UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31, 2008
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number 000-23223
CURAGEN CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Delaware
|
|
06-1331400
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
|
322 East Main Street,
Branford, Connecticut
|
|
06405
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrant’s telephone number, including area code: (203) 481-1104
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
|
Common Stock, $0.01 par value
|
|
NASDAQ Global Market
|
|
(excluding Preferred Stock Purchase Rights, $0.01 par value)
|
|
|
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
¨
No
x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes
¨
No
x
The aggregate market value of the registrant’s voting shares of common stock held by non-affiliates of the registrant on June 30,
2008, based on $0.96 per share, the last reported sale price on the NASDAQ Global Market on that date, was $53,957,363.
The number of
shares outstanding of the registrant’s common stock as of February 28, 2009 was 57,137,034.
Documents Incorporated by Reference
Portions of the Registrant’s definitive proxy statement for its 2009 Annual Meeting of Stockholders are incorporated by reference
into Part III of this report.
CURAGEN CORPORATION
FORM 10-K
INDEX
PART I
Overview
We are a biopharmaceutical development company dedicated to improving the lives of patients by developing novel therapeutics for the treatment of cancer.
We have taken a systematic approach to identifying and validating promising therapeutics and are now focused on developing and advancing a potential drug candidate, CR011-vcMMAE, through clinical development
We are a Delaware corporation. We were incorporated in 1991 and began operations in 1993. Our principal executive office is located at 322 East Main
Street, Branford, Connecticut 06405.
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and, accordingly, file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be read and copied at the public reference facilities
maintained by the Securities and Exchange Commission at the Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the
Securities and Exchange Commission.
Our Internet address is www.curagen.com. We are not including the information contained on our web
site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Strategy
Our goal is to generate value for our
stockholders by focusing our resources on advancing our cancer treatment CR011-vcMMAE, or CR011, through clinical development and towards commercialization, which may include establishing partnerships with pharmaceutical and biotechnology companies
for the development and commercialization of this therapeutic. In February 2009, we announced our plan to undertake a review of strategic alternatives that could enhance shareholder value. These alternatives range from selling or licensing
CR011, to acquiring additional assets or business lines, to selling the company. There is no assurance that this process will result in any changes to our current business plan or lead to any specific action or transaction.
CR011-vcMMAE for the Treatment of Cancer
CR011 is a
fully-human monoclonal antibody resulting from our collaboration with Amgen Fremont that utilizes antibody-drug conjugate, or ADC, technology licensed from Seattle Genetics to attach monomethylauristatin E, or vcMMAE, to yield CR011-vcMMAE. CR011
targets glycoprotein NMB, or GPNMB, a protein located specifically on the surface of cells including melanoma. After CR011-vcMMAE binds to the target protein, the ADC is transported inside the cancer cell where MMAE is cleaved from the antibody and
activated in the cell.
CR011-vcMMAE Clinical Development Program
In June 2006, we initiated a Phase I/II open-label, multi-center, dose escalation study evaluating the safety, tolerability and pharmacokinetics of CR011-vcMMAE for patients with unresectable Stage III or Stage IV
melanoma who have failed no more than one prior line of cytotoxic therapy. We are currently evaluating CR011-
1
vcMMAE in clinical trials for the treatment of patients with advanced melanoma and for the treatment of patients with metastatic breast cancer, as further
described in the table below.
|
|
|
|
|
|
|
|
|
|
|
Indication
|
|
Phase
|
|
Regimen
|
|
Initiation of Patient
Enrollment
|
|
Status
|
|
Metastatic melanoma
|
|
I/II
|
|
0.03 to 2.63 mg/kg every three weeks in Phase I; 1.88 mg/kg every three weeks in Phase II
|
|
June 2006
|
|
Enrollment completed. Updated results anticipated in the first half of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
Weekly and two out of every three week regimens
|
|
Sept 2007
|
|
Preliminary results anticipated in the first half of 2009.
|
|
|
|
|
|
|
|
Breast cancer
|
|
I/II
|
|
Every three weeks regimen
|
|
June 2008
|
|
Enrollment ongoing. Preliminary results anticipated in the first half of 2009.
|
Phase II Trial Results for the Treatment of Metastatic Melanoma Cancer
In June 2006, we initiated a Phase I/II open-label, multi-center, dose escalation study evaluating the safety, tolerability and pharmacokinetics of
CR011-vcMMAE for patients with unresectable Stage III or Stage IV melanoma who have failed no more than one prior line of cytotoxic therapy.
On June 1, 2008, we announced the presentation of results from this ongoing study at the 2008 American Society of Clinical Oncology, or ASCO, Annual Meeting. As of April 4, 2008, forty patients were treated in this first-in-man
Phase I/II study, including a total of 32 patients in the Phase I dose-escalation portion of the trial, that aimed to identify the safety and maximum tolerated dose, or MTD, of CR011-vcMMAE, and 8 patients in the ongoing Phase II portion of the
study.
During Phase I, doses of CR011-vcMMAE between 0.03 mg/kg to 2.63 mg/kg were evaluated and generally well tolerated, with rash and
neutropenia emerging at higher doses. Two dose-limiting toxicities, consisting of rash, were reported at the highest dose evaluated, and therefore the per-protocol MTD was determined to be 1.88 mg/kg administered intravenously (IV) once every three
weeks. The activity of CR011-vcMMAE appeared dose dependent with 50% of those patients treated with doses at or above 1.34 mg/kg exhibiting tumor shrinkage and 64% progression-free at 12 weeks compared to 17% with tumor shrinkage and 28%
progression-free at 12 weeks for patients treated at lower doses. One confirmed partial response was reported in Phase I. Based on the results of the Phase I portion of the trial, the dose selected for the Phase II portion was 1.88 mg/kg
administered intravenously every three weeks.
On September 11, 2008, we announced the completion of enrollment into the Phase II
portion of the melanoma clinical trial. Preliminary results from the trial were presented on November 1, 2008 at the 2008 International Society for Biologic Therapy of Cancer (iSBTc) Annual Meeting.
Thirty-six patients were enrolled in the Phase II portion of the trial. Of the patients enrolled, 94% had Stage IV disease, of which two-thirds were
classified as M1c, the poorest risk group. At the time of the data cutoff for this analysis (September 19, 2008), 31 patients had at least one efficacy assessment available, and 18 patients were continuing to receive ongoing treatment in the study.
The overall median progression-free survival, orPFS, was approximately 4.5 months. RECIST-defined partial responses were reported in 3 patients, 2 of whom were ongoing, and an unconfirmed partial response was noted in 1 patient. Nineteen patients
had stable disease, 14 of whom were ongoing, with tumor shrinkage observed in 12 of these patients. As expected based upon the expression of GPNMB and as observed in Phase I, dermatologic adverse events consisting of rash, alopecia, and
2
pruritus were the most common toxicities in this study. A preliminary exploratory analysis assessing the relationship of rash and PFS was performed and
showed a trend toward longer PFS in patients that developed Grade 2 or higher rash (n=13). Other adverse events included fatigue, diarrhea, anorexia and nausea. Grade 3 or 4 neutropenia was observed in 7 patients (22%).
We are also enrolling patients into the Phase I portion of the melanoma trial to evaluate more frequent dosing schedules of CR011-vcMMAE, including a
weekly and a two out of every three-week regimen, to explore if more frequent administration can provide additional activity in patients with metastatic melanoma. We anticipate presenting updated results from both the Phase I and Phase II portions
of the trial during the first half of 2009.
Phase II Trial Results for the Treatment of Breast Cancer
On June 25, 2008, we announced the initiation of patient dosing in an open-label, multi-center Phase II study of CR011-vcMMAE administered
intravenously once every three weeks to patients with locally-advanced or metastatic breast cancer who have received prior therapy. We expect to enroll up to approximately 40 patients to confirm the MTD in this population and to assess efficacy
using a Simon 2-Stage design with an endpoint of progression-free rate at 12 weeks. We anticipate presenting preliminary results from this study during the first half of 2009.
Earlier Stage Assets
In addition, we
have several potential preclinical protein, antibody, and antibody-drug conjugates that have been evaluated in animal studies. We will continue to evaluate strategic opportunities for these assets through partnerships, licensing, or the filing of
investigational new drug, or IND, applications in the future.
Research and Development
Research and Development Expenses
Research and development expenses for the years ending 2008, 2007 and 2006 were $15.1 million, $36.8 million and $44.0 million, respectively. Our research and development expenses consist of investments in the manufacturing, and clinical
development of our drug candidate CR011-vcMMAE. For additional details regarding our research and development expenses, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is
included elsewhere in this Annual Report on Form 10-K.
Strategic Collaborations
We have two primary collaborative partners, Amgen Fremont and Seattle Genetics, from whom we license technology which enables our development of
CR011-vcMMAE.
Amgen Fremont (formerly Abgenix)
In December 1999, we entered into a strategic collaboration with Abgenix to develop fully-human monoclonal antibody therapeutics. We amended and restructured this alliance in November 2000 and April 2004. The initial
phase of the agreement, involving the identification of targets and the initiation of antibody generation, was completed in June 2005. In April 2006, Amgen Inc. acquired Abgenix, and assumed all obligations of the agreement. Under this agreement, we
have advanced CR011-vcMMAE into clinical development. Under our agreement we are obligated to pay milestones to Amgen for the advancement of CR011-vcMMAE through clinical trials and regulatory approval. In addition, we are obligated to pay royalties
to Amgen based upon net sales of CR011-vcMMAE once commercialized. In return, Amgen is obliged to pay reciprocal milestones and royalties on antibody therapeutics from our collaboration which they develop.
3
Seattle Genetics
In June 2004, we announced the licensing of Seattle Genetics’ proprietary ADC technology for use with up to two of our fully-human monoclonal antibodies. We paid an upfront fee of $2.0 million for access to the
ADC technology for use with CR011-vcMMAE, our first fully-human monoclonal antibody program to utilize this technology which we announced in October 2004. We announced in July 2006 that an IND was filed with the Federal Drug Administration, or FDA,
for CR011-vcMMAE and patient enrollment was initiated in a Phase I clinical trial.
We are responsible for research, product development,
manufacturing and commercialization under this collaboration. We also pay maintenance and material supply fees for ongoing assistance provided by Seattle Genetics in developing ADC products. Under the agreement, we are obligated to pay milestones to
Seattle Genetics for the advancement of CR011-vcMMAE through clinical trials and regulatory approval. In addition, we are obligated to pay royalties to Seattle Genetics based upon Net Sales of CR011-vcMMAE once commercialized. We may terminate any
license under the agreement by providing not less than 90 days prior written notice to Seattle Genetics
TopoTarget
On April 21, 2008, we entered into a transfer and termination agreement with our former collaboration partner TopoTarget A.S, or TopoTarget, to
transfer our ownership and development rights to belinostat, a Phase I/II HDAC Inhibitor, and any other HDAC Inhibitors. There was no book value for belinostat. In consideration for the transfer, we received $24.6 million in net cash proceeds and
5 million shares of TopoTarget common stock, valued at $11.8 million as of the date of the Transfer Agreement based on the closing price of TopoTarget common stock (in DKK on the Copenhagen Exchange) on the date of the sale, April 21,
2008, multiplied by the exchange rate for the same date. In addition, we are eligible to receive $6.0 million in potential payments on future net sales and sublicenses of belinostat.
On June 3, 2008, we sold the 5 million shares of TopoTarget common stock for cash proceeds of $11.8 million. In connection with the Transfer
Agreement, we also entered into a Transition Services Agreement, or TSA, dated April 21, 2008 with TopoTarget, pursuant to which we agreed to provide certain regulatory and administrative services to TopoTarget for fees payable by TopoTarget.
All services under the TSA terminated as of December 31, 2008.
Competition
We are subject to significant competition in the development and commercialization of new drugs from organizations that are pursuing strategies,
approaches, technologies and products that are similar to our own. Many of the organizations competing with us have greater capital resources, research and development staffs, facilities, and marketing capabilities. We face competition from a number
of biotechnology and pharmaceutical companies with products in preclinical development, clinical trials, or approved for conditions identical or similar to the one we are pursuing.
We are aware of specific companies that are developing antibody drug conjugates (ADCs) for use in the treatment of cancer. Trastuzumab-DM1 (T-DM1) is a
first-in-class HER2 antibody drug conjugate comprised of Genentech’s trastuzumab antibody linked to ImmunoGen’s cell-killing agent, DM1. T-DM1 combines anti-HER2 activity and targeted intracellular delivery of the potent anti-microtubule
agent, DM1 (a maytansine derivative). A Phase III clinical trial evaluating T-DM1 for second-line HER2-positive metastatic breast cancer is planned and may be competitive with our developmental program in the breast cancer indication. Other ADCs are
in development by our collaborator of the MMAE technology, Seattle Genetics, using monomethylaurastatin derivatives as the cell-killing agent in hematologic cancers and other cancers. Marketed products that are used in the treatment of melanoma
include dacarbazine, temozolamide, and interleukin-2. In addition, several other pharmaceutical and biotechnology companies are engaged in research and development for the treatment of
4
melanoma. Many more products are on the market or in development for the treatment of metastatic breast cancer. How CR011 will compete with these other
commercial and development stage products in metastatic melanoma and breast cancer is not clear at this time.
Intellectual Property
Our business and competitive position depends in part on our ability to protect our gene sequences, the proteins they encode, fully-human monoclonal
antibodies raised against them, small molecules, other products, information systems and proprietary databases, software and other methods and technology. We have filed, and continue to file, patent applications that seek to protect commercially
significant aspects of our product candidates. Our patent portfolio for CR011 consists of approximately 13 pending patent applications worldwide which, if approved, would have estimated U.S. patent expiry dates through 2025.
CuraGen
®
and our other trademarks
mentioned in this report are the property of CuraGen Corporation. All other trademarks or trade names referred to herein are the property of their respective owners.
Government Regulation and Product Approval
Government authorities in the United States, at the
federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacturing, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of
products such as those we are developing.
United States Government Regulation
In the United States, the information that must be submitted to the FDA in order to obtain approval to market a new drug varies depending on whether the
drug is a new product whose safety and effectiveness has not previously been demonstrated in humans or a drug whose active ingredient(s) and certain other properties are the same as those of a previously approved drug. A new drug will typically
follow the new drug application, or NDA, route and a new biologic will typically follow the biologic license application, or BLA, route.
NDA and BLA Approval Processes
In the United States, the FDA regulates drugs and biologics under the Federal Food, Drug and
Cosmetic Act, or FFDCA, and in the case of biologics, also under the Public Health Service Act, and the FDA’s implementing regulations.
The process required by the FDA before a drug or biologic may be marketed in the United States generally involves the following:
|
|
•
|
|
completion of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory Practices;
|
|
|
•
|
|
submission of an IND which must become effective before human clinical trials may begin;
|
|
|
•
|
|
performance of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCPs, to establish the safety and efficacy of the
proposed drug for its intended use;
|
|
|
•
|
|
submission to the FDA of an NDA or BLA;
|
|
|
•
|
|
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good
manufacturing practice, or cGMP, to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity or to meet standards designed to ensure the biologic’s continued safety, purity
and potency; and
|
|
|
•
|
|
FDA review and approval of the NDA or BLA.
|
5
The results of product development, preclinical studies and clinical studies, along with descriptions of
the manufacturing process, analytical tests conducted on the chemistry of the drug, results of chemical studies and other relevant information are submitted to the FDA as part of an NDA or BLA requesting approval to market the product. The FDA
reviews all NDAs and BLAs submitted before it accepts them for filing. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA may refuse to approve an NDA or BLA if the applicable regulatory criteria are not satisfied
or may require additional clinical or other data. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant to assure and preserve the
product’s identity, strength, quality and purity. The FDA reviews a BLA to determine, among other things, whether the product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards
designed to assure the product’s continued safety, purity and potency. Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is manufactured.
Expedited review and approval
The
FDA has various programs, including fast track, priority review, and accelerated approval, that are intended to expedite or simplify the process for reviewing drugs, and/or provide for approval on the basis of surrogate endpoints. Generally, drugs
that may be eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that offer meaningful benefits over existing treatments, however, these programs do not
affect the standards for approval. Fast track designation applies to the combination of the product and the specific indication for which it is being studied. As a condition of approval, the FDA may require that a sponsor of a drug receiving
accelerated approval perform post-marketing clinical trials.
Orphan drug
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease
or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United
States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such
designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for seven years.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory standards is not maintained or if problems occur after
the product reaches the market. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA
may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing
programs.
The Clinical Trial Processes
We currently have one product, CR011-vcMMAE, in Phase I/II stages of clinical trial development. All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with
GCPs regulations. Human clinical trials are typically conducted in three sequential phases that may overlap or be combined and are as follows:
|
|
•
|
|
Phase I:
The drug candidate is initially introduced into healthy human volunteer subjects or patients with the disease. These studies are designed to
determine the safety and side effects associated with increasing dosages, absorption, metabolism, distribution and excretion, pharmacologic and mechanism
|
6
|
|
of action of the drug candidate in humans, and, if possible, to gain early evidence of effectiveness. Sufficient information about a drug candidate’s
pharmacokinetics and pharmacological effects should be obtained to permit the design of well-controlled, scientifically valid, Phase II studies;
|
|
|
•
|
|
Phase II:
Involves clinical studies conducted to evaluate the effectiveness of the drug candidate for a particular indication in patients with the disease or
condition under study and to determine the common short-term side effects and risks associated with the drug candidate. These studies are typically closely monitored and conducted in a relatively small number of patients, usually involving no more
than several hundred patients; and
|
|
|
•
|
|
Phase III:
Clinical trials are performed after preliminary evidence suggesting effectiveness of the drug candidate has been obtained, and are intended to
generate additional information about the drug candidate’s effectiveness and safety that is required to evaluate the overall benefit-risk relationship of the drug candidate and to provide an adequate basis for physician labeling. The studies
may include anywhere from several hundred to several thousand subjects.
|
Concurrent with clinical trials, companies
usually complete additional animal studies. Companies must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with cGMP requirements.
The manufacturing process must be capable of consistently producing quality batches of the product candidate and the manufacturer must develop methods for testing the quality, purity and potency of the final drugs.
Foreign Regulation
In addition to
regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of
a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter
than that required for FDA approval.
Under European Union regulatory systems, we may submit marketing authorization applications either
under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology and optional for those which are highly innovative, provides for the grant of a single marketing authorization
that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under the decentralized procedure, the holder of a national marketing authorization may submit an
application to the remaining member states. Within 90 days of receiving the applications and assessments report each member state must decide whether to recognize approval. If a member state does not recognize the marketing authorization, the
disputed points are eventually referred to the European Commission, whose decision is binding on all member states. As in the United States, we may apply for designation of our products as orphan drug for the treatment of a specific indication in
the European Union before the application for marketing authorization is made. Orphan drugs in Europe enjoy economic and marketing benefits, including a 10-year market exclusivity period for the approved indication, but not for the same drug, unless
another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan-designated product.
Employees
As of December 31, 2008, we had 16 full and part-time employees. Our employees include scientists, clinicians, physicians, accountants
and lawyers. We believe that we maintain good relationships with our employees. We believe that our future success will depend in large part on our ability to attract and retain experienced and skilled employees.
7
Statements
contained or incorporated by reference in this Annual Report on Form 10-K that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates,
forecasts, and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding results of operations, selling, general and administrative expenses, research and development expenses, the
sufficiency of our cash for future operations, and the success of our preclinical, clinical and development programs. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,”
“will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms.
We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to
differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. If any of the following risks actually occur, our business, financial condition, results of operations or liquidity would likely suffer.
Risks Related to Our Business
We currently
have only one significant asset (other than cash), which is CR011. We are currently considering strategic alternatives ranging from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. As a result,
the nature of our business could change significantly and our future is highly uncertain.
CR011 is currently our only significant asset
(other than cash), and as a result the future of our company is heavily dependent on the future progress of CR011, which is difficult to predict. If future clinical trial results for CR011 do not warrant continuing its development, our business
would be materially and adversely affected and we could be left with no development programs and no prospects of developing any in the future. In addition, in February 2009, we announced our plan to undertake a review of strategic alternatives for
the company. These alternatives range from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. It is impossible to predict whether this process will result in any changes to our current business
plans or lead to any specific action or transaction, or what such changes, actions or transactions might be if any do occur as a result of this process. As a result, the nature of our business could change significantly and our future is highly
uncertain.
We have a history of operating losses and expect to incur operating losses in the foreseeable future. We do not expect to have a meaningful
source of recurring revenue in the near future.
We have incurred losses since inception, except for 2007 and 2008, both years in which
we had non-recurring transactions which resulted in net income. We generated net income of $24.8 million in 2008 as a result of the sale of belinostat to TopoTarget and gains on the extinguishment of our convertible subordinated debt, and we also
generated net income of $25.4 million in 2007 principally resulting from the sale of our former majority-owned subsidiary 454 Life Sciences Corporation, or 454. We incurred a net loss of $59.8 million in 2006. As of December 31, 2008, we had an
accumulated deficit of $462.8 million. We expect to continue to incur operating losses for the foreseeable future. We anticipate incurring additional losses related to investments in CR011-vcMMAE and do not expect to have a meaningful source of
recurring revenue in the near future.
8
We can not ensure that our existing cash and investment balances will be sufficient to meet our requirements for the
future.
We believe that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our
requirements through 2011. We consider our operating expenditures to be crucial to our future success, and by continuing to make investments in CR011-vcMMAE, we believe that we are building value for our stockholders. The adequacy of our available
funds to meet our future operating and capital requirements will depend on many factors. These factors include: the number, breadth, progress and results of our research, product development and clinical programs; the costs and timing of obtaining
regulatory approvals for any of our products; in-licensing and out-licensing of pharmaceutical products; and costs incurred in enforcing and defending our patent claims and other intellectual property rights.
While we will continue to explore alternative sources for financing our business activities, including the possibility of private strategic-driven common
stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed, particularly in light of the current economic environment, or that our actual cash requirements will not be greater than anticipated.
In appropriate strategic situations, we may seek financing from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development.
However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market
pharmaceutical products, and may be unable to continue operations. This result could cause our stockholders to lose all or a substantial portion of their investment.
Our drug candidates are still in development and remain subject to clinical testing and regulatory approval. If we are unable to successfully develop and test our drug candidates, we will not be successful.
To date, we have not marketed, distributed or sold any drug candidates. The success of our business depends primarily upon our ability to
develop and commercialize our drug candidates successfully. Our only clinical stage drug candidate is CR011-vcMMAE, which is currently in Phase II clinical trials. Further development of our preclinical candidates will be limited in the foreseeable
future due to our decision to focus our resources on the development of CR011-vcMMAE. Our drug candidates must satisfy rigorous standards of safety and efficacy before they can be approved for sale. To satisfy these standards, we must engage in
expensive and lengthy testing and obtain regulatory approval of our drug candidates. Despite our efforts, our drug candidates may not:
|
|
•
|
|
offer therapeutic or other improvement over existing comparable drugs;
|
|
|
•
|
|
be proven safe and effective in clinical trials;
|
|
|
•
|
|
meet applicable regulatory standards;
|
|
|
•
|
|
be capable of being produced in commercial quantities at acceptable costs; or
|
|
|
•
|
|
be successfully commercialized.
|
Positive results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and promising results from early clinical trials of a drug candidate may not be replicated in later
clinical trials. For example, in the fourth quarter of 2007, we decided to discontinue the development of velafermin, a protein we were investigating for the prevention of oral mucositis in cancer patients receiving chemotherapy, after reviewing and
evaluating the results of Phase II clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage
development. Accordingly, the results from the completed preclinical studies and clinical trials and ongoing clinical trials for CR011-vcMMAE and our other potential future drug candidates may not be predictive of the safety, efficacy or dosing
results we may obtain in later stage trials. We do not expect any of our drug candidates to be commercially available for at least several years.
9
We may not be able to execute our business strategy if we are unable to enter into alliances with other companies that
can provide capabilities and funds for the development and commercialization of our drug candidates. If we are unsuccessful in forming or maintaining these alliances on favorable terms, our business may not succeed.
We have entered into collaboration arrangements with several companies for the research, development and commercialization of our drug candidates, and we
may enter into additional collaborative arrangements in the future. For example, we may enter into alliances with major biotechnology or pharmaceutical companies to jointly develop specific drug candidates and to jointly commercialize them if they
are approved. We may not be successful in entering into any such alliances on favorable terms. Even if we do succeed in securing such alliances, we may not be able to maintain them if, for example, development or approval of a drug candidate is
delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering into collaboration agreements could delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the
market. Any such delay related to our collaborations could adversely affect our business.
We may also depend on our alliances with other
companies to provide substantial additional funding for development and potential commercialization of our drug candidates. We may not be able to obtain funding on favorable terms from these alliances, and if we are not successful in doing so, we
may not have sufficient funds to develop a particular drug candidate internally, or to bring drug candidates to market. Failure to bring our drug candidates to market will prevent us from generating sales revenues, and this may substantially harm
our business.
We rely on third parties to conduct our clinical trials and provide other services, and those third parties may not perform
satisfactorily, including failing to meet established deadlines for the completion of such services.
We do not have the ability to
independently conduct some preclinical studies and the clinical trials for our drug candidates, and we rely on third parties such as contract laboratories, contract research organizations, medical institutions and clinical investigators to design
and conduct these studies and our clinical trials. Our reliance on these third parties reduces our control over these activities. Accordingly, these third-party contractors may not complete activities on schedule, or may not conduct the studies of
our clinical trials in accordance with regulatory requirements of our trial design. To date, we believe our contract research organizations and other similar entities with which we are working have performed well. However, if these third parties do
not successfully carry out their contractual duties or meet expected deadlines, we may be required to replace them. Although we believe that there are a number of other third-party contractors we could engage to continue these activities, it may
result in delays. Accordingly, our efforts to obtain regulatory approvals for and commercialize our drug candidates may be delayed.
In
addition, our ability to bring our future products to market depends on the quality and integrity of the data we present to regulatory authorities in order to obtain marketing authorizations. We cannot guarantee the authenticity or accuracy of data
compiled by third parties, nor can we be certain that such data has not been fraudulently generated. The failure of these third parties to carry out their obligations would materially adversely affect our ability to develop and market new products
and implement our strategies.
We currently depend on third-party manufacturers to produce our clinical drug supplies and intend to rely upon
third-party manufacturers to produce commercial supplies of any approved drug candidates. If, in the future, we manufacture any of our drug candidates, we will be required to incur significant costs and devote significant efforts to establish and
maintain these capabilities.
We have relied upon third parties to produce material for clinical testing purposes and intend to continue
to do so in the future. Although we believe that we will not have any material supply issues, we cannot be certain
10
that we will be able to obtain long-term supplies of those materials on acceptable terms, if at all. We also expect to rely upon third parties to produce
materials required for the commercial production of our drug candidates if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be
able to complete development of our drug candidates or market them. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured drug candidates ourselves, including reliance on the third party for
regulatory compliance and quality assurance, the possibility of breach of a manufacturing agreement by the third party because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third party, based
on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our drug candidates be manufactured according to cGMP regulations. Any failure by us or our third-party
manufacturers to comply with cGMP and/or our failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval of any of our drug candidates. In addition, such failure could be the basis for action
by the FDA to withdraw approvals for drug candidates previously granted to us and for other regulatory action.
We currently rely on a
limited number of manufacturers for the clinical supplies of our antibody, andADC drug candidates and do not currently have contractual relationships for redundant supply or a second source for any of these drug candidates. To date, our third-party
manufacturers have met our manufacturing requirements, but we cannot assure that they will continue to do so. Any performance failure on the part of our existing or future manufacturers could delay clinical development or regulatory approval of our
drug candidates or commercialization of any approved products. If for some reason our current contract manufacturers cannot perform as agreed, we may be required to replace them. Although we believe there are a number of potential replacements as
our manufacturing processes are not manufacturer specific, we may incur added costs and delays in identifying and qualifying any such replacements. Furthermore, although we generally do not begin a clinical trial unless we believe we have a
sufficient supply of a drug candidate to complete the trial, any significant delay in the supply of a drug candidate for an ongoing trial due to the need to replace a third-party manufacturer could delay completion of the trial.
We may in the future elect to manufacture certain of our drug candidates in our own manufacturing facilities. If we do so, we will require substantial
additional funds and need to recruit qualified personnel in order to build or lease and operate any manufacturing facilities.
Because we have limited
experience in developing, commercializing and marketing products, we may be unsuccessful in our efforts to do so.
Our products in
development will require significant research and development and preclinical and clinical testing prior to our submitting any regulatory application for their commercial use. These activities, even if undertaken without the collaboration of others,
will require us to expend significant funds and will be subject to the risks of failure inherent in the development of a pharmaceutical product. Even if we complete such studies, our ability to commercialize products will depend on our ability to:
|
|
•
|
|
obtain and maintain necessary intellectual property rights to our products;
|
|
|
•
|
|
enter into arrangements with third parties to manufacture our products on our behalf; and
|
|
|
•
|
|
deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these services.
|
As a result of these possibilities, we may not be able to develop any commercially viable products. In addition, should we choose to develop
pharmaceutical products internally, we will have to make significant investments in pharmaceutical product development, marketing, sales, and regulatory compliance resources and we will have to establish or contract for the manufacture of products
under the FDA cGMPs. Any potential products developed by our licensees will be subject to the same risks.
11
We do not currently have any marketed products. If we develop products that can be marketed, we intend to
market the products either independently or together with collaborators or strategic partners. If we decide to market any products independently, we will incur significant additional expenditures and commit significant additional management
resources to establish a sales force. For any products that we market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We may also contract with other third parties to market certain of our
products. Ultimately, we and our partners may not be successful in marketing our products.
If clinical trials for our drug candidates are prolonged or
delayed, we may be unable to commercialize our drug candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any product revenue.
We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory
authorities to delay or suspend clinical trials, or delay the analysis of data from our completed or ongoing clinical trials. Any of the following could delay the clinical development of our drug candidates:
|
|
•
|
|
ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
|
|
|
•
|
|
delays in receiving or the inability to obtain required approvals from institutional review boards or other reviewing entities at clinical sites selected for
participation in our clinical trials;
|
|
|
•
|
|
delays in enrolling volunteers and patients into clinical trials;
|
|
|
•
|
|
a lower than anticipated retention rate of volunteers and patients in clinical trials;
|
|
|
•
|
|
the need to repeat clinical trials as a result of inconclusive or negative results or unforeseen complications in testing;
|
|
|
•
|
|
inadequate supply or deficient quality of drug candidate materials or other materials necessary for the conduct of our clinical trials;
|
|
|
•
|
|
unfavorable FDA inspection and review of a clinical trial site or records of any clinical or preclinical investigation;
|
|
|
•
|
|
serious and unexpected drug-related side effects experienced by participants in our clinical trials; or
|
|
|
•
|
|
the placement by the FDA of a clinical hold on a trial.
|
Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis will be subject to a number of factors, including the size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. Delays in patient enrollment may result in increased costs and longer development times.
In addition, subjects may withdraw from our clinical trials, and thereby impair the validity or statistical significance of the trials.
We, the FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such clinical trials are being exposed to unacceptable health
risks or for other reasons.
We cannot predict whether any of our drug candidates will encounter problems during clinical trials which will
cause us or regulatory authorities to delay or suspend these trials, or which will delay the analysis of data from these trials. In addition, it is impossible to predict whether legislative changes will be enacted, or whether FDA regulations,
guidance or interpretations will be changed, or what the impact of such changes, if any, may be. If we experience any such problems, we may not have the financial resources to continue development of the drug candidate that is affected or the
development of any of our other drug candidates.
12
If a collaborative partner terminates or fails to perform its obligations under agreements with us, the development
and commercialization of our drug candidates could be delayed or terminated.
If any current or future collaborative partner does not
devote suffi cient time and resources to collaboration arrangements with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if any existing or future
collaboration partner were to breach or terminate its arrangements with us, the development and commercialization of the affected drug candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or
capabilities to continue development and commercialization of the drug candidate on our own.
Much of the potential revenue from our
existing and future collaborations will consist of contingent payments, such as payments for achieving development milestones and royalties payable on sales of drugs developed using our technologies. The milestone and royalty revenues that we may
receive under these collaborations will depend upon our collaborator’s ability to successfully develop, introduce, market and sell new products. In addition, our collaborators may decide to enter into arrangements with third parties to
commercialize products developed under our existing or future collaborations using our technologies, which could reduce the milestone and royalty revenue that we may receive, if any. In many cases we will not be involved in these processes and
accordingly will depend entirely on our collaborators. Our collaboration partners may fail to develop or effectively commercialize products using our products or technologies because they:
|
|
•
|
|
decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited cash resources
or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;
|
|
|
•
|
|
do not have sufficient resources necessary to carry the drug candidate through clinical development, regulatory approval and commercialization;
|
|
|
•
|
|
decide to pursue a competitive drug candidate developed outside of the collaboration; or
|
|
|
•
|
|
cannot obtain the necessary regulatory approvals.
|
If our collaboration partners fail to develop or effectively commercialize drug candidates or drugs for any of these reasons, we may not be able to replace the collaboration partner with another partner to develop and
commercialize a drug candidate or drugs under the terms of the collaboration. We may also be unable to obtain a license from such collaboration partner on terms acceptable to us, or at all.
Because neither we nor any of our collaborative partners have received marketing approval for any product resulting from our research and development efforts, and may
never be able to obtain any such approval, we may not be able to generate any product revenue.
All of the products being developed by
our collaborative partners will require additional research and development, extensive preclinical studies and clinical trials, and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our
collaborative partners to achieve various regulatory approval milestones may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaborative partners may need to address a number of technical
challenges successfully in order to complete development of our drug candidates. Moreover, these drug candidates may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities, or other
characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.
If we are unable to obtain U.S. and/or foreign
regulatory approval, we will be unable to commercialize our drug candidates.
Our drug candidates are subject to extensive governmental
regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical testing and clinical trials and an extensive
13
regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of our drug candidates.
Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we are developing will obtain marketing approval. In connection with
the clinical trials for CR011-vcMMAE and any other drug candidate we may seek to develop in the future, we face risks that:
|
|
•
|
|
the drug candidate may not prove to be efficacious;
|
|
|
•
|
|
the drug may not prove to be safe;
|
|
|
•
|
|
the results may not confirm the positive results from earlier preclinical studies or clinical trials; and
|
|
|
•
|
|
the results may not meet the level of statistical significance required by the FDA or other regulatory authorities.
|
We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The
time required to complete clinical trials and for the FDA and other countries’ regulatory review processes is uncertain and typically takes many years. Our analysis of data obtained from preclinical and clinical activities is subject to
confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.
Any delay in
obtaining, or failure to obtain, required approvals could materially adversely affect our ability to generate revenues from the particular drug candidate. Furthermore, any regulatory approval to market a product may be subject to limitations on the
indicated uses for which we may market the product. These limitations may limit the size of the market for the product. We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and
marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of foreign requirements.
Approval by the FDA does not ensure approval by regulatory authorities outside the United States. Foreign jurisdictions may have different approval procedures than those required by the FDA and may impose additional testing requirements for our drug
candidates.
Even if we obtain regulatory approvals, our drug candidates will be subject to ongoing regulatory review. If we fail to comply with
continuing U.S. and applicable foreign regulations, we could lose those approvals, and our business would be seriously harmed.
Even if
we receive regulatory approval of any drugs we may develop, we will be subject to continuing regulatory review, including the review of clinical results which are reported after our drug candidates become commercially available approved drugs. Since
drugs are more widely used by patients once approval has been obtained, side effects and other problems may be observed after approval that were not seen or anticipated during pre-approval clinical trials. In addition, the manufacturer, and the
manufacturing facilities we use to make any of our drug candidates, will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with the drug, manufacturer or facility may result in
restrictions on the drug, manufacturer or facility, including withdrawal of the drug from the market. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory
approval, product recalls and seizures, operating restrictions and criminal prosecutions.
Our business has a substantial risk of product liability
claims. If we are unable to obtain appropriate levels of insurance, a product liability claim could adversely affect our business.
Our
business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and sales and marketing of human therapeutic products. Although we do not currently
14
commercialize any products, claims could be made against us based on the use of our drug candidates in clinical trials. We currently have clinical trial
insurance and will seek to obtain product liability insurance prior to the sales and marketing of any of our drug candidates. However, our insurance may not provide adequate coverage against potential liabilities. Furthermore, clinical trial and
product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that could
have a material adverse effect on us. If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against us.
Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our drug candidates, we may not generate
product revenue.
We have no commercial products and we do not currently have an organization for the sales and marketing of
pharmaceutical products. In order to successfully commercialize any drugs that may be approved in the future by the FDA or comparable foreign regulatory authorities, we must build our sales and marketing capabilities or make arrangements with third
parties to perform these services. There are risks involved with establishing our own sales and marketing capabilities, as well as entering into arrangements with third parties to perform these services. For example, developing a sales force is
expensive and time consuming and could delay any product launch. In addition, to the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services, we will have less control over sales of our
products, and our future revenues would depend heavily on the success of the efforts of these third parties. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may
not be able to generate product revenue and may not become profitable.
If physicians, patients and third-party payors do not accept any future drugs
that we may develop, we may be unable to generate significant revenue, if any.
Even if CR011-vcMMAE or any other drug candidates we may
develop or acquire in the future obtain regulatory approval, they may not gain market acceptance among physicians, patients and health care payers. Physicians may elect not to recommend these drugs for a variety of reasons including:
|
|
•
|
|
timing of market introduction of competitive drugs;
|
|
|
•
|
|
lower demonstrated clinical safety and efficacy compared to other drugs;
|
|
|
•
|
|
lack of cost-effectiveness;
|
|
|
•
|
|
lack of availability of reimbursement from third-party payors;
|
|
|
•
|
|
convenience and ease of administration;
|
|
|
•
|
|
prevalence and severity of adverse side effects;
|
|
|
•
|
|
other potential advantages of alternative treatment methods; and
|
|
|
•
|
|
ineffective marketing and distribution support.
|
If our approved drugs fail to achieve market acceptance, we would not be able to generate sufficient revenue from product sales to maintain or grow our business.
If third-party payors do not adequately reimburse customers for any of our product candidates that are approved for marketing, they might not be purchased or used,
and our revenues and profits will not develop or increase.
Our revenues and profits will depend heavily upon the availability of
adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and
15
in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use
of a product is:
|
|
•
|
|
a covered benefit under its health plan;
|
|
|
•
|
|
safe, effective and medically necessary;
|
|
|
•
|
|
appropriate for the specific patient;
|
|
|
•
|
|
neither experimental nor investigational.
|
Obtaining reimbursement approval for a product from each government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use
of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that
preclude payment for some uses that are approved by the FDA or comparable authority. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our
costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may
be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or imperfections in Medicare, Medicaid or other
data used to calculate these rates. Net prices for products may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain medical products from
countries where they may be sold at lower prices than in the United States.
There have been, and we expect that there will continue to be,
federal and state proposals to constrain expenditures for medical products and services, which may affect payments for our products. The Centers for Medicare and Medicaid Services, or CMS, frequently change product descriptors, coverage policies,
product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both CMS and other third-party payors may have
sufficient market power to demand significant price reductions. Due in part to actions by third-party payors, the health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering
reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products.
Our inability to promptly obtain coverage and profitable reimbursement rates from government-funded and private payors for our products could have a material adverse effect on our operating results and our overall financial condition.
We depend on attracting and retaining key employees.
We are highly dependent on the principal members of our senior management and scientific staff. Our future success will depend in part on the continued services of our key management and scientific personnel. The loss
of services of any of these personnel could materially adversely affect our business, financial condition, and results of operations. We have entered into employment agreements with all of the principal members of our senior management team. Our
future success will also depend in part on our ability to attract, hire, and retain additional personnel. There is intense competition for qualified personnel and there can be no assurance that we will be able to continue to attract and retain such
personnel. Failure to attract and retain key personnel could materially, adversely affect our business, financial condition, and results of operations.
16
We depend on academic collaborators, consultants, and scientific advisors.
We have relationships with collaborators, consultants, and scientific advisors at academic and other institutions that conduct research or provide
consulting services at our request. These collaborators, consultants, and scientific advisors are not our employees. Substantially all of our collaborators, consultants, and scientific advisors are employed by employers other than us and may have
commitments to, or collaboration, consulting, or advisory contracts with, other entities that may limit their availability to us. As a result, we have limited control over their activities and, except as otherwise required by our collaboration,
consulting agreements, and advisory agreements, can expect only limited amounts of their time to be dedicated to our activities. Our ability to explore and validate biological activity of therapeutic candidates and commercialize products based on
these discoveries may depend, in part, on continued collaborations with researchers at academic and other institutions. We may not be able to negotiate additional acceptable collaborations with collaborators, consultants, or scientific advisors at
academic and other institutions.
Our academic collaborators, consultants, and scientific advisors may have relationships with other
commercial entities, some of which could compete with us. Our academic collaborators, consultants and scientific advisors sign agreements which provide for confidentiality of our proprietary information and of the results of studies. We may not be
able to maintain the confidentiality of our technology and other confidential information in connection with every academic collaboration, consulting, or advisory arrangement, and any unauthorized dissemination of our confidential information could
materially adversely affect our business, financial condition, and results of operations. Further, any such collaborator, consultant or advisor may enter into an employment agreement or consulting arrangement with one of our competitors.
Competition in our field is intense and likely to increase.
We are subject to significant competition in the development and commercialization of new drugs from organizations that are pursuing strategies, approaches, technologies and products that are similar to our own. Many
of the organizations competing with us have greater capital resources, research and development staffs and facilities and marketing capabilities. We face competition from a number of biotechnology and pharmaceutical companies with products in
preclinical development, clinical trials, or approved for conditions identical or similar to the ones we are pursuing. In addition, many other pharmaceutical and biotechnology companies are engaged in research and development for the treatment of
cancer from which we may face intense competition.
If we do not obtain adequate intellectual property protection, we may not be able to prevent our
competitors from commercializing our discoveries.
Our business and competitive position depends on our ability to protect our products
and processes, including obtaining patent protection on genes and proteins for which we or our collaborators discover utility, and on products, methods and services based on such discoveries.
The patent positions of pharmaceutical, biopharmaceutical, and biotechnology companies, including us, are generally uncertain and involve complex legal
and factual questions. The law relating to the scope of patent claims in the technology fields in which we operate is evolving, and the degree of future protection for our proprietary rights is uncertain. Furthermore, even if patents are issued to
us, there can be no assurance that others will not develop alternative technologies or design around the patented technologies developed by us. Therefore, our patent applications may not protect our products, processes, and technologies for at least
the following reasons:
|
|
•
|
|
there is no guarantee that any of our pending patent applications will result in additional issued patents;
|
|
|
•
|
|
there is no guarantee that any patents issued to us or our collaborative customers will provide a basis for commercially viable products;
|
17
|
|
•
|
|
there is no guarantee that any patents issued to us or our collaborative customers will provide us with any competitive advantages;
|
|
|
•
|
|
there is no guarantee that any patents issued to us or our collaborative customers will not be challenged or circumvented or invalidated by third parties; and
|
|
|
•
|
|
there is no guarantee that any patents issued to others will not have an adverse effect on our ability to do business.
|
The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without
infringing the patent rights of others. A patent could be challenged by litigation and, if the outcome of such litigation were adverse to the patent holder, competitors could be free to use the subject matter covered by the patent. The invalidation
of key patents owned by or licensed to us or the non-approval of pending patent applications could increase competition and materially adversely affect our business, financial condition, and results of operations.
Litigation, which could result in substantial cost to us, also may be necessary to enforce our patent and proprietary rights and/or to determine the
scope and validity of others’ proprietary rights. We may participate in interference proceedings that may in the future be declared by the USPTO to determine priority of invention, which could result in substantial cost to us. The outcome of
any such litigation or interference proceeding might not be favorable to us, and we might not be able to obtain licenses to technology that we require or, even if obtainable, such technology may not be available at a reasonable cost.
If we infringe on the intellectual property rights of others, we may be required to obtain a license, pay damages, and/or cease the commercialization of our
technology.
We believe that there may be significant litigation in the industry regarding patent and other intellectual property
rights. It is possible that the commercialization of our technology could infringe the patents or other intellectual property rights of others. In addition, others may have filed, and in the future are likely to file, patent applications covering
genes or gene products or antibodies against the gene products that are similar or identical to our products. Any such patent applications may have priority over our patent applications, and may result in the issuance of patents to others that could
be infringed by our products or processes.
A number of competitors are producing proteins from genes and claiming both the proteins as
potential therapeutics as well as the antibodies against these proteins. In many cases, generic antibody claims are being issued by the USPTO even though competitors have not actually made antibodies against the protein of interest, or do not have
cellular, animal, or human data to support the use of these antibodies as therapeutics. These claims to proteins as therapeutics, to all antibodies against a protein, and to methods of use in broad human indications are being filed at a rapid rate,
and patents including such claims have issued and may continue to issue. Such patents may prevent us from commercializing some products or processes or, if licenses under the patents are made available, may make the royalty burden on these products
and processes so high as to prevent commercial success.
In addition, we have sought and intend to continue to seek patent protection for
novel uses for genes and proteins and therapeutic antibodies that may have been patented by third parties. In such cases, we would need a license from the holder of the patent with respect to such gene or protein in order to make, use, or sell such
gene or protein for such use. We may not be able to acquire such licenses on commercially reasonable terms, if at all.
Any legal action
against us or our collaborators for patent infringement relating to our products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license in order to continue to
manufacture or market the affected products and processes, or could enjoin us from continuing to manufacture or market the affected products and processes. There can be no assurance that we or our collaborators would prevail in any such action or
that any license required under any such patent would be made available on commercially acceptable terms, if at all. If we become involved in such litigation, it could consume a substantial portion of our managerial and financial resources.
18
We cannot be certain that our security measures will protect our confidential information and proprietary
technologies.
We rely upon trade secret protection for some of our confidential and proprietary information that is not the subject
matter for which patent protection is being sought. We have taken security measures to protect our proprietary technologies
,
processes, information systems, and data and continue to explore ways to enhance such security. Such measures,
however, may not provide adequate protection for our trade secrets or other proprietary information. While we require employees, academic collaborators, consultants, and scientific advisors to enter into confidentiality and/or non-disclosure
agreements where appropriate, any of the following could still occur:
|
|
•
|
|
proprietary information could be disclosed;
|
|
|
•
|
|
others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, technology, or
disclose such information; or
|
|
|
•
|
|
we may not be able to meaningfully protect our trade secrets.
|
If the security of our confidential information is breached, our business could be materially adversely affected.
We
depend upon our ability to license technologies.
We may have to acquire or license certain components of our technologies or products
from third parties. We may not be able to acquire from third parties or develop new technologies, either alone or with others. We may not be able to acquire licenses on commercially reasonable terms, if at all. Failure to license or otherwise
acquire necessary technologies could materially adversely affect our business, financial condition, and results of operations.
If we do not comply with
laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research
and development efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to
numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation
insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. Due to the small amount of hazardous materials
that we generate, we do not currently maintain any environmental liability or toxic tort claim insurance coverage to cover pollution conditions or other extraordinary or unanticipated events relating to our use and disposal of hazardous materials.
Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.
Risks Related to Our Financial Results
We have convertible debt and our debt service obligations may prevent us from taking actions that we would otherwise consider to be in our best interests.
As of December 31, 2008, we had total outstanding convertible debt of $19.0 million which is due in February 2011; and for the year ended December 31, 2008, we had earnings available to cover fixed charges
of
19
$25.1 million due primarily to our sale of belinostat to TopoTarget, which was a one time non-recurring event. A variety of uncertainties and contingencies
will affect our future performance, many of which are beyond our control. We may not generate sufficient cash flow in the future to enable us to meet our anticipated fixed charges, including our debt service requirements. The following table shows,
as of December 31, 2008, the remaining aggregate amount of our interest payments due in each of the years listed
(in millions)
:
|
|
|
|
|
|
Year
|
|
Aggregate
Interest
|
|
2009
|
|
$
|
0.8
|
|
2010
|
|
|
0.8
|
|
2011
|
|
|
0.4
|
|
|
|
|
|
|
Total
|
|
$
|
2.0
|
|
|
|
|
|
Our leverage could have significant negative consequences for our future operations, including:
|
|
•
|
|
increasing our vulnerability to general adverse economic and industry conditions;
|
|
|
•
|
|
limiting our ability to obtain additional financing;
|
|
|
•
|
|
requiring the dedication of a substantial portion of our expected cash flow to service our indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including working capital and capital expenditures;
|
|
|
•
|
|
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; or
|
|
|
•
|
|
placing us at a possible competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources.
|
We will likely need to raise additional funding, which may not be available on favorable terms, if at all.
We believe that we have sufficient capital to satisfy our funding requirements through 2011. However, our future funding requirements will depend on many
factors and we anticipate that we will likely need to raise additional capital to fund our business plan and research and development efforts on a going-forward basis. To the extent that we need to obtain additional funding, the amount of additional
capital we would need to raise would depend on many factors, including:
|
|
•
|
|
the number, breadth, and progress of our research, product development, and clinical programs;
|
|
|
•
|
|
our ability to establish future potential strategic collaborations;
|
|
|
•
|
|
the progress of our collaborators;
|
|
|
•
|
|
our costs incurred in enforcing and defending our patent claims and other intellectual property rights; and
|
|
|
•
|
|
the costs and timing of obtaining regulatory approvals for any of our products.
|
We expect that we would raise any additional capital we require through private equity offerings, debt financings, or additional collaborations and
licensing arrangements. We cannot be certain that in the future these sources of liquidity will be available when needed, particularly in light of the current economic environment, or that our actual cash requirements will not be greater than
anticipated. In appropriate strategic situations, we may seek financing from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under
development. If we raise additional capital by issuing equity securities, the issuance of such securities would result in ownership dilution to our stockholders. If we raise additional funds through collaborations and licensing arrangements, we may
be required
20
to relinquish rights to certain of our technologies or product candidates, or to grant licenses on unfavorable terms. The relinquishing of rights or granting
of licenses on unfavorable terms could materially adversely affect our business, financial condition, and results of operations. If adequate funds are not available, our business, financial condition, and results of operations would be materially
adversely affected. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully
develop and market pharmaceutical products. If we require additional capital at a time when investment in biotechnology companies such as ours, or in the marketplace in general, is limited due to the then prevailing market or other conditions, we
may not be able to raise such funds at the time that we desire or any time thereafter.
Our quarterly operating results have fluctuated greatly and may
continue to do so.
Our operating results have fluctuated on a quarterly basis. We expect that losses will continue to fluctuate from
quarter to quarter and that these fluctuations may be substantial. Our results of operations are difficult to predict and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to
investors. Some of the factors that could cause our operating results to fluctuate include:
|
|
•
|
|
the nature, pricing, and timing of products and services provided to our collaborators and customers;
|
|
|
•
|
|
our ability to compete effectively in our therapeutic development efforts against competitors that have greater financial or other resources or drug candidates that
are in further stages of development;
|
|
|
•
|
|
acquisition, licensing, and other costs related to our operations;
|
|
|
•
|
|
losses and expenses related to our investments;
|
|
|
•
|
|
regulatory developments;
|
|
|
•
|
|
regulatory actions and changes related to the development of drugs;
|
|
|
•
|
|
changes in intellectual property laws that affect our patent rights;
|
|
|
•
|
|
payments of milestones, license fees, or research payments under the terms of our external alliances and our ability to monitor and enforce such payments; and
|
|
|
•
|
|
the timing of intellectual property licenses that we may enter.
|
We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, fluctuations in quarterly results could
affect the market price of our common stock in a manner unrelated to our long-term operating performance.
Our debt investments are impacted by the
financial viability of the underlying companies or assets.
We have a diversified portfolio of investments, of which 35% of our debt
investments at December 31, 2008 were invested in U.S. Treasuries and mortgage-backed securities that are sponsored by the U.S. Government. Our fixed-rate debt investments comply with our policy of investing in only highly rated debt
instruments. The ability for the debt to be repaid upon maturity or to have a viable resale market is dependent, in part, on the financial success of the underlying company or assets. Should the underlying company or assets suffer significant
financial difficulty, the debt instrument could either be downgraded or, in the worst case, our investment could be worthless. This would result in our losing the cash value of the investment and incurring a charge to our statement of operations.
The market price of our common stock is highly volatile.
The market price of our common stock has fluctuated widely and may continue to do so. For example, during the year ended December 31, 2008 the sales price of our stock ranged from a high of $1.20 per share to a
21
low of $0.41 per share. Many factors could cause the market price of our common stock to rise and fall. These factors include:
|
|
•
|
|
the current economic and credit crisis and associated turmoil in world financial markets;
|
|
|
•
|
|
variations in our quarterly operating results;
|
|
|
•
|
|
announcements of clinical results, technological innovations, or new products by us or our competitors;
|
|
|
•
|
|
acquisitions or strategic alliances by us or others in our industry;
|
|
|
•
|
|
announcement by the government or other agencies regarding the economic health of the United States and the rest of the world;
|
|
|
•
|
|
the hiring or departure of key personnel;
|
|
|
•
|
|
changes in market valuations of companies within the biotechnology industry; and
|
|
|
•
|
|
changes in estimates of our performance or recommendations by financial analysts.
|
Our common stock could be delisted from the NASDAQ Global Market if our stock price continues to trade below $1.00 per share.
In September 2008, we received a letter from The NASDAQ Stock Market LLC advising us that the closing bid price of our common stock for the previous 30 consecutive trading days had closed below the minimum $1.00 per
share required for continued listing on the NASDAQ Global Market pursuant to NASDAQ Marketplace Rule 4450(a)(5). Pursuant to NASDAQ Marketplace Rule 4450(e)(2), we were provided an initial period of 180 calendar days, or until March 23, 2009,
to regain compliance with the minimum price requirement.
In October 2008, we received a letter from NASDAQ informing us that NASDAQ had
temporarily suspended enforcement of the minimum price requirement due to conditions in U.S. and world financial markets, and in December 2008, we received an additional letter from NASDAQ indicating that the suspension period had been extended,
with enforcement of the requirement scheduled to resume on April 20, 2009. The December letter further stated that prior to the resumption of enforcement of the requirement, NASDAQ will send an additional letter to inform us of the number of
calendar days remaining in our compliance period and the specific date by which we need to regain compliance. The letter we received in October stated that we have 158 calendar days remaining in our compliance period. With the enforcement of the
requirement scheduled to resume on April 20, 2009, and assuming a 158 day compliance period, we would have until September 25, 2009 to regain compliance.
We can regain compliance with the minimum bid price requirement, either during the suspension period or during the compliance period resuming after the suspension period, by achieving a $1.00 closing bid price for a
minimum of 10 consecutive trading days. If we do not regain compliance with the requirement by the required date, we can apply to list our common stock on the NASDAQ Capital Market and NASDAQ will determine whether we meet the NASDAQ Capital Market
initial listing criteria as set forth in NASDAQ Marketplace Rule 4310(c), other than the minimum price requirement. If we meet the NASDAQ Capital Market initial listing criteria, NASDAQ will notify us that we have been granted an additional 180
calendar days to come into compliance with the requirement. If we do not meet the initial listing criteria, NASDAQ will provide us with written notification that our common stock will be delisted. At that time we would be permitted to appeal
NASDAQ’s determination to delist our common stock to a NASDAQ Listings Qualifications Panel.
We will seek to regain compliance with
the minimum price requirement by the required date, and are considering alternatives to address compliance with the continued listing standards of the NASDAQ Global Market, but it is possible that we will be unable to meet these standards despite
our efforts, and that our stock could be delisted from the NASDAQ Global Market as a result.
22
Delisting from the NASDAQ Global Market could have an adverse effect on our business and on the trading
of our common stock. If a delisting of our common stock from the NASDAQ Stock Market were to occur, our common stock would trade on the OTC Bulletin Board or on the “pink sheets” maintained by the National Quotation Bureau, Inc. Such
alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result.
Securities we issue to fund our operations could cause dilution to our stockholders’ ownership.
We may decide to raise additional funds through a private debt or equity financing to fund our operations. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced, and the new equity
securities may have rights with priority over our common stock. We may not be able to obtain sufficient financing on terms that are favorable to us or our existing stockholders, if at all.
We may effect future repurchases of our 4% convertible debentures due in February 2011, which may adversely affect our liquidity.
We may from time to time seek to repurchase or refinance all or a portion of our outstanding $19.0 million 4% convertible debentures that mature on
February 15, 2011. Any repurchases might occur through cash purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved in any such transaction, individually or in the aggregate, may be material and could adversely affect our liquidity and ability to fund ongoing operations.
We may from time to time exceed the Federal Deposit Insurance Corporation limits in our bank accounts.
We may from time to time have a balance in our bank account which exceeds the $250,000 per depositor, per insured bank amount guaranteed by the Federal
Deposit Insurance Corporation, or FDIC. The FDIC insures deposits in most banks and savings associations located in the United States. The FDIC protects depositors against the loss of their deposits if an FDIC-insured bank or savings association
fails. FDIC insurance is backed by the full faith and credit of the United States government.
|
Item 1B.
|
Unresolved Staff Comments
|
Not applicable.
We lease
executive, administrative and research offices at our Branford, Connecticut location. We believe that our facilities are adequate for our current operations or that suitable leased space will be available as needed.
|
Item 3.
|
Legal Proceedings
|
We are not
currently a party to any material legal proceedings.
|
Item 4.
|
Submission Of Matters To A Vote Of Security Holders
|
Not applicable.
23
PART II
|
Item 5.
|
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
Market Information
Our common stock is traded on the
Nasdaq Global Market under the symbol “CRGN”. The following table sets forth, for the periods indicated, the low and high sales prices per share for our common stock, as reported by the Nasdaq Global Market:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Low
|
|
High
|
|
Quarter Ended March 31, 2008
|
|
$
|
0.60
|
|
$
|
0.95
|
|
Quarter Ended June 30, 2008
|
|
|
0.71
|
|
|
1.20
|
|
Quarter Ended September 30, 2008
|
|
|
0.44
|
|
|
1.20
|
|
Quarter Ended December 31, 2008
|
|
|
0.41
|
|
|
0.81
|
|
|
|
|
|
|
2007
|
|
|
|
Low
|
|
High
|
|
Quarter Ended March 31, 2007
|
|
$
|
2.95
|
|
$
|
4.99
|
|
Quarter Ended June 30, 2007
|
|
|
1.82
|
|
|
3.19
|
|
Quarter Ended September 30, 2007
|
|
|
1.08
|
|
|
2.05
|
|
Quarter Ended December 31, 2007
|
|
|
0.73
|
|
|
1.58
|
Stockholders
As of February 28, 2009, there were approximately 186 stockholders of record of our common stock and, according to our estimates, 7,008 beneficial owners of our common stock.
Dividends
We have never paid cash dividends on our
common stock and do not anticipate declaring any cash dividends in the foreseeable future. We currently intend to retain earnings, if any, to finance the development of our business.
Equity Compensation Plan Information
Information relating to compensation plans under which our
equity securities are authorized for issuance is set forth under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our definitive proxy statement for our 2009 Annual Meeting of
Stockholders.
24
Performance Graph
The performance graph compares our cumulative 5-year total shareholder return on common stock with the cumulative total returns of The NASDAQ Composite Index and The NASDAQ Biotechnology Index (capitalization
weighted). The graph tracks the performance of a $100 investment in our common stock and in each of the designated indexes assuming (with the reinvestment of all dividends) for the period 12/31/2003 to 12/31/2008. The stock price performance
included in this graph is not necessarily indicative of future stock price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
|
Base Period
12/31/03
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
CuraGen Corporation
|
|
$
|
100.00
|
|
$
|
97.68
|
|
$
|
42.02
|
|
$
|
62.76
|
|
$
|
12.55
|
|
$
|
6.28
|
|
NASDAQ Composite Index
|
|
|
100.00
|
|
|
110.08
|
|
|
112.88
|
|
|
126.51
|
|
|
138.13
|
|
|
80.47
|
|
NASDAQ Biotechnology Index
|
|
|
100.00
|
|
|
112.17
|
|
|
130.53
|
|
|
130.05
|
|
|
132.24
|
|
|
122.10
|
|
(1)
|
Graph assumes $100 invested on December 31, 2003 in our common stock, The NASDAQ Composite Index and The NASDAQ Biotechnology Index (capitalization weighted).
|
|
(2)
|
Total return assumes reinvestment of dividends.
|
|
(3)
|
Year ended December 31.
|
The information included under
the heading “Performance Graph” in Item 5 of this Annual Report on Form 10-K is “furnished” and not “filed” and shall not be deemed to be “soliciting material” or subject to Regulation 14A, shall not be
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in
any filing under the Securities Act of 1933, as amended, or the Exchange Act.
25
|
Item 6.
|
Selected Consolidated Financial Data
|
The selected consolidated financial data set forth below are derived from our audited consolidated balance sheets as of December 31, 2008 and 2007 and the related audited consolidated statements of operations, changes in
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008 and notes thereto, which are included elsewhere in this report. The consolidated balance sheet data as of December 31, 2006, 2005
and 2004 and the consolidated statements of operations data for the years ended December 31, 2005 and 2004 have been derived from our related financial statements which are not included herein. The sale of 454 Life Sciences Corporation on
May 25, 2007 has been accounted for as a discontinued operation and is presented as such for all periods prior to its sale. Historical results are not necessarily indicative of future results. The selected consolidated financial data set forth
below should be read in conjunction with, and is qualified in its entirety by our audited consolidated financial statements and related notes thereto found at “Item 8. Financial Statements and Supplementary Data” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,174
|
|
$
|
88
|
|
|
$
|
2,298
|
|
|
$
|
4,825
|
|
|
$
|
4,684
|
|
|
Total operating expenses
|
|
|
20,756
|
|
|
59,710
|
|
|
|
57,657
|
|
|
|
72,503
|
|
|
|
80,235
|
|
|
Income (loss) from continuing operations
|
|
|
24,781
|
|
|
(49,963
|
)
|
|
|
(57,165
|
)
|
|
|
(69,168
|
)
|
|
|
(79,588
|
)
|
|
Income (loss) from discontinued operations
|
|
|
—
|
|
|
75,361
|
|
|
|
(2,675
|
)
|
|
|
(4,076
|
)
|
|
|
(10,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
24,781
|
|
|
25,398
|
|
|
|
(59,839
|
)
|
|
|
(73,244
|
)
|
|
|
(90,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share from continuing operations
|
|
|
0.44
|
|
|
(0.89
|
)
|
|
|
(1.04
|
)
|
|
|
(1.33
|
)
|
|
|
(1.59
|
)
|
|
Basic and diluted income (loss) per share from discontinued operations
|
|
|
—
|
|
|
1.34
|
|
|
|
(0.05
|
)
|
|
|
(0.08
|
)
|
|
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
|
0.44
|
|
|
0.45
|
|
|
|
(1.09
|
)
|
|
|
(1.41
|
)
|
|
|
(1.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic income (loss) per share
|
|
|
56,738
|
|
|
55,853
|
|
|
|
54,896
|
|
|
|
51,991
|
|
|
|
49,943
|
|
|
Weighted average number of shares used in computing diluted income (loss) per share
|
|
|
60,642
|
|
|
55,853
|
|
|
|
54,896
|
|
|
|
51,991
|
|
|
|
49,943
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
$
|
87,664
|
|
$
|
100,444
|
|
|
$
|
164,393
|
|
|
$
|
211,238
|
|
|
$
|
320,296
|
|
|
Restricted cash
|
|
|
—
|
|
|
14,533
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, restricted cash and investments
|
|
|
87,664
|
|
|
114,977
|
|
|
|
164,393
|
|
|
|
211,238
|
|
|
|
320,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
84,044
|
|
|
107,844
|
|
|
|
95,985
|
|
|
|
205,610
|
|
|
|
316,516
|
|
|
Total assets
|
|
|
88,546
|
|
|
119,282
|
|
|
|
227,294
|
|
|
|
269,979
|
|
|
|
366,671
|
|
|
4% Convertible subordinated notes due 2011
|
|
|
18,967
|
|
|
69,890
|
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
110,000
|
|
|
6% Convertible subordinated debentures due 2007
|
|
|
—
|
|
|
—
|
|
|
|
66,228
|
|
|
|
66,228
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible subordinated notes and debentures
|
|
|
18,967
|
|
|
69,890
|
|
|
|
176,228
|
|
|
|
176,228
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
18,967
|
|
|
70,975
|
|
|
|
111,174
|
|
|
|
176,228
|
|
|
|
240,000
|
|
|
Accumulated deficit
|
|
|
462,793
|
|
|
487,574
|
|
|
|
512,972
|
|
|
|
453,133
|
|
|
|
379,889
|
|
|
Stockholders’ equity
|
|
|
65,465
|
|
|
38,465
|
|
|
|
8,767
|
|
|
|
56,484
|
|
|
|
106,926
|
|
|
Cash dividends declared per common share
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
26
Earnings (Deficiency) Available to Cover Fixed Charges
The following table sets forth our consolidated earnings (deficiency) available to cover fixed charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
Earnings (deficiency) available to cover fixed charges (1) (2)
|
|
$
|
25,103
|
|
$
|
(50,148
|
)
|
|
$
|
(57,540
|
)
|
|
$
|
(69,571
|
)
|
|
$
|
(80,770
|
)
|
|
(1)
|
From 2004 to 2007, earnings were inadequate to cover fixed charges. We needed additional earnings, as indicated by the deficiency of earnings available to cover fixed charges for
each of the periods from 2004 to 2007 presented above, to achieve a ratio of earnings to fixed charges of 1.0x.
|
|
(2)
|
The deficiency of earnings available to cover fixed charges is computed by subtracting fixed charges from the loss from continuing operations before income tax benefit plus fixed
charges. Fixed charges consist of interest expense plus that portion of net rental expense deemed representative of interest.
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and
other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, “Risk Factors.”
Overview
We are a
biopharmaceutical development company dedicated to improving the lives of patients by developing novel therapeutics for the treatment of cancer. We have taken a systematic approach to identifying and validating promising therapeutics and are now
focused on developing and advancing a potential drug candidate through clinical development. We are currently focusing the majority of our human and financial resources on our oncology therapeutic area.
In February 2009, we announced our plan to undertake a review of strategic alternatives that could enhance shareholder value. These alternatives
range from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. There is no assurance that this process will result in any changes to our current business plan or lead to any specific action or
transaction.
Royalties or other revenue generated from commercial sales of products developed through the application of our technologies
or expertise is not expected for several years, if at all. We expect that our revenue or income sources for at least the next several years may be limited to potential milestones and other potential payments related to partnering CR011, and interest
income.
We expect to continue incurring expenses relating to our research and development efforts as we focus on clinical trials required
for the development of CR011-vcMMAE. Conducting clinical trials is a lengthy, time-consuming and expensive process and we expect to incur continued losses over the next several years. Results of operations for any period may be unrelated to the
results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.
CR011 is a fully-human monoclonal antibody resulting from our collaboration with Amgen Fremont that utilizes antibody-drug conjugate, or ADC, technology licensed from Seattle Genetics to attach monomethylauristatin E, or vcMMAE, to yield
CR011-vcMMAE. CR011 targets glycoprotein NMB, or GPNMB, a protein located specifically on the surface of cells including melanoma. After CR011-vcMMAE binds to the target protein, the ADC is transported inside the cancer cell where MMAE is cleaved
from the
27
antibody and activated in the cell. We are currently conducting a clinical development program evaluating CR011-vcMMAE for:
|
|
|
|
|
|
|
|
|
|
|
Indication
|
|
Phase
|
|
Regimen
|
|
Initiation of Patient
Enrollment
|
|
Status
|
|
|
|
|
|
|
|
Metastatic melanoma
|
|
I/II
|
|
0.03 to 2.63 mg/kg every three weeks in Phase I; 1.88 mg/kg every three weeks in Phase II
|
|
June 2006
|
|
Enrollment completed. Updated results anticipated in the first half of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
Weekly and two out of every three week regimens
|
|
Sept 2007
|
|
Preliminary results anticipated in the first half of 2009.
|
|
|
|
|
|
|
|
Breast cancer
|
|
I/II
|
|
Every three weeks regimen
|
|
June 2008
|
|
Enrollment ongoing. Preliminary results anticipated in the first half of 2009.
|
Critical Accounting Policies and Use of Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to investment valuation, prepaid expenses, accrued expenses, revenue recognition, and stock based compensation. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our
significant accounting policies are more fully described in Note 1 to our consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated
financial statements:
Investment Valuation
We invest in short-term and long-term marketable securities, principally corporate notes, government securities and other asset backed securities, in which our excess cash balances are invested.
As described in Note 8 to our consolidated financial statements, a substantial portion of our financial assets have been classified as Level 2.
Inherent in Level 2 securities valuation are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or
whose significant value drivers are observable. Judgments and estimates are used in pricing Level 2 securities. While we believe the valuation methodologies are appropriate, the use of valuation methodologies is judgmental and changes in
methodologies can have a material impact on our results of operations.
All of the securities in our investment portfolio are priced by our
investment manager, an independent third party. On a quarterly basis, we obtain a second price for each security to compare to the price obtained from our investment manager. As of December 31, 2008 there have been no material variances in the
prices obtained from these two sources, and as such we have used the pricing provided by our investment manager.
28
In accounting for investments, we evaluate if a decline in the fair value of a marketable security below
our cost basis is other-than-temporary, and if so, we record an impairment charge in our consolidated statement of income. The factors that we consider in our assessments for our investments in debt securities include the fair market value of the
security, the duration of the security’s decline, and our ability and intent to hold to maturity. The determination of whether a loss is other than temporary is judgmental and can have a material impact on our financial results.
Our investment portfolio has not been adversely materially impacted by the recent disruption in the credit markets. However, if there is continued
and expanded disruption in the credit markets this may have a potential impact on the determination of the fair value of financial instruments. Additionally, there can be no assurance that our investment portfolio will not be adversely affected in
the future.
Revenue Recognition
Overview
We recognize revenue when all four criteria are met: (1) persuasive evidence that an
arrangement exists; (2) delivery of the products has occurred or services have been rendered; (3) the selling price is fixed or determinable; and (4) the collectibility is reasonably assured, in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, “Revenue Recognition,” which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance.
Determination of criteria (2) and (3) are based on management’s judgment regarding delivery of products and the fee charged for products delivered.
Collaboration Revenue
During 2008, we recognized the remaining $1.2 million of collaboration revenue
related to the grant of exclusive worldwide rights by our former collaboration partner TopoTarget to an unrelated third party of a preclinical HDAC inhibitor for potential use in the field of dermatology. Under our collaboration agreement with
TopoTarget, we were entitled to receive 50% of initial payments received by TopoTarget from such third party. During 2006, we received $1.3 million which previously was being amortized on a straight line basis commencing in November 2006, the
month the agreement was signed, through April 2022, the date the first original patent will expire in the United States. In January 2008, TopoTarget was informed by the third party it had terminated the development of the preclinical compound
pursuant to its license agreement with TopoTarget, and all unrecognized revenue was recognized upon termination.
Collaboration revenue
during 2007 was generated by the recognition of collaboration revenue related to the grant of exclusive worldwide rights by our former collaboration partner TopoTarget to an unrelated third party of a preclinical HDAC inhibitor for potential use in
the field of dermatology. Collaboration revenue during 2006 was generated primarily under our Pharmacogenomics Agreement with Bayer, or the Bayer Agreement. Payments received under the terms of the Bayer Agreement consisted of non-refundable fixed
quarterly payments received in advance under the Bayer Agreement, which was completed in 2006.
The non-refundable fixed quarterly payments
received in advance under the Bayer Agreement related to our future performance of services and were deferred and recognized as revenue when the future performance occurred, based upon the satisfaction of defined metrics of completion, as outlined
in the Bayer Agreement, which included proportional performance and project specific deliverables. These metrics were reviewed internally each month to determine the work performed, deliverables met, and, if required, deliverables accepted by
Bayer. We estimated the time period over which services were provided and the level of effort in each period. We made judgments based upon the facts and circumstances known to us at the time and in accordance with generally accepted
accounting principles.
29
Accrued and Prepaid Expenses
We review new and open contracts, communicate with our applicable personnel to identify services that have been performed on our behalf and estimate the
level of service performed and the associated costs incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost for accrued expenses. We also review, with our applicable personnel, services that have been
performed when payment was required in advance and estimate the level of service performed and the associated cost incurred. The majority of our service providers invoice us monthly in arrears for services performed however, some required advanced
payments. We make estimates of our accrued and prepaid expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We also periodically confirm the accuracy of our estimates with the service
providers and make adjustments if necessary. To date, we have not adjusted our estimates at any particular balance sheet date in any material amount. Examples of estimated accrued and prepaid expenses include:
|
|
•
|
|
fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;
|
|
|
•
|
|
fees paid to investigative sites in connection with clinical trials;
|
|
|
•
|
|
fees paid to contract manufacturers in connection with the production of clinical trial materials; and
|
|
|
•
|
|
professional service fees.
|
We base
our accrued and prepaid expenses related to clinical trials on our estimates of the services received and efforts expended related to clinical trials all pursuant to contracts with multiple research institutions and clinical research organizations
that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on
factors such as the successful enrollment of patients and the completion of clinical trial milestones. We estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of
the performance of services or the level of effort varies from our estimate, we will adjust accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of
these services, our actual expenses could differ from our estimates.
Stock-Based Compensation
We utilized the modified prospective transition method to adopt Statement of Financial Accounting Standards No. 123 (revised 2004) “Share Based
Payment”, or SFAS 123R on January 1, 2006. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. Prior to January 2006, we accounted for stock options under the intrinsic value
method described in Accounting Principals Board Opinion No. 25, or APB 25, and related Interpretations as permitted by SFAS 123. Estimates in recording employee stock option expense include utilizing the Black-Scholes option valuation method to
estimate the fair value of stock options granted to employees and the number of options that will be forfeited due to employee terminations. The Black-Scholes option valuation method requires inputs for the following three
factors: (1) volatility, (2) risk-free interest rate, and (3) expected term of the option. We use historical volatility to determine the expected stock price volatility factor; risk-free interest rates are based on the U.S.
Treasury yield curve in effect at the time of grant, for the period corresponding to the approximate expected term of the options; and the expected term has been calculated using the simplified method to estimate expected term of stock options as
allowed under SAB 110. We estimate future forfeitures of stock options primarily based on historical experience. For additional information on stock-based compensation, please see Note 1 to our consolidated financial statements included in
this Annual Report on Form 10-K.
30
Results of Operations
Year 2008 Compared to Year 2007
The following table sets forth a comparison of the
components of our net income for the years ended December 31, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
$
Change
|
|
|
%
Change
|
|
|
Collaboration revenue
|
|
$
|
1.2
|
|
|
$
|
0.1
|
|
$
|
1.1
|
|
|
*
|
|
|
Research and development expenses
|
|
|
15.1
|
|
|
|
36.8
|
|
|
(21.7
|
)
|
|
(59
|
)%
|
|
General and administrative expenses
|
|
|
5.2
|
|
|
|
11.7
|
|
|
(6.5
|
)
|
|
(56
|
)%
|
|
Restructuring charges
|
|
|
0.5
|
|
|
|
11.3
|
|
|
(10.8
|
)
|
|
(96
|
)%
|
|
Gain on sale of intangible asset
|
|
|
36.4
|
|
|
|
—
|
|
|
36.4
|
|
|
*
|
|
|
Interest income
|
|
|
3.4
|
|
|
|
5.6
|
|
|
(2.2
|
)
|
|
(39
|
)%
|
|
Interest expense
|
|
|
1.7
|
|
|
|
5.2
|
|
|
(3.5
|
)
|
|
(67
|
)%
|
|
Realized (loss) gain on sale of available-for-sale investments, net
|
|
|
(0.4
|
)
|
|
|
0.7
|
|
|
(1.1
|
)
|
|
*
|
|
|
Gain on extinguishment of debt
|
|
|
7.0
|
|
|
|
8.4
|
|
|
(1.4
|
)
|
|
(17
|
)%
|
|
Income tax (provision) benefit
|
|
|
(0.3
|
)
|
|
|
0.2
|
|
|
0.5
|
|
|
*
|
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
75.4
|
|
|
(75.4
|
)
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24.8
|
|
|
$
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Based on prior year amounts, percentage change does not provide meaningful information.
|
Collaboration revenue.
The increase in collaboration revenue for the year ended December 31, 2008, as compared
to the year ended December 31, 2007 was due to the recognition of $1.2 million of the $1.3 million received during 2006 from TopoTarget’s licensing agreement with an unrelated third party. In January 2008, TopoTarget was informed by the
third party that it had terminated the development of the preclinical compound pursuant to which we formerly received collaboration revenue. Therefore, all unrecognized collaboration revenue was recognized. We do not expect any collaboration revenue
in 2009.
Research and development expenses.
Research and development expenses consist primarily of:
contractual and manufacturing costs; salary and benefits; license fees and milestone payments; supplies; drug supply; and allocated facility costs. Our research and development efforts in 2008 were concentrated solely on clinical trials. We budget
and monitor our research and development costs by expense category, rather than by project, because these costs often benefit multiple projects and/or our technology platform as a whole.
Below is a summary that reconciles our total research and development expenses for the years ended December 31, 2008 and 2007 by the major
categories
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$
Change
|
|
|
%
Change
|
|
|
Contractual and manufacturing costs
|
|
$
|
6.4
|
|
$
|
20.9
|
|
$
|
(14.5
|
)
|
|
(69
|
)%
|
|
Salary and benefits
|
|
|
4.2
|
|
|
9.1
|
|
|
(4.9
|
)
|
|
(54
|
)%
|
|
Supplies
|
|
|
0.1
|
|
|
0.7
|
|
|
(0.6
|
)
|
|
(86
|
)%
|
|
License fees and milestone payments
|
|
|
1.6
|
|
|
0.1
|
|
|
1.5
|
|
|
*
|
|
|
Depreciation and amortization
|
|
|
—
|
|
|
1.2
|
|
|
(1.2
|
)
|
|
(100
|
)%
|
|
Allocated facility costs
|
|
|
2.8
|
|
|
4.8
|
|
|
(2.0
|
)
|
|
(42
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
15.1
|
|
$
|
36.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The decrease in our research and development expenses for the year ended December 31, 2008 as
compared to the year ended December 31, 2007 was due to the Transfer Agreement entered into in the second quarter 2008 with TopoTarget A.S. which effectively sold our rights to belinostat, a Phase I/II HDAC inhibitor and any other HDAC
inhibitors, such that we would no longer incur additional clinical trial expenses. In 2007, we incurred expenses through the second quarter for our Biopharmaceutical Sciences Process facility, or BPS, which was closed July 27, 2007, and
expenses through the fourth quarter 2007 related to velafermin clinical trials which were terminated in the fourth quarter. The reductions in 2008 compared to 2007 included a decrease in supplies caused by the closure of BPS, a decrease in salary
and benefits caused by a reduction in personnel, a decrease in depreciation and amortization from a reduction in lab equipment and a decrease in allocated facility costs due to the closure of some facilities. We had an increase in license fees and
milestone payments in 2008 as compared to 2007, due to milestone expenses incurred relating to our collaboration agreements with Amgen Fremont and Seattle Genetics for advancing CR011-vcMMAE to Phase II. We anticipate our research and development
expenses for 2009 will decrease as compared to 2008 in the contractual and manufacturing costs expense category due to the sale of our rights to develop belinostat and in the personnel costs category due to a reduction in workforce in December 2008.
As soon as we advance a potential clinical candidate into clinical trials, we begin to track the direct research and development expenses
associated with that potential clinical candidate. The following table shows the cumulative direct research and development expenses as of December 31, 2008, as well as the current direct research and development expenses for the years ended
December 31, 2008 and 2007 which were incurred on or after we started conducting a Phase I clinical trial for CR011-vcMMAE
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Costs for CR011-vcMMAE
|
|
Cumulative as of
December 31,
2008 (since
commencement
of Phase I trial)
|
|
Year Ended
December 31,
2008
|
|
Year Ended
December 31,
2007
|
|
Indication
|
|
$ 15.0
|
|
$
|
7.9
|
|
$
|
2.7
|
|
Metastatic
Melanoma/
Breast Cancer
|
We expect that the direct research and development expenses incurred in connection with our
development of CR011-vcMMAE in 2009 will be consistent with expenses in 2008.
In addition, we have two inactive programs for which we
incurred costs in 2008:
Velafermin
—is a protein therapeutic we were investigating for the prevention of oral mucositis. We
discontinued the development of this protein in the fourth quarter of 2007, after our Phase II dose-confirmatory clinical trial did not meet its primary endpoint. We incurred $1.4 million of costs related to closing out the velafermin program for
the year ended December 31, 2008 compared to $13.2 million of costs for the year ended December 31, 2007. As of December 31, 2008, we had incurred cumulative costs of $51.7 million. As patients from this study were being followed for
approximately one year post treatment for protocol-specified safety monitoring, the study was clinically complete at the end of September 2008. We do not anticipate incurring additional future costs for this program.
Belinostat
—is a small molecule therapeutic, formerly referred to as PXD101, which inhibits the activity of the enzyme HDAC and is being
evaluated for the treatment of solid and hematologic cancers either alone or in combination with other active chemotherapeutic drugs and newer targeted agents. As of December 31, 2008 we had incurred cumulative costs of $48.1 million. On
April 21, 2008, we announced the sale of our ownership in and development rights to belinostat to TopoTarget, and as such, we do not expect to incur any additional expenses in 2009 associated with this program.
Currently, our potential pharmaceutical products require significant research and development efforts and preclinical testing, and will require extensive
evaluation in clinical trials prior to submitting an application to
32
regulatory agencies for their commercial use. Although we are conducting human studies with respect to CR011-vcMMAE, we may not be successful in developing
or commercializing this or other products. Our product candidates are subject to the risks of failure inherent in the development and commercialization of pharmaceutical products and we cannot currently provide reliable estimates as to when, if
ever, our product candidates will generate revenue and cash flows.
Completion of research and development, preclinical testing and
clinical trials may take many years. Estimates of completion periods for any of our major research and development projects are highly speculative and variable, and dependent on the nature of the disease indication, how common the disease is among
the general populace, and the results of the research. For example, preclinical testing and clinical trials can often go on for an indeterminate period of time since the results of tests are continually monitored, with each test considered
“complete” only when sufficient data has been accumulated to assess whether the next phases of clinical trials are warranted or whether the effort should be abandoned. Typically, Phase I clinical trials are expected to last between 12 and
24 months, Phase II clinical trials are expected to last between 24 and 36 months and Phase III clinical trials are expected to last between 24 and 60 months. The most significant time and costs associated with clinical development are the Phase III
trials as they tend to be the longest and largest studies conducted during the drug development process.
In addition, many factors may
delay the commencement and speed of completion of preclinical testing and clinical trials, including, but not limited to, the number of patients participating in the trial, the duration of patient follow-up required, the number of clinical sites at
which the trials are conducted, and the length of time required to locate and enroll suitable patient subjects. The successful completion of our development programs and the successful development of our product candidates are highly uncertain and
are subject to numerous challenges and risks. Therefore, we cannot presently estimate anticipated completion dates for any of our projects.
Due to the variability in the length of time necessary to develop a product candidate, the uncertainties related to the cost of projects and the need to obtain governmental approval for commercialization, accurate and meaningful estimates
of the ultimate costs to bring our product candidates to market are not available. If our major research and development projects are delayed, then we can expect to incur additional costs in conducting our preclinical testing and clinical trials,
and that it will be a longer period of time before we might achieve profitability from our operating activities. Accordingly, the timing of the potential market approvals for our existing product candidate CR011-vcMMAE, may have a significant impact
on our capital requirements.
General and administrative expenses.
The decrease in general and
administrative expenses for the year ended December 31, 2008, as compared to the year ended December 31, 2007, was due to a decrease in personnel, a decrease in consulting costs and lower patent legal fees all related to restructuring
activities that occurred through the third quarter 2007. Our general and administrative expenses in 2009 are expected to remain consistent as compared to 2008.
Restructuring charges.
During December 2008, we underwent a reduction in workforce and recorded restructuring charges of $0.5 million. This amount is related to employee separation
costs payable in cash during the first half of 2009. In 2007, we underwent corporate restructurings to reduce operating costs and to focus resources on the advancement of our therapeutic pipeline through clinical development, resulting in full
year 2007 restructuring charges of $11.3 million.
Gain on sale of intangible asset
.
The gain
on sale of intangible asset of $36.4 million for the year ended December 31, 2008 was a result of the sale of belinostat to TopoTarget in April 2008, which provided us with net cash proceeds of $24.6 million, and 5 million shares of
TopoTarget stock valued at $11.8 million on the closing date, April 21, 2008. These shares were liquidated in June 2008 for cash proceeds of $11.8 million.
Interest income.
Interest income for the year ended December 31, 2008 decreased as compared to the year ended December 31, 2007 due to a reduction in our cash, restricted
cash and investment balance. Our lower cash
33
and investment balance was due to the repurchase of $43.2 million of our 4% convertible subordinated debentures which occurred in the second quarter 2008 to
retire $50.9 million of debt and cash used from operations of $20.5 million, partially offset by the $36.4 million from the sale of belinostat to TopoTarget. We earned an average yield of 3.5% during 2008 as compared to 4.3% in 2007. We anticipate
interest income to decrease in 2009 compared to 2008, due to lower cash and investment balances caused by the utilization of cash and investment balances in the normal course of operations. We also expect the yields in our investment portfolio to
decrease during 2009 as a result of lower short term market interest rates in 2009.
Interest
expense.
Interest expense for the year ended December 31, 2008 decreased compared to the same period in 2007 primarily due to the repurchases of $50.9 million of our 4% convertible subordinated debentures due
February 2011 in the second quarter of 2008. In addition, in February 2009, we repurchased $4.8 million of our 4% convertible subordinated debentures due February 2011. As a result, we expect interest expense, including interest paid to debt
holders, as well as amortization of deferred financing costs, to decrease during 2009 as compared to 2008.
Realized (loss) gain on
sale of available-for-sale investments, net
.
During 2008, we realized a loss on the sale of available-for sale investments of $0.4 million primarily due to the impairment of certain of our asset-backed
securities. All of our asset-backed securities were sold in January 2009, resulting in an immaterial gain as compared to their book value at December 31, 2008. During 2007, we had a net gain on sale of available-for sale investments of $0.7
million due to a $1.0 million gain from the sale of our investment in TopoTarget, partially offset by a $0.3 million loss on the sale of a debt investment.
Gain on extinguishment of debt
.
During 2008, we repurchased a total of $50.9 million of our 4% outstanding convertible subordinated debentures due February 2011, for $43.2
million. This resulted in a gain of $7.0 million which is net of the write-off of the ratable portion of unamortized deferred financial costs relating to the repurchased debt.
Income tax (provision) benefit.
We recorded an income tax expense of $0.3 million during the year ended
December 31, 2008 related to Federal alternative minimum tax expense of $0.5 million partially offset by a research and development tax credit from the State of Connecticut of $0.2 million. The tax credit for the year ended December 31,
2008, is a result of Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for forgoing carryforward of the research
and development credit. Income tax expense for the year ended December 31, 2008 represents Federal alternative minimum tax related to taxable income recorded in 2008.
For the years ended December 31, 2008, the income tax benefit included an adjustment resulting from the expiration of the State of Connecticut
statute of limitations on research and development tax credits, as it relates to the Year 2003 income tax benefit.
Income from
discontinued operations
.
Our consolidated statement of operations for the year ended December 31, 2007 included income from discontinued operations as a result of the sale of our ownership in 454 in the
second quarter of 2007. We had no income from discontinued operations in the year ended December 31, 2008.
34
Year 2007 Compared to Year 2006
The following table sets forth a comparison of the components of our net income (loss) for the years ended December 31, 2007 and 2006 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
|
Collaboration revenue
|
|
$
|
0.1
|
|
$
|
2.3
|
|
|
$
|
(2.2
|
)
|
|
(96
|
)%
|
|
Research and development expenses
|
|
|
36.8
|
|
|
44.0
|
|
|
|
(7.2
|
)
|
|
(16
|
)%
|
|
General and administrative expenses
|
|
|
11.7
|
|
|
13.6
|
|
|
|
(1.9
|
)
|
|
(14
|
)%
|
|
Restructuring charges
|
|
|
11.3
|
|
|
—
|
|
|
|
11.3
|
|
|
*
|
|
|
Interest income
|
|
|
5.6
|
|
|
7.5
|
|
|
|
(1.9
|
)
|
|
(25
|
)%
|
|
Interest expense
|
|
|
5.2
|
|
|
9.4
|
|
|
|
(4.2
|
)
|
|
(45
|
)%
|
|
Realized gain (loss) on sale of available-for-sale investments, net
|
|
|
0.7
|
|
|
(0.3
|
)
|
|
|
1.0
|
|
|
*
|
|
|
Gain on extinguishment of debt
|
|
|
8.4
|
|
|
—
|
|
|
|
8.4
|
|
|
*
|
|
|
Income tax (provision) benefit
|
|
|
0.2
|
|
|
0.4
|
|
|
|
(0.2
|
)
|
|
(50
|
)%
|
|
Income (loss) from discontinued operations
|
|
|
75.4
|
|
|
(2.7
|
)
|
|
|
78.1
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25.4
|
|
$
|
(59.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Based on prior year amounts, percentage change does not provide meaningful information.
|
Collaboration revenue.
The decrease in collaboration revenue for year ended December 31, 2007, as compared to
the year ended December 31, 2006 was due to the completion of work under the Bayer Agreement during 2006.
Research and
development expenses.
Research and development expenses consist primarily of: contractual and manufacturing costs of our drug pipeline; salary and benefits; license fees and milestone payments; supplies and reagents;
depreciation and amortization; and allocated facility costs.
Below is a summary that reconciles our total research and development
expenses for the years ended December 31, 2007 and 2006 by the major categories mentioned above
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$
Change
|
|
|
%
Change
|
|
|
Contractual and manufacturing costs
|
|
$
|
20.9
|
|
$
|
19.6
|
|
$
|
1.3
|
|
|
7
|
%
|
|
Salary and benefits
|
|
|
9.1
|
|
|
11.0
|
|
|
(1.9
|
)
|
|
(17
|
)%
|
|
Supplies
|
|
|
0.7
|
|
|
1.9
|
|
|
(1.2
|
)
|
|
(63
|
)%
|
|
License fee and milestone payments
|
|
|
0.1
|
|
|
1.3
|
|
|
(1.2
|
)
|
|
(92
|
)%
|
|
Depreciation and amortization
|
|
|
1.2
|
|
|
2.8
|
|
|
(1.6
|
)
|
|
(57
|
)%
|
|
Allocated facility costs
|
|
|
4.8
|
|
|
7.4
|
|
|
(2.6
|
)
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expense
|
|
$
|
36.8
|
|
$
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in our research and development expenses for the year ended December 31, 2007 as
compared to the year ended December 31, 2006 was due to our decision in the first quarter of 2007 to focus our resources exclusively on generating clinical trial results from our lead oncology drug development programs, as well as the second
quarter 2007 restructuring, which included the closing of our BPS, and the third quarter 2007 restructuring related to the termination of velafermin and personnel reductions. The reductions included a decrease in supplies, a decrease in salary and
benefits caused by a reduction in personnel, a decrease in depreciation and amortization from a reduction in lab equipment and a decrease in allocated facility costs. We had an increase in contractual and manufacturing costs due to higher clinical
trial expenses related to velafermin and new Phase I/II studies for belinostat in 2007 compared to 2006.
35
As soon as we advance a potential clinical candidate into clinical trials, we begin to track the direct
research and development expenses associated with that potential clinical candidate. The following table shows the cumulative direct research and development expenses as of December 31, 2007, as well as the current direct research and
development expenses for the years ended December 31, 2007 and 2006 which were incurred on or after we started conducting a Phase I clinical trial for CR011-vcMMAE
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Costs for CR011-vcMMAE
|
|
Cumulative as of
December 31,
2007 (since
commencement
of Phase I trial)
|
|
Year Ended
December 31,
2007
|
|
Year Ended
December 31,
2006
|
|
Indication
|
|
$ 7.1
|
|
$
|
2.7
|
|
$
|
4.4
|
|
Metastatic
Melanoma/
Breast Cancer
|
In addition, we have two inactive programs for which we have incurred costs:
Velafermin
—is a protein therapeutic we were investigating for the prevention of oral mucositis. We discontinued the development of this
protein in the fourth quarter of 2007, after our Phase II dose-confirmatory clinical trial did not meet its primary endpoint. We incurred $13.2 million of costs for the year ended December 31, 2007 compared to $11.5 million for the year ended
December 31, 2006. As of December 31, 2007, we had incurred cumulative costs of $50.3 million. As patients from this study were being followed for approximately one year post treatment for protocol-specified safety monitoring, the study
was clinically complete at the end of September 2008.
Belinostat
—is a small molecule therapeutic, formerly referred to as
PXD101, which inhibits the activity of the enzyme HDAC and is being evaluated for the treatment of solid and hematologic cancers either alone or in combination with other active chemotherapeutic drugs and newer targeted agents. We incurred $13.6
million of costs for the year ended December 31, 2007 compared to $11.4 million for the year ended December 31, 2006. As of December 31, 2007 we had incurred cumulative costs of $44.1 million. On April 21, 2008, we announced the
sale of our ownership of and development rights to belinostat to TopoTarget.
General and administrative
expenses.
The decrease in general and administrative expenses for the year ended December 31, 2007, as compared to the year ended December 31, 2006, was primarily a result of our restructuring
activities through 2007 related to personnel reductions, a decrease in using consultants and lower patent legal fees.
Restructuring
charges.
During June and September 2007, we underwent corporate restructurings to reduce operating costs and to focus resources on the advancement of our therapeutic pipeline through clinical development,
resulting in full year 2007 restructuring charges of $11.3 million. This amount includes an asset impairment charge of $6.3 million (associated with the closure of BPS on July 27, 2007), $4.4 million related to employee separation costs paid in
cash, $0.3 million of non-cash employee separation costs and $0.3 million of other asset write-offs
.
As of December 31, 2007, the majority of the assets included in the $6.3 million asset impairment charge had been sold to various third
parties.
Interest income.
Interest income for the year ended December 31, 2007 decreased as
compared to the year ended December 31, 2006 due to a reduction in our cash balance and investment portfolio. Our lower cash balance was due to: the repayment of $66.2 million of our 6% convertible subordinated debentures which occurred upon
their maturity in February 2007 and $31.0 million of our 4% convertible subordinated debentures due 2011 to retire $40.1 million of debt; cash used from operations of $43.8 million, offset by the receipt of an aggregate of $91.0 million from the
sale of 454, the sale of our TopoTarget investment, and the sales of certain capital equipment. We earned an average yield of 4.3% during 2007 as compared to 3.9% in 2006.
36
Interest expense.
Interest expense for the year ended
December 31, 2007 decreased compared to the same period in 2006 primarily due to the $66.2 million repayment of our 6% convertible subordinated debentures which occurred upon their maturity in February 2007, and the total 2007 repurchases of
$40.1 million of our 4% convertible subordinated debentures due 2011.
Realized gain on sale of available-for-sale investments,
net
.
During 2007, we had a net gain on sale of available-for sale investments of $0.7 million due to a $1.0 million gain from the sale of our investment in TopoTarget, partially offset by a $0.3 million
loss on the sale of a debt investment.
Gain on extinguishment of debt
.
During 2007, we
repurchased a total of $40.1 of our 4% outstanding convertible subordinated debentures due February 2011, for $31.0 million. This resulted in a gain of $8.4 million which is net of the write-off of the ratable portion of unamortized deferred
financial costs relating to the repurchased debt.
Income tax benefit.
We recorded an income tax
benefit of $0.2 million during the year ended December 31, 2007 as a result of Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development
expense credit, in exchange for forgoing carryforward of the research and development credit. For the years ended December 31, 2007 and 2006, the income tax benefit included adjustments resulting from the expiration of the State of Connecticut
statute of limitations, as they relate to the Year 2002 and Year 2001 income tax benefit, respectively.
Income (loss) from
discontinued operations
.
Due to the sale of our ownership in 454 in the second quarter of 2007, the results of 454’s operations have been reclassified as discontinued operations for all periods presented.
The income from discontinued operations for the year ended December 31, 2007 as compared to 2006 was due to the sale of 454 to Roche Diagnostics Operations Inc., or RDO, during the second quarter of 2007. During 2006, the cumulative losses
applicable to the minority interest in subsidiary exceeded the minority interest in the equity capital of 454, and therefore all losses applicable to the minority interest for the year 2006 through the closing of the sale of 454 to RDO on
May 25, 2007 were charged to us. Our net gain of $75.4 million consists of $78.4 million gain on the sale of 454 offset by $3.0 million loss from discontinued operations.
Liquidity and Capital Resources
Since our inception, we have financed our operations and met our
capital expenditure requirements primarily through: private placements of equity securities; convertible subordinated debt offerings; public equity offerings; sales of assets; and revenues received under our collaborative research agreements. Since
inception, we have not had any off-balance sheet arrangements. To date, inflation has not had a material effect on our business.
In April
2008, we entered into a transfer and termination agreement with TopoTarget which effectively sold our rights to belinostat, a Phase I/II HDAC inhibitor and any other HDAC inhibitors, for $24.6 million in net cash proceeds, 5 million shares of
TopoTarget common stock valued at approximately $11.8 million as of the date of the transfer agreement and $6 million in potential payments on future net sales and sublicenses of belinostat. On June 3, 2008, we sold the 5 million shares of
TopoTarget common stock for cash proceeds of $11.8 million. Total net cash received related to the sale of belinostat was $36.4 million.
In May 2008, we completed a series of privately-negotiated transactions with holders of our 4% convertible subordinated notes due February 2011 in which we repurchased a total of $50.9 million of the 2011 Notes for an aggregate purchase
price of $43.2 million, reflecting an aggregate discount from the face value of such 2011 notes of approximately 15.1%.
In August 2008,
the escrow period for the escrow fund associated with the sale of 454 Life Sciences Corporation expired, and as such $14.7 million was released to us.
37
In February 2009, we repurchased a total of $4.8 million of our 4% convertible subordinated debentures
due February 2011, for an aggregate purchase price of $3.8 million reflecting an aggregate discount from the face value of such 2011 notes of approximately 21%.
Cash, restricted cash and investments.
The following table depicts changes in the cash, restricted cash, and investments for the years ended December 31, 2008 and 2007, using
the direct method
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash paid to suppliers, employees and collaborators
|
|
$
|
(18.7
|
)
|
|
$
|
(40.8
|
)
|
|
Restructuring charges paid
|
|
|
(2.7
|
)
|
|
|
(2.4
|
)
|
|
Interest income received
|
|
|
3.4
|
|
|
|
5.5
|
|
|
Interest expense paid
|
|
|
(2.3
|
)
|
|
|
(6.9
|
)
|
|
Income tax benefit (provisions)
|
|
|
(0.3
|
)
|
|
|
0.4
|
|
|
Cash paid to acquire property and equipment
|
|
|
—
|
|
|
|
(0.2
|
)
|
|
Proceeds from sale of fixed assets
|
|
|
0.1
|
|
|
|
—
|
|
|
Proceeds from sale of held for sale assets
|
|
|
—
|
|
|
|
2.6
|
|
|
Proceeds from sale of long-term marketable securities
|
|
|
—
|
|
|
|
6.3
|
|
|
Proceeds from disposal of assets of discontinued operations
|
|
|
—
|
|
|
|
82.0
|
|
|
Net cash received from sale of intangible asset
|
|
|
36.4
|
|
|
|
—
|
|
|
Cash received from employee stock option exercises
|
|
|
—
|
|
|
|
0.1
|
|
|
Repayment of convertible debt
|
|
|
—
|
|
|
|
(66.2
|
)
|
|
Cash paid for extinguishment of debt
|
|
|
(43.2
|
)
|
|
|
(31.0
|
)
|
|
Net unrealized gain on short-term investments and marketable securities
|
|
|
0.4
|
|
|
|
1.5
|
|
|
Net realized loss on short-term investments and marketable securities
|
|
|
(0.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and investments
|
|
|
(27.3
|
)
|
|
|
(49.4
|
)
|
|
Cash, restricted cash, and investments, beginning of year
|
|
|
115.0
|
|
|
|
164.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, restricted cash, and investments, end of year
|
|
$
|
87.7
|
|
|
$
|
115.0
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with our investment policy, we are utilizing the following investment objectives for
cash and investments: (1) investment decisions are made with the expectation of minimum risk of principal loss, even with a modest penalty in yield; (2) appropriate cash balances and related short-term funds are maintained for immediate
liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum yield is achieved.
Future
Liquidity.
In February 2009, we announced our plan to undertake a review of strategic alternatives that could enhance shareholder value. These alternatives range from selling or licensing CR011, to acquiring
additional assets or business lines, to selling the Company. There is no assurance that this process will result in any changes to our current business plan or lead to any specific action or transaction.
We expect to continue to fund our operations by a combination of the following sources: cash and investment balances; interest income; potential private
equity offerings; debt financing or additional collaborations and licensing arrangements. We intend to use the cash received in 2008 from the sale of belinostat to TopoTarget for the development costs of CR011-vcMMAE and also for other uses which
could include strategic transactions. We do not anticipate any material capital expenditures in the near future. Accordingly, we foresee the following as uses of short term liquidity: contractual services related to clinical trials and
manufacturing; salary and benefits; and license fees. We will also continue to evaluate potential acquisitions, including complementary businesses, technologies and products.
We will continue to evaluate options to repurchase or refinance all or a portion of our outstanding 4% convertible debentures that mature on
February 15, 2011. Repurchases might occur through cash purchases and/or exchange for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such
38
repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The
amounts involved in any such transactions, individually or in the aggregate, may be material.
We may use sources of liquidity for working
capital, general corporate purposes and potentially for future acquisitions of businesses, products or technologies. The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount and extent of any
acquisitions, our product development activities, our investments in technology and the amount of cash generated by our operations and may vary substantially from our estimates. Our failure to use sources of liquidity effectively could have a
material adverse effect on our business, results of operations and financial condition.
We believe that our existing cash and investment
balances and other sources of liquidity will be sufficient to meet our requirements through 2011. We consider our operating and capital expenditures to be crucial to our future success, and intend to continue to make strategic investments in our
clinical drug pipeline. In appropriate situations, we may seek financing from other sources, and expect that we will need additional funds to meet our future operating and capital requirements. To the extent that we need to obtain additional
funding, the amount of additional capital we would need to raise would depend on many factors, including: the number, breadth, progress and results of our research, product development and clinical programs; the costs and timing of obtaining
regulatory approvals for any of our products; in-licensing and out-licensing of pharmaceutical products; acquisitions, including complementary technologies and products; costs incurred in enforcing and defending our patent claims and other
intellectual property rights.
While we will continue to explore alternative sources for financing our business activities, including the
possibility of private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed, particularly in light of the current economic environment, or that our actual cash
requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financing from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the
development and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term
business plan, which is to successfully develop and market pharmaceutical products, and may be unable to continue operations. This result could cause our shareholders to lose all or a substantial portion of their investment.
We believe that our existing investment portfolio liquidity will not be significantly affected by the major disruption in U.S. and foreign credit and
financial markets. Our analyses of the severity and duration of price declines, market research industry reports, economic forecast and the specific circumstances of issuers support our ability and intent to hold securities with an unrealized loss
until they recover.
Contractual Obligations
In the table below, we set forth our enforceable and legally binding obligations, along with future commitments related to all contracts that we are likely to continue, regardless of the fact that they are cancelable as of December 31,
2008. At December 31, 2008, there were no future minimum rental commitments, as we are on a month-to-month payment schedule for our facility in Branford, Connecticut.
39
Some of the amounts included in this table under purchase commitments are based on management’s
estimates and assumptions about these obligations, including their duration, anticipated actions by third parties, progress of our clinical programs and other factors. These amounts exclude items accrued for on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
Year Ended December 31,
|
|
|
|
Total
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Long-term debt obligations (1)
|
|
$
|
19.0
|
|
$
|
—
|
|
$
|
—
|
|
$
|
19.0
|
|
$
|
—
|
|
$
|
—
|
|
Interest on convertible subordinated debt (1)
|
|
|
2.0
|
|
|
0.8
|
|
|
0.8
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
Purchase commitments (2)
|
|
|
3.0
|
|
|
2.8
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24.0
|
|
$
|
3.6
|
|
$
|
1.0
|
|
$
|
19.4
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Refer to Note 7 to our consolidated financial statements for additional discussion.
|
|
(2)
|
Includes: commitments for costs associated with our ongoing clinical trial development programs through completion, and our drug supply commitments. Excludes amounts included on our
balance sheet as liabilities.
|
The expected timing of payment of the obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
For the purposes of this table, contractual obligations for the purchase of services are defined as agreements that support our external cost related to
clinical trials through completion. Our purchases are based on current operating needs and are fulfilled by vendors within short time periods. We have unrecognized tax benefits of $0.8 million at December 31, 2008. This amount is excluded from
the table above.
In addition, we have committed to make potential future milestone payments to third-parties as part of in-licensing and
development programs. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is neither probable nor
reasonably estimable, such contingencies have not been recorded on our consolidated balance sheet and are not included above.
Income
Taxes
As of December 31, 2008, we have tax net operating loss carryforwards available to reduce future federal and Connecticut
taxable income, research and development tax credit carryforwards available to offset future federal and Connecticut income taxes. Utilization of the net operating loss and tax credit carryforwards may be limited due to changes in our ownership, as
defined within Section 382 of the Internal Revenue Code (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
|
|
|
|
Federal
|
|
Expire In
|
|
Connecticut
|
|
Expire In
|
|
|
|
|
|
$
|
506,317
|
|
2009 to 2028
|
|
$
|
443,687
|
|
2021 to 2028
|
|
|
|
|
|
|
|
|
|
|
Research and Development Tax Credit Carryforwards
|
|
|
|
|
|
Federal
|
|
Expire In
|
|
Connecticut
|
|
Expire In
|
|
|
|
|
|
$
|
20,653
|
|
2009 to 2028
|
|
$
|
14,573
|
|
2014 to 2023
|
|
|
Recently Enacted Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an
amendment of FAS 115” (“SFAS 159”). SFAS 159 allows companies to
40
choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at
fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements. SFAS 159 is
effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. We do not plan to elect to re-measure any of our existing financial assets or liabilities under the provisions of this standard.
In December 2007, the FASB ratified the EITF consensus on Issue No. 07-1, “Accounting for Collaborative Arrangements”, or EITF 07-1. The
EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with
third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent
, and other accounting literature. Payments to or
from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature EITF 07-1 is effective
for fiscal years beginning after December 15, 2008. The adoption of EITF 07-1 did not have a material impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). SFAS 162 identifies a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles, or GAAP, for nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS 162
is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” (“SAS 69”). SFAS 162 is effective 60
days following the United States Securities and Exchange Commission’s (the “SEC”) approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”. We do not believe the adoption of SFAS 162 will have a material effect on our consolidated financial statements.
In May 2008, FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” was issued which
specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
FSP No. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP No. APB 14-1 did not have a material impact on our consolidated financial statements.
On January 1, 2008, we adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. The valuation techniques defined in SFAS 157 are based on observable and
unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. In accordance with the provisions of FSP FAS 157-2, Effective Date of FASB Statement
No. 157, we deferred the implementation of SFAS 157-2 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until
January 1, 2009.
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
At December 31, 2008, we maintained approximately 21.8% of our cash and investments in financial instruments with original maturity dates of three months or less, 34.6% in financial instruments with original
maturity dates of greater than three months and less than one year and 43.6% in financial instruments with original maturity dates of equal to or greater than one year and less than five years. These financial instruments are subject to interest
rate risk and will decline in value if interest rates increase. These investments have no
41
risk related to foreign currency exchange or commodity prices.
We estimate that a change of 100 basis points in interest rates would
result in a $0.3 million decrease or increase in the fair value of our cash and investments.
Our outstanding long-term liabilities as of
December 31, 2008 consist of $19.0 million of our 4% convertible subordinated notes due February 15, 2011. As the notes bear interest at a fixed rate, our results of operations would not be affected by interest rate changes. Although
future borrowings may bear interest at a floating rate, and would therefore be affected by interest rate changes, at this point we do not anticipate any significant future borrowings at floating interest rates, and therefore do not believe that a
change of 100 basis points in interest rates would have a material effect on our financial condition. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
As of December 31, 2008, the market value of our $19.0 million 4% convertible subordinated notes
due 2011, based on quoted market prices, was approximately $16.1 million. In February 2009, we repurchased $4.8 million of our 4% convertible subordinated notes due 2011 for $3.8 million, representing a discount of 21% of face value.
Since September 2008, there has been a major disruption in U.S. and foreign credit and financial markets affecting consumers and the banking, finance and
housing industries. This disruption was evidenced by a deterioration of confidence in financial markets and a severe decline in the availability of capital and demand for debt and equity securities. The result has been depressed security values and
widening credit spreads in most types of investment bonds, debt obligations and mortgage- and asset-backed securities. We had 9.6% of our cash and investment securities in mortgage-backed securities as of December 31, 2008. All of these
mortgage-backed securities are sponsored by the United States Federal Government and were rated AAA by Moody’s at December 31, 2008. Additionally, we had 9.1% of our cash and investment securities in asset-backed securities which consisted
of auto, credit card and equipment loans as of December 31, 2008. In January 2009, we sold all of the asset-backed securities in our investments resulting in an immaterial gain as compared to their book value at December 31, 2008.
We review our investment portfolio on a regular basis to determine if there is an impairment that is other than temporary. During 2008, we
deemed the impairment of our asset-backed securities to be other than temporary and as such we recorded an impairment charge of $0.3 million.
42
|
Item 8.
|
Financial Statements and Supplementary Data
|
CURAGEN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,103
|
|
|
$
|
16,730
|
|
|
Restricted cash
|
|
|
—
|
|
|
|
14,533
|
|
|
Short-term investments
|
|
|
30,332
|
|
|
|
19,039
|
|
|
Marketable securities
|
|
|
38,229
|
|
|
|
64,675
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, restricted cash and investments
|
|
|
87,664
|
|
|
|
114,977
|
|
|
Income taxes receivable
|
|
|
283
|
|
|
|
419
|
|
|
Prepaid expenses
|
|
|
211
|
|
|
|
2,290
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
88,158
|
|
|
|
117,686
|
|
|
Property and equipment, net
|
|
|
102
|
|
|
|
479
|
|
|
Other assets, net
|
|
|
286
|
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,546
|
|
|
$
|
119,282
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
239
|
|
|
$
|
254
|
|
|
Accrued expenses
|
|
|
1,610
|
|
|
|
3,140
|
|
|
Accrued payroll and related items
|
|
|
660
|
|
|
|
1,613
|
|
|
Interest payable
|
|
|
253
|
|
|
|
1,048
|
|
|
Other current liabilities
|
|
|
1,352
|
|
|
|
3,787
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,114
|
|
|
|
9,842
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible subordinated debt
|
|
|
18,967
|
|
|
|
69,890
|
|
|
Deferred revenue, net of current portion
|
|
|
—
|
|
|
|
1,085
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
18,967
|
|
|
|
70,975
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common Stock; $.01 par value, issued and outstanding 57,118,186 shares at December 31, 2008, and 58,074,127 shares at December 31,
2007
|
|
|
571
|
|
|
|
581
|
|
|
Additional paid-in capital
|
|
|
527,294
|
|
|
|
525,481
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
393
|
|
|
|
(23
|
)
|
|
Accumulated deficit
|
|
|
(462,793
|
)
|
|
|
(487,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
65,465
|
|
|
|
38,465
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
88,546
|
|
|
$
|
119,282
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
43
CURAGEN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Collaboration revenue
|
|
$
|
1,174
|
|
|
$
|
88
|
|
|
$
|
2,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,076
|
|
|
|
36,778
|
|
|
|
44,009
|
|
|
General and administrative
|
|
|
5,151
|
|
|
|
11,658
|
|
|
|
13,648
|
|
|
Restructuring charges
|
|
|
529
|
|
|
|
11,274
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,756
|
|
|
|
59,710
|
|
|
|
57,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of intangible asset
|
|
|
36,397
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,815
|
|
|
|
(59,622
|
)
|
|
|
(55,359
|
)
|
|
Interest income
|
|
|
3,356
|
|
|
|
5,583
|
|
|
|
7,458
|
|
|
Interest expense
|
|
|
(1,687
|
)
|
|
|
(5,167
|
)
|
|
|
(9,351
|
)
|
|
Realized (loss) gain on sale of available-for-sale investments, net
|
|
|
(372
|
)
|
|
|
616
|
|
|
|
(288
|
)
|
|
Gain on extinguishment of debt
|
|
|
6,991
|
|
|
|
8,442
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
25,103
|
|
|
|
(50,148
|
)
|
|
|
(57,540
|
)
|
|
Income tax (provision) benefit
|
|
|
(322
|
)
|
|
|
185
|
|
|
|
376
|
|
|
Income (loss) from continuing operations
|
|
|
24,781
|
|
|
|
(49,963
|
)
|
|
|
(57,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
(2,991
|
)
|
|
|
(2,675
|
)
|
|
Gain on sale of subsidiary
|
|
|
—
|
|
|
|
78,352
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
—
|
|
|
|
75,361
|
|
|
|
(2,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,781
|
|
|
$
|
25,398
|
|
|
$
|
(59,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share from continuing operations
|
|
$
|
0.44
|
|
|
$
|
(0.89
|
)
|
|
$
|
(1.04
|
)
|
|
Basic and diluted income (loss) per share from discontinued operations
|
|
|
—
|
|
|
|
1.34
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.44
|
|
|
$
|
0.45
|
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
|
56,738
|
|
|
|
55,853
|
|
|
|
54,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
|
60,642
|
|
|
|
55,853
|
|
|
|
54,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements
44
CURAGEN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Accumulated
Deficit
|
|
|
Unamortized
Stock-Based
Compensation
|
|
|
Total
|
|
|
Total
Comprehensive
Income (Loss)
|
|
|
January 1, 2006
|
|
55,642,080
|
|
|
$
|
556
|
|
|
$
|
514,862
|
|
|
$
|
(2,785
|
)
|
|
$
|
(453,133
|
)
|
|
$
|
(3,016
|
)
|
|
$
|
56,484
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(59,839
|
)
|
|
|
—
|
|
|
|
(59,839
|
)
|
|
$
|
(59,839
|
)
|
|
Unrealized gains on available-for-sale securities, net of reclassification adjustment (see disclosure below)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,133
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,133
|
|
|
|
5,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(54,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
455,000
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
|
|
|
Retirement of restricted stock
|
|
(31,625
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Reversal of unamortized stock-based compensation
|
|
—
|
|
|
|
—
|
|
|
|
(3,016
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,016
|
|
|
|
—
|
|
|
|
|
|
|
Employee stock option activity
|
|
25,049
|
|
|
|
—
|
|
|
|
5,989
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,989
|
|
|
|
|
|
|
Non-employee stock option activity
|
|
216,000
|
|
|
|
2
|
|
|
|
657
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
659
|
|
|
|
|
|
|
Stock-based 401(k) plan employer match
|
|
84,178
|
|
|
|
1
|
|
|
|
335
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
56,390,682
|
|
|
|
564
|
|
|
|
518,827
|
|
|
|
2,348
|
|
|
|
(512,972
|
)
|
|
|
—
|
|
|
|
8,767
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,398
|
|
|
|
—
|
|
|
|
25,398
|
|
|
$
|
25,398
|
|
|
Unrealized losses on available-for-sale securities, net of reclassification adjustment (see disclosure below)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,371
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,371
|
)
|
|
|
(2,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
1,537,020
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
|
|
|
Retirement of restricted stock
|
|
(42,230
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Employee stock option activity
|
|
19,400
|
|
|
|
1
|
|
|
|
6,521
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,522
|
|
|
|
|
|
|
Non-employee stock option activity
|
|
—
|
|
|
|
—
|
|
|
|
(219
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(219
|
)
|
|
|
|
|
|
Stock-based 401(k) plan employer match
|
|
169,255
|
|
|
|
1
|
|
|
|
352
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
58,074,127
|
|
|
|
581
|
|
|
|
525,481
|
|
|
|
(23
|
)
|
|
|
(487,574
|
)
|
|
|
—
|
|
|
|
38,465
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,781
|
|
|
|
—
|
|
|
|
24,781
|
|
|
$
|
24,781
|
|
|
Unrealized gains on available-for-sale securities, net of reclassification adjustment (see disclosure below)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Retirement of restricted stock
|
|
(1,203,485
|
)
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
|
|
|
Employee stock option activity
|
|
—
|
|
|
|
—
|
|
|
|
1,665
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,665
|
|
|
|
|
|
|
Stock-based 401(k) plan employer match
|
|
197,544
|
|
|
|
2
|
|
|
|
148
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
57,118,186
|
|
|
$
|
571
|
|
|
$
|
527,294
|
|
|
$
|
393
|
|
|
$
|
(462,793
|
)
|
|
$
|
—
|
|
|
$
|
65,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
45
CURAGEN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—(Continued)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Accumulated
Deficit
|
|
Unamortized
Stock-Based
Compensation
|
|
Total
|
|
Total
Comprehensive
Income (Loss)
|
|
|
Disclosure of 2006 comprehensive loss reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available-for-sale securities arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,845
|
|
|
Reclassification adjustment for losses included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on short-term investments and marketable securities, net of reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of 2007 comprehensive loss reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available-for-sale securities arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,706
|
)
|
|
Reclassification adjustment for gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on short-term investments and marketable securities, net of reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of 2008 comprehensive loss reclassification adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available-for-sale securities arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58
|
|
|
Reclassification adjustment for losses included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on short-term investments and marketable securities, net of reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
46
CURAGEN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,781
|
|
|
$
|
25,398
|
|
|
$
|
(59,839
|
)
|
|
(Income) loss from discontinued operations
|
|
|
—
|
|
|
|
(75,361
|
)
|
|
|
2,675
|
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
(1,174
|
)
|
|
|
(89
|
)
|
|
|
1,174
|
|
|
Depreciation and amortization
|
|
|
454
|
|
|
|
3,493
|
|
|
|
7,343
|
|
|
Asset impairment expense
|
|
|
—
|
|
|
|
6,322
|
|
|
|
—
|
|
|
Non-monetary compensation
|
|
|
1,653
|
|
|
|
3,539
|
|
|
|
5,345
|
|
|
Stock-based 401(k) employer plan match
|
|
|
150
|
|
|
|
353
|
|
|
|
335
|
|
|
Non-cash interest income
|
|
|
(83
|
)
|
|
|
1,045
|
|
|
|
608
|
|
|
Non-cash interest income—Restricted cash
|
|
|
(144
|
)
|
|
|
(403
|
)
|
|
|
—
|
|
|
Realized loss (gain) on sale of available-for-sale investments, net
|
|
|
358
|
|
|
|
(616
|
)
|
|
|
288
|
|
|
Gain on extinguishment of debt
|
|
|
(6,991
|
)
|
|
|
(8,442
|
)
|
|
|
—
|
|
|
Gain on sale of long-term marketable securities
|
|
|
—
|
|
|
|
(665
|
)
|
|
|
—
|
|
|
Gain on sale of intangible asset
|
|
|
(36,397
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
551
|
|
|
|
—
|
|
|
|
—
|
|
|
Accrued interest receivable
|
|
|
356
|
|
|
|
357
|
|
|
|
267
|
|
|
Income taxes receivable
|
|
|
136
|
|
|
|
124
|
|
|
|
166
|
|
|
Accounts receivable
|
|
|
—
|
|
|
|
926
|
|
|
|
(871
|
)
|
|
Prepaid expenses
|
|
|
2,077
|
|
|
|
494
|
|
|
|
(836
|
)
|
|
Other assets
|
|
|
(22
|
)
|
|
|
279
|
|
|
|
(139
|
)
|
|
Accounts payable
|
|
|
(16
|
)
|
|
|
(57
|
)
|
|
|
(755
|
)
|
|
Accrued expenses
|
|
|
(1,529
|
)
|
|
|
(149
|
)
|
|
|
356
|
|
|
Accrued payroll and related items
|
|
|
(953
|
)
|
|
|
(197
|
)
|
|
|
629
|
|
|
Interest payable
|
|
|
(795
|
)
|
|
|
(2,257
|
)
|
|
|
—
|
|
|
Deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,121
|
)
|
|
Other current liabilities
|
|
|
(2,346
|
)
|
|
|
2,122
|
|
|
|
(914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,934
|
)
|
|
|
(43,784
|
)
|
|
|
(47,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property and equipment
|
|
|
(3
|
)
|
|
|
(188
|
)
|
|
|
(411
|
)
|
|
Proceeds from sale of fixed assets
|
|
|
96
|
|
|
|
29
|
|
|
|
180
|
|
|
Payments for other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
Net proceeds from sale of intangible asset
|
|
|
24,583
|
|
|
|
—
|
|
|
|
—
|
|
|
Gross purchases of short-term investments
|
|
|
(48,174
|
)
|
|
|
(18,961
|
)
|
|
|
(29,967
|
)
|
|
Gross maturities of short-term investments
|
|
|
23,450
|
|
|
|
15,900
|
|
|
|
14,527
|
|
|
Gross sales of short-term investments
|
|
|
11,726
|
|
|
|
7,123
|
|
|
|
4,930
|
|
|
Gross purchases of marketable securities
|
|
|
(4,021
|
)
|
|
|
(19,938
|
)
|
|
|
(11,710
|
)
|
|
Gross maturities of marketable securities
|
|
|
22,050
|
|
|
|
17,090
|
|
|
|
57,025
|
|
|
Gross sales of marketable securities
|
|
|
21,722
|
|
|
|
21,389
|
|
|
|
52,925
|
|
|
Proceeds from sale of held for sale assets
|
|
|
—
|
|
|
|
2,610
|
|
|
|
—
|
|
|
Proceeds from sale of long-term marketable securities
|
|
|
—
|
|
|
|
6,260
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
51,429
|
|
|
|
31,314
|
|
|
|
87,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
—
|
|
|
|
72
|
|
|
|
586
|
|
|
Repayment of convertible debt
|
|
|
—
|
|
|
|
(66,228
|
)
|
|
|
—
|
|
|
Payment for extinguishment of debt
|
|
|
(43,247
|
)
|
|
|
(31,024
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(43,247
|
)
|
|
|
(97,180
|
)
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating cash flows (used in) discontinued operations
|
|
|
—
|
|
|
|
(379
|
)
|
|
|
(7,870
|
)
|
|
Net investing cash flows provided by discontinued operations
|
|
|
14,125
|
|
|
|
67,819
|
|
|
|
8,480
|
|
|
Net financing cash flows provided by discontinued operations
|
|
|
—
|
|
|
|
23
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
14,125
|
|
|
|
67,463
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus decrease (increase) in cash and cash equivalents of discontinued operations, net of sale proceeds
|
|
|
—
|
|
|
|
431
|
|
|
|
(1,104
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,373
|
|
|
|
(41,756
|
)
|
|
|
40,789
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
16,730
|
|
|
|
58,486
|
|
|
|
17,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
19,103
|
|
|
$
|
16,730
|
|
|
$
|
58,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,275
|
|
|
$
|
6,752
|
|
|
$
|
8,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
494
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits received
|
|
$
|
247
|
|
|
$
|
407
|
|
|
$
|
1,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of marketable securities acquired
|
|
$
|
11,814
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
47
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Organization and Summary of Significant Accounting Policies
|
Organization
—CuraGen Corporation (“CuraGen” or the “Company”), is a Connecticut-based biopharmaceutical development company dedicated to improving the lives of patients by developing novel therapeutics
for the treatment of cancer.
In May 2007, the sale of 454 Life Sciences Corporation, our previously majority-owned subsidiary
(“454”), to Roche Diagnostics Operations, Inc. (“RDO”), was completed. See Notes 12 and 13 for further details.
All
dollar amounts are shown in thousands, except share and per share data.
CuraGen has reclassified the consolidated statements of operations
for the years ended December 31, 2007 and 2006 to reflect the realized (loss) gain on sale of available-for-sale investments on a separate line, rather than within interest income. This revision had no effect on the Company’s net income
(loss) reported.
As shown in the accompanying financial statements, the Company has incurred negative cash flows from operations in all
years. The Company generated net income of $24,781 in 2008 primarily as a result of the sale of belinostat to TopoTarget and gains on the extinguishment of our convertible subordinated debt. The Company had net income of $25,398 in 2007 principally
resulting from the sale of its former majority-owned subsidiary 454 Life Sciences Corporation. Absent these items in 2008 and 2007, the Company had negative cash flows and losses. The Company expects to continue to incur losses and negative cash
flows in the future. In the near future, the Company’s principal sources of liquidity will be its cash and investment balances, interest income, and potential private strategic-driven transactions. However, should these sources of liquidity not
be available when needed, or should the Company’s actual cash requirements be greater than anticipated, the Company may be unable to meet the critical objective of its long-term business plan, which is to successfully develop and market
pharmaceutical products, and it may be unable to continue operations. The Company’s failure to use sources of liquidity effectively could have a material adverse effect on its business, results of operations and financial condition.
The Company continues to carefully manage the amounts and timing of its expenditures for its product development activities. As a result of these
above actions, the Company believes that its existing cash balances will be sufficient to fund the Company’s operations into 2011. However, there can be no assurance that these measures will be successful to the extent necessary for the Company
to remain current on its obligations, and therefore, it may be unable to meet the critical objective of its long-term business plan, which is to successfully develop and market pharmaceutical products, and it may be unable to continue operations.
Use of Estimates
—The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Cash, Cash Equivalents and Investments
—The Company considers investments readily convertible into cash, with an original maturity of three months or less to be cash equivalents. Investments with an original maturity
greater than three months but less than one year are considered short-term investments. Investments with an original maturity equal to or greater than one year are designated as marketable securities. Both short-term investments and marketable
securities are classified as available-for-sale securities, and are carried at fair value with the unrealized gains and losses reported in other comprehensive income within stockholders’ equity.
48
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company periodically reviews its investment portfolio based on criteria established in Financial
Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” to determine if there is an impairment that is other than temporary. In testing for impairment, the Company considers, among other
factors, the length of time and the severity of a security’s unrealized loss, the financial condition and near term prospects of the issuer, economic forecasts, market or industry trends and the Company’s ability and intent to hold
securities to maturity. Interest on debt securities, amortization of premiums, and accretion of discounts are included in interest income. The cost of securities sold is based on the specific identification method.
Property and Equipment
—Property and equipment are recorded at cost. Additions, renewals and betterments that significantly extend the
life of an asset are capitalized. Minor replacements, maintenance and repairs are charged to operations as incurred. Equipment is depreciated over the estimated useful lives of the related assets, ranging from three to five years, using the
straight-line method. Leasehold improvements are amortized over the shorter of the estimated lives or the remaining terms of the leases, using the straight-line method. When assets are retired or otherwise disposed of, the assets and related
accumulated depreciation or amortization are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Impairment of Long-Lived Assets
—The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long Lived Assets,” which establishes a single accounting model for long lived assets to be held for use. The Company regularly evaluates the recoverability of the net carrying value of its property, and intangible assets, when an
indicator of impairment is present by comparing the carrying values to the estimated future undiscounted cash flows. An impairment loss is recognized when the carrying value of the long-lived asset exceeds its fair value. The impairment
write-down is the difference between the carrying amount and the fair value of these long-lived assets. A loss on impairment is recognized through a charge to earnings.
Licensing Fees
—Licensing fees are paid for the right to market and sell certain technologies in our platform and licensing fees for
various purposes. Perpetual licenses taken on potential therapeutic products for which there is no current indication as to whether or not there is a future commercial market for sale, are expensed when incurred. Licenses acquired for which there is
a specific period of benefit are amortized by the Company over that period. The costs of non-perpetual licenses, which are included in Other assets, net, are amortized over the various lives of the licenses.
Financing Costs
—The Company includes deferred financing costs incurred in connection with the issuance of convertible subordinated
debt in Other assets, net and amortizes these costs over the life of the debt. The amortization expense is included in interest expense. When debt is repurchased, the Company writes off the related unamortized deferred financing costs and nets the
write off with any gain or loss recognized on the extinguishment of the debt.
Accumulated amortization was $448 and $1,341, respectively,
as of December 31, 2008 and 2007. Amortization expense was $168, $534 and $865, respectively, for the years ended December 31, 2008, 2007 and 2006.
Patent Application Costs
—The Company seeks patent protection on processes and products in various countries. All patent related costs are expensed to general and administrative expenses as incurred,
as recoverability of such expenditures is uncertain.
Revenue Recognition
—The Company recognizes revenue when all four
criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products has occurred or services have been rendered;
49
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(3) the selling price is fixed or determinable; and (4) the collectibility is reasonably assured, in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, “Revenue Recognition,” which set forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance.
Collaboration Revenue
During 2008, the Company recognized the remaining $1,174 of collaboration revenue from the grant of exclusive worldwide rights from TopoTarget A/S (“TopoTarget”) to a third party for a preclinical histone deacetylase inhibitor
(“HDAC inhibitor”), and the Company’s agreement with TopoTarget in which the Company receives 50% of initial payments received by TopoTarget from the third party. In January 2008, TopoTarget was informed by the third party it had
terminated the development of the preclinical compound pursuant to its license agreement with TopoTarget, and all unrecognized revenue was recognized upon termination.
Accrued Expenses
—The Company reviews open contracts, communicates with applicable personnel to identify services that have been performed on the Company’s behalf and estimates the level of
service performed and the associated costs incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual costs. The majority of the Company’s service providers invoice monthly in arrears for services
performed. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known. The Company also periodically confirms the accuracy of its estimates with the service
providers and makes adjustments if necessary.
Prepaid Expenses
—The Company has established a method for monitoring and
accounting for prepaid expenses. Prepaid expenses are those that arise when cash is disbursed and a portion of the associated benefit of the disbursement is for a future period. An asset is recorded on the books for the total invoice amount when
paid and is amortized ratably over the coverage period.
Research and Development Expenses
—Research and development
costs are charged to research and development expenses as incurred. Such costs primarily include clinical trial related costs such as contractual services and manufacturing costs, salary and benefits, license fees and milestone payments, supplies
and reagents, and allocated facility costs. Amounts relating to protein (or compound, or drug) manufacturing activities, for which the physical drug products will be utilized in research and development, are expensed as incurred, as there is no
current indication that there is a future commercial market for sale of any successful drug development from these therapeutics.
Stock-Based Compensation
—The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), effective January 1, 2006. SFAS 123R
requires recognition of the fair value of stock-based compensation in net income (loss). The Company has one active stock-based compensation plan, the 2007 Stock Incentive Plan (“2007 Stock Plan”) and two inactive stock-based compensation
plans, the 1997 Employee, Director and Consultant Stock Plan (“1997 Stock Plan”) and the 1993 Stock Option and Incentive Award Plan (“1993 Stock Plan”).
The Company transitioned to fair-value-based accounting for stock-based compensation under SFAS 123R using the modified version of the prospective
application method (“modified prospective application method”). Under the modified prospective method, restatement of prior financial statements is not required; and SFAS 123R applies to new awards and to awards modified, repurchased or
cancelled on or after January 1, 2006. Additionally, compensation cost for the portion of awards that are outstanding as of January 1, 2006, for which the requisite service has not been rendered (generally referring to unvested awards), is
recognized as the remaining requisite service is rendered after January 1, 2006.
50
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Historically, the Company used the following methods to determine the factors input into the
Black-Scholes model: historical volatility is used to determine the expected stock price volatility factor; risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant, for the period corresponding to the
approximate expected term of the options; and the expected term of the options has been calculated using CuraGen’s historical exercise patterns to estimate future exercise patterns. Effective with the adoption of SFAS 123R, the Company
continues to utilize the same methodology for purposes of estimating the expected stock price volatility and the risk-free interest rates, however, for purposes of estimating the expected term, the Company uses the simplified approach as outlined in
Staff Accounting Bulletin No. 107 (Topic 14) (“SAB 107”), whereby the expected term is equal to the average of the vesting term and the contractual term.
Staff Accounting Bulletin 110, (“SAB 110”), was effective January 1, 2008 and allows companies to continue to utilize the simplified method in developing an estimate of the expected term of “plain
vanilla” share options in accordance with SFAS 123R when there have been structural changes in a Company’s business such that historical exercise data does not provide a reasonable basis upon which to estimate expected term. Due to the
Company’s restructuring activities from 2003 through 2008, and the current market value of the Company’s common stock being below historical strike prices of share options, historical exercise patterns do not provide a reasonable basis to
estimate expected term of current option grants. Accordingly, the Company will continue to utilize the simplified method to estimate expected term of stock options as allowed under SAB 110.
For purposes of restricted stock grants, the grant date fair value is calculated as the fair market value of the stock on the date of grant less the
purchase price of the restricted stock paid by the grantee, which is equal to the $.01 par value of the stock. The Company recognizes stock-based compensation expense for restricted stock grants over the requisite service period of the individual
grants, which equals the vesting period. Generally, restricted stock grants to employees fully vest between two and three years from the grant date.
Upon adoption of SFAS 123R, the Company recognizes the compensation expense associated with stock options granted to employees after January 1, 2006, and the unvested portion of previously granted employee stock
option awards that were outstanding as of December 31, 2005, in the consolidated statements of operations. During the years ended December 31, 2008 and 2007, the Company recognized compensation expense in total operating expenses on the
consolidated statements of operations with respect to employee stock options and restricted stock grants as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2008
|
|
Year Ended
December 31, 2007
|
|
Compensation expense with respect to employee stock options
|
|
$
|
764
|
|
$
|
1,167
|
|
Compensation expense with respect to restricted stock grants
|
|
$
|
900
|
|
$
|
2,552
|
The fair value of options granted during the years ended December 31, 2008, 2007 and 2006
were estimated as of the grant date using the Black-Scholes option valuation model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected stock price volatility
|
|
68%
|
|
66%
|
|
79%
|
|
Expected risk-free interest rate
|
|
4.45%
|
|
4.80%
|
|
4.28%
|
|
Expected option term in years
|
|
6.25
|
|
6.25
|
|
6.25
|
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
51
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The approximate weighted-average grant date fair values using the Black-Scholes option valuation
model of all stock options granted during the years ended December 31, 2008, 2007 and 2006 were $0.47, $1.27 and $2.78, respectively.
As of December 31, 2008 there was $1,061 of total unrecognized compensation expense related to unvested stock option grants under the 2007 Stock Plan and 1997 Stock Plan. This expense is expected to be recognized over a
weighted-average period of 1.62 years.
As of December 31, 2008, there was $202 of total unrecognized compensation expense related to
unvested restricted stock issuances under the 2007 Stock Plan and 1997 Stock Plan. This expense is expected to be recognized over a weighted-average period of 1.09 years.
As a result of the sale of 454 discussed in Note 12, 454’s operating results are being reported as discontinued operations for the period January 1, 2007 to May 25, 2007 and the year ended
December 31, 2006. During the period January 1, 2007 to May 25, 2007 and the year ended December 31, 2006, 454 recognized compensation expense of $2,706 and $678, respectively, with respect to employee stock option awards which
is included in income (loss) from discontinued operations.
Comprehensive Income (Loss)
—Statement of Financial
Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”), requires reporting and displaying of comprehensive income (loss) and its components. In accordance with SFAS 130, the accumulated balance of other
comprehensive income (loss) is disclosed as a separate component of stockholders’ equity and is comprised of unrealized gains and losses on short-term investments and marketable securities.
Income Taxes
—Income taxes are provided for as required under Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes” (“SFAS 109”). This statement requires the use of the asset and liability method in determining the tax effect of the “temporary differences” between the tax basis of assets and liabilities
and their financial reporting amounts (see Note 14 for the adoption of FIN 48 “Accounting for Uncertainties in Income Taxes”).
Income (Loss) Per Share
—Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, excluding unvested restricted stock.
Diluted income (loss) per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. For the years ended December 31, 2008, 2007 and 2006 potentially
dilutive securities representing 3,710,560, 3,804,419 and 4,852,431 shares, respectively, of common stock related to outstanding stock options were excluded from the computation of diluted earnings per share because their effect would have been
antidilutive. Anti-dilutive potential common shares, consisting of convertible subordinated debt and restricted stock were 173,195, 8,956,668 and 13,400,954 for the years ended December 31, 2008, 2007 and 2006, respectively.
Fair Value of Financial Instruments
—Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments” requires the disclosure of fair value information for certain assets and liabilities, whether or not recorded in the balance sheets, for which it is practical to estimate that value. The Company has the following
financial instruments: cash and cash equivalents, receivables, accounts payable, accrued expenses and certain other liabilities. The Company considers the carrying amount of these items to approximate fair value due to their short-term nature. In
addition, the Company has short-term investments and marketable securities which are recorded at fair value (see Note 8). The Company also has convertible subordinated debt (see Note 7).
52
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recently Enacted Pronouncements
— In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FAS 115” (“SFAS 159”). SFAS 159 allows companies to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each
subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. The Company does not plan to elect to
re-measure any of its existing financial assets or liabilities under the provisions of this standard.
In December 2007, the FASB ratified
the EITF consensus on Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”). The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to
significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF
99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of
the entity’s business, and whether those payments are within the scope of other accounting literature. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-1 did not have a material impact on
the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally
accepted accounting principles, or GAAP, for nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, “The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles” (“SAS 69”). SFAS 162 is effective 60 days following the United States Securities and Exchange Commission’s (the “SEC”) approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not believe the adoption of SFAS 162 will have a
material effect on its consolidated financial statements.
In May 2008, FASB Staff Position (“FSP”) No. APB 14-1,
“Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” was issued which specifies that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP No. APB 14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. The adoption of FSP No. APB 14-1 did not have a material impact on the Company’s consolidated financial statements.
On January 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent framework for measuring fair value
under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. The valuation techniques described in SFAS 157 are based on observable and unobservable inputs. Observable inputs reflect readily
obtainable data from independent sources, while unobservable inputs reflect our market assumptions. In accordance with the provisions of FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, the Company deferred the
implementation of SFAS 157-2 as it relates to its non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009.
53
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
2.
|
Property and Equipment
|
Property and equipment
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Laboratory equipment
|
|
$
|
69
|
|
$
|
102
|
|
Leasehold improvements
|
|
|
603
|
|
|
863
|
|
Office equipment
|
|
|
3,255
|
|
|
6,141
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
3,927
|
|
|
7,106
|
|
Less accumulated depreciation and amortization
|
|
|
3,825
|
|
|
6,627
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
102
|
|
$
|
479
|
|
|
|
|
|
|
|
|
The decrease in the cost of property and equipment during 2008 was primarily related to write-offs
of assets no longer in use. Depreciation and amortization expense for property and equipment was $176, $2,944 and $6,273, for the years ended December 31, 2008, 2007 and 2006, respectively.
Operating Leases
Total rent expense under all operating leases for 2008, 2007 and 2006 was approximately $744, $1,350 and $1,281, respectively. There are no future minimum
rental payments as of December 31, 2008, as the Company is on a month-to-month payment schedule for its facility in Branford, Connecticut.
|
4.
|
Major Collaborators and Geographical Information
|
The Company has entered into certain agreements with collaborators to provide products or services. There are no long-lived assets in countries other than the United States. Revenues from collaborators representing 10% or more of the
Company’s total collaboration revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
|
Company A
|
|
$
|
1,174
|
|
100
|
%
|
|
$
|
88
|
|
100
|
%
|
|
|
*
|
|
*
|
|
|
Company B
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
$
|
2,110
|
|
92
|
%
|
Revenue by country, based on the location
of each of the collaborators is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
United States
|
|
$
|
—
|
|
$
|
—
|
|
$
|
173
|
|
Europe
|
|
|
1,174
|
|
|
88
|
|
|
2,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,174
|
|
$
|
88
|
|
$
|
2,298
|
|
|
|
|
|
|
|
|
|
|
|
54
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Authorized Capital
Stock
The Company’s authorized capital stock consists of 250,000,000 shares of Common Stock, par value of $.01 per share
(“Common Stock”), 5,000,000 shares of Preferred Stock, par value of $.01 per share and 3,000,000 shares of Non-Voting Common Stock. At December 31, 2008, the Company had reserved 1,958,207 shares of Common Stock for issuance pursuant
to the 4% convertible subordinated notes due in 2011 (see Note 7). In addition, as of December 31, 2008, 6,892,626 and 5,875,000 shares of Common Stock had been reserved for issuance pursuant to the 1997 Stock and the 2007 Stock Plan,
respectively.
Stockholder Rights Plan
In March 2002, the Board of Directors of the Company adopted a stockholder rights plan and declared a dividend distribution of one preferred share purchase right for each outstanding share of the Company’s Common
Stock. Each right entitles registered holders of the Company’s Common Stock to purchase one one-hundredth of a share of a new series of junior participating Preferred Stock, designated as “Series A Junior Participating Preferred
Stock.” The rights generally will be exercisable only if a person (which term includes an entity or group) (i) acquires 20 percent or more of the Company’s Common Stock or (ii) announces a tender offer, the consummation of which
would result in ownership by that person, entity or group of 20 percent or more of the common stock. Once exercisable, the stockholder rights plan allows the Company’s stockholders (other than the acquiror) to purchase Common Stock of the
Company or of the acquiror at a substantial discount.
Stock Options
1993 Stock Plan
The
Company’s 1993 Stock Plan was adopted by its Board of Directors and stockholders in December 1993 and subsequently amended by the Board of Directors in May 1997. The 1993 Stock Plan provided for the issuance of stock options and stock awards to
officers, directors, advisors, employees, and affiliates of CuraGen. Of the 3,000,000 shares of Common Stock which were originally reserved for issuance under the 1993 Stock Plan, no options were outstanding as of December 31, 2008 and
1,576,504 stock options had been exercised under the 1993 Stock Plan as of December 31, 2008. Effective October 1997, upon a resolution by the Board of Directors, the Company will not grant any further options under the 1993 Stock Plan. The
total intrinsic value of options exercised under the 1993 Stock Plan during the year ended December 31, 2006 was $258. There were no options exercised under the 1993 Stock Plan during the year ended December 31, 2008 or 2007. There were no
options outstanding as of December 31, 2008 and 2007.
1997 Stock Plan
The Company’s 1997 Stock Plan was approved by its Board of Directors in October 1997 and by its stockholders in January 1998. The 1997 Stock Plan
provides for the issuance of stock options and stock grants (“Stock Rights”) to employees, directors and consultants of the Company. A total of 3,000,000 shares of Common Stock were originally reserved for issuance under the 1997 Stock
Plan; in May 1999, upon approval of the stockholders, the amount reserved was increased to 7,000,000; and, in May 2003, upon approval of the stockholders, the amount reserved was increased to 10,500,000. The 1997 Stock Plan is administered by the
Compensation Committee of the Board of Directors of the Company (“the Compensation Committee”). The Compensation Committee has the authority to administer the provisions of the 1997 Stock Plan and to determine the persons to whom Stock
Rights will be granted, the number of shares to be covered by each Stock Right and the terms and conditions upon which a Stock Right may be granted. Effective May 2007, upon a resolution by the
55
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Board of Directors, the Company will not grant any further options under the 1997 Stock Plan. Generally, stock option grants to employees under the 1997
Stock Plan fully vest between four and five years from the grant date. As of December 31, 2008, the Company had 1,757,320 options outstanding under the 1997 Stock Plan and 1,656,262 stock options had been exercised under the 1997 Stock Plan.
A summary of all stock option activity under the 1997 Stock Plan during the years ended December 31, 2006, 2007 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding January 1, 2006
|
|
5,183,311
|
|
|
11.54
|
|
6.02
|
|
$
|
18
|
|
Granted
|
|
1,673,070
|
|
|
3.86
|
|
|
|
|
|
|
Exercised
|
|
(112,649
|
)
|
|
3.22
|
|
|
|
|
|
|
Canceled or lapsed
|
|
(506,108
|
)
|
|
14.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2006
|
|
6,237,624
|
|
|
9.37
|
|
6.32
|
|
|
2,166
|
|
Granted
|
|
104,080
|
|
|
4.25
|
|
|
|
|
|
|
Exercised
|
|
(19,400
|
)
|
|
3.70
|
|
|
|
|
|
|
Canceled or lapsed
|
|
(2,625,385
|
)
|
|
13.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
3,696,919
|
|
|
6.21
|
|
5.67
|
|
|
—
|
|
Granted
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
|
|
|
|
|
|
Canceled or lapsed
|
|
(1,939,599
|
)
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
1,757,320
|
|
|
6.51
|
|
4.85
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2006
|
|
3,559,479
|
|
|
12.53
|
|
4.78
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2007
|
|
2,605,910
|
|
|
6.84
|
|
4.81
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2008
|
|
1,506,740
|
|
|
6.87
|
|
4.54
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Expected to Vest December 31, 2008
|
|
194,090
|
|
|
4.28
|
|
5.80
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised under the 1997 Stock Plan during the years ended
December 31, 2008, 2007 and 2006 were $0, $10 and $51, respectively.
56
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents weighted average price information about significant option groups under
the 1997 Stock Plan exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number of
Options Exercisable
|
|
Weighted Average
Remaining
Contractual
Life (in years)
|
|
Weighted Average
Exercise Price
|
|
$ 0-3.88
|
|
503,703
|
|
5.96
|
|
$
|
3.41
|
|
3.94-4.80
|
|
441,747
|
|
5.07
|
|
|
4.44
|
|
5.09-6.00
|
|
306,258
|
|
4.34
|
|
|
5.65
|
|
8.48-8.71
|
|
107,290
|
|
3.89
|
|
|
8.66
|
|
15.83-16.75
|
|
47,875
|
|
2.22
|
|
|
16.30
|
|
24.94-31.66
|
|
78,000
|
|
1.12
|
|
|
27.25
|
|
41.13-53.03
|
|
21,867
|
|
0.59
|
|
|
50.36
|
|
|
|
|
|
|
|
|
|
|
|
|
1,506,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Stock Plan
The 2007 Stock Plan was approved by the Company’s stockholders as of May 2, 2007. The 2007 Stock Plan provides for the issuance of stock options
and stock grants to employees, directors and consultants of the Company. A total of 3,000,000 shares of common stock were originally reserved for issuance under the 2007 Stock Plan; in May 2008, upon approval of the stockholders, the amount reserved
was increased to 6,000,000 shares. The 2007 Stock Plan is administered by the Compensation Committee. The Compensation Committee has the authority to administer the provisions of the 2007 Stock Plan and to determine the persons to whom Stock Rights
will be granted, the number of shares to be covered by each Stock Right and the terms and conditions upon which a Stock Right may be granted. Stock option grants to employees under the 2007 Stock Plan generally fully vest in four years. Of the
6,000,000 shares of Common Stock which are reserved for issuance under the 2007 Stock Plan, 1,953,240 options are outstanding under the 2007 Stock Plan and an additional 3,921,760 available for grant. As of December 31, 2008, no stock options
had been exercised under the 2007 Stock Plan.
A summary of all stock option activity under the 2007 Stock Plan during the years ended
December 31, 2007 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding May 2, 2007
|
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
|
724,556
|
|
|
$
|
1.59
|
|
|
|
|
|
Canceled or lapsed
|
|
(7,008
|
)
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
717,548
|
|
|
|
1.59
|
|
9.45
|
|
—
|
|
Granted
|
|
1,594,400
|
|
|
|
0.72
|
|
|
|
|
|
Canceled or lapsed
|
|
(358,708
|
)
|
|
|
0.81
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
1,953,240
|
|
|
|
1.02
|
|
8.94
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2007
|
|
107,500
|
|
|
|
2.73
|
|
7.94
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2008
|
|
468,765
|
|
|
|
1.45
|
|
8.84
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Expected to Vest December 31, 2008
|
|
1,400,528
|
|
|
|
0.85
|
|
8.97
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
57
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
There were no options exercised under the 2007 Stock Plan during the years ended December 31,
2007 or 2008.
The following table presents weighted average price information about significant option groups under the 2007 Stock Plan
exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number of
Options Exercisable
|
|
Weighted Average
Remaining
Contractual
Life (in years)
|
|
Weighted Average
Exercise Price
|
|
$ 0-0.69
|
|
92,500
|
|
9.07
|
|
$
|
0.69
|
|
0.70-1.09
|
|
92,500
|
|
9.39
|
|
|
1.09
|
|
1.10-1.34
|
|
165,625
|
|
8.74
|
|
|
1.34
|
|
1.35-1.67
|
|
28,140
|
|
8.55
|
|
|
1.67
|
|
1.68-2.73
|
|
90,000
|
|
8.34
|
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
468,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
1997 Stock Plan
From time to
time, the Compensation Committee approves grants for shares of restricted stock. Pursuant to the provisions of the 1997 Stock Plan and 2007 Stock Plan, the purchase price of the restricted stock is equal to the par value of the Company’s Common
Stock, and each grant of restricted stock is subject to certain repurchase rights of the Company. All repurchased shares are immediately retired upon resolutions by the Board of Directors.
A summary of all restricted stock activity under the 1997 Stock Plan during the years ended December 31, 2006, 2007 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares of
Restricted Stock
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding January 1, 2006
|
|
1,043,320
|
|
|
$
|
4.63
|
|
Granted
|
|
455,000
|
|
|
|
4.13
|
|
Restrictions lapsed
|
|
(460,070
|
)
|
|
|
5.31
|
|
Repurchased upon employee termination
|
|
(31,625
|
)
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2006
|
|
1,006,625
|
|
|
|
4.08
|
|
Granted
|
|
487,020
|
|
|
|
4.39
|
|
Restrictions lapsed
|
|
(760,395
|
)
|
|
|
4.09
|
|
Repurchased upon employee termination
|
|
(42,230
|
)
|
|
|
4.51
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
691,020
|
|
|
|
4.25
|
|
Restrictions lapsed
|
|
(326,840
|
)
|
|
|
4.33
|
|
Repurchased upon employee termination
|
|
(228,485
|
)
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
135,695
|
|
|
|
3.59
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested under the 1997 Stock Plan during the years ended
December 31, 2008, 2007 and 2006 was $150, $700 and $1,823, respectively.
58
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2008, of the 135,695 outstanding shares of restricted stock, 75,000 shares
were issued in 2006 and will fully vest on the third anniversary of each grant date. The remaining 60,695 outstanding shares of restricted stock which were issued in 2007 will fully vest on the second anniversary of each grant date.
2007 Stock Plan
A summary of
all restricted stock activity under the 2007 Stock Plan during the years ended December 31, 2007 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares of
Restricted Stock
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding May 2, 2007
|
|
—
|
|
|
|
—
|
|
Granted
|
|
1,050,000
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
1,050,000
|
|
|
|
1.28
|
|
Granted
|
|
50,000
|
|
|
|
0.68
|
|
Restrictions lapsed
|
|
(37,500
|
)
|
|
|
1.66
|
|
Repurchased upon employee termination
|
|
(975,000
|
)
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
87,500
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested under the 2007 Stock Plan during the year ended
December 31, 2008 was $17.
On May 25, 2007, the Compensation Committee of the Company approved the issuance of an aggregate of
975,000 shares of restricted common stock to five executive officers, which would have vested and become free from forfeiture on December 31, 2008, if the closing price of the common stock on the Nasdaq Global Market had equaled or exceeded
$5.00 per share over a period of 20 consecutive trading days for any period ending on or before December 31, 2008 and if each executive was an employee of the Company as of December 31, 2008. Pursuant to SFAS 123R, these restricted
stock awards were deemed to contain a market condition which is reflected in the grant-date fair value of the awards, based on a valuation technique which considered all the possible outcomes of such market condition. Compensation cost is required
to be recognized over the requisite service period for an award with a market condition provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. Due to involuntary terminations during the first
quarter of 2008 of three of the five executive officers, 525,000 of the original 975,000 shares were cancelled. The Company reversed previously recognized compensation cost for the 525,000 shares, as the requisite service was not fully rendered. On
December 31, 2008, the remaining 450,000 shares were cancelled as the market condition was not met. The Company did not reverse previously recognized compensation cost for the 450,000 shares, as the requisite service was rendered.
As of December 31, 2008, of the 87,500 outstanding shares of restricted stock, 37,500 shares were issued in 2007 and will fully vest on the
second anniversary of each grant date. The remaining 50,000 outstanding shares of restricted stock which were issued in 2008 will partially vest on the first, second and third anniversary of each grant date.
59
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company provides for income taxes
using the asset and liability method. The difference between the income tax (provision) benefit and the amount that would be computed by applying the statutory Federal income tax rate to income (loss) from continuing operations before income tax
(provision) benefit is attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income (loss) from continuing operations before income tax benefit
|
|
$
|
25,103
|
|
|
$
|
(50,148
|
)
|
|
$
|
(57,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax (provision) benefit at 35%
|
|
|
(8,786
|
)
|
|
|
17,552
|
|
|
|
20,139
|
|
|
Connecticut taxes, including research and development credits subject to carryforward, net of federal benefit
|
|
|
(936
|
)
|
|
|
622
|
|
|
|
3,426
|
|
|
Federal research and development credits subject to carryforward
|
|
|
333
|
|
|
|
1,472
|
|
|
|
1,458
|
|
|
Decrease (increase) in valuation allowance on deferred tax asset
|
|
|
9,052
|
|
|
|
(19,327
|
)
|
|
|
(24,284
|
)
|
|
Other
|
|
|
15
|
|
|
|
(134
|
)
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (provision) benefit
|
|
$
|
(322
|
)
|
|
$
|
185
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2008, the Company recorded an income tax expense of $515
primarily as a result of Federal Alternative Minimum Tax (“AMT”) liability.
The income tax benefits were recorded as a result of
Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for forgoing carryforward of the research and development
credit. For the years ended December 31, 2008 and 2006, the income tax benefit included an adjustment resulting from the expiration of the State of Connecticut statute, as they relate to the Year 2003 and 2002 income tax benefit, respectively.
Temporary differences and carryforwards that give rise to the deferred income tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
198,841
|
|
|
$
|
209,268
|
|
|
Research and development tax credit carryforwards
|
|
|
30,698
|
|
|
|
29,492
|
|
|
Stock options and restricted stock
|
|
|
3,361
|
|
|
|
2,811
|
|
|
Depreciation and amortization
|
|
|
350
|
|
|
|
367
|
|
|
Accumulated other comprehensive loss (income)
|
|
|
157
|
|
|
|
(9
|
)
|
|
Other
|
|
|
227
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
233,634
|
|
|
$
|
242,515
|
|
|
Valuation allowance
|
|
|
(233,634
|
)
|
|
|
(242,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
As the Company has no prior earnings history, a valuation allowance has been established to fully
offset the Company’s deferred tax asset since it is more likely than not that the Company will not realize such assets. A tax benefit of approximately $31,068 related to stock options, will be credited to equity when the benefit is realized.
60
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2008, CuraGen has tax net operating loss carryforwards available to reduce
future federal and Connecticut taxable income, research and development tax credit carryforwards available to offset future federal and Connecticut income taxes. Utilization of the net operating loss and tax credit carryforwards may be limited due
to changes to our ownership, as defined within Section 382 of the Internal Revenue Code.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
|
|
|
|
Federal
|
|
Expire In
|
|
Connecticut
|
|
Expire In
|
|
|
|
|
|
$
|
506,317
|
|
2009 to 2028
|
|
$
|
443,687
|
|
2021 to 2028
|
|
|
|
|
|
|
|
|
|
|
Research and Development Tax Credit Carryforwards
|
|
|
|
|
|
Federal
|
|
Expire In
|
|
Connecticut
|
|
Expire In
|
|
|
|
|
|
$
|
20,653
|
|
2009 to 2028
|
|
$
|
14,573
|
|
2014 to 2023
|
|
|
In addition, the Company has a Federal AMT tax credit carryforward of $515 which does not expire.
|
7.
|
Convertible Subordinated Debt
|
4% Convertible
Subordinated Notes Due 2011
In 2004, the Company completed an offering of $110,000 of 4% convertible subordinated notes due
February 15, 2011 and received net proceeds of approximately $106,200. During 2007, the Company repurchased a total of $40,110 of its 4% convertible subordinated debentures due February 2011, for total consideration of $31,024, plus accrued
interest of $365 to the date of repurchase. As a result of the transaction, in 2007 the Company recorded a gain of $8,442 classified as Gain on extinguishment of debt on the consolidated statements of operations, which is net of the effect of the
write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt. During 2008, the Company repurchased a total of $50,923 of its 4% convertible subordinated debentures due February 2011, for total
consideration of $43,247, plus accrued interest of $498 at the date of repurchase. As a result of the transaction, in 2008 the Company recorded a gain of $6,991 classified as Gain on extinguishment of debt on the consolidated statements of
operations, which is net of the effect of the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt.
The remaining $18,967 of notes may be resold by the initial purchasers to qualified institutional buyers under Rule 144A of the Securities Act and to non-U.S. persons outside the United States under Regulation S under
the Securities Act. The notes are convertible by the holders of the notes into the Company’s Common Stock at any time prior to the close of business on the maturity date of the notes, unless previously redeemed or repurchased, at a conversion
rate of approximately $9.69 per share of Common Stock, or a total of 1,958,207 shares of Common Stock issuable upon conversion of the notes as of December 31, 2008.
In addition, during the period commencing February 18, 2009, to and including February 14, 2010, the Company has the right to redeem the notes at a redemption price equal to 101.143% of the principal amount
of the notes plus accrued and unpaid interest, if any, to, but not including, the redemption date; and beginning on February 15, 2010, the Company has the right to redeem the notes at a redemption price equal to 100.571% of the principal amount
of the notes plus accrued and unpaid interest, if any, to, but not including, the redemption date. The market value of the notes, based on quoted market prices, was approximately $16,122 as of December 31, 2008.
61
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company pays interest in cash on the notes on February 15 and August 15 of each year.
Related interest expense for the years ended December 31, 2008, 2007 and 2006 was $1,480, $4,200 and $4,400, respectively.
The Company purchases short-term
investments and marketable securities consisting of debt securities, which have been designated as “available-for-sale” as required by Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in
Debt and Equity Securities.” Available-for-sale securities are carried at fair value with the unrealized gains and losses reported in stockholders’ equity under the caption Accumulated other comprehensive income (loss). The amortized cost
of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on debt securities, amortization of premiums and accretion of discounts is included in interest income. All of the securities in the
Company’s investment portfolio are priced by the Company’s investment manager, an independent third party. On a quarterly basis, the Company obtains a second price for each security to compare to the price obtained from its investment
manager. As of December 31, 2008, there were no material variances in the prices obtained from these two sources and as such the Company has used the pricing provided by its investment manager. The cost of securities sold is based on the
specific identification method.
At December 31, 2008 the Company had 9.6% of its cash and investment securities in mortgage-backed
securities. All of these mortgage-backed securities are sponsored by the United States Federal Government and are rated AAA by Moody’s. Additionally, the Company had 9.1% of its cash and investment securities in asset-backed securities at
December 31, 2008 which consist of auto, credit card and equipment loans. The mortgage-backed securities had an unrealized gain of $163 as of December 31, 2008. During 2008, the Company recorded impairment losses of $337 on certain
asset-backed securities. The Company believes that any other individual unrealized loss as of December 31, 2008 represents only a temporary impairment, and no further adjustment of carrying values is warranted. In January 2009, the Company
liquidated all asset-backed securities in its portfolio resulting in an immaterial gain as compared to their book value at December 31, 2008.
The amortized cost, gross unrealized gains and losses and estimated fair value based on published closing prices of securities at December 31, 2008 and 2007, by contractual maturity, are shown below. Contractual maturities of
mortgage-backed and asset-backed securities are allocated in the tables based on the expected maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
57,646
|
|
$
|
314
|
|
$
|
166
|
|
$
|
57,794
|
|
Due in one through three years
|
|
|
10,522
|
|
|
245
|
|
|
—
|
|
|
10,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for sale securities
|
|
$
|
68,168
|
|
$
|
559
|
|
$
|
166
|
|
$
|
68,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In September 2007 the Company sold its equity investment in TopoTarget for proceeds of $6,260 and
realized a gain of $973. In November 2007, the Company sold one of its investments to partially fund the repurchases of the 4% convertible debentures and realized a loss of $308.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
53,072
|
|
$
|
27
|
|
$
|
111
|
|
$
|
52,988
|
|
Due in one through three years
|
|
|
30,665
|
|
|
135
|
|
|
74
|
|
|
30,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for sale securities
|
|
$
|
83,737
|
|
$
|
162
|
|
$
|
185
|
|
$
|
83,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 the Company realized no gross gains and gross losses of
$358 on securities sold or deemed “other than temporary impairment”. For the year ended December 31, 2007, the Company realized gross gains of $1,033 and gross losses of $418 on securities sold. For the year ended December 31,
2006, the Company realized no gross gains and gross losses of $288.
The following tables show the gross unrealized losses and fair values
of the Company’s investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months, aggregated by contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Due in one year or less
|
|
$
|
4,646
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Due in one year or less
|
|
$
|
8,054
|
|
$
|
3
|
|
|
|
|
|
|
|
|
There were no securities that have been in a continuous unrealized loss position deemed to be
temporary for more than 12 months at December 31, 2008.
The following table shows the gross unrealized losses and fair values of the
Company’s investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for more than 12 months at December 31, 2007, aggregated by contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Due in one year or less
|
|
$
|
27,689
|
|
$
|
108
|
|
Due in one through three years
|
|
|
13,778
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,467
|
|
$
|
182
|
|
|
|
|
|
|
|
|
On January 1, 2008, the Company adopted SFAS 157. SFAS 157 defines fair value, provides a
consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. The valuation techniques defined in SFAS 157 are based on
63
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market
assumptions. SFAS 157 classifies these inputs into the following hierarchy:
Level 1 Inputs
– Quoted prices for identical
instruments in active markets.
Level 2 Inputs
– Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs
– Instruments with primarily unobservable value drivers.
The following table represents the fair value hierarchy for those financial assets measured at fair value on a recurring basis as of December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of December 31,
2008
|
|
Assets
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
18,517
|
|
$
|
—
|
|
$
|
|
|
$
|
18,517
|
|
Short-term investments
|
|
|
—
|
|
|
30,332
|
|
|
—
|
|
|
30,332
|
|
Marketable securities
|
|
|
—
|
|
|
38,229
|
|
|
—
|
|
|
38,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
18,517
|
|
$
|
68,561
|
|
$
|
—
|
|
$
|
87,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I securities consist primarily of Money Market accounts. Level II securities primarily
consist of investment grade fixed income securities.
The Company’s investment portfolio has not been adversely materially impacted by
the recent disruption in the credit markets. However, if there is continued and expanded disruption in the credit markets this may have a potential impact on the determination of the fair value of financial instruments. Additionally, there can
be no assurance that the Company’s investment portfolio will not be adversely affected in the future.
During 2007, the Company
underwent corporate restructurings to reduce operating costs and to focus resources on the advancement of its therapeutic pipeline through clinical development, resulting in a restructuring charge of $11,274. This amount included an asset impairment
charge of $6,322 (associated with the closure of its pilot manufacturing plant, also known as the Biopharmaceutical Sciences Process facility, on July 27, 2007), $4,408 related to employee separation costs paid or payable in cash, $286 of
non-cash employee separation costs and $258 of other asset write-offs.
In connection with a reduction in work force of eight employees in
December 2008, the Company also recorded a restructuring charge of $529 which consists of employee separation costs, payable in cash during the first half of 2009. The charge has been classified within Other current liabilities.
64
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the cash payments and balance of the restructuring reserve as of and
for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve at
December 31,
2007
|
|
Charges
in 2008
|
|
Cash
Payments
in 2008
|
|
Change in
Reserve
2008
|
|
|
Reserve at
December 31,
2008
|
|
Restructuring—2007
|
|
$
|
2,791
|
|
$
|
—
|
|
$
|
2,708
|
|
$
|
(80
|
)
|
|
$
|
3
|
|
Restructuring—2008
|
|
|
—
|
|
|
529
|
|
|
6
|
|
|
—
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS
|
|
$
|
2,791
|
|
$
|
529
|
|
$
|
2,714
|
|
$
|
(80
|
)
|
|
$
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
TopoTarget A/S Collaboration and License Agreement
|
On April 21, 2008, the Company entered into a transfer and termination agreement (the “Transfer Agreement”) with TopoTarget to transfer CuraGen’s ownership and development rights to belinostat, a Phase I/II HDAC
Inhibitor, and any other HDAC Inhibitors. There was no book value for belinostat. In consideration for the transfer, the Company received $24,583 in net cash proceeds and 5 million shares of TopoTarget common stock, valued at $11,814 as of the
date of the Transfer Agreement based on the closing price of TopoTarget common stock (in DKK on the Copenhagen Exchange) on the date of the sale, April 21, 2008, multiplied by the exchange rate for the same date. In addition, the Company is
eligible to receive $6,000 in potential payments on future net sales and sublicenses of belinostat.
On June 3, 2008, the Company sold
the 5 million shares of TopoTarget common stock for cash proceeds of $11,799. Additionally in June 2008, the Company recorded a $36,397 gain on sale of intangible asset, consisting of net cash proceeds of $24,583 and the fair value of
5 million shares of TopoTarget stock of $11,814 on the closing date, April 21, 2008.
Under the Transfer Agreement, the Company
assigned certain patents and granted a perpetual irrevocable license to the development and commercialization of the HDAC Inhibitors to TopoTarget and agreed for a period not to compete with TopoTarget in the HDAC Inhibitor market. The Transfer
Agreement contains customary representations and warranties, indemnification obligations of the parties and a mutual release from most claims under the License Agreement (as defined below). The Transfer Agreement terminates the License and
Collaboration Agreement between TopoTarget and CuraGen dated as of June 3, 2004 (the “License Agreement”) with the exception of provisions preserving certain of the parties’ rights, including confidentiality and indemnification
under the License Agreement. CuraGen will no longer have funding requirements for belinostat as TopoTarget immediately assumed financial and operational responsibility for the ongoing clinical development at the time of signing the Transfer
Agreement.
In connection with the Transfer Agreement, the Company and TopoTarget also entered into a Transition Services Agreement dated
April 21, 2008 (the “TSA”), pursuant to which, for fees payable by TopoTarget, CuraGen provided certain regulatory and administrative services to TopoTarget. All services under the TSA terminated as of December 31, 2008.
|
11.
|
Seattle Genetics, Inc. Collaboration Agreement
|
In
June 2004, the Company and Seattle Genetics, Inc. (“Seattle Genetics”) entered into a collaboration agreement to license Seattle Genetics’ proprietary antibody-drug conjugate (“ADC”) technology for use with the
Company’s proprietary antibodies for the potential treatment of cancer. The Company paid an upfront fee of $2,000 for access to the ADC technology for use in one of its proprietary antibody programs. In February 2005,
65
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the Company also exercised its option to access Seattle Genetics’ ADC technology for use with a second antibody program in exchange for a $1,000
payment. In June 2006, the Company paid a milestone payment for the enrollment of the first patient in the first Phase I clinical trial of CR011-vcMMAE for the treatment of metastatic melanoma. In April 2008, the Company paid a milestone payment for
the initiation of a Phase II clinical trial of CR011-vcMMAE. All payments discussed above were fully expensed at the time of payment, pursuant to the Company’s accounting policy for such fees.
The Company is responsible for research, product development, manufacturing and commercialization of all products under the collaboration, and will pay
maintenance and material supply fees as well as research support payments for any assistance provided by Seattle Genetics in developing ADC products.
|
12.
|
454 Life Sciences/Roche Holdings, Inc. Merger
|
On
March 28, 2007, 454 entered into the Merger Agreement with Roche Holdings, Inc. and 13 Acquisitions, Inc., an indirect wholly-owned subsidiary of Roche Holdings, Inc. Roche Holdings, Inc. subsequently assigned the Merger Agreement to its
affiliate RDO. Roche Holdings, Inc. and RDO are affiliates of Roche, a global research-based healthcare company. Under the Merger Agreement, 13 Acquisitions, Inc. was merged with and into 454 (the “Merger”), with 454 continuing after the
Merger as the surviving corporation and an indirect wholly-owned subsidiary of Roche Holdings, Inc.
Under the terms of the Merger
Agreement, upon the closing of the sale of 454 to RDO on May 25, 2007, the purchase price before transaction costs was $152,019, of which RDO paid $140,000 in cash and $12,019 was received from the exercise of 454 stock options following the
signing of the Merger Agreement and prior to the closing of the sale. Of the $140,000 received from RDO, $25,000 was placed in escrow for a period of 15 months, or until August 25, 2008, to provide for certain post-closing adjustments based on
454’s net working capital and net debt on May 25, 2007, and to secure the indemnification rights of RDO and its affiliates. The Company’s portion of the purchase price after transaction costs, including the net working capital and net
debt adjustment and the amount from the escrow, was $82,023. On August 25, 2008, the time period for submission of claims against the escrow expired and as such, $14,677 was released to the Company by the escrow agent.
|
13.
|
Discontinued Operations
|
The sale of 454 on
May 25, 2007 has been accounted for in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (“SFAS 144”), and 454’s operating
results are reported as a discontinued operation for the period January 1, 2007 to May 25, 2007 and the year ended December 31, 2006.
66
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the financial information for the discontinued operations of 454 for
the period January 1, 2007 to May 25, 2007 and the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
to
May 25, 2007
|
|
|
Year ended
December 31,
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
14,210
|
|
|
$
|
19,417
|
|
|
Sequencing service revenue
|
|
|
3,825
|
|
|
|
10,025
|
|
|
Collaboration revenue
|
|
|
1,350
|
|
|
|
1,500
|
|
|
Grant revenue
|
|
|
444
|
|
|
|
2,296
|
|
|
Milestone revenue
|
|
|
3,707
|
|
|
|
4,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
23,536
|
|
|
$
|
37,288
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
9,015
|
|
|
$
|
11,586
|
|
|
Cost of sequencing service revenue
|
|
|
2,407
|
|
|
|
4,334
|
|
|
Grant research expenses
|
|
|
425
|
|
|
|
2,095
|
|
|
Research and development expenses
|
|
|
7,908
|
|
|
|
14,535
|
|
|
General and administrative expenses
|
|
|
7,075
|
|
|
|
8,810
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
26,830
|
|
|
$
|
41,360
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before minority interest
|
|
$
|
(3,053
|
)
|
|
$
|
(3,655
|
)
|
|
Minority interest in loss of discontinued consolidated subsidiary
|
|
|
62
|
|
|
|
980
|
|
|
Gain on sale of subsidiary
|
|
|
78,352
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
75,361
|
|
|
$
|
(2,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Accounting for Uncertainty in Income Taxes
|
In
July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting for taxes in interim periods and disclosure requirements. The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48.
Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance
of retained earnings for that fiscal year. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. For the Company, this interpretation was effective beginning January 1, 2007.
67
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As a result of the implementation of FIN 48, the Company recorded no adjustments in its unrecognized
income tax benefits. The following table depicts the components of the Company’s unrecognized income tax benefits as of December 31, 2008.
|
|
|
|
|
|
|
Liability for Unrecognized Tax Benefits
|
|
|
|
|
|
Unrecognized tax benefits, January 1, 2008
|
|
$
|
907
|
|
|
Gross increases—tax positions in prior periods
|
|
|
13
|
|
|
Lapse of statute of limitations
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
Unrecognized tax benefits, December 31, 2008
|
|
$
|
825
|
|
|
|
|
|
|
|
If recognized, all of the unrecognized tax benefits would be recorded as a benefit to income tax
expense on the consolidated statements of operations. To the extent penalties and interest would be assessed on any underpayment of income tax, the Company’s policy is that such amounts would be accrued and classified as a component of income
tax expense in the financial statements. To date the Company has not accrued any interest or penalties as they would be immaterial.
As a
result of net operating loss carryforwards, the Company’s federal tax returns since 1993 remain open to examination with no years currently under examination by the Internal Revenue Service, and the Company’s Connecticut tax returns remain
open to examination for all years since 2000 with no years currently under examination by the Department of Revenue Services.
68
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
15.
|
Income (Loss) Per Share from Continuing Operations
|
Basic income (loss) per share from continuing operations is computed by dividing income (loss) from continuing operations by the weighted average number of shares of common stock outstanding for the period, excluding unvested restricted
stock. Diluted income (loss) per share from continuing operations reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Potential common shares consist of
unvested restricted stock (using the treasury stock method) and the conversion of the Company’s convertible subordinated debt. Due to the Company’s loss from continuing operations during the years ended December 31, 2007 and 2006, no
calculation of diluted income (loss) per share was necessary for those periods as all potential shares would have been antidilutive. The following table sets forth the computation of basic and diluted net income from continuing operations per share
for the year ended December 31, 2008 (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
Year Ended
December 31,
2008
|
|
Basic:
|
|
|
|
|
Numerator:
|
|
|
|
|
Income from continuing operations
|
|
$
|
24,781
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average common shares
|
|
|
56,737,976
|
|
|
|
|
|
|
Income from continuing operations per share—basic
|
|
$
|
0.44
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
Numerator:
|
|
|
|
|
Income from continuing operations
|
|
$
|
24,781
|
|
Interest expense
|
|
|
1,648
|
|
|
|
|
|
|
Income for diluted calculation
|
|
$
|
26,429
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Denominator for basic calculation
|
|
|
56,737,976
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
Restricted stock awards
|
|
|
18,576
|
|
Convertible subordinated notes
|
|
|
3,885,935
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
60,642,487
|
|
|
|
|
|
|
Income from continuing operations per share—diluted
|
|
$
|
0.44
|
|
|
|
|
|
69
CURAGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
16.
|
Summary of Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
22
|
|
|
$
|
1,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total operating expenses
|
|
|
7,086
|
|
|
|
5,078
|
|
|
|
4,529
|
|
|
|
4,063
|
|
|
(Loss) income from continuing operations
|
|
|
(6,773
|
)
|
|
|
39,258
|
|
|
|
(3,982
|
)
|
|
|
(3,722
|
)
|
|
Net (loss) income(1)
|
|
|
(6,773
|
)
|
|
|
39,258
|
|
|
|
(3,982
|
)
|
|
|
(3,722
|
)
|
|
Basic net (loss) income per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.69
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
Diluted net (loss) income per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.65
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
Total operating expenses
|
|
|
15,515
|
|
|
|
21,432
|
|
|
|
11,699
|
|
|
|
11,062
|
|
|
Loss from continuing operations
|
|
|
(15,908
|
)
|
|
|
(21,585
|
)
|
|
|
(9,897
|
)
|
|
|
(2,572
|
)
|
|
Net (loss) income(2)
|
|
|
(17,047
|
)
|
|
|
54,913
|
|
|
|
(9,897
|
)
|
|
|
(2,571
|
)
|
|
Basic and diluted net (loss) income per share
|
|
$
|
(0.31
|
)
|
|
$
|
0.98
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.04
|
)
|
The sale of 454 on May 25, 2007 has been accounted for in accordance with SFAS 144. In
addition, 454’s operating results are reported as a discontinued operation for the year ended December 31, 2006, and for the period January 1, 2007 to May 25, 2007.
|
(1)
|
The Company recorded a gain on sale of intangible asset of $36,397 as a result of the sale of belinostat to TopoTarget in April 2008.
|
|
(2)
|
During May 2007, the sale of 454 to RDO closed and as a result the Company recognized a gain on the sale of its ownership in 454 of $78,352.
|
|
17.
|
Subsequent Event—Extinguishment of Debt
|
During February 2009, the Company repurchased $4,825 of its 4% convertible subordinated debentures due February 2011, for total consideration of $3,812, plus accrued interest of $90 at the date of repurchase. As a result of the transaction,
in the first quarter of 2009 the Company will record a gain of $962 which is net of the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt.
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CuraGen Corporation
Branford,
Connecticut
We have audited the accompanying consolidated balance sheets of CuraGen Corporation and subsidiary (the “Company”) as
of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. We also have audited the
Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management Report. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the CuraGen Corporation and subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the
criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Hartford, CT
March 9, 2009
71
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
Not applicable.
|
Item 9A.
|
Controls and Procedures
|
|
1.
|
Disclosure Controls and Procedures
|
Our management,
with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31,
2008, our disclosure controls and procedures were effective at the reasonable assurance level.
|
2.
|
Internal Controls over Financial Reporting
|
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed
by, or under the supervision of, the company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
|
|
•
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
•
|
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
|
•
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Under the supervision and with the participation of management, including our chief executive officer and
chief financial officer, we assessed our internal control over financial reporting as of December 31, 2008, based on criteria for effective internal control over financial reporting established in “Internal Control—Integrated
Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31,
2008, based on the specified criteria.
72
Deloitte & Touche LLP has issued an attestation report on our internal control over financial
reporting, which report is included elsewhere in this Annual Report on Form 10-K.
No change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended as of December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
|
Item 9B.
|
Other Information
|
Not
applicable.
73
PART III
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
|
The information relating to our directors, nominees for election as directors, executive officers, audit committee, code of ethics and corporate code of conduct and changes to the procedures by which our security
holders may recommend nominees to our board of directors that appears under the headings “Proposal One—Election of Directors”, “Executive Officers”, “Corporate Governance”, “Code of Ethics and Corporate Code
of Conduct” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders is incorporated herein by reference to such proxy statement.
|
Item 11.
|
Executive Compensation
|
The
discussion under the headings “Executive Compensation”, “Director Compensation”, “Compensation Discussion and Analysis”, “Compensation Committee Report” and “Compensation Committee Interlocks and Insider
Participation” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders is incorporated herein by reference to such proxy statement.
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The discussion under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our
definitive proxy statement for our 2009 Annual Meeting of Stockholders is incorporated herein by reference to such proxy statement.
|
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
The discussion under the headings “Certain Relationships and Related Transactions” and “Corporate Governance” in our definitive proxy
statement for our 2009 Annual Meeting of Stockholders is incorporated herein by reference to such proxy statement.
|
Item 14.
|
Principal Accountant Fees and Services
|
The discussion under the heading “Principal Accountant Fees and Services” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
74
PART IV
|
Item 15.
|
Exhibits and Financial Statement Schedules
|
ITEM 15 (a)(1)
Financial Statements
The
following Financial Statements are included in Item 8:
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
ITEM 15 (a)(2)
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
ITEM 15 (a)(3)
Exhibits
Reference is made to the index to
Exhibits on page 84.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
Dated: March 10, 2009
|
|
|
|
C
URA
G
EN
C
ORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ S
EAN
A. C
ASSIDY
|
|
|
|
|
|
|
|
|
|
Sean A. Cassidy
Vice President and
Chief Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ T
IMOTHY
M. S
HANNON
,
M.D.
|
|
President and Chief Executive Officer
|
|
Timothy M. Shannon, M.D.
|
|
(principal executive officer of the registrant)
|
|
|
|
|
/s/ S
EAN
A. C
ASSIDY
|
|
Vice President and Chief Financial Officer
|
|
Sean A. Cassidy
|
|
(principal financial and accounting officer of the registrant)
|
|
|
|
|
/s/ V
INCENT
T. D
E
V
ITA
, J
R
.,
M.D.
|
|
Director
|
|
Vincent T. DeVita, Jr, M.D.
|
|
Dated: March 9, 2009
|
|
|
|
|
/s/ J
OHN
H. F
ORSGREN
|
|
Director
|
|
John H. Forsgren
|
|
Dated: March 9, 2009
|
|
|
|
|
/s/ J
AMES
J. N
OBLE
, M.A.,
F.C.A.
|
|
Director
|
|
James J. Noble, M.A., F.C.A.
|
|
Dated: March 9, 2009
|
|
|
|
|
/s/ R
OBERT
E. P
ATRICELLI
,
J.D.
|
|
Director
|
|
Robert E. Patricelli, J.D.
|
|
Dated: March 9, 2009
|
|
|
|
|
/s/ P
ATRICK
J. Z
ENNER
|
|
Director
|
|
Patrick J. Zenner
|
|
Dated: March 9, 2009
|
76
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Form and
SEC File No.
|
|
SEC
Filing Date
|
|
Exhibit
No.
|
|
Filed with
this 10-K
|
|
|
|
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
|
|
|
|
|
|
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated March 28, 2007, by and among 454 Life Sciences Corporation, Roche Holdings, Inc. and 13 Acquisitions, Inc.
|
|
8-K
(000-23223)
|
|
4-2-2007
|
|
99.1
|
|
|
|
|
|
|
|
|
Certificate of Incorporation and By-Laws
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation of the Registrant
|
|
S-1/A
(333-38051)
|
|
3-13-1998
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant
|
|
10-Q
(000-23223)
|
|
8-12-2003
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Certificate of Designation, Series A Junior Participating Preferred Stock of the Registrant
|
|
10-K
(000-23223)
|
|
3-26-2003
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Amended and Restated By-Laws of the Registrant
|
|
10-Q
(000-23223)
|
|
11-4-2005
|
|
4.1
|
|
|
|
|
|
|
|
|
Instruments Defining the Rights of Security Holders
|
|
|
|
|
|
|
|
|
4.1
|
|
Form of Common Stock Certificate of the Registrant
|
|
S-1/A
(333-38051)
|
|
3-13-1998
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Indenture, dated February 17, 2004 between the Registrant and The Bank of New York, as trustee
|
|
10-K
(000-23223)
|
|
3-11-2004
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Stockholder Rights Agreement, dated March 27, 2002, by and between the Registrant and American Stock Transfer and Trust Company
|
|
10-K
(000-23223)
|
|
4-1-2002
|
|
4.4
|
|
|
|
|
|
|
|
|
Material Contracts—Equity Compensation Plans and Related Agreements
|
|
|
|
|
|
|
|
|
10.1#
|
|
1997 Employee, Director and Consultant Stock Plan of the Registrant, as amended and restated through January 26, 2005
|
|
8-K
(000-23223)
|
|
2-7-2005
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
10.2#
|
|
2007 Stock Incentive Plan of the Registrant as amended and restated through May 21, 2008
|
|
10-Q
(000-23223)
|
|
8-7-2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
10.3#
|
|
Form of Non-Qualified Stock Option Agreement (Pre May 3, 2006) (Standard) under the 1997 Employee, Director and Consultant Stock Plan of the Registrant
|
|
8-K
(000-23223)
|
|
2-7-2005
|
|
99.3
|
|
|
|
|
|
|
|
|
|
|
10.4#
|
|
Form of Non-Qualified Stock Option Agreement (Pre May 3, 2006) (Director & Officer) under the 1997 Employee, Director and Consultant Stock Plan of the Registrant
|
|
8-K
(000-23223)
|
|
2-7-2005
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
10.5#
|
|
Form of Non-Qualified Stock Option Agreement (Effective May 3, 2006) (Standard) under the 1997 Employee, Director and Consultant Stock Plan of the Registrant
|
|
10-Q
(000-23223)
|
|
8-9-2006
|
|
10.5
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Form and
SEC File No.
|
|
SEC
Filing Date
|
|
Exhibit
No.
|
|
Filed with
this 10-K
|
|
|
|
|
|
|
|
|
10.6#
|
|
Form of Non-Qualified Stock Option Agreement (Effective May 3, 2006) (Director & Officer) under the 1997 Employee, Director and Consultant Stock Plan of the Registrant
|
|
10-Q
(000-23223)
|
|
8-9-2006
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
10.7#
|
|
Form of Nonstatutory Stock Option Agreement (Effective May 2, 2007) (Standard) under the 2007 Stock Incentive Plan of the Registrant
|
|
10-Q
(000-23223)
|
|
8-9-2007
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
10.8#
|
|
Form of Nonstatutory Stock Option Agreement (Effective January 24, 2008) under the 2007 Stock Incentive Plan of the Registrant
|
|
10-K
(000-23223)
|
|
3-13-2008
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
10.9#
|
|
Nonstatutory Stock Option Agreement, dated September 25, 2007, under the 2007 Stock Incentive Plan of the Registrant between the Registrant and Timothy M. Shannon, M.D.
|
|
10-Q
(000-23223)
|
|
11-9-2007
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
10.10#
|
|
Form of Incentive Stock Option Agreement under the 1997 Employee, Director and Consultant Stock Plan of the Registrant
|
|
8-K
(000-23223)
|
|
2-7-2005
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
10.11#
|
|
Form of Incentive Stock Option Agreement (Effective May 2, 2007) under the 2007 Stock Incentive Plan of the Registrant
|
|
10-Q
(000-23223)
|
|
8-9-2007
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
10.12#
|
|
Form of Restricted Stock Agreement under the 1997 Employee, Director and Consultant Stock Plan of the Registrant
|
|
8-K
(000-23223)
|
|
2-7-2005
|
|
99.6
|
|
|
|
|
|
|
|
|
|
|
10.13#
|
|
Form of Restricted Stock Agreement under the 2007 Stock Incentive Plan of the Registrant
|
|
10-Q
(000-23223)
|
|
8-9-2007
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
10.14#
|
|
Executive Incentive Plan of the Registrant
|
|
8-K
(000-23223)
|
|
2-7-2005
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
10.15#
|
|
Revised Board of Directors Compensation Policy of the Registrant, approved March 29, 2006
|
|
10-Q
(000-23223)
|
|
5-10-2006
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
10.16#
|
|
Executive Officer Compensation Summary
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
10.17#
|
|
Non-Employee Director Compensation Summary
|
|
|
|
|
|
|
|
*
|
|
|
|
Material Contracts—Stock Purchase, Registration Rights and Underwriting Agreements
|
|
|
|
|
|
|
|
|
10.18
|
|
Purchase Agreement, dated February 10, 2004, between the Registrant and Bear, Stearns & Co., Inc.
|
|
10-K
(000-23223)
|
|
3-11-2004
|
|
10.30
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Registration Rights Agreement, dated February 17, 2004 among the Registrant and Bear, Stearns & Co. Inc., as the initial purchaser
|
|
10-K
(000-23223)
|
|
3-11-2004
|
|
10.31
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Underwriting Agreement, dated August 9, 2005, by and between the Registrant and Bear, Stearns & Co., Inc.
|
|
8-K
(000-23223)
|
|
8-10-2005
|
|
1.1
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Form and
SEC File No.
|
|
SEC
Filing Date
|
|
Exhibit
No.
|
|
Filed with
this 10-K
|
|
|
|
|
|
|
|
|
10.21
|
|
Stock Purchase Agreement, dated January 12, 2001, by and between Bayer AG and the Registrant
|
|
10-K
(000-23223)
|
|
3-28-2001
|
|
10.26
|
|
|
|
|
|
|
|
|
|
|
10.22#
|
|
Indemnity Agreement, dated August 1, 2007, between 454 Life Sciences Corporation and the Registrant
|
|
10-Q
(000-23223)
|
|
11-9-2007
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Material Contracts—Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23#
|
|
Assignment and Assumption of Lease with Landlord’s Consent and Release, dated August 1, 2007, between ZFI Group, LLC, 454 Life Sciences Corporation and the Registrant
|
|
10-Q
(000-23223)
|
|
11-9-2007
|
|
10.4
|
|
|
|
|
|
|
|
|
|
Material Contracts—Collaboration, Supply, License, Distribution Agreements
|
|
|
|
|
|
|
|
|
|
|
10.24†
|
|
Metabolic Disorder Collaboration Agreement, dated January 12, 2001, by and between Bayer Corporation and the Registrant
|
|
10-K
(000-23223)
|
|
3-28-2001
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
10.25†
|
|
Amendment, dated November 11, 2005, to Metabolic Disorder Collaboration Agreement, dated January 12, 2001, by and between Bayer Corporation and the Registrant
|
|
10-K
(000-23223)
|
|
3-14-2006
|
|
10.30
|
|
|
|
|
|
|
|
|
|
|
10.26†
|
|
Amendment, dated May 30, 2006, to Metabolic Disorder Collaboration Agreement, dated January 12, 2001, by and between Bayer Corporation and the Registrant
|
|
10-Q
(000-23223)
|
|
8-9-2006
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
10.27†
|
|
Pharmacogenomics Agreement, dated January 12, 2001, by and between the Registrant and Bayer AG
|
|
10-K
(000-23223)
|
|
3-28-2001
|
|
10.25
|
|
|
|
|
|
|
|
|
|
|
10.28†
|
|
Amendment dated December 19, 2003 to Pharmacogenomics Agreement, dated January 12, 2001, by and between the Registrant and Bayer AG
|
|
10-K
(000-23223)
|
|
3-11-2004
|
|
10.12
|
|
|
|
|
|
|
|
|
|
|
10.29†
|
|
Second Restated Collaboration Agreement, dated April 12, 2004 and amended October 19, 2004, between Abgenix, Inc. and the Registrant
|
|
10-Q
(000-23223)
|
|
8-6-2004
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
10.30†
|
|
License and Collaboration Agreement, dated as of June 3, 2004, between TopoTarget A/S and the Registrant
|
|
10-Q
(000-23223)
|
|
8-6-2004
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
10.31†
|
|
Collaboration Agreement, dated June 18, 2004, between Seattle Genetics, Inc. and the Registrant
|
|
10-K
(000-23223)
|
|
3-14-2006
|
|
10.38
|
|
|
|
|
|
|
|
|
|
|
10.32†
|
|
Transfer and Termination Agreement, dated as of April 21, 2008 by and between TopoTarget A/S and CuraGen Corporation
|
|
8-K
(000-23223)
|
|
4-24-2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Material Contracts—Employment Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.33#
|
|
Employment Agreement, dated September 1, 2006, between the Registrant and Paul M. Finigan
|
|
8-K
(000-23223)
|
|
9-8-2006
|
|
99.2
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Form and
SEC File No.
|
|
SEC
Filing Date
|
|
Exhibit
No.
|
|
Filed with
this 10-K
|
|
|
|
|
|
|
|
|
10.34#
|
|
Amendment, dated January 24, 2007, to Employment Agreement dated September 1, 2006 between the Registrant and Paul M. Finigan
|
|
10-Q
(000-23223)
|
|
5-9-2007
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
10.35#
|
|
Amendment, dated March 5, 2009, to Employment Agreement dated September 1, 2006 between the Registrant and Paul M. Finigan
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
10.36#
|
|
Amended and Restated Employment Agreement, dated September 19, 2007, between the Registrant and Timothy M. Shannon, M.D.
|
|
10-Q
(000-23223)
|
|
11-9-2007
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
10.37#
|
|
Amendment, dated March 5, 2009, to Amended and Restated Employment Agreement dated September 19, 2007 between the Registrant and Timothy M. Shannon, M.D.
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
10.38#
|
|
Amended and Restated Employment Agreement, dated September 1, 2006, between the Registrant and David M. Wurzer
|
|
8-K
(000-23223)
|
|
9-8-2006
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
10.39#
|
|
Amendment, dated January 24, 2007, to Amended and Restated Employment Agreement dated September 1, 2006 between the Registrant and David M. Wurzer
|
|
10-Q
(000-23223)
|
|
5-9-2007
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
10.40#
|
|
Amendment, dated December 17, 2007, to Amended and Restated Employment Agreement, dated September 1, 2006, as amended, between the Registrant and David M. Wurzer
|
|
10-K
(000-23223)
|
|
3-13-2008
|
|
10.49
|
|
|
|
|
|
|
|
|
|
|
10.41#
|
|
Employment Agreement, dated December 14, 2007, between the Registrant and Sean A. Cassidy
|
|
10-K
(000-23223)
|
|
3-13-2008
|
|
10.50
|
|
|
|
|
|
|
|
|
|
|
10.42#
|
|
Amendment, dated March 5, 2009, to Employment Agreement, dated December 14, 2007, between the Registrant and Sean A. Cassidy
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
Additional Exhibits
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
Ratio of Earnings to Fixed Charges
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
14.1
|
|
Code of Ethics for the Chief Executive Officer and Senior Financial Officers of the Registrant, dated November 12, 2003
|
|
10-K
(000-23223)
|
|
3-11-2004
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
14.2
|
|
Corporate Code of Conduct of the Registrant, dated March 1, 2004
|
|
10-K
(000-23223)
|
|
3-11-2004
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
*
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Form and
SEC File No.
|
|
SEC
Filing
Date
|
|
Exhibit
No.
|
|
Filed with
this 10-K
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
*
|
|
#
|
Management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to Item 15(a) of Form 10-K.
|
|
†
|
Confidential treatment requested or granted as to certain portions, which portions have been separately filed with the Securities and Exchange Commission.
|
81
Curagen Corp. (MM) (NASDAQ:CRGN)
Gráfica de Acción Histórica
De May 2024 a Jun 2024
Curagen Corp. (MM) (NASDAQ:CRGN)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024
