minimum value method (in thousands, except per share data):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Net loss, as reported |
|
$ |
(10,530 |
) |
Deduct: Total stock-based employee compensation determined under fair value based method for
all awards |
|
|
(475 |
) |
|
|
|
|
Adjusted net loss |
|
$ |
(11,005 |
) |
|
|
|
|
Net loss per common share, basic and diluted: |
|
|
|
|
As reported |
|
$ |
(0.37 |
) |
|
|
|
|
Adjusted |
|
$ |
(0.39 |
) |
|
|
|
|
The value of each employee stock option granted is estimated on the date of grant under the
fair value method using the Black-Scholes option pricing model. Prior to our IPO on April 29, 2004,
the value of each employee stock option grant was estimated on the date of grant using the minimum
value method. Under the minimum value method, a volatility factor of 0% is assumed. The value of
employee stock options and employee stock purchase plan shares was estimated based the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase |
|
|
Employee Stock Options |
|
Plan |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
March 31, 2005 |
|
March 31, 2005 |
Risk-free interest rate |
|
|
4.21 |
% |
|
|
2.15 |
% |
Volatility |
|
|
80 |
% |
|
|
76 |
% |
Expected life (in years) |
|
|
5 |
|
|
|
1.25 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Note 2. Net Loss Per Share
Basic net loss per common share is computed by dividing net loss by the weighted-average
number of vested common shares outstanding during the period. Diluted net loss per common share is
computed by giving effect to all potentially dilutive common shares, including outstanding options,
common stock subject to repurchase and warrants. Following is a reconciliation of the numerator and
denominator used in the calculation of basic and diluted net loss per common share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator net loss |
|
$ |
(12,464 |
) |
|
$ |
(10,530 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
34,276 |
|
|
|
28,482 |
|
Less: Weighted-average shares subject to repurchase |
|
|
(29 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
Weighted-average shares used in computing basic and diluted net loss per common share |
|
|
34,247 |
|
|
|
28,382 |
|
|
|
|
|
|
|
|
8
The following outstanding instruments were excluded from the computation of diluted net loss
per common share for the periods presented, because their effect would have been antidilutive (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2006 |
|
|
2005 |
|
Options to purchase common stock |
|
|
4,302 |
|
|
|
3,016 |
|
Common stock subject to repurchase |
|
|
24 |
|
|
|
78 |
|
Shares issuable related to the ESPP |
|
|
103 |
|
|
|
109 |
|
Warrants to purchase common stock |
|
|
294 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Total shares |
|
|
4,723 |
|
|
|
3,273 |
|
|
|
|
|
|
|
|
Note 3. Supplemental Cash Flow Data
Supplemental cash flow data was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
Three Months Ended |
|
August 5, 1997 |
|
|
|
|
|
|
|
|
|
|
(date of inception) |
|
|
March 31, |
|
March 31, |
|
to March 31, |
|
|
2006 |
|
2005 |
|
2006 |
Significant non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,940 |
|
Purchases of property and equipment through accounts payable |
|
$ |
440 |
|
|
$ |
63 |
|
|
$ |
1,640 |
|
Purchases of property and equipment through trade in value
of disposed property and equipment |
|
$ |
|
|
|
$ |
|
|
|
$ |
127 |
|
Penalty on restructuring of equipment financing lines |
|
$ |
|
|
|
$ |
|
|
|
$ |
475 |
|
Conversion of convertible preferred stock to common stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
133,172 |
|
Note 4. Related Party Agreements
Research and Development
In September 2005, the Companys Collaboration and License Agreement with GlaxoSmithKline
(GSK) was amended to provide the Company an expanded role in the research and development of
SB-743921, a novel, small molecule inhibitor of kinesin spindle protein. SB-743921 is being
developed for the treatment of cancer. Under the amendment, the Company will lead and fund
development activities to explore the potential application of SB-743921 for the treatment of
non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma, subject to GSKs option to resume
responsibility for development and commercialization activities for SB-743921 for these indications
during a defined period. The amendment also provides for additional precommercialization payments
to the Company from GSK for the achievement of certain milestones for SB-743921 and increased
royalties for net sales of products containing SB-743921 under certain scenarios. The five-year
research term of the Collaboration and License Agreement expires on June 20, 2006, unless extended
by GSK. GSK has the right to terminate the Collaboration and License Agreement on six months notice
at any time after June 20, 2006. If GSK abandons development of any drug candidate prior to
regulatory approval, the Company would undertake and fund the clinical development of that drug
candidate or commercialization of any resulting drug, seek a new partner for such clinical
development or commercialization, or curtail or abandon such clinical development or
commercialization.
Other
In March 2006, the Company entered into the Second Amendment to Collaboration and Facilities
Agreement with Portola Pharmaceuticals, Inc. (Portola). Under the Collaboration and Facilities
Agreement, Portola provides research and related services and access to a portion of their
facilities to support such services. The First Amendment to Collaboration and Facilities Agreement
entered into in March 2005 also provided for the purchase and use of certain equipment by Portola
in connection with Portola providing research and related services to the Company, and the
Companys reimbursement to Portola of $285,000 for the equipment in eight quarterly payments from
January 2006 through October 2007. This second amendment extends the terms of the Collaboration
Agreement to December 31, 2006 and updates certain pricing and other terms and conditions. Charles
J. Homcy, M.D., is the President and CEO of Portola, a member of the Companys Board of Directors
and a consultant to the Company.
9
Note 5. Equipment Financing Lines
In January 2006, the existing $4.5 million equipment line of credit with GE Capital was
renewed and the expiration date extended to December 31, 2006. Borrowings under the line are
collateralized by associated property and equipment. The Company has made no additional borrowings
under the line subsequent to its renewal. As of March 31, 2006, additional borrowings of $2.3
million are available to the Company under the line. In connection with the line of credit, the
Company is obligated to maintain a certificate of deposit with the lender (see Note 1 Organization
and Summary of Significant Accounting Policies Restricted Cash).
In March 2006, the Company secured a second line of credit with GE Capital of up to $5.0
million to finance certain equipment until December 31, 2006. The line of credit is subject to the
Master Security Agreement (the MSA) between the Company and GE Capital, dated February 2001 and
as amended on March 24, 2005. Under the terms of the MSA, funds borrowed by the Company from GE
Capital are secured by property and equipment of the Company purchased by such borrowed funds and
other collateral as agreed to by the Company. As of March 31, 2006, there is no loan balance
outstanding under this line. In connection with the line of credit, the Company is obligated to
maintain a certificate of deposit with the lender (see Note 1, Organization and Summary of
Significant Accounting Policies Restricted Cash).
Note 6. Stockholders Equity (Deficit)
Common Stock
On January 18, 2006, the Company entered into a stock purchase agreement with certain
institutional investors relating to the issuance and sale of 5,000,000 shares of our common stock
at a price of $6.60 per share, for gross offering proceeds of $33.0 million. In connection with
this offering, the Company paid an advisory fee to a registered broker-dealer of $1.0 million.
After deducting the advisory fee and the offering costs, the Company received net proceeds of
approximately $32.0 million from the offering. The offering was made pursuant to the Companys
shelf registration statement on Form S-3 (SEC File No. 333-125786) filed on June 14, 2005.
In January 2006, we received proceeds of $4.9 million from the draw down and sale of 833,537 shares
of common stock pursuant to the Companys committed equity financing facility with Kingsbridge
Capital Ltd.
Stock Option Plans
2004 Plan
In January 2004, the Board of Directors adopted the 2004 Equity Incentive Plan (the 2004
Plan) which was approved by the stockholders in February 2004. The 2004 Plan provides for the
granting of incentive stock options, nonstatutory stock options, restricted stock purchase rights
and stock bonuses to employees, directors and consultants. Under the 2004 Plan, options may be
granted at prices not lower than 85% and 100% of the fair market value of the common stock on the
date of grant for nonstatutory stock options and incentive stock options, respectively. Options
granted to new employees generally vest 25% after one year and monthly thereafter over a period of
four years. On an annual basis, the number of authorized shares automatically increases by a number
of shares equal to the lesser of (i) 1,500,000 shares, (ii) 3.5% of the outstanding shares on such
date, or (iii) an amount determined by the Board of Directors. Options granted to existing
employees generally vest monthly over a period of four years. As of March 31, 2006, 3,799,161
shares of common stock were authorized for issuance under the 2004 Plan.
1997 Plan
In 1997, the Company adopted the 1997 Stock Option/Stock Issuance Plan (the 1997 Plan). The
Plan provides for the granting of stock options to employees and consultants of the Company.
Options granted under the Plan may be either incentive stock options or nonstatutory stock options.
Incentive stock options may be granted only to Company employees (including officers and directors
who are also employees). Nonstatutory stock options may be granted to Company employees and
consultants. Options under the Plan may be granted for periods of up to ten years and at prices no
less than 85% of the estimated fair value of the shares on the date of grant as determined by the
Board of Directors, provided, however, that (i) the exercise price of an incentive stock option and
nonstatutory shall not be less than 100% and 85% of the estimated fair value of the shares on the
date of grant, respectively, and (ii) with respect to any 10% shareholder, the exercise price of an
incentive stock option or nonstatutory stock option shall not be less than 110% of the estimated
fair market value of the shares on the date of grant and the term of the grant shall not exceed
five years. Options may be exercisable immediately and are subject to repurchase options held by
the Company which lapse over a maximum period of ten years at such times and under such conditions
as determined by the Board of Directors. To date, options granted generally vest over four or five
years (generally 25% after one year and monthly thereafter). As of March 31, 2006, the Company had
reserved 1,819,130 shares of common stock for issuance related to options outstanding under the
1997 Plan and there were no shares available for future grants under the 1997 Plan.
10
Activity under the two stock option plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
Weighted |
|
|
|
Available for |
|
|
Options |
|
|
Average Exercise |
|
|
|
Grant |
|
|
Outstanding |
|
|
Price per Share |
|
Balance at December 31, 2004 |
|
|
1,165,114 |
|
|
|
2,644,779 |
|
|
$ |
3.10 |
|
Increase in authorized shares |
|
|
995,861 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(996,115 |
) |
|
|
996,115 |
|
|
|
7.23 |
|
Options exercised |
|
|
|
|
|
|
(196,703 |
) |
|
|
1.48 |
|
Options forfeited |
|
|
182,567 |
|
|
|
(161,958 |
) |
|
|
5.89 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
1,347,427 |
|
|
|
3,282,233 |
|
|
|
4.31 |
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(1,079,486 |
) |
|
|
1,079,486 |
|
|
|
7.09 |
|
Increase in authorized shares |
|
|
1,039,881 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(51,250 |
) |
|
|
1.00 |
|
Options forfeited |
|
|
8,894 |
|
|
|
(8,894 |
) |
|
|
6.12 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
|
1,316,716 |
|
|
|
4,301,575 |
|
|
|
5.05 |
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and currently exercisable by exercise price at March 31, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Vested and Exercisable |
|
|
|
|
|
|
Weighted |
|
Weighted Average |
|
|
|
|
|
Weighted |
|
|
Number of |
|
Average |
|
Remaining Contractual |
|
Number of |
|
Average |
Range of Exercise Price |
|
Options |
|
Exercise Price |
|
Life (Years) |
|
Options |
|
Exercise Price |
$0.20
|
|
|
46,090 |
|
|
$ |
0.20 |
|
|
|
3.32 |
|
|
|
46,090 |
|
|
$ |
0.20 |
|
$0.58
|
|
|
438,187 |
|
|
$ |
0.58 |
|
|
|
4.45 |
|
|
|
438,187 |
|
|
$ |
0.58 |
|
$ 1.00
|
|
|
31,844 |
|
|
$ |
1.00 |
|
|
|
4.86 |
|
|
|
31,844 |
|
|
$ |
1.00 |
|
$1.20
|
|
|
921,488 |
|
|
$ |
1.20 |
|
|
|
6.53 |
|
|
|
726,543 |
|
|
$ |
1.20 |
|
$ 2.00 $6.50
|
|
|
578,721 |
|
|
$ |
5.23 |
|
|
|
8.00 |
|
|
|
295,035 |
|
|
$ |
5.28 |
|
$ 6.59 $7.03
|
|
|
342,900 |
|
|
$ |
6.65 |
|
|
|
9.20 |
|
|
|
64,560 |
|
|
$ |
6.61 |
|
$ 7.04
|
|
|
551,486 |
|
|
$ |
7.04 |
|
|
|
9.96 |
|
|
|
|
|
|
$ |
0.00 |
|
$ 7.10
|
|
|
379,959 |
|
|
$ |
7.10 |
|
|
|
8.98 |
|
|
|
94,481 |
|
|
$ |
7.10 |
|
$ 7.15
|
|
|
513,400 |
|
|
$ |
7.15 |
|
|
|
9.92 |
|
|
|
|
|
|
$ |
0.00 |
|
$ 7.17 $15.95
|
|
|
497,500 |
|
|
$ |
9.53 |
|
|
|
8.76 |
|
|
|
141,184 |
|
|
$ |
9.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,301,575 |
|
|
$ |
5.05 |
|
|
|
8.00 |
|
|
|
1,837,924 |
|
|
$ |
2.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the quarter ended March
31, 2006 was $4.92 per share. The total intrinsic value of options exercised during the period was
$319,000. The aggregate intrinsic value of options outstanding and options exercisable as of March
31, 2006 was $10.8 million and $8.5 million, respectively. The intrinsic value is calculated as the
difference between the market value as of March 31, 2006 and the exercise price of shares. The
market value as of March 31, 2006 was $7.29 as reported by Nasdaq.
Employee Stock Purchase Plan
In January 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan (the
ESPP) which was approved by the stockholders in February 2004. Under the ESPP, statutory
employees may purchase common stock of the Company up to a specified maximum amount through payroll
deductions. The stock is purchased semi-annually at a price equal to 85% of the fair market value
at certain plan-defined dates. At March 31, 2006 the Company had 251,081 shares of common stock
reserved for issuance under the ESPP. No shares were issued under the ESPP in the first quarter of
2006.
Note. 7 Subsequent Event
In April 2006, the Company received proceeds of $5.6 million from the draw down and sale of 821,244
shares of common stock pursuant to our committed equity financing facility with Kingsbridge Capital
Ltd.
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis should be read in conjunction with our financial statements and
accompanying notes included elsewhere in this report. Operating results are not necessarily
indicative of results that may occur in future periods.
This document contains forward-looking statements that are based upon current expectations
within the meaning of the Private Securities Reform Act of 1995. It is our intent that such
statements be protected by the safe harbor created thereby. Forward-looking statements involve
risks and uncertainties and our actual results and the timing of events may differ significantly
from the results discussed in the forward-looking statements. Examples of such forward-looking
statements include, but are not limited to, statements about or relating to:
|
|
|
the initiation, progress, timing, scope and anticipated date of completion of
preclinical research, clinical trials and development for our drug candidates and
potential drug candidates by ourselves, our strategic partners or the National Cancer
Institute, or NCI, including potential clinical trials to be conducted by us for our drug
candidate SB-743921 under our strategic alliance with GlaxoSmithKline, or GSK, and by us
for our drug candidate CK-1827452, the expected dates of initiation of various clinical
trials for our drug candidates and potential drug candidates, the anticipated dates of
data becoming available or being announced from various clinical trials and the numbers
of patients to be enrolled in these clinical trials; |
|
|
|
|
the exercise of our options to co-fund the development of one or both of ispinesib
(formerly designated SB-715992), a drug candidate, and GSK-923295, a potential drug
candidate; |
|
|
|
|
the extent to which we co-fund SB-743921 for cancer indications outside of
non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma; |
|
|
|
|
our plans or ability to develop drug candidates, such as CK-1827452, or
commercialize drugs with or without a partner, including our intention to build clinical
development and sales and marketing capabilities; |
|
|
|
|
the potential benefits of our drug candidates and potential drug candidates; |
|
|
|
|
the utility of the clinical trials programs for our drug candidates, including, but
not limited to, for the treatment of cancer and heart failure; |
|
|
|
|
issuance of shares of our common stock under our committed equity financing
facility, or CEFF, with Kingsbridge Capital Limited, or Kingsbridge; |
|
|
|
|
increasing losses, costs, expenses and expenditures; |
|
|
|
|
the sufficiency of existing resources to fund our operations for at least the next 12 months; |
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the scope and size of research and development efforts and programs; |
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our ability to protect our intellectual property and avoid infringing the intellectual property rights of others; |
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potential competitors and potential competitive products; |
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anticipated operating losses, capital requirements and our needs for additional financing; |
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future payments under lease obligations and equipment financing lines; |
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expected future sources of revenue and capital; |
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our plans to obtain limited product liability insurance; |
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our plans for strategic alliances; |
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receipt of milestone payments and other funds from our strategic partners under strategic alliances; |
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increasing the number of our employees and recruiting
additional key personnel; and |
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expected future amortization of employee stock-based
compensation. |
Such forward-looking statements involve risks and uncertainties, including, but not limited
to, those risks and uncertainties relating to:
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difficulties or delays in development, testing, obtaining regulatory approval for,
and undertaking production and marketing of our drug candidates, including decisions by
GSK or the NCI to postpone or discontinue development efforts for one or more compounds
or indications; |
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difficulties or delays in patient enrollment for our clinical trials; |
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unexpected adverse side effects or inadequate therapeutic efficacy of our drug
candidates that could slow or prevent product approval (including the risk that current
and past results of clinical trials or preclinical studies are not indicative of future
results of clinical trials); |
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the receipt of funds by us under our strategic alliances; |
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activities and decisions of, and market conditions affecting, current and future strategic partners; |
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our ability to obtain additional financing if necessary; |
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our ability to maintain the effectiveness of current public information under our
registration statement permitting resale of securities to be issued to Kingsbridge by us
under, and in connection with, the CEFF; |
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changing standards of care and the introduction of products by competitors or
alternative therapies for the treatment of indications we target; |
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the uncertainty of protection for our intellectual property or trade secrets, through patents or otherwise; and |
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potential infringement of the intellectual property rights or trade secrets of third parties. |
In addition such statements are subject to the risks and uncertainties discussed in the Risk
Factors section and elsewhere in this document.
When used in this Quarterly Report, unless otherwise indicated, Cytokinetics, the Company,
we, our and us refers to Cytokinetics, Incorporated.
CYTOKINETICS, our logo used alone and with the mark CYTOKINETICS, and CYTOMETRIX are
registered service marks and trademarks of Cytokinetics. PUMA is a trademark of Cytokinetics. Other
service marks, trademarks and trade names referred to in this Quarterly Report on Form 10-Q are the
property of their respective owners.
Overview
Cytokinetics, Incorporated is a biopharmaceutical company, incorporated in Delaware in 1997,
focused on the treatment of cancer and cardiovascular disease. We currently have three novel small
molecule drug candidates in clinical development and two novel small molecule potential drug
candidates currently in preclinical development, including an alternative formulation of one of our
current drug candidates. We anticipate one of these potential drug candidates will proceed to
clinical development in 2006, and the other in 2007. These drug candidates and potential drug
candidates are currently being evaluated or are expected to be evaluated during 2006 in
approximately 20 human clinical trials. Our clinical pipeline consists of two drug candidates and a
potential drug candidate for the treatment of cancer, a drug candidate for the treatment of heart
failure in an intravenous formulation and a potential drug candidate for the treatment of heart
failure via oral administration. Our most advanced cancer drug candidate, ispinesib, is the subject
of a broad Phase II clinical trials program being conducted by our partner GSK and the NCI that is
designed to evaluate its effectiveness in multiple tumor types. Currently, GSK is conducting two
Phase II clinical trials evaluating the effectiveness of ispinesib in breast cancer and ovarian
cancer. In March 2006, we announced that results from a planned interim analysis of the platinum
sensitive arm of a Phase II clinical trial of ispinesib in non-small cell lung cancer did not
satisfy the criteria for advancement to Stage 2 in that arm of the trial. GSK is collaborating with
the NCI to conduct five Phase II clinical trials in five other cancer indications, and is expected
to initiate a sixth Phase II clinical trial this year. SB-743921, our second drug candidate for the
treatment
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of cancer, is the subject of an on-going Phase I clinical trial being conducted by GSK. We
initiated a Phase I/II clinical trial of SB-743921 in non-Hodgkins lymphoma in April of 2006.
GSK-923295, our third potential drug candidate for the treatment of cancer, is currently in
preclinical development under our strategic alliance with GSK. We expect that GSK will initiate
Phase I clinical trials for GSK-923295 in the first half of 2007. Our drug candidate for the
treatment of heart failure in an intravenous formulation, CK-1827452, entered a Phase I clinical
trial in 2005. We plan to initiate a Phase II clinical trials program for this drug candidate in
the second half of 2006. CK-1827452 is also currently in preclinical development as a potential
drug candidate for the treatment of heart failure via oral administration. We plan to initiate an
oral bioavailability Phase I clinical trial for CK-1827452 in the second half of 2006.
Since our inception in August 1997, we have incurred significant net losses. As of March 31,
2006, we had an accumulated deficit of $186.0 million. We expect to incur substantial and
increasing losses for the next several years if:
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we conduct later-stage development and commercialization of ispinesib or GSK-923295
under our strategic alliance with GSK; |
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we advance SB-743921 through clinical development for the treatment of
non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma under our strategic
alliance with GSK or independently; |
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we elect to provide a higher rate of co-funding for the development of SB-743921
for indications outside of Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma; |
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we exercise our option to co-fund the development of one or both of ispinesib and
GSK-923295 under our strategic alliance with GSK; |
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we exercise our option to co-promote any of the products for which we have opted to
co-fund development under our strategic alliance with GSK; |
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we advance our novel cardiac myosin activator, CK-1827452, through clinical
development for the treatment of heart failure; |
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we advance other potential drug candidates into clinical trials; |
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we expand our research programs and further develop our proprietary drug discovery technologies; and |
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we elect to fund development or commercialization of any drug candidate. |
Oncology
In the first quarter of 2006, in connection with our strategic alliance with GSK, we continued
to make progress in advancing our oncology development program for both ispinesib and SB-743921,
which are both directed to the mitotic kinesin target kinesin spindle protein, or KSP. In addition,
we reported data from a planned interim analysis of a Phase II clinical trial of ispinesib
administered as monotherapy in the treatment of patients with platinum-sensitive non-small cell
lung cancer.
The oncology clinical trials program for ispinesib is a broad program that is planned to
consist of nine Phase II clinical trials and five Phase I or Ib clinical trials evaluating the use
of ispinesib in a variety of both solid and hematologic cancers. We believe that the breadth of
this clinical trials program reflects the potential of, and the complexity of developing, a drug
candidate such as ispinesib. We expect this approach should help us to identify those tumor types
that are the most promising for the continued development of ispinesib. Currently, ispinesib is
being studied in seven Phase II clinical trials evaluating the safety and efficacy of ispinesib in
the treatment of cancer. In addition, ispinesib is currently being studied in four Phase I or Phase
Ib clinical trials evaluating the safety, tolerability and pharmacokinetics of ispinesib alone or
in combination with other anti-cancer therapeutics.
Phase II clinical trials of ispinesib, sponsored by GSK through our strategic alliance, or by
the NCI are as follows:
Non-Small Cell Lung Cancer: GSK completed patient treatment in the platinum-sensitive arm
of a two-arm, international, Phase II, open-label, monotherapy clinical trial, designed
originally to enroll up to 35 patients in each arm. This clinical trial was designed to evaluate
the safety and efficacy of ispinesib administered at 18mg/m2 every 21 days in the
second-line treatment of patients with either platinum-sensitive or platinum-refractory
non-small cell lung cancer. In March 2006, we reported data from a planned interim analysis of
the platinum-sensitive treatment arm of this clinical trial. In the platinum-sensitive treatment
arm, ispinesib did not satisfy the criteria for advancement to Stage 2 in that treatment arm.
This clinical trial was designed to require a
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minimum of one confirmed partial or complete response out of 20 evaluable patients in a
treatment arm in order to proceed to Stage 2 in that treatment arm. The trials primary endpoint
is response rate as determined using the Response Evaluation Criteria in Solid Tumor, or RECIST,
criteria. The best overall response in the platinum-sensitive treatment arm of this clinical
trial was disease stabilization observed in 10 of 20 of evaluable patients, or 50%. In the
overall patient population, the median time to disease progression was 6 weeks, but in the 10
patients whose best response was stable disease, median time to progression was 17 weeks. The
platinum-refractory treatment arm of this clinical trial was completed in 2005. We reported data
from a planned interim analysis of the platinum-refractory treatment arm of this clinical trial
in September 2005. In the platinum-refractory treatment arm of this clinical trial, the
pre-defined efficacy criteria required to move forward to Stage 2 were also not met. The best
overall response observed in the platinum-refractory treatment arm, as determined using the
RECIST criteria, was disease stabilization observed in 5 of 20 of evaluable patients, or 25%.
The median time to disease progression for these patients was 12 weeks as compared to 6 weeks in
the overall treatment population. The safety and pharmacokinetics of ispinesib in both the
platinum-sensitive and platinum-refractory treatment arms of this clinical trial appear
comparable to that observed from its Phase I clinical trial experience at equivalent doses.
Breast Cancer: GSK continues to conduct an international, Phase II, open-label, monotherapy
clinical trial, designed to enroll up to 55 patients, evaluating the safety and efficacy of
ispinesib at 18mg/m2 every 21 days in the second- or third-line treatment of patients
with locally advanced or metastatic breast cancer whose disease has recurred or progressed
despite treatment with anthracyclines and taxanes. The clinical trials primary endpoint is
response rate as determined using the RECIST criteria. We reported data from a planned interim
analysis for this clinical trial in September 2005. Based on the data analysis to date, the best
overall responses, as determined using the RECIST criteria, were 3 confirmed partial responses
observed among the first 33 evaluable patients. The adverse events were manageable, predictable
and consistent with the Phase I clinical trial experience of ispinesib. The most common adverse
event was Grade 4 neutropenia. This clinical trial employs a Green-Dahlberg design, which
requires the satisfaction of pre-defined efficacy criteria in Stage 1 to allow advancement to
the Stage 2 of patient enrollment and treatment. In this clinical trial, ispinesib demonstrated
sufficient anti-tumor activity to satisfy the pre-defined efficacy criteria required to move
forward to the second stage. GSK is now proceeding to full enrollment of 55 evaluable patients
in this clinical trial. Based on the current rate of patient enrollment, we anticipate
additional data from this clinical trial in the second half of 2006.
Ovarian Cancer: GSK continues to conduct a Phase II, open-label, monotherapy clinical trial
evaluating the efficacy of ispinesib at 18mg/m2 dosed every 21 days in the
second-line treatment of patients with advanced ovarian cancer previously treated with a
platinum and taxane-based regimen. The primary endpoint of this clinical trial is response rate
as determined by the RECIST criteria and blood serum levels of the tumor mass marker CA-125.
Based on the current rate of patient enrollment, we anticipate interim data during the second or
third quarter of 2006.
Colorectal Cancer: The NCI has concluded enrollment of Stage 1 of a Phase II clinical trial
evaluating ispinesib in the second-line treatment of patients with colorectal cancer. This
open-label, monotherapy clinical trial contains two arms that evaluate different dosing
schedules of ispinesib, either infused at 7 mg/m2 on days 1, 8 and 15 of a 28-day
schedule or at 18mg/m2 every 21 days. The primary endpoint is objective response as
determined using the RECIST criteria. Data from this clinical trial will be presented at the
American Society of Clinical Oncology, or ASCO, Annual Meeting in June 2006.
Hepatocellular Cancer: The NCI has concluded enrollment of Stage 1 of a Phase II clinical
trial evaluating ispinesib in the first-line treatment of patients with hepatocellular cancer.
This open-label, monotherapy clinical trial will evaluate ispinesib infused at
18mg/m2 every 21 days. The primary endpoint is objective response as determined using
the RECIST criteria. Interim data from this clinical trial are anticipated to be available in
the second half of 2006.
Melanoma: The NCI has concluded enrollment of Stage 1 of a Phase II clinical trial
evaluating ispinesib in the first-line treatment of patients with melanoma who may have received
adjuvant immunotherapy but no chemotherapy. This open-label monotherapy clinical trial will
evaluate ispinesib infused at 18mg/m2 every 21 days. The primary endpoint is
objective response as determined using the RECIST criteria. Interim data from this clinical
trial are anticipated to be available in the second half of 2006.
Head and Neck Cancer: The NCI continues to conduct a Phase II clinical trial evaluating
ispinesib in the first- or second-line treatment of patients with head and neck cancer. This
open-label monotherapy clinical trial will evaluate ispinesib infused at 18mg/m2
every 21 days. The primary endpoint is objective response as determined using the RECIST
criteria. Data from this clinical trial is anticipated to be presented at a future medical
meeting in 2006.
Prostate Cancer: The NCI has concluded enrollment of Stage 1 of a Phase II clinical trial
evaluating ispinesib in the second-line treatment of patients with hormone-refractory prostate
cancer. This open-label monotherapy clinical trial will evaluate
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ispinesib infused at 18mg/m2 every 21 days. The primary endpoint is objective
response as determined by blood serum levels of the tumor mass marker Prostate Specific Antigen.
Interim data from this clinical trial are anticipated to be available in the second half of
2006.
In addition to these Phase II clinical trials, GSK also continues to conduct two Phase Ib
clinical trials evaluating ispinesib in combination therapy. These clinical trials are both
dose-escalating studies evaluating the safety, tolerability and pharmacokinetics of ispinesib, one
in combination with carboplatin and the second in combination with capecitabine. Data from GSKs
Phase Ib clinical trial evaluating ispinesib in combination with carboplatin is expected to be
presented at the ASCO conference in June 2006. Additional data are anticipated from GSKs Phase Ib
clinical trial evaluating ispinesib in combination with capecitabine in the second half of 2006.
In 2005, we and GSK presented data from two Phase Ib combination clinical trials of ispinesib at
the 2005 AACR-NCI-EORTC International Meeting. These data suggest ispinesib has an acceptable
tolerability profile and no pharmacokinetic interactions in patients with advanced solid tumors
when used in combination with capecitabine or docetaxel. One presentation contained data from an
ongoing clinical trial that demonstrated that the combination of ispinesib and capecitabine appears
to have an acceptable tolerability profile on the clinical trials treatment schedule, suggesting
that these two agents have non-overlapping toxicities and therefore may be successfully combined in
the treatment of certain types of cancers. The second presentation contained data from a clinical
trial that demonstrated that the combination of ispinesib with docetaxel has an acceptable
tolerability profile on a once every 21 day schedule. The regimen-limiting toxicity in this second
clinical trial was prolonged Grade 4 neutropenia, which was consistent with the Phase I clinical
trial experience with ispinesib and clinical experience with docetaxel.
The NCI also continues patient enrollment in two Phase I clinical trials designed to evaluate
the safety, tolerability and pharmacokinetics of ispinesib on an alternative dosing schedule. One
clinical trial is enrolling patients with advanced solid tumors who have failed to respond to all
standard therapies, and the second clinical trial is enrolling patients with acute leukemia,
chronic myelogenous leukemia, or advanced myelodysplastic syndromes. Data from the Phase I clinical
trial evaluating an alternative dosing schedule in patients with advanced solid tumors is expected
to be presented at the ASCO Meeting in June 2006.
In addition, the NCI is planning on initiating the following open-label, monotherapy, Phase II
clinical trial of ispinesib:
Renal Cell Cancer: The NCI is planning on initiating a Phase II clinical trial evaluating
ispinesib in the treatment of patients with renal cell cancer in the second half of 2006.
We expect that it will take several years before we can commercialize ispinesib, if at all.
Accordingly, we cannot reasonably estimate when and to what extent ispinesib will generate revenues
or material net cash flows, which may vary widely depending on numerous factors, including, but not
limited to, the safety and efficacy profile of the drug, market acceptance, then-prevailing
reimbursement policies, competition and other market conditions. GSK currently funds the research
and development costs associated with ispinesib pursuant to our strategic alliance. We expect to
determine whether and to what extent we will exercise our co-funding option during the conduct of
our clinical trials for this drug candidate, taking into consideration clinical trial results and
our business, finances and prospects at that time. If we exercise our option to co-fund certain
later stage development activities associated with ispinesib, our expenditures relating to research
and development of this drug candidate will increase significantly.
GSK continued to enroll patients in a dose-escalating Phase I clinical trial evaluating the
safety, tolerability and pharmacokinetics of SB-743921 in advanced cancer patients. Data from this
clinical trial is expected to be presented at the ASCO Meeting in June 2006. In April 2006, we
initiated a Phase I/II clinical trial of SB-743921 in patients with non-Hodgkins lymphoma , or
NHL, in connection with an expanded development program for SB-743921 under the amendment to our
Collaboration and License Agreement with GSK. This Phase I/II clinical trial is an open-label,
non-randomized clinical trial designed to investigate the safety, tolerability, pharmacokinetic and
pharmacodynamic profile of SB-743921 administered as a one-hour infusion on days 1 and 15 of a
28-day schedule, first without, then with the administration of granulocyte colony stimulating
factor, and then to assess the potential efficacy of the maximum tolerated dose, or MTD, of
SB-743921 in patients with NHL. The clinical trials program for SB-743921 may proceed for several
years, and we will not be in a position to generate any revenues or material net cash flows from
this drug candidate until the program is successfully completed, regulatory approval is achieved
and a drug is commercialized. SB-743921 is at too early a stage of development for us to predict
when or if this may occur.
GSK currently funds the research and development costs associated with SB-743921 outside of
the indications of non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma. The 2005
amendment to the Collaboration and License Agreement provides for us to fund the development of
SB-743921 in these hematologic cancer indications. As a result of this amendment and the co-funding
of certain later-stage development activities associated with SB-743921, our expenditures relating
to research and development of this drug candidate will increase significantly.
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In December 2005, GSK selected a novel small molecule development candidate, GSK-923295,
directed against a second mitotic kinesin, centromere-associated protein E, or CENP-E, under our
strategic alliance. We anticipate that GSK will file a regulatory filing for GSK-923295 in late
2006 and begin clinical trials in the first half of 2007.
Cardiovascular
We have focused our cardiovascular research and development activities on heart failure, a
disease most often characterized by compromised contractile function of the heart that impacts its
ability to effectively pump blood throughout the body. We have discovered and optimized small
molecules that improve cardiac contractility by specifically binding to and activating cardiac
myosin, a cytoskeletal protein essential for cardiac muscle contraction.
In 2005, we selected a drug candidate, CK-1827452, a novel cardiac myosin activator for the
treatment of heart failure, for further development in our cardiovascular program and initiated a
Phase I clinical trial. In the first quarter of 2006, we continued to dose-escalate CK-1827452
through several cohorts in the Phase I clinical trial designed to determine the MTD and plasma
concentration of this drug candidate. The clinical trial is a double-blind, randomized,
placebo-controlled, dose-escalation clinical trial being conducted to investigate the safety,
tolerability, pharmacokinetic and pharmacodynamic profile of CK-1827452 in normal healthy
volunteers. Top-line data from this Phase I clinical trial are anticipated to be disclosed in the
second quarter of 2006 with additional data to be disclosed at an appropriate medical meeting later
in 2006. Assuming the successful completion of this Phase I clinical trial, we intend to initiate
Phase II clinical trials for this drug candidate in patients with heart failure in the second half
of 2006.
In 2005, we also selected CK-1827452 as a potential drug candidate for the treatment of
patients with chronic heart failure via oral administration. Initiation of our Phase I oral
bioavailability clinical trial is expected in the second half of 2006.
As with our drug candidates in our other programs, the compounds in our cardiovascular
program, including our new drug candidate, are at too early a stage of development for us to
predict if and when we will be in a position to generate any revenues or material net cash flows
from any of them. We currently fund all research and development costs associated with this
program. We recorded research and development expenses for activities relating to our
cardiovascular program of approximately $4.6 million for the three months ended March 31, 2006 and
$4.2 million for the three months ended March 31, 2005. We anticipate that our expenditures
relating to research and development of compounds in our cardiovascular program will increase
significantly as we advance CK-1827452 through clinical development.
Development Risks
The successful development of all of our drug candidates is highly uncertain. We cannot
estimate with certainty or know the exact nature, timing and estimated costs of the efforts
necessary to complete the development of any of our drug candidates or the date of completion of
these development efforts. We cannot estimate with certainty any of the foregoing due to the
numerous risks and uncertainties associated with developing our drug candidates, including, but not
limited to:
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the uncertainty of the timing of the initiation and completion of patient
enrollment in our clinical trials; |
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the possibility of delays in the collection of clinical trial data and the
uncertainty of the timing of the analyses and subsequent release of our clinical trial
data after such trials have been initiated and completed; |
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the uncertainty of clinical trial results; |
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the uncertainty of obtaining U.S. Food and Drug Administration, or FDA, or other
foreign regulatory agency approval required for new therapies; |
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the possibility of delays in characterization, synthesis or optimization of
potential drug candidates in our cardiovascular program; and |
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the uncertainty related to the development of commercial scale manufacturing
processes and qualification of a commercial scale manufacturing facility. |
If we fail to complete the development of any of our drug candidates in a timely manner, it
could have a material adverse effect on our operations, financial position and liquidity. In
addition, any failure by us or our partners to obtain, or any delay in obtaining, regulatory
approvals for our drug candidates could have a material adverse effect on our results of
operations. A further discussion of
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the risks and uncertainties associated with completing our programs on schedule, or at all,
and certain consequences of failing to do so are discussed further in the risk factors entitled We
have never generated, and may never generate, revenues from commercial sales of our drugs and we
may not have drugs to market for at least several years, if ever, Clinical trials may fail to
demonstrate the desired safety and efficacy of our drug candidates, which could prevent or
significantly delay completion of clinical development and regulatory approval and Clinical
trials are expensive, time consuming and subject to delay, as well as other risk factors.
Funding
To date, we have funded our operations primarily through the sale of equity securities, non-equity
payments from GSK and AstraZeneca, equipment financings, interest on investments and government
grants. We have received net proceeds from the sale of equity securities of $255.6 million from
August 5, 1997, the date of our inception, through March 31, 2006, excluding sales of equity to
GSK. Included in these proceeds are $94.0 million received upon closing of the initial public
offering of our common stock in May 2004 and proceeds from our registered direct offering in
January 2006 of $32.0 million. In 2001, under our strategic alliance with GSK, GSK made a $14.0
million upfront cash payment as well as an initial $14.0 million equity investment. In April 2004,
GSK purchased 538,461 shares of our common stock at $13.00 per share immediately prior to the
closing of our initial public offering for a total price of $7.0 million. GSK also made a $3.0
million equity investment in us in 2003. GSK has also committed to reimburse certain of our full
time equivalents, or FTEs, through the end of the minimum five-year research term of the strategic
alliance, and to make additional payments upon the achievement of certain precommercialization
milestones. Cumulatively as of March 31, 2006, we received $31.0 million in FTE and other expense
reimbursements and $7.0 million in milestone payments from GSK. The research term of our
Collaboration and License Agreement with AstraZeneca expired in December 2005. AstraZeneca retains
the right to purchase a license to certain proprietary technology developed as part of the
collaboration for a fee of up to $2.0 million as may be agreed by both parties. Cumulatively as of
March 31, 2006, we received $17.6 million under equipment financing arrangements. Interest income
earned on investments, excluding amortization and accretion on investments, was $720,000 and $1.1
million in the first quarter of 2006 and 2005, respectively.
The five-year research term of our strategic alliance with GSK ends on June 20, 2006 unless
extended by GSK. GSK has agreed to fund worldwide development and commercialization of drug
candidates that arise from our strategic alliance and for which GSK elects to continue in
development, other than the funding for development and commercialization of SB-743921 for
non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma. We will earn royalties from sales
of any resulting drugs. We retain product-by-product options to co-fund certain later-stage
development activities, thereby potentially increasing our royalties and affording co-promotion
rights in North America. If we exercise our co-promotion option, then we are entitled to receive
reimbursement from GSK for certain sales force costs we incur in support of our commercial
activities. GSK has the right to terminate the Collaboration and License Agreement on six months
notice at any time after June 20, 2006. If GSK abandons one or more of ispinesib, SB-743921 and
GSK-923295, it would delay or prevent us from commercializing such current or potential drug
candidates, and would delay or prevent our ability to generate revenues. In such event, or if GSK
abandons development of any drug candidate prior to regulatory approval, we would have to undertake
and fund the clinical development of our drug candidates or commercialization of our drugs, seek a
new partner for clinical development or commercialization, or curtail or abandon the clinical
development or commercialization programs.
In October 2005, we entered into a CEFF with Kingsbridge, pursuant to which Kingsbridge
committed to finance up to $75.0 million of capital during the next three years. Subject to certain
conditions and limitations, from time to time under the CEFF, at our election, Kingsbridge will
purchase newly-issued shares of our common stock at a price that is between 90% and 94% of the
volume weighted average price on each trading day during an eight day, forward-looking pricing
period. The maximum number of shares we may issue in any pricing period is the lesser of 2.5% of
our market capitalization immediately prior to the commencement of the pricing period or $15.0
million. The minimum acceptable volume weighted average price for determining the purchase price at
which our stock may be sold in any pricing period is determined by the greater of $3.50 or 85% of
the closing price for our common stock on the day prior to the commencement of the pricing period.
As part of the arrangement, we issued a warrant to Kingsbridge to purchase 244,000 shares of our
common stock at a price of $9.13 per share, which represents a premium over the closing price of
our common stock on the date we entered into the CEFF. This warrant is exercisable beginning six
months after the date of grant and for a period of five years thereafter. The CEFF also required us
to file a resale registration statement with respect to the resale of shares issued pursuant to the
CEFF and underlying the warrant within 60 days of entering into the CEFF, and to use commercially
reasonable efforts to have such registration statement declared effective by the Securities and
Exchange Commission within 180 days of our entry into the CEFF. Our Registration Statement on Form
S-3 filed in connection with the CEFF was declared effective on December 2, 2005 (SEC File No.
333-129786). Under the terms of the CEFF, the maximum number of shares we may sell is 5,703,488
(exclusive of the shares underlying the warrant) which, under the rules of the National Association
of Securities Dealers, Inc., is approximately the maximum number of shares we may sell to
Kingsbridge without approval of our stockholders. This limitation may further limit the amount of
proceeds we are able to obtain from the CEFF. We are not obligated to sell any of the $75.0 million
of common stock available under the CEFF and there are no minimum commitments or minimum use
penalties. The CEFF does not contain any
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restrictions on our operating activities, any automatic pricing resets or any minimum market
volume restrictions. In January 2006, we received proceeds of $4.9 million from the draw down and
sale of 833,537 shares of common stock to Kingsbridge. In April 2006, we received proceeds of $5.6
million from the draw down and sale of 821,244 shares of common stock to Kingsbridge.
In January 2006, we sold 5,000,000 shares of our common stock pursuant to a take down from our
shelf Registration Statement on Form S-3 (SEC File No. 333-125786) to certain institutional
investors at a price of $6.60 per share, for gross offering proceeds of $33.0 million and net
offering proceeds of approximately $32.0 million.
Revenues
Our current revenue sources are limited, and we do not expect to generate any direct revenue
from product sales for several years. We currently recognize revenues from our strategic alliance
with GSK for contract research activities, which we record as related
expenses are incurred.
Charges to GSK are based on negotiated rates that are intended to approximate the costs for
our FTEs performing research under the strategic alliance and our out-of-pocket expenses. GSK has
paid us an upfront licensing fee, which we recognize ratably over the five-year research term of
the strategic alliance. We may receive additional payments from GSK upon achieving certain
precommercialization milestones. Milestone payments are non-refundable and are recognized as
revenue when earned, as evidenced by achievement of the specified milestones and the absence of
ongoing performance obligations. We record amounts received in advance of performance as deferred
revenue. The revenues recognized to date are not refundable, even if the relevant research effort
is not successful. Because a substantial portion of our revenues for the foreseeable future will
depend on achieving research, development and other precommercialization milestones under our
strategic alliance with GSK, our results of operations may vary substantially from year to year. In
the event we exercise our co-promotion option, we are entitled to receive reimbursement from GSK
for certain sales force costs we incur in support of our commercial activities.
We expect that our future revenues ultimately will be derived from royalties on sales from
drugs licensed to GSK under our strategic alliance and from those licensed to future partners, as
well as from direct sales of our drugs. We retain a product-by-product option to co-fund certain
later-stage development activities under our strategic alliance with GSK, thereby potentially
increasing our royalties and affording co-promotion rights in North America.
Research and Development
We incur research and development expenses associated with both partnered and unpartnered
research activities, as well as the development and expansion of our drug discovery technologies.
Research and development expenses relating to our strategic alliance with GSK consist primarily of
costs related to research and screening, lead optimization and other activities relating to the
identification of compounds for development as mitotic kinesin inhibitors for the treatment of
cancer. Certain of these costs are reimbursed by GSK on an FTE basis. At this time, GSK funds the
majority of the costs related to preclinical and clinical development of ispinesib. Under our 2005
amendment to the Collaboration and License Agreement with GSK, we have committed to fund certain
development activities for SB-743921 for non-Hodgkins lymphoma, Hodgkins lymphoma and multiple
myeloma. We have the option to co-fund certain later-stage development activities for ispinesib and
GSK-923295. This commitment and the potential exercise of any of our co-funding options will result
in a significant increase research and development expenses. Research and development expenses
related to any development and commercialization activities we elect to fund would consist
primarily of employee compensation, supplies and materials, costs for consultants and contract
research, facilities costs and depreciation of equipment. We expect to incur research and
development expenses to conduct preclinical studies and clinical trials for CK-1827452 and other
of our cardiac myosin activator compounds for the treatment of heart failure and in connection with
our early research programs in other diseases, as well as the continued refinement of our
PUMAtm system and development of our Cytometrix® technologies and our other
existing and future drug discovery technologies. From our inception through March 31, 2006, we
incurred costs of approximately $50.2 million for research and development activities relating to
the discovery of mitotic kinesin inhibitors, $68.1 million for our cardiac contractility program,
$41.3 million for our proprietary technologies and $32.5 million for all other programs.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for employees in
executive and administrative functions, including but not limited to finance, business and
commercial development and strategic planning. Other significant costs include facilities costs and
professional fees for accounting and legal services, including legal services associated with
obtaining and maintaining patents. Now in our third year as a public company, we anticipate
continued increases in general and administrative
19
expenses associated with operating as a publicly traded company, such as increased costs for
insurance, investor relations and compliance with section 404 of the Sarbanes-Oxley Act of 2002.
Stock Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment, which required the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee stock options and
employee stock purchases based on estimated fair values. The following table summarizes stock-based
compensation related to employee stock options and employee stock purchases under SFAS No. 123R for
the three months ended March 31, 2006, which was allocated as follows (in thousands):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
Research and development |
|
$ |
556 |
|
General and administrative |
|
|
382 |
|
|
|
|
|
Stock-based compensation included in operating expenses |
|
$ |
938 |
|
Stock-based compensation related to employee stock options and employee stock purchases |
|
|
938 |
|
As of March 31, 2006, there was $8.5 million of total unrecognized compensation cost related
to non-vested stock-based compensation arrangements granted under the Companys stock option plans.
That cost is expected to be recognized over a weighted-average period of 3.4 years. In addition, we
continue to amortize deferred stock-based compensation recorded prior to adoption of SFAS No. 123R
for stock options granted prior to the initial public offering. At March 31, 2006, the balance of
deferred stock based compensation was $2.1 million. We expect the remaining balance of deferred
employee stock-based compensation of $2.1 million as of March 31, 2006 to be amortized in future
years as follows, assuming no cancellations of the related stock options: $900,000 in the remainder
of 2006, $800,000 in 2007 and $400,000 in 2008.
Interest and Other Income and Expense
Interest and other income and expense consist primarily of interest income and interest
expense. Interest income is generated primarily from investment of our cash, cash equivalents and
investments. Interest expense generally relates to the borrowings under our equipment financing
lines.
Results of Operations
Revenues
We recorded total revenues of $1.4 million in the first quarter of 2006 compared with $2.6
million in the first quarter of 2005. The decrease in revenues for the three months ended March 31,
2006, compared to the same period in 2005, was primarily due to reductions in collaboration revenue
from GSK of approximately $900,000 and a reduction in collaboration revenue from AstraZeneca of
approximately $300,000.
Research and development revenues from a related party refers to revenues from our strategic
partner, GSK, which is also a stockholder of the Company. Research and development revenues from
GSK were approximately $700,000 and $1.6 million in the first quarter of 2006 and 2005,
respectively. The decrease in the first quarter of 2006, compared with 2005, was primarily due to a
$500,000 decrease in full time equivalents, or FTE, reimbursements and a $400,000 decrease in
patent expense reimbursements by GSK. The FTE reimbursement level is determined annually by GSK and
us, in accordance with the annual research plan and contractually predefined minimum FTE support
levels.
License revenues from related party represents license revenue from our strategic alliance
with GSK. License revenue was $700,000 for each of the three month periods ending March 31, 2006
and 2005. The license revenue is being amortized on a straight line basis over the research term of
our Collaboration and License Agreement with GSK. As of March 31, 2006, our remaining balance of
deferred revenue is $700,000, which we expect to fully amortize in the second quarter of 2006.
20
Research and Development Expenses
Research and development expenses increased to $11.3 million in the first quarter of 2006 from
$10.5 million in the first quarter of 2005. The overall increase in research and development
expenses in the first quarter of 2006, compared to the first quarter of 2005, was primarily due to
increased clinical consulting and outsourced services, increased facilities expense related to the
new laboratory and office space subleased in late 2005 and other overhead costs. In the first
quarter of 2006, higher stock-based compensation expense related to the adoption of SFAS No. 123R
was offset by lower salaries expense. For the three months ended March 31, 2006, total stock-based
compensation expense was approximately $600,000.
From a program perspective, the increase in spending in the first quarter of 2006, compared to
the first quarter in 2005, was primarily due to higher expenditures related to the advancement of
our cardiovascular program of approximately $400,000 and early research programs of $1.1 million,
slightly offset by decreased spending on proprietary technologies of $600,000.
Research and development expenses incurred in the first three months of 2006 and 2005 related
to the following programs (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Mitotic kinesin inhibitors |
|
$ |
1.9 |
|
|
$ |
2.0 |
|
Cardiac contractility |
|
|
4.6 |
|
|
|
4.2 |
|
Proprietary technologies |
|
|
1.2 |
|
|
|
1.8 |
|
All other research programs |
|
|
3.6 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
11.3 |
|
|
$ |
10.5 |
|
|
|
|
|
|
|
|
Clinical timelines, likelihood of success and total completion costs vary significantly for
each drug candidate and are difficult to estimate. We anticipate that we will make determinations
as to which research programs to pursue and how much funding to direct to each program on an
ongoing basis in response to the scientific and clinical success of each drug candidate. The
lengthy process of seeking regulatory approvals and subsequent compliance with applicable
regulations requires the expenditure of substantial resources. Any failure by us to obtain, or any
delay in obtaining, regulatory approvals could cause our research and development expenditures to
increase and, in turn, could have a material adverse effect on our results of operations.
We expect research and development expenditures to continue to increase in 2006 and beyond as
we advance research and development for our drug candidate CK-1827452 and continue our clinical
trial of SB-743921 under our strategic alliance with GSK. In addition, research and development
expenditures will increase significantly if we exercise our option to co-fund certain later-stage
research and development activities relating to ispinesib or GSK-923295.
General and Administrative Expenses
General and administrative expenses increased to $3.6 million in the first quarter of 2006
from $3.1 million in the first quarter of 2005. The increase in the first quarter of 2006 over the
comparable period of the prior year was primarily due to increased personnel expenses of
approximately $500,000, including higher stock-based compensation charges related to the adoption
of SFAS No. 123R and higher salaries and benefits. For the three months ended March 31, 2006, total
stock-based compensation expense was approximately $400,000.
We expect that general and administrative expenses will continue to increase during the
remainder of 2006 and beyond due to increasing payroll related expenses in support of our initial
precommercialization efforts, business development costs, our expanding operational infrastructure,
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, expenses
resulting from our adoption of SFAS No. 123R and other costs associated with being a public
company.
Interest and Other Income and Expense
Interest and other income was $1.1 million and $700,000 for the three months ended March 31,
2006 and 2005, respectively. The increase in the first quarter of 2006 over the comparable period
in 2005 was attributable to higher interest yields resulting from higher market interest rates
earned on our invested cash.
Interest and other expense was approximately $100,000 in each of the three months ended March
31, 2006 and 2005. Interest and other expense in each of these periods primarily consisted of
interest expense on our equipment financing line of credit.
21
Critical Accounting Policies
The accounting policies that we consider to be our most critical (those that are most
important to the portrayal of our financial condition and results of operations and that require
our most difficult, subjective or complex judgments), the effects of those accounting policies
applied and the judgments made in their application are summarized in Item 7Managements
Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting
Policies and Estimates in our Annual Report on Form 10-K for the fiscal year ended December 31,
2005. As a result of our adoption of SFAS No. 123R during the first quarter of 2006, we also
consider our accounting policy relating to stock-based compensation, which is set forth in Note 1
to the Unaudited Condensed Financial Statements and summarized below, to be critical.
Stock-Based Compensation
Effective January 1, 2006 we adopted SFAS No. 123R using the modified prospective transition
method for awards granted subsequent to our initial public offering, or IPO, and the prospective
transition method for awards granted prior to our IPO. Prior periods are not revised for
comparative purposes under either transition method. Under the fair value recognition provisions of
this statement, stock-based compensation cost is measured at the grant date based on the fair value
of the award.
We currently use the Black-Scholes option pricing model to determine the fair value of stock
options and employee stock purchase plan shares. The determination of the fair value of stock-based
payment awards on the date of grant using an option-pricing model is affected by our stock price as
well as assumptions regarding a number of complex and subjective variables. The variables include
our expected stock price volatility over the term of the awards, actual and projected employee
stock option exercise behaviors, risk-free interest rate and expected dividends, if any.
We estimate the expected term of options granted by taking the average of the vesting term and
the contractual term of the options, as illustrated in Staff Accounting Bulletin No. 107,
Share-Based Payment. We estimate the volatility of our common stock by using an average of
historical stock price volatility of comparable companies. We base the risk-free interest rate that
we use in the option pricing model on the U.S. Treasury zero-coupon issues with remaining terms
similar to the expected terms on the options. We do not anticipate paying dividends in the
foreseeable future and therefore use an expected dividend yield of zero in the option pricing
model. We are required to estimate forfeitures at the time of grant and revise those estimates in
subsequent periods is actual forfeitures differ from those estimates. We use historical data to
estimated pre-vesting options forfeitures and record stock-based compensation expense only on those
awards that are expected to vest. All share-based payment awards are amortized on a straight-line
basis over the requisite service periods of the awards, which are generally the vesting periods. If
factors change and we employ different assumptions for estimating stock-based compensation expense
in future periods or if we decide to use a different valuation model, the future periods may differ
significantly from what we have recorded in the current period.
We continue to amortize deferred stock-based compensation recorded prior to adoption of SFAS
No. 123R for stock options granted prior to our IPO. Fair value of these awards has been calculated
at grant date using the intrinsic value method as prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
Liquidity and Capital Resources
From August 5, 1997, our date of inception, through March 31, 2006, we funded our operations
through the sale of equity securities, equipment financings, non-equity payments from
collaborators, government grants and interest income.
Our cash, cash equivalents and investments, excluding restricted cash, totaled $101.3 million
at March 31, 2006 compared with $76.2 million at December 31, 2005. The increase primarily
represents proceeds from the issuance of common stock related to our registered direct offering in
January 2006 and to a lesser extent the draw down under our CEFF with Kingsbridge, partly offset by
the use of proceeds from investment maturities to fund operations.
Net cash used in operating activities in the first three months of 2006 was $11.0 million and
was primarily due to a net loss of $12.5 million. This compares with net cash used in operating
activities of $8.6 million, and a net loss of $10.5 million, in the first three months of 2005.
Net cash provided by investing activities was $34.3 million in the first three months of 2006
and represented primarily the proceeds from the sales and maturities of investments, net of
purchase of investments. Restricted cash totaled $4.5 million at March 31, 2006 and $5.2 million at
December 31, 2005. The balance decreased because our equipment financing lender required a lower
security deposit in 2006.
22
Net cash provided by financing activities of $36.3 million in the first three months of 2006
represented proceeds from the issuance and sale of common stock, net of repayment of our equipment
financing line. In January 2006, we sold 5,000,000 shares of our common stock to certain
institutional investors at a price of $6.60 per share, for gross offering proceeds of $33.0 million
and net offering proceeds of approximately $32.0 million. In the first quarter of 2006, we received
proceeds of $4.9 million from the draw down and sale of 833,537 shares of common stock to
Kingsbridge.
In January 2006, the existing $4.5 million equipment line of credit with General Electric
Capital Corporation, or GE Capital, was renewed and the expiration date extended to December 31,
2006. We have made no additional borrowings under the line subsequent to its renewal. As of March
31, 2006, additional borrowings of $2.3 million are available to us under the line. In March 2006,
we secured a second line of credit with GE Capital of up to $5.0 million to finance certain
equipment until December 31, 2006. As of March 31, 2006, there is no loan balance outstanding under
this line. Both equipment lines are subject to the Master Security Agreement, or MSA, between us
and GE Capital, dated February 2001 as amended on March 24, 2005. Under the terms of the MSA, funds
borrowed by us from GE Capital are collateralized by our property and equipment purchased by such
borrowed funds and other collateral as agreed to by us. In connection with each line of credit, we
are obligated to maintain a certificate of deposit with the lender.
As of March 31, 2006, future minimum payments under lease obligations and equipment financing
lines were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
Two to |
|
|
Four to |
|
|
After |
|
|
|
|
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
Operating leases |
|
$ |
2,539 |
|
|
$ |
5,673 |
|
|
$ |
5,698 |
|
|
$ |
4,947 |
|
|
$ |
18,857 |
|
Equipment financing line |
|
|
2,763 |
|
|
|
5,169 |
|
|
|
764 |
|
|
|
|
|
|
|
8,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,302 |
|
|
$ |
10,842 |
|
|
$ |
6,462 |
|
|
$ |
4,947 |
|
|
$ |
27,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our long-term commitments under operating leases relate to payments under our two facility
leases in South San Francisco, California, which expire in 2011 and 2013.
Under the provisions of our amended agreement with Portola Pharmaceuticals, Inc., or Portola,
we are obligated to reimburse Portola for certain equipment costs incurred by Portola in connection
with research and related services that Portola provides to us. We began to incur these costs when
the equipment became available for use in the second quarter of 2005. Our payments to Portola for
such equipment costs, totaling $285,000, are scheduled to be made in eight quarterly installments
commencing in the first quarter of 2006 and continuing through the fourth quarter of 2007.
We expect to incur substantial costs as we continue to expand our research programs and
related research and development activities. Under the terms of our strategic alliance with GSK, we
have options to co-fund certain later-stage development activities for ispinesib. We have committed
to fund certain later-stage development activities for SB-743921 for non-Hodgkins lymphoma,
Hodgkins lymphoma and multiple myeloma. In addition, we have committed to co-fund certain
later-stage development activities for SB-743921 for cancer indications outside of these
hematologic indications. This commitment and the potential exercise of any of our co-funding
options will result in a significant increase in research and development expenses. We expect to
determine whether and to what extent we will exercise our co-funding options based on clinical
results and our business, finances and prospects at the time we receive the Phase II clinical trial
results for each drug candidate under our strategic alliance with GSK. Research and development
expenses for our unpartnered drug discovery programs consist primarily of employee compensation,
supplies and materials, costs for consultants and contract research and development, facilities
costs and depreciation of equipment. We expect to incur significant research and development
expenses as we advance the research and development of our cardiac myosin activators for the
treatment of heart failure, continue clinical trials of CK-1827452 and SB-743921 in 2006, pursue
our other early stage research programs in multiple therapeutic areas, refine our
PUMAtm system and develop Cytometrix® technologies and other proprietary drug
discovery technologies.
Our future capital uses and requirements depend on numerous forward-looking factors. These
factors include, but are not limited to, the following:
|
|
|
the initiation, progress, timing, scope and completion of preclinical research,
development and clinical trials for our drug candidates and potential drug candidates; |
|
|
|
|
the time and costs involved in obtaining regulatory approvals; |
|
|
|
|
delays that may be caused by requirements of regulatory agencies; |
23
|
|
|
GSKs decisions with regard to continued funding of development of our drug candidates; |
|
|
|
|
our level of funding for other current or future drug candidates, including CK-1827452 for the treatment of heart failure; |
|
|
|
|
our level of funding for SB-743921 for the treatment of non-Hodgkins lymphoma, Hodgkins
lymphoma and multiple myeloma; |
|
|
|
|
our options to co-fund the development of ispinesib and GSK-923295; |
|
|
|
|
our level of co-funding for the development of SB-743921 for cancer indications other
than Hodgkins lymphoma, non-Hodgkins lymphoma and multiple myeloma; |
|
|
|
|
the number of drug candidates we pursue; |
|
|
|
|
the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; |
|
|
|
|
our ability to establish, enforce and maintain selected strategic alliances and
activities required for commercialization of our potential drugs; |
|
|
|
|
our plans or ability to establish sales, marketing or manufacturing capabilities and to
achieve market acceptance for potential drugs; |
|
|
|
|
expanding and advancing our research programs; |
|
|
|
|
hiring of additional employees and consultants; |
|
|
|
|
expanding our facilities; |
|
|
|
|
the acquisition of technologies, products and other business opportunities that require financial commitments; and |
|
|
|
|
our revenues, if any, from successful development of our drug candidates and commercialization of potential drugs. |
We believe that our existing cash and cash equivalents, proceeds from our January 2006
offering of common stock, future payments from GSK, interest earned on investments, proceeds from
equipment financings and the potential proceeds from the CEFF will be sufficient to meet our
projected operating requirements for at least the next 12 months. If, at any time, our prospects
for internally financing our research and development programs decline, we may decide to reduce
research and development expenses by delaying, discontinuing or reducing our funding of development
of one or more of our drug candidates or potential drug candidates. Alternatively, we might raise
funds through public or private financings, strategic relationships or other arrangements. We
cannot assure you that the funding, if needed, will be available on attractive terms, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if
available, may involve restrictive covenants. Similarly, financing obtained through future
co-development arrangements may require us to forego certain commercial rights to future drug
candidates. Our failure to raise capital as and when needed could have a negative impact on our
financial condition and our ability to pursue our business strategy.
Off-balance Sheet Arrangements
As of March 31, 2006, we did 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 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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk has not changed materially subsequent to our disclosures in Item
7A, Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K
for the year ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management evaluated, with the participation and under the supervision of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, subject to
the limitations described below, that our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to management as appropriate to allow timely decisions regarding
required disclosures.
(b) Changes in internal control over financial reporting
There was no change in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
(c) Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the controls are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected. Accordingly, our disclosure
controls and procedures are designed to provide reasonable, not absolute, assurance that the
objectives of our disclosure control system are met.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Our future operating results may vary substantially from anticipated results due to a number
of factors, many of which are beyond our control. The following discussion highlights some of these
factors and the possible impact of these factors on future results of operations. You should
carefully consider these factors before making an investment decision. If any of the following
factors actually occur, our business, financial condition or results of operations could be harmed.
In that case, the price of our common stock could decline, and you could experience losses on your
investment.
Risks Related To Our Business
Our drug candidates are in the early stages of clinical testing and we have a history of
significant losses and may not achieve or sustain profitability and, as a result, you may lose all
or part of your investment.
Our drug candidates are in the early stages of clinical testing and we must conduct
significant additional clinical trials before we can seek the regulatory approvals necessary to
begin commercial sales of our drugs. We have incurred operating losses in each year since our
inception in 1997 due to costs incurred in connection with our research and development activities
and general and administrative costs associated with our operations. We expect to incur increasing
losses for at least several years, as we continue our research activities and conduct development
of, and seek regulatory approvals for, our drug candidates, and commercialize any approved drugs.
If our drug candidates fail in clinical trials or do not gain regulatory approval, or if our drugs
do not achieve market acceptance, we will not be profitable. If we fail to become and remain
profitable, or if we are unable to fund our continuing losses, you could lose all or part of your
investment.
We have never generated, and may never generate, revenues from commercial sales of our drugs and we
may not have drugs to market for at least several years, if ever.
We currently have no drugs for sale and we cannot guarantee that we will ever have marketable
drugs. We must demonstrate that our drug candidates satisfy rigorous standards of safety and
efficacy to the U.S. Food and Drug Administration, or FDA, and other regulatory authorities in the
United States and abroad. We and our partners will need to conduct significant additional research
and preclinical and clinical testing before we or our partners can file applications with the FDA
or other regulatory authorities for approval of our drug candidates. In addition, to compete
effectively, our drugs must be easy to use, cost-effective and economical to manufacture on a
commercial scale, compared to other therapies available for the treatment of the same conditions.
We may not achieve any of these objectives. Ispinesib, our most advanced drug candidate for the
treatment of cancer, SB-743921, our second drug candidate for the treatment of cancer, and
CK-1827452 in an intravenous form, our drug candidate for the treatment of heart failure, are
currently our only drug candidates in clinical trials and we cannot be certain that the clinical
development of these or any other drug candidate in preclinical testing or clinical development
will be successful, that they will receive the regulatory approvals required to commercialize them,
or that any of our other research programs will yield a drug candidate suitable for entry into
clinical trials. Our commercial revenues, if any, will be derived from sales of drugs that we do
not expect to be commercially available for several years, if at all. The development of any one or
all of these drug candidates may be discontinued at any stage of our clinical trials programs and
we may not generate revenue from any of these drug candidates.
We currently finance and plan to continue to finance our operations through the sale of equity,
incurring debt, and potentially entering into additional strategic alliances, which may result in
additional dilution to our stockholders, restriction of our business activities or relinquishment
of valuable technology rights, or may cease to be available on attractive terms or at all.
We have funded all of our operations and capital expenditures with proceeds from both private
and public sales of our equity securities, strategic alliances with GSK, AstraZeneca and others,
equipment financings, interest on investments and government grants. We believe that our existing
cash and cash equivalents, future payments from GSK and potentially AstraZeneca, interest earned on
investments, proceeds from equipment financings and potential proceeds from our CEFF with
Kingsbridge will be sufficient to meet our projected operating requirements for at least the next
12 months. To meet our future cash requirements, we may raise funds through public or private
equity offerings, debt financings or strategic alliances. To the extent that we raise additional
funds by issuing equity securities, our stockholders may experience additional dilution. To the
extent that we raise additional funds through debt financing, if available, such financing may
involve covenants that restrict our business activities. To the extent that we raise
26
additional funds through strategic alliance and licensing arrangements, we will likely have to
relinquish valuable rights to our technologies, research programs or drug candidates, or grant
licenses on terms that may not be favorable to us. In addition, we cannot assure you that any such
funding, if needed, will be available on attractive terms, or at all.
Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates,
which could prevent or significantly delay completion of clinical development and regulatory
approval.
Prior to receiving approval to commercialize any of our drug candidates, we must demonstrate
with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA
and other regulatory authorities in the United States and abroad, that such drug candidate is both
sufficiently safe and effective. Before we can commence clinical trials, we must demonstrate
through preclinical studies a satisfactory manufacturing process for the drug in stable formulation
and a suitable safety profile in order to file an investigational new drug application, or IND, or
a foreign equivalent. In clinical trials we will need to demonstrate efficacy for the treatment of
specific indications and monitor safety throughout the clinical development process. Long-term
safety and efficacy have not yet been demonstrated in clinical trials for any of our drug
candidates, and satisfactory chemistry, formulation, stability and toxicity levels have not yet
been demonstrated for any of our potential drug candidates or compounds that are currently the
subject of preclinical studies. If our preclinical studies, current clinical trials or future
clinical trials are unsuccessful, our business and reputation will be harmed and our stock price
will be negatively affected.
All of our drug candidates are prone to the risks of failure inherent in drug development.
Preclinical studies may not yield results that would satisfactorily support the filing of an IND
(or a foreign equivalent) with respect to our potential drug candidates, and, even if these
applications would be or have been filed with respect to our drug candidates, the results of
preclinical studies do not necessarily predict the results of clinical trials. Similarly,
early-stage clinical trials do not predict the results of later-stage clinical trials, including
the safety and efficacy profiles of any particular drug candidate. In addition, there can be no
assurance that the design of our clinical trials is focused on appropriate tumor types, patient
populations, dosing regimens or other variables which will result in obtaining the desired efficacy
data to support regulatory approval to commercialize the drug. Even if we believe the data
collected from clinical trials of our drug candidates are promising, such data may not be
sufficient to support approval by the FDA or any other U.S. or foreign regulatory authority.
Preclinical and clinical data can be interpreted in different ways. Accordingly, FDA officials or
officials from foreign regulatory authorities could interpret the data in different ways than we or
our partners do, which could delay, limit or prevent regulatory approval.
Administering any of our drug candidates or potential drug candidates that are the subject of
preclinical studies to animals may produce undesirable side effects, also known as adverse effects.
Toxicities and adverse effects that we have observed in preclinical studies for some compounds in a
particular research and development program may occur in preclinical studies or clinical trials of
other compounds from the same program. Such toxicities or adverse effects could delay or prevent
the filing of an IND (or a foreign equivalent) with respect to such drug candidates or potential
drug candidates or cause us to cease clinical trials with respect to any drug candidate. In
clinical trials of ispinesib, the dose-limiting toxicity was neutropenia, a decrease in the number
of a certain type of white blood cell that results in an increase in susceptibility to infection.
In a Phase I clinical trial of SB-743921, the dose-limiting toxicities observed to date were:
prolonged neutropenia, with or without fever and with or without infection; elevated transaminases
and hyperbilirubinemia, both of which are abnormalities of liver function; and hyponatremia, which
is a low concentration of sodium in the blood. In clinical trials, administering any of our drug
candidates to humans may produce adverse effects. These adverse effects could interrupt, delay or
halt clinical trials of our drug candidates and could result in the FDA or other regulatory
authorities denying approval of our drug candidates for any or all targeted indications. The FDA,
other regulatory authorities, our partners or we may suspend or terminate clinical trials at any
time. Even if one or more of our drug candidates were approved for sale, the occurrence of even a
limited number of toxicities or adverse effects when used in large populations may cause the FDA to
impose restrictions on, or stop, the further marketing of such drugs. Indications of potential
adverse effects or toxicities which may occur in clinical trials and which we believe are not
significant during the course of such clinical trials may later turn out to actually constitute
serious adverse effects or toxicities when a drug has been used in large populations or for
extended periods of time. Any failure or significant delay in completing preclinical studies or
clinical trials for our drug candidates, or in receiving and maintaining regulatory approval for
the sale of any drugs resulting from our drug candidates, may severely harm our reputation and
business.
Clinical trials are expensive, time consuming and subject to delay.
Clinical trials are very expensive and difficult to design and implement, especially in the
cancer and heart failure indications that we are pursuing, in part because they are subject to
rigorous requirements. The clinical trial process is also time consuming. According to industry
studies, the entire drug development and testing process takes on average 12 to 15 years, and the
fully capitalized resource cost of new drug development averages approximately $800 million.
However, individual clinical trials and individual drug candidates may incur a range of costs or
time demands above or below this average. We estimate that clinical trials of our most advanced
drug
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candidates will continue for several years, but they may take significantly longer to
complete. The commencement and completion of our clinical trials could be delayed or prevented by
many factors, including, but not limited to:
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delays in obtaining regulatory approvals to commence a clinical trial; |
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delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites; |
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slower than expected rates of patient recruitment and enrollment, including as a
result of the introduction of alternative therapies or drugs by others; |
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lack of effectiveness during clinical trials; |
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unforeseen safety issues; |
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inadequate supply of clinical trial material; |
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uncertain dosing issues; |
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introduction of new therapies or changes in standards of practice or regulatory
guidance that render our clinical trial endpoints or the targeting of our proposed
indications obsolete; |
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inability to monitor patients adequately during or after treatment; and |
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inability or unwillingness of medical investigators to follow our clinical protocols. |
We do not know whether planned clinical trials will begin on time, or whether planned or
currently ongoing clinical trials will need to be restructured or will be completed on schedule, if
at all. Significant delays in clinical trials will impede our ability to commercialize our drug
candidates and generate revenue and could significantly increase our development costs.
We depend on GSK for the conduct, completion and funding of the clinical development and
commercialization of our current drug candidates for the treatment of cancer.
Under our strategic alliance with GSK, as amended, GSK is currently responsible for the
clinical development and regulatory approval of our drug candidate ispinesib and our potential drug
candidate GSK-923295 for all cancer indications, and for our drug candidate SB-743921 for all
cancer indications except non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma. Other
than our right to file INDs (or the foreign equivalent) for SB-743921 for these three hematologic
cancer indications, GSK is responsible for filing applications with the FDA or other regulatory
authorities for approval of these drug candidates and our potential drug candidate and will be the
owner of any marketing approvals issued by the FDA or other regulatory authorities. If the FDA or
other regulatory authorities approve these drug candidates, GSK will also be responsible for the
marketing and sale of these drugs including, at their option, SB-743921 for non-Hodgkins lymphoma,
Hodgkins lymphoma and multiple myeloma. Because GSK is responsible for these functions, we cannot
control whether GSK will devote sufficient attention and resources to the clinical trials program
or will proceed in an expeditious manner. GSK generally has discretion to elect whether to pursue
the development of our drug candidates or to abandon the clinical trial programs, and, after June
20, 2006, GSK may terminate our strategic alliance for any reason upon six months prior notice.
These decisions are outside our control.
Two of our cancer drug candidates being developed by GSK act through inhibition of KSP, a
member of a class of cytoskeletal proteins that regulate cell division called mitotic kinesins.
Because these drug candidates have similar mechanisms of action, GSK may elect to proceed with the
development of only one such drug candidate. If GSK were to elect to proceed with the development
of SB-743921 in lieu of ispinesib, because SB-743921 is at an earlier stage of clinical development
than ispinesib, the approval, if any, of a new drug application, or NDA, with respect to a drug
candidate from our cancer program would be delayed. In particular, if the initial clinical results
of some of our early clinical trials do not meet GSKs expectations, GSK may elect to terminate
further development of one or both drug candidates or certain of the ongoing clinical trials for
drug candidates, even though the actual number of patients that have been treated is relatively
small. Furthermore, GSK may elect to terminate one or more clinical trials for ispinesib at any
time for some or all indications, including indications which GSK previously determined to advance
to the next stage of patient enrollment, such as the ongoing breast cancer clinical trial, even
though such clinical trial may not yet have been completed and regardless of clinical activity that
may have been demonstrated.
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If GSK abandons one or more of ispinesib, SB-743921 and GSK-923295, it would result in a delay
in or prevent us from commercializing such current or potential drug candidates, and would delay or
prevent our ability to generate revenues. Disputes may arise between us and GSK, which may delay or
cause termination of any clinical trials program, result in significant litigation or arbitration,
or cause GSK to act in a manner that is not in our best interest. If development of our current and
potential drug candidates does not progress for these or any other reasons, we would not receive
further milestone payments from GSK. GSK has the right to reduce its funding of our full time
equivalents, or FTEs, for these programs at its discretion, subject to certain agreed minimum
levels, in the beginning of each contract year based on the activities of the agreed upon research
plan. In addition, the five year research term of the strategic alliance expires on June 20, 2006,
unless GSK agrees to extend the research term, and GSK has the right to terminate the Collaboration
and License Agreement on six months notice at any time after June 20, 2006. Even if the FDA or
other regulatory agencies approve one or more of our drug candidates, GSK may elect not to proceed
with the commercialization of such drugs, or may elect to pursue commercialization of one drug but
not others, and these decisions are outside our control. In such event, or if GSK abandons
development of any drug candidate prior to regulatory approval, we would have to undertake and fund
the clinical development of our drug candidates or commercialization of our drugs, seek a new
partner for clinical development or commercialization, or curtail or abandon the clinical
development or commercialization programs. If we were unable to do so on acceptable terms, or at
all, our business would be harmed, and the price of our common stock would be negatively affected.
If we fail to enter into and maintain successful strategic alliances for certain of our drug
candidates, we may have to reduce or delay our drug candidate development or increase our
expenditures.
Our strategy for developing, manufacturing and commercializing certain of our drug candidates
currently requires us to enter into and successfully maintain strategic alliances with
pharmaceutical companies or other industry participants to advance our programs and reduce our
expenditures on each program. We have formed a strategic alliance with GSK with respect to
ispinesib, SB-743921, GSK-923295 and certain other research activities. However, we may not be able
to negotiate additional strategic alliances on acceptable terms, if at all. If we are not able to
maintain our existing strategic alliances or establish and maintain additional strategic alliances,
we may have to limit the size or scope of, or delay, one or more of our drug development programs
or research programs or undertake and fund these programs ourselves. If we elect to increase our
expenditures to fund drug development programs or research programs on our own, we will need to
obtain additional capital, which may not be available on acceptable terms, or at all.
The success of our development efforts depends in part on the performance of our partners and the
NCI, over which we have little or no control.
Our ability to commercialize drugs that we develop with our partners and that generate
royalties from product sales depends on our partners abilities to assist us in establishing the
safety and efficacy of our drug candidates, obtaining and maintaining regulatory approvals and
achieving market acceptance of the drugs once commercialized. Our partners may elect to delay or
terminate development of one or more drug candidates, independently develop drugs that could
compete with ours or fail to commit sufficient resources to the marketing and distribution of drugs
developed through their strategic alliances with us. Our partners may not proceed with the
development and commercialization of our drug candidates with the same degree of urgency as we
would because of other priorities they face. In particular, we are relying on the NCI to conduct
several important clinical trials of ispinesib. The NCI is a government agency and there can be no
assurance that the NCI will not modify its plans to conduct such clinical trials or will proceed
with such clinical trials diligently. We have no control over the conduct of clinical trials being
conducted by the NCI, including the timing of initiation, termination or completion of such
clinical trials, the analysis of data arising out of such clinical trials or the timing of release
of complete data concerning such clinical trials, which may impact our ability to report on their
results. If our partners fail to perform as we expect, our potential for revenue from drugs
developed through our strategic alliances, if any, could be dramatically reduced.
Our focus on the discovery of drug candidates directed against specific proteins and pathways
within the cytoskeleton is unproven, and we do not know whether we will be able to develop any drug
candidates of commercial value.
We believe that our focus on drug discovery and development directed at the cytoskeleton is
novel and unique. While a number of commonly used drugs and a growing body of research validate the
importance of the cytoskeleton in the origin and progression of a number of diseases, no existing
drugs specifically and directly interact with the cytoskeletal proteins and pathways that our drug
candidates seek to modulate. As a result, we cannot be certain that our drug candidates will
appropriately modulate the targeted cytoskeletal proteins and pathways or produce commercially
viable drugs that safely and effectively treat cancer, heart failure or other diseases, or that the
results we have seen in preclinical models will translate into similar results in humans. In
addition, even if we are successful in developing and receiving regulatory approval for a
commercially viable drug for the treatment of one disease focused on the cytoskeleton, we cannot be
certain that we will also be able to develop and receive regulatory approval for drug candidates
for the treatment of other forms of that disease or other diseases. If we or our partners fail to
develop and commercialize viable drugs, we will not achieve commercial success.
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Our proprietary rights may not adequately protect our technologies and drug candidates.
Our commercial success will depend in part on our obtaining and maintaining patent and trade
secret protection of our technologies and drug candidates as well as successfully defending these
patents against third-party challenges. We will only be able to protect our technologies and drug
candidates from unauthorized use by third parties to the extent that valid and enforceable patents
or trade secrets cover them. In the event that our issued patents and our patent applications, if
granted, do not adequately describe, enable or otherwise provide coverage of our technologies and
drug candidates, including for example ispinesib, SB-743921, GSK-923295 and CK-1827452, we would
not be able to exclude others from developing or commercializing these drug candidates and
potential drug candidates. Furthermore, the degree of future protection of our proprietary rights
is uncertain because legal means afford only limited protection and may not adequately protect our
rights or permit us to gain or keep our competitive advantage.
The patent positions of life sciences companies can be highly uncertain and involve complex
legal and factual questions for which important legal principles remain unresolved. No consistent
policy regarding the breadth of claims allowed in such companies patents has emerged to date in
the United States. The patent situation outside the United States is even more uncertain. Changes
in either the patent laws or in interpretations of patent laws in the United States or other
countries may diminish the value of our intellectual property. Accordingly, we cannot predict the
breadth of claims that may be allowed or enforced in our patents or in third-party patents. For
example:
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we or our licensors might not have been the first to make the inventions covered by
each of our pending patent applications and issued patents; |
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we or our licensors might not have been the first to file patent applications for
these inventions; |
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others may independently develop similar or alternative technologies or duplicate
any of our technologies without infringing our intellectual property rights; |
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Some or all of our or our licensors pending patent applications may not result in
issued patents; |
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our and our licensors issued patents may not provide a basis for commercially
viable drugs or therapies, or may not provide us with any competitive advantages, or may
be challenged and invalidated by third parties; |
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our or our licensors patent applications or patents may be subject to
interference, opposition or similar administrative proceedings; |
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we may not develop additional proprietary technologies or drug candidates that are
patentable; or |
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the patents of others may prevent us or our partners from discovering, developing
or commercializing our drug candidates. |
We also rely on trade secrets to protect our technology, especially where we believe patent
protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While
we use reasonable efforts to protect our trade secrets, our or our strategic partners employees,
consultants, contractors or scientific and other advisors may unintentionally or willfully disclose
our information to competitors. In addition, confidentiality agreements, if any, executed by such
persons may not be enforceable or provide meaningful protection for our trade secrets or other
proprietary information in the event of unauthorized use or disclosure. If we were to enforce a
claim that a third party had illegally obtained and was using our trade secrets, our enforcement
efforts would be expensive and time consuming, and the outcome would be unpredictable. In addition,
courts outside the United States are sometimes less willing to protect trade secrets. Moreover, if
our competitors independently develop information that is equivalent to our trade secrets, it will
be more difficult for us to enforce our rights and our business could be harmed.
If we are not able to defend the patent or trade secret protection position of our
technologies and drug candidates, then we will not be able to exclude competitors from developing
or marketing competing drugs, and we may not generate enough revenue from product sales to justify
the cost of development of our drugs and to achieve or maintain profitability.
If we are sued for infringing intellectual property rights of third parties, such litigation will
be costly and time consuming, and an unfavorable outcome would have a significant adverse effect on
our business.
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Our ability to commercialize drugs depends on our ability to sell such drugs without
infringing the patents or other proprietary rights of third parties. Numerous U.S. and foreign
issued patents and pending patent applications owned by third parties exist in the areas that we
are exploring. In addition, because patent applications can take several years to issue, there may
be currently pending applications, unknown to us, which may later result in issued patents that our
drug candidates may infringe. There could also be existing patents of which we are not aware that
our drug candidates may inadvertently infringe.
In particular, we are aware of an issued U.S. patent and at least one pending U.S. patent
application assigned to Curis, Inc., or Curis, relating to certain compounds in the quinazolinone
class. Ispinesib falls into this class of compounds. The Curis patent claims a method of use for
inhibiting signaling by what is called the hedgehog pathway using certain such compounds. Curis has
pending applications in Europe, Japan, Australia and Canada with claims covering certain
quinazolinone compounds, compositions thereof and/or methods of their use. We are also aware that
two of the Australian applications have been allowed and two of the European applications have been
granted. In Europe, Australia and elsewhere, the grant of a patent may be opposed by one or more
parties. We and GSK have each opposed the granting of certain such patents to Curis in Europe and
in Australia. Curis or a third party may assert that the sale of ispinesib may infringe one or more
of these or other patents. We believe that we have valid defenses against the Curis patents if
asserted against us. However, we cannot guarantee that a court would find such defenses valid or
that such oppositions would be successful. We have not attempted to obtain a license to this
patent. If we decide to obtain a license to these patents, we cannot guarantee that we would be
able to obtain such a license on commercially reasonable terms, or at all.
In addition, we are aware of various issued U.S. and foreign patents and pending U.S. and
foreign patent applications assigned to Cellomics, Inc., or Cellomics, relating to an automated
method for analyzing cells. We received a letter from Cellomics notifying us that it believes we
may be practicing one or more of the Cellomics patents and offering a use license for such patents
through its licensing program. Cellomics has since been acquired by Fisher Scientific
International, Inc., or Fisher. Fisher or a third party may assert that our Cytometrix®
technologies for cell analysis fall within the scope of, and thus infringe, one or more of these
patents. We believe that we have persuasive defenses to such an assertion. Moreover, the grant of
the European Cellomics patent has been opposed by another company. However, we cannot guarantee
that a court would find such defenses persuasive or that such opposition would be successful. If we
decide to obtain a license to these patents, we cannot guarantee that we would be able to obtain
such a license on commercially reasonable terms, or at all.
Other future products of ours may be impacted by patents of companies engaged in competitive
programs with significantly greater resources (such as Merck & Co., Inc., or Merck, and
Bristol-Myers Squibb, or BMS). Further development of these products could be impacted by these
patents and result in the expenditure of significant legal fees.
If a third party claims that our actions infringe on their patents or other proprietary
rights, we could face a number of issues that could seriously harm our competitive position,
including, but not limited to:
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infringement and other intellectual property claims that, with or without merit,
can be costly and time consuming to litigate and can delay the regulatory approval
process and divert managements attention from our core business strategy; |
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substantial damages for past infringement which we may have to pay if a court
determines that our drugs or technologies infringe a competitors patent or other
proprietary rights; |
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a court prohibiting us from selling or licensing our drugs or technologies unless
the holder licenses the patent or other proprietary rights to us, which it is not
required to do; and |
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if a license is available from a holder, we may have to pay substantial royalties
or grant cross licenses to our patents or other proprietary rights. |
We may become involved in disputes with our strategic partners over intellectual property
ownership, and publications by our research collaborators and scientific advisors could impair our
ability to obtain patent protection or protect our proprietary information, which, in either case,
would have a significant impact on our business.
Inventions discovered under our strategic alliance agreements become jointly owned by our
strategic partners and us in some cases, and the exclusive property of one of us in other cases.
Under some circumstances, it may be difficult to determine who owns a particular invention, or
whether it is jointly owned, and disputes could arise regarding ownership of those inventions.
These disputes could be costly and time consuming, and an unfavorable outcome would have a
significant adverse effect on our business if we were not able to protect or license rights to
these inventions. In addition, our research collaborators and scientific advisors have contractual
rights to publish our data and other proprietary information, subject to our prior review.
Publications by our research collaborators and scientific advisors containing such information,
either with our permission or in contravention of the terms of their agreements with
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us, may impair our ability to obtain patent protection or protect our proprietary information,
which could significantly harm our business.
To the extent we elect to fund the development of a drug candidate or the commercialization of a
drug at our expense, we will need substantial additional funding.
The discovery, development and commercialization of novel small molecule drugs focused on the
cytoskeleton for the treatment of a wide array of diseases is costly. As a result, to the extent we
elect to fund the development of a drug candidate or the commercialization of a drug at our
expense, we will need to raise additional capital to:
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expand our research and development and technologies; |
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fund clinical trials and seek regulatory approvals; |
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build or access manufacturing and commercialization capabilities; |
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implement additional internal systems and infrastructure; |
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maintain, defend and expand the scope of our intellectual property; and |
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hire and support additional management and scientific personnel. |
Our future funding requirements will depend on many factors, including, but not limited to:
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the rate of progress and cost of our clinical trials and other research and development activities; |
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the costs and timing of seeking and obtaining regulatory approvals; |
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the costs associated with establishing manufacturing and commercialization capabilities; |
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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; |
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the costs of acquiring or investing in businesses, products and technologies; |
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the effect of competing technological and market developments; and |
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the payment and other terms and timing of any strategic alliance, licensing or other arrangements that we may establish. |
Until we can generate a sufficient amount of product revenue to finance our cash requirements,
which we may never do, we expect to continue to finance our future cash needs primarily through
public or private equity offerings, debt financings and strategic alliances. We cannot be certain
that additional funding will be available on acceptable terms, or at all. If we are not able to
secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one
or more of our clinical trials or research and development programs or future commercialization
initiatives.
We have limited capacity to carry out our own clinical trials in connection with the development of
our drug candidates and potential drug candidates, and to the extent we elect to develop a drug
candidate without a strategic partner we will need to expand our development capacity, and will
require additional funding.
The development of drug candidates is complicated, and the required resources and experience
that we currently have to carry out such development are limited. Currently, we generally rely on
our strategic partners to carry out these activities for certain of our drug candidates. We do not
have a partner for our cardiac myosin activator drug candidate, CK-1827452, and, if GSK elects to
terminate its development efforts, we do not have an alternative partner for our current and
potential cancer drug candidates. Pursuant to our Collaboration and License Agreement with GSK, we
may initiate and conduct clinical trials for our drug candidate SB-743921 for the treatment of
non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma. For the clinical trials we conduct
with SB-743921 for these hematologic cancer indications, we plan to rely on contractors for the
manufacture and distribution of clinical supplies. To the extent we conduct clinical trials for a
drug candidate without support from a strategic partner, as we are doing with CK-1827452 and
SB-743921, we will need to develop additional skills, technical expertise and resources necessary
to carry out such development efforts on our own or through the use of other third parties, such as
contract research organizations, or CROs.
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If we utilize CROs, we will not have control over many aspects of their activities, and will
not be able to fully control the amount or timing of resources that they devote to our programs.
These third parties also may not assign as high a priority to our programs or pursue them as
diligently as we would if we were undertaking such programs ourselves, and therefore may not
complete their respective activities on schedule. CROs may also have relationships with our
competitors and potential competitors, and may prioritize those relationships ahead of their
relationships with us. Typically, we would prefer to qualify more than one vendor for each function
performed outside of our control, which could be time consuming and costly. The failure of CROs to
carry out development efforts on our behalf according to our requirements and FDA or other
regulatory agencies standards, or our failure to properly coordinate and manage such efforts,
could increase the cost of our operations and delay or prevent the development, approval and
commercialization of our drug candidates.
If we fail to develop the additional skills, technical expertise and resources necessary to
carry out the development of our drug candidates, or if we fail to effectively manage our CROs
carrying out such development, the commercialization of our drug candidates will be delayed or
prevented.
We have no manufacturing capacity and depend on our partners or contract manufacturers to produce
our clinical trial drug supplies for each of our drug candidates and potential drug candidates, and
anticipate continued reliance on contract manufacturers for the development and commercialization
of our potential drugs.
We do not currently operate manufacturing facilities for clinical or commercial production of
our drug candidates or potential drug candidates. We have limited experience in drug formulation
and manufacturing, and we lack the resources and the capabilities to manufacture any of our drug
candidates on a clinical or commercial scale. As a result, we currently rely on our partner, GSK,
to manufacture, supply, store and distribute drug supplies for its ispinesib and SB-743921 clinical
trials, and will rely on GSK to be responsible for such activities for the planned GSK-923295
clinical trial. For our drug candidate CK-1827452, and our drug candidate SB-743921 for
non-Hodgkins lymphoma, Hodgkins lymphoma and multiple myeloma, we currently rely on a limited
number of contract manufacturers, and, in particular, we expect to rely on single-source contract
manufacturers for the active pharmaceutical ingredient and the drug product supply for our clinical
trials. In addition, we anticipate continued reliance on a limited number of contract
manufacturers. Any performance failure on the part of our existing or future contract manufacturers
could delay clinical development or regulatory approval of our drug candidates or commercialization
of our drugs, producing additional losses and depriving us of potential product revenues.
Our drug candidates require precise, high quality manufacturing. Our, our partners or any
contract manufacturers failure to achieve and maintain high manufacturing standards, including the
incidence of manufacturing errors, could result in patient injury or death, product recalls or
withdrawals, delays or failures in product testing or delivery, cost overruns or other problems
that could seriously hurt our business. Contract drug manufacturers often encounter difficulties
involving production yields, quality control and quality assurance, as well as shortages of
qualified personnel. These manufacturers are subject to stringent regulatory requirements,
including the FDAs current good manufacturing practices regulations and similar foreign laws, as
well as ongoing periodic unannounced inspections by the FDA, the U.S. Drug Enforcement Agency and
other regulatory agencies, to ensure strict compliance with current good manufacturing practices
and other applicable government regulations and corresponding foreign standards. However, we do not
have control over our contract manufacturers compliance with these regulations and standards. If
one of our contract manufacturers fails to maintain compliance, the production of our drug
candidates could be interrupted, resulting in delays, additional costs and potentially lost
revenues. Additionally, our contract manufacturer must pass a preapproval inspection before we can
obtain marketing approval for any of our drug candidates in development.
If the FDA or other regulatory agencies approve any of our drug candidates for commercial
sale, we will need to manufacture them in larger quantities. To date, our drug candidates have been
manufactured only in small quantities for preclinical testing and clinical trials. We may not be
able to successfully increase the manufacturing capacity, whether in collaboration with contract
manufacturers or on our own, for any of our drug candidates in a timely or economic manner, or at
all. Significant scale-up of manufacturing may require additional validation studies, which the FDA
must review and approve. If we are unable to successfully increase the manufacturing capacity for a
drug candidate, the regulatory approval or commercial launch of any related drugs may be delayed or
there may be a shortage in supply. Even if any contract manufacturer makes improvements in the
manufacturing process for our drug candidates, we may not own, or may have to share, the
intellectual property rights to such improvements.
In addition, our existing and future contract manufacturers may not perform as agreed or may
not remain in the contract manufacturing business for the time required to successfully produce,
store and distribute our drug candidates. If a natural disaster, business failure, strike or other
difficulty occurs, we may be unable to replace such contract manufacturer in a timely manner and
the production of our drug candidates would be interrupted, resulting in delays and additional
costs.
33
Switching manufacturers or manufacturing sites may be difficult and time consuming because the
number of potential manufacturers is limited. In addition, prior to the commercialization of a
drug from any replacement manufacturer or manufacturing site, the FDA must approve that site. Such
approval would require new testing and compliance inspections. In addition, a new manufacturer or
manufacturing site would have to be educated in, or develop substantially equivalent processes for,
production of our drugs after receipt of FDA approval. It may be difficult or impossible for us to
find a replacement manufacturer on acceptable terms quickly, or at all.
We currently have no marketing or sales staff, and if we are unable to enter into or maintain
strategic alliances with marketing partners or if we are unable to develop our own sales and
marketing capabilities, we may not be successful in commercializing our potential drugs.
We currently have no sales, marketing or distribution capabilities. To commercialize our drugs
that we determine not to market on our own, we will depend on strategic alliances with third
parties, such as GSK, which have established distribution systems and direct sales forces. If we
are unable to enter into such arrangements on acceptable terms, we may not be able to successfully
commercialize such drugs.
We plan to commercialize drugs on our own, with or without a partner, that can be effectively
marketed and sold in concentrated markets that do not require a large sales force to be
competitive. To achieve this goal, we will need to establish our own specialized sales force and
marketing organization with technical expertise and with supporting distribution capabilities.
Developing such an organization is expensive and time consuming and could delay a product launch.
In addition, we may not be able to develop this capacity efficiently, or at all, which could make
us unable to commercialize our drugs.
To the extent that we are not successful in commercializing any drugs ourselves or through a
strategic alliance, our product revenues will suffer, we will incur significant additional losses
and the price of our common stock will be negatively affected.
We expect to expand our development, clinical research, sales and marketing capabilities, and as a
result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to have significant growth in expenditures, the number of our employees and the
scope of our operations, in particular with respect to those drug candidates that we elect to
develop or commercialize independently or together with a partner. To manage our anticipated future
growth, we must continue to implement and improve our managerial, operational and financial
systems, expand our facilities and continue to recruit and train additional qualified personnel.
Due to our limited resources, we may not be able to effectively manage the expansion of our
operations or recruit and train additional qualified personnel. The physical expansion of our
operations may lead to significant costs and may divert our management and business development
resources. Any inability to manage growth could delay the execution of our business plans or
disrupt our operations.
The failure to attract and retain skilled personnel could impair our drug development and
commercialization efforts.
Our performance is substantially dependent on the performance of our senior management and key
scientific and technical personnel, particularly James H. Sabry, M.D., Ph.D., our Chief Executive
Officer, Robert I. Blum, our President, Andrew A. Wolff, M.D., F.A.C.C., our Senior Vice President,
Clinical Research and Chief Medical Officer, Sharon A. Surrey-Barbari, our Senior Vice President,
Finance and Chief Financial Officer, David J. Morgans, Ph.D., our Senior Vice President of
Preclinical Research and Development, Jay K. Trautman, Ph.D., our Vice President of Research, and
David Cragg, our Vice President of Human Resources. The employment of these individuals and our
other personnel is terminable at will with short or no notice. We carry key person life insurance
on James H. Sabry. The loss of the services of any member of our senior management, scientific or
technical staff may significantly delay or prevent the achievement of drug development and other
business objectives by diverting managements attention to transition matters and identification of
suitable replacements, and could have a material adverse effect on our business, operating results
and financial condition. We also rely on consultants and advisors to assist us in formulating our
research and development strategy. All of our consultants and advisors are either self-employed or
employed by other organizations, and they may have conflicts of interest or other commitments, such
as consulting or advisory contracts with other organizations, that may affect their ability to
contribute to us.
In addition, we believe that we will need to recruit additional executive management and
scientific and technical personnel. There is currently intense competition for skilled executives
and employees with relevant scientific and technical expertise, and this competition is likely to
continue. Our inability to attract and retain sufficient scientific, technical and managerial
personnel could limit or delay our product development efforts, which would adversely affect the
development of our drug candidates and commercialization of our potential drugs and growth of our
business.
34
Risks Related to Our Industry
Our competitors may develop drugs that are less expensive, safer, or more effective, which may
diminish or eliminate the commercial success of any drugs that we may commercialize.
We compete with companies that are also developing drug candidates that focus on the
cytoskeleton, as well as companies that have developed drugs or are developing alternative drug
candidates for cancer and cardiovascular and other diseases for which our compounds may be useful
treatments. For example, if approved for marketing by the FDA, depending on the approved clinical
indication, our cancer drug candidates such as ispinesib and SB-743921 could compete against
existing cancer treatments such as paclitaxel, docetaxel, vincristine, vinorelbine or navelbine and
potentially against other novel cancer drug candidates that are currently in development such as
those that are reformulated taxanes, other tubulin binding compounds or epothilones. We are also
aware that Merck, Array Biopharma Inc., BMS and others are conducting research and development
focused on KSP and other mitotic kinesins. In addition, BMS, Merck, Novartis, Genentech, Inc. and
other pharmaceutical and biopharmaceutical companies are developing other approaches to inhibiting
mitosis.
With respect to heart failure, if CK-1827452 or any other of our compounds is approved for
marketing by the FDA for heart failure, that compound could compete against current generically
available therapies, such as milrinone, dobutamine or digoxin or newer drugs such as nesiritide, as
well as potentially against other novel drug candidates in development such as ularitide, which is
being developed by PDL Biopharma, Inc., urocortin II, which is being developed by Neurocrine
Biosciences, Inc., and levosimendan, which is being developed in the United States by Abbott
Laboratories and is commercially available in a number of countries outside of the United States.
Our competitors may:
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develop drug candidates and market drugs that are less expensive or more effective than our future drugs; |
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commercialize competing drugs before we or our partners can launch any drugs developed from our drug candidates; |
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hold or obtain proprietary rights that could prevent us from commercializing our products; |
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initiate or withstand substantial price competition more successfully than we can; |
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have greater success in recruiting skilled scientific workers from the limited pool of available talent; |
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more effectively negotiate third-party licenses and strategic alliances; |
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take advantage of acquisition or other opportunities more readily than we can; |
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develop drug candidates and market drugs that increase the levels of safety or
efficacy or alter other drug candidate profile aspects that our drug candidates will need
to show in order to obtain regulatory approval; or |
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introduce therapies or market drugs that render the market opportunity for our
potential drugs obsolete. |
We will compete for market share against large pharmaceutical and biotechnology companies and
smaller companies that are collaborating with larger pharmaceutical companies, new companies,
academic institutions, government agencies and other public and private research organizations.
Many of these competitors, either alone or together with their partners, may develop new drug
candidates that will compete with ours. These competitors may, and in certain cases do, operate
larger research and development programs or have substantially greater financial resources than we
do. Our competitors may also have significantly greater experience in:
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developing drug candidates; |
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undertaking preclinical testing and clinical trials; |
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building relationships with key customers and opinion-leading physicians; |
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obtaining and maintaining FDA and other regulatory approvals of drug candidates; |
35
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formulating and manufacturing drugs; and |
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launching, marketing and selling drugs. |
If our competitors market drugs that are less expensive, safer or more efficacious than our
potential drugs, or that reach the market sooner than our potential drugs, we may not achieve
commercial success. In addition, the life sciences industry is characterized by rapid technological
change. Because our research approach integrates many technologies, it may be difficult for us to
stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of
technological change we may be unable to compete effectively. Our competitors may render our
technologies obsolete by advances in existing technological approaches or the development of new or
different approaches, potentially eliminating the advantages in our drug discovery process that we
believe we derive from our research approach and proprietary technologies.
The regulatory approval process is expensive, time consuming and uncertain and may prevent our
partners or us from obtaining approvals to commercialize some or all of our drug candidates.
The research, testing, manufacturing, selling and marketing of drug candidates are subject to
extensive regulation by the FDA and other regulatory authorities in the United States and other
countries, which regulations differ from country to country. Neither we nor our partners are
permitted to market our potential drugs in the United States until we receive approval of a New
Drug Application, or NDA, from the FDA. Neither we nor our partners have received marketing
approval for any of Cytokinetics drug candidates. Obtaining approval of an NDA can be a lengthy,
expensive and uncertain process. In addition, failure to comply with the FDA and other applicable
foreign and U.S. regulatory requirements may subject us to administrative or judicially imposed
sanctions. These include warning letters, civil and criminal penalties, injunctions, product
seizure or detention, product recalls, total or partial suspension of production, and refusal to
approve pending NDAs or supplements to approved NDAs.
Regulatory approval of an NDA or NDA supplement is never guaranteed, and the approval process
typically takes several years and is extremely expensive. The FDA also has substantial discretion
in the drug approval process. Despite the time and expense exerted, failure can occur at any stage,
and we could encounter problems that cause us to abandon clinical trials or to repeat or perform
additional preclinical testing and clinical trials. The number and focus of preclinical studies and
clinical trials that will be required for FDA approval varies depending on the drug candidate, the
disease or condition that the drug candidate is designed to address, and the regulations applicable
to any particular drug candidate. The FDA can delay, limit or deny approval of a drug candidate for
many reasons, including, but not limited to:
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a drug candidate may not be safe or effective; |
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the FDA may not find the data from preclinical testing and clinical trials sufficient; |
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the FDA might not approve our or our contract manufacturers processes or facilities; or |
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the FDA may change its approval policies or adopt new regulations. |
If we or our partners receive regulatory approval for our drug candidates, we will also be subject
to ongoing FDA obligations and continued regulatory review, such as continued safety reporting
requirements, and we may also be subject to additional FDA post-marketing obligations, all of which
may result in significant expense and limit our ability to commercialize our potential drugs.
Any regulatory approvals that we or our partners receive for our drug candidates may be
subject to limitations on the indicated uses for which the drug may be marketed or contain
requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA
approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage,
advertising, promotion and record-keeping for the drug will be subject to extensive regulatory
requirements. The subsequent discovery of previously unknown problems with the drug, including
adverse events of unanticipated severity or frequency, or the discovery that adverse effects or
toxicities previously observed in preclinical research or clinical trials that were believed to be
minor actually constitute much more serious problems, may result in restrictions on the marketing
of the drug, and could include withdrawal of the drug from the market.
The FDAs policies may change and additional government regulations may be enacted that could
prevent or delay regulatory approval of our drug candidates. We cannot predict the likelihood,
nature or extent of adverse government regulation that may arise from future legislation or
administrative action, either in the United States or abroad. If we are not able to maintain
regulatory compliance, we might not be permitted to market our drugs and our business could suffer.
36
If physicians and patients do not accept our drugs, we may be unable to generate significant
revenue, if any.
Even if our drug candidates obtain regulatory approval, resulting drugs, if any, may not gain
market acceptance among physicians, healthcare payors, patients and the medical community. Even if
the clinical safety and efficacy of drugs developed from our drug candidates are established for
purposes of approval, physicians may elect not to recommend these drugs for a variety of reasons
including, but not limited to:
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timing of market introduction of competitive drugs; |
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clinical safety and efficacy of alternative drugs or treatments; |
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cost-effectiveness; |
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availability of coverage and reimbursement from health maintenance organizations and other third-party payors; |
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convenience and ease of administration; |
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prevalence and severity of adverse side effects; |
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other potential disadvantages relative to alternative treatment methods; or |
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insufficient marketing and distribution support. |
If our drugs fail to achieve market acceptance, we may not be able to generate significant
revenue and our business would suffer.
The coverage and reimbursement status of newly approved drugs is uncertain and failure to obtain
adequate coverage and reimbursement could limit our ability to market any drugs we may develop and
decrease our ability to generate revenue.
There is significant uncertainty related to the coverage and reimbursement of newly approved
drugs. The commercial success of our potential drugs in both domestic and international markets is
substantially dependent on whether third-party coverage and reimbursement is available for the
ordering of our potential drugs by the medical profession for use by their patients. Medicare,
Medicaid, health maintenance organizations and other third-party payors are increasingly attempting
to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs,
and, as a result, they may not cover or provide adequate payment for our potential drugs. They may
not view our potential drugs as cost-effective and reimbursement may not be available to consumers
or may not be sufficient to allow our potential drugs to be marketed on a competitive basis. If we
are unable to obtain adequate coverage and reimbursement for our potential drugs, our ability to
generate revenue may be adversely affected. Likewise, legislative or regulatory efforts to control
or reduce healthcare costs or reform government healthcare programs could result in lower prices or
rejection of coverage and reimbursement for our potential drugs. Changes in coverage and
reimbursement policies or healthcare cost containment initiatives that limit or restrict
reimbursement for our drugs may cause our revenue to decline.
We may be subject to costly product liability claims and may not be able to obtain adequate
insurance.
If we conduct clinical trials in humans, we face the risk that the use of our drug candidates
will result in adverse effects. We currently maintain product liability insurance. We cannot
predict the possible harms or side effects that may result from our clinical trials. We may not
have sufficient resources to pay for any liabilities resulting from a claim excluded from, or
beyond the limit of, our insurance coverage.
In addition, once we have commercially launched drugs based on our drug candidates, we will
face exposure to product liability claims. This risk exists even with respect to those drugs that
are approved for commercial sale by the FDA and manufactured in facilities licensed and regulated
by the FDA. We intend to secure limited product liability insurance coverage, but may not be able
to obtain such insurance on acceptable terms with adequate coverage, or at reasonable costs. There
is also a risk that third parties that we have agreed to indemnify could incur liability, or that
third parties that have agreed to indemnify us do not fulfill their obligations. Even if we were
ultimately successful in product liability litigation, the litigation would consume substantial
amounts of our financial and managerial resources and may create adverse publicity, all of which
would impair our ability to generate sales of the affected product as well as our other potential
drugs. Moreover, product recalls may be issued at our discretion or at the direction of the FDA,
other governmental agencies or other companies having regulatory control for drug sales. If product
recalls occur, they are generally expensive and often have an adverse effect on the image of the
drugs being recalled as well as the reputation of the drugs developer or manufacturer.
37
We may be subject to damages resulting from claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although no claims
against us are currently pending, we may be subject to claims that these employees or we have
inadvertently or otherwise used or disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend against these claims. If we fail in
defending such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel. A loss of key research personnel or their work product could hamper
or prevent our ability to commercialize certain potential drugs, which could severely harm our
business. Even if we are successful in defending against these claims, litigation could result in
substantial costs and be a distraction to management.
We use hazardous chemicals and radioactive and biological materials in our business. Any claims
relating to improper handling, storage or disposal of these materials could be time consuming and
costly.
Our research and development processes involve the controlled use of hazardous materials,
including chemicals and radioactive and biological materials. Our operations produce hazardous
waste products. We cannot eliminate the risk of accidental contamination or discharge and any
resultant injury from those materials. Federal, state and local laws and regulations govern the
use, manufacture, storage, handling and disposal of hazardous materials. We may be sued for any
injury or contamination that results from our use or the use by third parties of these materials.
Compliance with environmental laws and regulations is expensive, and current or future
environmental regulations may impair our research, development and production efforts.
In addition, our partners may use hazardous materials in connection with our strategic
alliances. To our knowledge, their work is performed in accordance with applicable biosafety
regulations. In the event of a lawsuit or investigation, however, we could be held responsible for
any injury caused to persons or property by exposure to, or release of, these hazardous materials
used by these parties. Further, we may be required to indemnify our partners against all damages
and other liabilities arising out of our development activities or drugs produced in connection
with these strategic alliances.
Our facilities in California are located near an earthquake fault, and an earthquake or other types
of natural disasters or resource shortages could disrupt our operations and adversely affect
results.
Important documents and records, such as hard copies of our laboratory books and records for
our drug candidates and compounds, are located in our corporate headquarters at a single location
in South San Francisco, California near active earthquake zones. In the event of a natural
disaster, such as an earthquake or flood, or localized extended outages of critical utilities or
transportation systems, we do not have a formal business continuity or disaster recovery plan, and
could therefore experience a significant business interruption. In addition, California from time
to time has experienced shortages of water, electric power and natural gas. Future shortages and
conservation measures could disrupt our operations and cause expense, thus adversely affecting our
business and financial results.
Risks Related To Our Common Stock
We expect that our stock price will fluctuate significantly, and you may not be able to resell your
shares at or above your investment price.
The stock market, particularly in recent years, has experienced significant volatility,
particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks.
The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does
not relate to the operating performance of the companies represented by the stock. Factors that
could cause volatility in the market price of our common stock include, but are not limited to:
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results from, delays in, or discontinuation of, any of the clinical trials for our
drug candidates for the treatment of cancer or heart failure, including the current and
proposed clinical trials for ispinesib, SB-743921 and GSK-923295 for cancer, and
CK-1827452 for heart failure, and including delays resulting from slower than expected
patient enrollment or discontinuations resulting from a failure to meet pre-defined
clinical end-points; |
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delays in or discontinuation of the development of any of our drug candidates by GSK; |
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failure or delays in entering additional drug candidates into clinical trials; |
38
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failure or discontinuation of any of our research programs; |
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delays or other developments in establishing new strategic alliances; |
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announcements concerning our strategic alliances with GSK or future strategic alliances; |
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announcements concerning clinical trials being initiated or conducted by the NCI; |
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issuance of new or changed securities analysts reports or recommendations; |
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market conditions in the pharmaceutical, biotechnology and other healthcare related sectors; |
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actual or anticipated fluctuations in our quarterly financial and operating results; |
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developments or disputes concerning our intellectual property or other proprietary rights; |
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introduction of technological innovations or new commercial products by us or our competitors; |
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issues in manufacturing our drug candidates or drugs; |
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market acceptance of our drugs; |
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third-party healthcare coverage and reimbursement policies; |
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FDA or other U.S. or foreign regulatory actions affecting us or our industry; |
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litigation or public concern about the safety of our drug candidates or drugs; |
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additions or departures of key personnel; or |
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volatility in the stock prices of other companies in our industry. |
These and other external factors may cause the market price and demand for our common stock to
fluctuate substantially, which may limit or prevent investors from readily selling their shares of
common stock and may otherwise negatively affect the liquidity of our common stock. In addition,
when the market price of a stock has been volatile, holders of that stock have instituted
securities class action litigation against the company that issued the stock. If any of our
stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit.
Such a lawsuit could also divert our managements time and attention.
If the ownership of our common stock continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate decisions and may result in conflicts of
interest that could cause our stock price to decline.
As of April 28, 2006, our executive officers, directors and their affiliates beneficially
owned or controlled approximately 32.0% percent of the outstanding shares of our common stock
(after giving effect to the exercise of all outstanding vested and unvested options and warrants).
Accordingly, these executive officers, directors and their affiliates, acting as a group, will have
substantial influence over the outcome of corporate actions requiring stockholder approval,
including the election of directors, any merger, consolidation or sale of all or substantially all
of our assets or any other significant corporate transactions. These stockholders may also delay or
prevent a change of control of us, even if such a change of control would benefit our other
stockholders. The significant concentration of stock ownership may adversely affect the trading
price of our common stock due to investors perception that conflicts of interest may exist or
arise.
Evolving regulation of corporate governance and public disclosure may result in additional expenses
and continuing uncertainty.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission
regulations and Nasdaq National Market rules are creating uncertainty for public companies. We are
presently evaluating and monitoring developments with respect to new and proposed rules and cannot
predict or estimate the amount of the additional costs we may incur or the timing of such costs.
For example, compliance with the internal control requirements of Sarbanes-Oxley Section 404 has to
date required the commitment of significant resources to document and test the adequacy of our
internal control over financial reporting. While our assessment, testing and evaluation of the
design and
39
operating effectiveness of our internal control over financial reporting resulted in our
conclusion that as of December 31, 2005, our internal control over financial reporting was
effective, we can provide no assurance as to conclusions of management or by our independent
registered public accounting firm with respect to the effectiveness of our internal control over
financial reporting in the future. These new or changed laws, regulations and standards are subject
to varying interpretations, in many cases due to their lack of specificity, and, as a result, their
application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. We are
committed to maintaining high standards of corporate governance and public disclosure. As a result,
we intend to invest the resources necessary to comply with evolving laws, regulations and
standards, and this investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to compliance
activities. If our efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies, due to ambiguities related to
practice or otherwise, regulatory authorities may initiate legal proceedings against us and our
reputation and business may be harmed.
Volatility in the stock prices of other companies may contribute to volatility in our stock price.
The stock market in general, and Nasdaq and the market for technology companies in particular,
have experienced significant price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further, there has been
particular volatility in the market prices of securities of early stage and development stage life
sciences companies. These broad market and industry factors may seriously harm the market price of
our common stock, regardless of our operating performance. In the past, following periods of
volatility in the market price of a companys securities, securities class action litigation has
often been instituted. A securities class action suit against us could result in substantial costs,
potential liabilities and the diversion of managements attention and resources.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date and we currently
intend to retain our future earnings, if any, to fund the development and growth of our businesses.
In addition, the terms of existing or any future debts may preclude us from paying these dividends.
Our common stock is thinly traded and there may not be an active, liquid trading market for our
common stock.
There is no guarantee that an active trading market for our common stock will be maintained on
Nasdaq, or that the volume of trading will be sufficient to allow for timely trades. Investors may
not be able to sell their shares quickly or at the latest market price if trading in our stock is
not active or if trading volume is limited. In addition, if trading volume in our common stock is
limited, trades of relatively small numbers of shares may have a disproportionate effect on the
market price of our common stock.
Risks Related To The Committed Equity Financing Facility With Kingsbridge
Our committed equity financing facility with Kingsbridge may not be available to us if we elect to
make a draw down, may require us to make additional blackout or other payments to Kingsbridge,
and may result in dilution to our stockholders.
In October 2005, we entered into the CEFF with Kingsbridge. The CEFF entitles us to sell and
obligates Kingsbridge to purchase, from time to time over a period of three years, shares of our
common stock for cash consideration up to an aggregate of $75.0 million, subject to certain
conditions and restrictions. Kingsbridge will not be obligated to purchase shares under the CEFF
unless certain conditions are met, which include a minimum price for our common stock; the accuracy
of representations and warranties made to Kingsbridge; compliance with laws; effectiveness of a
registration statement registering for resale the shares of common stock to be issued in connection
with the CEFF and the continued listing of our stock on the Nasdaq National Stock market. In
addition, Kingsbridge is permitted to terminate the CEFF if it determines that a material and
adverse event has occurred affecting our business, operations, properties or financial condition
and if such condition continues for a period of 10 days from the date Kingsbridge provides us
notice of such material and adverse event. If we are unable to access funds through the CEFF, or if
the CEFF is terminated by Kingsbridge, we may be unable to access capital on favorable terms or at
all.
We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to
suspend the use of the resale registration statement and prohibit Kingsbridge from selling shares
under the resale registration statement. If we deliver a blackout notice in the 15 trading days
following the settlement of a draw down, or if the resale registration statement is not effective
in circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or
issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number
of shares held by Kingsbridge (exclusive of shares that Kingsbridge may hold pursuant to exercise
of the Kingsbridge warrant) and the change in the market price of our common stock during the
period in which the use of
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the registration statement is suspended. If the trading price of our common stock declines
during a suspension of the resale registration statement, the blackout or other payment could be
significant.
Should we sell shares to Kingsbridge under the CEFF, or issue shares in lieu of a blackout
payment, it will have a dilutive effective on the holdings of our current stockholders, and may
result in downward pressure on the price of our common stock. If we draw down under the CEFF, we
will issue shares to Kingsbridge at a discount of up to 10 percent from the volume weighted average
price of our common stock. If we draw down amounts under the CEFF when our share price is
decreasing, we will need to issue more shares to raise the same amount than if our stock price was
higher. Issuances in the face of a declining share price will have an even greater dilutive effect
than if our share price were stable or increasing, and may further decrease our share price.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
We registered and sold 7,935,000 shares of our common stock in connection with our initial
public offering in April 2004. We received net proceeds of approximately $94.0 million after
deducting offering costs of approximately $9.1 million, which we invested in short-term
investment-grade securities and money market accounts pending use to fund working capital
requirements. In 2006, we utilized approximately $11.0 million to fund operations and $0.7 million
to repay equipment financing lines.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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Exhibit |
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Exhibit Description |
3.1
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Amended and Restated Certificate of Incorporation. (1) |
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3.2
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Amended and Restated Bylaws. (1) |
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4.1
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Specimen Common Stock Certificate. (1) |
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4.2
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Fourth Amended and Restated Investors Rights Agreement, dated March 21, 2003, by and among the
Registrant and certain stockholders of the Registrant. (1) |
|
|
|
4.3
|
|
Loan and Security Agreement, dated September 25, 1998, by and between the Registrant and Comdisco. (1) |
|
|
|
4.4
|
|
Amendment No. One to Loan and Security Agreement, dated February 1, 1999. (1) |
|
|
|
4.5
|
|
Warrant for the purchase of shares of Series A preferred stock, dated September 25, 1998, issued by
the Registrant to Comdisco. (1) |
|
|
|
4.6
|
|
Loan and Security Agreement, dated
December 16, 1999, by and between the Registrant and Comdisco. (1) |
|
|
|
4.7
|
|
Amendment No. 1 to Loan and Security Agreement, dated June 29, 2000, by and between the Registrant and
Comdisco. (1) |
|
|
|
4.8
|
|
Warrant for the purchase of shares of Series B preferred stock, dated December 16, 1999, issued by the
Registrant to Comdisco. (1) |
|
|
|
4.9
|
|
Master Security Agreement, dated February 2, 2001, by and between the Registrant and General Electric
Capital Corporation. (1) |
|
|
|
4.10
|
|
Cross-Collateral and Cross-Default Agreement by and between the Registrant and Comdisco. (1) |
|
|
|
4.11
|
|
Warrant for the purchase of shares of common stock, dated July 20, 1999, issued by the Registrant to
Bristow Investments, L.P. (1) |
|
|
|
4.12
|
|
Warrant for the purchase of shares of common stock, dated July 20, 1999, issued by the Registrant to the
Laurence and Magdalena Shushan Family Trust. (1) |
|
|
|
4.13
|
|
Warrant for the purchase of shares of common stock, dated July 20, 1999, issued by the Registrant to
Slough Estates USA Inc. (1) |
|
|
|
4.14
|
|
Warrant for the purchase of shares of Series B preferred stock, dated August 30, 1999, issued by the
Registrant to The Magnum Trust. (1) |
|
|
|
4.15
|
|
Warrant for the purchase of shares of common stock, dated October 28, 2005, issued by the Registrant and
Kingsbridge Capital Limited. (2) |
|
|
|
4.16
|
|
Registration Rights Agreement, dated October 28, 2005, by and between the Registrant and Kingsbridge
Capital Limited. (2) |
|
|
|
10.59
|
|
Stock Purchase Agreement dated January 18, 2006, by and among the Registrant, Federated Kaufmann Fund and
Red Abbey Venture Partners, LLC. (3) |
|
|
|
10.60
|
|
Letter Agreement dated January 17, 2006, by and between the Registrant and Pacific Growth Equities LLC. (3) |
|
|
|
10.61
|
|
2006 Base Salaries for Named Executive Officers. (4) |
|
|
|
10.62
|
|
GE Loan Proposal, dated as of January 18, 2006, by and between the Registrant and GE. (2) |
|
|
|
10.63
|
|
GE Loan Proposal, executed as of March 16, 2006, by and between the Company and General Electric Capital
Corporation. (5) |
43
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.64*
|
|
Second Amendment to Collaboration and Facilities Agreement, dated March 17, 2006, by and between the
Company and Portola Pharmaceuticals, Inc. (5) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
|
|
|
(1) |
|
Incorporated by reference from our registration statement on Form S-1,
registration number 333-112261, declared effective by the Securities
and Exchange Commission on April 29, 2004. |
|
(2) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on January 20, 2006. |
|
(3) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on January 18, 2006. |
|
(4) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 7, 2006. |
|
(5) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 22, 2006. |
|
* |
|
Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from
the publicly filed document and have been furnished separately to the Securities and Exchange
Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934. |
44
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
Dated: May 9, 2006 |
CYTOKINETICS, INCORPORATED
(Registrant)
|
|
|
/s/ James H. Sabry
|
|
|
James H. Sabry |
|
|
Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
|
|
|
|
/s/ Sharon Surrey-Barbari
|
|
|
Sharon Surrey-Barbari |
|
|
Senior Vice President, Finance and Chief Financial
Officer
(Principal Financial Officer) |
|
45
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
3.1
|
|
Amended and Restated Certificate of Incorporation. (1) |
|
|
|
3.2
|
|
Amended and Restated Bylaws. (1) |
|
|
|
4.1
|
|
Specimen Common Stock Certificate. (1) |
|
|
|
4.2
|
|
Fourth Amended and Restated Investors Rights Agreement, dated March 21, 2003, by and among the
Registrant and certain stockholders of the Registrant. (1) |
|
|
|
4.3
|
|
Loan and Security Agreement, dated September 25, 1998, by and between the Registrant and Comdisco. (1) |
|
|
|
4.4
|
|
Amendment No. One to Loan and Security Agreement, dated February 1, 1999. (1) |
|
|
|
4.5
|
|
Warrant for the purchase of shares of Series A preferred stock, dated September 25, 1998, issued by
the Registrant to Comdisco. (1) |
|
|
|
4.6
|
|
Loan and Security Agreement, dated
December 16, 1999, by and between the Registrant and Comdisco.
(1) |
|
|
|
4.7
|
|
Amendment No. 1 to Loan and Security Agreement, dated June 29, 2000, by and between the Registrant and
Comdisco. (1) |
|
|
|
4.8
|
|
Warrant for the purchase of shares of Series B preferred stock, dated December 16, 1999, issued by the
Registrant to Comdisco. (1) |
|
|
|
4.9
|
|
Master Security Agreement, dated February 2, 2001, by and between the Registrant and General Electric
Capital Corporation. (1) |
|
|
|
4.10
|
|
Cross-Collateral and Cross-Default Agreement by and between the Registrant and Comdisco. (1) |
|
|
|
4.11
|
|
Warrant for the purchase of shares of common stock, dated July 20, 1999, issued by the Registrant to
Bristow Investments, L.P. (1) |
|
|
|
4.12
|
|
Warrant for the purchase of shares of common stock, dated July 20, 1999, issued by the Registrant to the
Laurence and Magdalena Shushan Family Trust. (1) |
|
|
|
4.13
|
|
Warrant for the purchase of shares of common stock, dated July 20, 1999, issued by the Registrant to
Slough Estates USA Inc. (1) |
|
|
|
4.14
|
|
Warrant for the purchase of shares of Series B preferred stock, dated August 30, 1999, issued by the
Registrant to The Magnum Trust. (1) |
|
|
|
4.15
|
|
Warrant for the purchase of shares of common stock, dated October 28, 2005, issued by the Registrant and
Kingsbridge Capital Limited. (2) |
|
|
|
4.16
|
|
Registration Rights Agreement, dated October 28, 2005, by and between the Registrant and Kingsbridge
Capital Limited. (2) |
|
|
|
10.59
|
|
Stock Purchase Agreement dated January 18, 2006, by and among the Registrant, Federated Kaufmann Fund and
Red Abbey Venture Partners, LLC. (3) |
|
|
|
10.60
|
|
Letter Agreement dated January 17, 2006, by and between the Registrant and Pacific Growth Equities LLC. (3) |
|
|
|
10.61
|
|
2006 Base Salaries for Named Executive Officers. (4) |
|
|
|
10.62
|
|
GE Loan Proposal, dated as of January 18, 2006, by and between the Registrant and GE. (2) |
46
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.63
|
|
GE Loan Proposal, executed as of March 16, 2006, by and between the Company and General Electric Capital
Corporation. (5) |
|
|
|
10.64*
|
|
Second Amendment to Collaboration and Facilities Agreement, dated March 17, 2006, by and between the
Company and Portola Pharmaceuticals, Inc. (5) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
|
|
|
(1) |
|
Incorporated by reference from our registration statement on Form S-1,
registration number 333-112261, declared effective by the Securities
and Exchange Commission on April 29, 2004. |
|
(2) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on January 20, 2006. |
|
(3) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on January 18, 2006. |
|
(4) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 7, 2006. |
|
(5) |
|
Incorporated by reference from our Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 22, 2006. |
|
* |
|
Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from
the publicly filed document and have been furnished separately to the Securities and Exchange
Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934. |
47
exv31w1
EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, James H. Sabry, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Cytokinetics, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in
this report fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules
13a(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and;
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting that are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Dated: May 9, 2006
|
|
|
|
|
|
|
|
|
By: |
/s/ James H. Sabry
|
|
|
|
James H. Sabry |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
exv31w2
EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, Sharon Surrey-Barbari, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Cytokinetics, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in
this report fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and;
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting that are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Dated: May 9, 2006
|
|
|
|
|
|
|
|
|
By: |
/s/ Sharon Surrey-Barbari
|
|
|
|
Sharon Surrey-Barbari |
|
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
exv32w1
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18. U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Quarterly Report of Cytokinetics, Incorporated on Form 10-Q
for the quarterly period ended March 31, 2006 fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q
fairly presents in all material respects the financial condition and results of operations of
Cytokinetics, Incorporated.
Dated: May 9, 2006
|
|
|
|
|
|
|
|
|
/s/ James H. Sabry
|
|
|
James H. Sabry |
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
/s/ Sharon Surrey-Barbari
|
|
|
Sharon Surrey-Barbari |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|