sv1za
As filed with the Securities and Exchange Commission on
June 28, 2006
Registration
No. 333-133021
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
REPLIDYNE, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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2834 |
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84-1568247 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
1450 Infinite Dr.
Louisville, CO 80027
(303) 996-5500
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Kenneth J. Collins
President and Chief Executive Officer
Replidyne, Inc.
1450 Infinite Dr.
Louisville, CO 80027
(303) 996-5500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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James C.T. Linfield, Esq. |
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David J. Segre, Esq. |
Laura M. Medina, Esq.
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Jose F. Macias, Esq. |
Cooley Godward LLP
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Wilson Sonsini Goodrich & Rosati |
380 Interlocken Crescent
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Professional Corporation |
Suite 900
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650 Page Mill Road |
Broomfield, CO 80021
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Palo Alto, California 94304 |
(720) 566-4000
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(650) 493-9300 |
Approximate
date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration
statement.
If any of
the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act, check the following
box. o
If this
form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this
form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this
form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
The
Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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P R O S P E C T U S
(Subject to Completion)
Issued June 28, 2006
4,500,000 Shares
Common Stock
We are offering 4,500,000 shares of our common stock. This
is our initial public offering and no public market currently
exists for our shares. We anticipate that the initial public
offering price will be $10.00 per share.
Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol RDYN, subject to
official notice of issuance.
Investing in our common stock involves risks. See Risk
Factors beginning on page 7.
PRICE
$ A
SHARE
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Per Share | |
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Total | |
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Price to Public
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$ |
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$ |
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Underwriting Discounts and Commissions
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$ |
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$ |
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Proceeds to Replidyne
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$ |
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$ |
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We have granted the underwriters the right to purchase up to an
additional 675,000 shares of common stock from us at the
public offering price, less the underwriting discounts and
commissions to cover over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on
or
about ,
2006.
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Merrill Lynch & Co. |
Morgan Stanley |
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Cowen and Company |
Pacific Growth Equities, LLC |
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with information different from
or in addition to that contained in this prospectus. If anyone
provides you with different or inconsistent information, you
should not rely on it. We are offering to sell, and are seeking
offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. Our business,
financial conditions, results of operations and prospects may
have changed since that date.
For investors outside the U.S.: Neither we nor any of the
underwriters have done anything that would permit this offering
or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the U.S. You are required to inform yourselves about and
to observe any restrictions relating to this offering and the
distribution of this prospectus.
Through and
including ,
2006 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and
should be read together with, the more detailed information and
financial statements and related notes thereto appearing
elsewhere in this prospectus. Before you decide to invest in our
common stock, you should read the entire prospectus carefully,
including the risk factors and the financial statements and
related notes included in this prospectus.
Our Company
We are a biopharmaceutical company focused on discovering,
developing, in-licensing and commercializing innovative
anti-infective products. Our lead product, Orapem, is a novel
oral, community antibiotic, meaning that it is generally used to
treat infections acquired in the community and not in a hospital
setting. Forest Laboratories is our partner for the development
and commercialization of Orapem in the U.S. Orapem is a member
of the penem sub-class within the beta-lactam class of
antibiotics. Beta-lactam antibiotics all share a core structural
feature (a beta-lactam ring) and include antibiotics such as
penicillins and cephalosporins. The penem sub-class of
beta-lactam antibiotics has structural features that resemble a
fusion of the penicillin and cephalosporin core structures and
has an intrinsic ability to resist degradation by commonly
encountered enzymes that inactivate some other beta-lactam
antibiotics. Beta-lactams are generally characterized by their
favorable safety and tolerability profiles, as well as their
broad spectrum of activity, and as a result are typically used
as first-line therapy in many respiratory and skin infections in
adult and pediatric patients. In December 2005, we submitted a
New Drug Application, or NDA, to the U.S. Food and Drug
Administration, or FDA, for Orapem. If approved by the FDA,
Orapem would be the first orally available penem in the U.S. Our
NDA is based on 11 Phase III studies, conducted by
Bayer AG when it was a previous licensee of Orapem, and safety
data for over 5,000 patients who have been treated with
Orapem. We believe that Orapems safety profile and
activity against many common bacterial infections suggest the
potential for Orapem to become a leading branded oral
beta-lactam antibiotic.
According to IMS Health, the annual worldwide market for
antibiotics was $25.0 billion in 2005, which includes U.S.
sales of $8.5 billion for oral antibiotics, consisting of
$7.0 billion in the adult market and $1.5 billion in
the pediatric market. IMS Health estimates that, in 2005,
beta-lactams had a 42.7% market share of the adult oral
antibiotic market representing over 90 million
prescriptions and a 74.5% market share of the pediatric oral
antibiotic market representing over 40 million
prescriptions.
We submitted an IND for the clinical development of our second
product candidate, REP8839, in May 2006. We are developing
REP8839 for topical use for skin and wound infections and
prevention of Staphylococcus aureus, or
S. aureus, infections, including methicillin
resistant S. aureus, or MRSA, infections in hospital
settings. We are also pursuing the development of other novel
anti-infective products using compounds we have selected from a
library of proprietary compounds, as well as compounds
identified in assays we have developed to identify compounds
that inhibit bacterial DNA replication.
Our Product Candidates
We believe that our innovative product candidates offer
advantages over existing antibiotics by virtue of better overall
profiles in terms of activity, safety, tolerability and
induction of bacterial resistance. We also believe that the
markets these products address present us with significant
commercial opportunities.
Orapem
We believe that Orapem, with its broad spectrum of activity,
increased potency and safety and tolerability profile, would be
appropriate for use as a first-line antibiotic. We have
submitted an NDA for Orapem for four indications: acute
bacterial sinusitis; community-acquired pneumonia; acute
exacerbation of chronic bronchitis; and uncomplicated skin and
skin structure infections. Community-acquired pneumonia refers
to pneumonia acquired outside of the hospital setting. Although
the efficacy data for acute exacerbation of chronic bronchitis
and uncomplicated skin and skin structure infections may be
1
adequate for FDA approval, we expect that the FDA will likely
require additional clinical trials, including a
placebo-controlled trial in the case of acute exacerbation of
chronic bronchitis, before it will approve these indications. We
are currently conducting a Phase III placebo-controlled clinical
trial for acute exacerbation of chronic bronchitis for adult use.
We are also developing, together with Forest Laboratories, an
oral liquid formulation of Orapem for the pediatric market and
are currently conducting a Phase II clinical trial using a
prototype oral liquid formulation among pediatric patients with
acute otitis media. We intend to conduct Phase III clinical
trials for the two largest pediatric indications: acute otitis
media and tonsillitis/pharyngitis. Pediatric antibiotics compete
primarily on safety, efficacy and taste. We believe
Orapems safety profile and broad spectrum of activity
against bacteria that cause common infections in children make
Orapem a promising product candidate for pediatric use. In
addition, we believe that there will be fewer competitive
branded pediatric oral antibiotics in the next several years.
Under our agreement with Forest Laboratories, we have an option
to exclusively promote Orapem to pediatricians. Assuming we
successfully complete clinical development of an oral liquid
formulation for Orapem, we currently intend to expand our sales
force at our expense to promote Orapem to pediatricians, thereby
increasing our economic interest in pediatric sales.
REP8839
REP8839 is an inhibitor of methionyl tRNA synthetase, which is
an enzyme that plays an essential role in protein synthesis.
Inhibition of methionyl tRNA synthetase results in reduced
protein synthesis and attenuation of bacterial growth. We are
developing REP8839 for topical use for skin and wound infections
and prevention of S. aureus infections, including MRSA
infections, in hospital settings. REP8839 has exhibited
promising activity against S. aureus, including MRSA, in
pre-clinical studies. We submitted an IND application in May
2006 for the clinical development of a REP8839/mupirocin
combination product for topical use for skin and wound
infections and prevention of S. aureus infections,
including MRSA infections, in hospital settings. We believe that
the distinctive mechanisms of action of the two drugs may
greatly reduce the likelihood that S. aureus will develop
resistance to this combination. We retain worldwide rights to
REP8839.
Research and Discovery Programs
We are also pursuing the development of other novel
anti-infective products based on our own research efforts. We
have developed assays that identify compounds that inhibit
bacterial DNA replication. The compounds may be useful to treat
bacterial infections. We believe that bacterial DNA replication
is an attractive target system for new antibacterial drugs
because it is an essential cellular process and stalled DNA
replication can trigger cell death. Our assays are designed to
mimic the bacterial DNA replication systems of numerous
bacteria. We have identified compounds that are able to inhibit
bacterial DNA replication in these assays. We believe that the
novel mechanism of action of our technology may reduce the risk
that bacteria will develop resistance to drugs based on this
technology. We are currently optimizing the initial inhibitors
identified in the assays. We have also selected from a
proprietary library several potential compounds for development
to treat infections in hospital settings caused by
Clostridium difficile, or C. difficile. We
are currently in pre-clinical testing for these compounds. We
retain worldwide rights to all of these programs.
Our Collaboration with Forest Laboratories
In February 2006, we entered into a collaboration and
commercialization agreement with Forest Laboratories to
co-develop and co-market Orapem in the U.S. We believe that
Forest Laboratories experience in successfully launching
branded primary care products and the lack of competing
community antibiotics in its current product portfolio make it a
strong partner for us in the development and commercialization
of Orapem. We have received $60.0 million in upfront and
milestone payments. We may receive up to an additional
$90.0 million in development milestones and
$100.0 million in commercial milestones for both adult and
pediatric indications. In addition, we will receive a royalty on
all sales of Orapem. Forest Laboratories will be responsible for
sales and marketing of Orapem to primary care
2
physicians. We intend to build our own marketing and sales force
to promote Orapem to otolaryngologists (ear, nose and throat
specialists) in major metropolitan areas. Forest Laboratories
will reimburse us for most of these marketing and sales force
expenses. We and Forest Laboratories may conduct additional
clinical trials for other indications, which may include higher
dose therapies. Forest Laboratories has committed to pay a
substantial portion of the costs for further development of
Orapem.
Our Strategy
Our goal is to discover, in-license, develop and commercialize
novel anti-infective compounds that address unmet medical needs
resulting from growing resistance to existing drug products. Key
elements of our strategy are:
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Maximize commercial potential for Orapem as a leading community
antibiotic and a preferred branded oral beta-lactam in adult and
pediatric markets. |
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Develop specialty sales and marketing capabilities to target
specialist physicians in major metropolitan areas, including
otolaryngologists, if Orapem is approved for adult use, and
pediatricians, if Orapem is approved for pediatric use. We plan
to leverage this sales force to market other products that we
may develop, acquire or in-license. |
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Develop REP8839/mupirocin combination for topical use in
treatment of skin and wound infections and prevention of
S. aureus infections, including MRSA infections, in
hospital settings. |
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Discover and develop novel anti-infective products by continuing
to pursue our discovery research programs in DNA replication
inhibition and our program to develop a treatment for
C. difficile. |
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Leverage our development, regulatory and commercial resources by
acquiring or in-licensing additional products or product
candidates. |
Risks Related to Our Business
Our ability to implement our current business strategy is
subject to numerous risks, as more fully described in the
section entitled Risk Factors immediately following
this prospectus summary. These risks include, among others,
delays in obtaining, or a failure to obtain, regulatory approval
for our product candidates, failure of any approved product to
achieve significant commercial acceptance in the medical
community or receive reimbursement by third-party payors, our
dependence upon third parties under our licensing and
collaboration agreements, unfavorable clinical trial results,
delays in product launch, and failure to maintain and protect
our proprietary intellectual property assets. All of our product
candidates are subject to regulatory approval by the FDA and
comparable agencies in other countries. Orapem is our only
product candidate in clinical development. To date, we have not
obtained regulatory approval of any product candidate. All of
our other compounds or potential product candidates are in
preclinical development or the discovery stage. Although the FDA
has recently accepted the filing of our first NDA for use of
Orapem in four clinical indications, we cannot give any
assurance that it, or any of our other product candidates, will
receive regulatory approval or be successfully commercialized.
While we have generated limited amounts of revenue from license
and milestone payments under our collaboration agreements and
payments for funded research and development, we have not
generated any revenue to date from product sales. We have
incurred significant operating losses since our inception in
2000. We incurred net losses of approximately $14.0 million
in 2003, $19.2 million in 2004, $33.7 million in 2005
and $7.7 million in the three months ended March 31,
2006. As of March 31, 2006, we had an accumulated deficit
of $93.1 million, and we expect to incur losses for the
foreseeable future. We are unable to predict the extent of
future losses or when we will become profitable, if at all. Even
if we succeed in developing and commercializing one or more of
our product candidates, we may never generate sufficient revenue
to achieve and sustain profitability.
3
Corporate Information
We were incorporated under the laws of the state of Delaware on
December 6, 2000. Our principal executive offices are
located at 1450 Infinite Drive, Louisville, Colorado 80027,
and our telephone number is
(303) 996-5500.
Our web site address is http://www.replidyne.com. The
information contained in, or that can be accessed through, our
website is not part of this prospectus and should not be
considered part of this prospectus. Unless the context indicates
otherwise, as used in this prospectus, the terms
Replidyne, we, us and
our refer to Replidyne, Inc.
The names Replidyne and Orapem are our
trademarks. All other trademarks, trade names and service marks
appearing in this prospectus are the property of their
respective owners.
4
THE OFFERING
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Common stock offered by us |
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4,500,000 shares |
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Common stock to be outstanding after this offering |
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26,426,497 shares |
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Use of proceeds |
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To fund clinical trials and other research and development
activities; to fund activities in preparation for the potential
commercial launch of Orapem; and for working capital, capital
expenditures and other general corporate purposes. |
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Nasdaq National Market symbol |
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RDYN |
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The number of shares of common stock that will be outstanding
immediately after this offering is based on
21,926,497 shares of common stock outstanding as of May 31,
2006, giving effect to the issuance of 1,781,826 shares of
common stock to the holders of our Series A, B, C
and D convertible preferred stock upon the closing of this
offering in satisfaction of accumulated dividends and excludes:
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1,779,318 shares of common stock issuable upon the exercise
of outstanding options, with a weighted average exercise price
of $3.11 per share; |
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111,375 shares of common stock reserved for future issuance
under our benefit plans; and |
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53,012 shares of common stock issuable upon the exercise of
outstanding warrants, with a weighted average exercise price of
$5.47 per share. |
Except as otherwise indicated, all information in this
prospectus assumes:
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a 1-for-4.904 reverse
stock split of our common stock effected on June 26, 2006. |
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the conversion of all our outstanding shares of preferred stock
into 18,067,322 shares of common stock; |
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the issuance of 1,781,826 shares of common stock to the
holders of our Series A, B, C and D convertible
preferred stock upon the closing of this offering in
satisfaction of accumulated dividends, as required by the terms
of the Series A, B, C and D convertible preferred stock,
assuming for this purpose that the closing of this offering
occurs on July 3, 2006 and the initial public offering
price is $10.00 per share, all of which is described more
fully under the section of this prospectus entitled
Capitalization; |
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the filing of our restated certificate of incorporation, which
will occur immediately prior to the closing of this offering; and |
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no exercise of the underwriters over-allotment option. |
5
SUMMARY FINANCIAL DATA
We have derived the following summary of our statements of
operations data for the years ended December 31, 2003, 2004
and 2005 from our audited financial statements appearing
elsewhere in this prospectus. We have derived the following
summary of our statements of operations data for the three
months ended March 31, 2005 and 2006 and the balance sheet
data as of March 31, 2006 from our unaudited financial
statements appearing elsewhere in this prospectus. Our
historical results are not necessarily indicative of the results
that may be expected in the future. The summary of our financial
data set forth below should be read together with our financial
statements and the related notes to those statements, as well as
Managements Discussion and Analysis of Financial
Condition and Results of Operations, appearing elsewhere
in this prospectus.
The pro forma as adjusted balance sheet data reflects the
balance sheet data at March 31, 2006 as adjusted for the
sale of 4,500,000 shares of our common stock in this
offering at an assumed initial offering price to the public of
$10.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses
payable by us and the automatic conversion of all preferred
stock into common stock upon the completion of this offering.
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Three Months Ended | |
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Year Ended December 31, | |
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March 31, | |
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2003 | |
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2004 | |
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2005 | |
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2005 | |
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2006 | |
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(unaudited) | |
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(unaudited) | |
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(in thousands, except share and per share amounts) | |
Statement of Operations Data:
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Revenue
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$ |
726 |
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$ |
834 |
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$ |
441 |
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$ |
267 |
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$ |
2,877 |
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Costs and expenses:
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Research and development
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12,331 |
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16,282 |
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29,180 |
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5,013 |
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8,970 |
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Sales, general and administrative
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2,155 |
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2,994 |
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5,329 |
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686 |
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1,953 |
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Total costs and expenses
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14,486 |
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19,276 |
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34,509 |
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5,699 |
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10,923 |
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Loss from operations
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(13,760 |
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(18,442 |
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(34,068 |
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(5,432 |
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(8,046 |
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Other (expense) income, net
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(190 |
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(797 |
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399 |
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42 |
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344 |
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Net loss
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(13,950 |
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(19,239 |
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(33,669 |
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(5,390 |
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(7,702 |
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Preferred stock dividends and accretion
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(1,294 |
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(3,560 |
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(7,191 |
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(1,291 |
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(2,653 |
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Net loss attributable to common stockholders
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$ |
(15,244 |
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$ |
(22,799 |
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$ |
(40,860 |
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$ |
(6,681 |
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$ |
(10,355 |
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Basic and diluted net loss attributable to common stockholders
per share(1):
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Historical
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$ |
(20.82 |
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$ |
(30.55 |
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$ |
(39.20 |
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$ |
(8.13 |
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$ |
(7.21 |
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Pro forma
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$ |
(2.18 |
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$ |
(0.37 |
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Weighted average shares outstanding(1):
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Historical
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732,044 |
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746,306 |
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1,042,388 |
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821,757 |
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1,435,726 |
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|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
15,414,638 |
|
|
|
|
|
|
|
21,015,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
|
(in thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
109,900 |
|
|
$ |
150,150 |
|
Working capital
|
|
|
98,800 |
|
|
|
139,050 |
|
Total assets
|
|
|
116,112 |
|
|
|
156,362 |
|
Accumulated deficit
|
|
|
(93,060 |
) |
|
|
(93,060 |
) |
Preferred stock
|
|
|
139,568 |
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(92,539 |
) |
|
|
87,279 |
|
|
|
(1) |
Please see Note 1 to our financial statements for an
explanation of the method used to calculate the historical and
pro forma net loss attributable to common stockholders per share
and the number of shares used in the computation of the per
share amounts. |
6
RISK FACTORS
You should carefully consider the risks described below,
which we believe are the material risks of our business and this
offering, before making an investment decision. Our business
could be harmed by any of these risks. The trading price of our
common stock could decline due to any of these risks, and you
may lose all or part of your investment. In assessing these
risks, you should also refer to the other information contained
in this prospectus, including our financial statements and
related notes.
Risk Related to our Business
We are dependent on the success of our lead product
candidate, Orapem, and we cannot give any assurance that it will
receive regulatory approval, which is necessary before it can be
commercialized.
If we are not able to commercialize Orapem, we will not generate
product revenues for several years, if at all, and we may never
generate sufficient revenue to achieve and sustain
profitability. We need approval from the FDA prior to marketing
our product candidates in the U.S. In December 2005, we
submitted our first NDA to the FDA for use of Orapem in four
clinical indications, and the FDA accepted this NDA for filing
in February 2006. Even if we obtain FDA approval for Orapem, it
may not cover all of the clinical indications for which we are
seeking approval and we expect that the FDA will likely require
additional clinical trials, including a placebo-controlled trial
in the case of acute exacerbation of chronic bronchitis. Also,
an approval might contain significant limitations with respect
to conditions of use in the form of narrow indications,
warnings, precautions or contra-indications. We cannot predict
if or when we might seek regulatory review of Orapem for any
other indications or of any of our other product candidates.
The FDA has substantial discretion in the approval process and
may either refuse to accept an application for substantive
review or may conclude after review of our data that our
application is insufficient to allow approval of a product
candidate. If the FDA does not accept or approve our
application, it may require that we conduct additional clinical,
pre-clinical or manufacturing validation studies and submit that
data before it will reconsider our application. Depending on the
extent of these or any other studies, approval of any
application that we submit may be delayed by several years, or
may require us to expend more resources than we have available.
It is also possible that additional studies, if performed and
completed, may not be considered sufficient by the FDA to
approve our application or any particular indication for which
we are seeking approval. If any of these outcomes occur, we may
be forced to abandon our application for approval, which might
cause us to cease operations.
Our lead product candidate, Orapem, has been in-licensed from
another pharmaceutical company, Daiichi Asubio Pharma Co., Ltd.,
or Daiichi Asubio. A previous licensee, Bayer AG, or Bayer,
completed extensive pre-clinical studies and Phase II and
Phase III clinical trials for a particular dosage of
Orapem. We are relying on the data from these pre-clinical
studies and clinical trials in our application to the FDA for
approval to market Orapem. Any problems with these previous
pre-clinical studies or clinical trials, including problems with
the design or statistical analysis of such pre-clinical studies
or clinical trials, could cause our application for regulatory
approval to be delayed or rejected, in which case we might need
to conduct additional trials. In addition, because these
clinical trials were conducted using an active compound
manufactured by Nippon Soda Co., Ltd., or Nippon Soda, at its
facility in Takaoka, Japan, we expect the FDA will require us to
demonstrate to its satisfaction the comparability of the active
compound we are sourcing from Nippon Sodas new facility in
Nihongi, Japan.
The FDA may change its approval policies or requirements, or
apply interpretations to its policies or requirements, in a
manner that could delay or prevent commercialization of Orapem
for some or all indications that are the subject of our pending
NDA.
Regulatory requirements for approval of antibiotics may change
in a manner that requires us to conduct additional large-scale
clinical trials, which may delay or prevent commercialization of
Orapem for some or all indications. Historically, the FDA and
foreign regulatory authorities have not required placebo-
7
controlled clinical trials for approval of antibiotics but
instead have relied on non-inferiority studies. In a
non-inferiority study, a drug candidate is compared with an
approved antibiotic treatment and it must be shown that the
product candidate is not less effective than the approved
treatment. All efficacy studies upon which our NDA is based were
designed as non-inferiority studies after consultation with the
FDA. In September 2005, the FDA indicated to us that it will
likely require data from a placebo-controlled trial of Orapem
before it will consider approving it for acute exacerbation of
chronic bronchitis. In May 2006, the FDA requested an
explanation of how our non-inferiority studies contained in our
NDA for Orapem support efficacy in each of the indications for
which we are seeking approval. We cannot assure you that the FDA
will not require placebo-controlled trials, or other trials
involving comparator antibiotics, to demonstrate the superiority
of Orapem to placebo before considering the approval of Orapem
for one or more of the indications that are the subject of our
pending NDA. Conducting placebo-controlled trials for
antibiotics can be time consuming and expensive and can be
difficult to complete. Institutional review boards may not grant
approval for placebo-controlled trials because of ethical
concerns about denying some participating patients access to any
antibiotic therapy during the course of the trial. It may be
difficult to enroll patients in placebo-controlled trials even
if institutional review board approval is obtained because
certain patients would receive no therapy. Although we are
currently conducting a placebo-controlled trial for acute
exacerbation of chronic bronchitis, we have not completed any
placebo-controlled trials for Orapem for any indications. We may
not be able to show a statistically significant advantage over
placebo in any trials that we are able to complete. These
factors could delay for several years or ultimately prevent
commercialization of Orapem for any indications for which the
FDA requires placebo-controlled trials.
The efficacy of Orapem in subjects with uncomplicated skin and
skin structure infections was evaluated in two Phase III
studies. The results of one study met the protocol-specified
criterion for non-inferiority of Orapem to
amoxicillin/clavulanate. A second study did not demonstrate
non-inferiority of Orapem to cephalexin. The FDA has informed us
that evidence based on only a single trial will not provide
adequate evidence for efficacy for this indication. Therefore,
unless the FDA accepts our pooled clinical data compiled in two
studies, we will likely need to complete additional trials in
order to obtain approval for this indication. Even if we
complete these additional trials, we may not be able to obtain
adequate evidence of efficacy to support approval in
uncomplicated skin and skin structure infections.
We may experience significant delays in the launch of Orapem
for commercialization, which in turn could delay or prevent us
from generating significant revenues from the sale of Orapem
products.
We could experience potentially significant delays in the
commercial launch of Orapem due to many factors, such as:
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If any FDA approval of Orapem does not include approvals for at
least two commercially viable respiratory indications, which
must include both (i) acute sinusitis and (ii) either
community-acquired pneumonia or acute exacerbation of chronic
bronchitis, our partner, Forest Laboratories Holdings Limited,
or Forest Laboratories, has the contractual right to delay
launch of Orapem following such initial FDA approval. |
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|
If any FDA approval of Orapem does not include approval of
Orapem having at least an 18 month shelf-life, then Forest
Laboratories has the contractual right to delay launch of Orapem
following such initial FDA approval until sufficient supplies of
Orapem having at least an 18 month shelf-life are
available. The FDA will make a decision regarding shelf-life
based on ongoing real time and accelerated stability studies
combined with data from prior stability studies conducted by
Bayer and we cannot assure you that, at the time of initial FDA
approval, the FDA will consider this data sufficient for an
18 month shelf-life labeling. |
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If the FDAs inspections of the manufacturing facilities
for Orapem drug substance or Orapem tablets or the proposed
packaging operations for Orapem products reveal problems with
the manufacturer or the manufacturers facilities, then the
FDA may refuse to approve our pending NDA or issue a not
approvable letter or may require additional manufacturing
validation studies |
8
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or impose restrictions on operations, including new
manufacturing requirements, any of which would be costly and
time consuming and require further FDA review and approval. |
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The supply chain for Orapem for the U.S. market is a complex
process with highly interactive components consisting of the
manufacture of Orapem drug substance, the manufacture of Orapem
tablets, the packaging and labeling of Orapem, and the
distribution in the U.S. We rely on third parties for each of
these activities, including management of the supply chain. Any
failure in the complex execution that would influence the
ability to establish or manage these manufacturing, packaging
and distribution relationships in an effective or timely manner
could prevent us from achieving or maintaining market acceptance
of Orapem. |
Any one or a combination of these events could significantly
delay or prevent our ability to commercialize Orapem. If we are
not successful in commercializing Orapem, or are significantly
delayed in doing so, our business will be materially harmed.
The success of Orapem depends heavily on our collaboration
with Forest Laboratories, which was established only in February
2006 and involves a complex sharing of decisions,
responsibilities, costs and benefits. Any loss of Forest
Laboratories as a partner, or any adverse developments in the
collaboration, would materially harm our business.
In February 2006, we entered into a collaboration agreement with
Forest Laboratories to develop and commercialize Orapem. We have
granted Forest Laboratories an exclusive sublicense for the
development and sale of Orapem for all indications in the
U.S. We have also granted Forest Laboratories a right of
first refusal to extend the territory to include Canada. Forest
Laboratories is responsible for funding a substantial portion of
the continued development of Orapem, including clinical trials
and regulatory approval. If the FDA approves Orapem, Forest
Laboratories will also have primary responsibility for the
marketing and sales of the approved product and will share
responsibility for compliance with regulatory requirements.
Although Forest Laboratories has an established sales force
targeting primary care physicians, they do not have significant
experience marketing antibiotics. We have limited control over
the amount and timing of resources that Forest Laboratories will
dedicate to the development, approval and marketing of Orapem.
Although we share decision-making authority with respect to the
marketing of Orapem through a joint marketing committee, Forest
Laboratories generally has the right to make final decisions on
this committee if the parties are unable to reach consensus.
We are subject to a number of additional risks associated with
our dependence on our collaboration with Forest Laboratories,
including:
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We and Forest Laboratories could disagree as to development
plans, including clinical trials or regulatory approval
strategy, or as to which additional indications for Orapem
should be pursued. Disputes regarding the collaboration
agreement that delay or terminate the development,
commercialization or receipt of regulatory approvals of Orapem
would harm our business and could result in significant
litigation or arbitration. |
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|
Forest Laboratories could fail to devote sufficient resources to
the development, approval, commercialization, or marketing and
distribution of Orapem. After the time periods stated in the
collaboration agreement, Forest Laboratories could shift its
research, development and commercialization resources to other
product opportunities including those that might be competitive
with Orapem. |
|
|
|
Forest Laboratories has the contractual right to delay launch of
Orapem following the initial FDA approval if that approval does
not include both (i) acute sinusitis and (ii) either
community-acquired
pneumonia or acute exacerbation of chronic bronchitis. |
9
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|
Forest Laboratories has the contractual right to delay launch of
Orapem following the initial FDA approval until sufficient
supplies of Orapem having at least an 18 month shelf-life
are available, which we have not achieved to date. |
Forest Laboratories could also fail to effectively manage its
manufacturing relationship with its supplier of Orapem tablets,
Tropon GmbH, or Tropon, or with our supplier of Orapem drug
substance, Nippon Soda. Forest Laboratories is contractually
bound to purchase all of its tablet requirements from Tropon,
subject to certain exceptions. Tropon and Nippon Soda will
be subject to ongoing periodic unannounced inspections by the
FDA and corresponding state agencies for compliance with good
manufacturing practices regulations, or cGMPs, and similar
foreign standards. Neither we nor Forest Laboratories has
control over compliance by Tropon and Nippon Soda with
these regulations and standards.
Furthermore, Forest Laboratories may terminate our collaboration
agreement upon our material breach of the collaboration
agreement or our bankruptcy. Forest Laboratories may also
terminate our agreement upon 90 days notice in the
event that Forest Laboratories reasonably determines the
development program indicates issues of safety or efficacy that
are likely to prevent or significantly delay the filing or
approval of an NDA for Orapem or to result in labeling or
indications that would significantly adversely affect the
marketing of any product developed under the agreement.
We do not currently have the resources necessary to develop and
market Orapem on our own. If either we or Forest Laboratories do
not perform our respective obligations under, or devote
sufficient resources to, our collaboration, or if we and Forest
Laboratories do not work effectively together, Orapem may not be
successfully commercialized. If our collaboration were to be
terminated, we would need to establish an alternative
collaboration and may not be able to do so on acceptable terms
or at all.
We are at an early stage of development as a company, with
limited sources of revenue, and we may never become
profitable.
We are a development stage biopharmaceutical company with a
limited operating history. Currently, we have no products
approved for commercial sale and, to date, we have not generated
any revenue from product sales. Our ability to generate revenue
depends heavily on:
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obtaining U.S. and foreign regulatory approvals for our lead
product candidate, Orapem; |
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successfully developing and securing regulatory approval for our
other product candidate, REP8839; and |
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successfully commercializing any product candidates for which we
receive FDA approval. |
Our existing product candidates will require extensive
additional clinical evaluation, regulatory approval, significant
marketing efforts and substantial investment before they can
provide us with any revenue. If we do not receive regulatory
approval for and successfully commercialize Orapem, we will be
unable to generate any revenue from product sales for many
years, if at all. If we are unable to generate revenue, we will
not become profitable, and we may be unable to continue our
operations.
We have incurred significant operating losses since inception
and anticipate that we will incur continued losses for the
foreseeable future.
We have experienced significant operating losses since our
inception in 2000. At December 31, 2005, we had a deficit
accumulated during the development stage of approximately
$83.1 million. We have generated no revenue from product
sales to date. We have funded our operations to date principally
from the sale of our securities and from payments by Forest
Laboratories under our collaboration agreement. We expect to
continue to incur substantial additional operating losses for
the next several years as we pursue our clinical trials and
research and development efforts. Because of the numerous risks
and uncertainties associated with developing and commercializing
antibiotics, we are unable to predict the extent of any future
losses. We may never have any significant future revenue or
become profitable.
10
The commercial success of our product candidates will depend
upon attaining significant market acceptance of these products
among physicians, patients, health care payors and the medical
community.
None of our product candidates has been commercialized for any
indication. Even if approved for sale by the appropriate
regulatory authorities, physicians may not prescribe our product
candidates, in which case we would not generate revenue or
become profitable. Market acceptance of our lead product
candidate, Orapem, and any future product candidates by
physicians, healthcare payors and patients will depend on a
number of factors, including:
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the clinical indications for which the product candidate is
approved; |
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acceptance by physicians and patients of each product candidate
as a safe and effective treatment; |
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perceived advantages over alternative treatments; |
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the cost of treatment in relation to alternative treatments,
including numerous generic antibiotics; |
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the extent to which the product candidate is approved for
inclusion on formularies of hospitals and managed care
organizations; |
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the extent to which bacteria develop resistance to the product
candidate, thereby limiting its efficacy in treating or managing
infections; |
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whether the product candidate is designated under physician
treatment guidelines as a first-line therapy or as a
second- or
third-line therapy for
particular infections; |
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the availability of adequate reimbursement by third parties; |
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relative convenience and ease of administration; and |
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prevalence and severity of side effects. |
If our product candidates are unable to compete effectively
with generic and branded antibiotics, our commercial opportunity
will be reduced or eliminated.
If approved, our lead product candidate, Orapem, will compete
against both generic and branded community antibiotic therapies.
The market for such products is very competitive and includes
generic products, such as amoxicillin/clavulanate, and
established branded products, such as Omnicef, Zithromax, Ketek
and Levaquin, which are marketed by major pharmaceutical
companies, all of which have significantly greater financial
resources and expertise in research and development,
pre-clinical testing, conducting clinical trials, obtaining
regulatory approvals, manufacturing and marketing approved
products than we do. Smaller or early-stage companies may also
prove to be significant competitors, particularly through
collaborative arrangements with large, established companies.
Over the next several years, our products will face more
competition in the form of generic versions of branded products
of competitors that will lose their patent exclusivity. For
example, Orapem will begin to face competition from generic
Omnicef in 2008. Generic antibiotic therapies typically are sold
at lower prices than branded antibiotics and are preferred by
managed care providers of health services. If we are unable to
demonstrate to physicians that, based on experience, clinical
data, side-effect profiles and other factors, our products are
preferable to these generic antibiotic therapies, we may never
generate meaningful revenue. Our commercial opportunity will
also be reduced or eliminated if our competitors develop and
commercialize generic or branded antibiotics that are safer,
more effective, have fewer side effects or are less expensive
than our product candidates.
Daiichi Asubio owns a portfolio of patents related to faropenem
compounds, including the faropenem parent compound, Orapem and
other faropenem prodrugs. We have licensed from Daiichi Asubio
the patents to Orapem and other faropenem prodrugs. These
patents may not prevent competitors from developing other
faropenem drugs that are not covered by the Daiichi Asubio
patents. Beginning in
11
2008, when the Daiichi Asubio patents expire, competitors may
submit NDAs seeking approval of antibiotics containing the
faropenem parent compound as the active ingredient. These
applications would have to contain full reports of safety and
efficacy data conducted by or for the applicants and could not
in any way rely upon the safety and efficacy data utilized in
the approval of Orapem. In addition, as early as four years
after the approval of the Orapem NDA, competitors could also
file NDAs seeking approval of faropenem drugs that would likely
require the applicant to conduct clinical trials in order to
bring the product to market in the U.S., though the FDA may
allow the applicant to rely in part on the FDAs prior
findings of safety and efficacy of Orapem.
We have limited manufacturing capabilities and will depend on
third parties to manufacture Orapem and future products. If
these manufacturers fail to meet our or Forest
Laboratories requirements and strict regulatory standards,
we may be unable to develop or commercialize our products.
We do not have the capability to manufacture commercial
quantities of Orapem drug substance. We engaged a third party
manufacturer, Nippon Soda, as our sole supplier of Orapem drug
substance. We are contractually bound to purchase all of our
requirements from this party and we expect Nippon Soda will be
our and Forest Laboratories sole supplier of Orapem drug
substance for the foreseeable future. Nippon Soda may terminate
our supply agreement for a number of reasons, such as:
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an uncured material breach of the supply agreement by us; |
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our liquidation or insolvency; or |
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in some circumstances, following a change of control. |
Nippon Soda has only a single facility located in Nihongi, Japan
that can readily manufacture commercial quantities of Orapem. If
that facility were to be damaged or destroyed, we would have no
readily available source of supply. Nippon Soda has not yet
manufactured Orapem at commercial scale on a consistent basis,
nor has Nippon Soda completed the manufacturing process
validations that are part of the regulatory requirements prior
to obtaining marketing approval for Orapem.
Reliance on a third party manufacturer entails risks to which we
would not be subject if we manufactured products ourselves,
including:
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reliance on the third party for regulatory compliance and
quality assurance; |
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the possible breach of the manufacturing agreement by the third
party because of factors beyond our control; and |
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the possibility of termination or nonrenewal of the agreement by
the third party because of our breach of the manufacturing
agreement or based on its own business priorities. |
Any of these factors could cause delay or suspension of clinical
trials, regulatory submissions, required approvals or
commercialization of Orapem, cause us to incur higher costs and
could prevent us from commercializing our product candidates
successfully. Furthermore, if our contract manufacturers fail to
deliver the required commercial quantities of bulk drug
substance or finished product on a timely basis and at
commercially reasonable prices and we are unable to find one or
more replacement manufacturers capable of production at a
substantially equivalent cost, in substantially equivalent
volumes and quality, and on a timely basis, we would likely be
unable to meet demand for Orapem and we would lose potential
revenue. It may take several years to establish an alternative
source of supply for Orapem and to have any such new source
approved by the FDA.
Forest Laboratories has agreed to assume responsibility for
supply chain management for Orapem and we anticipate that Forest
Laboratories will enter into a direct relationship with Nippon
Soda as its sole supplier of Orapem drug substance under similar
terms as those currently in place between us and Nippon Soda.
12
If the FDA does not approve Nippon Sodas facility, we
may be unable to develop or commercialize Orapem.
We rely on Nippon Soda to manufacture Orapem drug substance and
currently have no plans to develop our own manufacturing
facility. The facilities used by our contract manufacturer to
manufacture our product candidates must be approved by the FDA.
Nippon Sodas facility has never been inspected by the FDA.
If Nippon Soda cannot successfully manufacture material that
conforms to our specifications and strict regulatory
requirements, Nippon Soda will not be able to secure FDA
approval for its manufacturing facility. If the FDA does not
approve this facility for the manufacture of Orapem, we and
Forest Laboratories may need to find alternative manufacturing
facilities, which would result in significant delay of up to
several years in obtaining approval for and manufacturing
Orapem. In addition, our contract manufacturer will be subject
to ongoing periodic unannounced inspections by the FDA and
corresponding state and foreign agencies for compliance with
cGMPs and similar regulatory requirements. These regulations
cover all aspects of the manufacturing, testing, quality control
and record keeping relating to our product candidates. We do not
have control over Nippon Sodas compliance with these
regulations and standards. Failure by Nippon Soda to comply with
applicable regulations could result in sanctions being imposed
on us, including fines, injunctions, civil penalties, failure to
grant approval to market our product candidates, delays,
suspension or withdrawals of approvals, operating restrictions
and criminal prosecutions, any of which could significantly and
adversely affect our business. In addition, we have no control
over Nippon Sodas ability to maintain adequate quality
control, quality assurance and qualified personnel. Failure by
our contract manufacturer to comply with or maintain any of
these standards could adversely affect our ability to develop,
obtain regulatory approval for or market our product candidates.
The success of our current business strategy will depend in
part on our ability to obtain FDA approval of Orapem for
pediatric use and, if FDA approval is obtained, to successfully
market an oral liquid formulation for the pediatric market.
The development of Orapem for pediatric use is an important part
of our current business strategy. We are developing Orapem for
pediatric use in conjunction with our strategic partner, Forest
Laboratories. We have developed a prototype oral liquid
formulation, have initiated a Phase II trial in acute
otitis media (middle ear infection) and are considering
conducting studies in tonsillitis/pharyngitis. Our ability to
successfully develop and market this product candidate for
pediatric use is subject to various risks, including the
following:
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Pre-clinical testing and clinical trials are protracted,
expensive and uncertain processes. It might take us and our
partner several years to complete the testing process, and
failure can occur at any stage of the process. Success in
pre-clinical testing and early clinical trials does not ensure
that later clinical trials will be successful. These risks are
potentially more pronounced in clinical tests involving children. |
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We have not completed any clinical trials in children to date. A
clinical trial conducted by Bayer for tonsillitis/pharyngitis in
adults did not meet its primary end point. |
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Any regulatory approval we ultimately obtain may be limited or
subject to post-approval commitments that render the product not
commercially viable. |
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Any NDA or other marketing authorization applications that we
may file might be denied by the FDA and analogous foreign
regulators. |
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This product candidate, even if found to be safe and effective,
might be difficult to develop into a commercially viable drug or
to manufacture on a large scale or might be uneconomical to
market commercially. |
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Third parties might market superior drugs or be more effective
in marketing equivalent drugs. |
13
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Even if this product candidate is successfully developed and
effectively marketed, the size of the potential market might
change such that our sales revenue is less than initially
contemplated. |
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Because of our relationship with our partner, Forest
Laboratories, we are dependent on Forest Laboratories to
commercialize Orapem. |
Any failure to obtain regulatory approval of Orapem for
pediatric use or to effectively market an approved product would
have a material and adverse impact on our ability to
successfully execute our current business strategy and would
significantly reduce the revenues that we might generate from
Orapem.
Any of our product candidates that are in clinical trials or
that we advance into clinical trials are subject to extensive
regulation, which can be costly and time consuming, cause
unanticipated delays, or prevent the receipt of the required
approvals to commercialize our product candidates.
The clinical development, manufacturing, labeling, storage,
record-keeping, advertising, promotion, export, marketing and
distribution of any of our product candidates currently in
clinical trials or that we advance into clinical trials are
subject to extensive regulation by the FDA in the U.S. and by
comparable governmental authorities in foreign markets.
Currently, we are developing Orapem for pediatric use and for
additional indications for adults and we are conducting
pre-clinical testing of REP8839. In the U.S. and in many foreign
jurisdictions, rigorous pre-clinical testing and clinical trials
and an extensive regulatory review process must be successfully
completed before a new drug can be sold. Satisfaction of these
and other regulatory requirements is costly, time consuming,
uncertain and subject to unanticipated delays. Clinical testing
is expensive, can take many years to complete and its outcome is
uncertain. Failure can occur at any time during the clinical
trial process. The results of pre-clinical studies and early
clinical trials of our product candidates may not be predictive
of the results of later-stage clinical trials. Product
candidates in later stages of clinical trials may fail to show
the desired safety and efficacy traits despite having progressed
through initial clinical testing. The time required to obtain
approval by the FDA is unpredictable but typically takes many
years following the commencement of clinical trials, depending
upon numerous factors. In addition, approval policies,
regulations, or the type and amount of clinical data necessary
to gain approval may change. We have not obtained regulatory
approval for any product candidate.
Our product candidates may fail to receive regulatory approval
for many reasons, including the following:
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we may be unable to demonstrate to the satisfaction of the FDA
or comparable foreign regulatory authorities that a product
candidate is safe and effective for a particular indication; |
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the results of clinical trials may not meet the level of
statistical significance required by the FDA or other regulatory
authorities for approval; |
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the FDA or other regulatory authorities may disagree with the
design of our clinical trials; |
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we may be unable to demonstrate that a product candidates
benefits outweigh its risks; |
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we may be unable to demonstrate that the product candidate
presents an advantage over existing therapies, or over placebo
in any indications for which the FDA requires a
placebo-controlled trial; |
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the FDA or comparable foreign regulatory authorities may
disagree with out interpretation of data from pre-clinical
studies or clinical trials; |
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the data collected from clinical trials of our product
candidates may not be sufficient to support the submission of a
new drug application or to obtain regulatory approval in the
U.S. or elsewhere; |
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the FDA or comparable foreign regulatory authorities may fail to
approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial
supplies; and |
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the approval policies or regulations of the FDA or comparable
foreign regulatory authorities may change. |
The FDA or comparable foreign regulatory authorities might
decide that our data are insufficient for approval and require
additional clinical trials or other studies. Furthermore, even
if we do receive regulatory approval to market a commercial
product, any such approval may be subject to limitations on the
indicated uses for which we may market the product. It is
possible that none of our existing product candidates or any
product candidates we may seek to develop in the future will
ever obtain the appropriate regulatory approvals necessary for
us or our collaborators to begin selling them.
Also, recent events have raised questions about the safety of
marketed drugs and may result in increased cautiousness by the
FDA in reviewing new drugs based on safety, efficacy or other
regulatory considerations and may result in significant delays
in obtaining regulatory approvals and more stringent product
labeling requirements. Any delay in obtaining, or inability to
obtain, applicable regulatory approvals would prevent us from
commercializing our product candidates.
If product liability lawsuits are successfully brought
against us or our partner Forest Laboratories, we may incur
substantial liabilities and may be required to limit
commercialization of our product candidates.
We face an inherent risk of product liability lawsuits related
to the testing of our product candidates, and will face an even
greater risk if product candidates are introduced commercially.
An individual may bring a liability claim against us if one of
our product candidates causes, or merely appears to have caused,
an injury. We have agreed to indemnify Nippon Soda from product
liability claims under our commercial arrangement with them. We
have also agreed to indemnify Forest Laboratories from claims
arising from our development, manufacture, use, handling,
storage, promotion, marketing or sale of any product, except as
related to certain Orapem products in the U.S. with respect
to which Forest Laboratories has agreed to bear a substantial
portion of any product liability claims. If we cannot
successfully defend ourselves against the product liability
claim, we may incur substantial liabilities. Regardless of merit
or eventual outcome, liability claims may result in:
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decreased demand for our product candidates; |
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injury to our reputation; |
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withdrawal of clinical trial participants; |
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significant litigation costs; |
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substantial monetary awards to or costly settlement with
patients; |
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product recalls; |
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loss of revenue; and |
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the inability to commercialize our product candidates. |
We are highly dependent upon consumer perceptions of us, the
Orapem brand and the safety and quality of our products. We
could be adversely affected if we or the Orapem brand is subject
to negative publicity. We could also be adversely affected if
any of our products or any similar products distributed by other
companies prove to be, or are asserted to be, harmful to
consumers. Also, because of our dependence upon consumer
perceptions, any adverse publicity associated with illness or
other adverse effects resulting from consumers use or
misuse of our products or any similar products distributed by
other companies could have a material adverse impact on our
results of operations.
15
We have global clinical trial liability insurance that covers
our clinical trials up to a $5.0 million annual aggregate
limit. Our current or future insurance coverage may prove
insufficient to cover any liability claims brought against us.
We intend to expand our insurance coverage to include the sale
of commercial products if marketing approval is obtained for our
product candidates. In addition, because of the increasing costs
of insurance coverage, we may not be able to maintain insurance
coverage at a reasonable cost or obtain insurance coverage that
will be adequate to satisfy any liability that may arise.
We currently have no sales organization. If we are unable to
establish a direct sales force in the U.S. to promote our
product candidates, the commercial opportunity for our product
candidates may be diminished.
We currently have no sales organization. If our lead product
candidate, Orapem, is approved by the FDA for adult use, Forest
Laboratories will market that product candidate directly to
primary care physicians in the U.S. but will rely on us to
market to physician specialists, such as otolaryngologists. If
Orapem is approved by the FDA for pediatric use and if we
exercise our option, we would be responsible for marketing
Orapem to pediatricians in the U.S. Although Forest
Laboratories will provide some funding, we will incur
significant additional expenses and commit significant
additional management resources to establish a pediatric sales
force. We may not be able to establish a specialty sales force
in a cost effective manner or realize a positive return on this
investment. We will also have to compete with other
pharmaceutical and biotechnology companies to recruit, hire,
train and retain sales and marketing personnel. If we elect to
rely on third parties, such as Forest Laboratories, to sell our
product candidates in the U.S., we may receive less revenue than
if we sold our product candidates directly. In addition, we may
have little or no control over the sales efforts of those third
parties. In the event we are unable to develop our own sales
force or collaborate with a third party to sell our product
candidates, we may not be able to commercialize our product
candidates which would negatively impact our ability to generate
revenue.
Delays in clinical testing could result in increased costs to
us and delay our ability to generate revenue.
We may experience delays in clinical testing of our product
candidates, including with respect to any clinical trials that
may be conducted by Forest Laboratories. We do not know whether
planned clinical trials will begin on time, will need to be
redesigned or will be completed on schedule, if at all. Clinical
trials can be delayed for a variety of reasons, including delays
in obtaining regulatory approval to commence a trial, in
reaching agreement on acceptable clinical trial terms with
prospective sites, in obtaining institutional review board
approval at each site, in recruiting patients to participate in
a trial, or in obtaining sufficient supplies of clinical trial
materials. Many factors affect patient enrollment, including the
size and nature of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the
trial, the design of the clinical trial, competing clinical
trials, clinicians and patients perceptions as to
the potential advantages of the drug being studied in relation
to other available therapies, including any new drugs that may
be approved for the indications we are investigating, and
whether the clinical trial design involves comparison to
placebo. Our antibiotics treat bacterial infections which tend
to be seasonal in nature. As a result, during certain times of
the year, it is difficult to find patients to enroll in our
trials. Prescribing physicians would also face ethical issues
associated with enrolling patients in clinical trials of our
product candidates over existing antibiotics that have
established safety and efficacy profiles or in
placebo-controlled trials. These ethical issues may be even more
pronounced in conducting clinical trials of antibiotics in
children. Any delays in completing our clinical trials will
increase our costs, slow down our product development and
approval process and delay our ability to generate revenue.
We may be required to suspend or discontinue clinical trials
due to side effects or other safety risks that could preclude
approval of our product candidates.
Our clinical trials may be suspended at any time for a number of
reasons. We may voluntarily suspend or terminate our clinical
trials if at any time we believe that they present an
unacceptable risk to participants. In addition, regulatory
agencies may order the temporary or permanent discontinuation of
our
16
clinical trials at any time if they believe that the clinical
trials are not being conducted in accordance with applicable
regulatory requirements or that they present an unacceptable
safety risk to participants.
Many antibiotics can produce significant side effects. Side
effects associated with many current antibiotics include kidney
and liver toxicities, heart rhythm abnormalities,
photosensitivity, rash, excessive flushing of the skin and
central nervous system toxicities, such as seizures. In clinical
trials, side effects of Orapem have included gastrointestinal
disorders (such as diarrhea, nausea and vomiting), nervous
system disorders (such as dizziness and headaches), as well as
infections and infestations (such as pneumonia and vaginal
mucosis). Later clinical trials in a larger patient population
could reveal other side effects. These or other side effects
could interrupt, delay or halt clinical trials of our product
candidates and could result in the FDA or other regulatory
authorities stopping further development of or denying approval
of our product candidates for any or all targeted indications.
Even if we believe our product candidates are safe, our data is
subject to review by the FDA, which may disagree with our
conclusions. Moreover, we could be subject to significant
liability if any volunteer or patient suffers, or appears to
suffer, adverse health effects as a result of participating in
our clinical trials.
If we fail to obtain additional financing, we may be unable
to complete the development and commercialization of Orapem and
other product candidates, or continue our research and
development programs.
Our operations have consumed substantial amounts of cash since
inception. We expect to continue to spend substantial amounts to:
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complete the clinical development of Orapem and REP8839; |
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license or acquire additional product candidates; |
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launch and commercialize any product candidates for which we
receive regulatory approval, including building our own sales
force to address certain markets; and |
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continue our research and development programs. |
We estimate that our net proceeds from this offering will be
approximately $40.3 million. We expect that the net
proceeds from this offering, together with our existing capital
resources, will be sufficient to fund our operations for at
least the next 18 months. We may be required to raise
additional capital to complete the development and
commercialization of our current product candidates.
To date, our sources of cash have been limited primarily to the
proceeds from the sale of our securities and payments by Forest
Laboratories under our collaboration agreement. We cannot be
certain that additional funding will be available on acceptable
terms, or at all. To the extent that we raise additional funds
by issuing equity securities, our stockholders may experience
significant dilution. Any debt financing, if available, may
involve restrictive covenants, such as limitations on our
ability to incur additional indebtedness, limitations on our
ability to acquire or license intellectual property rights and
other operating restrictions that could adversely impact our
ability to conduct our business. If we are unable to raise
additional capital when required or on acceptable terms, we may
have to significantly delay, scale back or discontinue the
development and/or commercialization of one or more of our
product candidates. We also may be required to:
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seek collaborators for our product candidates at an earlier
stage than otherwise would be desirable and on terms that are
less favorable than might otherwise be available; and |
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relinquish or license on unfavorable terms our rights to
technologies or product candidates that we otherwise would seek
to develop or commercialize ourselves. |
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Our ability to pursue the development and commercialization
of our product candidates depends upon the continuation of our
licenses from third parties.
Our license agreement with Daiichi Asubio provides us with an
exclusive license to develop and sell any products with the
compound Orapem as an active ingredient for any indication in
the U.S. and Canada, with a right to sublicense certain rights
to Forest Laboratories under our collaboration with Forest
Laboratories. Either we or Daiichi Asubio may terminate the
license agreement immediately upon the bankruptcy or dissolution
of the other party or upon a breach of any material provision of
the agreement if the breach is not cured within 60 days
following written notice. If our license agreement with Daiichi
Asubio were terminated, we would lose our rights to develop and
commercialize Orapem.
If we fail to gain and maintain approval for our product
candidates in international markets, our market opportunities
will be limited.
Sales of our product candidates outside of the U.S. will be
subject to foreign regulatory requirements governing clinical
trials and marketing approval. Even if the FDA grants marketing
approval for a product candidate, comparable regulatory
authorities of foreign countries must also approve the
manufacturing or marketing of the product candidate in those
countries. Approval in the U.S., or in any other jurisdiction,
does not ensure approval in other jurisdictions. Obtaining
foreign approvals could result in significant delays,
difficulties and costs for us and require additional trials and
additional expenses. Regulatory requirements can vary widely
from country to country and could delay the introduction of our
products in those countries. Clinical trials conducted in one
country may not be accepted by other countries and regulatory
approval in one country does not mean that regulatory approval
will be obtained in any other country. None of our products is
approved for sale in international markets and we do not have
experience in obtaining regulatory approval in international
markets. If we fail to comply with these regulatory requirements
or to obtain and maintain required approvals, our target market
will be reduced and our ability to generate revenue will be
diminished.
We may not be able to enter into acceptable agreements to
market and commercialize our product candidates in international
markets.
If appropriate regulatory approvals are obtained, we intend to
commercialize our product candidates in international markets
through collaboration arrangements with third parties. Our
collaboration with Forest Laboratories does not cover any
markets outside of the U.S. and Canada. If we decide to sell our
product candidates in international markets, we may not be able
to enter into any arrangements on favorable terms or at all. In
addition, these arrangements could result in lower levels of
income to us than if we marketed our product candidates entirely
on our own. If we are unable to enter into a marketing
arrangement for our product candidates in international markets,
we may not be able to develop an effective international sales
force to successfully commercialize those products in
international markets. If we fail to enter into marketing
arrangements for our products and are unable to develop an
effective international sales force, our ability to generate
revenue would be limited.
If we fail to attract and keep senior management and key
scientific personnel, we may be unable to successfully develop
our product candidates, conduct our clinical trials and
commercialize our product candidates.
Our success depends in part on our continued ability to attract,
retain and motivate highly qualified management, clinical and
scientific personnel and on our ability to develop and maintain
important relationships with leading academic institutions,
clinicians and scientists. We are highly dependent upon our
senior management and scientific staff, particularly Kenneth
Collins, our President and Chief Executive Officer, Roger
Echols, M.D., our Chief Medical Officer, Peter Letendre, Pharm.
D., our Chief Commercial Officer, and Nebojsa Janjic, Ph.D., our
Chief Scientific Officer. The loss of services of any of
Mr. Collins, Dr. Echols, Dr. Letendre or
Dr. Janjic or one or more of our other members of senior
management could delay or prevent the successful completion of
our planned clinical trials or the commercialization of our
product candidates. In addition, we only recently formed our
clinical
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and regulatory group, which is based in Connecticut, the
services of which we highly depend upon in order to conduct our
clinical programs and obtain regulatory approvals.
Competition for qualified personnel in the biotechnology and
pharmaceuticals field is intense. We will need to hire
additional personnel as we expand our clinical development and
commercial activities. We may not be able to attract and retain
quality personnel on acceptable terms. We do not carry key
person insurance covering any members of our senior
management. Each of our officers and key employees may terminate
his employment at any time without notice and without cause or
good reason.
Even if we receive regulatory approval for our product
candidates, we will be subject to ongoing significant regulatory
obligations and oversight.
If we receive regulatory approval to sell our product
candidates, the FDA and foreign regulatory authorities may
impose significant restrictions on the indicated uses or
marketing of such products, or impose ongoing requirements for
post-approval studies. Following any regulatory approval of our
product candidates, we and Forest Laboratories will be subject
to continuing regulatory obligations, such as safety reporting
requirements, and additional post-marketing obligations,
including regulatory oversight of the promotion and marketing of
our products. If we or Forest Laboratories become aware of
previously unknown problems with any of our product candidates
here or overseas or at our contract manufacturers
facilities, a regulatory agency may impose restrictions on our
products, our contract manufacturers or on us, including
requiring us to reformulate our products, conduct additional
clinical trials, make changes in the labeling of our products,
implement changes to, or obtain re-approvals of, our contract
manufacturers facilities, or withdraw the product from the
market. In addition, Forest Laboratories may experience a
significant drop in the sales of the affected products and our
product royalty will be reduced, our reputation in the
marketplace may suffer and we may become the target of lawsuits,
including class action suits. Moreover, if we or Forest
Laboratories fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecution. Any
of these events could harm or prevent sales of the affected
products and our royalties or could substantially increase the
costs and expenses of commercializing and marketing these
products.
Our corporate compliance program cannot guarantee that we are
in compliance with all potentially applicable regulations.
The development, manufacturing, pricing, marketing, sales, and
reimbursement of our product candidates, together with our
general operations, are subject to extensive regulation by
federal, state and other authorities within the U.S. and
numerous entities outside of the U.S. If we or Forest
Laboratories fail to comply with any of these regulations, we or
they could be subject to a range of regulatory actions,
including suspension or termination of clinical trials, the
failure to approve a product candidate, restrictions on our
product candidates or manufacturing processes, withdrawal of
products from the market, significant fines, or other sanctions
or litigation, and exclusion of our products from the
Medicare/Medicaid payment system. Further, becoming a publicly
traded company will subject us to significant additional
regulations. If we fail to comply with these new regulations, we
could face enforcement or other civil or criminal actions by the
Securities and Exchange Commission or delisting by The Nasdaq
National Market.
We rely on third parties to conduct our clinical trials. If
these third parties do not successfully carry out their
contractual duties or meet expected deadlines, we may not be
able to obtain regulatory approval for or commercialize our
product candidates.
We have agreements with third-party contract research
organizations to provide monitors for and to manage data for our
on-going clinical programs. We and our contract research
organizations are required to comply with current Good Clinical
Practices, or GCPs, regulations and guidelines enforced by the
FDA for all of our products in clinical development. The FDA
enforces GCPs through periodic inspections of trial sponsors,
principal investigators and trial sites. If we or our contract
research organizations fail to comply with applicable GCPs, the
clinical data generated in our clinical trials may be
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deemed unreliable and the FDA may require us to perform
additional clinical trials before approving our marketing
applications. We cannot assure you that, upon inspection, the
FDA will determine that any of our clinical trials comply with
GCPs. In addition, our clinical trials must be conducted with
product produced under cGMP regulations, and will require a
large number of test subjects. Our failure to comply with these
regulations may require us to repeat clinical trials, which
would delay the regulatory approval process.
Our contract research organizations have the right to terminate
their agreements with us in the event of an uncured material
breach. In addition, some of our contract research organizations
have an ability to terminate their respective agreements with us
if it can be reasonably demonstrated that the safety of the
subjects participating in our clinical trials warrants such
termination, if we make a general assignment for the benefit of
our creditors, or if we are liquidated. If any of our
relationships with these third-party contract research
organizations terminate, we may not be able to enter into
arrangements with alternative contract research organizations.
If contract research organizations do not successfully carry out
their contractual duties or obligations or meet expected
deadlines, if they need to be replaced, or if the quality or
accuracy of the clinical data they obtain is compromised due to
the failure to adhere to our clinical protocols, regulatory
requirements, or for other reasons, our clinical trials may be
extended, delayed or terminated, and we may not be able to
obtain regulatory approval for or successfully commercialize our
product candidates. As a result, our financial results and the
commercial prospects for our product candidates would be harmed,
our costs could increase and our ability to generate revenue
could be delayed.
Reimbursement may not be available for our product
candidates, which could diminish our sales or affect our ability
to sell our products profitably.
Market acceptance and sales of our product candidates will
depend on reimbursement policies and may be affected by future
health care reform measures. Government authorities and
third-party payors, such as private health insurers and health
maintenance organizations, decide which drugs they will pay for
and establish reimbursement levels. We cannot be sure that
reimbursement will be available for any of our product
candidates. Also, we cannot be sure that reimbursement amounts
will not reduce the demand for, or the price of, our products.
We have not commenced efforts to have our product candidates
reimbursed by government or third party payors. If reimbursement
is not available or is available only to limited levels, we may
not be able to commercialize our products.
In both the U.S. and certain foreign jurisdictions, there have
been a number of legislative and regulatory changes to the
healthcare system that could impact our ability to sell our
products profitably. In particular, the Medicare Modernization
Act of 2003 added an outpatient prescription drug benefit to
Medicare, which became effective on January 1, 2006. Drug
benefits under this provision are administered through private
plans that negotiate price concessions from pharmaceutical
manufacturers. We cannot be certain that Orapem will
successfully be placed on the list of drugs covered by
particular health plans, plan formularies, nor can we predict
the negotiated price for Orapem, which will be determined by
market factors. With respect to Medicaid, the Deficit Reduction
Act of 2005 made several changes to the way pharmacies are
reimbursed under Medicaid, most of which go into effect on
January 1, 2007. These changes could lead to reduced drug
prices. Many states have also created preferred drug lists and
include drugs on those lists only when the manufacturers agree
to pay a supplemental rebate. If Orapem is not included on these
preferred drug lists, physicians may not be inclined to
prescribe it to their Medicaid patients.
As a result of legislative proposals and the trend towards
managed health care in the U.S., third-party payors are
increasingly attempting to contain health care costs by limiting
both coverage and the level of reimbursement of new drugs. They
may also refuse to provide any coverage of uses of approved
products for medical indications other than those for which the
FDA has granted market approvals. As a result, significant
uncertainty exists as to whether and how much third-party payors
will reimburse patients for their use of newly-approved drugs,
which in turn will put pressure on the pricing of drugs. The
availability of numerous generic antibiotics at lower prices
than branded antibiotics, such as Orapem, if it
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were approved for commercial introduction, can also be expected
to substantially reduce the likelihood of reimbursement for
Orapem. We expect to experience pricing pressures in connection
with the sale of our products due to the trend toward managed
health care, the increasing influence of health maintenance
organizations and additional legislative proposals.
We will need to increase the size of our organization, and we
may experience difficulties in managing growth.
We are a small company with 61 employees as of March 31,
2006, approximately 30% of whom have joined us in the
preceding 12 months. To continue our clinical trials and
commercialize our product candidates, we will need to expand our
employee base for managerial, operational, sales, financial and
other resources, which we expect will result in our
approximately doubling the number of employees we have by the
end of 2006. Future growth will impose significant added
responsibilities on members of management, including the need to
identify, recruit, maintain and integrate additional employees.
Our future financial performance and our ability to
commercialize our product candidates and to compete effectively
will depend, in part, on our ability to manage any future growth
effectively. To that end, we must be able to:
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manage our development efforts effectively; |
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manage our clinical trials effectively; |
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integrate additional management, administrative, manufacturing
and sales and marketing personnel; |
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maintain sufficient administrative, accounting and management
information systems and controls; and |
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hire and train additional qualified personnel. |
We may not be able to accomplish these tasks, and our failure to
accomplish any of them could harm our financial results.
If we fail to identify, acquire and develop other products or
product candidates, we may be unable to grow our business.
A key element of our strategy is to commercialize a portfolio of
new anti-infective products in addition to Orapem. To date, we
have in-licensed rights to each of our product candidates. As a
significant part of our growth strategy, we intend to develop
and commercialize additional products and product candidates
through our discovery research program or by licensing or
acquiring additional products from third parties. The success of
this strategy depends upon our ability to identify, select and
acquire the right pharmaceutical product candidates and products
on terms that are acceptable to us.
Any product candidate we identify, license or acquire may
require additional development efforts prior to commercial sale,
including extensive clinical testing and approval by the FDA and
applicable foreign regulatory authorities. All product
candidates are prone to the risks of failure inherent in
pharmaceutical product development, including the possibility
that the product candidate will not be shown to be sufficiently
safe and effective for approval by regulatory authorities. In
addition, we cannot assure you that any such products that are
approved will be manufactured or produced economically,
successfully commercialized or widely accepted in the
marketplace.
Proposing, negotiating and implementing an economically viable
product acquisition or license is a lengthy and complex process.
Other companies, including those with substantially greater
financial,
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marketing and sales resources, may compete with us for the
acquisition or license of product candidates and approved
products. We may not be able to acquire or license the rights to
additional product candidates and approved products on terms
that we find acceptable, or at all.
A significant portion of the research that we are conducting
involves new and unproven technologies. Research programs to
identify new disease targets and product candidates require
substantial technical, financial and human resources whether or
not we ultimately identify any candidates. Our research programs
may initially show promise in identifying potential product
candidates, yet fail to yield product candidates for clinical
development.
If we are unable to develop suitable potential product
candidates through internal research programs or by obtaining
rights to novel therapeutics from third parties, our business
will suffer.
If we do not find collaborators for our future product
candidates, we may have to reduce or delay our rate of product
development and commercialization and/or increase our
expenditures.
Our strategy to develop and commercialize our products includes
entering into various relationships with pharmaceutical or
biotechnology companies to advance our programs. We may not be
able to negotiate any collaborations on acceptable terms. If we
are not able to establish collaborative arrangements, we may
have to reduce or delay further development of some of our
programs and/or increase our expenditures and undertake the
development activities at our own expense.
If we are able to identify and reach agreement with
collaborators for our product candidates, those relationships
will also be subject to a number of risks, including:
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collaborators may not pursue further development and
commercialization of compounds resulting from collaborations or
may elect not to renew research and development programs; |
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collaborators may delay clinical trials, underfund a clinical
trial program, stop a clinical trial or abandon a product
candidate, repeat or conduct new clinical trials, or require the
development of a new formulation of a product candidate for
clinical testing; |
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a collaborator with marketing and distribution rights to one or
more of our products may not commit sufficient resources to the
marketing and distribution of our products, limiting our
potential revenues from the commercialization of these products;
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disputes may arise delaying or terminating the research,
development or commercialization of our product candidates, or
result in significant litigation or arbitration. |
Seasonal fluctuations in demand for our current product
candidates may cause our operating results to vary significantly
from quarter to quarter.
We expect physician and patient demand for our antibiotic
products to be higher between October and February due to
greater amounts of respiratory illness in North America during
that time period. As a result, our shipments, and therefore
revenues, are expected to be higher in the fourth calendar
quarter and first calendar quarter reflecting higher demand
through that season. We generally expect our revenues during the
third calendar quarter to be lower than the other quarters. In
addition, fluctuations in the peak and trough of respiratory
illness incidence may cause our operating results to vary from
year to year. Due to these seasonal fluctuations in demand, our
operating results in any particular quarter may not be
indicative of the results for any other quarter or for the
entire year.
Risks Related to our Intellectual Property
It is difficult and costly to protect our proprietary rights,
and we may not be able to ensure their protection.
Our commercial success will depend in part on obtaining and
maintaining patent protection and trade secret protection of our
product candidates, and the methods used to manufacture them, as
well as
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successfully defending these patents against third-party
challenges. Our ability to protect our product candidates from
unauthorized making, using, selling, offering to sell or
importation by third parties is dependent upon the extent to
which we have rights under valid and enforceable patents or
trade secrets that cover these activities.
As of March 31, 2006, we have exclusively licensed from
Daiichi Asubio two issued U.S. patents, one issued foreign
patent and one pending U.S. patent application covering Orapem,
a prodrug of faropenem. The two issued U.S. patents covering
Orapem also cover other potential prodrugs of faropenem but do
not cover all potential faropenem-based antibiotic compounds. We
do not and have not had any control over the filing or
prosecution of these patents or patent applications. We cannot
be certain that such prosecution efforts have been or will be
conducted in compliance with applicable laws and regulations or
will result in valid and enforceable patents. In addition, our
enforcement of these Orapem patents or defense of any claims
asserting the invalidity of these patents would be subject to
the cooperation of Daiichi Asubio and Forest Laboratories.
Although Daiichi Asubio and Forest Laboratories have agreed to
cooperate with us in such efforts, if requested, we cannot be
assured that Daiichi Asubio and Forest Laboratories would devote
sufficient efforts to cooperate with us in these circumstances.
The patent positions of pharmaceutical and biotechnology
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 biotechnology patents has emerged to date in the
U.S. The biotechnology patent situation outside the
U.S. is even more uncertain. Changes in either the patent
laws or in interpretations of patent laws in the U.S. and 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 licensed patents, our patents or in
third-party patents.
Daiichi Asubio owns a portfolio of patents related to faropenem
compounds, including the faropenem parent compound, Orapem and
other faropenem prodrugs. We have licensed from Daiichi Asubio
the patents to Orapem and other faropenem prodrugs. These
patents may not prevent competitors from developing other
faropenem drugs that are not covered by the Daiichi Asubio
patents. Beginning in 2008, when the Daiichi Asubio patents
expire, competitors may submit NDAs seeking approval of
antibiotics containing the faropenem parent compound as the
active ingredient. These applications would have to contain full
reports of safety and efficacy data conducted by or for the
applicants and could not in any way rely upon the safety and
efficacy data utilized in the approval of Orapem. In addition,
as early as four years after the approval of the Orapem NDA,
generic and branded competitors could also file NDAs seeking
approval of faropenem drugs that would likely require the
applicant to conduct clinical trials in order to bring the
product to market in the U.S., though the FDA may allow the
applicant to rely in part on the FDAs prior findings of
safety and efficacy of Orapem. To the extent that any competitor
relies on any of the findings of safety or efficacy with respect
to Orapem, the competitor will have to certify that its compound
either does not infringe our patents or that our patents are
invalid.
The degree of future protection for 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. For example:
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others may be able to make compounds that are similar to our
product candidates but that are not covered by the claims of our
licensed patents, or for which we are not licensed under our
license agreements; |
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we or our licensors might not have been the first to make the
inventions covered by our pending patent application or the
pending patent applications and issued patents of our licensors; |
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we or our licensors might not have been the first to file patent
applications for these inventions; |
23
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others may independently develop similar or alternative
technologies or duplicate any of our technologies; |
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it is possible that our pending patent applications will not
result in issued patents; |
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our issued patents and the issued patents of our licensors may
not provide us with any competitive advantages, or may be held
invalid or unenforceable as a result of legal challenges by
third parties; |
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we may not develop additional proprietary technologies that are
patentable; or |
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the patents of others may have an adverse effect on our business. |
We also may rely on trade secrets to protect our technology,
especially where we do not believe patent protection is
appropriate or obtainable. However, trade secrets are difficult
to protect. Although we use reasonable efforts to protect our
trade secrets, our employees, consultants, contractors, outside
scientific collaborators and other advisors may unintentionally
or willfully disclose our information to competitors. Enforcing
a claim that a third party illegally obtained and is using any
of our trade secrets is expensive and time consuming, and the
outcome is unpredictable. In addition, courts outside the
U.S. are sometimes less willing to protect trade secrets.
Moreover, our competitors may independently develop equivalent
knowledge, methods and know-how.
We may incur substantial costs as a result of litigation or
other proceedings relating to patent and other intellectual
property rights and we may be unable to protect our rights to,
or use, our technology.
If we choose to go to court to stop someone else from using the
inventions claimed in our patents or our licensed patents, that
individual or company has the right to ask the court to rule
that these patents are invalid and/or should not be enforced
against that third party. These lawsuits are expensive and would
consume time and other resources even if we were successful in
stopping the infringement of these patents. In addition, there
is a risk that the court will decide that these patents are not
valid and that we do not have the right to stop the other party
from using the inventions. There is also the risk that, even if
the validity of these patents is upheld, the court will refuse
to stop the other party on the ground that such other
partys activities do not infringe our rights to these
patents.
Furthermore, a third party may claim that we or our
manufacturing or commercialization partners are using inventions
covered by the third partys patent rights and may go to
court to stop us from engaging in our normal operations and
activities, including making or selling our product candidates.
These lawsuits are costly and could affect our results of
operations and divert the attention of managerial and technical
personnel. There is a risk that a court would decide that we or
our commercialization partners are infringing the third
partys patents and would order us or our partners to stop
the activities covered by the patents. In addition, there is a
risk that a court will order us or our partners to pay the other
party damages for having violated the other partys
patents. We have indemnified our commercial partners against
patent infringement claims. The biotechnology industry has
produced a proliferation of patents, and it is not always clear
to industry participants, including us, which patents cover
various types of products or methods of use. The coverage of
patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent
infringement, we would need to demonstrate that our products or
methods of use either do not infringe the patent claims of the
relevant patent and/or that the patent claims are invalid, and
we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear
and convincing evidence to overcome the presumption of validity
enjoyed by issued patents.
Because some patent applications in the U.S. may be
maintained in secrecy until the patents are issued, because
patent applications in the U.S. and many foreign jurisdictions
are typically not published until eighteen months after filing,
and because publications in the scientific literature often lag
behind actual discoveries, we cannot be certain that others have
not filed patent applications for technology covered by our
licensors issued patents or our pending applications or
our licensors pending applications, or that we or our
licensors were the first to invent the technology. Our
competitors may have filed, and
24
may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority
over our or our licensors patent applications and could
further require us to obtain rights to issued patents covering
such technologies. If another party has filed a U.S. patent
application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the
U.S. Patent and Trademark Office to determine priority of
invention in the U.S. The costs of these proceedings could
be substantial, and it is possible that such efforts would be
unsuccessful, resulting in a loss of our U.S. patent
position with respect to such inventions.
Some of our competitors may be able to sustain the costs of
complex patent litigation more effectively than we can because
they have substantially greater resources. In addition, any
uncertainties resulting from the initiation and continuation of
any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
Risks Related to this Offering and Ownership of our Common
Stock
The market price of our common stock may be highly volatile,
and you may not be able to resell your shares at or above the
initial public offering price.
Prior to this offering, there has not been a public market for
our common stock. We cannot assure you that an active trading
market for our common stock will develop following this
offering. You may not be able to sell your shares quickly or at
the market price if trading in our common stock is not active.
The initial public offering price for the shares will be
determined by negotiations between us and representatives of the
underwriters and may not be indicative of prices that will
prevail in the trading market.
The trading price of our common stock is likely to be highly
volatile and could be subject to wide fluctuations in price in
response to various factors, many of which are beyond our
control, including:
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announcement of FDA approval or non-approval of our product
candidates, or specific label indications for their use, or
delays in the FDA review process; |
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actions taken by regulatory agencies with respect to our product
candidates, clinical trials, manufacturing process or sales and
marketing activities; |
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changes in laws or regulations applicable to our products,
including but not limited to clinical trial requirements for
approvals; |
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the success of our development efforts and clinical trials; |
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the success of our efforts to acquire or in-license additional
products or product candidates; |
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developments concerning our collaborations, including but not
limited to those with our sources of manufacturing supply and
our commercialization partners; |
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actual or anticipated variations in our quarterly operating
results; |
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announcements of technological innovations by us, our
collaborators or our competitors; |
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new products or services introduced or announced by us or our
commercialization partners, or our competitors and the timing of
these introductions or announcements; |
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actual or anticipated changes in earnings estimates or
recommendations by securities analysts; |
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conditions or trends in the biotechnology and biopharmaceutical
industries; |
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments; |
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general economic and market conditions and other factors that
may be unrelated to our operating performance or the operating
performance of our competitors; |
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changes in the market valuations of similar companies; |
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sales of common stock or other securities by us or our
stockholders in the future; |
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additions or departures of key scientific or management
personnel; |
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developments relating to proprietary rights held by us or our
competitors; |
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disputes or other developments relating to proprietary rights,
including patents, litigation matters and our ability to obtain
patent protection for our technologies; |
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trading volume of our common stock; and |
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sales of our common stock by us or our stockholders. |
In addition, the stock market in general and the market for
biotechnology and biopharmaceutical companies in particular have
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those 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, securities class-action
litigation has often been instituted against companies. Such
litigation, if instituted against us, could result in
substantial costs and diversion of managements attention
and resources, which could materially adversely affect our
business and financial condition.
Our principal stockholders and management own a significant
percentage of our stock and will be able to exercise significant
influence over matters subject to stockholder approval.
Our executive officers, directors and principal stockholders,
together with their respective affiliates, currently own
approximately 83.0% of our voting stock, including shares
subject to outstanding options, and we expect that upon
completion of this offering that same group will continue to
hold at least a majority of our outstanding voting stock.
Accordingly, even after this offering, these stockholders will
likely be able to determine the composition of our board of
directors, retain the voting power to approve all matters
requiring stockholder approval and continue to have significant
influence over our operations. This concentration of ownership
could have the effect of delaying or preventing a change in our
control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a
material and adverse effect on the market value of our common
stock.
We will incur significant increased costs as a result of
operating as a public company, and our management will be
required to devote substantial time to new compliance
initiatives.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the Securities and Exchange
Commission and the Nasdaq National Market, have imposed various
new requirements on public companies, including requiring
establishment and maintenance of effective disclosure and
financial controls and changes in corporate governance
practices. Our management and other personnel will need to
devote a substantial amount of time to these new compliance
initiatives. Moreover, these rules and regulations will increase
our legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we
expect these rules and regulations to make it more difficult and
more expensive for us to obtain director and officer liability
insurance, and we may be required to incur substantial costs to
maintain the same or similar coverage.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, commencing in
fiscal 2007, we must perform system and process evaluation and
testing of our internal controls over financial reporting to
allow management and our independent registered public
accounting firm to report on the effectiveness of our internal
controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material
weaknesses.
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Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and
we will need to hire additional accounting and financial staff
with appropriate public company experience and technical
accounting knowledge. Moreover, if we are not able to comply
with the requirements of Section 404 in a timely manner, or
if we or our independent registered public accounting firm
identifies deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses, the market
price of our stock could decline and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other
regulatory authorities, which would require additional financial
and management resources.
Future sales of our common stock in the public market could
cause our stock price to fall.
Sales of a substantial number of shares of our common stock in
the public market after this offering, or the perception that
these sales might occur, could depress the market price of our
common stock and could impair our ability to raise capital
through the sale of additional equity securities. After this
offering, we will have 26,426,497 shares of common stock
outstanding.
Substantially all of our existing stockholders are subject to
lock-up agreements with
the underwriters of this offering that restrict the
stockholders ability to transfer shares of our common
stock for at least 180 days from the date of this
prospectus. The lock-up
agreements, together with restrictions under the securities laws
described in Shares Eligible for Future Sale limit
the number of shares of common stock that may be sold
immediately following the public offering.
All of the shares of common stock sold in this offering will be
freely tradable without restrictions or further registration
under the Securities Act of 1933, as amended, except for any
shares purchased by our affiliates as defined in Rule 144
under the Securities Act. Rule 144 defines an affiliate as
a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under
common control with, us and would include persons such as our
directors and executive officers. The remaining
21,926,497 shares of common stock outstanding after this
offering will be available for sale as described in the
Shares Eligible for Future Sale section of this
prospectus.
If you purchase shares of common stock sold in this offering,
you will experience immediate dilution. You will experience
further dilution if we issue shares in future financing
transactions or upon exercise of options or warrants.
If you purchase shares of common stock in this offering, you
will experience immediate dilution of $6.62 per share
because the price that you pay will be substantially greater
than the net tangible book value per share of the shares you
acquire. This dilution is due in large part to the fact that our
earlier investors paid substantially less than the initial
public offering price when they purchased their shares.
If we raise additional funds by issuing additional common stock,
or securities convertible into or exchangeable or exercisable
for common stock, our stockholders will experience additional
dilution, and new investors could have rights superior to
existing stockholders.
Pursuant to our 2006 Equity Incentive Plan, our management is
authorized to grant stock options to our employees, directors
and consultants, and following the completion of this offering,
our employees will be eligible to participate in our 2006
Employee Stock Purchase Plan. In addition, we also have warrants
outstanding to purchase shares of our common stock. You will
incur dilution upon exercise of any outstanding stock options or
warrants.
We are at risk of securities class action litigation.
In the past, securities class action litigation has often been
brought against a company following a decline in the market
price of its securities. This risk is especially relevant for us
because biotechnology and biopharmaceutical companies have
experienced significant stock price volatility in recent years.
If we face such litigation, it could result in substantial costs
and a diversion of managements attention and resources,
which could harm our business.
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We have broad discretion to use the net proceeds from this
offering and our investment of these proceeds may not yield a
favorable return.
Our management has broad discretion as to how to spend and
invest the proceeds from this offering, and we may spend or
invest these proceeds in ways with which our stockholders may
not agree. Accordingly, you will need to rely on our judgment
with respect to the use of these proceeds, and you will not have
the opportunity as part of your investment decision to assess
whether they are being used or invested appropriately. We plan
to invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities. These investments
may not yield a favorable return to our stockholders.
Our ability to utilize our net operating loss carryforwards
and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code, if a
corporation undergoes an ownership change (generally
defined as a greater than 50% change (by value) in its equity
ownership over a three-year period), the corporations
ability to use its pre-change net operating loss carryforwards
and other pre-change tax attributes to offset its post-change
income may be limited. We believe that, with our initial public
offering, our most recent private placement and other
transactions that have occurred over the past three years, we
have triggered an ownership change limitation. We
have performed an analysis to determine to what extent our
ability to utilize our net operating loss carryforwards is
limited. We may also experience ownership change in the future
as a result of subsequent shifts in our stock ownership. At
December 31, 2005, the Company had approximately
$67.9 million of net operating loss carryforwards and
approximately $1.4 million of research and experimentation
credits which may be used to offset future taxable income.
Some provisions of our charter documents and Delaware law may
have anti-takeover effects that could discourage an acquisition
of us by others, even if an acquisition would be beneficial to
our stockholders.
Provisions in our certificate of incorporation and bylaws, as
well as provisions of Delaware law, could make it more difficult
for a third party to acquire us, even if doing so would benefit
our stockholders. These provisions include:
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authorizing the issuance of blank check preferred
stock, the terms of which may be established and shares of which
may be issued without stockholder approval; |
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limiting the removal of directors by the stockholders; |
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prohibiting stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
our stockholders; |
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eliminating the ability of stockholders to call a special
meeting of stockholders; and |
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted upon at stockholder meetings. |
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business
combinations with an interested stockholder for a period of
three years following the date on which the stockholder became
an interested stockholder, unless such transactions are approved
by our board of directors. This provision could have the effect
of delaying or preventing a change of control, whether or not it
is desired by or beneficial to our stockholders.
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FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Business and elsewhere in this prospectus contain
forward-looking statements. In some cases, you can identify
forward-looking statements by the following words:
may, will, could,
would, should, expect,
intend, plan, anticipate,
believe, estimate, predict,
project, potential,
continue, ongoing or the negative of
these terms or other comparable terminology, although not all
forward-looking statements contain these words. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity,
performance or achievements to be materially different from the
information expressed or implied by these forward-looking
statements. Although we believe that we have a reasonable basis
for each forward-looking statement contained in this prospectus,
we caution you that these statements are based on a combination
of facts and factors currently known by us and our projections
of the future, about which we cannot be certain. Many important
factors affect our ability to achieve our objectives, including:
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the success and timing of our pre-clinical studies and clinical
trials; |
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our ability to obtain and maintain regulatory approval of our
product candidates and the labeling under any approval we may
obtain; |
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our plans to develop and commercialize our product candidates; |
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the loss of key scientific or management personnel; |
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the size and growth of the potential markets for our product
candidates and our ability to serve those markets; |
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regulatory developments in the U.S. and foreign countries; |
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the rate and degree of market acceptance of any future products; |
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our use of the proceeds from this offering; |
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the accuracy of our estimates regarding expenses, future
revenues and capital requirements; |
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our ability to obtain and maintain intellectual property
protection for our product candidates; |
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the successful development of our sales and marketing
capabilities; |
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the success of competing drugs that are or become available; and |
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the performance of third party manufacturers. |
In addition, you should refer to the Risk Factors
section of this prospectus for a discussion of other important
factors that may cause our actual results to differ materially
from those expressed or implied by our forward-looking
statements. As a result of these factors, we cannot assure you
that the forward-looking statements in this prospectus will
prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be
material. In light of the significant uncertainties in these
forward-looking statements, you should not regard these
statements as a representation or warranty by us or any other
person that we will achieve our objectives and plans in any
specified time frame, or at all. The Private Securities
Litigation Reform Act of 1995 and Section 27A of the
Securities Act of 1933 do not protect any forward-looking
statements that we make in connection with this offering.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information that is different. We are offering to sell and
seeking offers to buy shares of our common stock only in
jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or any sale of our common stock. We undertake
no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or
otherwise, except as required by law.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
our common stock in this offering will be approximately
$40.3 million, or approximately $46.5 if the underwriters
exercise their over-allotment option in full, based upon an
assumed initial public offering price of $10.00 per share
and after deducting underwriting discounts and commissions and
estimated offering expenses.
We currently expect to use our net proceeds from this offering
as follows:
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approximately $20.0 million to fund clinical trials and
other research and development activities for Orapem; |
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approximately $12.0 million to fund future clinical trials
for REP8839; |
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approximately $5.0 million to fund activities in
preparation for the potential commercial launch of Orapem; and |
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the remainder, along with our available cash and cash
equivalents, short-term investments and interest earned, to fund
working capital and other general corporate purposes, including
sales, general and administrative expenses and potential further
expansion of our employee base and facilities, as well as
amounts due to Daiichi Asubio under our license agreement, which
amounts are uncertain as to timing and dependent on the
achievement of milestones. |
We may also use a portion of the proceeds for the potential
acquisition of, or investment in, other product candidates,
intellectual property rights or companies that complement our
business, although we have no current understandings,
commitments or agreements to do so.
This expected use of net proceeds of this offering represents
our current intentions based upon our present plans and business
conditions. As of the date of this prospectus, we cannot specify
with certainty all of the particular uses for the net proceeds
to be received upon the completion of this offering.
Accordingly, our management will have broad discretion in the
application of the net proceeds, and investors will be relying
on the judgment of our management regarding the application of
the proceeds of this offering. Pending their uses, we plan to
invest the net proceeds of this offering in short- and
intermediate-term, interest-bearing obligations,
investment-grade instruments, certificates of deposit or direct
or guaranteed obligations of the U.S. government.
We do not expect the net proceeds from this offering alone to be
sufficient to fully support commercial scale operations if we
successfully commercialize Orapem or to fund the completion of
development of our REP8839 product candidate, any product
candidates generated from our discovery research program or our
Orapem product candidate for certain indications. We intend to
use our cash and cash equivalents, short-term investments,
funding received or made available under our collaboration
agreement with Forest Laboratories and interest earned on these
balances toward the additional funding necessary to support
these activities. If the funds provided by these sources are
insufficient to satisfy our future capital needs, or if we
develop additional products or pursue additional applications
for our products, or conduct additional clinical trials beyond
those currently contemplated, we may seek to sell additional
equity or debt securities or acquire a credit facility. Any such
required additional capital may not be available on reasonable
terms, if at all. If we are unable to obtain additional
financing, we may be required to modify our planned research,
development and commercialization strategy, which could
materially and adversely affect our business.
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The timing and costs to complete the successful development and
commercialization of any of our product candidates are highly
uncertain and therefore difficult to estimate. However, we
expect that during the next 18 months we will be able to:
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complete our Phase III
placebo-controlled
clinical trial for Orapem in the treatment of acute exacerbation
of chronic bronchitis; |
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complete our Phase II clinical trials for an oral liquid
formulation of Orapem among pediatric patients; and |
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initiate and advance a Phase I clinical trial for a
REP8839/mupirocin combination product for topical use for skin
and wound infections and prevention of S. aureus
infections, including MRSA infections, in hospital settings. |
The lengthy process of seeking regulatory approvals for our
product candidates, and the subsequent compliance with
applicable regulations, require the expenditure of substantial
resources. The actual costs and timing of clinical trials are
highly uncertain, subject to risk and may change depending upon
the clinical indication targeted, the development strategy
pursued and the results of preclinical studies and earlier
clinical trials. The amounts and timing of other expenditures
will depend upon numerous factors, including the status of our
product development and commercialization efforts, timing and
outcomes of regulatory approvals, competition, manufacturing,
and any strategic partnership arrangements we may enter into.
Because of these risks and uncertainties, we cannot predict when
or whether we will successfully obtain regulatory approval for,
or successfully commercialize, Orapem or complete the
development of any of our other product candidates or the
ultimate costs of such efforts. Whether we will need to raise
additional funds to complete the development of any of our
product candidates or market any products is directly affected
by these risks and uncertainties, as well as a variety of
factors discussed under Risk Factors elsewhere in
this prospectus.
We believe that the net proceeds from this offering, together
with our existing cash and cash equivalents, short-term
investments, funding received from our collaboration agreements
and interest earned on these balances, will be sufficient to
satisfy our anticipated cash needs for working capital and
capital expenditures through at least the next 18 months.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth
and development of our business. We do not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to dividend policy will be made at
the discretion of our board of directors.
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CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2006:
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on an actual basis, |
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on a pro forma as adjusted basis to reflect: |
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the filing of a restated certificate of incorporation to
authorize 100,000,000 shares of common stock and
5,000,000 shares of undesignated preferred stock; |
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|
|
the sale of 4,500,000 shares of common stock in this
offering at an assumed initial offering price of $10.00 per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses; |
|
|
|
|
the conversion of all of our outstanding shares of preferred
stock into shares of common stock upon the closing of this
offering; and |
|
|
|
|
the issuance of 1,781,826 shares of common stock upon the
closing of this offering in satisfaction of accumulated
dividends on our Series A, B, C and D convertible preferred
stock, assuming an initial public offering of $10.00 per share,
and the closing of this offering occurs on July 3, 2006. |
|
You should read the information in this table together with our
financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
|
(in thousands, except | |
|
|
share data) | |
Cash, cash equivalents and short-term investments
|
|
$ |
109,900 |
|
|
$ |
150,150 |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 to $0.001 par value: 88,862,226
authorized, 88,602,223 issued and outstanding shares,
actual; 5,000,000 authorized, issued and outstanding shares, as
adjusted
|
|
|
139,568 |
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 115,000,000 authorized
shares; 2,094,706 issued shares and 2,064,119 outstanding
shares, actual; 100,000,000 authorized shares;
26,443,854 issued shares and 26,413,267 outstanding
shares, as adjusted
|
|
|
2 |
|
|
|
26 |
|
|
Additional paid-in capital
|
|
|
|
|
|
|
179,794 |
|
|
Treasury stock, $0.01 par value; 30,587 shares
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Accumulated other comprehensive income
|
|
|
521 |
|
|
|
521 |
|
|
Deficit accumulated during the development stage
|
|
|
(93,060 |
) |
|
|
(93,060 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(92,539 |
) |
|
|
87,279 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
47,029 |
|
|
$ |
87,279 |
|
|
|
|
|
|
|
|
The outstanding share information in the table above excludes:
|
|
|
|
|
1,626,286 shares of common stock issuable upon the exercise
of outstanding options, with a weighted average exercise price
of $2.59 per share; |
|
|
|
277,708 shares of common stock reserved for future issuance
under our benefit plans; and |
|
|
|
53,012 shares of common stock issuable upon the exercise of
outstanding warrants, with a weighted average exercise price of
$5.47 per share. |
32
Between April 1, 2006 and May 31, 2006, we issued additional
options to purchase up to 168,362 shares of common stock at a
weighted average exercise price of $7.93 per share, options to
purchase 13,230 shares of common stock were exercised and
options to purchase 2,100 shares of common stock were forfeited.
The terms of our existing Series A, B, C and D convertible
preferred stock require us, upon the closing of this offering,
to issue additional shares of common stock to the preferred
stockholders in satisfaction of accumulated dividends on the
preferred stock. The accumulated dividends were
$15.2 million at March 31, 2006 and continue to
accumulate at the rate of approximately $0.8 million per
month thereafter. The common stock issued in satisfaction of
those dividends will be valued at the public offering price per
share in this offering. Accordingly, the actual amount of shares
we issue upon the closing of this offering in satisfaction of
the accumulated dividends will depend both upon the timing and
the pricing of this offering.
33
DILUTION
If you invest in our common stock in this offering, your
ownership interest will be diluted to the extent of the
difference between the initial public offering price per share
and the pro forma net tangible book value per share of our
common stock after this offering. The historical net tangible
book value (deficit) of our common stock as of March 31, 2006
was approximately $(92.5) million, or approximately
$(62.49) per share, based on the number of shares
outstanding as of March 31, 2006 (excluding unvested restricted
shares), as adjusted to reflect the one-for-4.904 reverse split
of our common stock. Historical net tangible book value per
share is determined by dividing the number of outstanding shares
of our common stock (excluding unvested restricted shares) into
our total tangible assets (total assets less intangible assets)
less total liabilities.
Investors participating in this offering will incur immediate,
substantial dilution. After giving effect to the sale of
4,500,000 shares of common stock in this offering at an assumed
initial public offering price of $10.00 per share, and
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, and after giving
effect to the conversion of all outstanding shares of preferred
stock into 18,067,322 shares of common stock upon
completion of this offering and the issuance of
1,781,826 shares of common stock upon the closing of this
offering in satisfaction of accumulated dividends on our
Series A, B, C and D convertible preferred stock, our pro
forma as adjusted net tangible book value as of March 31, 2006
would have been approximately $87.3 million, or
approximately $3.38 per share of common stock. This
represents an immediate increase in pro forma as adjusted net
tangible book value of $1.18 per share to existing
stockholders, and an immediate dilution of $6.62 per share
to investors participating in this offering. The following table
illustrates this per share dilution:
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
$10.00 |
Historical net tangible book value per share as of
March 31, 2006
|
|
$(62.49) |
|
|
Pro forma increase in net tangible book value per share
attributable to conversion of convertible preferred stock and
issuance of shares of common stock in satisfaction of
accumulated dividends on convertible preferred stock
|
|
$64.69 |
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of March 31, 2006
before this offering
|
|
$2.20 |
|
|
Increase in net tangible book value per share attributable to
this offering
|
|
$1.18 |
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
$3.38 |
|
|
|
|
|
Dilution per share to investors participating in this offering
|
|
|
|
$6.62 |
|
|
|
|
|
If the underwriters exercise their over-allotment option in full
to purchase 675,000 additional shares of common stock in this
offering, the pro forma as adjusted net tangible book value
after the offering would be $3.53 per share, the increase
in the pro forma net tangible book value attributable to
investors in this offering would be $1.33 per share and the
dilution to new investors purchasing common stock in this
offering would be $6.47 per share.
34
The following table summarizes, on a pro forma as adjusted basis
as of March 31, 2006, the differences between the number of
shares of common stock purchased from us, the total
consideration and the average price per share paid by
stockholders and by investors participating in this offering,
after deducting underwriting discounts and commissions and
estimated offering expenses, at an assumed initial public
offering price of $10.00 per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased | |
|
Total Consideration | |
|
|
|
|
| |
|
| |
|
Average Price | |
|
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Existing stockholders before this offering
|
|
|
21,913,267 |
|
|
|
82.96% |
|
|
$ |
144,912,984 |
|
|
|
76.30 |
% |
|
$ |
6.61 |
|
Investors participating in this offering
|
|
|
4,500,000 |
|
|
|
17.04 |
|
|
|
45,000,000 |
|
|
|
23.70 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,413,267 |
|
|
|
100 |
% |
|
$ |
189,912,984 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of shares of common stock outstanding in the table
above is based on the number of shares outstanding as of
March 31, 2006 and assumes no exercise of the
underwriters over-allotment option. If the
underwriters over-allotment option is exercised in full,
the number of shares of common stock held by existing
stockholders will be reduced to 80.90% of the total number of
shares of common stock to be outstanding after this offering and
the number of shares of common stock held by investors
participating in this offering will be increased to
5,175,000 shares or 19.10% of the total number of shares of
common stock to be outstanding after this offering.
The above discussion and tables also assume no exercise of any
outstanding stock options or warrants. As of March 31,
2006, there were:
|
|
|
|
|
1,626,286 shares of common stock subject to outstanding
options, having a weighted average exercise price of
$2.59 per share; |
|
|
|
277,708 shares of common stock reserved for future issuance
under our benefit plans as of the completion of this offering;
and |
|
|
|
53,012 shares of common stock subject to outstanding
warrants, having a weighted average exercise price of
$5.47 per share. |
Effective upon the completion of this offering, an aggregate of
5,663,584 shares of our common stock will be reserved for
issuance under our benefit plans, and these share reserves may
be subject to annual increases in accordance with the terms of
the plans. To the extent that any of these options or warrants
are exercised, new options are issued under our benefit plans or
we issue additional shares of common stock in the future, there
will be further dilution to investors participating in this
offering.
35
SELECTED FINANCIAL DATA
The following selected financial data should be read together
with our financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus. The selected financial data in this section is
not intended to replace our financial statements and the
accompanying notes. Our historical results are not necessarily
indicative of our future results.
The consolidated statements of operations data for the years
ended December 31, 2003, 2004 and 2005 and the consolidated
balance sheet data as of December 31, 2003, 2004 and 2005
are derived from our audited financial statements appearing
elsewhere in this prospectus, which have been audited by KPMG
LLP. The statements of operations data for the period from
December 6, 2000 (date of inception) to December 31,
2001 and for the year ended December 31, 2002 and the
consolidated balance sheet data as of December 31, 2001 and
2002 are derived from our unaudited financial statements not
included in this prospectus. The statement of operations data
for the three months ended March 31, 2005 and 2006 and the
balance sheet data as of March 31, 2006 have been derived
from our unaudited financial statements included elsewhere in
this prospectus. In the opinion of management, those unaudited
financial statements have been prepared on a basis substantially
consistent with the audited financial statements and include all
adjustments, consisting of normal and recurring adjustments,
necessary for the fair presentation of the results for these
periods and as of such date. We adopted the provisions of SFAS
123(R) on January 1, 2006, and our results for the three
months ended March 31, 2006 reflect $0.1 million of
stock-based compensation expense. Historical results are not
necessarily indicative of operating results to be expected in
the future.
The pro forma basic and diluted net loss per common share data
for the year ended December 31, 2005 reflect the mandatory
conversion, upon the closing of this offering, of the
Series A, B, C and D convertible preferred stock at their
respective conversion rates into our common stock and the
issuance of shares of common stock in satisfaction of the
accumulated dividends on the Series A, B, C and D
convertible preferred stock through the end of the applicable
period based on an assumed initial public offering price of
$10.00 per share, as if the conversion had occurred at
March 31, 2006.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from | |
|
|
|
Three Months Ended | |
|
|
December 6, 2000 | |
|
Years Ended December 31, | |
|
March 31, | |
|
|
(Date of Inception) | |
|
| |
|
| |
|
|
to December 31, 2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands, except share and per share amounts) | |
|
|
(unaudited) | |
|
(unaudited | |
|
) | |
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
49 |
|
|
$ |
|
|
|
$ |
726 |
|
|
$ |
834 |
|
|
$ |
441 |
|
|
$ |
267 |
|
|
$ |
2,877 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
125 |
|
|
|
2,517 |
|
|
|
12,331 |
|
|
|
16,282 |
|
|
|
29,180 |
|
|
|
5,013 |
|
|
|
8,970 |
|
|
Sales, general and administrative
|
|
|
397 |
|
|
|
1,275 |
|
|
|
2,155 |
|
|
|
2,994 |
|
|
|
5,329 |
|
|
|
686 |
|
|
|
1,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
522 |
|
|
|
3,792 |
|
|
|
14,486 |
|
|
|
19,276 |
|
|
|
34,509 |
|
|
|
5,699 |
|
|
|
10,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(473 |
) |
|
|
(3,792 |
) |
|
|
(13,760 |
) |
|
|
(18,442 |
) |
|
|
(34,068 |
) |
|
|
(5,432 |
) |
|
|
(8,046 |
) |
Other (expense) income, net
|
|
|
(12 |
) |
|
|
30 |
|
|
|
(190 |
) |
|
|
(797 |
) |
|
|
399 |
|
|
|
42 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(485 |
) |
|
|
(3,762 |
) |
|
|
(13,950 |
) |
|
|
(19,239 |
) |
|
|
(33,669 |
) |
|
|
(5,390 |
) |
|
|
(7,702 |
) |
Preferred stock dividends and accretion
|
|
|
|
|
|
|
(915 |
) |
|
|
(1,294 |
) |
|
|
(3,560 |
) |
|
|
(7,191 |
) |
|
|
(1,291 |
) |
|
|
(2,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(485 |
) |
|
$ |
(4,677 |
) |
|
$ |
(15,244 |
) |
|
$ |
(22,799 |
) |
|
$ |
(40,860 |
) |
|
$ |
(6,681 |
) |
|
$ |
(10,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common stockholders
per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$ |
(0.72 |
) |
|
$ |
(6.59 |
) |
|
$ |
(20.82 |
) |
|
$ |
(30.55 |
) |
|
$ |
(39.20 |
) |
|
$ |
(8.13 |
) |
|
$ |
(7.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2.18 |
) |
|
|
|
|
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
674,599 |
|
|
|
709,568 |
|
|
|
732,044 |
|
|
|
746,306 |
|
|
|
1,042,388 |
|
|
|
821,757 |
|
|
|
1,435,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,414,638 |
|
|
|
|
|
|
|
21,015,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of | |
|
|
| |
|
March 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
(unaudited) | |
|
|
(in thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
80 |
|
|
$ |
8,549 |
|
|
$ |
692 |
|
|
$ |
27,018 |
|
|
$ |
59,420 |
|
|
$ |
109,900 |
|
Working capital
|
|
|
(498 |
) |
|
|
7,400 |
|
|
|
(1,657 |
) |
|
|
24,409 |
|
|
|
50,755 |
|
|
|
98,800 |
|
Total assets
|
|
|
412 |
|
|
|
11,988 |
|
|
|
4,169 |
|
|
|
30,067 |
|
|
|
63,579 |
|
|
|
116,112 |
|
Long-term debt, net of current portion and discount
|
|
|
|
|
|
|
1,688 |
|
|
|
1,208 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(485 |
) |
|
|
(4,960 |
) |
|
|
(20,105 |
) |
|
|
(42,235 |
) |
|
|
(83,107 |
) |
|
|
(93,060 |
) |
Preferred stock
|
|
|
|
|
|
|
13,764 |
|
|
|
20,058 |
|
|
|
69,447 |
|
|
|
136,815 |
|
|
|
139,568 |
|
Total stockholders deficit
|
|
|
(428 |
) |
|
|
(4,918 |
) |
|
|
(20,115 |
) |
|
|
(42,202 |
) |
|
|
(82,632 |
) |
|
|
(92,539 |
) |
|
|
(1) |
Please see Note 1 to our financial statements for an
explanation of the method used to calculate the historical and
pro forma net loss attributable to common stockholders per share
and the number of shares used in the computation of the per
share amounts. |
Effective April 12, 2005, KPMG LLP was engaged as our
independent registered public accounting firm and replaced
PricewaterhouseCoopers LLP, who were dismissed as our
independent registered public accounting firm. The decision to
change independent registered public accounting firms was
approved by our Audit Committee of the Board of Directors.
PricewaterhouseCoopers LLP reported on our financial statements
as of and for the years ended December 31, 2002 and 2003,
and cumulatively for the period from December 6, 2000 (date
of inception) to December 31, 2003. Except for an
explanatory paragraph expressing significant doubt about the
ability of Replidyne to continue as a going
37
concern, the report of PricewaterhouseCoopers LLP on those
financial statements did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. During the
years ended December 31, 2002 and 2003 and through
April 12, 2005, we did not have any disagreements with
PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to their satisfaction, would have caused them to make
reference thereto in connection with their report on the
financial statements for such years. PricewaterhouseCoopers LLP
has not audited or reported on any financial statements or
information included in this prospectus. For purposes of this
filing, the financial statements for the years ended
December 31, 2003, 2004 and 2005 (and for the period from
December 6, 2000 through December 31, 2005) have been
audited by KPMG LLP. Prior to retaining KPMG LLP, we had not
consulted with KPMG LLP on items that involved our accounting
principles or the form of audit opinion to be issued on our
financial statements. PricewaterhouseCoopers LLPs letter
to the Securities and Exchange Commission stating its agreement
with the statements in this paragraph is filed as an exhibit to
the registration statement of which this prospectus is a part.
38
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis
together with our financial statements and the notes to those
statements included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve
risks and uncertainties. As a result of many factors, such as
those set forth under Risk Factors and elsewhere in
this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
Overview
We are a biopharmaceutical company initially focused on
discovering, developing, in-licensing and commercializing
innovative anti-infective products. Our lead product, Orapem, is
a novel oral community antibiotic for which we have filed an
NDA. In December 2005, we submitted to the FDA our NDA for
Orapem for four indications: acute bacterial sinusitis,
community-acquired pneumonia, acute exacerbation of chronic
bronchitis and uncomplicated skin and skin structure infections.
Although the efficacy data for acute exacerbation of chronic
bronchitis and uncomplicated skin and skin structure infections
may be adequate for FDA approval, we expect that the FDA will
likely require additional clinical trials, including a
placebo-controlled trial in the case of acute exacerbation of
chronic bronchitis, before it will approve these indications. We
have entered into a collaboration and commercialization
agreement with Forest Laboratories to co-develop and co-market
Orapem in the U.S. We and Forest Laboratories are currently
conducting a Phase III placebo-controlled clinical trial
for acute exacerbation of chronic bronchitis for adult use. We
are also developing, together with Forest Laboratories, an oral
liquid formulation of Orapem for the pediatric market and are
currently conducting a Phase II clinical trial using a
prototype oral liquid formulation among pediatric patients with
acute otitis media. We intend to conduct Phase III clinical
trials seeking clinical indications for the two largest
pediatric indications: acute otitis media and
tonsillitis/pharyngitis.
Our second product candidate is REP8839, which we are developing
for topical use for skin and wound infections and prevention of
S. aureus infections, including MRSA, in hospital
settings. REP8839 is an inhibitor of methionyl tRNA synthetase
and, in pre-clinical studies, has shown promising activity. We
submitted an investigational new drug application, or IND, for
the development of a REP8839/mupirocin combination product in
May 2006.
We are also pursuing the development of other novel
anti-infective products based on our own research efforts. We
have developed an assay that identifies compounds that inhibit
bacterial DNA replication. The compounds may be useful to treat
bacterial infections. We have also selected from a proprietary
library several potential compounds for development to treat
infections in hospital settings caused by
C. difficile and are in late pre-clinical testing.
We were incorporated on December 6, 2000 in Delaware. Prior
to inception, we had not commenced any significant activity to
develop our technology. On December 6, 2000, an affiliated
entity contributed certain assets and liabilities to us, which
we recorded at their historical cost at that time, and we
commenced development activity. Since our inception, we have
focused on the
in-license and
acquisition of technology and acquisition of our technology
acquired as in-process
research and development, the selection of pre-clinical testing
of product candidates and the manufacture of clinical trial
supplies. The majority of our activities have been in support of
the development of Orapem and REP8839.
We have incurred significant operating losses since our
inception on December 6, 2000, and, as of March 31,
2006, we had an aggregate net loss of $78.8 million and
accumulated net loss attributable to common stockholders of
$94.4 million. We have generated no revenue from product
sales to date. We have funded our operations to date principally
from the sale of our securities and, subsequent to
December 31, 2005, from payments by Forest Laboratories
under our collaboration and commercialization agreement. We
expect to continue to incur substantial operating losses for the
next several years as we pursue our clinical trials and research
and development efforts.
39
Our Collaboration with Forest Laboratories
In February 2006, we entered into a collaboration and
commercialization agreement with Forest Laboratories to be our
exclusive partner for the development and marketing of Orapem in
the U.S. We granted Forest Laboratories a right of first
refusal to extend the territory to include Canada. We received
an up-front payment of $50.0 million in February 2006 and
$10.0 million in milestone payments in March 2006 from
Forest Laboratories. We may receive up to an additional
$90.0 million in development milestones and
$100.0 million in commercial milestones for both adult and
pediatric indications, which will be reduced by
$25.0 million if we exercise our option to directly market
and promote Orapem to pediatricians on an exclusive basis, which
we expect to do. These milestone payments are largely dependent
on the acceptance of additional NDA filings, FDA approvals and
achieving certain sales levels of adult and pediatric
formulations of Orapem. Forest Laboratories will book all Orapem
sales and pay us a co-promotion fee, reimburse our marketing
expenses and pay us royalties on all sales, milestones on
development of the liquid oral formulation and, provided we
exercise our option to market Orapem directly to pediatricians,
a portion of the commercialization milestones. Product
development activities under the agreement are a joint
responsibility between us and Forest Laboratories, although
Forest Laboratories is responsible for a substantial portion of
development expenses. We maintain access to all data generated
in our joint development efforts for use in territories outside
the U.S. Forest Laboratories has agreed to assume responsibility
for supply chain management in the territory for Orapem, and we
anticipate that Forest Laboratories will enter into a direct
relationship with Nippon Soda as its sole supplier of Orapem
drug substance under similar terms as those currently in place
between us and Nippon Soda. Forest Laboratories is responsible
for sales and marketing activities and associated costs.
We will perform marketing and promotion activities directed
toward targeted specialists, such as otolaryngologists (ear,
nose and throat specialists). With respect to these activities,
Forest Laboratories will reimburse us for our sales force
expenses incurred during the one year period prior to
commencement of these marketing and promotion activities, up to
a maximum amount as provided in our agreement. For the five year
period after commencement of such marketing and promotion
activities, Forest Laboratories will reimburse us for certain
marketing and sample expenses (subject to an approved annual
budget) and for certain sales force expenses. As to sales forces
expenses during this period, Forest Laboratories will reimburse
us for all of such expenses incurred during the first two years
after commencement of our marketing and promotion activities up
to a maximum amount as provided in our agreement, and for the
remaining three years Forest Laboratories will reimburse us for
such sales force expenses up to a certain percentage of the
maximum amount as provided in our agreement. We have the right
to retain the majority of the sales margin, defined as net sales
less cost of goods and marketing expenses, from the oral liquid
formulation of Orapem prescribed by pediatricians, provided we
exercise this option at least six months before this formulation
is submitted for regulatory approval. If the sales margin is
negative, we will bear the majority of the losses in the period
they are generated. If we exercise this option, we and Forest
Laboratories will jointly determine the product launch and
marketing and selling strategies for the oral liquid formulation
of Orapem. Further, if we exercise this option, Forest
Laboratories will extend us a $60.0 million line of credit
to support our promotional efforts to pediatricians.
In accordance with our revenue recognition policy for up-front
and milestone payments received under collaboration and
commercialization agreements, we intend to recognize revenue for
the payments received to date on a straight-line basis over a
period of 13.5 years, which is the period of estimated
benefit to us. The up-front payment and milestone payment
received are non-refundable. We anticipate accounting for
amounts received as reimbursements from Forest Laboratories for
research and development and sales and marketing activities as
revenue. This treatment reflects our role as principal in these
transactions whereby we are responsible for selecting vendors,
performing significant duties and bearing credit risk.
Financial Operations Overview
Revenue. Through December 31, 2005, we have
generated revenue from a research and license agreement. Under
the terms of this agreement, to date, we have received up-front
license payments and
40
periodic, non-refundable milestone payments. As of
December 31, 2005, we have no additional obligations under
this agreement and no further milestone payments are currently
due. As a result of our collaboration agreement with Forest
Laboratories, we began to recognize revenue from Forest
Laboratories during the three months ended March 31, 2006.
Research and Development Expense. Research and
development expense consists primarily of expenses incurred to
acquire in-process research and development and to develop and
test our product candidates. Such expenses include:
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external research and development expenses, including the costs
of materials relating to our pre-clinical studies and clinical
trials; |
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third party supplier, consultant and employee related expenses,
including compensation and benefits; |
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|
license fees associated with acquiring in-process research and
development; and |
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|
facilities, depreciation and other allocated expenses, which
include direct and allocated expenses for rent, maintenance of
facilities, information technology, laboratory and office
supplies and depreciation of capital assets used to research and
develop our product candidates. |
Through December 31, 2005, we have incurred approximately
$60.4 million in research and development expenses. Prior
to 2003, all research and development activities were related to
discovery research activities.
In March 2004, we licensed all rights to Orapem from Daiichi
Asubio in the U.S. and Canada. In addition, we have the sole
negotiation right to license such rights for the rest of the
world, except Japan. Orapem was in development at the time we
entered into the license and we accounted for the license of the
technology as acquired in-process research and development.
Since March 2004, we have focused our efforts on completing the
clinical program, establishing commercial scale manufacturing
capability and completing other regulatory steps to support the
NDA for Orapem that we submitted to the FDA in December 2005. We
are in the process of conducting an additional Phase III
clinical trial using a higher dose therapy to treat acute
exacerbation of chronic bronchitis. We are also seeking to
expand the expected labeled indication of Orapem into pediatric
markets for treatment of acute otitis media using an oral liquid
formulation. To be accepted in the pediatric market, in addition
to an excellent safety and efficacy profile, an oral liquid
formulation must have a taste that is acceptable to children. We
are continuing development work to improve the taste of our oral
liquid formulation of Orapem.
We acquired the worldwide rights to the methionyl tRNA
synthetase inhibitor program from GlaxoSmithKline PLC, or GSK,
in June 2003 in exchange for 4,000,000 shares of our
Series B convertible preferred stock at a deemed fair value
of $1.25 per share. Because this program was in
pre-clinical development at the time we acquired the worldwide
rights, we accounted for the acquisition as acquired in-process
research and development in 2003. Using this acquired
technology, we have continued the development of our product
candidate REP8839 for the treatment of skin and wound infections
and eradication of S. aureus in the hospital setting. We
submitted an IND for REP8839 in combination with mupirocin in
May 2006, and if the IND is approved, we anticipate commencing a
Phase I clinical trial of REP8839/mupirocin in late 2006.
Mupirocin is a widely used generic antibiotic that is indicated
for treatment of skin infections and nasal decolonization of
S. aureus.
Our 2005 and current year research and development activities
are primarily focused on the clinical development of Orapem. We
expect our research and development expense to increase as we
advance Orapem, REP8839 and new product candidates into further
clinical and pre-clinical development. We are unable to estimate
with any certainty the costs we will incur in the continued
development of Orapem, REP8839 and our other product candidates.
We expect to continue to expand our research and development
activities relating to the clinical development of our product
candidates and pre-clinical research of treatments in the
anti-infective area. If we acquire or in-license additional
technologies or
41
product candidates in the clinical or pre-clinical development
stage, we also expect to expand our research and development
activities to develop these technologies or product candidates.
Clinical development timelines, likelihood of success and
associated costs are uncertain and therefore vary widely.
Although we are currently focused primarily on Orapem for the
treatment of community-acquired respiratory tract and skin
infections and have commenced the clinical trials program for an
oral liquid formulation of Orapem for treatment of acute otitis
media in pediatric patients, we anticipate that we will make
determinations as to which research and development projects to
pursue and how much funding to direct toward each project on an
on-going basis in response to the scientific and clinical
success of each product candidate and each additional indication
for Orapem.
Due to the risks inherent in the clinical trial process,
development completion dates and costs will vary significantly
for each product candidate and are difficult to estimate. The
lengthy regulatory approval process requires substantial
additional resources. Any failure by us to obtain, or any delay
in obtaining, regulatory approvals for our product candidates
could cause the costs of our research and development to
increase and have a material adverse effect on our results of
operations. We cannot be certain when any cash flows from our
current product candidates will commence.
Sales, General and Administrative Expense. Sales, general
and administrative expense consist principally of compensation
and related costs for personnel in executive, sales, marketing,
corporate development, legal, finance, accounting and human
resource functions. Other sales, general and administrative
costs include professional fees, costs of insurance and market
research.
Interest and Other Income. Interest income consists of
interest earned on our cash and cash equivalents and short-term
investments. Other income consists primarily of realized gains
on short-term investments available-for-sale.
Interest Expense. Interest expense consists of interest
incurred on equipment loans and convertible promissory notes.
Loss on Extinguishment of Convertible Notes Payable.
Loss on extinguishment of convertible notes payable represents a
charge equal to the difference between the carrying amount of
our convertible promissory notes on the date the notes were
converted to Series C redeemable convertible preferred
stock and the fair value of the stock received on conversion in
2004.
Preferred Stock Dividends and Accretion. Preferred stock
dividends and accretion consists of cumulative but undeclared
dividends payable and accretion of issuance costs on preferred
stock. The issuance costs on the shares of Series A, C and
D redeemable convertible preferred stock were recorded as a
reduction to the carrying amount of the stock when issued, and
are accreted to preferred stock ratably through July 31,
2014 by a charge to additional paid-in capital and loss
attributable to common stockholders. Upon the completion of this
offering, the cumulative but unpaid dividends on Series A,
B, C and D preferred stock are payable in shares of common stock
at the price of the common stock sold in the offering. Upon
closing of this offering, we will no longer record preferred
dividends and accretion on the preferred stock, which will
convert into common shares upon completion of this offering. As
of March 31, 2006, the cumulative dividends payable on our
preferred stock totaled $15.2 million.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and
results of operations is based on our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation
of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. Actual
results may differ from these estimates. Our significant
accounting policies are described in the Note 1 of
Notes to Financial Statements appearing elsewhere in
this prospectus. We believe the following accounting policies
affect our more significant judgments and estimates used in the
preparation of our financial statements.
42
Revenue Recognition. We generate revenue through
research, license, collaboration and commercialization
agreements. These agreements can contain multiple elements,
including non-refundable up-front fees, payments for
reimbursement of research and commercialization costs,
non-refundable payments associated with achieving specific
milestones, promotion fees based on marketing margins defined in
our agreement with Forest Laboratories and royalties based on
specified percentages of net product sales.
In determining when to recognize revenue related to up-front and
milestone payments under these agreements we apply the revenue
recognition criteria as outlined in EITF
Issue 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
In applying these criteria, we consider a variety of factors to
determine the appropriate method of revenue recognition,
including whether the elements of the agreement are separable,
whether payments received are subject to refund or forfeiture,
whether there are determinable fair values and whether there is
a unique earnings process associated with each element of an
agreement.
When a payment is specifically tied to a separate earnings
process and the amount to be received is fixed and determinable,
revenue is recognized when the performance obligation associated
with the payment is completed. Performance obligations typically
consist of significant and substantive milestones. Revenues from
milestone payments may be considered separable from funding for
research, development or commercial activities because of the
uncertainty surrounding the achievement of the milestones.
Accordingly, these payments could be recognized as revenue when
the performance milestone is achieved as described in
EITF 00-21. In
circumstances where we cannot identify a separate earnings
process related to an upfront or milestone payment, we record
deferred revenue and recognize revenue ratably over the period
of expected benefit, which is generally the unexpired contract
term.
Revenues derived from reimbursement of expenses for research,
development and commercial activities under our collaboration
and commercialization agreements are recorded in compliance with
EITF Issue 99-19,
Reporting Revenue Gross as Principal Versus Net as an Agent
(EITF 99-19).
In accordance with the criteria established by
EITF 99-19, in
transactions where we act as principal, with discretion to
choose suppliers, bear credit risk and perform a substantive
part of the services, revenue is recorded at the gross amount of
the reimbursement. Costs associated with these reimbursements
are reflected as a component of operating expenses in our
statements of operations.
Under our agreement with Forest Laboratories entered into in
February 2006, we intend to record the initial $50 million
upfront payment received in February 2006 as deferred revenue
and recognize this amount into revenue ratably over a
13.5 year period. In addition, we have and may continue to
receive payments upon the achievement of certain development and
commercial milestones. The first milestone was achieved and a
payment of $10 million was received in March 2006. Due to
this milestone being achieved within one month of entering into
the collaboration and commercialization agreement with Forest
Laboratories, we could not identify a separate earnings process
related to this milestone payment and will recognize revenue
related to this payment over 13.5 years, the expected term
of the agreement. In assessing the remaining milestone payments
contemplated in our agreement with Forest Laboratories we have
reviewed the criteria for achievement of future milestones.
Based on this review, we believe that achievement is uncertain
and dependent upon a number of factors which will involve
substantive effort. We further believe that a unique earnings
process has been identified for each of the remaining
development and commercial milestones, the amounts received will
be fixed and determinable and, therefore, we intend to recognize
revenue related to these milestones upon achievement.
We also anticipate receiving amounts from Forest Laboratories as
reimbursement for certain research and development and sales and
marketing activities under our agreement. We believe that, as it
relates to these activities, we will act as the principal,
performing a substantive part of the services directly, having
the discretion to choose our suppliers and bearing all credit
risk associated with the performance of these activities. We
therefore intend to record these amounts as revenue in
accordance with our revenue recognition policy. See Note 1
to our financial statements for more information about our
revenue recognition policies.
43
Stock-Based Compensation. Through December 31, 2005,
we have accounted for employee stock options using the
intrinsic-value method in accordance with Accounting Principles
Board (APB), Opinion No. 25, Accounting for Stock Issued
to Employees, Financial Accounting Standards Board (FASB),
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of
APB No. 25, and related interpretations. For periods
prior to December 31, 2005, we have adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS), No. 123, Accounting for Stock-Based
Compensation, as amended.
Under APB No. 25, we recognized stock-based compensation
expense, which is a non-cash charge, when we issued employee
stock option grants at exercise prices that, for financial
reporting purposes, are deemed to be below the estimated fair
value of the underlying common stock on the date of grant.
Because shares of our common stock have not been publicly
traded, the fair value of our common stock for financial
accounting purposes has been determined by our board of
directors on the dates of grant after consideration of several
factors, each of which have a significant impact on valuation of
the common stock, including:
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pricing of private sales of our convertible preferred stock; |
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relative rights and preferences of our common stock compared to
the rights and preferences of our other outstanding equity
securities; |
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our progress towards clinical and product development milestones; |
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the risks and uncertainties of obtaining FDA approval for Orapem; |
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progress towards establishing a collaborative development and
commercialization partnership for Orapem, and evaluation of the
alternatives available to the Company if a commercialization
partnership is not obtained; |
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the status of our efforts to build our management team; |
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changes in valuations of comparable publicly-traded companies
and acquisitions of companies similar to ours; |
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the likelihood of achieving a liquidity event such as an initial
public offering or sale of our company, and the proceeds that
would be allocated to holders of our common stock given the
amounts contractually due to the holders of preferred stock in
preference to, and participating with, the common shareholder; |
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the inherent risks associated with the Companys business
at the time; and |
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overall equity market conditions and general economic trends. |
Based on these factors, during 2005, we valued our common stock
and set exercise prices for common stock options at each date of
grant within the range of $0.61 to $1.32. During 2005, we
granted options to purchase a total of 569,541 shares of our
common stock. If our estimates of the deemed fair value of these
equity instruments are too low, it would have the effect of
understating our expenses. For example, a 100% increase in the
deemed fair market value of our common stock for financial
accounting purposes associated with option grants made from
August 2005 through December 2005 would result in an increase in
stock-based compensation expense for fiscal years 2005 and 2006
of approximately $11,500 and $48,600, respectively.
The fair value of the common stock underlying grants of options
for common stock issued to employees prior to our consideration
of a public offering of securities has historically been
determined by our board of directors based upon information
available to it on the grant dates. However, in December 2005
and early 2006, we performed retrospective analyses to determine
the deemed fair market value of our common stock for accounting
purposes at various points in time in 2005. These retrospective
analyses addressed the deemed fair market value of our common
stock utilizing a probability-weighted expected return method
(PWERM), as detailed in a practice aid issued by the American
Institute of Certified
44
Public Accountants entitled Valuation of Privately Held
Company Equity Securities Issued as Compensation (AICPA
Guide). This valuation methodology evaluates the probability of
various potential liquidity events and the value of the common
stock in each scenario. At each valuation date, we specifically
considered changes in the factors described above, which
resulted in changes to the probabilities of various possible
liquidity events, and the resulting impact to the valuations of
the common stock. The resulting valuations supported the fair
value of our common stock established by our board of directors
during the year ended December 31, 2005. Since December
2005, we have obtained multiple contemporaneous valuations
utilizing the same valuation methodology to determine the fair
market value of our common stock for accounting purposes at
various points in time in 2006.
Information on stock options granted during 2005 and the first
quarter of 2006 is summarized as follows:
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Estimated Fair | |
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Shares of Common | |
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Value per share of | |
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Stock Underlying | |
|
Exercise Price per | |
|
the Underlying | |
|
Intrinsic Value per | |
Grant Date |
|
Option Grants | |
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Share | |
|
Common Stock | |
|
Option Share | |
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| |
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| |
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| |
|
| |
March 9, 2005
|
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|
243,680 |
|
|
$ |
0.613 |
|
|
$ |
0.613 |
|
|
$ |
0.00 |
|
May 26, 2005
|
|
|
74,920 |
|
|
$ |
0.613 |
|
|
$ |
0.613 |
|
|
$ |
0.00 |
|
June 10, 2005
|
|
|
103,996 |
|
|
$ |
0.613 |
|
|
$ |
0.613 |
|
|
$ |
0.00 |
|
August 18, 2005
|
|
|
36,832 |
|
|
$ |
1.324 |
|
|
$ |
0.932 |
|
|
$ |
0.00 |
|
September 8, 2005
|
|
|
46,900 |
|
|
$ |
1.324 |
|
|
$ |
0.932 |
|
|
$ |
0.00 |
|
November 30, 2005
|
|
|
46,900 |
|
|
$ |
1.324 |
|
|
$ |
1.324 |
|
|
$ |
0.00 |
|
December 8, 2005
|
|
|
16,313 |
|
|
$ |
1.324 |
|
|
$ |
1.324 |
|
|
$ |
0.00 |
|
Total 2005 Option Grants
|
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569,541 |
|
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|
|
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.00 |
|
January 19, 2006
|
|
|
851,021 |
|
|
$ |
3.188 |
|
|
$ |
3.188 |
|
|
$ |
0.00 |
|
February 6, 2006
|
|
|
45,866 |
|
|
$ |
3.188 |
|
|
$ |
3.188 |
|
|
$ |
0.00 |
|
March 9, 2006
|
|
|
193,718 |
|
|
$ |
5.198 |
|
|
$ |
5.198 |
|
|
$ |
0.00 |
|
Total First Quarter 2006 Option Grants
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1,090,605 |
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The chart below indicates how our estimates of likely liquidity
events have changed over time, as we evaluated the significant
valuation drivers noted above:
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Subsequent Path | |
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Major Path | |
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Other (No | |
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Option | |
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With | |
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Without | |
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Public | |
|
Sale of | |
|
value to | |
|
Pricing | |
|
|
Valuation Date |
|
Partner | |
|
Partner | |
|
Offering | |
|
Company/Assets | |
|
common) | |
|
Method | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
8-Sep-05
|
|
|
25 |
% |
|
|
|
|
|
|
35 |
% |
|
|
40 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
% |
|
|
|
|
|
|
25 |
% |
|
|
50 |
% |
|
|
25 |
% |
|
$ |
0.93 |
|
30-Nov-05
|
|
|
40 |
% |
|
|
|
|
|
|
50 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
% |
|
|
|
|
|
|
25 |
% |
|
|
50 |
% |
|
|
25 |
% |
|
$ |
1.32 |
|
30-Dec-05
|
|
|
60 |
% |
|
|
|
|
|
|
50 |
% |
|
|
30 |
% |
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
% |
|
|
|
|
|
|
25 |
% |
|
|
50 |
% |
|
|
25 |
% |
|
$ |
2.21 |
|
19-Jan-06
|
|
|
75 |
% |
|
|
|
|
|
|
50 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
% |
|
|
|
|
|
|
25 |
% |
|
|
50 |
% |
|
|
25 |
% |
|
$ |
3.19 |
|
10-Feb-06
|
|
|
100 |
% |
|
|
|
|
|
|
60 |
% |
|
|
25 |
% |
|
|
15 |
% |
|
|
|
|
|
$ |
5.20 |
|
In evaluating these events, the following factors are
significant.
|
|
|
|
|
In March and May 2005, the estimated fair of our common stock
was determined by our board of directors to be $0.613 per share.
At this time, we had not sufficiently developed our |
45
|
|
|
|
|
product to a point in which we believed we could reasonably be
considered for acquisition and we needed additional funding to
support that development effort. |
|
|
|
In August 2005, the estimated fair value of our common stock was
determined to be $0.932 per share. At that time, we had just
completed a significant funding through issuance of
Series D preferred stock in August 2005 for aggregate
proceeds of $62.5 million. Our ability to secure this
funding was based in significant part upon our determination
shortly prior to that time that we would likely be able to file
an NDA for Orapem with the FDA based on our existing clinical
trials. Obtaining a collaboration partner with an appropriate
distribution channel for Orapem was a critical factor in
achieving value for our stockholders, both preferred and common.
Consummating a collaboration partnership would allow us to focus
on drug development without the need to expend significant
costs, at significant risk, to distribute Orapem ourselves. As
such, we determined the value of our common stock under a
scenario in which we were successful in obtaining a
collaboration partner and a scenario without a collaboration
partner. In August 2005, we considered the fact that we had
spoken with numerous potential collaboration partners for
Orapem, including several major pharmaceutical companies,
without successfully securing a partner due to the fact that
these companies had a competing product already in their
portfolio, did not believe that the product was compatible with
their other products or for other reasons. Further, the number
of remaining potential collaboration partners was limited and
the risk was high that we would not be successful in obtaining a
suitable collaboration partner. Accordingly, we determined that
the probability was high that we would not be able to find such
a collaboration partner and that the resulting possible
liquidity events were limited. We also noted that the consensus
among industry analysts was that an initial public offering
without a collaboration partner would be unlikely. |
|
|
|
In November 2005, the estimated fair value of our common stock
was increased to $1.324 per share, primarily based on the
initiation of partnership discussions with Forest Laboratories,
who we believed to be one of the few remaining appropriate
potential collaboration partners. Following the initiation of
partnership discussions, we considered the concerns raised by
Forest Laboratories, including supply risks related to Orapem
drug substance being manufactured at a single site with limited
experience manufacturing in an FDA regulated environment and
risks surrounding our ability to file an NDA for Orapem with the
FDA that would be accepted for review, and ultimately approved
by the FDA for sufficient indications to make the product
commercially viable for us and for Forest Laboratories. |
|
|
|
In January 2006, the estimated fair value of our common stock
was increased to $3.188 per share, primarily based on the filing
of our NDA for Orapem on December 20, 2005 and continuing
progress in our discussions with Forest Laboratories regarding a
possible partnership and specifically addressing significant
concerns raised by Forest Laboratories that threatened the
possible partnership. |
|
|
|
On February 10, 2006, we signed the collaboration agreement
with Forest Laboratories. It was only at this time that we
believe we became a candidate for an initial public offering
that would meet the valuation requirements of our preferred
stockholders. Further, on February 17, 2006, our NDA for
Orapem was accepted for review by the FDA. Accordingly, on the
date that we next granted options for our common stock,
March 9, 2006, the estimated fair value of our common stock
was increased to $5.198 per share. Also at this time, our board
of directors approved our proceeding with an initial public
offering and investment bankers were retained. On April 5,
2006, we filed a registration statement for the initial public
offering of our common stock. |
46
The above table summarizes the specific probabilities assigned
to certain liquidity events using PWERM, based on assessments of
company-specific risks and the timing and probability of
anticipated liquidity events, including:
|
|
|
|
|
the potential of an initial public offering at various market
capitalizations; |
|
|
|
a sale of us or our assets in a merger or acquisition; or |
|
|
|
a transaction resulting in no value to the holders of common
stock. |
In addition to these potential liquidation events, we also
incorporated an option-pricing method under which each class of
our stock was considered as a series of call options that were
then valued using the option-pricing method. Under this
approach, a hypothetical payoff representing each class of stock
as a series of call options was utilized. As our enterprise
value increased beyond the liquidation preferences of our
preferred stock, all further benefits accrued to both the
holders of preferred and common stock. Our total derived
enterprise value was applied to this liquidation analysis to
derive a total value of our common stock evaluated on a weighted
average basis with the potential liquidation events as
illustrated in the table above.
Based on discussions with potential underwriters, we believed
that our ability to pursue an initial public offering would
depend on our securing a suitable collaboration partner for
commercialization of Orapem in the U.S. As a result, the
probabilities assigned to a specific liquidity event were
affected by the probability assigned to the successful
completion of a collaboration arrangement. Without a
collaboration partner, we believed that we would not have been
able to pursue a public offering and thus that the most likely
outcome would have been a sale or merger. This consideration
impacted the valuation of our common stock in periods prior to
securing a collaboration partner because of the significant
liquidation preferences of the preferred stock.
We considered in each liquidity scenario that the holders of
preferred stock are entitled to liquidation preferences equal to
their initial purchase prices plus dividends that accrue at a
rate of 8% per year. Following the issuance of our Series D
preferred stock in August 2005, dividends accrued at the rate of
approximately $0.8 million per month. The aggregate
liquidation preferences of our preferred stock holders as of
March 31, 2006 was approximately $141.8 million. Under
all scenarios other than an initial public offering, payments of
these liquidation preferences are senior to any claims of our
common stockholders and, in the event that there are any
available funds remaining after distribution to preferred
stockholders in accordance with their liquidation preferences,
such funds would have been distributed among the common
stockholders and preferred stockholders on a pro rata basis. In
initial public offerings, accrued dividends are converted to
common stock at the initial public offering price.
The assessment of probabilities at each valuation date
considered the probability of successfully completing an initial
public offering, taking into account that:
|
|
|
|
|
historically, 22% of proposed initial public offerings have been
withdrawn after filing; |
|
|
|
historically, initial public offerings that have not been
withdrawn have been priced at approximately a 27% discount from
the mid-point of the initial filing range; and |
|
|
|
of the 14 initial public offerings completed in 2006 through the
date of our evaluation for biotechnology and pharmaceutical
companies that may be considered comparable to us, 12 of those
offerings were priced below the low point of the initial filing
range. |
At each date of value, our valuations incorporate a discount
rate, also known as required return or cost of capital, based on
the risk-adjusted rate of return an investor would require given
the circumstances of the company at that time, which reflects
the risk associated with the company, risks and uncertainty
regarding the achievement of potential liquidity events and
consideration of observed rates of return on comparable
investments. The selected discount rates were decreased from 40%
in September 2005, to 30% in January 2006 and to 25% in February
and April 2006, reflecting changes in the risks and
uncertainties related to securing a collaboration partner, the
FDA review process and our ability to access the public
47
markets. We believe that our selected discount rates are
consistent with required rates of return as outlined in the
AICPA Guide, which provides that the cost of equity capital for
a private enterprise prior to its initial public offering
generally ranges from 20% to 35%. We also note that discount
rates are expected to be higher for biotechnology companies
without an approved product. By contrast, the cost of equity
capital for a newly public enterprise generally ranges from 15%
to 25%.
Additionally, we adjusted the indicated value of our common
stock to reflect reductions for lack of control, potential
dilution and the lack of liquidity and a trading market for our
common stock at each valuation date. The weighted average
reduction that reflects these factors decreased from 40% in
September 2005, to 20% in February 2006 to 15% in April 2006, as
we progressed toward significant events that could provide
liquidity for our stockholders in the public markets. Although
many of the economic factors of control were incorporated in our
valuation analyses, our common stockholders do not share the
same control over the enterprise as our preferred stockholders.
In February 2006, we executed the collaboration agreement with
Forest Laboratories and, in April 2006, we filed our initial
registration statement. In determining the appropriate
adjustment, we considered the following factors as outlined in
the AICPA Guide:
|
|
|
|
|
prospects for liquidity, including the expectation of an initial
public offering in the future; |
|
|
|
restrictions on the transferability of our common and preferred
stock; |
|
|
|
risk and volatility associated with us, our industry and our
peers; |
|
|
|
uncertainty of our value; and |
|
|
|
concentration and control of our ownership. |
The lack of marketability discount is based on qualitative and
quantitative analysis, as well as subjective judgment of these
factors. Published restricted stock studies indicate these
discounts may fall within the range of 9% to 45%. For the
valuations performed in September 2005 through January 2006, we
used one combined discount of 40% to reflect the impact of all
these factors on the value of our common stock. For the February
and April 2006 valuations, we performed the valuations in two
steps as follows:
|
|
|
|
|
we calculated the anticipated dilution to the common
stockholders in each initial public offering scenario that we
estimated based on available market data to be within the range
of 25% to 35%; and |
|
|
|
then utilized a probability weighted average lack of
marketability discount of 20% in February 2006, which was
further reduced to 15% in April 2006 at the time we filed our
initial registration statement. |
We believe that we have applied reasonable valuation
methodologies, including the application of the discounts noted
above, to properly reflect the risks and uncertainties in our
common stock as of each date of value.
While our financial statements through December 31, 2005,
account for stock option grants pursuant to APB No. 25, in
accordance with SFAS No. 123, we disclose in the notes
to our financial statements the pro forma impact on our net loss
had we accounted for stock option grants using the fair value
method of accounting. This information is presented as if we had
accounted for our employee stock options at fair value using the
minimum value option-pricing model. Our use of the minimum value
model was primarily due to our determination as to its
appropriateness as well as its general acceptance as an option
valuation technique for private companies. We will not utilize
the minimum value method subsequent to our adoption of
SFAS 123(R) on January 1, 2006, and the fair value of
our options will be higher as a result. Stock-based compensation
expense under APB No. 25 for stock options granted to
employees and directors has been determined as the difference
between the exercise price and the fair value of our common
stock on the date of grant, as estimated by us for financial
reporting purposes, on the date those options were granted. It
also includes stock-based compensation for options granted to
consultants that has been determined in accordance with SFAS
No. 123, and Emerging Issues Task Force
48
(EITF) Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling
Goods and Services, as the fair value of the equity
instruments issued and is periodically revalued as the options
vest. Stock-based compensation expense depends on the amount of
stock options and other equity compensation awards we grant to
our employees, consultants and directors and the exercise price
of those options. See Notes 1 and 9 to our financial
statements.
|
|
|
Adoption of SFAS No. 123(R) |
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment (SFAS 123(R)), which requires compensation costs
related to share-based transactions, including employee stock
options, to be recognized in the financial statements based on
fair value. SFAS 123(R) revises SFAS 123, as amended,
Accounting for Stock-Based Compensation (SFAS 123), and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees(APB 25). We adopted SFAS 123(R) using the
prospective method. Under this method, compensation cost is
recognized for all share-based payments granted subsequent to
December 31, 2005. Prior to January 1, 2006, we used
the minimum value method, to determine values of our pro forma
stock-based compensation disclosures.
We selected the Black-Scholes option pricing model as the most
appropriate valuation method for option grants with service
and/or performance conditions. The fair value of these option
grants is estimated as of the date of grant using the
Black-Scholes option pricing model with the following
weighted-average assumptions for options granted during the
three month period ended March 31, 2006. For options
granted in 2006, we separated optionees into two groups: grants
with early exercise provisions and grants without early exercise
provisions. We have determined that the exercise behavior of the
two option groups is distinct and, therefore, the assumptions
are different for purposes of valuing the options. The expected
lives (net of forfeitures) for options with and without early
exercise provisions are estimated to be 4.00 years and
4.40 years, respectively. Expected volatility for the two
groups is estimated to be 75%. The risk free interest rate is
4.44% for both groups and the dividend yield is 0%. An expected
life of 7.01 years was derived from the model.
During the three month period ended March 31, 2006, we also
issued options which vest over the earlier to be achieved
service or market condition. In determining the estimated fair
value of these option awards on the date of grant, we elected to
use a binomial lattice option pricing model together with Monte
Carlo simulation techniques using the following weighted average
assumptions during the three months ended March 31, 2006:
risk-free interest rate of 5.08%, expected dividend yield of 0%,
expected volatility of 75%, forfeiture rate of 6.97%, suboptimal
exercise factor of 2, and post-vesting exit rate of 6.97%.
The Black-Scholes model requires inputs for risk-free interest
rate, dividend yield, volatility and expected lives of the
options. Since the Company has a limited history of stock
activity, expected volatility is based on historical data from
several public companies similar in size and value to us. We
will continue to use a weighted average approach using
historical volatility and other similar public entity volatility
information until our historical volatility is relevant to
measure expected volatility for future option grants. We
estimate the forfeiture rate based on historical data. Based on
an analysis of historical forfeitures, we applied an annual
forfeiture rate of 6.97% to all options granted in the three
months ended March 31, 2006. This analysis will be
re-evaluated quarterly and the forfeiture rate will be adjusted
as necessary. The risk-free rate for periods within the
contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of the
grant. The expected lives (net of forfeitures) for options
granted represents the period of time that options granted are
expected to be outstanding and is derived from the contractual
terms of the options granted.
The lattice model requires inputs for risk-free interest rate,
dividend yield, volatility, contract term, average vesting
period, post-vest exit rate and suboptional exercise factor.
Both the fair value and expected life are outputs from the
model. The risk-free interest rate was determined based on the
yield available on U.S. Treasury Securities over the life of the
option. The dividend yield and volatility factor was determined
49
in the same manner as described above for the Black-Scholes
model. The lattice model assumes that employees exercise
behavior is a function of the options remaining vested
life and the extent to which the option is in-the-money. The
lattice model estimates the probability of exercise as a
function of the suboptional exercise factor and the post-vesting
exit rate. The suboptional exercise factor and post-vesting exit
rate were based on actual historical exercise behavior.
We had a choice of two attribution methods for allocating
compensation costs under SFAS No. 123(R): the
straight-line method, which allocates expense on a
straight-line basis over the requisite service period of the
last separately vesting portion of an award, or the graded
vesting attribution method, which allocates expense on a
straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was,
in-substance, multiple awards. We chose the latter method (i.e.
graded vesting). We amortize the fair value of each option over
each options vesting period (requisite service period).
Deferred Tax Asset Valuation Allowance. In establishing
an allowance on the valuation of our deferred tax assets we are
required to make significant estimates and judgments about our
future operating results. Our ability to realize deferred tax
assets depends on our future taxable income as well as
limitations on utilization primarily of net operating losses and
tax credits. We are required to reduce our deferred tax assets
by a valuation allowance if it is more likely than not that some
portion or all of our deferred tax asset will not be realized.
As we have historically incurred significant operating losses,
it is difficult to conclude with certainty that any of our
deferred tax assets will be realized. Accordingly, we have
recorded a full valuation allowance on our net deferred tax
assets since inception due to uncertainties related to our
ability to realize deferred tax assets in the foreseeable
future. See Note 10 to our financial statements.
Results of Operations
|
|
|
Comparison of Three Months Ended March 31, 2006 and
2005 |
Revenue. Revenue was $2.9 million for the three
months ended March 31, 2006 compared to $0.3 million
for the three months ended March 31, 2005. The increase was
primarily due to revenue generated from our collaboration and
commercialization agreement with Forest Laboratories, which we
entered into on February 10, 2006. Revenue recognized
during the three months ended March 31, 2006 includes
$0.6 million of license revenue, representing a portion of
the upfront and milestone payments totaling $60 million
that were received in February 2006, which is being
recognized as revenue over the estimated period of performance
of 13.5 years, and $2.3 million of contract revenue
for funded activity under our collaboration and
commercialization agreement with Forest Laboratories. Revenue
recognized in the three months ended March 31, 2005
consists solely of license revenue generated from a research and
development project that was completed in 2005.
Research and Development Expense. Research and
development expenses were $9.0 million for the three months
ended March 31, 2006, as compared to $5.0 million for the
corresponding period in 2005. The increase was primarily due to:
|
|
|
|
|
increased clinical trial costs and related expenses including
continued clinical trials for an Orapem placebo controlled
Phase III clinical trial among patients with acute
exacerbation of chronic bronchitis and a Phase II clinical
trial using an oral liquidation formulation targeted for
pediatric use; and |
|
|
|
expense of $1.1 million payable to Daiichi Asubio in
accordance with the February 2006 amended license agreement
due to acceptance of the NDA by the FDA. |
50
Research and development expenditures made to advance our
product candidates and other research efforts during the three
months ended March 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
|
|
Ended | |
|
|
|
|
March 31, | |
|
Change | |
|
|
| |
|
| |
|
|
2005 | |
|
2006 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
(in thousands) | |
|
|
|
|
| |
|
|
Orapem
|
|
$ |
4,322 |
|
|
$ |
6,199 |
|
|
$ |
1,877 |
|
|
|
43% |
|
REP8839
|
|
|
625 |
|
|
|
1,245 |
|
|
|
620 |
|
|
|
99% |
|
Other research and development
|
|
|
66 |
|
|
|
1,526 |
|
|
|
1,460 |
|
|
|
2212% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,013 |
|
|
$ |
8,970 |
|
|
$ |
3,957 |
|
|
|
79% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, our total external clinical trial and research services
development expenditures increased by $0.5 million and
$0.7 million, respectively, during the three months ended
March 31, 2006 as compared to the corresponding period in
2005 related to our clinical trial activity. The cost of
internal research and development personal and related costs
increased by $0.7 million in the three month period ended
March 31, 2006 as compared to the corresponding period in
2005 as we increased our research and development head count in
support of our expanded clinical development activities.
Research and development expenses are expected to increase
substantially during 2006 and in future periods as we:
|
|
|
|
|
advance our Phase III placebo controlled clinical trial for
Orapem in the treatment of acute exacerbation of chronic
bronchitis; |
|
|
|
complete our Phase II clinical trials for an oral liquid
formulation of Orapem among pediatric patients; and |
|
|
|
advance REP8839 into clinical trials. |
Selling, General and Administrative Expenses. Selling,
general and administrative expenses were $2.0 million for
the three months ended March 31, 2006, as compared to
$0.7 million for the corresponding period in 2005. The
increase was primarily due to increased personnel and related
costs of $0.9 million representing additional staff
required to support our growth, costs of recruiting and
relocating personnel, costs associated with the initial adoption
of FAS 123(R), Share-based Payment, as well as professional
service expenses of $0.2 million, principally legal
expenses related to patent filings and general corporate and
licensing activities.
Marketing and sales costs are expected to increase substantially
during 2006 and in future periods as we expand our sales and
marketing organization to support the potential
commercialization of Orapem. General and administrative costs
are expected to increase as a result of increased compensation
costs, as well as higher legal, accounting, insurance and other
professional costs relating to the compliance obligations
associated with being a public company.
Interest and Other Income. Interest and other income was
$0.7 million for the three months ended March 31,
2006, as compared to $0.1 million for the corresponding
period in 2005. The increase was primarily due to higher overall
cash available for investing throughout the three month period
ended March 31, 2006 as compared to the corresponding
period in 2005. We completed our $62.5 million
Series D redeemable convertible preferred stock financing
in August 2005 and received $60.0 million under our
collaboration and commercialization agreement with Forest
Laboratories increasing the average balances of cash and short
term investments available for investment during the three month
period ended March 31, 2006 compared to the corresponding
period in 2005.
Interest and Other Expense. Interest expense was
$0.3 million for the three months ended March 31,
2006, as compared to $35,000 for the corresponding period in
2005. The increase was due to
51
$0.3 million in other expenses associated with adjusting
the value of our stock purchase warrants to fair value which
became a required accounting policy in July 2005.
|
|
|
Comparison of Years Ended December 31, 2005 and
2004 |
Revenue. Revenue was $0.4 million for the year ended
December 31, 2005, as compared to $0.8 million for the
year ended December 31, 2004. The decrease was primarily
due to the completion of a research and development project
in 2005.
Research and Development Expense. Research and
development expenses were $29.2 million for the year ended
December 31, 2005 compared to $16.3 million for the
year ended December 31, 2004. The increase was primarily
due to:
|
|
|
|
|
the commencement of clinical trials for Orapem higher dose
therapy for acute exacerbation of chronic bronchitis and an oral
liquid formulation for pediatric use; |
|
|
|
activities related to completing our NDA for Orapem that was
submitted in December 2005; |
|
|
|
expenses of $2.1 million payable to Daiichi Asubio upon
submission of our NDA for Orapem in accordance with the terms of
our license agreement; and |
|
|
|
expanded pre-clinical development spending on REP8839. |
Other research and development costs included personnel and
related costs of $0.2 million, a decrease of
$0.1 million from 2004, to support our pre-clinical studies
as we allocated more internal resources to our Orapem and
REP8839 programs. Outside laboratory testing and pre-clinical
research totaling $0.4 million in support of our
pre-clinical testing of our pre-clinical programs comprising our
discovery research projects, including our DNA replication
inhibitors and C. difficile programs were essentially the
same in 2004 and 2005.
Research and development expenditures made to advance our
product candidates and other research efforts during the years
ended December 31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
December 31, | |
|
Change | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
| |
|
|
Orapem
|
|
$ |
12,626 |
|
|
$ |
24,744 |
|
|
$ |
12,118 |
|
|
|
96 |
% |
REP8839
|
|
|
2,629 |
|
|
|
3,589 |
|
|
|
960 |
|
|
|
37 |
|
Other research and development
|
|
|
1,027 |
|
|
|
847 |
|
|
|
(180 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,282 |
|
|
$ |
29,180 |
|
|
$ |
12,898 |
|
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, our total external clinical trial and pre-clinical
development expenditures increased by $7.9 million and
$1.3 million, respectively, in 2005 compared to 2004
related to our clinical and pre-clinical trial activity. The
cost of our internal research and development personnel and
related costs increased by $3.5 million in 2005 compared to
2004 as we increased our clinical and regulatory head count in
support of our clinical development activities. During 2004, our
clinical and pre-clinical efforts were focused primarily on
preparing to file our Orapem NDA in 2005 and designing clinical
studies on Orapem in additional areas, including a placebo
controlled Phase III study for treatment of acute
exacerbation of chronic bronchitis.
Research and development expenses are expected to increase in
2006 as we:
|
|
|
|
|
advance our placebo controlled Phase III clinical trial for
use of adult Orapem therapy in the treatment of acute
exacerbation of chronic bronchitis; |
52
|
|
|
|
|
complete our Phase II clinical trials for an oral liquid
formulation of Orapem among pediatric patients; and |
|
|
|
initiate clinical development of REP8839. |
Selling, General and Administrative Expenses. Selling,
general and administrative expenses were $5.3 million for
the year ended December 31, 2005, as compared to
$3.0 million for the year ended December 31, 2004. The
increase was primarily due to increased personnel and related
costs of $0.8 million related to staffing necessary to
support our growth, costs of recruiting and relocating personnel
and conducting market research of $0.7 million, as well as
professional service expenses of $0.4 million, principally
legal expenses related to patent filings and general corporate
and licensing activities.
Marketing and sales costs are expected to increase substantially
in 2006 as we expand our sales and marketing organization to
support the potential commercialization of Orapem. General and
administrative costs are expected to increase as a result of
increased compensation costs, as well as higher legal,
accounting, insurance and other professional service costs
relating to compliance obligations associated with being a
public company.
Interest and Other Income. Interest and other income was
$0.7 million for the year ended December 31, 2005, as
compared to $0.2 million for the year ended
December 31, 2004. The increase was due to higher overall
cash available for investing throughout 2005 as compared to
2004. We sold shares of our Series C redeemable convertible
preferred stock in preferred stock financings that were
completed in April, August, September and November 2004 with net
proceeds of $38.8 million and therefore did not have a full
year of interest and other income on the proceeds from that
financing in 2004. We sold shares of our Series D
redeemable convertible preferred stock in a preferred stock
financing that we completed in August 2005 with net proceeds of
$60.2 million, which increased our average cash balance
available for investment in 2005 compared to 2004.
Interest and Other Expense. Interest expense was
$0.3 million for the year ended December 31, 2005, as
compared to $0.5 million for the year ended
December 31, 2004. The decrease was due to a lower overall
debt balance throughout 2004 as compared to 2005. Additionally,
we ceased to incur interest expense on our convertible notes
payable when the notes were converted to Series C
redeemable convertible preferred stock in 2004.
Loss on Extinguishment of Convertible Notes Payable.
In 2004, our convertible notes payable were converted into
Series C redeemable convertible preferred stock. We
recorded a loss of $0.5 million, which amount is equal to
the difference between the carrying value of the convertible
notes payable and the fair value of the Series C redeemable
convertible preferred stock received on conversion.
|
|
|
Comparison of Years Ended December 31, 2004 and
2003 |
Revenue. Revenue was $0.8 million for the year ended
December 31, 2004, as compared to $0.7 million for the
year ended December 31, 2003. The increase was primarily
due to the timing of scheduled milestone payments under a
research and development project.
Research and Development Expense. Research and
development expenses were $16.3 million for the year ended
December 31, 2004, as compared to $12.3 million for
the year ended December 31, 2003. The increase was
primarily due to the in-license of Orapem in 2004 and related
costs. In 2004, we incurred expenditures of $3.2 million to
complete the acquisition of the U.S. and Canadian rights to
Orapem and the sole negotiation right to acquire rights to
Orapem from Daiichi Asubio for the rest of the world, except
Japan. In 2003, we initiated discussions with Daiichi Asubio for
these Orapem product rights and incurred expenditures of
$0.6 million to enter into a letter of intent. As Orapem
was in clinical development at the time we entered into the
license agreement, we accounted for the acquisition of the
license as in-process research and development. In addition,
once we acquired the rights to Orapem, we began preparations to
file our NDA for Orapem and design clinical studies to pursue
additional indications including higher dose therapies for
treatment of acute exacerbation of chronic bronchitis and
pediatric indications. In 2003, we acquired the rights that
included technology used in our REP8839 program in
53
exchange for 4,000,000 shares of our Series B
convertible preferred stock valued at $5.0 million. The
full amount was accounted for as acquisition of
in-process research and
development expenses in 2003.
Research and development expenditures made to advance our
product candidates and other research efforts during the years
ended December 31, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
December 31, | |
|
Change | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
| |
|
|
Orapem
|
|
$ |
634 |
|
|
$ |
12,626 |
|
|
$ |
11,992 |
|
|
|
1,891 |
% |
REP8839
|
|
|
6,239 |
|
|
|
2,629 |
|
|
|
(3,610 |
) |
|
|
(58 |
) |
Other research and development
|
|
|
5,458 |
|
|
|
1,027 |
|
|
|
(4,431 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,331 |
|
|
$ |
16,282 |
|
|
$ |
3,951 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the acquisition of the in-process research and
development programs that provided us with Orapem and REP8839,
our research and development efforts were focused principally on
discovery.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses were $3.0 million for
the year ended December 31, 2004, as compared to
$2.2 million for the year ended December 31, 2003. The
increase was primarily due to increased personnel and related
costs to support our increased research and business development
activities, including market research related to assessing the
market potential of our product candidates, and professional
service expenses, principally legal expenses related to patent
filings and general corporate governance and licensing
activities.
Interest and Other Income. Interest and other income was
$0.2 million for the year ended December 31, 2004, as
compared to $0.1 million for the year ended
December 31, 2003. This increase was due to higher overall
cash available for investing throughout 2004 as compared to
2003. We sold shares of our Series C redeemable convertible
preferred stock in financings that we completed in April,
August, September and November 2004 with net proceeds of
$38.8 million, increasing our cash and cash equivalents and
short term investments balances available for investment.
Interest and Other Expense. Interest expense was
$0.5 million for the year ended December 31, 2004, as
compared to $0.3 million for the year ended
December 31, 2003. The increase was due primarily to
interest expense on our convertible notes payable that ceased
during 2004 upon conversion of the notes into Series C
redeemable convertible preferred stock.
Loss on Extinguishment of Convertible Notes Payable.
In 2004, outstanding convertible notes were converted into
Series C redeemable convertible preferred stock, in
connection with which we recorded a loss of $0.5 million,
equal to the difference between the carrying value of the
convertible notes and the fair value of the Series C
redeemable convertible preferred stock issued upon conversion.
Liquidity and Capital Resources
We have incurred losses since our inception in 2000. As of
March 31, 2006, we had an accumulated deficit of
$93.1 million. We have funded our operations to date
principally from private placements of equity securities and
convertible notes totaling $121.5 million through
December 31, 2005 and, subsequent to December 31,
2005, from payments by Forest Laboratories under our
collaboration and commercialization agreement. As of
March 31, 2006, we had $109.9 million in cash, cash
equivalents and short-term investments classified as securities
available-for-sale.
In February 2006, we entered into a collaboration and
commercialization agreement with Forest Laboratories for the
right to be our development and marketing partner of Orapem in
the U.S. We also granted Forest Laboratories a right of
first refusal to extend the territory to include Canada. Under
our agreement, in February 2006 we have received an up-front
payment of $50.0 million and in March 2006 we received a
$10.0 million development milestone payment from Forest
Laboratories. We may receive up to an additional
$190.0 million in development and commercial milestones for
both adult and pediatric
54
indications, which will be reduced by $25.0 million if we
exercise our option to directly market and promote Orapem
products to pediatricians, which we currently expect to do.
These milestone payments are largely dependent on the acceptance
of additional NDA filings, FDA approvals and achieving certain
sales levels of adult and pediatric formulations of Orapem.
Product development activities under the agreement are a joint
responsibility between us and Forest Laboratories although
Forest Laboratories is responsible for the substantial portion
of development expenses. We will perform marketing and promotion
activities directed toward targeted specialists, such as
otolaryngologists, for which we will be reimbursed by Forest
Laboratories up to established limits in the first year of the
agreement. For the following five years, we will be reimbursed
up to established limits in accordance with our direct marketing
and selling activities. We have the right to retain the majority
of the sales margin, defined as net sales less cost of goods and
marketing expense, from the oral liquid formulation of Orapem
prescribed by pediatricians, provided we exercise this option at
least six months before this formulation is submitted for
regulatory approval. If we exercise this option, we and Forest
Laboratories will jointly determine the product launch and
marketing and selling strategies for any approved pediatric
formulation of Orapem. Further, if we exercise this option,
Forest Laboratories will extend us a $60.0 million line of
credit to support our promotional efforts to pediatricians.
In 2002, we entered into an equipment loan and security
agreement that provided a line of credit of up to
$3.5 million for the purchase of equipment, tenant
improvements and software licenses. Through December 31,
2005, we borrowed $3.4 million under this arrangement. The
line of credit bears interest at a weighted-average rate of
8.97% and is collateralized by the assets purchased with
borrowed funds. As of December 31, 2005, we had
$0.2 million in payments remaining on our equipment loan,
which was repaid in full by March 31, 2006, and no amounts
remain available for additional borrowing under this facility.
In 2005, we entered into interest bearing loans with two of our
officers for the purpose of exercising stock options in
accordance with the provisions of our equity incentive plan and
their option agreements. The loans plus accrued interest, which
totaled $0.4 million and bore interest at a market rate,
were repaid in full in cash on February 28, 2006.
In 2004, we entered into a license agreement with Daiichi Asubio
to develop and commercialize Orapem in the U.S. and Canada and
we have the sole negotiation right to license such rights for
the rest of the world except Japan. In consideration for the
license, we paid an initial license fee of $3.8 million
comprising $0.6 million paid in 2003 and paid in
$3.2 million in 2004. In December 2005, we recorded
research and development expense for a milestone payable of
$2.1 million in accordance with the terms of the license
agreement following submission of the NDA to the FDA in December
2005. In February 2006, in conjunction with our entering into
the license agreement with Forest Laboratories, this milestone
payment was increased to ¥375 million (approximately
$3.2 million using the U.S. dollar to Japanese yen
exchange rate as of March 31, 2006). The increased
milestone amount was accounted for as research and development
expense in 2006 when the modified terms of the license were
finalized. Under the modified license agreement we are further
obligated to future payments of (i) up to
¥375 million (approximately $3.2 million as of
March 31, 2006) upon initial FDA approval,
(ii) ¥500 million (approximately
$4.3 million as of March 31, 2006) upon a product
launch and (iii) up to ¥750 million
(approximately $6.4 million as of March 31, 2006) in
subsequent milestone payments for Orapem. If the NDA for Orapem
is approved and Orapem is launched within the next 12 months, we
will make the approval and launch milestone payments during that
time period. Additionally, we are responsible for royalty
payments to Daiichi Asubio based upon net sales of Orapem. The
license term extends to the later of: (i) the expiration of
the last to expire of the licensed patents owned or controlled
by Daiichi Asubio or (ii) 12 years after the first
commercial launch of Orapem. We have recorded payments made to
date as research and development expense, as Orapem has not yet
been approved by the FDA.
Under a supply agreement entered into in December 2004 between
Daiichi Asubio, Nippon Soda and us, we are obligated to
purchase, and Nippon Soda is obligated to supply, all our
commercial requirements of the Orapem active pharmaceutical
ingredient. At the time of full commercial launch, we are
obligated to make certain annual minimum purchase commitments.
If the full commercial launch is delayed, we may be obligated
for certain delay compensation to Nippon Soda up to
¥280 million (approximately $2.4 million as of
March 31, 2006) per year. Under the agreement with Forest
55
Laboratories entered into in February 2006, we are responsible
for only the delay compensation that may accrue for any period
ending on or prior to December 31, 2007. Thereafter, Forest
Laboratories will be responsible for any delay compensation.
After consideration of the agreement with Forest Laboratories,
our maximum potential delay compensation obligation is
¥105 million ($0.9 million at March 31,
2006). If we terminate the Orapem program, under certain
circumstances we may be obligated to reimburse Nippon Soda for
up to ¥65 million (approximately $0.6 million as
of March 31, 2006) in engineering costs.
In April 2005, we entered into a supply agreement for production
of adult tablets of Orapem with Tropon, which was amended as to
certain terms in March 2006. Beginning in 2006, we are obligated
to make minimum purchases of Tropons product of
2.3 million
(approximately $2.8 million as of March 31, 2006)
annually. If in any year the Company has not satisfied its
minimum purchase commitments, the Company is required to pay
Tropon the shortfall amount. Fifty percent (50%) of the
shortfall amount, if applicable, may be credited against future
drug product purchases. We are required to buy all of our
requirements for adult oral Orapem tablets from Tropon until
cumulative purchases exceed
22 million
($26.6 million at March 31, 2006). If the agreement is
terminated, under certain circumstances we may be obligated to
pay up to
1.7 million
(approximately $2.1 million as of March 31, 2006) in
facility decontamination costs. In March 2006 when the agreement
was amended, Replidynes obligations with respect to all
purchase commitments and facility decontamination costs were
suspended and deemed satisfied by Forest Laboratories pursuant
to an agreement between Tropon and Forest Laboratories. Under
our agreement with Forest Laboratories, we remain responsible
for only any shortfall amount in 2006 that may not be credited
against future drug product purchases.
In June 2003, we acquired certain intellectual property and
supporting material from GSK in exchange for the issuance of
4,000,000 shares of our Series B convertible preferred
stock at a fair value of $5.0 million. The acquisition was
accounted for as a research and development expense. Under this
agreement, we have an obligation to pay GSK $1.5 million by
July 4, 2006.
In 2006, we anticipate that capital expenditures will total
approximately $4.0 million.
We have not yet commercialized our products or achieved
profitability. We anticipate that we will continue to incur
substantial net losses for the next several years as we develop
our products, conduct and complete clinical trials, pursue
additional product candidates, expand our clinical development
team and corporate infrastructure and prepare for the potential
commercial launch of Orapem. We do not anticipate generating any
product related revenue until we obtain FDA approval for Orapem
and Forest Laboratories launches the product.
We believe that the net proceeds from this offering, together
with our current cash and cash equivalents, securities
available-for-sale, funding received from our collaboration
agreement with Forest Laboratories and interest earned on these
balances, will be sufficient to satisfy our anticipated cash
needs for working capital and capital expenditures through at
least the next 18 months. This forecast of the period in
which our financial resources will be adequate to support
operations is a forward-looking statement and involves risks,
uncertainties and assumptions. Our actual results and the timing
of selected events may differ materially from those anticipated
as a result of many factors, including but not limited to those
discussed under Risk Factors and elsewhere in this
prospectus.
Our future capital uses and requirements depend on a number of
factors, including but not limited to the following:
|
|
|
|
|
the rate of progress and cost of our pre-clinical studies,
clinical trials and other research and development activities; |
|
|
|
the scope and number of clinical development and research
programs we pursue; |
|
|
|
the costs, timing and outcomes of regulatory approvals; |
|
|
|
the costs of establishing or contracting for marketing and sales
capabilities, including the establishment of our own sales force; |
56
|
|
|
|
|
the extent to which we acquire or in-license new products,
technologies or businesses; |
|
|
|
the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; and |
|
|
|
the terms and timing of any additional collaborative, strategic
partnership or licensing agreements that we may establish. |
If our available cash and cash equivalents, securities
available-for-sale, funding received or made available under our
collaboration agreement with Forest Laboratories, net proceeds
from this offering and interest earned on these balances are
insufficient to satisfy our liquidity requirements, or if we
develop additional products or pursue additional applications
for our products or conduct additional clinical trials beyond
those currently contemplated, we may seek to sell additional
equity or debt securities or acquire an additional credit
facility. The sale of additional equity and debt securities may
result in additional dilution to our stockholders. If we raise
additional funds through the issuance of debt securities, these
securities could have rights senior to those of our common stock
and could contain covenants that would restrict our operations.
We may require additional capital beyond our currently
forecasted amounts. Any such required additional capital may not
be available on reasonable terms, if at all. If we are unable to
obtain additional financing, we may be required to modify our
planned research, development and commercialization strategy,
which could adversely affect our business.
Our future contractual obligations, including financing costs,
at December 31, 2005, include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less than | |
|
|
|
Over | |
|
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
| |
Operating lease obligations
|
|
$ |
3,592 |
|
|
$ |
712 |
|
|
$ |
1,213 |
|
|
$ |
1,256 |
|
|
$ |
411 |
|
Equipment financing obligations
|
|
|
172 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Milestone payments (1)
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,264 |
|
|
$ |
2,384 |
|
|
$ |
1,213 |
|
|
$ |
1,256 |
|
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents a $1.5 million milestone payment due to GSK by
July 4, 2006, or ten days after the IND for REP8839 is
considered filed with the FDA. We submitted an IND for REP8839
in combination with mupirocin in May 2006. |
The table above reflects only payment obligations that are fixed
and determinable. Our commitments for operating leases primarily
relate to the lease for our office and laboratory facilities in
Colorado and Connecticut.
The table above does not include information with respect to the
following contractual obligations because the amounts of the
obligations are not currently determinable:
|
|
|
|
|
contractual obligations for clinical trials that are payable on
a per patient basis; |
|
|
|
royalty obligations, which would be payable based on sales of
Orapem in future periods; |
|
|
|
amounts due to Daiichi Asubio under our license agreement, which
amounts are uncertain as to timing and dependent on the
achievement of milestones; and |
|
|
|
contingent amounts that may become due under supply agreements. |
We enter into agreements with clinical sites that conduct our
clinical trials. We make payments to sites based upon the number
of patients enrolled. For the three months ended March 31,
2006 and the year ended December 31, 2005, we incurred
costs of approximately $2.6 million and $11.3 million,
respectively, associated with payments to these clinical sites.
At this time, due to the variability associated
57
with these agreements, we are unable to estimate the future
patient enrollment costs we will incur and therefore have
excluded these costs from the table above.
Under our license agreement with Daiichi Asubio, we are
obligated to make future payments of (i) up to
¥375 million (approximately $3.2 million as of
March 31, 2006) upon initial FDA approval,
(ii) ¥500 million (approximately
$4.3 million as of March 31, 2006) upon a product
launch and (iii) up to ¥750 million
(approximately $6.4 million as of March 31, 2006) in
subsequent milestone payments for Orapem. If the NDA for Orapem
is approved and Orapem is launched within the next 12 months, we
will make the approval and launch milestone payments during that
time period. Additionally, we are responsible for royalty
payments to Daiichi Asubio based upon net sales of Orapem.
We have no royalty or other ongoing financial obligations to
GSK, except for a $1.5 million milestone payment due by
July 4, 2006, or ten days after the IND for REP8839 is
considered filed with the FDA. We submitted an IND for REP8839
in combination with mupirocin in May 2006.
Under a supply agreement entered into in December 2004 between
Daiichi Asubio, Nippon Soda and us, we are obligated to
purchase, and Nippon Soda is obligated to supply, all our
commercial requirements of the Orapem active pharmaceutical
ingredient in bulk form. At the time of full commercial launch,
we are obligated to make minimum purchase commitments of
quantities of drug substance to be determined initially by us
with Nippon Soda at the time of launch. If the full
commercial launch is delayed beyond January 1, 2007, we may
be obligated to pay Nippon Soda delay compensation up to
¥280 million (approximately $2.4 million as of
March 31, 2006) annually beginning July 1, 2007. Under
the agreement with Forest Laboratories entered into in February
2006, we are responsible for only the delay compensation that
may accrue for any period ending on or prior to
December 31, 2007. Thereafter, Forest Laboratories is
primarily liable for any delay compensation. After consideration
of the agreement with Forest Laboratories, the Companys
maximum potential delay compensation obligation is
¥105 million ($0.9 million at March 31,
2006). If the agreement is terminated as a result of our
material breach, bankruptcy, abandonment of the development or
commercialization of Orapem or significant delay in launch, as
defined in the agreement, and fail to launch Orapem we will be
obligated to reimburse Nippon Soda for up to
¥65 million (approximately $0.6 million as of
March 31, 2006) in engineering costs. As of March 31,
2006, payments under the delay compensation and engineering cost
provisions are not deemed to be probable.
In April 2005, we entered into a supply agreement for production
of adult tablets of Orapem with Tropon, which was amended as to
certain terms in March 2006. Beginning in 2006, we are obligated
to make minimum purchases of Tropons product of
2.3 million
(approximately $2.8 million as of March 31, 2006)
annually. If in any year we have not satisfied our minimum
purchase commitments, we are required to pay Tropon the short
fall amount. An amount equal to 50% of the short fall amount, if
applicable, may be credited against future drug product
purchases. We are required to buy all of our requirements for
adult oral Orapem tablets from Tropon until cumulative purchases
exceed
22 million
(approximately $26.6 million as of March 31, 2006). If
the agreement is terminated, under certain circumstances we may
be obligated to pay up to
1.7 million
(approximately $2.1 million as of March 31, 2006) in
facility decontamination costs. In March 2006 when the agreement
was amended, our obligations with respect to all purchase
commitments and facility decontamination costs were suspended
and deemed satisfied by Forest Laboratories pursuant to an
agreement between Tropon and Forest Laboratories. Under our
agreement with Forest Laboratories, we remain responsible for
only any shortfall in the minimum purchase commitments in 2006
that may not be credited against future purchases. As of
March 31, 2006, payments under the purchase commitment and
facility decontamination cost provisions described above are not
deemed to be probable.
Redeemable Convertible Preferred Stock
Our redeemable convertible preferred stock is classified on the
balance sheet between liabilities and stockholders deficit
as the holders of the redeemable convertible preferred stock
have the right to request redemption in the future if certain
classes of stockholders vote in favor of such redemption. Our
Series B convertible preferred stock is also classified on
the balance sheet between liabilities and
58
stockholders deficit as the holders of Series B
convertible preferred stock have certain rights in liquidation.
Immediately prior to the closing of this offering, all of our
outstanding shares of preferred stock will convert into shares
of common stock and the redemption right and rights in
liquidation will terminate.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R),
Share-based Payment. SFAS No. 123(R) revises
SFAS No. 123, supersedes APB No. 25 and amends
SFAS No. 95, Cash Flows.
SFAS No. 123(R) applies to transactions in which an
entity exchanges its equity instruments for goods or services
and also applies to liabilities an entity may incur for goods or
services that are based on the fair value of those equity
instruments. Under SFAS No. 123(R), we will be
required to follow a fair value approach using an option
valuation model, such as the Black-Scholes option-pricing model,
at the date of stock option grants. The deferred compensation
amount calculated under the fair value method will then be
recognized over the respective vesting period of the stock
options.
We adopted the provisions of SFAS No. 123(R) as of
January 1, 2006. Due to our use of the minimum value method
for valuing employees stock options during prior periods,
we are required to adopt SFAS No. 123(R) using the
prospective method. Pursuant to the prospective method of
adoption, we will continue to account for options granted before
adoption under the current APB No. 25 accounting. All
grants issued or modified subsequent to adoption will be
accounted for pursuant to SFAS No. 123(R). Since the
adoption of SFAS No. 123(R) relates only to future
grants or modifications under the prospective method of
adoption, the adoption of the new guidance will only impact
future periods to the extent we grant or modify options in the
future. As such, the impact of the adoption of
SFAS No. 123(R) cannot be predicted at this time
because it will depend on levels of share based payments granted
or modified in the future.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in material off-balance
sheet activities, including the use of structured finance,
special purpose entities or variable interest entities.
Qualitative and Quantitative Disclosures About Market Risk
Our exposure to market risk is confined to our cash, cash
equivalents that have original maturities of less than
three months and investment securities. The primary
objective of our investment activities is to preserve our
capital for the purpose of funding operations while at the same
time maximizing the income we receive from our investments
without significantly increasing risk. To achieve these
objectives, our investment policy allows us to maintain a
portfolio of cash equivalents and investments in a variety of
marketable securities, including U.S. government and
mortgage backed securities, money market funds and under certain
circumstances, derivative financial instruments. Our cash and
cash equivalents as of December 31, 2005 included liquid
money market accounts. The securities in our investment
portfolio are classified as available for sale and are, due to
their short-term nature, subject to minimal interest rate risk.
We currently hedge exposure to foreign currency fluctuations on
current and forecasted expenses denominated in Japanese Yen. The
risk that counterparties to our derivative contracts will
default and not settle according to the terms of the agreements
is a credit risk. Although these instruments are considered
derivatives, their economic risks have historically been
insignificant and managed on the same basis as risks of other
securities we hold.
59
BUSINESS
Overview
We are a biopharmaceutical company focused on discovering,
developing, in-licensing and commercializing innovative
anti-infective products. Our lead product, Orapem, is a novel
oral, community antibiotic for which we have submitted an NDA.
Orapem is a member of the penem family within the beta-lactam
class of antibiotics. Beta-lactams are generally characterized
by their favorable safety and tolerability profiles, as well as
their broad spectrum of activity, and as a result are often used
as first-line therapy in many respiratory and skin infections in
adult and pediatric patients. If approved by the FDA, Orapem
would be the first orally available penem in the U.S. Our
NDA is based on 11 Phase III studies in the indications for
which we are seeking approval and safety data for over
5,000 patients who have been treated with Orapem. We
submitted an IND for the clinical development of our second
product candidate, REP8839, in May 2006. REP8839 is being
developed for topical use for skin and wound infections and
prevention of S. aureus infections, including MRSA
infections, in hospital settings. We are also pursuing the
development of other novel anti-infective products using
compounds we have selected from a library of proprietary
compounds, as well as compounds identified in assays we have
developed to identify compounds that inhibit bacterial DNA
replication.
According to IMS Health, the annual worldwide market for
antibiotics was $25.0 billion in 2005, which includes
$8.5 billion of U.S. sales for oral antibiotics, consisting
of $7.0 billion in the adult market and $1.5 billion
in the pediatric market. IMS Health estimates that, in 2005,
beta-lactams had a 42.7% market share of the adult oral
antibiotic market representing over 90 million
prescriptions and a 74.5% market share of the pediatric oral
antibiotic market representing over 40 million
prescriptions. We believe that Orapems safety profile and
activity against many common bacterial infections suggest the
potential for Orapem to become a leading branded oral
beta-lactam antibiotic.
In December 2005, we submitted our NDA for Orapem for four
indications: acute bacterial sinusitis; community-acquired
pneumonia; acute exacerbation of chronic bronchitis; and
uncomplicated skin and skin structure infections. Although the
efficacy data for acute exacerbation of chronic bronchitis and
uncomplicated skin and skin structure infections may be adequate
for FDA approval, we expect that the FDA will likely require
additional clinical trials, including a placebo-controlled trial
in the case of acute exacerbation of chronic bronchitis, before
it will approve these indications. We are currently conducting a
Phase III placebo-controlled clinical trial for acute
exacerbation of chronic bronchitis for adult use.
We have licensed all rights to Orapem from Daiichi Asubio in the
U.S. and Canada. In addition, we have the sole negotiation right
to license such rights for the rest of the world, except Japan.
In February 2006, we entered into a collaboration and
commercialization agreement with Forest Laboratories to
co-develop and co-market Orapem in the U.S. We granted
Forest Laboratories a first refusal right to market Orapem in
Canada. We believe that Forest Laboratories experience in
successfully launching branded primary care products and the
fact that Forest Laboratories has no competing community
antibiotics in its current product portfolio make it a strong
partner for us in the development and commercialization of
Orapem. We received an upfront payment of $50.0 million in
February 2006 and a milestone payment of $10.0 million
March 2006. We may receive up to an additional
$90.0 million in development milestones and
$100.0 million in commercial milestones for both adult and
pediatric indications. In addition, we will receive a royalty on
all sales of Orapem. Forest Laboratories will be responsible for
sales and marketing of Orapem to primary care physicians. We
intend to build our own marketing and sales force to promote
Orapem to otolaryngologists (ear, nose and throat physicians) in
major metropolitan areas. Forest Laboratories will reimburse us
for most of these marketing and sales force expenses. We and
Forest Laboratories may conduct additional clinical trials for
other indications, which may include higher dose therapies.
Forest Laboratories has committed to pay a substantial portion
of the costs for further development of Orapem.
We are also developing, together with Forest Laboratories, an
oral liquid formulation of Orapem for the pediatric market and
are currently conducting a Phase II clinical trial using a
prototype oral liquid
60
formulation among pediatric patients with acute otitis media. We
intend to conduct Phase III clinical trials seeking
clinical indications for the two largest pediatric indications:
acute otitis media and tonsillitis/ pharyngitis. Pediatric
antibiotics compete primarily on safety, efficacy and taste. We
believe Orapems safety profile and broad spectrum of
activity against bacteria that cause common infections in
children make Orapem a promising product candidate for pediatric
use. In addition, we believe that there will be fewer
competitive branded pediatric oral antibiotics in the next
several years. Under our agreement with Forest Laboratories, we
have an option to exclusively promote Orapem to pediatricians.
Assuming we successfully complete clinical development of an
oral liquid formulation for Orapem, we currently intend to
expand our sales force at our expense to promote Orapem to
pediatricians, thereby increasing our economic interest in
pediatric sales.
Our second product candidate, REP8839, has exhibited promising
activity in pre-clinical studies against S. aureus,
including MRSA. We are developing REP8839 for topical use for
skin and wound infections and prevention of
S. aureus infections, including MRSA infections, in
hospital settings. We submitted an IND application for the
clinical development of a REP8839/mupirocin combination product
in May 2006. Mupirocin is a widely used topical antibiotic. We
believe that the distinctive mechanisms of action of the two
drugs may greatly reduce the likelihood that S. aureus
will develop resistance to this combination. We retain
worldwide rights to REP8839.
We are also pursuing the development of other novel
anti-infective products based on our own research efforts. We
have developed assays that identify compounds that inhibit
bacterial DNA replication. The compounds may be useful to treat
bacterial infections. We believe that bacterial DNA replication
is an attractive target system for new antibacterial drugs
because it is an essential cellular process and stalled DNA
replication can trigger cell death. Our assays are amenable to
efficient screening of large libraries of small molecules and
are designed to mimic the bacterial DNA replication systems of
numerous bacteria, with the goal of identifying novel inhibitors
of bacterial DNA replication. We have identified compounds that
are able to inhibit bacterial DNA replication in these assays.
We believe that the novel mechanism of action of our technology
may reduce the risk that bacteria will develop resistance to
drugs based on this technology. We are currently optimizing the
initial inhibitors identified in the assays. We have also
selected from a proprietary library several potential compounds
for development to treat infections in hospital settings caused
by C. difficile. We are currently in pre-clinical
testing for these compounds. We retain worldwide rights to all
of these programs.
Strategy
Our goal is to discover,
in-license, develop and
commercialize novel anti-infective compounds that address unmet
medical needs resulting from growing resistance to existing drug
products. Key elements of our strategy are:
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Maximize commercial potential for Orapem as a leading
community antibiotic. If approved, we intend to establish
Orapem as a leading community antibiotic and a preferred branded
oral beta-lactam in adult and pediatric markets. We believe that
Orapems safety profile and spectrum of activity make it
suitable for use against a wide variety of common bacterial
infections. Forest Laboratories will market Orapem in the
U.S. to primary care physicians using its established
primary care sales force. We will seek to commercialize Orapem
outside the U.S. and Canada through additional strategic
collaborations. |
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|
Develop specialty sales and marketing capabilities. We
intend to build our own sales and marketing capabilities to
target specialist physicians in major metropolitan areas. If
Orapem is approved for adult use, we intend to promote Orapem
directly to otolaryngologists (ear, nose and throat physicians)
and Forest Laboratories will reimburse us for most of the
related marketing and sales force costs. If Orapem is approved
for pediatric use, we intend to expand our sales force to market
Orapem to pediatricians. We plan to leverage this sales force to
market other products that we may develop, acquire or in-license. |
61
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Develop REP8839 to treat S. aureus infections. We are
developing REP8839 for topical use in treatment of skin and
wound infections and prevention of S. aureus
infections, including MRSA infections, in hospital settings. Our
pre-clinical studies have shown promising activity in each of
these target indications. We submitted an IND application for
the development of a REP8839/mupirocin combination product in
May 2006 and plan to aggressively pursue clinical development if
the IND is approved. |
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Discover and develop novel anti-infective products. We
intend to expand our pipeline of novel anti-infective product
candidates by continuing to pursue our discovery research
programs. We plan to use our DNA replication inhibitor expertise
to develop anti-infective products with novel mechanisms of
action based on inhibition of bacterial DNA replication, which
we believe may limit development of resistance to those
products. We also have an active program to develop a treatment
for C. difficile, a growing medical problem in hospital
settings for which existing therapies have significant
limitations, and are conducting pre-clinical testing of several
small molecules to treat C. difficile. |
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Acquire or in-license additional products or product
candidates. We plan to leverage our development, regulatory
and commercial resources by acquiring or in-licensing additional
products or product candidates. These may include anti-infective
products or other products that are prescribed by the physicians
targeted by our sales force. |
Antibiotic Market Background and Opportunity
Bacterial infections occur when bacteria that naturally exist in
the body or that are inhaled, ingested or otherwise acquired are
not controlled by our immune systems. The antibiotics used to
treat these infections are classified as either broad spectrum
or narrow spectrum. The broad spectrum antibiotics are typically
oral antibiotics used to treat
community-acquired
infections, whereas the narrow spectrum antibiotics are
typically intravenous antibiotics used to treat specific
bacteria in the hospital setting with the exception of
penicillin. According to IMS Health, the annual worldwide market
for antibiotics was $25.0 billion in 2005, which includes
U.S. sales of $8.5 billion for oral antibiotics,
consisting of $7.0 billion in the adult market and
$1.5 billion in the pediatric market.
The two primary factors that drive a physicians choice of
a particular oral antibiotic to treat
community-acquired
infections are the drugs effectiveness against a
particular type of bacterial infection and the safety profile of
the drug. We believe that an antibiotic with good efficacy and
an excellent safety profile may be used in preference to a more
powerful antibiotic that has the risk of serious side effects,
especially in non life-threatening infections. As a
patients condition becomes more serious, the physician may
be more willing to expose a patient to a potentially increased
risk of side effects and safety issues in order to obtain the
benefit of a drug that may be more potent against the bacteria
that caused that infection.
Oral antibiotics are classified as either first- or second-line
therapies for each disease state by the key opinion leader
physicians who write the adult and pediatric antibiotic
treatment guidelines, such as those published by the Sinus and
Allergy Health Partnership and American Academy of Pediatrics.
First-line therapy includes both branded and generic antibiotics
and constitutes a larger market than second-line therapy which
currently includes primarily branded products.
According to IMS Health, over 90% of all bacterial infections
that occurred in 2005 were classified as upper respiratory tract
infections, lower respiratory tract infections and uncomplicated
skin and skin structure infections. There are three primary
classes of oral antibiotics that are prescribed to treat
respiratory tract and skin infections. These include the
beta-lactam, macrolide/ketolide and quinolone classes. Each
class has a distinctive chemical structure that is shared by the
various antibiotics included in that class.
Beta-lactam antibiotics have been the most widely prescribed
antibiotics for more than 50 years. This class of
antibiotics is well known for favorable efficacy, safety and
tolerability. Since the introduction
62
of penicillin in 1942, only two other sub-classes of
beta-lactams have been introduced: cephalosporins
(1974) and carbapenems (1985). Carbapenems are only
available in intravenous form for use in the hospital setting.
Therefore, if approved, the introduction of the penem sub-class
will represent the first oral community beta-lactam sub-class
introduction in the past 30 years.
The penem sub-class of beta-lactam antibiotics have structural
features that resemble a fusion of the penicillin and
cephalosporin core structures. An advantage of penems is their
ability to resist degradation by commonly encountered
beta-lactamase enzymes. Bacteria commonly become resistant to
beta-lactam antibiotics by producing beta-lactamase enzymes
which inactivate the antibiotic. Beta-lactamase enzymes are
known to destroy some of the penicillin and cephalosporin
antibiotics, which can result in resistance to those sub-classes
of beta-lactam antibiotics.
Beta-lactam antibiotics are effective against a range of common
bacterial infections and do not exhibit many of the safety
issues common with the macrolide/ketolide and quinolone classes.
The beta-lactam class is recommended as first-line therapy and
is the leading antibiotic class for treating acute bacterial
sinusitis and uncomplicated skin and skin structure infections
in adults. According to the Infectious Disease Society of
America macrolides are a preferred treatment for acute
exacerbation of chronic bronchitis while quinolones are a
preferred treatment for community-acquired pneumonia. In more
serious conditions, the benefit of using antibiotics with
greater potency may outweigh the risks of increased side effects
and safety issues.
The following table shows the prescriptions and percentage use
of each class of oral antibiotics in 2005 for common adult
indications:
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|
Drug Class Share of Indication | |
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|
|
Adult | |
|
| |
|
|
|
|
Oral Market | |
|
Beta- | |
|
Macrolides/ | |
|
|
|
Other | |
Bacterial Infection Type | |
|
Indication |
|
Prescriptions | |
|
Lactams | |
|
Ketolides | |
|
Quinolones | |
|
Antibiotics | |
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(in millions) | |
|
|
|
|
|
|
|
|
Upper Respiratory Tract Infections |
|
Acute Bacterial Sinusitis |
|
|
34.4 |
|
|
|
49.3 |
% |
|
|
32.7 |
% |
|
|
13.2 |
% |
|
|
4.8 |
% |
|
|
|
|
Acute Otitis Media |
|
|
9.0 |
|
|
|
68.2 |
% |
|
|
21.4 |
% |
|
|
6.8 |
% |
|
|
3.6 |
% |
|
|
|
|
Tonsilitis/ Pharyngitis |
|
|
19.0 |
|
|
|
70.8 |
% |
|
|
25.4 |
% |
|
|
2.4 |
% |
|
|
1.3 |
% |
Lower Respiratory Tract Infections |
|
Acute Exacerbation of Chronic Bronchitis |
|
|
33.5 |
|
|
|
21.5 |
% |
|
|
50.5 |
% |
|
|
19.2 |
% |
|
|
8.9 |
% |
|
|
|
|
Community-Acquired Pneumonia |
|
|
6.6 |
|
|
|
11.5 |
% |
|
|
35.5 |
% |
|
|
49.6 |
% |
|
|
3.4 |
% |
|
Skin Infections |
|
|
Uncomplicated Skin & Skin Structure Infections |
|
|
34.2 |
|
|
|
62.8 |
% |
|
|
6.7 |
% |
|
|
14.3 |
% |
|
|
16.1 |
% |
Total |
|
|
42.9 |
% |
|
|
26.1 |
% |
|
|
19.9 |
% |
|
|
11.1 |
% |
Source: IMS Health
The safety profile of the beta-lactam class has been
particularly important in the pediatric market. The beta-lactam
class is recommended by the American Academy of Pediatrics as
first-line therapy for acute otitis media,
tonsillitis/pharyngitis and acute bacterial sinusitis in the
pediatric market. Ketolides and quinolones are not currently
approved for pediatric indications.
63
The following table shows the prescriptions and percentage use
of each class of oral antibiotics in 2005 for common pediatric
indications:
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|
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|
Drug Class Share of Indication | |
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|
Pediatric | |
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| |
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|
|
Oral Market | |
|
Beta- | |
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|
|
Other | |
Bacterial Infection Type | |
|
Indication |
|
Prescriptions | |
|
Lactams | |
|
Macrolides | |
|
Quinolones | |
|
Antibiotics | |
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
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|
(in millions) | |
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|
|
|
|
Upper Respiratory Tract Infections |
|
Acute Bacterial Sinusitis |
|
|
4.8 |
|
|
|
84.8 |
% |
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14.0 |
% |
|
|
0.0 |
% |
|
|
1.1 |
% |
|
|
|
|
Acute Otitis Media |
|
|
22.7 |
|
|
|
88.9 |
% |
|
|
9.2 |
% |
|
|
0.0 |
% |
|
|
1.9 |
% |
|
|
|
|
Tonsillitis/Pharyngitis |
|
|
9.3 |
|
|
|
89.0 |
% |
|
|
10.0 |
% |
|
|
0.0 |
% |
|
|
1.0 |
% |
Lower Respiratory Tract Infections |
|
Acute Exacerbation of Chronic Bronchitis |
|
|
3.5 |
|
|
|
43.0 |
% |
|
|
53.7 |
% |
|
|
0.0 |
% |
|
|
3.3 |
% |
|
|
|
|
Community-Acquired Pneumonia |
|
|
1.5 |
|
|
|
49.3 |
% |
|
|
50.7 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Skin Infections |
|
|
Uncomplicated Skin & Skin Structure Infections |
|
|
2.8 |
|
|
|
81.8 |
% |
|
|
8.6 |
% |
|
|
0.0 |
% |
|
|
9.6 |
% |
Total |
|
|
82.0 |
% |
|
|
14.6 |
% |
|
|
0.0 |
% |
|
|
3.4 |
% |
Source: IMS Health
We believe that in addition to efficacy and safety, the
prescribing decisions in the pediatric market are also
significantly affected by the tolerability and taste of the
antibiotic. Diarrhea is the leading tolerability issue for the
currently marketed oral antibiotics in the pediatric market
which can cause therapy to be discontinued early. Because the
efficacy of many antibiotics depends on the patient taking the
full course of therapy at the prescribed times, a patients
discontinuation of therapy or refusal to take the drug can
result in prolongation of the infection and possibly serious
complications.
We believe that three key factors are creating significant
opportunities for new branded antibiotics that are more
effective, better tolerated and safer than existing therapies:
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Emergence of Drug-resistant Bacteria. Over the past
several decades, many of the most prevalent bacteria that cause
adult and pediatric respiratory and skin infections have
developed resistance to currently marketed antibiotics. If
bacteria are resistant, the infection can become difficult or
impossible to treat and may lead to serious complications,
including death. The two most prevalent bacteria in respiratory
infections include Streptococcus pneumoniae, or S.
pneumoniae and Haemophilus influenzae, or H.
influenzae. According to the 2006 PROTEKT
U.S. surveillance study, designed to track antibiotic
resistance, more than 29% of the Streptococcus species are
resistant to at least one of the drugs most commonly used to
treat these infections. The rate of H. influenzae
resistance to at least one of the drugs most commonly used
to treat infections caused by this bacteria has reached 30%, as
reported in the 2005 Journal of Clinical Infectious Disease. The
U.S. Centers for Disease Control has stated that antibiotic
resistance is now among that organizations top concerns. |
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Tolerability Issues. Many current oral antibiotics have
been associated with tolerability issues that cause patients
extreme discomfort and compliance issues that can lead to
product failures. The most widely reported adverse event among
leading oral antibiotics is diarrhea. The prescribing label for
two of the leading oral beta-lactam antibiotics for use in
adults, Augmentin and Omnicef, list diarrhea incidence levels
that are approximately 15%. |
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Safety Issues. Many of the common oral antibiotics in the
quinolone and macrolide/ketolide classes are burdened with
safety issues such as hepatotoxicity (drug related liver
damage), heart rhythm abnormalities, photosensitivity (increased
sensitivity to sunlight), hypoglycemia (low blood sugar),
hyperglycemia (high blood sugar) or rash. Macrolide and ketolide
class antibiotics are also associated with clinically meaningful
drug |
64
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interaction issues with frequently prescribed drugs such as
cholesterol lowering agents. To date, four of the nine quinolone
antibiotics that have been marketed have been withdrawn from the
market due to safety issues. |
Our Product Candidates
We believe that our innovative product candidates offer
advantages over existing antibiotics by virtue of better overall
profiles in terms of activity, safety, tolerability and
induction of bacterial resistance. We also believe that the
markets these products address present us with significant
commercial opportunities. Our current product candidate
portfolio consists of the following:
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Commercial Rights |
Product Candidate |
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(Dosage Form) |
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Target Indications |
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Development Status |
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Replidyne |
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Partner |
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Orapem
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300 mg tablet
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Acute bacterial sinusitis
Community-acquired pneumonia
Acute exacerbation of chronic bronchitis
Uncomplicated skin and skin structure infections |
|
NDA submitted December 2005; currently under review |
|
U.S.: specialists; co-promote option to exclusively promote to
pediatricians
Canada
Sole negotiation right in rest of world, except Japan |
|
Forest: U.S. primary care physicians and other non-
specialists
First refusal right in Canada |
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600 mg tablet
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Acute exacerbation of chronic bronchitis |
|
Phase III |
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Oral liquid |
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Acute otitis media |
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Phase II |
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formulation |
|
(pediatric) |
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REP8839
|
|
Skin and wound infections
Prevention of S. aureus infections, including MRSA
infections, in hospital settings |
|
Pre-clinical |
|
Worldwide |
|
Not applicable |
Orapem is a member of the penem class of beta-lactam
antibiotics. If approved by the FDA, it would be the first oral
penem available outside of Japan. We believe that with its broad
spectrum of activity, increased potency and safety and
tolerability profile, Orapem would be appropriate for use as a
first-line therapy. Promotional efforts by us and Forest
Laboratories will be concentrated on this market.
We believe that, if approved, Orapem will be well-positioned to
capitalize on market opportunities within the oral antibiotic
arenas of adult and pediatric community-acquired respiratory
tract and skin infections. The following characteristics
differentiate Orapem from existing beta-lactam antibiotics:
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First oral penem available in the U.S. If approved by the
FDA, Orapem would represent the first new sub-class of
beta-lactams (penems) to be introduced in oral form for
community use in more than 30 years. According to IMS
Health, beta-lactams are the most widely used first-line
therapy; however, over the years many bacteria have developed
resistance to older beta-lactam antibiotics. Penems are
intrinsically able to resist degradation by beta-lactamase
enzymes. Because Orapem is a first product in a new class of
antibiotics, its introduction should not be burdened with the
resistance issues at the levels associated with other existing
antibiotics. |
65
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Potency Profile. In vitro studies have indicated that
Orapem is four times more active than Augmentin
(amoxicillin/clavulanate) against S. pneumoniae,
including those strains that have evolved resistance to
penicillin or amoxicillin. Orapem is also generally twice as
active as Augmentin against H. influenzae, including
those strains that have evolved resistance to other beta-lactam
antibiotics. In vitro potency does not always correlate
to clinical efficacy. |
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Safety profile consistent with other beta-lactam
antibiotics. Due to its safety profile, we believe that
Orapem would be appropriate as a first-line treatment for common
respiratory and skin infections in the primary care setting. We
believe that Orapem would allow physicians to reserve quinolones
for second-line therapy, reducing quinolone resistance and
improving the
risk-to-benefit ratio
for individual patients. Unlike carbapenems, Orapem has a low
potential for neurotoxicity. In Phase III clinical testing,
Orapem did not exhibit the potentially serious safety issues
that affect the macrolide/ketolide and quinolone classes of
antibiotics. Due to the safety issues previously listed for the
ketolide and quinolone antibiotics, we do not anticipate
competitive activity from products in these classes in the
leading pediatric disease states (i.e. acute otitis media). |
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Tolerability Profile. In the Phase II and
Phase III clinical studies referenced in our NDA, the
overall incidence of diarrhea was less than 5% in over
5,000 patients treated with Orapem. This rate of incidence
compares favorably with the incidence of diarrhea reported in
other commonly used beta-lactam antibiotics. Further, in two
Phase III clinical studies in which Orapem was compared
directly to Augmentin, the incidence of diarrhea was two to
three times lower in the Orapem-treated patients. |
Orapem (faropenem medoxomil) is a prodrug form of the parent
compound faropenem and was initially discovered by Suntory
Limited, now known as Daiichi Asubio. Faropenem medoxomil is
metabolized by the body to release faropenem sodium, a drug that
has been approved and sold in Japan by Daiichi Asubio since
1997. Since then, it is estimated that approximately
68.5 million prescriptions have been written. Prodrugs are
designed to improve the amount of drug reaching the bloodstream
in which the prodrug molecule is separated by the bodys
natural metabolic enzymes into its active component and an
inactive component. In clinical pharmacology studies,
approximately 72% to 84% of an orally administered dose of
Orapem was absorbed into the bloodstream and then rapidly
converted to the active parent compound faropenem, resulting in
three to four times greater bioavailability compared to
faropenem sodium.
In pre-clinical studies, Orapem has exhibited broad spectrum
activity that includes bacteria commonly associated with
respiratory infections (S. pneumoniae,
H. influenzae and Moraxella catarrhalis, or
M. Catarrhalis) and uncomplicated skin structure and skin
infections (methicillin-susceptible S. aureus and
Streptococcus pyogenes, or S. pyogenes).
The following table shows the antibacterial activities of Orapem
and other antibiotics against these common respiratory and skin
bacterial pathogens in in vitro studies. The
MIC90
value shown is the minimum inhibitory concentration of drug
required to inhibit growth of 90% of the bacterial isolates
within a given population. The lower the
MIC90
value for a given drug the more potent it is against the
population of bacteria. In these studies, Orapem was the most
active agent against S. pneumoniae, including
penicillin-resistant isolates, where it was four-fold more
active than Augmentin. Among H. influenzae, the
activity of Orapem did not appear to be compromised by the
ability of the bacteria to produce beta-lactamase enzymes.
Orapem showed equivalent activity to Augmentin against
beta-lactamase producing strains of M. catarrhalis and
was active against methicillin-susceptible S. aureus
but was inactive against methicillin-resistant isolates.
S. pyogenes, the other major skin pathogen, was also
susceptible to Orapem. Collectively, these data indicate the
potent activity of Orapem against the important respiratory and
skin pathogens.
66
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Respiratory Pathogens
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S. pneumoniae
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Penicillin-susceptible
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0.008 |
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0.03 |
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0.12 |
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0.25 |
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1 |
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Penicillin-intermediate
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0.25 |
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1 |
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4 |
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³512 |
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Penicillin-resistant
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H. influenzae
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1 |
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0.015 |
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M. catarrhalis
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0.25 |
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0.06 |
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0.12 |
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0.03 |
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0.12 |
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0.06 |
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Skin Pathogens
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S. aureus
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>64 |
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S. pyogenes
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0.03 |
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£0.015 |
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£0.03 |
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0.25 |
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1 |
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Orapem for the Adult Market |
We submitted our NDA for Orapem to the FDA in December 2005 and
requested approval for four indications: acute bacterial
sinusitis, community-acquired pneumonia, acute exacerbation of
chronic bronchitis and uncomplicated skin and skin structure
infections. The FDA accepted the NDA for review in February
2006. The anticipated 10 month review period by the FDA
will include among other data, review of the clinical data and
manufacturing related issues. Unless there is a regulatory
extension of the review period, we expect that the FDA will
provide us with an assessment of the NDA by the end of October
2006. We believe that the Phase III studies used to support
regulatory approval that were designed and carried out by Bayer
after conferring with the appropriate FDA review division met
all the applicable clinical trial guidelines that were in place
at the time the studies were conducted.
One study submitted in the NDA in uncomplicated skin and skin
structure infections showed statistical non-inferiority to a
FDA-approved comparator treatment regimen, while a second study
did not show statistical non-inferiority. The definition of
statistical non-inferiority was met if there was less than
5% probability (a 95% confidence interval, or CI) that
Orapem was 10% worse than the standard treatment. The choice of
a delta of 10% conforms to current FDA standards for
establishing non-inferiority of antimicrobial agents. When we
pool the data from the two studies, clinical outcomes were
similar and microbiological eradication rates were similar and
greater than 90%. When presented with the data at a meeting in
April 2005, the FDA review division advised that these data
would be carefully scrutinized but that an additional
Phase III clinical trial will likely be required for
approval of this indication.
Regulatory requirements for approval of new drugs can change
over time. Historically, the FDA and foreign regulatory
authorities have not required placebo-controlled clinical trials
for approval of antibiotics but instead have relied on
non-inferiority studies. In a non-inferiority study, a drug
candidate is compared with an approved antibiotic treatment and
it must be shown that the product candidate is not significantly
less effective than the approved treatment. All efficacy studies
upon which our NDA is based were designed as non-inferiority
studies after consultation with the FDA. In September 2005, the
FDA informed us that it will likely require a placebo-controlled
trial prior to approving Orapem for acute exacerbation of
chronic bronchitis. Nevertheless, the FDA agreed to review our
application for this
67
indication and accepted the NDA for filing. In May 2006, the FDA
requested an explanation of how our non-inferiority studies
contained in our NDA for Orapem support efficacy in each of the
indications for which we are seeking approval. We cannot assure
you that the FDA will not require placebo-controlled trials, or
other trials involving comparator antibiotics, to demonstrate
the superiority of Orapem to placebo before considering the
approval of Orapem for one or more of the indications that are
the subject of our pending NDA.
Clinical Overview. The trials that supported our NDA
filing were conducted by Bayer when it was a previous licensee
of Orapem and were generally designed to support approval in the
U.S. and also in major international markets other than Japan.
As has been the norm in antimicrobial drug development, the
primary study objective in most of these studies was to
demonstrate that Orapem was non-inferior to a control antibiotic
treatment approved for use in the U.S. Orapem was
demonstrated to be non-inferior in eight of the nine randomized
controlled studies and similar efficacy was demonstrated in the
two uncontrolled studies. The definition of statistical
non-inferiority was met if there was less than 5% probability (a
95% CI) that Orapem was 10% worse than the standard treatment.
The choice of a delta of 10% conforms to current standards for
establishing non-inferiority of antimicrobial agents. Efficacy
evaluation, including clinical and microbiological responses,
was determined by physician assessment and bacterial cultures.
The clinical outcome analysis was first conducted for subjects
who met all the protocol defined criteria or rules (the
clinically evaluable population) and subsequently on
all treated subjects (the
intent-to-treat
population). The references to N/N in the
tables below represent the number of patients who had a clinical
response compared to the total number of patients included in
the study population. For all non-inferiority studies, the
intent-to-treat
analysis supported the per protocol analysis. In this extensive
Phase III clinical testing, Orapem exhibited the activity
and safety profile typical of beta-lactam antibiotics with
improved tolerability.
Clinical Studies for Acute Bacterial Sinusitis. The
efficacy of Orapem in subjects with acute bacterial sinusitis
was evaluated in three Phase III studies. In two
comparative studies, where seven-day and
10-day courses of
Orapem were compared to cefuroxime axetil, the primary endpoints
were met and statistical non-inferiority was demonstrated. The
third study (Study 100287) was an open-label (no comparative
control treatment) trial in which all subjects received Orapem
after undergoing a needle aspiration of the sinus cavity in
order to obtain a direct sinus specimen to culture for bacterial
pathogens. The clinical and microbiological outcomes were
consistent with the comparative studies and we believe the
microbiological results support approval of Orapem to treat
acute bacterial sinusitis caused by all three of the major
respiratory pathogens. We believe the results of the three
studies demonstrate that seven-day
68
treatment with Orapem is effective in the treatment of subjects
with acute bacterial sinusitis. The following table summarizes
the clinical results of the acute bacterial sinusitis studies:
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Cefuroxime |
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Orapem |
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Orapem |
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Axetil |
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Statistical |
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300 mg |
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300 mg |
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250 mg |
|
Result |
Study |
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2x/day |
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2x/day |
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2x/day |
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95% CI |
Population |
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n/n |
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n/n |
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n/n |
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% |
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Study 100288 |
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7 days |
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10 days |
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10 days |
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Clinically
Non-Inferior |
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Clinically Evaluable
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237/295(80%) |
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229/280(82%) |
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213/286(74%) |
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0.1, 13.6 (7 day)
1.7, 15.2 (10 day) |
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Intent-to-Treat
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262/366(72%) |
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255/363(70%) |
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250/370(68%) |
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-2.7, 10.5 (7 day)
-3.9, 9.5 (10 day) |
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Study 10186 |
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7 days |
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7 days |
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Clinically
Non-Inferior |
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Clinically Evaluable
|
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203/228(89%) |
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198/224(88%) |
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-5.2, 6.4 |
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Intent-to-Treat
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237/274(86%) |
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239/273(88%) |
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-7.0, 4.0 |
|
Study 100287 |
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7 days |
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Open Label |
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Clinically Evaluable
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246/300(82%) |
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Not relevant |
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Intent-to-Treat
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269/353(76%) |
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Not relevant |
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Clinical Studies for Community-Acquired Pneumonia.
Community-acquired pneumonia is the most serious type of
bacterial respiratory infection and can be life threatening. The
efficacy of Orapem in subjects with community-acquired pneumonia
was evaluated in four Phase III studies. In the three
comparative studies, the primary endpoints were met and
non-inferiority was demonstrated for
10-day therapy with
Orapem compared to
10-day therapy with
amoxicillin/clavulanate,
14-day therapy with
cefpodoxime and 10-day
therapy with amoxicillin. The fourth study (Study 100289) was an
open-label (no comparative control treatment) trial in which
bacterial samples were collected for culture. The clinical and
microbiological outcomes were consistent with the comparative
studies and we believe the results of this study support
approval of Orapem for community-acquired pneumonia caused by
all three major respiratory pathogens. Overall, we believe the
results of the four studies demonstrate that
10-day treatment with
Orapem is effective in the treatment of subjects with
community-acquired pneumonia. The following table summarizes the
clinical results of the community-acquired pneumonia studies:
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Orapem |
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|
Statistical Result |
Study |
|
300 mg 2x/day 10 days |
|
Comparator |
|
95% CI |
Population |
|
n/n |
|
n/n |
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% |
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Amoxicillin |
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Clinically |
Study 10188
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|
1g 3x/day 10 days |
|
Non-Inferior |
|
Clinically Evaluable
|
|
260/284 (92%) |
|
237/268 (88%) |
|
-1.9, 8.1 |
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Intent-to-Treat
|
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289/314 (92%) |
|
270/304 (89%) |
|
-1.4, 7.8 |
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Amoxicillin/Clavulanate |
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Clinically |
Study 10189
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625 mg 3x/ day 10 days |
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Non-Inferior |
|
Clinically Evaluable
|
|
222/257 (86%) |
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223/253 (88%) |
|
-7.6, 3.9 |
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Intent-to-Treat
|
|
242/305(79%) |
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242/309(78%) |
|
-5.4, 5.9 |
|
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Cefpodoxime |
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Clinically |
Study 100290
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200 mg 2x/day 14 days |
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Non-Inferior |
|
Clinically Evaluable
|
|
205/229 (90%) |
|
203/229 (89%) |
|
-4.1, 7.1 |
|
Intent-to-Treat
|
|
223/304 (73%) |
|
224/298 (75%) |
|
-7.4, 6.3 |
Study 100289
|
|
|
|
|
|
Open Label |
|
Clinically Evaluable
|
|
252/294 (86%) |
|
|
|
Not relevant |
|
Intent-to-Treat
|
|
287/388 (74%) |
|
|
|
Not relevant |
|
Clinical Studies for Acute Exacerbation of Chronic
Bronchitis. The efficacy of Orapem in acute exacerbation of
chronic bronchitis was evaluated in two comparative,
non-inferiority Phase III studies. The
69
primary endpoints were met in both studies and statistical
non-inferiority was demonstrated for five-day Orapem compared to
five-day azithromycin and seven-day clarithromycin, both
macrolide antibiotics. Overall, we believe the results of both
studies demonstrate that five-day treatment with Orapem is
effective in the treatment of subjects with acute exacerbation
of chronic bronchitis. The following table summarizes the
clinical results of the acute exacerbation of chronic bronchitis
studies:
|
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Orapem |
|
|
|
Statistical Result |
Study |
|
300 mg 2x/day 5 days |
|
Comparator |
|
95% CI |
Population |
|
n/n |
|
n/n |
|
% |
|
|
|
|
|
Azithromycin |
|
Clinically |
Study 100291
|
|
|
|
500 mg 1 day,
200 mg 4 days |
|
Non-Inferior |
|
Clinically Evaluable
|
|
225/278 (81%) |
|
236/279 (85%) |
|
-9.5, 2.6 |
|
Intent-to-Treat
|
|
277/410 (68%) |
|
283/405 (70%) |
|
-8.5, 4.0 |
|
|
|
|
Clarithromycin |
|
Clinically |
Study 10187
|
|
|
|
500 mg 2x/day 7days |
|
Non-Inferior |
|
Clinically Evaluable
|
|
262/299 (88%) |
|
288/318 (91%) |
|
-7.9, 2.0 |
|
Intent-to-Treat
|
|
316/369 (86%) |
|
337/379 (89%) |
|
-7.2, 2.0 |
|
Clinical Studies for Uncomplicated Skin and Skin Structure
Infections. The efficacy of Orapem in subjects with
uncomplicated skin and skin structure infections was evaluated
in two Phase III studies. The results of one study met the
protocol-specified criterion for non-inferiority of Orapem to
amoxicillin/clavulanate. A second study did not demonstrate
non-inferiority of Orapem to cephalexin. When we pooled the data
from the two studies, results indicated that Orapem was not less
effective than the control treatments. The eradication rates for
the key pathogens in this indication, S. aureus and S.
pyogenes, were high (greater than 90%) and were similar for
Orapem and the comparators. We believe that these findings show
that Orapem is effective in the treatment of subjects with
uncomplicated skin and skin structure infections. The following
table summarizes the clinical results of the uncomplicated skin
and skin structure infections studies:
|
|
|
|
|
|
|
|
|
|
Orapem |
|
|
|
Statistical Result |
Study |
|
300 mg 2x/day 7 days |
|
Comparator |
|
95% CI |
Population |
|
n/n |
|
n/n |
|
% |
|
|
|
|
|
Cephalexin |
|
|
Study 100292
|
|
|
|
500 mg 2x/day 7 days |
|
Clinically Inferior |
|
Clinically Evaluable
|
|
210/246 (85%) |
|
226/246 (92%) |
|
-12.3, -1.3 |
|
Intent-to-Treat
|
|
220/290 (76%) |
|
228/283 (81%) |
|
-11.5, 2.1 |
|
|
|
|
|
Amoxicillin/Clavulanate |
|
Clinically |
Study 10190
|
|
|
|
625 mg 3x/day 7 days |
|
Non-Inferior |
|
Clinically Evaluable
|
|
224/246 (91%) |
|
207/227 (91%) |
|
-5.1, 5.3 |
|
Intent-to-Treat
|
|
258/298 (87%) |
|
254/295 (86%) |
|
-4.7, 6.4 |
|
Other Studies. Three Phase III studies for other
indications were also initiated, two in tonsillitis/pharyngitis
and one in uncomplicated urinary tract infections. One study in
each indication did not meet the primary efficacy criteria for
non-inferiority, and the second study in tonsillitis/pharyngitis
was halted shortly after enrollment began. Although the safety
data from all treated subjects are included in the overall
safety analysis of Orapem submitted with the NDA, we are not
seeking approval of the specific treatment indications explored
in these studies.
The efficacy of five-day treatment with Orapem in subjects with
tonsillitis/pharyngitis was evaluated in one Phase III
study. The comparator was
10-day treatment with
penicillin VK. Another study was discontinued shortly after
enrollment began. In the completed study, a five-day treatment
with Orapem did not demonstrate non-inferiority relative to the
comparator. The bacteriological cure rate was 87% in the Orapem
treated patients and 94% in the penicillin VK patients. We
believe that this difference may be related to the shorter
course of therapy in the Orapem arm. Multiple published reports
suggest that shorter course therapy with penicillin is
associated with lower bacteriological cure rates in this
70
indication. We currently do not intend to conduct additional
studies in adults for this indication and are not seeking
approval of this indication in our pending NDA.
The efficacy of five-day treatment with Orapem in subjects with
uncomplicated urinary tract infections was studied in one
Phase III study. The comparator was five-day treatment with
trimethoprim-sulfamethoxazole. In this study, five-day treatment
with Orapem did not demonstrate non-inferiority relative to the
comparator. The clinical cure rate was 86% in the Orapem treated
patients and 96% in the trimethoprim-sulfamethoxazole patients.
We believe that this difference may be related at least in part
to factors specific to the kidneys. There is an enzyme in the
kidneys known to degrade carbapenem antibiotics and also Orapem,
resulting in decreased drug concentrations in the region of the
infection. We do not consider this indication to be an important
commercial opportunity for a beta-lactam antibiotic such as
Orapem. We currently do not intend to conduct additional studies
in this indication and we are not seeking approval of this
indication in our pending NDA.
|
|
|
Safety and Tolerability Data |
We believe that Orapem has a favorable safety and tolerability
profile. The pharmacokinetics of faropenem following oral
administration of Orapem were evaluated in 27 Phase I
studies, three Phase II studies and one Phase III
study. Orapem was well absorbed, rapidly converted to faropenem
and reached maximum plasma concentrations approximately one hour
after administration. Single doses of Orapem up to 3,000 mg
and multiple doses up to 3,750 mg per day were administered
without notable safety issues.
At the request of the FDA, we evaluated Orapem in a Phase I
study to determine whether there was any potential of Orapem to
prolong QT interval, a measure of electrocardiac function, which
has been problematic for the quinolone and macrolide (including
telithromycin) classes of antibiotics. This Thorough
QT study, now required for all new drug applications,
demonstrated that Orapem does not cause any electrocardiographic
abnormalities, including QT interval prolongation.
In Phase III clinical testing, Orapem exhibited the
activity and safety profile typical of beta-lactam antibiotics
with improved tolerability. The Phase III studies have
accrued a safety database comprising 3,461 patients in
respiratory tract infection indications and 4,863 patients
in all Phase III studies. Orapem has been administered to
over 5,000 people including all Phase I, Phase II and
Phase III studies. The most common adverse events involved
the gastrointestinal tract, including diarrhea, nausea or
abdominal pain, or the central nervous system, including
headaches and dizziness.
We believe that the safety profile of Orapem is similar to that
of penicillins and cephalosporins. Unlike some carbapenems,
Orapem showed no proconvulsant effects in animal models. There
was only one incident of convulsion in the Orapem clinical
studies (a rate of 0.02%), which the treating physician did not
attribute to Orapem. In comparison with amoxicillin/clavulanate,
Orapem produced lower rates of adverse events, including
gastrointestinal events and liver enzyme abnormalities. Unlike
macrolides/ketolides and quinolones, Orapem was not associated
with hepatotoxicity, heart rhythm abnormalities,
photosensitivity, hypoglycemia or hyperglycemia.
In the Phase II and Phase III clinical studies
referenced in our NDA, the overall incidence of diarrhea was
less than 5% in over 5,000 patients treated with Orapem.
Further, in two Phase III clinical studies in which Orapem
was compared directly to Augmentin, the incidence of diarrhea
was two to three times lower in the Orapem-treated patients. We
believe the safety and tolerability profile of Orapem make it a
promising agent to be used as a first-line antibiotic in the
community setting.
Ongoing Clinical Development. We and Forest Laboratories
are committed to conducting additional clinical studies to
expand the indications for which we will seek approval,
including higher dose therapy and pediatric indications.
Placebo-controlled Acute Exacerbation of Chronic Bronchitis
Study. We are currently conducting another Phase III
trial in acute exacerbation of chronic bronchitis. The
comparators include both placebo and Ketek (telithromycin), an
approved ketolide antibiotic. Our primary purpose in conducting
this study
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is to demonstrate the benefit of treatment with Orapem over
placebo because the FDA has communicated to us that it may begin
requiring such data before approving an antibiotic for this
indication.
In this study, we are using a higher dose of Orapem than in
previous Phase III studies; 600 mg twice per day
rather than 300 mg twice per day. Study subjects are taking
two 300 mg tablets at each dose. However, we may develop a
single 600 mg tablet for commercial use, which will require
that we demonstrate bioequivalence of the two dosage forms. The
duration of therapy is five days, as it was in previous studies
in this indication. We believe that this higher dose may offer
the potential for even greater efficacy than the current dose,
particularly in short course therapy. Beta-lactam antibiotics
have typically been used for seven to 14 days for acute
exacerbation of chronic bronchitis.
We have corresponded with the FDA regarding our ongoing
development work in this indication. Based on this
correspondence, we believe that the results of this single study
may support filing for approval of the higher dose to treat this
indication. Because the FDA has not issued formal guidance
regarding the design or conduct of placebo-controlled studies
for this indication, there can be no assurance that the FDA will
accept such a filing or grant approval even if the results
obtained from our study meet the primary endpoint(s) defined in
our protocol.
We have previously evaluated the potential for adverse events
with the 600 mg dose in a Phase I study and a
Phase II study conducted in 2005. In the Phase I
study, the 600 mg twice per day dose was directly compared
to a 300 mg two times per day regimen, both administered
for seven days. In the Phase II study, a 300 mg two
times per day seven day treatment course was compared to a
600 mg two times per day regimen in patients with acute
bacterial sinusitis. In both trials, the adverse events were
similar in both type and frequency. Based on the results of
these two studies, together with prior Phase I studies that
included increased doses of Orapem, we believe that the
incidence and severity of adverse events may prove not to be
substantially higher with the 600 mg two times per day dose
than previously observed with the 300 mg two times per day
dose.
We currently anticipate that enrollment in the ongoing
Phase III acute exacerbation of chronic bronchitis study
will continue into 2007.
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Orapem for the Pediatric Market |
We are developing an Orapem oral liquid formulation for
pediatric use in conjunction with our strategic partner, Forest
Laboratories. Under our agreement with Forest Laboratories, we
have an option to exclusively promote to pediatricians. Assuming
we successfully complete clinical development of an oral liquid
formulation for Orapem, we currently intend to expand our sales
force at our expense to promote Orapem to pediatricians, thereby
increasing our economic interest in pediatric sales.
Orapem has performed well in vitro against many
common pediatric pathogens. We believe that the well-known
safety of beta-lactam antibiotics and the tolerability profile
of Orapem demonstrated in extensive clinical testing in adults
make Orapem a promising candidate for the pediatric market.
Interactions with the FDA. We met with the FDA on
January 18, 2006 to discuss the filing of our IND in the
U.S. for the oral liquid formulation for pediatric use and
our ongoing Phase II clinical trial. We also began a
discussion with the FDA regarding pediatric Phase III
clinical design. We will have ongoing interactions with the FDA
to finalize the design of our Phase III clinical trials.
Formulation Development. For pediatric indications, it is
important that Orapem be available as an oral liquid formulation
since the majority of patients being treated for acute otitis
media are less than three years old. Any oral liquid formulation
should have both a competitive taste profile and the requisite
stability. Like many other medications, the active ingredient in
Orapem is bitter. We have developed a prototype oral liquid
formulation that has been used to complete a bioavailability
study in healthy adults. We have also initiated a Phase II
trial in acute otitis media described further below. Additional
work to optimize the taste and stability of the oral liquid
formulation is ongoing.
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Clinical Studies Completed or Ongoing. We have completed
a bioavailability study in healthy adults that showed similar
drug absorption for the tablet and oral liquid formulation. We
also have a Phase II clinical trial that began enrolling
patients in January 2006 for acute otitis media. The
Phase II trial is designed to determine the dosage for our
planned Phase III clinical trials. We anticipate that the
results of the Phase II clinical trial will be available in
early 2007.
Clinical Studies Planned or Under Consideration. We
expect to conduct additional bioavailability studies with an
improved oral liquid formulation. Upon successful completion of
such bioavailability studies and following assessment of the
Phase II clinical trial, we and Forest Laboratories plan to
conduct Phase III clinical trials to support an NDA for two
pediatric indications, acute otitis media and
tonsillitis/pharyngitis. The details of the study design will be
determined through an interactive process involving the FDA,
Forest Laboratories and external advisors.
We are developing REP8839 for topical use for skin and wound
infections and prevention of S. aureus infections,
including MRSA infections, in hospital settings. REP8839 is an
inhibitor of methionyl tRNA synthetase, which is an enzyme that
plays an essential role in protein synthesis. Inhibition of
methionyl tRNA synthetase results in reduced protein synthesis
and attenuation of bacterial growth. Mupirocin, an isoleucyl
tRNA synthetase inhibitor, has proved to be a successful topical
antibiotic with activity against both S. aureus and
S. pyogenes and serves as a precedent for the
development of aminoacyl tRNA synthetases as topical
antibiotics. REP8839 is a member of a novel group of
structurally-related molecules that selectively inhibit the
activity of methionyl rRNA synthetase. Methionyl and isoleucyl
tRNA synthetase are each a specific aminoacyl tRNA synthetase
responsible for the attachment of the amino acid methionine (or
isoleucine) to its cognate tRNA. Aminocyl tRNA synthetases are
enzymes that play an essential role in protein biosyntheses by
attaching amino acids to specific carrier molecules, called
tRNAs, that then carry the amino acid to the ribosome and donate
it to the growing polypeptide chain. Pre-clinical studies have
indicated that REP8839 exhibits potent activity against major
skin pathogens such as S. aureus and
S. pyogenes, including strains of S. aureus
that are resistant to methicillin, vancomycin, linezolid or
mupirocin.
We acquired the worldwide rights to the methionyl tRNA
synthetase inhibitor program from GSK in June 2003 in exchange
for 4,000,000 shares of our Series B convertible
preferred stock at a deemed fair value of $1.25 per share.
As part of this asset purchase, we acquired certain patents and
patent applications and other program intellectual property,
supporting material and related license rights. Using this
acquired technology, we have continued the development of our
product candidate REP8839 for the treatment of skin and wound
infections and prevention of S. aureus infections,
including MRSA infections, in hospital settings. We have no
royalty or other ongoing financial or other obligations to GSK,
except for a $1.5 million milestone payment due by
July 4, 2006, which is payable in either cash or equity, at
our option.
We are currently conducting pre-clinical testing of REP8839 to
evaluate its suitability for use in humans. We submitted an IND
application for the development of a REP8839/mupirocin
combination product in May 2006. Mupirocin is a widely used
topical antibiotic. We believe that the distinctive mechanisms
of action of the two drugs greatly reduce the likelihood that
S. aureus will develop resistance to this
combination. We retain worldwide rights to REP8839.
MRSA is a significant and growing public health threat. The
Infectious Disease Society of America has published a series of
reports entitled Bad Bugs, No Drugs that highlights
the severity of this and other infectious disease concerns
related to increasing bacterial resistance to antibiotics and
decreasing investment in antibiotic development by the
pharmaceutical industry. MRSA infections have been a recognized
problem in hospitals for a number of years. Recently, MRSA has
become a significant concern in the community setting, appearing
in groups such as sports teams and child care facilities. There
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are a number of approved antibiotics to treat MRSA in the
hospital and more are in development. However, as indicated in
the March 2006 update of Infectious Disease Society of
Americas report, a need exists for oral or topical
antibiotics that can be used for MRSA infection prevention,
where infection may be suspected but not confirmed.
Mupirocin is the most widely prescribed topical antibiotic,
indicated for the treatment of skin infections, wound infection
prevention and eradications of S. aureus in hospital
outbreaks of MRSA. Some strains of MRSA have also begun to
exhibit resistance to mupirocin. It is well documented that
widespread use of mupirocin can lead to a marked rise in the
number of mupirocin-resistant strains of S. aureus,
including MRSA strains. For example, mupirocin was made
available without a prescription in the early 1990s in New
Zealand. Resistance increased dramatically within just a few
years and the product was taken off the
over-the-counter
market. We believe there is a need in the medical community for
an antibiotic that offers the advantages of mupirocin, is
effective against mupirocin-resistant strains and is less likely
to develop resistance when used widely in the community or as a
prophylactic.
Oral antibiotics also can be used to treat skin infections. The
leading oral antibiotic used to treat skin infections has been
cephalexin for many years. The limitations associated with
cephalexin include a requirement for dosing three or four times
per day and concerns regarding resistance, efficacy and the
treatment of a skin infection with a systemic agent that has the
potential to cause adverse events. We believe an opportunity
exists to convert some use of oral cephalexin in this indication
to a new and more effective topical agent.
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Differentiating Characteristics |
We observed the following characteristics that we believe may
make the combination of REP8839 and mupirocin a promising
topical treatment option for bacterial skin and wound infections
and prevention of S. aureus infections, including
MRSA infections, in hospital settings:
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Novel mechanism of action. REP8839 is a synthetic
antibiotic with a distinct mechanism of action from mupirocin
and other marketed antibiotics. REP8839 is an inhibitor of
methionyl tRNA synthetase, a previously unexploited drug target.
REP8839 showed potent antibacterial activity in vitro
against important skin pathogens such as S. aureus
and S. pyogenes and is more potent than
mupirocin in vitro against these skin pathogens. |
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Low rate of spontaneous resistance emergence. Antibiotics
are sometimes used in combination to prevent or delay the
emergence of drug-resistant strains of bacteria. When drugs that
act on different molecular targets are used in combination, the
probability of emergence of strains resistant to both drugs is
substantially reduced. Since REP8839 and mupirocin act on two
distinct essential enzymes (tRNA synthetases), the probability
that bacterial resistance will develop during therapy is low. |
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REP8839/mupirocin combination is unlikely to compromise the
effectiveness of antibiotics used for the treatment of systemic
infections. Because REP8839 and mupirocin have different
mechanisms of action from the systemic antibacterial agents that
are commonly used to treat more serious hospital infections,
development of resistance to mupirocin or REP8839 would not
jeopardize the efficacy of these systemic agents. |
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Pre-Clinical Data and Clinical Development Strategy |
In pre-clinical studies, REP8839 has exhibited low dermal
irritancy potential, low genotoxicity potential, low systemic
toxicity following intravenous administration and low systemic
exposure following application to skin. Taken together, the
pre-clinical studies we have conducted to date suggest a safety
profile that is suitable for the initiation of Phase I
clinical trials.
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We plan to pursue the following clinical indications for the
combination of REP8839 and mupirocin:
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treatment of uncomplicated skin and wound infections, including
secondarily infected traumatic skin lesions caused by
S. aureus, MRSA and S. pyogenes; and |
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prevention of S. aureus infections, including MRSA
infections, in hospital settings. |
A pre-IND meeting with the FDA was held on April 12, 2006
to discuss our plans for the clinical development of a
REP8839/mupirocin combination product. We submitted an IND for
the REP8839/mupirocin combination product in May 2006. Four
Phase I studies are proposed to be carried out in the
second half of 2006 to support further clinical development of
all these indications. FDA approval of a combination drug
product requires demonstration that the combination is superior
to the individual components. We expect that our clinical
strategy will evolve as our discussions with the FDA continue.
Research Capabilities and Discovery Programs
We maintain an active internal research effort that is currently
focused on identifying novel antibiotics. We have built a
research organization that includes expertise in biochemistry,
microbiology, medicinal chemistry, process chemistry,
pharmacology and toxicology. We believe it is important to have
expertise in these areas not only for discovery programs, but
also for developing later stage products and evaluating new
product opportunities. Our research organization was initially
responsible for evaluating the Orapem and REP8839 programs as
in-license opportunities and has continued with the development
of both programs. The research organization also pursues our own
internal discovery activities. Our discovery activities at this
time include the following programs:
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DNA Replication Inhibitors Program. Bacterial DNA
replication is an attractive target system for new antibacterial
drugs since it is an essential process and stalled DNA
replication can trigger cell death. However, to date, this is an
underexploited drug target. Our high-throughput assays are
designed to mimic the bacterial DNA replication systems from the
following bacteria: Escherichia coli, S. pyogenes,
Pseudomonis aeruginosa, S. aureus and
Bacillus subtilis. Each high-throughput assay
includes at least six protein components and many include twelve
or more proteins that constitute the replication system of
bacteria that need to work together in highly cooperative DNA
replication reactions. These assays simultaneously target
multiple sites that are amenable to inhibition by small
molecules. We have screened a library of approximately 250,000
compounds assembled from various sources and are currently
optimizing the initial inhibitors identified from the assays. |
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Clostridium difficile Program. Another one of our
discovery programs is focused on the identification of novel
antibacterial drugs that are active against
C. difficile. In recent years, C. difficile
associated diarrhea has emerged as a major public health threat
among elderly patients in health care or long-term care
institutions. Oral vancomycin is the only antibiotic that is
currently approved by the FDA for the treatment of
C. difficile associated diarrhea. Metronidazole is
also used extensively in clinical practice following early
reports of its efficacy in C. difficile associated
diarrhea. However, recent studies have noted relatively high and
growing incidence of treatment failure and relapse following
both vancomycin and metronidazole therapy. Furthermore,
widespread vancomycin use raises resistance concerns. Overall,
options for the treatment of C. difficile associated
diarrhea are currently limited and a need exists for the
development of new agents to address this emerging problem. |
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An ideal drug for treating C. difficile associated
diarrhea would have good activity against C. difficile
but limited activity against normal intestinal flora, low
oral bioavailability and a mechanism-of-action that is distinct
from antibiotics currently used for the treatment of systemic
infections. We have recently identified a class of compounds
with in vitro activity against C. difficile
that may meet the above criteria. To date, we have
synthesized and |
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tested approximately 140 structurally related compounds and
identified several compounds that have considerably improved
antibacterial activity against C. difficile. We are
currently studying pharmacology, toxicology and animal efficacy
of several representative compounds. |
Our Collaboration with Forest Laboratories
In February 2006, we entered into a collaboration and
commercialization agreement with Forest Laboratories to be our
exclusive partner for the development and marketing of Orapem in
the U.S. We believe that Forest Laboratories is particularly
well suited to help us develop and commercialize Orapem in the
U.S. for a number of reasons. In recent years, Forest
Laboratories has successfully launched new products into primary
care markets, particularly mature markets with many product
alternatives. We believe that Forest Laboratories
commercial success with
Celexa®,
Lexapro®
and
Benicar®,
for example, are indicative of its strong capabilities in this
area. We also believe that the timing of an Orapem launch
complements Forest Laboratories portfolio of other
products. Forest Laboratories presently has no competing
community antibiotics in their product portfolio. Finally, we
believe that Forest Laboratories core competencies
complement ours by combining their strength in executing major
launches with our expertise in antibacterial development and
marketing.
Forest Laboratories will make payments to us upon the
achievement of certain development and commercial milestones and
royalty payments to us based upon Orapem sales. We have received
$60.0 million in upfront and milestone payments. We may
receive up to an additional $90.0 million in development
milestones and $100.0 million in commercial milestones,
which will be reduced by $25.0 million if we exercise our
option to directly market and promote Orapem to pediatricians on
an exclusive basis, which we expect to do. We will oversee the
development and regulatory approval of the products through a
joint development committee with Forest Laboratories. A
substantial portion of development and regulatory expenses are
paid by Forest Laboratories.
Under the collaboration and commercialization agreement, Forest
Laboratories is required, subject to certain conditions, to
launch Orapem within six to nine months after approval of our
NDA by the FDA, provided that the FDA approval includes at least
two respiratory tract infection indications, the approved
products have a shelf life of at least 18 months and that
adequate product supply is available. Forest Laboratories is
generally responsible for all sales and marketing activities
related to primary care physicians and has agreed to certain
minimum commitments for sales and marketing efforts. We have the
right to promote to targeted specialists, such as
otolaryngologists. Forest Laboratories will reimburse us for
most expenses associated with such marketing and selling
efforts. We may terminate our promotion activities upon
12 months notice to Forest Laboratories. Similarly, Forest
Laboratories may terminate our specialist promotion to target
specialists if it ceases to promote Orapem entirely, or if our
sales force fails to substantially perform as provided in the
marketing plan for two consecutive years.
We also have an option to market and promote Orapem products to
pediatricians on an exclusive basis in the U.S. for the
life of the products. This option must be exercised at least six
months before an NDA for a liquid oral formulation is projected
to be submitted. If we exercise this option, all joint marketing
committee decisions with respect to the liquid oral formulation
will be by mutual agreement, including the approval of launch
strategy and commitments by each party for marketing and selling
efforts. Forest Laboratories will extend us a line of credit in
the amount of $60.0 million which we may elect to draw
against to support our promotional efforts. Forest Laboratories
will book all Orapem sales and, under certain circumstances, pay
us a co-promotion fee, reimburse our marketing expenses and pay
us royalties on all sales, milestones on development of the
liquid oral formulation and a portion of the commercialization
milestones. We may terminate our promotion activities to
pediatricians upon 18 months notice to Forest Laboratories.
Similarly, Forest Laboratories may terminate our promotion to
pediatricians if it ceases to promote Orapem entirely, or if we
fail to meet our promotional commitments under the agreement.
Unless terminated earlier, the term of the pediatrician
promotion option ends upon the earlier of the expiration of the
last to expire of the applicable patents regarding the liquid
oral formulation, including extended commercial exclusivity, and
the commercial introduction by a third party of a generic liquid
oral formulation containing faropenem medoxomil.
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We have a reciprocal agreement with Forest Laboratories that
restricts either of us from developing, marketing or selling
certain competing products for a period of time. Forest
Laboratories has no rights to other of our current product
candidates or to our future products, if any. Forest
Laboratories has a right of first refusal to extend the
territory for Orapem to include Canada if we decide to
commercialize Orapem in Canada through a third party.
The agreement with Forest Laboratories extends until the later
of (a) the expiration of the last to expire of the
applicable patents, including extended commercial exclusivity,
(b) 12 years after the first commercial sale of a
product under the agreement and (c) the commercial
introduction by a third party of a generic product, unless
terminated earlier. Forest Laboratories may also terminate our
agreement upon 90 days written notice if safety or efficacy
issues arise that could prevent or materially delay regulatory
approval of Orapem or substantially negatively impact
Orapems marketing potential. Each party has the right to
terminate the agreement upon
60-days prior
written notice in the case of the other partys bankruptcy
or dissolution or a material breach of the agreement.
We have agreed to a reciprocal standstill provision whereby
neither we nor Forest Laboratories will acquire any interest in
the other without the partys consent. Either we or Forest
Laboratories may assign this agreement to an affiliate or in
connection with a transfer or sale of the business related to
Orapem, provided that the third party has no competing products
or a firewall is created to protect promotion and sales of
Orapem.
Sales and Marketing
Our collaboration agreement with Forest Laboratories provides
that Forest Laboratories will be responsible for the sales and
marketing efforts of Orapem within the U.S. primary care
market, which includes the family practice, general practice and
internal medicine physicians, physician assistants and nurse
practitioners.
We plan to build an initial sales organization of 50 to 75
specialty representatives geographically-focused in major
metropolitan areas to promote Orapem tablets to relevant
specialists, principally otolaryngologists. We are also
currently building a marketing group to initially market this
product to all relevant specialists, including key opinion
leaders in the infectious disease and otolaryngology communities
and other physician groups. Forest Laboratories will reimburse
us for a majority of the expenses we incur for our sales force
and marketing activity relating to specialists promotion in the
near term. In addition, we intend to evaluate additional
products for in-licensing or acquisition that our specialty
sales organization could promote and sell outside the context of
our collaboration with Forest Laboratories.
We plan to grow the size of our specialty sales organization if
and when additional Orapem indications are approved by the FDA
or if our other product candidates are successfully developed,
approved and launched. In particular, we may elect to exercise
our option to promote Orapem to pediatricians if an oral liquid
formulation can be successfully developed. In this case, we plan
to substantially increase the size of our specialty sales
organization to address this physician group. Sales
organizations designed to market to pediatricians are typically
comprised of 200 to 400 representatives. If we make the election
to promote Orapem to pediatricians, we plan to acquire or
develop additional pediatric products for such an organization
to promote and sell to pediatricians.
We do not anticipate building sales capabilities outside the
U.S. and expect to enter into strategic collaborations with
respect to any of these sales activities.
Our License Agreement with Daiichi Asubio
We entered into a license agreement with Daiichi Suntory Pharma
(now Daiichi Asubio Pharma Co., Ltd.) that was effective in
March 2004. Under this agreement, we have an exclusive license
to, with the right to sublicense, Daiichi Asubios patent
rights and know-how to develop and commercialize all forms of
Orapem for adult and pediatric use in the U.S. and Canada. The
license includes rights to all clinical and other data related
to Orapem generated by Daiichi Asubio and prior licensees, other
than
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rights to manufacture Orapem. Bayer was a prior licensee of
Orapem and conducted Phase III studies in multiple
indications, including the studies that form the basis of our
pending NDA.
We also have a sole negotiation right to develop and
commercialize Orapem in the rest of the world, excluding Japan,
until two years following the commercial introduction of Orapem
in the U.S. or Canada. Our license does not include the
rights to other forms of faropenem, such as faropenem sodium,
but Daiichi Asubio has agreed not to license or market any other
form of faropenem for use in the U.S. or Canada.
In consideration for our licenses, we paid Daiichi Asubio an
initial license fee of $3.8 million comprised of
$0.6 million paid in 2003 and $3.2 million paid in
2004. In December 2005, we submitted our first NDA for adult use
of Orapem and, at that time, we recorded research and
development expense in the amount of ¥250 million
(approximately $2.1 million) for the first milestone due to
Daiichi Asubio under this agreement. In February 2006, in
conjunction with our entering into the license agreement with
Forest Laboratories, this milestone payment was increased to
¥375 million (approximately $3.2 million using
the U.S. dollar to Japanese yen exchange rate as of
March 31, 2006). The increased milestone amount was
accounted for as research and development expense in 2006 when
the modified terms of the license were finalized. Under the
modified license agreement we are further obligated to make
future payments of (i) up to ¥375 million
(approximately $3.2 million as of March 31, 2006) upon
initial FDA approval, (ii) ¥500 million
(approximately $4.3 million as of March 31, 2006) upon
a product launch and (iii) up to ¥750 million
(approximately $6.4 million as of March 31, 2006) in
subsequent milestone payments for Orapem. If the NDA for Orapem
is approved and Orapem is launched within the next 12 months, we
will make the approval and launch milestone payments during that
time period. Additionally, we are responsible for royalty
payments to Daiichi Asubio based upon net sales of Orapem.
Our license agreement with Daiichi Asubio extends until the last
relevant patent expires or 12 years after the first
commercial sale of a Orapem in the territory, whichever is
later. Each party has the right to terminate the agreement in
the event of the bankruptcy or dissolution of the other party or
a material breach of the agreement. We may also terminate the
license agreement upon six months written notice in the event
that the development program indicates significant issues of
safety or efficacy for an indication or it becomes no longer
commercially reasonable to commercialize the product.
If we substantially fail to meet our goals under our sales and
marketing plan over a period of two years, then we must make
certain payments to Daiichi Asubio or Daiichi Asubio may convert
our license to a non-exclusive license, in which case we would
be required to grant Daiichi Asubio a license to use the
information and know-how we have developed under this agreement.
Under certain circumstances, we may be required to make certain
payments to Daiichi Asubio upon termination of the agreement.
Manufacturing
We obtain the drug substance, or active pharmaceutical
ingredient, faropenem medoxomil, from Nippon Soda and the
finished Orapem tablet from Tropon. These contract manufacturers
are the sole manufacturing sources for Orapem. Under our
collaboration agreement with Forest Laboratories, Forest
Laboratories will assume sole responsibility for managing the
supply chain for Orapem for the U.S. market. We will
cooperate with Forest Laboratories and manage the supply of
Orapem for the rest of the world. As a penem antibiotic, Orapem
requires dedicated manufacturing facilities for the manufacture
of drug substance and drug product. For many years, beta-lactams
have been produced separately in segregated facilities due to
concerns about allergic reactions to these types of antibiotics.
During development, faropenem medoxomil was manufactured by
Nippon Soda in a segregated building at its Takaoka facility in
Japan and Bayer manufactured the Orapem tablet internally for
its clinical studies.
In anticipation of commercial production, Nippon Soda expanded
and equipped a new facility located in Nihongi, Japan. The
Nihongi facility is presently being used for the manufacture of
faropenem sodium for the Japanese market. Faropenem medoxomil is
produced from faropenem sodium by converting it into an ester
prodrug form. We have a requirements contract for the supply of
faropenem medoxomil at the Nihongi facility. Nippon Soda is
obliged to supply all of our requirements of faropenem medoxomil
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and we and Forest Laboratories are obligated to purchase all
faropenem medoxomil requirements from Nippon Soda. We have the
right to transfer manufacturing to a third party, with Nippon
Sodas cooperation, if Nippon Soda cannot assure supply and
in certain other circumstances. In the case of such a transfer,
Nippon Soda will be required to grant us the necessary licenses,
including the right to sublicense, under its intellectual
property to manufacture faropenem medoxomil. Nippon Soda has
patent protection for certain aspects of the manufacturing
process through 2014. Nippon Soda has agreed to complete
preparations necessary at its Nihongi facility for FDA
regulatory approval and launch of Orapem in accordance with an
agreed timeline. Nippon Soda recently added a quality control
facility at its Nihongi plant specifically for GMP compliant
products, including Orapem. After launch, the parties have
agreed to certain minimum purchase requirements and pricing. The
term of this agreement is for the life of the Daiichi Asubio
patents on faropenem medoxomil or 12 years after launch,
whichever is longer. We believe that the capacity of this plant
is sufficient to provide commercial quantities of faropenem
medoxomil for the next several years.
Forest Laboratories has contracted with Tropon to complete and
equip an existing building as a commercial drug product facility
for Orapem. The facility consists of a stand-alone building
encompassing all aspects of the tablet manufacturing process
including manufacturing, packaging, labeling and warehousing.
This facility was built specifically for the manufacture of
Orapem tablets. We believe that the capacity of this plant will
be sufficient to supply all requirements for adult tablet dosage
forms of Orapem to Forest Laboratories for the next several
years. The parties have agreed to certain minimum purchase
requirements and pricing. The initial term of Forest
Laboratories agreement with Tropon is 10 years. If
our agreement with Forest Laboratories terminates for any
reason, the Tropon obligations will revert to us directly.
We have built a small scale drug product manufacturing facility
at our Louisville, Colorado site. The facility is used for the
manufacture of development batches (oral tablets and liquid
suspensions) and for the manufacture of clinical supplies. The
facility is dedicated exclusively for Orapem manufacturing and
will not be used for other product classes.
We currently have a small internal manufacturing group that we
intend to expand to manage both internal manufacturing and
external contract manufacturers. For the REP8839 program and
other discovery programs, we generally conduct research and
development scale manufacturing in-house or use contract
manufacturers. We use contract manufacturers for scale up of
pre-clinical and clinical quantities of product. We anticipate
using contract manufacturers for commercial scale quantities of
product when this is commercially feasible.
Government Regulation and Product Approval
Regulation by governmental authorities in the U.S. and other
countries is a significant factor in the development,
manufacture and marketing of pharmaceuticals and antibiotics.
All of our products will require regulatory approval by
governmental agencies prior to commercialization. In particular,
pharmaceutical drugs are subject to rigorous preclinical testing
and clinical trials and other premarketing approval requirements
by the FDA and regulatory authorities in other countries. In the
U.S., various federal, and, in some cases, state statutes and
regulations, also govern or impact the manufacturing, safety,
labeling, storage, record-keeping and marketing of
pharmaceutical products. The lengthy process of seeking required
approvals and the continuing need for compliance with applicable
statutes and regulations require the expenditure of substantial
resources. Regulatory approval, if and when obtained for any of
our product candidates, may be limited in scope, which may
significantly limit the indicated uses for which our product
candidates may be marketed. Further, approved drugs and
manufacturers are subject to ongoing review and discovery of
previously unknown problems that may result in restrictions on
their manufacture, sale or use or in their withdrawal from the
market.
Before testing any compounds with potential therapeutic value in
human subjects in the U.S., we must satisfy stringent government
requirements for pre-clinical studies. Pre-clinical testing
includes both in vitro and in vivo laboratory
evaluation and characterization of the safety and efficacy of a
drug and its
79
formulation. Pre-clinical testing results obtained from studies
in several animal species, as well as data from in vitro
studies, are submitted to the FDA as part of an IND and are
reviewed by the FDA prior to the commencement of human clinical
trials. These pre-clinical data must provide an adequate basis
for evaluating both the safety and the scientific rationale for
the initial trials in human volunteers.
In order to test a new drug in humans in the U.S., an IND must
be filed with the FDA. The IND will become effective
automatically 30 days after receipt by the FDA, unless the
FDA raises concern or questions about the conduct of the trials
as outlined in the IND prior to that time. In this case, the IND
sponsor and the FDA must resolve any outstanding concerns before
clinical trials can proceed.
Clinical trials are typically conducted in three sequential
phases, phases I, II and III, with phase IV trials potentially
conducted after initial marketing approval. These phases may be
compressed, may overlap or may be omitted in some circumstances.
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Phase I. After an IND becomes effective, Phase I human
clinical trials may begin. These trials evaluate a drugs
safety profile and the range of safe dosages that can be
administered to healthy volunteers and/or patients, including
the maximum tolerated dose that can be given to a trial subject
with the target disease or condition. Phase I trials also
determine how a drug is absorbed, distributed, metabolized and
excreted by the body and the duration of its action. |
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Phase II. Phase II clinical trials are typically designed
to evaluate the potential effectiveness of the drug in patients
and to further ascertain the safety of the drug at the dosage
given in a larger patient population. |
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Phase III. In Phase III clinical trials, the drug is
usually tested in one or more controlled, randomized trials
comparing the investigational new drug to an approved form of
therapy or placebo in an expanded and well defined patient
population and at multiple clinical sites. The goal of these
trials is to obtain definitive statistical evidence of safety
and effectiveness of the investigational new drug regimen as
compared to a placebo or an approved standard therapy in defined
patient populations with a given disease and stage of illness. |
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Phase IV. Clinical trials are studies required of or
agreed to by a sponsor that are conducted after the FDA has
approved a product for marketing. These studies are used to gain
additional experience from the treatment of patients in the
intended therapeutic indication and to document a clinical
benefit in the case of drugs approved under accelerated approval
regulations. If the FDA approves a product while a company has
ongoing clinical trials that were not necessary for approval, a
company may be able to use the data from these clinical trials
to meet all or part of any Phase IV clinical trial requirement.
These clinical trials are often referred to as Phase III/ IV
post approval clinical trials. Failure to promptly conduct Phase
IV clinical trials could result in withdrawal of approval for
products approved under accelerated approval regulations. |
After completion of Phase I, II and III clinical trials, if
there is substantial evidence that the drug is safe and
effective, an NDA is prepared and submitted for the FDA to
review. The NDA must contain all of the essential information on
the drug gathered to that date, including data from preclinical
and clinical trials, and the content and format of an NDA must
conform to all FDA regulations and guidelines. Accordingly, the
preparation and submission of an NDA is a significant
undertaking for a company.
The FDA reviews all submitted NDAs before it accepts them for
filing and may request additional information from the sponsor
rather than accepting an NDA for filing. In this case, the NDA
must be re-submitted with the additional information and, again,
is subject to review before filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the
NDA. Most NDAs are reviewed by the FDA within 10 months of
submission. The review process is often significantly extended
by the FDA through requests for additional information and
clarification. The FDA may refer the application to an
appropriate advisory committee, typically a panel of clinicians,
for review, evaluation and a recommendation as to whether the
application should be approved. The FDA is not bound by the
recommendation but typically gives it great weight. If the FDA
evaluations of both the NDA and the
80
manufacturing facilities are favorable, the FDA may issue either
an approval letter or an approvable letter, the later of which
usually contains a number of conditions that must be satisfied
in order to secure final approval. If the FDAs evaluation
of the NDA submission or manufacturing facility is not
favorable, the FDA may refuse to approve the NDA or issue a not
approvable letter.
Any products we manufacture or distribute under FDA approvals
are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse
experiences with the products. Drug manufacturers and their
subcontractors are required to register with the FDA and, where
appropriate, state agencies, and are subject to periodic
unannounced inspections by the FDA and state agencies for
compliance with cGMPs regulations which impose procedural and
documentation requirements upon us and any third party
manufacturers we utilize.
The FDA closely regulates the marketing and promotion of drugs.
A company can make only those claims relating to safety and
efficacy that are approved by the FDA. Failure to comply with
these requirements can result in adverse publicity, warning
letters, corrective advertising and potential civil and criminal
penalties. Physicians may prescribe legally available drugs for
uses that are not described in the products labeling and
that differ from those tested by us and approved by the FDA.
Such off-label uses are common across medical specialties.
Physicians may believe that such off-label uses are the best
treatment for many patients in varied circumstances. The FDA
does not regulate the behavior of physicians in their choice of
treatments. The FDA does, however, restrict manufacturers
communications on the subject of off-label use.
The FDAs policies may change and additional government
regulations may be enacted that could prevent or delay
regulatory approval of our product candidates or approval of new
indications after the initial approval of our existing products.
We cannot predict the likelihood, nature or extent of adverse
governmental regulations that might arise from future
legislative or administrative action, either in the U.S. or
abroad.
We will also be subject to a wide variety of foreign regulations
governing the development, manufacture and marketing of our
products. Whether or not FDA approval has been obtained,
approval of a product by the comparable regulatory authorities
of foreign countries must still be obtained prior to
manufacturing or marketing the product in those countries. The
approval process varies from country to country and the time
needed to secure approval may be longer or shorter than that
required for FDA approval. We cannot assure you that clinical
trials conducted in one country will be accepted by other
countries or that approval in one country will result in
approval in any other country.
The Drug Price Competition and Patent Term Restoration Act of
1984, also known as the Hatch-Waxman Act, provides five years of
new chemical entity, or NCE, marketing exclusivity,
to the first applicant who obtains approval of an NDA for a
product that does not contain an active ingredient found in any
other FDA approved product. If the FDA approves our NDA for
Orapem, we will likely be entitled to five years of NCE
exclusivity for Orapem. This exclusivity period would not
prevent the submission by a generic competitor of an abbreviated
new drug application, or by a branded competitor of a new drug
application under Section 505(b)(2) of the Federal Food, Drug
and Cosmetic Act, for a compound that contains faropenem as the
active ingredient as early as four years following the
FDAs approval of our NDA for Orapem. Such a competitor
would likely be required to conduct clinical trials in order to
bring a faropenem product, other than Orapem, to market in the
U.S., though the competitor may be able to rely in part on the
FDAs prior findings of safety and efficacy of Orapem.
Similarly, data exclusivity in Europe provides a period of up to
10 years from the date a product is granted marketing
approval, during which the regulatory authorities are not
permitted to cross-refer to the data submitted by the original
applicant for approval when reviewing an application from a
generic manufacturer of the same approved product. Data
exclusivity does not prevent a generic manufacturer from filing
for regulatory approval of the same or similar drug, even in the
same indication for which that drug was previously approved in
Europe, based upon data generated independently by that
manufacturer.
81
Intellectual Property
The proprietary nature of, and protection for, our product
candidates, processes and know-how are important to our
business. We seek patent protection in the U.S. and
internationally for our product candidates and other technology.
Our policy is to patent or in-license the technology, inventions
and improvements that we consider important to the development
of our business. In addition, we use license agreements to
selectively convey to others rights to our own intellectual
property. We also rely on trade secrets, know-how and continuing
innovation to develop and maintain our competitive position. We
cannot be sure that patents will be granted with respect to any
of our pending patent applications or with respect to any patent
applications filed by us in the future, nor can we be sure that
any of our existing patents or any patents granted to us in the
future will be commercially useful in protecting our technology.
We have licensed two U.S. patents from Daiichi Asubio
covering the faropenem medoxomil composition of matter and a
process for making faropenem medoxomil. Both of these patents
expire on November 3, 2015. The Canadian and European
equivalents of these patents expire in August 2011. The U.S. and
Canadian patents are licensed to us and we have the sole
negotiation right to license such rights in the rest of the
world, excluding Japan. We believe that patent term extension
under Hatch-Waxman Act should be available to extend our patent
exclusivity for faropenem medoxomil to at least 2018 in the
U.S. In Europe, we believe that patent term extension under
a supplementary protection certificate should be available for
an additional five years to 2016. We plan to pursue development
of alternative formulations of faropenem medoxomil, such as a
pediatric formulation. We have not controlled and do not control
the prosecution of the patents licensed from Daiichi Asubio. We
cannot be certain that such prosecution efforts have been or
will be conducted in compliance with applicable laws and
regulations or will result in valid and enforceable patents.
Daiichi Asubio also owns patents related to faropenem sodium
composition of matter that expire in 2008 in the U.S. and have
expired in the rest of the world. We do not have a license to
the faropenem sodium patents but our agreement with Daiichi
Asubio specifies that it will not license any form of faropenem
for use in the U.S. or Canada.
We acquired worldwide rights to the methionyl tRNA synthetase
inhibitor program from GSK in June 2003. Our agreement with GSK
included the assignment of patents and patent applications to us
relating to small molecule MRS inhibitors and the targets
initially used to identify the inhibitors. We have filed
additional patent applications directed to small molecule
methionyl tRNA synthetase, uses, production methods and the
like. We have two issued U.S. patents that cover REP8839
and additional patent applications directed to REP8839 and
combinations of REP8839 and mupirocin. As of March 31,
2006, we have eight issued U.S. patents, 10 pending
U.S. patent applications and 23 pending foreign patent
applications related to the REP8839 program. These patents
expire from 2017 to 2025.
We have begun to file patent applications directed to compounds
that inhibit DNA replication that have been identified through
our in-house screening efforts. We also own a portfolio of
patents related to the DNA replication targets and drug
screening methods to identify inhibitors of DNA replication. As
of March 31, 2006, we have one issued U.S. patent,
five pending U.S. patent applications and 14 pending
foreign patent applications related to our bacterial DNA
replication program. These patents expire from 2021 to 2025.
Competition
The oral anti-infective marketplace has traditionally been one
of the most competitive within the pharmaceutical industry due
to the large number of products competing for market share and
significant levels of commercial resources being utilized to
promote brands. In addition, our ability to compete may be
affected because in some cases insurers and other third-parties
may seek to encourage the use of generic products. This may have
the effect of making branded products less attractive, from a
cost perspective, to buyers. Among the products with which we
will directly compete, we expect to differentiate on the basis
of greater potency, improved resistance profile, enhanced safety
and tolerability. Although we expect to face competition in the
future, we do not expect the level of competition from branded
products
82
to be as intense as it has been in prior years due to the recent
and ongoing exclusivity expiration of many major brands.
Furthermore, we believe the pipeline of new oral antibiotics to
treat community-acquired respiratory tract infections in
development is weak, with a limited number of products currently
in Phase III development. Several pharmaceutical and
biotechnology companies are actively engaged in research and
development related to new generations of antibiotics. We cannot
predict the basis upon which we will compete with new products
marketed by others. Many of our competitors have substantially
greater financial, operation, sales and marketing and research
and development resources than we have.
Legal Proceedings
We are not currently a party to any legal proceeding.
Facilities
Our facilities currently consist of approximately
42,000 square feet of laboratory and office facilities
located at our headquarters in Louisville, Colorado, which is
leased until September 2011, and approximately 8,000 square
feet of office facilities for our clinical and regulatory group
located in Milford, Connecticut, which is leased until May 2010.
We believe that these facilities are adequate to meet our
current needs. We have an option to lease more space at our
Louisville, Colorado facility should we need additional space.
We believe that if additional space beyond that is needed in the
future, such space will be available on commercially reasonable
terms as needed.
Employees
As of March 31, 2006, we employed 61 persons, 18 of whom
hold Ph.D., M.D. or Pharm.D. degrees. 28 employees were
engaged in discovery research, 15 in clinical research and
regulatory affairs, eight in commercial and corporate
development and 10 in support administration, including finance,
information systems, facilities and human resources. We consider
our relationship with our employees to be good.
83
MANAGEMENT
Executive Officers and Directors
Our directors and executive officers and their respective ages
and positions are as follows:
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Name |
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Age | |
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Position |
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Kenneth J. Collins(1)
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59 |
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President, Chief Executive Officer and Director |
Roger M. Echols, M.D.(1)
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58 |
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Chief Medical Officer |
Nebojsa Janjic, Ph.D.(1)
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46 |
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Chief Scientific Officer and Secretary |
Peter W. Letendre, Pharm.D.(1)
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48 |
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Chief Commercial Officer |
Donald J. Morrissey, Jr.(1)
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40 |
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Senior Vice President, Corporate Development |
Mark L. Smith(1)
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44 |
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Chief Financial Officer and Treasurer |
Kirk K. Calhoun(2)
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62 |
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Director |
Ralph E. Christoffersen, Ph.D.(4)
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68 |
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Director |
Geoffrey Duyk, M.D., Ph.D.(3)
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47 |
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Director |
Christopher D. Earl, Ph.D.(2)
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50 |
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Director |
Augustine Lawlor(2)(3)
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49 |
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Director |
Daniel J. Mitchell(3)(4)
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49 |
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Director |
Henry Wendt(4)
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72 |
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Director |
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(1) |
Executive officer. |
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(2) |
Member of the audit committee. |
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(3) |
Member of the compensation committee. |
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(4) |
Member of the corporate governance and nominating committee. |
Executive Officers
Kenneth J. Collins has served as our President, Chief
Executive Officer and a member of the board of directors since
January 2002. From 1997 to 2001, Mr. Collins served as
President of Pegasus Technology Ventures, a firm that advised
and raised seed capital for early stage life sciences companies.
From 1995 to 1996, Mr. Collins served as Chief Financial
Officer and a member of the board of directors of Quark, Inc., a
developer of desktop publishing software. Mr. Collins
served as an Executive Vice President from 1992 to 1994 and
Chief Financial Officer from 1983 to 1994 of Synergen, Inc., a
biotechnology company. Mr. Collins holds a B.S. from the
University of Notre Dame and an M.B.A. from the Harvard Business
School.
Roger M. Echols, M.D. has served as our Chief
Medical Officer since January 2005. From 1997 to 2004,
Dr. Echols served as Vice President of Infectious Disease
Clinical Research and Development at Bristol Myers Squibb. He
served as Medical Director at Immunex Corporation from 1996 to
1997 and as Medical Director at Bayer Corporation from 1989 to
1996. Prior to joining the pharmaceutical industry,
Dr. Echols was Head of the Division of Infectious Diseases
at Albany Medical College and an attending physician at Albany
Medical College. Dr. Echols holds a B.A. from Yale
University and an M.D. from Tufts University School of Medicine
and trained in internal medicine and infectious diseases at the
University of New Mexico.
Nebojsa Janjic, Ph.D. has served as our Secretary
since December 2000 and as our Chief Scientific Officer since
June 2005. Dr. Janjic joined us at inception and served as
our Senior Vice President and Vice President, Research and
Development until June 2005. From 1992 to 1999, Dr. Janjic
held various positions at NeXstar Pharmaceuticals, Inc., a
biotechnology company, most recently serving as Senior Director,
Drug Discovery. Dr. Janjic holds B.S. and Ph.D. degrees
from the University of Washington and completed postdoctoral
training at the Scripps Research Institute.
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Peter W. Letendre, Pharm.D. has served as our Chief
Commercial Officer since March 2005. From October 2002 until
February 2005, Dr. Letendre held various positions at
Abbott Laboratories, most recently as Vice President and General
Manager of the anti-infective division from October 2002 until
July 2004. From August 1990 to September 2002, Dr. Letendre
held a number of marketing positions with SmithKline Beecham and
GlaxoSmithKline Pharmaceuticals, including marketing director
for the diabetes and metabolism division from 1998 to 2000. From
1988 to 1990, Dr. Letendre served as the Associate Dean of
Clinical Practice at Southeastern University of the Health
Sciences. Dr. Letendre holds B.S. and Doctor of Pharmacy
degrees from the Massachusetts College of Pharmacy and Allied
Health Sciences.
Donald J. Morrissey, Jr. has served as our Senior
Vice President, Corporate Development since March 2006 and,
prior to that, as Vice President, Corporate Development since
2002. From 1997 to 2002, Mr. Morrissey held various
positions with Caliper Technologies, most recently as Vice
President, Legal Affairs and Business Development from September
2001 to November 2002. From 1992 to 1997, Mr. Morrissey was
a business attorney with Cooley Godward
llp
. Mr. Morrissey holds a B.A. from the University of
Colorado and a J.D. from the University of Southern California
Law School.
Mark L. Smith has served as our Chief Financial Officer
and Treasurer since March 2006. From August 1999 to March 2006,
Mr. Smith held financial executive capacities at Nabi
Biopharmaceuticals, including serving as Senior Vice President,
Finance, Chief Financial Officer and Chief Accounting Officer
from 2001 to March 2006. From 1998 to 1999, Mr. Smith
served as Vice President of Finance and Administration and Chief
Financial Officer of Neuromedical Systems, Inc. From 1996 to
1998, Mr. Smith served in various financial executive
capacities at Genzyme Corporation. From 1991 to 1996,
Mr. Smith held various positions at Genetrix, Inc., most
recently as its Chief Financial Officer. Before joining
Genetrix, Inc., Mr. Smith practiced with the accounting
firm of PricewaterhouseCoopers LLP in both the U.S. and
Australia. Mr. Smith holds a B.A. in Accounting from the
Canberra College of Advanced Education in Australia.
Directors
Kirk K. Calhoun has served as a Director since March
2006. Mr. Calhoun joined Ernst & Young, LLP, a
public accounting firm, in 1965 and served as a partner of the
firm from 1975 until his retirement in 2002. His
responsibilities included both area management and serving
clients in a variety of industries, including biotechnology.
Mr. Calhoun is a Certified Public Accountant with a
background in auditing and accounting. He is currently on the
Board of Directors of Adams Respiratory Therapeutics, Inc.,
Abraxis Bioscience, Inc., Aspreva Pharmaceuticals Corporation
and Myogen, Inc. and the Board of Governors of the California
State University Foundation. Mr. Calhoun received a B.S. in
Accounting from the University of Southern California.
Ralph E. Christoffersen, Ph.D. has served as a
Director since December 2003. Dr. Christoffersen has been a
partner at Morgenthaler Ventures since August 2001. From 1992 to
2001, Dr. Christoffersen was the President and Chief
Executive Officer of Ribozyme Pharmaceuticals, Inc. From 1981 to
1992, he was the Senior Vice President of Research at SmithKline
Beecham, Vice President of Discovery Research at The Upjohn
Company, and President of Colorado State University.
Dr. Christoffersen is a member of the Board of Directors of
Serologicals Corp. Dr. Christoffersen holds a B.S. from
Cornell College and a Ph.D. from Indiana University.
Geoffrey Duyk, M.D., Ph.D. has served as a
Director since June 2004. Dr. Duyk is a partner at Texas
Pacific Group Ventures. From 1996 to 2003, Dr. Duyk was
President of Research & Development and a director of
Exelixis Inc. From 1993 to 1996, he was one of the founding
scientific staff at Millennium Pharmaceuticals. Prior thereto,
Dr. Duyk was an Assistant Professor at Harvard Medical
School in the Department of Genetics and Assistant Investigator
of the Howard Hughes Medical Institute. Dr. Duyk holds a
B.A. from Wesleyan University and a Ph.D. and M.D. from Case
Western Reserve University.
Christopher D. Earl, Ph.D. has served as a Director since
September 2004. Dr. Earl is President and Chief Executive
Officer of BIO Ventures for Global Health. From 1997 to 2005, he
served as
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Managing Director at Perseus Capital and of Perseus-Soros
Management, LLC, an affiliate of the Perseus-Soros
BioPharmaceutical Fund, LP, a private equity fund. Prior to
that, Dr. Earl was President and Chief Executive Officer of
Avitech Diagnostics, Inc. and a General Partner of Plant
Resources Venture Funds. Dr. Earl serves on the Board of
Governing Trustees of the Jackson Laboratory. Dr. Earl
holds a B.A. from the University of Pennsylvania and a Ph.D.
from Harvard University.
Augustine Lawlor has served as a Director since March
2002. Mr. Lawlor has been a Managing Director of HealthCare
Ventures LLC since 2000. Mr. Lawlor was previously Chief
Operating Officer of LeukoSite, Inc. and has also served as a
management consultant with KPMG Peat Marwick. Mr. Lawlor is a
member of the Board of Directors of Human Genome Sciences Inc.
Mr. Lawlor holds a B.A. from the University of New
Hampshire and a M.P.P.M. from the School of Management at Yale
University.
Daniel J. Mitchell has served as a Director since March
2002. Mr. Mitchell founded and is a Manager of Sequel
Venture Partners, L.L.C., a venture capital firm formed in
January 1997. Mr. Mitchell was a founder of Capital Health
Venture Partners, a health care focused venture capital firm, in
October 1986 and has been a General Partner since December 1992.
Mr. Mitchell is a member of the Board of Directors of Myogen,
Inc. Mr. Mitchell holds a B.S. from the University of
Illinois and an M.B.A. from the University of California at
Berkeley.
Henry Wendt has served as a Director since August 2005.
Mr. Wendt founded and is a Managing Director of HealthCare
Investment Partners LLC, a healthcare private equity
partnership. From 1997 until 2002, Mr. Wendt served as the
Founder and Chairman of Global Health Care Partners specializing
in investments in health care businesses. From 1955 to 1994,
Mr. Wendt held various positions with SmithKline, most
recently as Chairman and Chief Executive Officer. Mr. Wendt
is Chairman of the Boards of Directors of Computerized Medical
Systems and Arrail Dental (China), Ltd. and serves on the Boards
of Directors of BioPartners, SA and Cambridge Laboratories Ltd.
He is also Chairman of the Community Foundation of Sonoma County
Leadership Committee, director of The Pacific Basin Institute at
Pomona College and Trustee Emeritus of the American Enterprise
Institute. Mr. Wendt holds a B.A. from Princeton University.
Board Composition
Our board of directors currently consists of eight members.
Effective upon the completion of this offering, we will divide
our board of directors into three classes, as follows:
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Class I, which will consist of Drs. Christoffersen and
Earl, and whose term will expire at our annual meeting of
stockholders to be held in 2007; |
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Class II, which will consist of Messrs. Wendt and
Mitchell and Dr. Duyk, and whose term will expire at our
annual meeting of stockholders to be held in 2008; and |
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Class III, which will consist of Messrs. Calhoun,
Lawlor and Collins, and whose term will expire at our annual
meeting of stockholders to be held in 2009. |
At each annual meeting of stockholders to be held after the
initial classification, the successors to directors whose terms
then expire will serve until the third annual meeting following
their election and until their successors are duly elected and
qualified. The authorized number of directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
directors will be distributed between the three classes so that,
as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may
have the effect of delaying or preventing changes in our control
or management. Under Delaware law, our directors may be removed
for cause by the affirmative vote of the holders of a majority
of our voting stock.
Board Committees
Our board of directors has an audit committee, a compensation
committee and a corporate governance and nominating committee.
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Our audit committee consists of Messrs. Calhoun and Lawlor
and Dr. Earl. The functions of this committee include, among
other things:
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evaluating the performance of our independent auditors and
deciding whether to retain their services; |
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reviewing and pre-approving the engagement of our independent
auditors to perform audit services and any permissible non-audit
services; |
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reviewing our annual and quarterly financial statements and
reports and discussing the statements and reports with our
independent auditors and management; |
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reviewing and approving all related-party transactions; |
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reviewing with our independent auditors and management
significant issues that arise regarding accounting principles
and financial statement presentation, and matters concerning the
scope, adequacy and effectiveness of our financial controls; and |
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establishing procedures for the receipt, retention and treatment
of complaints received by us regarding financial controls,
accounting or auditing matters. |
Our board of directors has determined that Mr. Calhoun
qualifies as an audit committee financial expert within the
meaning of SEC regulations and the Nasdaq listing standards. In
making this determination, our board has considered the nature
and scope of experience Mr. Calhoun has previously had with
reporting companies. Both our independent auditors and
management periodically meet privately with our audit committee.
Our compensation committee consists of Dr. Duyk and
Messrs. Lawlor and Mitchell. The functions of this
committee include, among other things:
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determining the compensation and other terms of employment of
our executive officers and senior management and reviewing and
approving corporate performance goals and objectives relevant to
such compensation; |
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evaluating and recommending to our board of directors the equity
incentive plans, compensation plans and similar programs
advisable for us, as well as modification or termination of
existing plans and programs; |
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reviewing and approving appropriate insurance coverage for our
officers and directors; and |
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reviewing and approving the terms of any employment agreements,
severance arrangements,
change-in-control
protections and any other compensatory arrangements for our
executive officers. |
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Corporate Governance and Nominating Committee |
Our corporate governance and nominating committee consists of
Dr. Christoffersen and Messrs. Mitchell and Wendt. The
functions of this committee include, among other things:
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developing and maintaining a current list of the functional
needs and qualifications of members of our board of directors; |
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evaluating director performance on the board and applicable
committees of the board and determining whether continued
service on our board is appropriate; |
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interviewing, evaluating, nominating and recommending
individuals for membership on our board of directors; |
87
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evaluating nominations by stockholders of candidates for
election to our board; |
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reviewing and reporting annually to our board of directors an
assessment of our boards performance; |
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reviewing and recommending to our board of directors any
amendments to our corporate governance documents; and |
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reviewing and recommending to our board of directors changes
with respect to corporate governance issues, issues of broad
social significance and our overall conduct as a responsible
corporate citizen. |
Compensation Committee Interlocks and Insider
Participation
No member of our compensation committee has ever been an
executive officer or employee of ours. None of our executive
officers currently serves, or has served during the last
completed fiscal year, on the compensation committee or board of
directors of any other entity that has one or more executive
officers serving as a member of our board of directors or
compensation committee. Prior to establishing the compensation
committee, our full board of directors made decisions relating
to compensation of our executive officers.
Director Compensation
In the past, we have not provided cash compensation to directors
for their services as directors or members of committees of the
board of directors. In April 2006, our board of directors
adopted a compensation program for non-employee directors. This
compensation program will be effective immediately upon the
closing of this offering. Pursuant to this program, each member
of our board of directors who is not our employee will receive
the following cash compensation for board services, as
applicable:
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$17,500 per year for service as a board member; |
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$7,500 per year for service as chairman of the audit
committee; |
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$2,500 per year for service as chairman of the compensation
committee or the nominating and corporate governance committee; |
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$1,500 for each board meeting attended in person ($750 for
meetings attended by video or telephone conference); |
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$1,500 for each audit or compensation committee meeting attended
by the chairman of such committee in person ($750 for meetings
attended by video or telephone conference); and |
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$1,000 for each committee meeting attended in person by members
who are not chairman of such committee ($500 for meetings
attended by video or telephone conference). |
We have reimbursed and will continue to reimburse our
non-employee directors for their reasonable expenses incurred in
attending meetings of our board of directors and committees of
the board of directors.
Members of our board of directors who are not our employees will
receive non-statutory stock options under our 2006 Equity
Incentive Plan, which will become effective as of the effective
date of this offering. Each non-employee director on our board
of directors at the effective date of the offering, who has
served as a non-employee director for at least one year prior to
such date, or upon initially joining our board of directors will
automatically be granted a non-statutory stock option to
purchase 16,313 shares of common stock with an exercise
price equal to the then fair market value of our common stock.
On the date of each annual meeting of our stockholders beginning
in 2007, each non-employee director who has served as a
non-employee director for at least six months prior to that
annual meeting will also automatically be granted a
non-statutory stock option to purchase 8,156 shares of our
common stock on
88
that date with an exercise price equal to the then fair market
value of our common stock. Initial grants vest over three years
with 33.33% of the shares vesting one year from the date of
grant and the remaining shares vesting in equal monthly
installments over the next 24 months. Automatic annual
grants will vest on the first anniversary of the date of grant.
All stock options granted under our 2006 Equity Incentive Plan
will have a term of 10 years.
Executive Compensation
The following table provides information regarding the
compensation earned during the fiscal year ended
December 31, 2005 by our chief executive officer and our
four other most highly compensated executive officers who were
employed by us as of December 31, 2005 and whose combined
salary and bonus exceeded $100,000 during that fiscal year. We
refer to our chief executive officer and these other executive
officers as our named executive officers elsewhere
in this prospectus.
Summary Compensation Table
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Annual Compensation | |
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Number of | |
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| |
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Securities | |
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All Other | |
Name and Principal Position |
|
Salary | |
|
Bonus | |
|
Underlying Options | |
|
Compensation | |
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| |
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| |
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| |
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| |
Kenneth J. Collins
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$ |
305,000 |
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$ |
122,000 |
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President, Chief Executive Officer and Member of the Board of
Directors |
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Roger M. Echols, M.D.
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325,000 |
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149,500 |
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Chief Medical Officer
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Nebojsa Janjic, Ph.D.
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250,000 |
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75,000 |
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Chief Scientific Officer and Secretary
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Peter W. Letendre, Pharm.D
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217,708 |
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210,000 |
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203,915 |
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$ |
299,603 |
(1) |
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Chief Commercial Officer
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Donald J. Morrissey, Jr.
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205,000 |
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61,500 |
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16,313 |
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Senior Vice President,
Corporate Development |
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(1) |
Represents housing and relocation costs. |
Stock Option Grants in Last Fiscal Year
All options granted to our named executive officers are
incentive stock options, to the extent permissible under the
Internal Revenue Code of 1986, as amended, or Internal Revenue
Code. The exercise price per share of each option granted to our
named executive officers was equal to the fair market value of
our common stock as determined by our board of directors on the
date of the grant.
89
The following table provides information regarding grants of
options to purchase shares of our common stock to our named
executive officers in the fiscal year ended December 31,
2005:
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Individual Grants(1) | |
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| |
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Potential Realizable | |
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% of Total | |
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Value at Assumed | |
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Options | |
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Annual Rates of | |
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Number of | |
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Granted to | |
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Stock Price | |
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Securities | |
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Employees in | |
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Appreciation | |
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Underlying | |
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the Year Ended | |
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Exercise or | |
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for Option Term(3) | |
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Options | |
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December 31, | |
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Base Price | |
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Name |
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Granted | |
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2005(2) | |
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($/Sh) | |
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Expiration Date | |
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5% | |
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10% | |
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| |
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Kenneth J. Collins
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Roger M. Echols, M.D.
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Nebojsa Janjic, Ph.D.
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Peter W. Letendre, Pharm.D.
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203,915 |
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35.8% |
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$ |
0.61 |
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03/09/15 |
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$ |
3,199,426 |
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$ |
5,157,010 |
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Donald J. Morrissey, Jr.
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16,313 |
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2.9% |
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$ |
0.61 |
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05/26/15 |
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255,951 |
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412,556 |
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(1) |
The option grants listed above to Peter Letendre and Donald
Morrissey vest over a four year period with 25% of the shares
vesting one year from the vesting commencement date and the
remaining shares vesting in equal monthly installments over the
next 36 months. These options may be exercised immediately
for shares of restricted stock, which are subject to a
repurchase right by us that lapses on the same vesting schedule
as the options. |
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(2) |
Based on 569,541 options granted during the fiscal year ended
December 31, 2005 under our amended and restated 2006
Equity Incentive Plan, including grants to executive officers. |
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(3) |
Potential realizable values are computed by (a) multiplying
the number of shares of common stock subject to a given option
by an assumed initial public offering price of $10.00 per
share, (b) assuming that the aggregate stock value derived
from that calculation compounds at the annual 5% or 10% rate
shown in the table for the entire ten-year term of the option
and (c) subtracting from that result the aggregate option
exercise price. The 5% and 10% assumed annual rates of stock
price appreciation are mandated by the rules of the SEC and do
not represent our estimate or projection of future common stock
prices. |
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Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table provides information regarding options
exercised by each of our named executive officers during the
fiscal year ended December 31, 2005, as well as the number
of shares of common stock subject to exercisable and
unexercisable stock options held as of December 31, 2005 by
each of our named executive officers. All options listed in the
table permit early exercise of unvested shares, in which case
all unvested shares are subject to repurchase by us.
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Number of Securities | |
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Value of Unexercised | |
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Underlying Unexercised | |
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In-the-Money Options | |
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Shares | |
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Options at Fiscal Year-End | |
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at Fiscal Year-End(1) | |
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Acquired | |
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Value | |
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Name |
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on Exercise | |
|
Realized(1) | |
|
Exercisable | |
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Unexercisable | |
|
Exercisable | |
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Unexercisable | |
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| |
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| |
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Kenneth J. Collins
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356,851 |
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$ |
3,350,831 |
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Roger M. Echols, M.D.
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101,957 |
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$ |
957,376 |
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101,957 |
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$ |
957,376 |
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Nebojsa Janjic, Ph.D.
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224,306 |
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$ |
2,106,233 |
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Peter W. Letendre, Pharm.D.
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0 |
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203,915 |
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$ |
1,914,762 |
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Donald J. Morrissey, Jr.
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0 |
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144,779 |
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$ |
1,366,326 |
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(1) |
Amounts described under value realized and the value
of an unexercised
in-the-money option as
of December 31, 2005 is equal to the excess of an assumed
initial public offering price of $10.00 per share over the
exercise price for the option, multiplied by the number of
shares issued or issuable upon exercise of the option, without
taking into account any taxes that may be payable in connection
with the transaction. |
90
Employment Contracts, Termination of Employment and
Change-in-Control
Arrangements
We have entered into employment agreements with the following
executive officers, which set forth the officers position,
duties, base salary and benefits, among other things:
Kenneth J. Collins, Roger M. Echols, M.D., Nebojsa
Janjic, Ph.D., Peter W. Letendre, Pharm.D., Donald J.
Morrissey, Jr. and Mark L. Smith. The employment agreements
provide that we may terminate the employee at any time with or
without cause. However, if the employees employment is
terminated without cause or terminated by the employee for good
reason, then the employee shall be entitled to receive a
severance package consisting of:
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salary continuation for a period of 12 months from the date
of termination; and |
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reimbursement for the cost of continued medical insurance
coverage through the end of this 12 month period or, if
earlier, the date on which the employee obtains alternative
group health insurance. |
Upon a change in control of us, each of the employment
agreements provide that the employee shall be entitled to
acceleration of vesting of 50% of the employees
outstanding unvested options to purchase our common stock. If
the employees employment is terminated without cause or
terminated by the employee for good reason within one month
before or 13 months following a change of control of us,
then the employee shall be entitled to the following benefits:
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salary continuation for a period of 12 months (or
18 months with respect to Mr. Collins and
Dr. Janjic) from the date of termination; |
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reimbursement for the cost of continued medical insurance
coverage through the end of this 12 month period (or
18 month period with respect to Mr. Collins and
Dr. Janjic) or if earlier, the date on which the employee
obtains alternative group health insurance; and |
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acceleration of vesting of all of the employees
outstanding unvested options to purchase our common stock. |
In addition, if Mr. Collins employment is terminated
without cause or terminated by him for good reason within one
month before or 13 months following a change of control of
us, then he would be entitled to payment of a bonus equal to the
average of his annual bonus for the two years prior to such
termination.
Under these employment agreements, the annual base salary and
bonus eligibility of each employee is as follows:
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Officer |
|
Base Salary | |
|
Bonus Eligibility | |
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Kenneth J. Collins
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$ |
350,000 |
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50% of Base Salary |
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Roger M. Echols, M.D.
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$ |
345,000 |
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30% of Base Salary |
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Nebojsa Janjic, Ph.D.
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$ |
275,000 |
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30% of Base Salary |
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Peter W. Letendre, Pharm.D.
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$ |
295,000 |
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40% of Base Salary |
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Donald J. Morrissey, Jr.
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$ |
240,000 |
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30% of Base Salary |
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Mark L. Smith
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$ |
280,000 |
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30% of Base Salary |
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Under the employment agreements, the employees eligibility
to receive an annual performance bonus is based upon the
employees achievement of milestones and objectives
established by us, as determined by our board of directors in
its sole discretion.
In the employment agreement with Mr. Smith, we have agreed
to reimburse Mr. Smith for certain relocation and temporary
housing costs.
91
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Confidential Information and Inventions Agreement |
Each of our named executive officers has also entered into a
standard form agreement with respect to confidential information
and inventions. Among other things, this agreement obligates
each named executive officer to refrain from disclosing any of
our confidential information received during the course of
employment and, with some exceptions, to assign to us any
inventions conceived or developed during the course of
employment.
Employee Benefit Plans
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2006 Equity Incentive Plan |
On June 1, 2006, our board adopted our 2006 Equity
Incentive Plan, or 2006 Incentive Plan, as an amendment and
restatement of our Amended and Restated 2001 Long-Term Incentive
Plan, or the Original Plan. Subject to stockholder approval, the
2006 Incentive Plan will become effective immediately upon the
effective date of this offering. The 2006 Incentive Plan will
terminate on May 31, 2016, unless sooner terminated by our
board of directors.
Stock Awards. The 2006 Incentive Plan provides for the
grant of incentive stock options, nonstatutory stock options,
restricted stock awards, restricted stock unit awards, stock
appreciation rights, performance stock awards and other forms of
equity compensation (together, stock awards), as
well as performance cash awards (performance cash
awards and together with stock awards,
awards), which may be granted to employees,
including officers, non-employee directors and consultants.
However, participation in the non-discretionary grant program is
limited to the non-employee directors (see
Non-Discretionary Grant Program below).
As of May 31, 2006, options to purchase
1,779,318 shares of common stock at a weighted average
exercise price per share of $3.11 were outstanding under the
Original Plan. All outstanding awards under the Original Plan
will automatically become subject to the terms and conditions of
the 2006 Incentive Plan on the effective date of this offering.
Share Reserve. Following this offering, the aggregate
number of shares of common stock that may be issued pursuant to
stock awards under the 2006 Incentive Plan is
7,137,030 shares. This number includes shares subject to
stock awards outstanding under the Original Plan as of the
effective date of the underwriting agreement, which awards will
become subject to the 2006 Incentive Plan as of such effective
date. Subject to approval by our board of directors of such
increase by no later than March 31st of each year, the
number of shares of common stock reserved for issuance will
increase, effective as of April 1st, from April 1,
2007 through and including April 1, 2016, by the lesser of
(a) 5% of the total number of shares of common stock
outstanding on December 31st of the preceding calendar year
or (b) 1,325,448 shares, or such lesser amount as
determined by the board. The maximum number of shares that may
be issued pursuant to the exercise of incentive stock options
under the 2006 Incentive Plan is equal to the total share
reserve, as increased from time to time pursuant to any annual
increase.
Under the 2006 Incentive Plan, no person may be granted stock
awards whose value is determined by reference to an increase
over an exercise or strike price of at least 100% of the fair
market value of the common stock on the date of grant under the
2006 Incentive Plan covering more than 3,568,515 shares of
common stock during any calendar year. Such limitation is
designed to ensure that any deductions to which we would
otherwise be entitled upon the exercise of such stock options
and stock appreciation rights, will not be subject to the
$1.0 million limitation on the income tax deductibility of
compensation paid to certain executive officers imposed by
Section 162(m) of the Internal Revenue Code.
The following types of shares issued under the 2006 Incentive
Plan (including shares subject to awards originally issued under
the Original Plan and outstanding at the effective date of the
underwriting agreement) may again become available for the grant
of new awards under the 2006 Incentive Plan: (a) shares
that are forfeited to or repurchased by us prior to becoming
fully vested; (b) shares subject to stock awards that are
settled in cash; (c) shares withheld to satisfy income and
employment withholding taxes; (d) shares used to pay the
exercise price of an option in a net exercise arrangement;
(e) shares
92
tendered to us to pay the exercise price of an option; and
(f) shares that are cancelled pursuant to an exchange or
repricing program. In addition, if a stock award granted under
the 2006 Incentive Plan (including a stock award originally
granted under the Original Plan and outstanding at the effective
date of the underwriting agreement) expires or otherwise
terminates without being exercised in full, the shares of common
stock not acquired pursuant to the award again become available
for subsequent issuance under the 2006 Incentive Plan. Shares
issued under the 2006 Incentive Plan may be previously unissued
shares or reacquired shares, including shares bought by us on
the open market.
Administration. Our board of directors has delegated its
authority to administer the 2006 Incentive Plan (except the
non-discretionary grant program) to our compensation committee.
Subject to the terms of the 2006 Incentive Plan, our board of
directors or an authorized committee determines recipients,
dates of grant, the numbers and types of equity awards to be
granted, and the terms and conditions of the equity awards,
including the period of their exercisability and vesting.
Subject to the limitations set forth below, the board of
directors will also determine the exercise price of options
granted and the strike price of stock appreciation rights.
The board of directors has the authority to reduce the exercise
price of any outstanding option or the strike price of any stock
appreciation right, with the consent of any adversely affected
optionee; cancel any outstanding option or stock appreciation
right and to grant in exchange one or more of (i) new
options or stock appreciation rights covering the same or a
different number of shares of common stock, (ii) new stock
awards, (iii) cash, and/or (iv) other valuable
consideration; or engage in any action that is treated as a
repricing under generally accepted accounting principles.
Stock Options. Incentive and nonstatutory stock options
are granted pursuant to incentive and nonstatutory stock option
agreements. The board of directors determines the exercise price
for a stock option, within the terms and conditions of the 2006
Incentive Plan and applicable law, provided that the exercise
price of an incentive stock option and nonstatutory stock option
cannot be less than 100% of the fair market value of our common
stock on the date of grant. Options granted under the 2006
Incentive Plan vest at the rate specified by the board of
directors.
Generally, the board of directors determines the term of stock
options granted under the 2006 Incentive Plan, up to a maximum
of ten years (except in the case of certain incentive stock
options, as described below). Unless the terms of an
optionees stock option agreement provide otherwise, if an
optionees relationship with us, or any of our affiliates,
ceases for any reason other than disability or death, the
optionee may exercise any vested options for a period of three
months following the cessation of service. If an optionees
service relationship with us, or any of our affiliates, ceases
due to disability or death, the optionee or a beneficiary may
exercise any vested options for a period of 12 months. In
no event, however, may an option be exercised beyond the
expiration of its term.
Acceptable consideration for the purchase of common stock issued
upon the exercise of a stock option will be determined by the
board of directors and may include (a) cash, check, bank
draft or money order, (b) a broker-assisted cashless
exercise, (c) the tender of common stock previously owned
by the optionee, (d) a net exercise of the option and
(e) other legal consideration approved by the board of
directors.
Unless the board of directors provides otherwise, options
generally are not transferable except by will, the laws of
descent and distribution, or pursuant to a domestic relations
order. An optionee may designate a beneficiary, however, who may
exercise the option following the optionees death.
Tax Limitations on Incentive Stock Option Grants. The
aggregate fair market value, determined at the time of grant, of
shares of our common stock with respect to incentive stock
options that are exercisable for the first time by an optionee
during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option may be granted to any
person who, at the time of the grant, owns or is deemed to own
stock possessing more than 10% of our total combined voting
power or that of any of our affiliates unless (a) the
option exercise price is at least 110% of the fair market value
of the
93
stock subject to the option on the date of grant, and
(b) the term of the incentive stock option does not exceed
five years from the date of grant.
Restricted Stock Awards. Restricted stock awards are
granted pursuant to restricted stock award agreements. A
restricted stock award may be granted in consideration for the
recipients past or future services performed for us or our
affiliates or any other form of legal consideration acceptable
to the board of directors. Payment of any purchase price for
stock under a restricted stock award may be made in any form
permitted under applicable law; however, we will settle a
payment due to a recipient of a restricted stock award by cash,
delivery of stock, a combination of cash and stock as deemed
appropriate by the board of directors, or in any other form of
consideration set forth in the restricted stock award agreement.
Shares of common stock acquired under a restricted stock award
may, but need not, be subject to forfeiture to us in accordance
with a vesting schedule to be determined by the board of
directors. Rights to acquire shares under a restricted stock
award may be transferred only upon such terms and conditions as
set by the board of directors.
Restricted Stock Unit Awards. Restricted stock unit
awards are granted pursuant to restricted stock unit award
agreements. A restricted stock unit award may be granted in
consideration for any form of legal consideration acceptable to
the board of directors. Payment of any purchase price may be
made in any form permitted under applicable law; however, we
will settle a payment due to a recipient of a restricted stock
unit award by cash, delivery of stock, a combination of cash and
stock as deemed appropriate by the board of directors, or in any
other form of consideration set forth in the restricted stock
unit award agreement. Additionally, dividend equivalents may be
credited in respect of shares covered by a restricted stock unit
award. Except as otherwise provided in the applicable award
agreement, restricted stock units that have not vested will be
forfeited upon the participants cessation of continuous
service for any reason.
Stock Appreciation Rights. Stock appreciation rights are
granted pursuant to stock appreciation rights agreements. The
board of directors determines the strike price for a stock
appreciation right, except that the strike price of a stock
appreciation right granted as a stand-alone or tandem stock
award cannot be less than 100% of the fair market value of the
common stock equivalents on the date of grant. Upon exercise of
a stock appreciation right, we will pay the participant an
amount equal to the excess of (i) the aggregate fair market
value of our common stock on the date of exercise, over
(ii) the strike price determined by the board of directors
on the date of grant. A stock appreciation right granted under
the 2006 Incentive Plan vests at the rate specified in the stock
appreciation right agreement as determined by the board of
directors.
The board of directors determines the term of stock appreciation
rights granted under the 2006 Incentive Plan, but in no event
are stock appreciation rights exercisable after the expiration
of ten years from the date of grant. If a participants
service relationship with us, or any of our affiliates, ceases,
then the participant, or the participants beneficiary, may
exercise any vested stock appreciation right for three months
(or such longer or shorter period specified in the stock
appreciation right agreement) after the date such service
relationship ends. In no event, however, may an option be
exercised beyond the expiration of its term.
Performance Awards. The 2006 Incentive Plan allows our
board of directors to issue performance stock awards and
performance cash awards that qualify as performance-based
compensation that is not subject to the income tax deductibility
limitations imposed by Section 162(m) of the Internal
Revenue Code, if the issuance of such stock or cash is approved
by the compensation committee and the grant or vesting of one or
more stock awards and the delivery of such cash is tied solely
to the attainment of certain performance goals during a
designated performance period. To assure that the compensation
attributable to one or more restricted stock awards, restricted
stock unit awards, or performance awards will qualify as
performance-based compensation that will not be subject to the
$1.0 million limitation on the income tax deductibility of
the compensation paid to certain executive officers imposed by
Section 162(m) of the Internal Revenue Code, our
compensation committee has the authority to structure one or
more such awards so that stock or cash will be issued or paid
pursuant to the award only upon the
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achievement of certain pre-established performance goals. The
maximum benefit to be received by a participant in any calendar
year attributable to performance stock awards may not exceed
3,568,515 shares of common stock. The maximum benefit to be
received by a participant in any calendar year attributable to
performance cash awards may not exceed $2.0 million.
Other Equity Awards. Our board of directors may grant
other awards valued in whole or in part by reference to our
common stock. Our board of directors will set the number of
shares under the award, the purchase price, if any, the timing
of exercise and vesting and any repurchase rights associated
with such awards.
Non-Discretionary Grant Program. The 2006 Incentive Plan
provides for the automatic grant of stock options to
non-employee members of our board of directors. Pursuant to the
non-discretionary grant program under the proposed 2006
Incentive Plan, eligible non-employee members of our board of
directors may receive a series of stock awards over their period
of service on the board of directors. Those stock awards will be
made as follows:
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Initial Option Grant. Each non-employee member of our
board of directors who has been a non-employee member of our
board of directors for at least 12 months as of the
effective date of this offering will, on the effective date of
this offering, be eligible to receive an option to purchase
16,313 shares of our common stock. In addition, each new
non-employee member of our board of directors elected or
appointed after the effective date of this offering will, at the
time of his or her initial election or appointment to the board
of directors, be eligible to receive an option to purchase
16,313 shares of our common stock. An option grant
described in this paragraph is referred to as an initial
option grant. |
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Annual Awards. On the date of each annual meeting of our
stockholders, commencing with the annual meeting in 2007 (the
annual award date), each non-employee member of our
board of directors who has been a non-employee member of our
board of directors for at least six months as of the date
of such annual meeting, will be eligible to receive a stock
award (the annual award) as follows: |
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Form of Annual Award. The annual award will be either in
the form of a nonstatutory stock option grant or restricted
stock award. In the calendar year prior to the grant of an
annual award, the board of directors decides whether the annual
award will be in the form of a nonstatutory stock option or
restricted stock award. If the board of directors does not make
such a determination by December 31st of the preceding
calendar year, the annual awards to be granted in the subsequent
calendar year will be granted in the form of a nonstatutory
stock option. |
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Number of Shares for Annual Awards. If the annual award
is in the form of a nonstatutory stock option (the annual
option grant), each non-employee director receiving an
annual award will be eligible to receive an option to purchase
8,156 shares of our common stock. If the annual award is in
the form of a restricted stock award, the annual award will not
be more favorable to a non-employee director than that number of
unvested shares of our common stock equal to the quotient
obtained by dividing (a) the fair value of an
annual option grant at such time, as determined under generally
accepted accounting principles and using the option pricing
model employed by us for purposes of estimating the value of
compensatory stock options, by (b) the fair market value of
our common stock on the date of grant. In addition, the board of
directors has the authority to provide that the issuance of an
annual award will be delivered in a restricted stock unit award
with shares to be delivered when shares would have otherwise
vested under the restricted stock award. |
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Terms of Non-Discretionary Grant Program Options. The
exercise price of each option granted under the
non-discretionary grant program shall be equal to 100% of the
fair market value of the common stock subject to the option on
the date of grant. The maximum term |
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of options granted under the non-discretionary grant program is
10 years. Vesting ceases when the optionee is no longer in
our service as a director, employee or consultant. The remaining
terms and conditions of each option is set forth in an option
agreement in the form adopted from time to time by the board of
directors. |
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Terms of Non-Discretionary Grant Program Restricted Stock
Awards and Restricted Stock Unit Awards. Restricted stock
awards and Restricted Stock Unit Awards under the
non-discretionary grant program are granted in consideration for
past or future services rendered to us or any of our affiliates.
Vesting ceases when the optionee is no longer in our service as
a director, employee or consultant. The remaining terms and
conditions of each restricted stock award and restricted stock
unit award is set forth in the restricted stock award agreement
or restricted stock unit award agreement, in the form adopted
from time to time by the Board. |
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Change in Control. In the event of certain significant
corporate transactions constituting a change in control, the
vesting of stock awards granted under the non-discretionary
grant program will automatically accelerate in full, unless
provided otherwise in an applicable award agreement. |
Changes to Capital Structure. If any change is made to
the outstanding shares of our common stock without our receipt
of consideration (whether through a stock split or other
specified change in our capital structure), appropriate
adjustments will be made to: (i) the maximum number and/or
class of securities issuable under the 2006 Incentive Plan;
(ii) the maximum number and/or class of securities that may
be issued pursuant to the exercise of incentive stock options
under the 2006 Incentive Plan; (iii) the maximum number
and/or class of securities for which any one person may be
granted stock awards per calendar year pursuant to the
section 162(m) limitation; (iv) the number and/or
class of securities for which stock awards are subsequently to
be made under the non-discretionary grant program to new and
continuing non-employee members of the board of directors; and
(v) the number and/or class of securities and the price per
share in effect under each outstanding stock award under the
2006 Incentive Plan (including shares subject to awards
originally issued under the Original Plan and outstanding at the
effective date of the underwriting agreement).
Corporate Transactions. In the event of certain
significant corporate transactions, outstanding stock awards
under the 2006 Incentive Plan may be assumed, continued or
substituted for by any surviving or acquiring entity (or its
parent company). If the surviving or acquiring entity (or its
parent company) elects not to assume, continue or substitute for
such stock awards, then (a) with respect to any such stock
awards that are held by individuals whose service with us or our
affiliates has not terminated prior to the effective date of the
corporate transaction, the vesting and exercisability provisions
of such stock awards will be accelerated in full and such awards
will be terminated if not exercised prior to the effective date
of the corporate transaction, and (b) all other outstanding
stock awards will terminate if not exercised prior to the
effective date of the corporate transaction. Our board of
directors may also provide that the holder of an outstanding
stock award not assumed in the corporate transaction will
surrender such stock award in exchange for a payment equal to
the excess of (a) the value of the property that the stock
award would have received upon exercise of the stock award, over
(b) the exercise price otherwise payable in connection with
the stock award.
Changes in Control. Our board of directors has the
discretion to provide that a stock award under the 2006
Incentive Plan may be subject to additional acceleration of
vesting and exercisability upon or after certain specified
change in control transactions. Stock awards held by
participants under the 2006 Incentive Plan will not vest on such
an accelerated basis unless specifically provided by the
participants applicable award agreement. However, the
board of directors expects that most award agreements under the
2006 Incentive Plan will provide that, if the participants
service is terminated within 13 months after a specified
change in control transaction, the vesting of the award will
accelerate as if the participant had remained employed for an
additional 12 months after such termination. Most of the
awards originally issued under the Original Plan contain a
similar vesting acceleration provision.
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2006 Employee Stock Purchase Plan |
Our board of directors adopted our 2006 Employee Stock Purchase
Plan on June 1, 2006, and the 2006 Employee Stock Purchase
Plan will be submitted to our stockholders for their approval
prior to the commencement of the initial offering under the
plan. The 2006 Employee Stock Purchase Plan will be effective
immediately upon the closing of this offering.
Share Reserve. The board of directors authorized the
issuance of 305,872 shares of our common stock pursuant to
purchase rights granted to eligible employees under the 2006
Employee Stock Purchase Plan. Subject to approval by our board
of directors of such increase by no later than March 31st
of each year, on April 1st of each year for ten years,
beginning on April 1, 2007, through and including
April 1, 2016, the number of shares in the reserve will be
increased by the lesser of (i) 1% of our outstanding shares
on December 31st of the prior year or
(ii) 101,957 shares of common stock, or such lesser
amount approved by the board of directors.
Eligibility. The 2006 Employee Stock Purchase Plan is
intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code.
The 2006 Employee Stock Purchase Plan provides a means by which
eligible employees may purchase our common stock through payroll
deductions. We will implement the 2006 Employee Stock Purchase
Plan by offerings of purchase rights to eligible employees.
Generally, all of our employees and the employees of our
affiliates incorporated in the U.S., who are employed at
least 20 hours a week and at least five months per calendar
year, may participate in offerings under the purchase plan.
However, no employee may participate in the 2006 Employee Stock
Purchase Plan if, immediately after we grant the employee a
purchase right, the employee has voting power over 5% or more of
our outstanding capital stock.
Offerings. The board of directors has the authority to
set the terms of each offering under the 2006 Employee Stock
Purchase Plan. The board may specify offerings of up to
27 months where common stock is purchased for accounts of
participating employees at a price per share equal to the lower
of:
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85% of the fair value of a share on the first day of the
offering, or |
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85% of the fair value of a share on the purchase date. |
The first offering under the 2006 Employee Stock Purchase Plan
will begin on the effective date of this initial public offering
and we expect the first offering will be for approximately
six months, with one purchase date at the end of such
offering. The fair market value of the shares on the first date
of the offering will be the price per share at which our shares
are first sold to the public as specified in this prospectus.
Otherwise, fair market value generally means the closing sales
price (rounded up where necessary to the nearest whole cent) for
such shares (or the closing bid, if no sales were reported) as
quoted on the Nasdaq National Market or the Nasdaq Small Cap
Market on the last trading day preceding the relevant
determination date, as reported in The Wall Street Journal.
Eligible employees will purchase our stock at the lower of:
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85% of the market value of a share on the day they began
participating in the purchase plan, or |
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85% of the market value of a share on the purchase date. |
The board of directors may permit participants under the terms
of an offering to authorize payroll deductions of up to 20% of
their base compensation for the purchase of stock under the
plan. Under the initial offering, the maximum percentage will be
12% of base compensation. If expressly permitted by the terms of
an offering, participants may make a cash payment to purchase
shares on specified purchase dates under the offering.
Participants may end their participation in an offering at any
time prior to a purchase date. Their participation ends
automatically on termination of their employment.
Other Provisions. A participants right to purchase
our stock under the 2006 Employee Stock Purchase Plan, plus any
other employee stock purchase plans intended to qualify under
Section 423 of the Internal Revenue Code established by us
or by our affiliates, is limited. The right may accrue to any
97
participant at a rate of no more than $25,000 worth of our stock
for each calendar year in which purchase rights are outstanding.
We determine the fair market value of our stock, for the purpose
of this limitation, as of the first day of the offering.
Upon a change of control, the board of directors may provide
that the successor corporation will assume or substitute for
outstanding purchase rights. Alternatively, if a successor
corporation does not assume or substitute for outstanding
purchase rights, accumulated contributions shall be used to
purchase our stock for the participants immediately before the
change of control and purchase rights under any ongoing
offerings shall terminate immediately after such purchase.
Shares Issued. As of the date hereof, no shares of common
stock have been purchased under the purchase plan.
Plan Termination. The 2006 Employee Stock Purchase Plan
will terminate on May 31, 2016, unless the board of
directors, in its discretion, earlier terminates the 2006
Employee Stock Purchase Plan.
We maintain a defined contribution employee retirement plan for
our employees. The plan is intended to qualify as a
tax-qualified plan under Section 401(k) of the Internal
Revenue Code. The plan provides that each participant may
contribute up to 12% of his or her pre-tax compensation, up to a
statutory limit, which is generally $15,000 for calendar year
2006. Participants that are 50 years or older can also make
catch-up contributions, which in calendar year 2006
may be up to an additional $5,000 above the statutory limit.
Under the plan, each employee is fully vested in his or her
deferred salary contributions. Employee contributions are held
and invested by the plans trustee. The plan also permits
us to make discretionary contributions and matching
contributions, subject to established limits and a vesting
schedule. To date, we have not made any discretionary or
matching contributions to the plan on behalf of participating
employees. However, upon the closing of this offering, we plan
to match 50% of employee contributions up to $2,000 per year.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation, which
will become effective upon the closing of this offering, limits
the liability of directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for
liability for any:
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breach of their duty of loyalty to the corporation or its
stockholders; |
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act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law; |
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unlawful payment of dividends or redemption of shares; or |
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transaction from which the directors derived an improper
personal benefit. |
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Our amended and restated bylaws, which will become effective
upon the closing of this offering, provide that we will
indemnify our directors and executive officers, and may
indemnify other officers, employees and other agents, to the
fullest extent permitted by law. Our amended and restated bylaws
also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out
of his or her actions in connection with their services to us,
regardless of whether our amended and restated bylaws permit
such indemnification. We have obtained a policy of
directors and officers liability insurance.
We have entered, and intend to continue to enter, into separate
indemnification agreements with our directors and executive
officers, in addition to the indemnification provided for in our
amended and
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restated bylaws. These agreements, among other things, require
us to indemnify our directors and executive officers for certain
expenses, including attorneys fees, judgments, fines and
settlement amounts incurred by a director or executive officer
in any action or proceeding arising out of their services as one
of our directors or executive officers, or to any of our
subsidiaries or to any other company or enterprise to which the
person provides services at our request.
At present, there is no pending litigation or proceeding
involving any of our directors or executive officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, executive officers
or persons controlling us, we have been informed that in the
opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act and is therefore
unenforceable.
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RELATED PARTY TRANSACTIONS
The following includes a description of transactions since
January 1, 2003 and certain transactions prior to that date
to which we have been a party, in which the amount involved in
the transaction exceeds $60,000, and in which any of our
directors, executive officers, or holders of more than 5% of our
capital stock had or will have a direct or indirect material
interest other than equity and other compensation, termination,
change-in control and other arrangements, which are described
under Management. We believe the terms obtained or
consideration that we paid or received, as applicable, in
connection with the transactions described below were comparable
to terms available or the amounts that would be paid or
received, as applicable, in arms-length transactions.
All share and per share amounts pertaining to common stock have
been retroactively adjusted to give effect to a one-for-4.904
reverse stock split of our common stock to be effected before
the closing of this offering. As a result of the one-for-4.904
reverse stock split to be effected before the completion of this
offering, each share of outstanding preferred stock is
convertible into 0.204 of a share of our common stock. The
one-for-4.904 reverse stock split of our common stock adjusted
the conversion ratio of the preferred stock but did not adjust
the number of outstanding shares of preferred stock.
Preferred Stock Issuances
In February 2002, we issued and sold to investors an aggregate
of 13,000,000 shares of Series A preferred stock at a
purchase price of $1.00 per share, for aggregate
consideration of $13,000,000. Upon the closing of this offering,
these shares will convert into 2,650,895 shares of common
stock.
In June 2003, we issued and sold to investors an aggregate of
4,000,000 shares of Series B preferred stock at a
purchase price of $1.25 per share, for aggregate
consideration of $5,000,000, all of which was paid to us through
the transfer of certain assets. Upon the closing of this
offering, these shares will convert into 815,660 shares of
common stock.
In April 2004, with subsequent closings in August 2004,
September 2004 and November 2004, we issued and sold to
investors an aggregate of 36,800,000 shares of
Series C preferred stock at a purchase price of
$1.25 per share, for aggregate consideration of
$46,000,000, including $7,000,000 of converted indebtedness.
Upon the closing of this offering, these shares will convert
into 7,504,074 shares of common stock.
In August 2005, we issued and sold to investors an aggregate of
34,722,722 shares of Series D preferred stock at a
purchase price of $1.80 per share, for aggregate
consideration of $62,499,999.60. Upon the closing of this
offering, these shares will convert into 7,080,380 shares
of common stock.
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The participants in these preferred stock financings included
the following directors, executive officers and holders of more
than 5% of our capital stock or entities affiliated with them.
The following table presents the number of shares issued to
these related parties in these financings:
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Stockholder(1) |
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Series A Preferred | |
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Series C Preferred | |
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Series D Preferred | |
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Holders of More than 5%
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HealthCare Investment Partners Holdings III, LLC
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5,555,556 |
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HealthCare Ventures VI, L.P.(2)
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8,250,300 |
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7,200,000 |
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3,447,188 |
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Morgenthaler Partners VII, L.P.
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2,000,000 |
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6,400,000 |
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1,874,163 |
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OZ Master Fund, Ltd.
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7,777,778 |
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Perseus-Soros Biopharmaceutical Fund, LP
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5,600,000 |
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1,110,554 |
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Entities affiliated with Sequel Limited Partnership III(3)
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2,000,000 |
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3,200,000 |
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1,160,196 |
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Entities affiliated with TPG Biotechnology Partners, L.P.(4)
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9,600,000 |
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2,705,756 |
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Entities affiliated with Duquesne Capital Management LLC(5)
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6,388,889 |
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(1) |
Additional detail regarding these stockholders and their equity
holdings is provided in Principal Stockholders. |
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(2) |
Includes: (a) 8,250,300 shares of Series A
preferred stock held by HealthCare Ventures VI, L.P.;
(b) 7,200,000 shares of Series C preferred stock
held by HealthCare Ventures VI, L.P.; and
(c) 3,447,188 shares of Series D preferred Stock
held by HealthCare Ventures VIII, L.P. Upon completion of this
offering, these shares will convert into 3,853,483 shares
of common stock. |
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(3) |
Includes: (a) 1,945,920 shares of Series A
preferred stock held by Sequel Limited Partnership III;
(b) 54,080 shares of Series A preferred stock
held by Sequel Entrepreneurs Fund III, L.P.;
(c) 3,113,472 shares of Series C preferred stock
held by Sequel Limited Partnership III;
(d) 86,528 shares of Series C preferred stock
held by Sequel Entrepreneurs Fund III, L.P.;
(e) 1,128,824 shares of Series D preferred stock
held by Sequel Limited Partnership III; and
(f) 31,372 shares of Series D preferred stock
held by Sequel Entrepreneurs Fund III., L.P. Upon
completion of this offering, these shares will convert into
1,296,938 shares of common stock. |
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(4) |
Includes: (a) 2,880,000 shares of Series C
preferred stock held by TPG Ventures, L.P.;
(b) 6,720,000 shares of Series C preferred stock
held by TPG Biotechnology Partners, L.P.;
(c) 811,727 shares of Series D preferred stock
held by TPG Ventures, L.P.; and (d) 1,894,029 shares
of Series D preferred stock held by TPG Biotechnology
Partners, L.P. Upon completion of this offering, these shares
will convert into 2,509,328 shares of common stock. |
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(5) |
Includes: (a) 1,111,111 shares of Series D
preferred stock held by Juggernaut Fund, L.P.;
(b) 211,111 shares of Series D preferred stock
held by Iron City Fund, Ltd.; and (c) 5,066,667 shares
of Series D preferred stock held by Windmill Master Fund,
L.P. Upon completion of this offering, these shares will convert
into 1,302,790 shares of common stock. |
In each of these preferred stock financings, we entered into or
amended various stockholder agreements with the holders of our
preferred stock relating to voting rights, information rights,
rights of first refusal and registration rights, among other
things. These stockholder agreements will terminate upon the
closing of this offering, except for the registration rights
granted under our fourth amended and restated stockholders
agreement, as more fully described in Description of
Capital Stock Registration Rights.
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Some of our directors are associated with our principal
stockholders as indicated in the table below:
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Principal Stockholder |
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Henry Wendt
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HealthCare Investment Partners |
Augustine Lawlor
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HealthCare Ventures VI, L.P. |
Ralph E. Christoffersen, Ph.D.
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Morgenthaler Partners VII, L.P. |
Daniel J. Mitchell
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Sequel Limited Partnership III |
Geoffrey Duyk M.D., Ph.D.
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TPG Biotechnology Partners, L.P. |
Secured Bridge Financing
In December 2003, as part of a secured loan financing, we issued
convertible promissory notes in an aggregate principal amount of
$7.0 million to certain investors in five tranches.
The notes were secured by substantially all of our assets,
accrued interest at 6% per year and were automatically
convertible into shares of our Series C preferred stock in
the event we completed a Series C preferred stock financing
of at least $12.0 million. All convertible promissory notes
were terminated in connection with our Series C preferred stock
financing in April 28, 2004, with subsequent closings on
August 12, 2004, September 14, 2004 and
November 12, 2004, and all principal and unpaid interest
accrued under the notes converted into shares of our
Series C preferred stock.
In connection with the secured loan financing, we issued
warrants to the investors that were exerciseable for a number of
shares of our Series C preferred stock determined based on
the conversion price at which the notes were to be converted.
For a description of these warrants, see Description of
Capital Stock Warrants. In February 2006,
HealthCare Ventures VI, L.P. exercised its warrant to
purchase 80,001 shares of Series C preferred
stock.
The following table sets forth the names of our directors,
executive officers or holders of more than 5% of our capital
stock who participated in our secured loan financing, the
principal amount of each loan and the number of shares of our
Series C preferred stock issued upon conversion of the
loans.
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Shares of Series C | |
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Preferred Stock | |
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Principal Amount | |
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Issued upon | |
Holders of More Than 5% |
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of Loan | |
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Conversion | |
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| |
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| |
HealthCare Ventures VI, L.P.
|
|
$ |
2,800,000 |
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|
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2,240,000 |
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Morgenthaler Partners, VII, L.P.
|
|
$ |
2,800,000 |
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|
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2,240,000 |
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Entities affiliated with Sequel Limited Partnership III(1)
|
|
$ |
1,400,000 |
|
|
|
1,120,000 |
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(1) |
Includes: (a) a loan of $1,362,144 from Sequel Limited
Partnership III and 1,089,715 shares of Series C
preferred stock issued upon conversion; and (b) a loan of
$37,856 from Sequel Entrepreneurs Fund III, L.P. and
30,285 shares of Series C preferred stock issued upon
conversion. |
Loans
We loaned Nebojsa Janjic, Ph.D., our current Chief Scientific
Officer, $137,500.00 pursuant to a promissory note dated
March 8, 2005. The note accrued interest at an adjustable
rate equal to the prime rate. Dr. Janjic paid us
$146,321.24 on February 28, 2006, in full satisfaction of
amounts owing under the note.
We loaned Kenneth J. Collins, our current President and Chief
Executive Officer, $218,750.00 pursuant to a promissory note
dated March 8, 2005. The note accrued interest at an
adjustable rate equal to the prime rate. Mr. Collins paid
us $232,783.79 on February 28, 2006, in full satisfaction
of amounts owing under the note.
102
Amended and Restated Stockholders Agreement
We have entered into a fourth amended and restated stockholders
agreement with the purchasers of our outstanding preferred stock
and certain holders of common stock and warrants to purchase our
preferred stock, including entities with which certain of our
directors are affiliated. Upon the completion of this offering,
the holders of 19,902,160 shares of our common stock,
including the shares of common stock issuable upon the automatic
conversion of our preferred stock and shares of common stock
issued upon exercise of warrants, are entitled to rights with
respect to the registration of their shares under the Securities
Act. For a description of these registration rights, see
Description of Capital Stock Registration
Rights.
Other Transactions
We have entered into employment agreements with our executive
officers. For a description of these employment agreements, see
Management Employment Contracts, Termination
of Employment and Change in Control Arrangements.
We have granted stock options to our directors and executive
officers. For a description of these options, see
Management Director Compensation and
Management Executive Compensation.
We have entered into indemnification agreements with our
directors and executive officers. For a description of these
agreements, see Management Limitation of
Liability and Indemnification.
103
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our capital stock by:
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each person, or group of affiliated persons, known by us to
beneficially own more than 5% of our common stock; |
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each of our directors; |
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|
each of our named executive officers; and |
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|
|
all of our directors and executive officers as a group. |
The percentage ownership information shown in the table is based
upon (1) shares outstanding as of May 31, 2006,
(2) the conversion of all outstanding shares of our
preferred stock into 18,067,322 shares of common stock upon
the completion of this offering, (3) the issuance of
4,500,000 shares of common stock in this offering and
(4) the issuance of 1,781,826 shares of common stock
to the holders of our Series A, B, C and D convertible
preferred stock upon the closing of this offering in
satisfaction of accumulated dividends, assuming for this purpose
that the closing of this offering occurs July 3, 2006 and
the initial public offering price is $10.00 per share. The
percentage ownership information assumes no exercise of the
underwriters over-allotment option.
Each individual or entity shown in the table has furnished
information with respect to beneficial ownership. We have
determined beneficial ownership in accordance with the
SECs rules. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared
voting power or investment power with respect to those
securities. In addition, the rules include shares of common
stock issuable pursuant to the exercise of stock options or
warrants that are either immediately exercisable or exercisable
on July 30, 2006, which is 60 days after May 31,
2006. These shares are deemed to be outstanding and beneficially
owned by the person holding those options or warrants for the
purpose of computing the percentage ownership of that person,
but they are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. All of
the options held by the executive officers and directors are
exercisable at any time but, if exercised, are subject to a
lapsing right of repurchase until the options are fully vested.
Unless otherwise indicated, the persons or entities identified
in this table have sole voting and investment power with respect
to all shares shown as beneficially owned by them, subject to
applicable community property laws.
Except as otherwise noted below, the address for each person or
entity listed in the table is c/o Replidyne, Inc., 1450
Infinite Drive, Louisville, Colorado 80027.
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|
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|
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|
|
Percentage of Shares |
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|
|
|
Beneficially Owned |
|
|
Number of Shares |
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|
Name and Address of Beneficial Owner |
|
Beneficially Owned |
|
Before Offering |
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After Offering |
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5% Stockholders
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Duquesne Capital Management LLC and its affiliates(1)
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1,302,790 |
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6.47% |
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5.01% |
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HealthCare Investment Partners Holdings II LLC(2)
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1,132,862 |
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5.62% |
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4.53% |
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HealthCare Ventures VI, L.P.(3)
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3,869,796 |
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19.21% |
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16.60% |
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Morgenthaler Partners VII, L.P.(4)
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2,095,057 |
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10.47% |
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8.56% |
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OZ Master Fund, Ltd(5)
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1,586,006 |
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7.87% |
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6.38% |
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Perseus-Soros Biopharmaceutical Fund, LP(6)
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1,368,382 |
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6.79% |
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5.63% |
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Sequel Limited Partnership III and its affiliates(7)
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1,296,938 |
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6.48% |
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5.81% |
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TPG Biotechnology Partners, L.P. and its affiliates(8)
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2,509,328 |
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12.46% |
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10.35% |
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Named Executive Officers and Directors
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Kenneth J. Collins(9)
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530,176 |
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2.63% |
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2.01% |
|
Kirk K. Calhoun
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0 |
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* |
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|
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* |
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Ralph E. Christoffersen Ph.D.(4)
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2,095,057 |
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10.47% |
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8.56% |
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104
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Percentage of Shares |
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Beneficially Owned |
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|
Number of Shares |
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|
Name and Address of Beneficial Owner |
|
Beneficially Owned |
|
Before Offering |
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After Offering |
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Geoffrey Duyk M.D., Ph.D.(8)
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2,509,328 |
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12.46% |
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10.35% |
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Christopher D. Earl Ph.D.(10)
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0 |
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* |
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* |
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Augustine Lawlor(3)
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3,869,796 |
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19.21% |
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16.60% |
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Daniel J. Mitchell(7)
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1,296,938 |
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6.48% |
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5.81% |
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Henry Wendt(2)
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1,132,862 |
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5.62% |
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4.53% |
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Roger M. Echols M.D.(11)
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101,957 |
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* |
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* |
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Nebojsa Janjic Ph.D.(12)
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397,633 |
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1.97% |
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1.50% |
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Peter W. Letendre Pharm.D.(13)
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|
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74,768 |
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* |
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* |
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Donald J. Morrissey, Jr.(14)
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136,110 |
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|
|
* |
|
|
|
* |
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Mark Smith
|
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0 |
|
|
|
* |
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|
|
* |
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All directors and executive officers as a group
(13 persons)(15)
|
|
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1,130,024 |
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6.13% |
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|
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4.68% |
|
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|
|
|
* |
Represents beneficial ownership of less than 1%. |
|
|
(1) |
Includes 1,033,170 shares held by Windmill Master Fund,
L.P., 226,572 shares held by Juggernaut Fund, L.P. and
43,048 shares held by Iron City Fund, Ltd. The Chairman and
Chief Executive Officer of Duquesne Capital Management LLC,
Stanley F. Druckenmiller, possesses voting and investment
authority over these shares. The address for all entities and
individuals affiliated with Duquesne Capital Management LLC is
2579 Washington Road, Suite 322, Pittsburgh, PA 15241. |
|
(2) |
HealthCare Investment Partners LLC is the managing member of
HealthCare Investment Partners Holdings II LLC. The managing
members of HealthCare Investment Partners LLC, Henry Wendt,
Edward Brown and Reid Perper, share voting and investment
authority with respect to these shares. Mr. Wendt disclaims
beneficial ownership of these shares except to the extent of his
proportionate pecuniary interest in these securities. The
address for all entities and individuals affiliated with
HealthCare Investment Partners Holdings II LLC is 400 West
Dry Creek Road, Healdsburg, CA 95448. |
|
(3) |
Includes 702,933 shares held by HealthCare Ventures VIII,
L.P. HealthCare Ventures VI, L.P. disclaims beneficial ownership
of those shares owned by HealthCare Ventures VIII, L.P.
Mr. Lawlor is a general partner of HealthCare
Partners VI, L.P. which is the general partner of
HealthCare Ventures VI, L.P. Mr. Lawlor shares voting
and investment authority over the shares held by HealthCare
Ventures VI, L.P. with Eric Aguiar, James Cavanaugh, William
Crouse, John Littlechild, Christopher Mirabelli and Harold
Werner. Mr. Lawlor is also a managing director of
HealthCare Partners VIII LLC which is the general partner
of HealthCare Partners VIII, L.P. which is the general
partner of HealthCare Ventures VIII, L.P. Mr. Lawlor
shares voting and investment authority over the shares held by
HealthCare Ventures VIII, L.P. with Eric Aguiar, James
Cavanaugh, John Littlechild, Christopher Mirabelli and Harold
Werner. Mr. Lawlor disclaims beneficial ownership of these
shares except to the extent of his proportionate pecuniary
interest in these securities. The address for HealthCare
Ventures VI, L.P. is 44 Nassau Street, Princeton, NJ 08542. |
|
(4) |
Includes 16,311 shares that Morgenthaler Partners VII, L.P.
has the right to acquire from us within 60 days of
May 31, 2006 pursuant to the exercise of outstanding
warrants. Morgenthaler Management Partners VII, LLC is the
managing general partner of Morgenthaler Partners VII, L.P.
The members of Morgenthaler Management Partners VII, LLC,
Ralph E. Christoffersen, Robert C. Bellas, Jr., Greg E. Blonder,
James W. Broderick, Daniel F. Farrar, Andrew S. Lanza, Theodore
A. Laufik, Paul H. Levine, Gary R. Little, John D. Lutsi, Gary
J. Morgenthaler, Robert D. Pavey, G. Gary Shaffer, Alfred J.V.
Stanley and Peter G. Taft, share voting and investment authority
over these shares. Dr. Christoffersen disclaims beneficial
ownership of these shares except to the extent of his
proportionate pecuniary interest in these securities. The
address for Morgenthaler Partners VII, L.P. is
4430 Arapahoe Avenue, Suite 220, Boulder, CO
80303. |
105
|
|
(5) |
Daniel S. Och is the Senior Managing Member of OZ
Management, L.L.C., the investment manager of OZ Master Fund,
Ltd. As such, Mr. Och may be deemed to exercise voting and
investment discretion of the shares held by OZ Master Fund, Ltd.
The address of Oz Master Fund, Ltd. is
9 West 57th
Street,
39th Floor,
New York, NY 10019. |
|
(6) |
Perseus-Soros Partners, LLC is the general partner of the
Perseus-Soros BioPharmaceutical Fund, LP. Perseus BioTech Fund
Partners, LLC and SFM Participation, L.P. are the managing
members of Perseus-Soros Partners, LLC. Perseuspur, LLC is the
managing member of Perseus BioTech Fund Partners, LLC. Frank
Pearl is the sole member of Perseuspur, LLC and in such capacity
may be deemed a beneficial owner of securities held for the
account of the Perseus-Soros BioPharmaceutical Fund, LP.
SFM AH, LLC is the general partner of SFM Participation,
L.P. The sole managing member of SFM AH, LLC is Soros Fund
Management LLC. George Soros is the Chairman of Soros Fund
Management LLC and in such capacity may be deemed a beneficial
owner of securities held for the account of the Perseus-Soros
BioPharmaceutical Fund, LP. The address of Perseus-Soros
BioPharmaceutical Fund, LP is 888 Seventh Avenue,
30th Floor, New York, New York 10106. |
|
(7) |
Includes 35,068 shares held by Sequel Entrepreneurs
Fund III, L.P. Also includes 8,154 shares that Sequel
Limited Partnership III and Sequel Entrepreneurs
Fund III, L.P. have the right to acquire from us within
60 days of May 31, 2006 pursuant to the exercise of
outstanding warrants. Sequel Venture Partners L.L.C. is the
general partner of Sequel Limited Partnership III and
Sequel Entrepreneurs Fund III, L.P. The managers of
Sequel Venture Partners, L.L.C., Daniel Mitchell, Timothy
Conner, Thomas Washing, John Greff and Kinney Johnson, share
voting and investment authority over these shares.
Mr. Mitchell disclaims beneficial ownership of these shares
except to the extent of his proportionate pecuniary interest in
these securities. The address for all entities and individuals
affiliated with Sequel Limited Partnership III is
4430 Arapahoe Avenue, Suite 220, Boulder, CO 80303. |
|
(8) |
Includes 752,798 shares held by TPG Ventures, L.P. Jeff
Ekberg, John Viola and David Spuria share voting authority with
respect to these shares. Steve Foster, Fred Cohen, Geoffrey
Duyk, Bill McGlashan, Vivek Paul, David Bonderman, Jim Coulter
and Bill Price share investment authority over these shares.
Dr. Duyk disclaims beneficial ownership of these shares
except to the extent of his proportionate pecuniary interest in
these securities. The address for all entities and individuals
affiliated with TPG Biotechnology Partners, L.P. is 345
California Street, Suite 2600, San Francisco, CA 94104. |
|
(9) |
Includes 63,192 unvested shares which are subject to a
right of repurchase in our favor as of July 30, 2006,
25,488 shares held by Ryan D. Collins and
25,488 shares held by Brendan C. Collins, of which
Mr. Collins is custodian. |
|
|
(10) |
Christopher D. Earl does not have voting or dispositive power
with respect to any of the shares owned by Perseus-Soros
Biopharmaceutical Fund, LP. |
|
(11) |
Includes 21,241 unvested shares which are subject to a
right of repurchase in our favor as of July 30, 2006. |
|
(12) |
Includes 39,721 unvested shares which are subject to a
right of repurchase in our favor as of July 30, 2006. |
|
(13) |
Includes 74,768 shares Dr. Letendre has the right to
acquire within 60 days of May 31, 2006 through the
exercise of vested options. |
|
(14) |
Includes 35,853 shares Mr. Morrissey has the right to
acquire within 60 days of May 31, 2006 through the
exercise of vested options. |
|
(15) |
Includes shares, options and warrants described in the notes
above, as applicable to our directors and named executive
officers. Includes an aggregate of 124,154 shares subject
to a repurchase option in favor of us and an aggregate of
110,621 additional shares subject to vested options
exercisable within 60 days of May 31, 2006 held by our
directors and named executive officers. |
106
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering and the filing of our amended
and restated certificate of incorporation, our authorized
capital stock will consist of 100,000,000 shares of common
stock, par value $0.001 per share, and
5,000,000 shares of preferred stock, par value
$0.001 per share.
The following is a summary of the rights of our common stock and
preferred stock. This summary is not complete. For more detailed
information, please see our amended and restated certificate of
incorporation and bylaws, which are filed as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
Outstanding Shares. Based on 2,077,349 shares of
common stock outstanding as of May 31, 2006, the conversion
of preferred stock into 18,067,322 shares of common stock
upon the completion of this offering, the issuance of
1,781,826 shares of common stock upon the closing of this
offering in satisfaction of accumulated dividends on our
convertible preferred stock (assuming that the initial public
offering price is $10.00 per share and that the offering
closes on July 3, 2006), the issuance of
4,500,000 shares of common stock in this offering, and no
exercise of options or warrants, there will be
26,426,497 shares of common stock outstanding upon
completion of this offering. As of May 31, 2006, assuming
the conversion of all outstanding preferred stock into common
stock upon the completion of this offering, we had approximately
86 record holders of our common stock.
As of May 31, 2006, there were 1,779,318 shares of
common stock subject to outstanding options, and up to
53,012 shares of common stock subject to outstanding
warrants.
Voting Rights. Each holder of common stock is entitled to
one vote for each share on all matters submitted to a vote of
the stockholders, including the election of directors. Our
amended and restated certificate of incorporation and bylaws do
not provide for cumulative voting rights. Because of this, the
holders of a majority of the shares of common stock entitled to
vote in any election of directors can elect all of the directors
standing for election, if they should so choose.
Dividends. Subject to preferences that may be applicable
to any then outstanding preferred stock, holders of common stock
are entitled to receive dividends, if any, as may be declared
from time to time by our board of directors out of legally
available funds.
Liquidation. In the event of our liquidation, dissolution
or winding up, holders of common stock will be entitled to share
ratably in the net assets legally available for distribution to
stockholders after the payment of all of our debts and other
liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of preferred
stock.
Rights and Preferences. Holders of common stock have no
preemptive, conversion or subscription rights, and there are no
redemption or sinking fund provisions applicable to the common
stock. The rights, preferences and privileges of the holders of
common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred
stock which we may designate in the future.
Fully Paid and Nonassessable. All of our outstanding
shares of common stock are, and the shares of common stock to be
issued in this offering will be, fully paid and nonassessable.
Preferred Stock
Assuming the closing of this offering, all outstanding shares of
preferred stock will have been converted into shares of common
stock. See Note 7 to our financial statements for a
description of the currently outstanding preferred stock.
Following the conversion, our restated certificate of
incorporation will be restated to delete all references to such
shares of preferred stock. Under the amended and restated
certificate of incorporation, our board of directors will have
the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock in one or
more series, to establish from
107
time to time the number of shares to be included in each such
series, to fix the rights, preferences and privileges of the
shares of each wholly unissued series and any qualifications,
limitations or restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the
number of shares of such series then outstanding).
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of the
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing a change in our control and
may adversely affect the market price of the common stock and
the voting and other rights of the holders of common stock. We
have no current plans to issue any shares of preferred stock.
Warrants
In July 2002, we issued a warrant to purchase up to an aggregate
of 60,000 shares of our Series A preferred stock to
TBCC Funding Trust II and a warrant to purchase up to an
aggregate of 80,000 shares of our Series A preferred
stock to GATX Ventures, Inc. These warrants are immediately
exercisable at an exercise price of $1.00 per share and
expire the later of ten years from the date of grant,
July 31, 2002, or five years after the closing of this
offering. Upon completion of this offering, the warrant issued
to TBCC Funding Trust II will convert into a warrant to
purchase up to 12,234 shares of our common stock and the
warrant issued to GATX Ventures, Inc. will convert into a
warrant to purchase 16,313 shares of our common stock, with
an exercise price of $4.90 per share.
Each of these warrants for Series A preferred stock has a
net exercise provision under which its holder may, in lieu of
payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares of our Series A preferred
stock based on the fair market value of our Series A
preferred stock at the time of exercise of the warrant after
deduction of the aggregate exercise price. Each of these
warrants for Series A preferred stock also contains
provisions for the adjustment of the exercise price and the
aggregate number of shares issuable upon the exercise of the
warrant in the event of stock dividends, stock splits,
reorganizations and reclassifications and consolidations.
In December 2003, we entered into a note and warrant purchase
agreement with HealthCare Ventures VI, L.P., Morgenthaler
Partners, VII, L.P., Sequel Limited Partnership III and
Sequel Entrepreneurs Fund III, L.P. Pursuant to this
agreement, we issued warrants at three different tranches to
purchase shares of our Series C preferred stock. As of this
offering, Morgenthaler Partners, VII, L.P. has three warrants
outstanding to purchase up to an aggregate of 80,001 shares
of our Series C preferred stock, Sequel Limited
Partnership III has three warrants outstanding to purchase
up to an aggregate of 38,919 shares of our Series C
preferred stock, and Sequel Entrepreneurs Fund III,
L.P. has three warrants outstanding to purchase up to an
aggregate of 1,083 shares of our Series C preferred
stock. All of these warrants are immediately exercisable at an
exercise price of $1.25 per share and will expire the later
of ten years from the date of issuance or five years after the
closing of this offering. Upon completion of this offering, all
of these warrants will convert into warrants to purchase up to
an aggregate of 24,465 shares of our common stock at an
exercise price of $6.13 per share.
Each of these warrants for Series C preferred stock has a
net exercise provision under which its holder may, in lieu of
payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares of Series C preferred stock
based on the fair market value of our Series C preferred
stock at the time of exercise of the warrant after deduction of
the aggregate exercise price. Each of these warrants for
Series C preferred stock also contains provisions for the
adjustment of the exercise price and the aggregate number of
shares issuable upon the exercise of the warrant in the event of
stock dividends, stock splits, reorganizations and
reclassifications and consolidations.
The holders of these warrants for our Series A preferred
stock and our Series C preferred stock are entitled to
registration rights under our fourth amended and restated
stockholders agreement, as described in Registration
Rights below.
108
Registration Rights
Under our fourth amended and restated stockholders agreement,
following the completion of this offering, the holders of
19,849,148 shares of common stock and warrants to purchase
up to 53,012 shares of common stock, or their transferees,
have the right to require us to register their shares with the
SEC so that those shares may be publicly resold, or to include
their shares in any registration statement we file.
Demand Registration Rights. At any time beginning
12 months after the completion of this offering, the
holders of at least 50% of the shares having registration rights
have the right to demand that we file up to two registration
statements. In addition, at any time beginning 12 months
after the completion of this offering, the holders of at least
50% of the shares of common stock issued upon conversion of the
Series D preferred stock have the right to demand that we
file up to two registration statements. These registration
rights are subject to specified conditions and limitations,
including the right of the underwriters to limit the number of
shares included in any such registration under certain
circumstances.
Form S-3
Registration Rights. If we are eligible to file a
registration statement on
Form S-3, each
holder of shares having registration rights has the right to
demand that we file up to three registration statements for such
holder, but not more than two annually, on
Form S-3 so long
as the aggregate amount of securities to be sold under the
registration statement on
Form S-3 is at
least $1,000,000, subject to specified exceptions, conditions
and limitations.
Piggyback Registration Rights. If we register
any securities for public sale, stockholders with registration
rights will have the right to include their shares in the
registration statement. The underwriters of any underwritten
offering will have the right to limit the number of shares
having registration rights to be included in the registration
statement, but not below 30% of the total number of shares
included in the registration statement, except for this offering
in which the underwriters have excluded any shares by existing
investors.
Expenses of Registration. We will pay all expenses
relating to all demand registrations,
Form S-3
registrations and piggyback registrations, other than
underwriting discounts and commissions.
Expiration of Registration Rights. The registration
rights described above will terminate upon the earlier of either
five years following the completion of this offering or as to a
given holder of registrable securities, when such holder of
registrable securities can sell all of such holders
registrable securities in a three month period pursuant to
Rule 144 promulgated under the Securities Act.
Delaware Anti-Takeover Law and Provisions of our Amended and
Restated Certificate of Incorporation and Bylaws
Delaware Anti-Takeover Law. We are subject to
Section 203 of the Delaware General Corporation Law.
Section 203 generally prohibits a public Delaware
corporation from engaging in a business combination
with an interested stockholder for a period of three
years after the date of the transaction in which the person
became an interested stockholder, unless
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder, |
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the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of
shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by
employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer, or |
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on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual
or special meeting of stockholders, and not by written |
109
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consent, by the affirmative vote of at least
662/3
% of the outstanding voting stock which is not owned by
the interested stockholder. |
Section 203 defines a business combination to include:
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any merger or consolidation involving the corporation and the
interested stockholder, |
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any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation, |
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subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder, and |
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation. |
In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by the
entity or person.
Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws. Provisions of our amended and restated
certificate of incorporation and amended and restated bylaws,
which will become effective upon the completion of this
offering, may delay or discourage transactions involving an
actual or potential change in our control or change in our
management, including transactions in which stockholders might
otherwise receive a premium for their shares, or transactions
that our stockholders might otherwise deem to be in their best
interests. Therefore, these provisions could adversely affect
the price of our common stock. Among other things, our amended
and restated certificate of incorporation and bylaws:
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permit our board of directors to issue up to
5,000,000 shares of preferred stock, with any rights,
preferences and privileges as they may designate (including the
right to approve an acquisition or other change in our control); |
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provide that the authorized number of directors may be changed
only by resolution adopted by a majority of the authorized
number of directors constituting the board of directors; |
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum; |
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divide our board of directors into three classes; |
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require that any action to be taken by our stockholders must be
effected at a duly called annual or special meeting of
stockholders and not be taken by written consent; |
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice; |
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do not provide for cumulative voting rights (therefore allowing
the holders of a majority of the shares of common stock entitled
to vote in any election of directors to elect all of the
directors standing for election, if they should so choose); and |
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provide that special meetings of our stockholders may be called
only by the chairman of the board, our chief executive officer
or by the board of directors pursuant to a resolution adopted by
a majority of the total number of authorized directors. |
The amendment of any of the provisions of the amended and
restated certificate of incorporation would require approval by
the holders of at least
662/3
% of our then outstanding capital stock. Any adoption,
amendment or repeal of the amended and restated bylaws by the
board of directors requires the
110
approval of a majority of the authorized number of directors and
the stockholders also have the power to adopt, amend or repeal
the bylaws provided that in addition to any vote required by law
or the amended and restated certificate, such stockholder action
would require the affirmative vote of at least
662/3
% of our then outstanding capital stock.
Nasdaq National Market Listing
Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol RDYN, subject to
official notice of issuance.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company, Inc. The
transfer agent and registrars address is 59 Maiden
Lane, Plaza Level, New York, NY 10038.
111
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there has been no public
market for our common stock. Future sales of substantial amounts
of common stock in the public market could adversely affect
prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock in
the public market after the restrictions lapse could adversely
affect the prevailing market price for our common stock as well
as our ability to raise equity capital in the future.
Based on the number of shares of common stock outstanding as of
May 31, 2006, upon completion of this offering,
26,426,497 shares of common stock will be outstanding,
assuming no exercise of the underwriters over-allotment
option and no exercise of options or warrants. All of the shares
sold in this offering will be freely tradable unless held by an
affiliate of ours. Except as set forth below, the remaining
21,926,497 shares of common stock outstanding after this
offering will be restricted as a result of securities laws or
lock-up agreements.
These remaining shares will generally become available for sale
in the public market as follows:
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no restricted shares will be eligible for immediate sale upon
the completion of this offering; |
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19,372,003 restricted shares, less shares subject to a
repurchase option in our favor tied to the holders
continued service to us, which will be eligible for sale upon
lapse of the repurchase option, will be eligible for sale upon
expiration of lock-up
agreements 180 days after the date of this prospectus; and |
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the remainder of the restricted shares will be eligible for sale
from time to time thereafter upon expiration of their respective
one-year holding periods, but could be sold earlier if the
holders exercise any available registration rights. |
Rule 144
In general, under Rule 144 under the Securities Act of
1933, as in effect on the date of this prospectus, a person who
has beneficially owned shares of our common stock for at least
one year would be entitled to sell within any three-month period
a number of shares that does not exceed the greater of:
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1% of the number of shares of our common stock then outstanding,
which will equal approximately 264,265 shares immediately
after this offering; or |
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the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale. |
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k) under the Securities Act as in effect on
the date of this prospectus, a person who is not deemed to have
been one of our affiliates at any time during the 90 days
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144. 3,930,212 shares of our common stock will
qualify for resale under Rule 144(k) within 180 days
of the date of this prospectus.
Rule 701
Rule 701 under the Securities Act, as in effect on the date
of this prospectus, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions
of Rule 144, including the holding period requirement. Most
of our employees, executive officers, directors or consultants
who
112
purchased shares under a written compensatory plan or contract
may be entitled to rely on the resale provisions of
Rule 701, but all holders of Rule 701 shares are
required to wait until 90 days after the date of this
prospectus before selling their shares. However, substantially
all Rule 701 shares are subject to
lock-up agreements as
described below and under Underwriting and will
become eligible for sale at the expiration of those agreements.
Lock-Up Agreements
We, along with our directors, executive officers and
substantially all of our other stockholders, optionholders and
warrantholders, have agreed with the underwriters that for a
period of 180 days following the date of this prospectus,
we or they will not offer, sell, assign, transfer, pledge,
contract to sell or otherwise dispose of or hedge any shares of
our common stock or any securities convertible into or
exchangeable for shares of common stock, subject to specified
exceptions. Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley & Co. Incorporated may,
in their sole discretion, at any time without prior notice,
release all or any portion of the shares from the restrictions
in any such agreement.
Registration Rights
Upon completion of this offering, the holders of
19,849,148 shares of our common stock and warrants to
purchase up to 53,012 shares of our common stock will be
entitled to rights with respect to the registration of their
shares under the Securities Act, subject to the
180-day
lock-up arrangement
described above. Registration of these shares under the
Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act, except
for shares purchased by affiliates, immediately upon the
effectiveness of this registration. Any sales of securities by
these stockholders could have a material adverse effect on the
trading price of our common stock. See Description of
Capital Stock Registration Rights.
Equity Incentive Plans
We intend to file with the SEC a registration statement under
the Securities Act covering the shares of common stock reserved
for issuance under our 2006 Equity Incentive Plan and our 2006
Employee Stock Purchase Plan. The registration statement is
expected to be filed and become effective as soon as practicable
after the completion of this offering. Accordingly, shares
registered under the registration statement will be available
for sale in the open market following its effective date,
subject to Rule 144 volume limitations and the
180-day
lock-up arrangement
described above, if applicable.
113
UNDERWRITERS
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated are acting as
representatives of the underwriters named below. Subject to the
terms and conditions described in a purchase agreement among us
and the underwriters, we have agreed to sell to the
underwriters, and the underwriters severally have agreed to
purchase from us the number of shares of common stock listed
opposite their names below:
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Number of | |
Underwriters |
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Shares | |
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Morgan Stanley & Co. Incorporated
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Cowen and Company, LLC
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Pacific Growth Equities, LLC
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Total
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4,500,000 |
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The underwriters have agreed to purchase all of the shares sold
under the purchase agreement if any of these shares are
purchased. If an underwriter defaults, the purchase agreement
provides that the purchase commitments of the non-defaulting
underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities
Act of 1933, or to contribute to payments the underwriters may
be required to make in respect of any such liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
purchase agreement, such as the receipt by the underwriters of
officers certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters
propose initially to offer the shares of common stock directly
to the public at the initial public offering price listed on the
cover page of this prospectus and to dealers at that price, less
a concession not in excess of
$ per
share. The underwriters may allow, and the dealers may reallow,
a discount not in excess of
$ per
share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us. The
information assumes either no exercise or full exercise by the
underwriters of their over-allotment option.
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Per Share | |
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Without Option | |
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With Option | |
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Public offering price
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$ |
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$ |
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$ |
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Underwriting discount
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$ |
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$ |
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$ |
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Proceeds, before expenses, to us
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$ |
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$ |
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$ |
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The expenses of the offering, not including the underwriting
discount, are estimated at $1,600,000 and are payable by us.
114
Over-Allotment Option
We have granted an option to the underwriters to purchase up to
675,000 additional shares at the public offering price less the
underwriting discount. The underwriters may exercise this option
for 30 days from the date of this prospectus solely to
cover any over-allotments. If the underwriters exercise this
option, each will be obligated, subject to conditions contained
in the purchase agreement, to purchase a number of additional
shares proportionate to that underwriters initial amount
reflected in the above table.
No Sales of Similar Securities
We and our executive officers, directors, stockholders, warrant
holders and option holders, who hold an aggregate of
23,481,226 shares of our common stock, on a fully diluted
basis, have agreed, with exceptions, not to sell or transfer any
common stock for 180 days after the date of this prospectus
without first obtaining the written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated. Specifically, we and these
other individuals have agreed not to directly or indirectly:
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offer, pledge, sell or contract to sell any common stock; |
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sell any option or contract to purchase any common stock; |
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purchase any option or contract to sell any common stock; |
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grant any option, right or warrant for the sale of any common
stock; |
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otherwise dispose of or transfer any common stock; |
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file or cause to be filed any registration statement related to
the common stock; or |
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enter into any swap or other arrangement or any transaction that
transfers, in whole or in party, directly or indirectly, any of
the economic consequences of ownership of any common stock,
whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise. |
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for common
stock. It also applies to common stock owned now or acquired
later by the person executing the agreement or for which the
person executing the agreement later acquires the power of
disposition.
Quotation on the Nasdaq National Market
We expect the shares of common stock to be approved for
quotation on the Nasdaq National Market, subject to notice of
issuance, under the symbol RDYN.
Before this offering, there has been no public market for shares
of our common stock. The initial public offering price will be
determined through negotiations among us, the representatives
and the lead managers. In addition to prevailing market
conditions, the factors to be considered in determining the
initial public offering price are:
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the valuation multiples of publicly traded companies that the
representatives and the lead managers believe to be comparable
to us; |
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our financial information; |
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the history of, and the prospects for, our company and the
industry in which we compete; |
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an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues; |
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the present state of our development; and |
115
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours. |
An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representatives
may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain
that price.
If the underwriters create a short position in the common stock
in connection with the offering, i.e., if they sell more shares
than are listed on the cover of this prospectus, the
representatives may reduce that short position by purchasing
shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common
stock to stabilize its price or to reduce a short position may
cause the price of the common stock to be higher than it might
be in the absence of such purchases.
The representatives may also impose a penalty bid on
underwriters and selling group members. This means that if the
representatives purchase shares in the open market to reduce the
underwriters short position or to stabilize the price of
such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who
sold those shares. The imposition of a penalty bid may also
affect the price of the shares in that it discourages resales of
those shares.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters makes any representation that the representatives
or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued
without notice.
Electronic Distribution
A prospectus in electronic format will be made available on the
websites maintained by one or more of the underwriters of this
offering. Other than the electronic prospectus, the information
on the websites of the underwriters is not part of this
prospectus. The underwriters may agree to allocate a number of
shares to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated to
underwriters that may make Internet distributions on the same
basis as other allocations.
Other Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us.
They have received customary fees and commissions for these
transactions.
116
LEGAL MATTERS
The validity of the shares of common stock being offered by this
prospectus will be passed upon for us by Cooley
Godward llp
, Broomfield, Colorado. The underwriters are being
represented by Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
EXPERTS
The financial statements of Replidyne, Inc. as of
December 31, 2004 and 2005, and for each of the years in
the three-year period ended December 31, 2005 and for the
period from December 6, 2000 (inception) to
December 31, 2005, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP,
independent registered public accounting firm, appearing
elsewhere herein, and upon the authority of said firm as experts
in accounting and auditing.
117
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares
of common stock being offered by this prospectus. This
prospectus does not contain all of the information in the
registration statement and its exhibits. For further information
with respect to Replidyne and the common stock offered by this
prospectus, we refer you to the registration statement and its
exhibits. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are
not necessarily complete, and in each instance, we refer you to
the copy of the contract or other document filed as an exhibit
to the registration statement. Each of these statements is
qualified in all respects by this reference.
You can read our SEC filings, including the registration
statement, over the Internet at the SECs website at
http://www.sec.gov. You may also read and copy any document we
file with the SEC at its public reference facilities at
100 F Street, NE, Washington, D.C. 20549. You may also
obtain copies of these documents at prescribed rates by writing
to the Public Reference Section of the SEC at 100 F Street,
NE, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for
further information on the operation of the public reference
facilities.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934, as amended, and we will file reports, proxy
statements and other information with the SEC. These reports,
proxy statements and other information will be available for
inspection and copying at the public reference room and web site
of the SEC referred to above. We also maintain a website at
http://www.Replidyne.com, at which you may access these
materials free of charge as soon as reasonably practicable after
they are electronically filed with, or furnished to, the SEC.
The information contained in, or that can be accessed through,
our website is not part of this prospectus.
118
Replidyne, Inc.
Index to Financial Statements
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-9 |
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F-10 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Replidyne, Inc.:
We have audited the accompanying balance sheets of Replidyne,
Inc. (a development stage enterprise) as of December 31,
2004 and 2005, and the related statements of operations;
preferred stock, stockholders deficit, and comprehensive
loss; and cash flows for each of the years in the three-year
period ended December 31, 2005 and for the period from
December 6, 2000 (inception) to December 31,
2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Replidyne, Inc. (a development stage enterprise) as of
December 31, 2004 and 2005, and the results of its
operations and its cash flows for each of the years in the
three-year period ended December 31, 2005 and for the
period from December 6, 2000 (inception) to
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
Boulder, Colorado
April 4, 2006, except as to
Note 1(e), as to which
the date is June 26, 2006
F-2
REPLIDYNE, INC.
(a development stage enterprise)
BALANCE SHEETS
(in thousands, except share and per share amounts)
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December 31, | |
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March 31, | |
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2004 | |
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2005 | |
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2006 | |
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(unaudited) | |
ASSETS
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Current assets:
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Cash and cash equivalents
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$ |
4,640 |
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$ |
4,353 |
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$ |
32,385 |
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Short-term investments
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22,378 |
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55,067 |
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77,515 |
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Receivable from Forest Laboratories
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2,140 |
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Notes receivable from officers
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375 |
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