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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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 No. 000-30369
MONOGRAM BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 94-3234479 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer identification no.) | |
345 Oyster Point Blvd South San Francisco, California | 94080 | |
(Address of principal executive offices) | (Zip code) |
Registrant’s Telephone Number, Including Area Code: (650) 635-1100
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.001 Par Value
(Title of class)
The NASDAQ Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 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 (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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. ¨
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.
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2008 was $98,723,493.*
The number of shares outstanding of the Registrant’s Common Stock was 22,963,153 as of February 6, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant’s Definitive Proxy Statement, to be filed with the Securities and Exchange Commission (the “Commission”) pursuant to Regulation 14A in connection with the 2009 Annual Meeting of Stockholders (the “2009 Annual Meeting”), is incorporated by reference into Part III of this Report.
* | Excludes 7,913,493 shares of Common Stock held by directors, officers and stockholders whose beneficial ownership exceeds 5% of the Registrant’s Common Stock outstanding. The number of shares owned by such persons was determined based upon information supplied by such persons and upon Schedules 13D and 13G, if any, filed with the SEC. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, that such person is controlled by or under common control with the Registrant, or that such persons are affiliates for any other purpose. |
Table of Contents
PART I | ||||
Item 1. | 3 | |||
Item 1A. | 24 | |||
Item 1B. | 43 | |||
Item 2. | 43 | |||
Item 3. | 43 | |||
Item 4. | 43 | |||
PART II | ||||
Item 5. | 44 | |||
Item 6. | 45 | |||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 47 | ||
Item 7A. | 62 | |||
Item 8. | 64 | |||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 97 | ||
Item 9A. | 97 | |||
Item 9B. | 98 | |||
PART III | ||||
Item 10. | 99 | |||
Item 11. | 99 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 99 | ||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 99 | ||
Item 14. | 99 | |||
PART IV | ||||
Item 15. | 100 | |||
105 |
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This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding development and commercialization of our proposed products and services, and the possible growth of our business into new markets. These statements, which sometimes include words such as “expect,” “goal,” “may,” “anticipate,” “should,” “continue,” “plan,” or “will,” reflect our expectations and assumptions as of the date of this Annual Report based on currently available operating, financial and competitive information. Actual results could differ materially from those in the forward-looking statements as a result of a number of factors, including our ability to successfully complete the development and clinical validation of assays in addition to HERmark™ based on the VeraTag™ technology platform and commercialize these assays for guiding treatment of cancer patients, the potential role of our assays in the development and use of new classes of human immunodeficiency virus, or HIV, drugs such as CCR5 antagonists including Selzentry™, the market acceptance of our products, the effectiveness of competitive products, new products and technological approaches, the risks associated with our dependence on patents and proprietary rights, the possible infringement of the intellectual property rights of others, and our ability to raise additional capital if needed. These factors and others are more fully described in “Risk Factors” and elsewhere in this Form 10-K. We assume no obligation to update any forward-looking statements. PhenoSense™, PhenoSenseGT™, Trofile™, HERmark and VeraTag are trademarks of Monogram Biosciences, Inc. Herceptin® is a registered trademark of Genentech, Inc. Selzentry is a trademark of Pfizer Inc.
PART I
Overview
We are a life sciences company committed to advancing personalized medicine and improving patient outcomes through the development of innovative molecular diagnostic products that guide and target the most appropriate treatments. Through a comprehensive understanding of the genetics, biology and pathology of particular diseases, we have pioneered and are developing molecular diagnostics and laboratory services that are designed to:
• | enable physicians to better manage infectious diseases and cancers by providing the critical information that helps them prescribe personalized treatments for patients by matching the underlying molecular features of an individual patient’s disease to the drug expected to have maximal therapeutic benefit; and |
• | enable pharmaceutical companies to develop new and improved anti-viral therapeutics and targeted cancer therapeutics more efficiently and cost effectively by providing enhanced patient selection and monitoring capabilities throughout the development process. |
Through this process, we have become a leader in developing and commercializing innovative products that help guide and improve the treatment of infectious diseases and cancer. In the future, we plan to seek opportunities to address an even broader range of serious diseases. Our goal with personalized medicine is to enable the management of diseases at the individual patient level through the use of sophisticated diagnostics that permit the targeting of therapeutics to those patients most likely to respond to or benefit from them, thereby offeringthe right treatment tothe right patient atthe right time.
Over the last several years, we have built our business based on the personalized medicine approach to human immunodeficiency virus (“HIV”) with drug resistance testing products and, more recently, with a unique patient selection test, Trofile. With the commercialization in 2008 of the first product based on our proprietaryVeraTag™ technology, we have begun to leverage the experience and infrastructure built in the HIV market to the larger market opportunity in cancer.
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In HIV, our phenotypic and genotypic resistance testing products provide a practical method for measuring the impact of genetic mutations on HIV drug resistance. This information is used to optimize treatment options for the individual patient. We currently market these resistance testing products to assess, in individual HIV patients, their susceptibility to HIV drugs in the drug classes of reverse transcriptase inhibitors, protease inhibitors, entry (fusion) inhibitors and integrase inhibitors. In addition to these resistance tests, in 2007, we initiated commercial sales of the Trofile Co-Receptor Tropism Assay. Trofile is a patient selection assay for the new class of CCR5 antagonists. The first drug in this class,Selzentry (maraviroc) from Pfizer Inc (Pfizer), was approved by the U.S. Food and Drug Administration (“FDA”) and by the European Commission in 2007. Upon approval ofSelzentry in the U.S., we introduced our Trofile Assay commercially and it is now available to help physicians select patients for clinical use ofSelzentry. Outside of the U.S., we are making Trofile available through a global collaboration with Pfizer. In HIV, combination therapy, where a patient is treated with a regimen of several drugs, is the standard of care. Tests to properly construct the optimal regimen, such as our phenotypic resistance tests and our Trofile Assay for patient selection are critical to the successful management of HIV.
In oncology, numerous targeted drugs for the treatment of cancer are being marketed and many additional targeted therapies are in development. Increasingly, combination therapy, where multiple drugs are used concurrently to treat a patient, is being evaluated for cancer patients. Our proprietaryVeraTag technology provides an assay platform for analyzing very small amounts of tumor samples recovered and prepared in a variety of methods, including formalin fixation, the current standard technique in hospital pathology laboratories. We believe this analytical platform may be well suited for currently marketed drugs such as Herceptin as well as the next generation of targeted cancer therapeutics. Conventional tests provide a qualitative measure of the presence of genes or proteins. In contrast, theVeraTag technology permits the quantitative and accurate measurement of proteins, and proteins in their activated form of homodimers and heterodimers. We believe that by measuring the target of drugs we can provide a more reliable indicator of likely drug response or drug resistance. Such measurements may permit the prediction, with a high degree of accuracy, of the likelihood of a patient’s cancer responding to a given therapy, facilitating the selection of more precise and effective therapeutic options. Our firstVeraTag product,HERmark, is approved for routine testing in our CLIA (Clinical Laboratory Improvement Amendments) certified clinical reference laboratory and was introduced commercially in July 2008.HERmark determines a patient’s HER2 status by measuring the level of HER2 total protein and HER2 homodimers that are present. Clinical data was presented in 2008 and additional clinical studies are in progress to confirmHERmark’sclinical utility and to optimize its commercial value. Additional assays are in development that measure other proteins, protein complexes and signaling pathways that are key drivers of proliferation or survival in cancer cells, both in breast cancer and other cancer types.
We were incorporated in the state of Delaware, in November 1995, and commenced commercial operations in 1999. Our principal executive offices are located at 345 Oyster Point Blvd., South San Francisco, CA 94080. Further information can be found on our website:www.monogrambio.com. Information found on our website is not incorporated by reference into this report.
Background
Personalized Medicine
There is growing evidence that while many serious diseases, such as Acquired Immune Deficiency Syndrome, or AIDS, and cancer, can be characterized at the molecular level, many drugs simply do not work optimally for an entire population of patients in these broad disease categories. The biopharmaceutical industry is witnessing two mutually dependent innovations:
• | targeted therapies that act on very specific disease mechanisms that may not be present in all patients with a broadly defined disease; and |
• | molecular diagnostic tests that may be able to predict, in advance, whether a patient is likely to respond to a certain drug. |
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Based on these innovations, a new approach to disease management is emerging—Personalized Medicine—in which effective treatment options for the individual patient can be identified using specific diagnostic tests. The ideal of personalized medicine is to move from the so-called “one size fits all” method of drug treatment, to providing “the right treatment to the right patient at the right time.”
Infectious Diseases
Viruses are microorganisms that infect living cells in order to reproduce or replicate. These viruses infect human cells and replicate, making new viruses that can infect other cells. There are many different types of viruses, but all viruses share structural and functional characteristics associated with their ability to replicate. During the replication cycle, all types of virus often change slightly, or mutate. This is particularly true of viruses such as HIV and hepatitis C virus, or HCV. For example, in an untreated HIV-infected patient, HIV generates virus variants with genetic mutations at every possible nucleotide position, causing billions of new viruses to be produced each day. At any given time, there can be many different variants of the virus present within the infected patient’s body, each with a slightly different genetic sequence. This large number of virus variants allows HIV to adapt very rapidly and develop resistance to drugs. As a consequence of drug resistance, HIV continues to cause a large number of infections and deaths despite the availability and introduction of new and effective treatments.
Viral drug resistance refers to a reduction in the ability of a particular drug or combination of drugs to block replication of the virus. Drug resistance typically occurs as a result of mutations that accumulate in the viral genome as it replicates. As the virus replicates and creates a multitude of mutations, the drug resistant mutations become more prominent. For people infected with HIV, drug resistance can render drugs less effective or even completely ineffective, thus significantly reducing treatment options. The emergence and spread of strains of virus with drug resistance means that the ability to treat infections and save lives has become increasingly difficult.
There are approximately 40,000 new diagnoses of HIV infection in the United States each year. In time, most of these progress to AIDS, which is one of the leading causes of death worldwide. It is estimated that approximately one million individuals in the United States are currently living with this disease. HIV was once considered a fatal disease. However, with the advent of over 20 FDA-approved anti-viral HIV drugs (and many more in development), coupled with the availability of diagnostic tests for patient selection and monitoring, HIV infection increasingly can be treated as a chronic disease.
Drug Resistance
While more effective combination treatment regimens have been introduced for HIV, over time the virus often develops resistance to the administered drugs, requiring a change in the combination of anti-viral agents prescribed. Selecting the right combination of drugs for optimal treatment of HIV patients is often difficult when physicians have limited information about the susceptibility of the patient’s HIV to specific anti-viral drugs. Each treatment failure increases the risk that the next drug combination will not work or work for a shorter period of time leaving the patient with fewer effective future treatment options. Physicians are faced with the challenge of tailoring therapy to individual patients numerous times over the course of the disease.
Resistance to anti-viral drugs is one of the most serious impediments to successful treatment of HIV/AIDS patients. In response to the problem of anti-viral drug resistance, physicians use combinations, or cocktails, of anti-viral drugs, attacking different targets within the virus simultaneously. However, even combination therapy eventually fails in a great majority of patients, due, in large part, to the fact that the virus becomes resistant to some or all of the drugs used in combination.
Anti-viral drugs approved by the FDA are generally used in various combinations to treat HIV infected patients. Combination therapy requires each drug in the combination to be active, interfering with key viral
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functions, for the therapy to be most effective. If any of the drugs are not active, the combination therapy will likely fail more quickly. Each treatment failure leaves the patient with fewer future treatment options. Drug resistant viruses can also be transmitted to newly infected individuals, increasing the risk that initial treatment for those individuals will not work.
There are over 20 FDA-approved drugs currently marketed for treatment of HIV. These generally fall into the following classes of drugs:
• | nucleoside reverse transcriptase inhibitors; |
• | non-nucleoside reverse transcriptase inhibitors; |
• | protease inhibitors; |
• | entry (fusion) inhibitors; |
• | CCR5 antagonists; and |
• | integrase inhibitors. |
For many years, available drugs for antiretroviral HIV treatment were limited to the first three classes. The first fusion inhibitor was approved in 2001. In 2007, new drugs were approved in two separate new classes—CCR5 antagonists and integrase inhibitors. The first CCR5 antagonist,Selzentry from Pfizer, was approved by the FDA in August 2007. The first integrase inhibitor, Isentriss from Merck, was approved by the FDA in October 2007. Many more drugs are in development. These new drugs and drug classes may be expected to add to the richness of available therapeutic choices for physicians and patients, but they also add to the complexity of the choices, which may increase the need for sophisticated techniques for choosing among those potential therapies.
While new anti-viral drugs which may have increased potency and activity against drug resistant viruses are under development, the ability of HIV to mutate and replicate continues to challenge physicians, who are faced with the challenge of identifying the most appropriate therapy for the individual patient. We believe that this ability of HIV to continually mutate, coupled with the increased complexity of available therapy choices, will increase the need for sophisticated testing to identify resistance profiles and to guide treatment decisions on an individualized basis.
Viral Resistance Testing
In response to the challenge posed by drug resistant viruses and the complexity provided by multiple choices of therapies, tests have been developed to assess the resistance of viruses to particular drugs. Simple tests based on an analysis of the genetic composition of the virus are now quite common. In addition, more sophisticated tests focused on more direct, or phenotypic, measurement of drug resistance are also available. The technologies available for resistance testing are:
• | Phenotypic Assays—based on direct measurements of anti-viral susceptibility in cell culture assays in the presence of commercially available drugs; and |
• | Genotypic Assays—based on scanning the viral genome to identify known mutations associated with resistance to particular drugs. |
Both types of tests may improve treatment response and can be used either to realign existing therapy or to help selection of the best initial therapy for a patient. Resistance testing has emerged as the “standard of care” in the management of patients with HIV. Current treatment guidelines from the U.S. Department of Health and Human Services, the International AIDS Society-USA and the EuroGuidelines Group recommend resistance testing to identify new potent drug combinations both on initial diagnosis and after therapy failure. Phenotypic testing provides the most direct measure of drug resistance and, when combined with genotypic testing, provides
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the most comprehensive view of a patient’s situation. The ultimate goal of resistance testing is to optimize therapies for the individual patient. Increasingly, the complexity of the virus, the sophistication of available testing, and the cost to the patient both in terms of lost future treatment options as well as funds spent on expensive but ineffective therapies, make it more and more critical that physicians have access to as much information as possible when they determine therapy for their patients.
Tropism and Patient Selection Testing
Resistance testing is used at the time of therapy failure to determine which specific elements in a patient’s treatment regimen are failing and which drugs might be added to the regimen prospectively. HIV utilizes one of two co-receptors to enter a patient’s host cells. These co-receptors are known as CCR5 and CXCR4. Each infected patient has HIV that uses one or the other of these two co-receptors or that uses both co-receptors simultaneously. Where both co-receptors are used, such patients are known as “dual/mixed.”
A new type of testing has emerged that can be used prior to therapy prescription to determine, in advance, whether specific patients are suitable for a particular drug. This form of testing assesses the “tropism” of the patient. Tropism refers to the particular co-receptor—CCR5 or CXCR4—that the patient’s virus uses to infect host cells. Such testing may also have a role during therapy, or after therapy failure, for patient monitoring.
A new class of HIV drugs called CCR5 antagonists are designed to inhibit the use of the CCR5 co-receptor, and thereby prevent entry by HIV into host cells. However, for CCR5 antagonists to be effective, it is necessary for the patient’s virus to use the CCR5 co-receptor. Efficacy is not expected where the patient’s HIV uses CXCR4 or is dual-mixed. Accordingly, efficacy of CCR5 antagonist drugs requires an effective test that identifies the tropism of the patient, or whether the CCR5 co-receptor target of the drug is present, or not. Our Trofile Co-Receptor Tropism Assay is such a test and has been used in all phase II and phase III trials, to date, for CCR5 antagonists.
Current treatment guidelines from the U.S. Department of Health and Human Services recommend that tropism testing be performed whenever the use of a CCR5 antagonist is being considered, and that tropism testing might also be considered for patients who fail therapy while on a CCR5 antagonist.
Oncology
Over one million new cases of solid tumor cancer are diagnosed each year in the United States, with three cancer types (breast, lung and colorectal) accounting for over 500,000 of these. Many more patients are living with cancer, and, it is estimated that there are more than two million women living with breast cancer. Although there are often several therapeutic options for a given indication, treatment is typically expensive and accompanied by a host of adverse side effects that are detrimental to a patient’s quality of life. In many cases, treatments are effective in only a small percentage of the total patient population and so multiple treatment options must be pursued sequentially, until an effective one is found. Often, relatively non-specific broader acting cancer therapeutic agents, including various chemotherapies and radiotherapy are used as first-line and second-line therapies before more specific, targeted therapeutics are used. These broader agents often have serious debilitating side effects associated with them. Often, not until a patient has “failed” these treatments either because of intolerable or adverse side effects, or because their cancer does not respond or has progressed, are newer targeted therapies tried. These targeted therapies are often used in third-line treatment because the percentage of patients in the overall population, for whom they are effective, is relatively low (10%-20%). For patients with a life threatening disease, the sequential approach to the selection of therapies is not optimal but is a consequence of the limited information available to physicians. Despite many years of clinical studies, physicians still have inadequate information on which to base many treatment decisions and many newer targeted drugs have low levels of response in the general disease population, even though in a subset of the patient population they can be extremely effective. The consequences of suboptimal or inappropriate therapies include poor patient outcomes, both from side effects and lack of activity, as well as an economic burden on the healthcare system—the added costs of the physician’s time, wasted drugs and increased hospitalization.
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Patient Selection Testing
There is growing acknowledgement that the current methods of classifying different types of cancer by the tissue of origin (e.g. breast cancer or lung cancer) are relatively imprecise, and that better methods of categorizing an individual’s cancer or tumor may be possible. In fact, it is now believed that tumors may be more reliably characterized by reference to their molecular characteristics. For a treatment to be optimally effective in killing or controlling cancer cells in an individual patient, it is desirable to have diagnostic tests that are able to determine the molecular processes that are driving the growth of the cancer cells in the individual patient and which drug, or combination of drugs, is likely to be most effective.
Cancer cells proliferate through the activation and interaction of complex biological pathways, stimulated by extra-cellular signals or by aberrations in intra-cellular signaling or regulatory processes. In order to cure a patient’s cancer, or to control it and limit its progression, physicians must have an understanding of these complex processes, and which particular signaling pathways have been activated and are driving cancer cell growth in each particular patient. Attempts to understand these processes have used the available, although not necessarily optimal, analytical tools. For example, use has been made of established tools for the identification of specific gene mutations or gene expression levels present in the tumor tissue of certain patients. While this information is extremely useful in some cases, the biological patterns that result in uncontrolled cell growth and cancer are much more complex, and are influenced by many additional factors—many more than can be communicated in simple gene-based measurements. Often, while statistical relationships are postulated between the presence of these genetic markers and clinical outcome, there may be no well understood biological rationale for the statistical relationship.
The most common use of testing for these elements has been in the treatment of breast cancer. The presence of certain genes may lead, through biological processes, to the generation of the related protein. However gene amplification, usually measured using a testing technology known as fluorescence in-situ hybridization (FISH), or a similar approach known as chromogenic in-situ hybridization (CISH), is not precise and is only an indirect indication of whether the related protein may be present and of the quantity in which it may be present. Measurements of the presence of proteins are often performed using a testing technology known as immunohistochemistry (IHC), which is qualitative in nature and subject to substantial variability depending on the individual interpretation of results. There is increasing debate in the clinical community as to the accuracy and reliability of the conventional testing methods. Whether assessing the gene or protein expression levels, neither testing approach directly addresses the critical aspect of whether the protein is activated or not nor whether a signaling pathway has actually been triggered.
We believe that a more comprehensive understanding of the biology involved in cancer cell growth and drug response is required to enable physicians to select the right therapy. We believe that such an understanding requires information at the level of proteins, especially activated proteins such as protein dimers, the target of many drugs. Accordingly, we believe that the most effective diagnostic tests would be those that can identify the presence of the proteins and protein complexes that are the targets of the drugs in question.
There are many cellular pathways which, when activated, cause proliferation of cancer cells. One family of proteins thought to be active in a number of such pathways and for which substantial drug development activity has been targeted, is the EGFR/HER pathway. The four receptors in the EGFR/HER family—HER1, HER2, HER3 and HER4—are present on the surface of many cells and, when activated, can combine with other HER family receptors to form a protein “dimer.” These dimers initiate signaling pathways that can cause proliferation of cancer cells. Examples of such dimers are “homodimers” of HER2, where two HER2 proteins dimerize, and “heterodimers” of two different HER proteins, such as HER2 and HER3. Knowledge of the particular individual signaling pathways and combinations of signaling pathways that are active in particular patients, not only has the potential to inform decisions about the applicability of specific drugs to specific patients, but also potential combinations of drugs that may be relevant—raising the possibility of bringing cocktail therapy to cancer therapy, just as it has become the standard of care in HIV treatment. Signaling pathways activated by the HER family of proteins are believed to be relevant in many types of cancer, including breast cancer.
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Breast Cancer
The number of women newly diagnosed with breast cancer each year in the United States approaches 200,000. In addition, it is estimated that there are more than two million women living with breast cancer. Traditionally, the first treatment approaches have included surgery to remove as much of the tumor as possible followed by chemotherapy or radiotherapy. Generally, only when patients had failed these courses of therapy and the cancer had continued to develop or had recurred, were newer targeted drugs prescribed. Herceptin® is one such drug that was approved by the FDA, in 1998, for such use in late stage breast cancer patients, in whom the cancer had metastasized and spread to other organs. In 2006, Herceptin was approved for use in earlier stage patients in the adjuvant setting, i.e. in patients who had initial surgery and then embarked on a drug treatment to supplement the surgery. Recently a second targeted drug, Tykerb®, was approved by the FDA for patients who had failed Herceptin therapy. Both Herceptin and Tykerb are believed to act on related signaling pathways in the HER family. Many other drugs targeting the HER family are in development. For example, in February 2008, the FDA granted accelerated approval for Avastin® (bevacizumab), in combination with paclitaxel chemotherapy, for the treatment of patients who have not received chemotherapy for their metastatic HER2-negative breast cancer.
The approved labeling for Herceptin requires that patients be tested for the presence of HER2. Historically, this has been done by either, or both, of IHC and FISH testing, which have been the only available testing methods. There is growing recognition that these conventional tests may not be sufficiently accurate and may even miss patients who could benefit from Herceptin. For example, guidance issued jointly by the ASCO/CAP (American Society of Clinical Oncology / College of American Pathologists) indicated that approximately 20% of HER2 determinations by current testing technologies may be inaccurate. Less than half of those patients reported as HER2 positive by these tests actually respond to Herceptin in the metastatic setting, due to the inherent inaccuracy of the tests and due to the presence of alternate signaling pathways that are not blocked by Herceptin.
We believe that new technologies, such as ourVeraTag technology, are required to more accurately determine which patients would be most likely to respond to targeted breast cancer drugs.
Monogram’s Solution
Our solution to these challenges is based on molecular diagnostic tools that are designed to aid drug development and guide patient therapy by:
• | enabling physicians to better manage infectious diseases and cancers by providing the critical information that helps them prescribe personalized treatments for patients by matching the underlying molecular features of an individual patient’s disease to the drug expected to have maximal therapeutic benefit; and |
• | enabling pharmaceutical companies to develop new and improved anti-viral therapeutics and targeted cancer therapeutics more efficiently and cost effectively by providing enhanced patient selection and monitoring capabilities throughout the development process. |
Infectious Diseases
Our proprietary technology identifies drug resistance to HIV and can also identify a patient’s tropism to screen for likely drug response to certain HIV drugs. We make our tests available both to physicians to guide the management of patients’ treatment and to pharmaceutical companies to aid in the development and clinical evaluation of new drugs, including screening of potential new drug candidates, pre-clinical and clinical development, and patient selection and monitoring. The following table sets out these products.
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Products for HIV Testing
Purpose | Product | Description | Physicians | Pharmaceutical Companies | ||||
HIV Drug Resistance Tests | ||||||||
For HIV Drugs in the nucleoside reverse transcriptase inhibitor, non-nucleoside reverse transcriptase inhibitor and protease inhibitor classes. | PhenoSense HIV | Directly and quantitatively measures resistance of a patient’s HIV to anti-viral drugs and measures viral fitness (1) | ü | ü | ||||
GeneSeq HIV | Evaluates the genetic sequences of a patient’s HIV for evidence of drug resistance | ü | ü | |||||
PhenoSense GT | Combination product of the PhenoSense HIV and GeneSeq HIV tests integrated into one report | ü | ü | |||||
For HIV Drugs in the entry (fusion) class | PhenoSense HIV Entry | Directly and quantitatively measures resistance of a patient’s HIV to anti-viral drugs | ü | ü | ||||
GeneSeq HIV Entry | Evaluates the genetic sequences of a patient’s HIV for evidence of drug resistance | ü | ||||||
For HIV Drugs in the integrase inhibitor class | PhenoSense HIV Integrase | Directly and quantitatively measures resistance of a patient’s HIV to anti-viral drugs and measures viral fitness (1) | ü | ü | ||||
GeneSeq HIV Integrase | Evaluates the genetic sequences of a patient’s HIV for evidence of drug resistance | ü | ||||||
Tropism Patient Selection Test | ||||||||
For HIV drugs in the CCR5 antagonist class of drugs | Trofile Co-Receptor Tropism | Identifies the co-receptor the patient’s virus uses to enter cells, or tropism; Trofile is a patient screening assay for the CCR5 antagonist class of drugs (2) | ü | ü | ||||
Tests for Use in HIV Drug Development Programs | ||||||||
For use in vaccine development programs | PhenoSense HIV Antibody Neutralization | Tests patients’ blood samples for the presence of antibodies that neutralize the HIV virus preventing the virus from infecting other cells | ü | |||||
For use in HIV drug development programs | PhenoScreen | High-throughput screening for the identification of potential drug candidates | ü |
(1) | Viral fitness, or replication capacity, represents the ability of a virus to reproduce and infect new cells. |
(2) | Tropism may also be a prognostic factor in the pace of HIV disease progression. |
In addition to the HIV testing products detailed above, we have PhenoSense HCV and GeneSeq HCV assays, some of which are still in development with partial funding from pharmaceutical partners, while others are made available to pharmaceutical companies for use in their drug discovery and development programs.
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Trofile
Our Trofile Co-Receptor Tropism Assay identifies the co-receptor that the patient’s HIV uses to enter the cell. For the new class of CCR5 antagonist drugs, it is important to know which co-receptor is being accessed by the virus for entry into cells. This test has been used to select patients for all phase II and phase III clinical trials of CCR5 antagonists to date. The first of these drugs, Pfizer’sSelzentry, was approved in 2007, by both the FDA and European Union regulatory authorities for treatment-experienced HIV patients. Upon approval of the drug, we initiated commercial sales of Trofile in the U.S. and are making Trofile available outside of the U.S. through our collaboration with Pfizer. A separate phase III clinical trial ofSelzentry was conducted by Pfizer in treatment-naïve HIV patients.
In June 2008, we introduced an enhanced version of Trofile with a thirty-fold improvement in sensitivity for identifying CXCR4-using virus. The new version of Trofile can detect CXCR4-using virus at a level as low as 0.3% of the total virus population, with 100% sensitivity. This increased sensitivity enables an optimized selection of patients. Clinical validation of the enhanced Trofile Assay’s ability to further optimize patient selection for CCR5 antagonist treatment was achieved through an analysis of subjects from the AIDS Clinical Trials Group 5211 phase II study of Schering-Plough’s CCR5 antagonist,vicriviroc, in highly treatment experienced HIV patients. Based on test results obtained with the newly enhanced sensitivity of Trofile, greater reductions in viral load were observed invicriviroc recipients confirmed to have pure R5 virus populations (1.95 log reduction at week 24) compared to those newly reclassified as having minor sub-populations of CXCR4-using virus (0.57 log reduction at week 24) (P<0.001).
Additional clinical validation of the enhanced Trofile Assay was demonstrated in a re-analysis by Pfizer of the results of their phase III trial (MERIT trial) ofSelzentry in treatment-naïve patients. The results of this reanalysis were reported by Pfizer in October 2008. In the MERIT study, Pfizer compared the efficacy ofSelzentry plus Combivir to Sustiva (efavirenz) plus Combivir in treatment naïve individuals with CCR5-tropic HIV-1. Patient enrollment criteria included CCR5 tropism (no CXCR4-tropism) as determined by the original Trofile assay. Based on the original analysis,Selzentry plus Combivir treatment did not meet the predefined endpoint of non-inferiority to Sustiva plus Combivir as assessed by the percentage of patients reaching undetectable virus replication at week 48. In a retrospective analysis limiting the analysis to patients infected with CCR5 tropic virus as determined using the enhanced version of Trofile (i.e. excluding patients that tested CCR5 tropic in the original Trofile assay but were later shown to contain low level CXCR4 tropic virus when tested in the enhanced Trofile assay), the MERIT study was able to demonstrate thatSelzentry plus Combivir would have met the non-inferiority endpoint. In this analysis, 68% of patients achieved HIV-1 RNA <50 copies/mL at week 48 in both theSelzentry plus Combivir and Sustiva plus Combivir arms.
Oncology
Utilizing ourVeraTag technology platform, we are expanding our business into oncology. Our goal is to leverage our commercial experience to develop molecular diagnostic tests that will differentiate those cancer patients who are likely to respond to targeted therapies from those patients who are less likely to respond, and that will enable the rational design of combination therapies based on the biology of the individual patient’s cancer.
VeraTag Technology Platform
VeraTag assays are designed to detect proteins and protein complexes, including protein dimers and modified forms of these proteins. These analytes are not readily discernible with other technologies, especially in human tissue samples that have been stored in the standard clinical method of formalin-fixed/paraffin embedded (FFPE). Measurements of activated proteins are expected to provide valuable information with respect to the activation states of key signaling pathways that drive cell proliferation and survival in tumors, and serve as biomarkers that indicate the likelihood of response to particular targeted therapeutics in individual patients and
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specific patient sub-groups. Importantly, ourVeraTag assays require only a very small amount of biological sample and are designed to be performed directly on FFPE tissue samples, as well as other sample formats. This ability to utilize small amounts of human clinical samples in a wide range of formats, without extensive and time-consuming sample preparation, makesVeraTag assays well suited to diagnostic applications in human disease management.
TheVeraTag platform is not specific to cancer. Measurements of proteins and activated proteins may be clinically relevant in a wide range of disease areas. Our focus in developing the technology to date has been on cancer, and within cancer, on the EGFR/HER family of protein receptors.
The following assays are CLIA validated and are commercially available in theHERmark Breast Cancer Assay: HER2 total protein and HER2:HER2 homodimers.
The following assays are available for research use, including use by us in our ongoing and planned clinical studies to establish and confirm the clinical utility of these assays, and by biopharmaceutical companies for use in drug development, including clinical evaluation of targeted cancer therapies: HER1 total protein, HER3 total protein, HER1:HER1 homodimers, HER1:HER2 and HER2:HER3 heterodimers, HER3:PI3K complex (a downstream signaling complex in the Akt pathway), and p95 (a proteolytically truncated form of the HER2 protein). On establishment of clinical utility, these research assays may be validated in our CAP-certified CLIA laboratory and subsequently made available as CLIA validated assays to physicians.
The EGFR/HER markers measured by these assays are believed to be relevant in a wide variety of cancers. HER2 is well recognized as being important in breast cancer and other markers in the EGFR/HER family are believed to be relevant not only in breast cancer but in lung, head and neck, colorectal and other cancers. To date we have focused on the development and, more recently, the clinical evaluation of HER2 and HER2:HER2 homodimer assays, and on the development of the other assays. All of the assays listed above are now developed as assays for the measurement of the relevant markers in tumor tissue. Work has begun to clinically validate certain of these assays in patient cohorts.
We believe that these assays will enable us to address a broad range of cancers and a broad range of targeted cancer drugs and drugs in development, with the goal of determining which drugs may be most relevant for particular patients. Our first focus however has been on breast cancer where HER2 is well recognized as an important marker for Herceptin response and where we have CLIA validated assays for HER2 total protein and HER2:HER2 homodimer levels.
HERmark Breast Cancer Assay
Our firstVeraTag product,HERmarkwas introduced commercially in July 2008. HERmarkis a proprietary diagnostic that accurately quantifies HER2 total protein levels and HER2:HER2 homodimerization in patients with breast cancer.HERmarkis a CLIA-validated assay that is performed exclusively in our CAP-certified clinical reference laboratory in South San Francisco. Robust, accurate, sensitive and reproducible measurements of HER2 status are reported to physicians with a turnaround time of about seven days. With the accurate measurements provided by HERmark,we expect that as many as 15-20% of patients determined by conventional technologies to be HER2-negative would be reclassified by HERmark.
Physicians orderingHERmark receive a report indicating a specific quantitative measurement of the levels of HER2 total protein and HER2 homodimer, together with a comparison of where the patient’s level of HER2 total protein falls within ranges ofHERmark measurements that have been previously correlated in over 1,000 patients with HER2-positive and HER2-negative status by central laboratory FISH and IHC assessments. The report indicatesHERmark status of “positive”, “negative” and “equivocal”. The boundaries for the equivocal zone represent an upper level above which 95% are positive and a lower level below which 95% are negative patients.
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Clinical studies are ongoing to confirm the clinical utility ofHERmark, and in certain cases to extend the study to include an evaluation of additionalVeraTag assays. In these clinical studies, we access previously collected tumor samples, performing ourassays on those samples and comparing the results and predictions obtained from our assays with the known clinical outcomes. In these retrospective studies, we are blinded to the clinical outcome by our clinical collaborators until assay measurements have been completed and analysis can be performed to correlate the assay measurements with clinical outcomes. The following table sets out the clinical studies that have been conducted or are in progress or planned to evaluateHERmark and additionalVeraTag assays in patients with metastatic breast cancer and in patients treated with Herceptin in the adjuvant setting. Several additional studies are in discussion with potential collaborators.
Institution | Nature of collaboration | Status | Planned activities | |||
Metastatic | ||||||
Jules Bordet Institute | Evaluation ofHERmark as predictor of Herceptin response in a cohort of patient tissue samples from a European clinical trial | Study completed; results presented at ASCO (June 2007) and accepted for publication | None | |||
Penn State University | Evaluation ofHERmark in a cohort of approximately 100 patients | Evaluation withHERmark completed; study results presented at ASCO (June 2008) and SABC (December 2008) and submitted for publication | Evaluation of additionalVeraTag assays to assess correlation with clinical outcomes (in process) | |||
Dana Farber Cancer Institute | Evaluation ofHERmark in a cohort of approximately 500 patients | Initial set of patient samples received and assays performed | Obtain remaining samples, conduct the assays and evaluate results for potential presentation and publication | |||
Adjuvant | ||||||
FINHER | Evaluation ofHERmark in a cohort of approximately 900 patients | Evaluation withHERmark completed; study results submitted for presentation at an upcoming oncology meeting | Evaluation of additionalVeraTag assays to assess correlation with clinical outcomes (in process) | |||
NSABP | Evaluation ofHERmark in a cohort of approximately 1,600 patients, in two phases of approximately 800 each | The first phase samples have been evaluated withHERmark and analysis with clinical outcomes has been partially conducted | Under discussion with collaborator |
ASCO – American Society of Clinical Oncology
SABC – San Antonio Breast Cancer Symposium
Results of the study conducted with collaborators at the Hershey Medical Center/Penn State University were presented at ASCO, in June 2008, and at the San Antonio Breast Cancer Symposium in December 2008. These study results demonstrate the superiority ofHERmark over conventional FISH and IHC testing for predicting patient response to Herceptin (trastuzumab). At San Antonio, in an oral presentation, entitled “HER2 Protein expression and homodimer levels predict response to trastuzumab in centrally tested FISH-positive metastatic breast cancer patients,” Allan Lipton M.D., Professor of Medicine & Oncology at Hershey Medical Center/Penn
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State University reported on the study that assessedHERmark as a means to measure HER2 total protein and homodimer levels and to predict the response to treatment with trastuzumab in patients with metastatic breast cancer. The data indicated that, regardless of whether they tested positively or negatively with FISH, those patients that had low HER-2 total protein expression responded to a trastuzumab-containing regimen similarly, and significantly worse than patients who had FISH-positive tumors with high HER-2 total expression. Preliminary results from this study, that were previously presented at ASCO in June 2008, indicated thatHERmark was a better predictor of response to trastuzumab than FISH testing, even when conducted in a central laboratory. The preliminary results also indicated discordance between the assessments of HER2 status as measured byHERmark and FISH, such that 14% of FISH-negative patients were determined to be HER2 high expressors byHERmark and 13% of FISH-positive patients were determined to be HER2 low expressors byHERmark. The additional analyses reported at San Antonio clarify that in the specific patients where there is discordance between the two assessments of HER2 status, theHERmark result is the one that is aligned with clinical outcome.
Monogram’s Strategy
Our objective is to be a world leader in developing and commercializing innovative products to help guide and improve the treatment of infectious diseases, cancer and other serious diseases. We have developed products that meet the treatment needs for HIV/AIDS and believe that we have built the leading franchise in this area. We now seek to expand into the area of cancer therapy and, in the future, will seek opportunities to address an even broader range of serious diseases.
Our strategy for addressing these objectives is two-fold: to support drug development and guide patient therapy. Specifically, key elements of our strategy are to:
• | Leverage the Increasing Trend Towards Personalized Medicine. Our innovative technologies are developed to facilitate and guide treatment regimens for specific patients. There is a growing need for technologies that identify those particular patients most likely to respond to a particular therapy, so that the drugs can be prescribed for the appropriate patient groups allowing for a personalized approach to therapy, by getting the right treatment to the right patient at the right time. |
• | Maintain and Enhance Our Leadership Position in Molecular Testing for HIV/AIDS. We believe we are the leading provider of sophisticated tests for HIV drug resistance and have established ourselves as a leader in this field. We believe the use of our Trofile Co-Receptor Tropism Assay in patient selection for the new HIV drug class of CCR5 antagonists has opened a new era in molecular testing for HIV patients. We plan to maintain our leadership position by continuing a strong emphasis on the scientific basis for our products. |
• | Develop a Leadership Position in Molecular Testing to Guide Cancer Treatments. We intend to develop a market position in oncology that mirrors the leadership position we have built in HIV, through our proprietaryVeraTag technology. New targeted cancer drugs that are approved for marketing and in development for treatment of breast cancer, provide an opportunity for our expertise in developing tools that can differentiate likely responders and non-responders in a large patient population. As the range of available assays expands, we intend to broaden our activities from breast cancer to other cancer types. |
• | Leverage Our Relationships with the Pharmaceutical/Biotechnology Industry. We believe we are the partner of choice for pharmaceutical companies seeking molecular testing for HIV drugs in development. We believe our drug resistance tests and patient selection tests have been used by almost every company with a significant HIV drug development program. We intend to leverage our expertise by building a similar position in the oncology market with biopharmaceutical companies with cancer drug development programs. |
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• | Provide Broad, Convenient Access to our Products on a Worldwide Basis. We have created broad access to our current commercial products in the United States by focusing on reimbursement, education and distribution. In the U.S., we have relationships, providing broad access to our HIV resistance tests, with Quest Diagnostics and Laboratory Corporation of America, the two largest national networks of clinical reference laboratories in the United States and will continue to seek the broadest and most optimal distribution structure for our products. We are making our Trofile Co-Receptor Tropism Assay available outside of the U.S. through our collaboration with Pfizer. For our oncology products, we are implementing a similar commercial approach in the U.S. and intend to access major international markets, either directly or indirectly through partnerships. |
• | Develop strategic partnerships to optimize the development of our business. We will seek partnerships related to technologies, products and commercialization approaches where these can enhance our technology platforms or our market position. |
• | Maintain a Strong Intellectual Property Portfolio. We have a significant portfolio of patents and patent applications related to our products and technologies. We intend to continue enhancing our portfolio to maintain a strong proprietary position. |
Sales & Marketing
We market our HIV and oncology tests to physicians and pharmaceutical customers in the United States, through both a direct and indirect organization. We have built an efficient commercial infrastructure to support the industry’s most comprehensive line of HIV drug resistance and patient selection tests currently available. Our commercial organization is composed of approximately 83 people in sales, marketing, customer service, payer relations and sales management functions. With this organization we have dedicated field sales and medical education teams focused on HIV physicians and oncologists.
We market ourHERmark Breast Cancer Assay in the U.S. directly to physician offices and clinics and market our HIV tests to physicians in the U.S., directly to physician offices and clinics and indirectly through national, regional and hospital laboratories. For our HIV resistance tests, we have contracts and alliances with Quest Diagnostics and Laboratory Corporation of America, the two largest national networks of laboratories in the U.S. These alliances allow for streamlined collection of blood specimens as well as convenience for physicians who desire to consolidate testing for payers.
We market our Trofile Co-Receptor Tropism Assay outside of the U.S. through our collaboration with Pfizer Inc. On May 5, 2006, we entered into a Collaboration Agreement with Pfizer regarding our Trofile Assay (the “Collaboration Agreement”). The Collaboration Agreement has an initial term that expires on December 31, 2009, and is renewable by Pfizer for five successive one-year terms.
Under the agreement, we collaborate with Pfizer to make our Trofile Co-Receptor Tropism Assay available globally. We are responsible for making the assay available in the U.S. and performing the assay in accordance with agreed upon performance standards. We also are obligated to undertake certain efforts to plan for, establish and maintain an infrastructure to support the commercial availability of the assay outside the U.S. in countries designated by Pfizer, and we will be obligated to perform the assay with respect to patient blood samples originating outside of the U.S., in accordance with agreed upon performance standards. Pfizer is responsible for sales, marketing and regulatory matters related to the assay outside of the U.S. Pfizer will also reimburse us for costs incurred in establishing and maintaining the necessary logistics infrastructure to make the assay available outside of the U.S., and, Pfizer pays us for each assay that we perform with respect to patient blood samples originating outside of the U.S.
Subject to certain limitations, Pfizer will be entitled to establish its own facility to perform the assay in support of its human clinical trials and to perform the assay with respect to patient blood samples in the event of certain uncured material breaches by us of the Collaboration Agreement (including the performance standards).
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For such purposes, we have granted Pfizer a license to use certain intellectual property rights and proprietary materials related to our Trofile Co-Receptor Tropism Assay. We will be obligated in such a case to assist Pfizer in establishing and operating such facility, for which Pfizer will reimburse us for all costs incurred to provide such assistance. To secure our obligations under the license described above, we have granted Pfizer a security interest in certain of our intellectual property rights and proprietary materials related to the Trofile Co-Receptor Tropism Assay. We have also extended the co-receptor tropism assay portion of the existing services agreement between us and Pfizer in support of potential additional Pfizer clinical trials, through December 31, 2009.
Our marketing strategies focus on physician, patient and payer education in order to increase market awareness of our resistance testing products. We routinely sponsor and participate in conferences and scientific meetings, sponsor educational forums for physicians, and advertise in relevant journals and publications. Additionally, we target patients directly through educational programs. As part of our effort to maintain scientific leadership within the clinical community, which represents our customer base, we have a clinical advisory board consisting of leading clinicians.
We have an active reimbursement strategy and educate both private and public payers regarding the benefits of our molecular diagnostic testing services in an effort to maximize reimbursement. We believe that most HIV/AIDS patients in the U.S. now have access to coverage for resistance testing. For our tropism test, Trofile, we currently have coverage from the federal Medicare program, most of the states’ Aids Drug Assistance Programs (ADAP programs), most state Medicaid programs and from several private insurers. ForHERmark, claims have been submitted to a number of public and private payers and these claims are being negotiated through a normal adjudication process. As clinical studies are completed, this validation information will be presented to payers in support of claims.
Research & Development
Research and development expenditures were $23.8 million, $19.4 million and $19.0 million in 2008, 2007 and 2006, respectively. These expenditures reflect both ongoing research and development work on our portfolio of HIV and related testing products and continuing development of our proprietaryVeraTag technology.
As of December 31, 2008, we had 55 employees in research and development and clinical research activities, of whom approximately 30% were primarily focused on infectious disease programs, and approximately 70% were primarily focused on oncology programs.
We maintain an active effort to seek grant funding in support of research programs. Revenue from grants, recorded as contract revenue, was $2.4 million, $1.9 million and $1.8 million in 2008, 2007 and 2006, respectively. These grants help support the development of analytical and database tools used to facilitate the identification and characterization of drug resistant strains of HIV, and assays that aid in the pre-clinical and clinical evaluation of the next generation of anti-viral therapeutics and vaccines.
Competition
The markets for life science research and diagnostic products are highly competitive and are subject to rapid technological change. In particular, approaches to personalized medicine are rapidly evolving and there are many companies attempting to establish their technological approaches and products as the standard of care.
For our HIV resistance testing products, genotypic tests are available through national laboratories such as Quest Diagnostics and Laboratory Corporation of America, as well as regional and hospital laboratories and commercial laboratories such as Mayo Laboratories and Kaiser Permanente. These tests are supplied by a number of manufacturers including Applied Biosystems Group, and Visible Genetics, a division of Siemens. While alternate approaches to phenotypic testing are commercialized, we believe that the primary competition for our phenotypic resistance tests is the alternate approach of genotyping. For our Trofile Co-Receptor Tropism
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Assay, we are not aware of any other clinically validated products currently available for this application. However, we are aware of efforts by third parties to develop competitive assays using phenotypic and genotypic approaches. We believe that genotypic approaches to the identification of tropism are significantly less precise than our phenotypic approach. Nevertheless, we expect that reference laboratories and academics may develop products based on genotypic approaches.
For diagnostic testing used for cancer therapies, we expect to compete with existing mass protein and RNA based technologies as well as with companies that are developing alternative technological approaches for patient testing in the cancer field. There are likely to be many technological approaches in the emerging field of testing for likely responsiveness to the new class of targeted cancer therapies, potentially from companies that currently commercialize testing products for guiding therapy of cancer patients, such as DakoCytomation A/S, Genzyme, Abbott Laboratories and Roche Diagnostics. Established national clinical laboratories such as Quest Diagnostics and Laboratory Corporation of America may also develop or commercialize services or products that are competitive with those that we anticipate developing and commercializing. In addition, there are likely alternative technology approaches being developed by competitors and evaluated by pharmaceutical and biotechnology companies as well as being studied by the oncology community. In particular, while products based on ourVeraTag technology are based on the identification of protein-based differences among patients, there is significant interest in the oncology community for gene-based approaches that may be available from other companies.
We believe that the principal competitive factors in our markets are product capability supported by clinical validation, scientific credibility and reputation, customer service, cost effectiveness of the technology and the sales and marketing strength of the supplier.
Many of our competitors and potential competitors in these markets have substantially greater market presence and substantially greater financial, technical and human resources than we do. We cannot assure you that our competitors will not succeed in developing technologies and products that would render our technologies and products obsolete and noncompetitive. We also cannot assure you that we will be able to compete effectively with these competitors’ greater marketing presence and financial strength.
Operations
We perform our HIV testing in South San Francisco, California. Our clinical laboratory is accredited by the College of American Pathologists and our facility is subject to stringent CLIA operating regulations. Patient samples for testing are delivered by courier and, for HIV testing, are treated as infectious specimens. After processing of the samples with our proprietary technology, results are reported to the customer. The CLIA regulations require that we meet certain quality and personnel standards and undergo proficiency testing and inspections.
HERmark, our first product based on ourVeraTag technology platform, was validated in our CLIA certified clinical laboratory in South San Francisco, California. This validation involved testing and analysis to demonstrate reproducibility and compliance with CLIA standards and procedures, including documentation and quality procedures comparable to those used in our HIV testing products. The validation processwas completed in December 2007 andHERmark was introduced commercially in July 2008.
WhileHERmark and our currently planned products for the cancer market are expected to be provided through our CLIA certified clinical laboratory, future cancer testing products may include test kits that could be subject to the regulatory authority of the FDA. The FDA regulatory framework is complicated and we have limited experience at managing FDA compliance issues. If we develop cancer test kits, the kits could be subject to premarket FDA approval requirements, which would be expensive and time-consuming, and could delay or prevent us from marketing these tests. In addition, the production of the future cancer test kits may be subject to Good Manufacturing Practice Regulation, or GMP, under the auspices of the FDA. Our facilities are not GMP
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compliant. If the manufacture of the proposed kits is subject to GMP regulation, we will be required to establish a GMP compliant facility, or to enter into a relationship with a third party manufacturer that operates a GMP compliant facility. We do not have experience with GMP compliance. GMP compliance, or entry into a manufacturing relationship with a third party manufacturer, would also be time-consuming and expensive.
Patents and Proprietary Rights
Our Intellectual Property Strategy
We will be able to protect our technology from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Patents and other proprietary rights are an essential element of our business. Our policy is to file patent applications and to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. Our commercial success will depend in part on obtaining this patent protection.
With respect to our viral disease portfolio, we have approximately 91 granted, issued, allowed and pending patent applications in the United States and in other countries, including 27 issued patents as of December 31, 2008. With respect to ourVeraTag technology, including our current and planned oncology products, we have approximately 78 granted, issued, allowed and pending patent applications in the United States and in other countries, including 34 issued patents as of December 31, 2008. We have 101 granted, issued, allowed and pending patent applications in the United States and in other countries as of December 31, 2008, including 80 issued or allowed patents, relating to the historic microfluidics business of ACLARA Biosciences, Inc. (“ACLARA”) which addresses microfluidic and nanofluidic instruments and devices, their fabrication and their applications. These microfluidics patents and patent applications have been licensed to Caliper Life Sciences, Inc. and we may receive certain royalties pursuant to this license agreement.
Our patents and patent applications related to ourVeraTag technology and products in development address the following essential areas: Biomarkers identified byVeraTag technology, including the recognition, determination and quantification of protein-protein complexes, such as cell-surface receptor dimers and intracellular factors, to indicate disease status, particularly in the cancer field; andVeraTag technology, including compositions, methods and applications related to gene expression and recognition, determination and quantification of protein-protein interactions, post-translational modification of proteins and/or protein activation, particularly as those processes relate to cell-based assays for quantification of dimerized receptors and analysis of signal transduction pathways.
Our patents and patent applications related to our viral disease portfolio address the following essential aspects of resistance testing: 1) assessment of patient resistance to treatment regimens, including phenotypically assessing whether a patient is likely to respond to treatments targeted to viral protein targets, such as protease inhibitors or reverse transcriptase (RTs), or whether a patient is likely to respond to a treatments targeted to viral processes more generally, such as viral entry or incorporation of nucleotide analogues into the viral coding sequence; and 2) genotypic assessment of patient resistance to treatment regimens, including a comprehensive proprietary database of mutations in viral proteins and an assessment of whether patients harboring mutations will respond to current treatment regimens.
These patents and patent applications also include many patents around our entry and tropism assays. The phenotypic approach covered by these patents is able to directly and accurately assess the susceptibility or resistance of a patient’s HIV to entry inhibitors, and to determine to what extent a patient’s virus is able to gain entry into cells via one or other, or a mixture, of the two major co-receptors, CCR5 or CXCR4. This approach also allows us to assess how resistant a patient’s virus is to entry inhibitors, to identify the “tropism” that a patient’s virus exhibits (i.e. whether it uses the CCR5 or CXCR4 co-receptor, or both), to screen for new entry inhibitor compounds, and to test for antibody responses capable of blocking infection, a critical need in assessing HIV vaccines. We have a comprehensive intellectual property portfolio covering both broad and narrow aspects of the assay.
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These patents and patent applications cover a broad range of technology applicable across our entire current and planned product line. We cannot assure you that any of the currently pending or future patent applications will be issued as patents, or that any patents issued to us will not be challenged, invalidated, held unenforceable or circumvented. Further, we cannot assure you that our intellectual property rights will be sufficiently broad to prevent third parties from producing competing products that are similar in design to our products.
In addition to patent protection, we also rely on protection of trade secrets, know-how and confidential and proprietary information. We generally enter into confidentiality agreements with our employees, consultants and our collaborative partners upon commencement of a relationship with us. However, we cannot assure you that these agreements will provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information or that adequate remedy would exist if unauthorized use or disclosure were to occur. The exposure of our trade secrets and other proprietary information would impair our competitive advantage and could have a material adverse effect on our operating results, financial condition and future growth prospects. Further, we cannot assure you that others have not or will not independently develop substantially equivalent know-how and technology.
Further, there is a risk that some of our confidential information could be compromised during the discovery process of any litigation. During the course of any lawsuit, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our stock.
Intellectual Property of Others
Our commercial success also depends, in part, on avoiding the infringement of other parties’ patents or proprietary rights and the breach of any licenses that may relate to our technologies and products. Third parties may have patents or patent applications relating to products or processes similar to, competitive with or otherwise related to our products. These products and processes may include technologies relating to HIV, hepatitis B and C, other viruses and oncology technologies. Third parties have from time to time threatened to assert infringement or other intellectual property rights against us based on their patents or other intellectual property rights.
We have had to, and expect to continue to have to, enter into licenses covering the rights at issue. Unless we are able to expand our existing licenses or obtain additional licenses, patents covering these technologies may adversely impact our ability to commercialize one or more of our potential products. We are aware of various third-party patents that may relate to our technology. We believe that we do not infringe on these patents but cannot assure that we will not be found in the future to infringe on these or other patents or proprietary rights of third parties, either with products we are currently developing or with new products that we may seek to develop in the future. If third parties assert infringement claims against us, we may be forced to enter into license arrangements with them. Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay royalties. Even if infringement claims against us are without merit, defending a lawsuit will take significant time, and may be expensive and divert management attention from other business concerns. For instance, we were informed by Bayer Diagnostics, in 2002, that it believes we require one or more licenses to patents controlled by Bayer in order to conduct certain of our current and planned operations and activities. Although we believe we do not need a license from Bayer for our HIV products, we believe that, if necessary, licenses would be available to us on commercially acceptable terms. However, in the future, we may have to pay damages, possibly including treble damages, for infringement if it is ultimately determined that our products infringe a third party’s patents.
We cannot assure you that we could enter into the required licenses on commercially reasonably terms, if at all. The failure to obtain necessary licenses or to implement alternative approaches may prevent us from commercializing products under development and would impair our ability to be commercially competitive. We may also become subject to interference proceedings conducted in the U.S. Patent and Trademark Office to determine the priority of inventions.
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The defense and prosecution, if necessary, of intellectual property suits, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings will result in substantial expense to us, and significant diversion of effort by our technical and management personnel. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities to third parties, could put our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Regulation and Reimbursement
Regulation of Clinical Laboratory Operations
The Clinical Laboratory Improvement Amendments of 1988 (CLIA) extends federal oversight to virtually all clinical laboratories by requiring that laboratories be certified by the federal government, by a federally approved accreditation agency or by a state that has been deemed exempt from the regulation’s requirements. We currently provide our viral disease assays, including our PhenoSense, PhenoSense GT and Trofile Co-Receptor Tropism Assays, and ourHERmark Breast Cancer Assay, under the standards of these regulations. Pursuant to these federal clinical laboratory regulations, clinical laboratories must meet quality assurance, quality control and personnel standards. Labs also must undergo proficiency testing and inspections. Standards are based on the complexity of the method of testing performed by the laboratory.
These regulations categorize our laboratory as high complexity, and we believe we are in compliance with the more stringent standards applicable to high complexity testing for personnel, quality control, quality assurance and patient test management. Our clinical laboratory holds a Certificate of Registration under these regulations. Our clinical laboratory has been surveyed by the College of American Pathologists, a federally approved accreditation agency, which has accredited our clinical laboratory. In addition to the Federal laboratory regulations, states, including California, require laboratory licensure and may adopt regulations that are more stringent than federal law. We believe we are in material compliance with California and other applicable state laws and regulations.
The sanctions for failure to comply with federal or state clinical laboratory regulations, or accreditation requirements of federally approved agencies, may be suspension, revocation or limitation of a laboratory’s certificate or accreditation. There also could be fines and criminal penalties. The suspension or loss of a license, failure to achieve or loss of accreditation, imposition of a fine, or future changes in applicable federal or state laws or regulations or in the interpretation of current laws and regulations, could have a material adverse effect on our business.
In September 2006, the FDA issued draft guidance related to the regulation of certain kinds of tests, multivariate index assays (“MIAs”) provided by CLIA labs. Following public comment, the FDA issued revised draft guidance in July 2007. The revised guidance was again subject to public comment and may be further revised before being finalized. The draft guidance states that it applies to those tests provided by CLIA laboratories and that are categorized as IVDMIAs where multiple variables are analyzed, using complex statistical proprietary algorithms and the reported results may not be understood by physicians. It is not clear which tests may be covered by the final guidance when issued, when such guidance may be issued or what form of approval process may be required. There is no assurance that some or all of our current products and products in development, including those for HIV, breast cancer or for other diseases based on theVeraTag technology, will not be covered by the final guidance. In addition, certain members of Congress have announced that they may introduce proposed legislation regarding laboratory testing and third parties have recommended further regulation over laboratory tests such as ours.
Under our current labeling and marketing plans, our products have not been subject to FDA regulation. We cannot predict the nature or extent of future FDA, or other regulation, such as Congressional legislation, and all of our products, including our existing assays and our plannedVeraTag oncology products, might be subject in the future to greater regulation, or different regulations, that could have a material effect on our finances and operations.
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Regulation for Manufacture and Sale of Kit based Assays
We may be subject to FDA and other regulation with regard to future diagnostic kits and services that we may develop. Under the Federal Food, Drug and Cosmetic Act and related regulations, the FDA regulates the design, development, manufacturing, labeling, sale, distribution and promotion of drugs, medical devices and diagnostics. Before a new drug, device or diagnostic product can be introduced in the market, the product must undergo rigorous testing and an extensive regulatory approval process implemented by the FDA under federal law. In addition, the FDA imposes additional regulations on manufacturers of approved products. We have limited experience with obtaining FDA approvals and developing, manufacturing, distributing or selling products within FDA requirements. Any failure to obtain FDA and other requisite governmental approvals with regard to any future products that we may develop could have a material adverse affect on our business, results of operations and financial condition.
Medical Waste and Radioactive Materials
We are subject to licensing and regulation under federal, state and local laws relating to the handling and disposal of medical specimens, hazardous waste and radioactive materials, as well as to the health and safety of laboratory employees. Our clinical laboratory facility in South San Francisco, California is operated in material compliance with applicable federal and state laws and regulations relating to disposal of all laboratory specimens. We utilize outside vendors for disposal of specimens. Our research and development and manufacturing processes at the former ACLARA facilities in Mountain View, California involved the use of hazardous materials, including chemicals and biological materials. Our ongoing operations also produce hazardous waste materials.
We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use, or the use by third parties, of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development or production efforts.
Occupational Safety
In addition to its comprehensive regulation of safety in the workplace, the Federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for healthcare employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to chemicals and transmission of the blood-borne and airborne pathogens. Although we believe that we are currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
Specimen Transportation
Regulations of the Department of Transportation, the International Air Transportation Agency, the Public Health Service and the Postal Service apply to the surface and air transportation of clinical laboratory specimens.
Regulation of Coverage and Reimbursement
Revenues for clinical laboratory testing services come from a variety of sources, including Medicare and Medicaid programs; other third-party payers, including commercial insurers, health maintenance and other
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managed care organizations; and patients, physicians, hospitals and other laboratories. We are a Medicare laboratory services provider. Medicare has issued coverage policies and payment guidelines for resistance testing, including phenotypic and genotypic testing. Currently, nearly all public and a majority of private payers have approved the reimbursement of our HIV Resistance Testing products. While issued guidelines of the Department of Health and Human Services recommend drug resistance testing for HIV patients, this does not assure coverage or level of coverage, by state, Medicare or any other payers. Medicare and several state Medicaid and private insurers have approved reimbursement for Trofile and we continue the process of establishing and improving coverage with payers who have not yet approved reimbursement for Trofile or who reimburse at low rates. We are in the process of establishing coverage and obtaining reimbursement forHERmark.
Since 1984, Congress has periodically lowered the ceilings on Medicare reimbursement for clinical laboratory services from previously authorized levels. In addition, state Medicaid programs are prohibited from paying more than Medicare for clinical laboratory tests. In some instances, they pay significantly less. Certain States, including California, have recently announced or are considering plans to decrease Medicaid rates in response to budgetary constraints. Similarly, other payers, including managed care organizations, have sought on an ongoing basis to reduce the costs of healthcare by limiting utilization and payment rates. Actions by Medicare or other payers to reduce reimbursement rates or limit coverage or utilization of resistance testing would have a direct adverse impact on our revenues and cash flows. We cannot predict whether reductions or limitations will occur.
Our agreements with third-party payers, including Medicare and Medicaid, require that we identify the services we perform using industry standard codes known as the Current Procedural Terminology, or CPT, codes, which are developed by the American Medical Association, or AMA. Most payers maintain a list of standard reimbursement rates for each code, and our ability to be reimbursed for our services is therefore effectively limited by our ability to describe the services accurately using the CPT codes. From time to time, the AMA changes its instructions about how our services should be coded using the CPT codes. If these changes leave us unable to accurately describe our services or are not coordinated with payers such that corresponding changes are made to the payers’ reimbursement schedules, we may have to renegotiate our pricing and reimbursement rates, the changes may interrupt our ability to be reimbursed, and/or the overall reimbursement rates for our services may decrease dramatically.
Significant uncertainty exists as to the reimbursement status of new medical products such as ourHERmarkAssays,particularly if these products fail to show demonstrable value in clinical studies. If government and other third-party payers do not provide adequate coverage and reimbursement for our planned products, our revenues will be reduced.
Fraud and Abuse Regulation
Existing federal laws governing Medicare and Medicaid and other federal healthcare programs, as well as similar state laws, impose a variety of broadly described fraud and abuse prohibitions on healthcare providers, including clinical laboratories. Multiple government agencies enforce these laws. The Health Insurance Portability and Accountability Act of 1996 provides for the establishment of a program to coordinate federal, state and local law enforcement programs. Over the last several years, the clinical laboratory industry has also been the focus of major government enforcement actions.
One set of fraud and abuse laws, the federal anti-kickback laws, prohibits clinical laboratories from, among other things, making payments or furnishing other benefits intended to induce the referral of patients for tests billed to Medicare, Medicaid, or certain other federally funded programs. California also has its own Medicaid anti-kickback law, as well as an anti-kickback law that prohibits payments made to physicians to influence the referral of any patients. California laws also limit the ability to use a non-employee sales force.
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Under another federal provision, known as the “Stark” law or “self-referral” prohibition, physicians who have an investment or compensation relationship with a clinical laboratory may not, unless a statutory exception applies, refer Medicare or Medicaid patients for testing to the laboratory. In addition, a laboratory may not bill Medicare, Medicaid or any other party for testing furnished pursuant to a prohibited referral. There is a California self-referral law, as well, which applies to all patient referrals.
Currently, we have a financial relationship with one referring physician, who serves as part-time medical director at our clinical laboratory. Very few of this physician’s patients, if any, are federal healthcare program patients. In addition, we do not bill for services furnished to any patients referred by this physician. We believe that we are in compliance with applicable state and federal regulations.
There are a variety of other types of federal and state anti-fraud and abuse laws, including laws prohibiting submission of false or otherwise improper claims to federal healthcare programs, and laws limiting the extent of any differences between charges to Medicare and Medicaid and charges to other parties. We seek to structure our business to comply with the federal and state anti-fraud and abuse laws. We cannot predict, however, how these laws will be applied in the future, and we cannot be sure arrangements will not be found in violation of them. Sanctions for violations of these laws may include exclusion from participation in Medicare, Medicaid and other federal healthcare programs, criminal and civil fines and penalties, and loss of license. Any of these could have a material adverse effect on our business.
Patient Privacy
The Department of Human Health and Services, or HHS, issued final regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, designed to improve the efficiency and effectiveness of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions, while protecting the privacy and security of the information exchanged. Three principal regulations have been issued:
• | Privacy regulations; |
• | Security regulations; and |
• | Standards for electronic transactions, or transaction standards. |
The privacy regulations prohibit the use or disclosure of “protected health information” except for certain purposes or unless specific conditions are met. Protected health information is information transmitted or maintained in any form—by electronic means, on paper, or through oral communications that: (1) relates to the past, present or future physical or mental health or condition of an individual, the provision of health care to an individual, or the past, present or future payment for the provision of health care to an individual; and (2) identifies the individual or with respect to which there is a reasonable basis to believe the information can be used to identify the individual. Data that has been de-identified in accordance with the Privacy regulation’s stringent de-identification standard are not considered protected health information and are not subject to the regulation. We have implemented privacy and security changes that we believe comply with these standards. In addition, we implemented measures that we believe will reasonably and appropriately meet the specifications of the security regulations and the transaction standards.
The HIPAA regulations on transaction standards establish uniform standards for electronic transactions and code sets, including the electronic transactions and code sets used for claims, remittance advices, enrollment and eligibility. These standards are complex, and subject to differences in interpretation. We cannot guarantee that our compliance measures will meet the specifications for any of these regulations. In addition, certain types of information, including demographic information not usually provided to us by physicians, could be required by certain payers. As a result of inconsistent application of requirements by payers, or our inability to obtain billing information, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues.
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HHS issued additional guidance on July 24, 2003, stating that it will not penalize a covered entity for post-implementation date transactions that are not fully compliant with the transactions standards, if the covered entity can demonstrate its good faith efforts to comply with the standards. HHS’ stated purpose for this flexible enforcement position was to “permit health plans to mitigate unintended adverse effects on covered entities’ cash flow and business operations during the transition to the standards, as well as on the availability and quality of patient care.”
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandated that the Secretary of Health and Human Services adopt a standard unique health identifier of health care providers. All covered health care providers, both individuals and organizations must obtain a National Provider Identifier (NPI) for use on all HIPAA-related electronic transactions. The compliance date for obtaining and using an NPI was May 23, 2008. The NPI will be the sole provider identifier and will replace the multiple provider identification numbers currently used. We have been notified by some payers (both major and minor) that they will not meet this deadline. At this time, we cannot estimate the potential impact of payers implementing, or failing to implement the HIPAA standard on our cash flows and results of operations.
In addition to the HIPAA provisions described above, there are a number of state laws regarding the confidentiality of medical information, some of which apply to clinical laboratories. These laws vary widely, and new laws in this area are pending, but they most commonly restrict the use and disclosure of medical information without patient consent. Penalties for violation of these laws include sanctions against a laboratory’s state licensure, as well as civil and/or criminal penalties. Compliance with such rules could require us to spend substantial sums, which could negatively impact our profitability.
Employees
As of December 31, 2008, we had 382 employees, of whom 36 hold Ph.D. or M.D. degrees and 69 hold other advanced degrees. Approximately 179 employees are engaged in clinical laboratory, process development and supporting operations, 55 employees are engaged in research and development and clinical research activities, 83 employees are engaged in sales and marketing and 65 employees are engaged in general and administrative functions.
Available Information
We maintain a site on the worldwide web atwww.monogrambio.com; however, information found on our website is not incorporated by reference into this report. We make available free of charge on or through our website our SEC filings, including our annual report on Form 10-K, quarterly interim 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 SEC.
Except for the historical information contained or incorporated by reference, this annual report on Form 10-K and the information incorporated by reference contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed in Part I, Item 1 entitled “Business,” Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this annual report and in any other documents incorporated by reference into this annual report. You should consider carefully the following risk factors, together with all of the other information included in this annual report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.
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We have not achieved profitability and we anticipate continuing losses, which may cause our stock price to fall.
We have experienced significant losses each year since inception, and we expect to continue to incur additional losses as we complete the development of theVeraTag technology and commercialize products for oncology. We have experienced losses applicable to common stockholders of $11.7 million for the year ended December 31, 2008. As of December 31, 2008, we had an accumulated deficit of approximately $299.2 million. We expect to continue to incur losses, primarily as a result of expenses related to:
• | research and product development costs, including the continued development and clinical validation of theVeraTag technology and products based on that technology; |
• | sales and marketing activities related to existing and planned products, including the development of a sales organization focused on the oncology market; |
• | general and administrative costs to support growth of the business; |
• | interest expense related to outstanding debt; |
• | non-cash adjustments in our statement of operations to reflect changes in the fair value of our outstanding convertible debt; |
• | recognition of costs in our statement of operations associated with certain product revenues that are deferred due to the accounting for our collaboration with Pfizer; and |
• | non-cash adjustments relating to stock-based compensation. |
If our losses continue, our liquidity may be impaired, our stock price may fall and our stockholders may lose part or all of their investment.
In the event that we need to raise additional capital, or restructure existing convertible notes, our stockholders could experience substantial additional dilution. If such financing is not available on commercially reasonable terms, we may have to significantly curtail our operations or sell significant assets and could adversely impact our liquidity.
We anticipate that our capital resources, together with funds from the sale of our products, contract and license revenue and borrowing under equipment and accounts receivable financing arrangements, will enable us to maintain our current research and development, marketing, production and general administrative activities related to HIV drug resistance in the United States, together with the development and initial commercialization of theVeraTag technology, at least for the next twelve months. The commercialization of theVeraTag technology is expected to include the development of a testing service and possibly test kits for use in connection with the treatment of cancer patients. However, we may need additional funding to accomplish these goals. To the extent operating and capital resources are insufficient to meet our obligations, including lease payments and future requirements, we will have to raise additional funds to continue the development, commercialization and expansion of our technologies, including theVeraTag technology and products based on that technology. Our inability to raise capital would seriously harm our business and product development efforts.
In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. However, we cannot guarantee that additional financing, in any form, will be available at all, or on terms acceptable to us. If we sell equity or convertible debt securities to raise additional funds, our existing stockholders may incur substantial dilution and any shares so issued will likely have rights, preferences and privileges superior to the rights, preferences and privileges of our outstanding common stock. In the event financing is not available in the time frame required, we could be forced to reduce our operating expenses, curtail sales and marketing activities, reschedule research and development projects or delay, scale back or eliminate some or all of our activities. Further, we might be required to sell certain of our assets or obtain funds through arrangements with third parties
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that require us to relinquish rights to certain of our technologies or products that we would seek to develop or commercialize on our own. These actions, while necessary for the continuance of operations during a time of cash constraints and a shortage of working capital, could make it difficult or impossible to implement our long-term business plans or could adversely impact our liquidity.
We may consider incurring additional indebtedness and issuing additional debt securities in the future to fund potential acquisitions or investments, to refinance existing debt or for general corporate purposes. As a result of recent sub prime loan losses and write-downs, as well as other economic trends in the credit market industry, we may not be able to secure additional financing for future activities on satisfactory terms, or at all. Additionally, our existing debt obligations may limit our ability to obtain certain types of indebtedness. If we are not successful in obtaining sufficient financing because we are unable to access the capital markets at financially economical interest rates, it could reduce our research and development efforts and may materially adversely affect our future growth, results of operations and financial results, and we may be required to curtail significantly, or eliminate at least temporarily, one or more of our development programs.
The new class of drugs for treatment of HIV, known as CCR5 antagonists, including Pfizer’sSelzentry™, is important to Monogram’s business due to the use of the Trofile Assay for selection of patients. The CCR5 class andSelzentry may not be successful. WhileSelzentryhas been approved by the FDA for use with treatment experienced patients and is in use for that indication, it may not achieve significant market adoption and may not be approved by the FDA for the broader indication of treatment naïve patients. While Trofile has been used to select patients in all phase III clinical trials to date for CCR5 antagonists, including that forSelzentry,and is currently in use for patient selections, physicians may not continue to use Trofile for this purpose.
Our testing services, including our Trofile Assay, have been used by certain pharmaceutical company customers, including Pfizer, in phase III clinical trials of the new class of CCR5 antagonist drugs. Pfizer’s CCR5 antagonist,Selzentry, was approved by the FDA in August 2007, for use in CCR5-tropic treatment-experienced patients. The FDA-approved label forSelzentry indicates that tropism testing should guide the use ofSelzentry and the Trofile Assay is currently being used to select patients forSelzentry. However, if our test is not used to select patients forSelzentry and other CCR5 antagonists, this could have a significant negative impact on our potential future revenues.
With the approval ofSelzentry, patient testing use of the Trofile assay has become an important source of testing revenue for us. While the FDA-approved label forSelzentry states that tropism testing should guide the use ofSelzentry, there is no guarantee that our testing services will continue to be used by physicians. If such use does not continue and grow then the Trofile Assay will not generate significant future patient testing revenues for us. This could damage our market position, adversely affect our business, and cause our revenues to decline. While there are additional CCR5 antagonists in development, Pfizer’sSelzentry has the most significance to our near term business as it has been approved by the FDA. Any difficulty related toSelzentry would have a serious adverse affect on our revenues and business. If safety or efficacy concerns arise related toSelzentry, or to the entire class of CCR5 antagonists, all use and additional clinical trials related to this class of drugs could be terminated,Selzentry may not remain on the market and additional drugs might not be approved by the FDA, which would abruptly and negatively impact our revenues.
Even ifSelzentry is successful in its use with treatment experienced patients, it may not be approved by the FDA for the broader indication of treatment naïve patients. A phase III trial of Selzentry in treatment naïve patients missed a trial endpoint in 2007. Even though a re-analysis, in 2008, of the patient samples using the enhanced version of Trofile may facilitate a determination that the trial endpoint was met, there is no guarantee that the FDA will approve Selzentry for the treatment naïve indication. Failure to achieve this approval would limit adoption of Selzentry and would adversely affect adoption of Trofile and our revenues and business.
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Our revenues will be limited or diminished if changes are made to the way that our products are reimbursed, or if government or third-party payers limit the amounts that they will reimburse for our current products, or do not authorize reimbursement for our planned products.
Government and third-party payers, including Medicare and state Medicaid programs, generally require that we identify the services we perform in our clinical laboratory using industry standard codes known as the Current Procedural Terminology, or CPT codes, which are developed by the American Medical Association, or AMA. Most payers maintain a list of standard reimbursement rates for each such code, and our ability to be reimbursed for our services may therefore be effectively limited by our ability to describe the services accurately using the CPT codes. From time to time, the AMA changes its instructions about how our services should be coded using the CPT codes. If these changes leave us unable to accurately describe our services or we are not coordinated with payers such that corresponding changes are made to the payers’ reimbursement schedules, we may have to renegotiate our pricing and reimbursement rates, the changes may interrupt our ability to be reimbursed, and/or the overall reimbursement rates for our services may decrease dramatically. We may spend significant time and resources to minimize the impact of these changes on reimbursement. If the coding available does not apply or cannot accurately reflect the testing we perform, such as in the billing of a new product, we may have to use an unlisted procedure CPT Code, or a “miscellaneous” code. This is the approach we have adopted for Trofile andHERmark, and the use of this code may delay our ability to be reimbursed, the timing of payments for our services and could cause interruptions in the future in reimbursement for our products, including Trofile andHERmark.
Government and third-party payers are attempting to contain or reduce the costs of healthcare and are challenging the prices charged for medical products and services. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of healthcare products. This could, in the future, limit the price that we can charge for our products or cause fluctuations in reimbursement rates for our products. Changes occur from time to time in the administration of reimbursement by public payers, such as the recent change in the local contractor for the Medicare system for reference laboratories in California, and such changes could cause interruptions or changes in previously established reimbursement arrangements. This could hurt our ability to generate revenues. Significant uncertainty exists as to the reimbursement status of new medical products, such as our Trofile Assay and ourHERmarkBreast Cancer Assay, and products that we expect to develop, such as additional assays based on ourVeraTag technology. Additionally, revenue recognition is delayed until reimbursement is established, on a payer by payer basis. If government and other third-party payers do not continue to provide adequate coverage and reimbursement for our testing products or do not authorize reimbursement for our newly introduced and our planned products, our revenues will be reduced.
We derive a significant portion of our revenues from a small number of customers and our revenues may decline significantly if any major customer cancels, reduces or delays a purchase of our products.
Our revenues to date consist, and are anticipated to consist in 2009, largely of sales of HIV testing products. We have significant customer concentration and the loss of any major customer or the reduced use of our products by a major customer could have a significant negative impact on our revenue. Our revenue derived from tests performed for beneficiaries of Medicare and Medicaid programs represented approximately 21%, 20% and 16% of the Company’s revenues in 2008, 2007 and 2006, respectively. Additionally, gross accounts receivable balances from Medicare and Medicaid represented 35% and 32% at December 31, 2008 and December 31, 2007, respectively. Other significant customers included: Schering-Plough representing approximately 13%, 5% and 4%; Quest Diagnostics Incorporated represented approximately 10%, 11% and 11%, Laboratory Corporation of America represented approximately 7%, 11% and 6%, Pfizer Inc represented approximately 3%, 6% and 19%, of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. It is likely that we will have significant customer concentration in the future.
Following our entry into the Collaboration Agreement with Pfizer in May 2006, and the amendment of our services agreement with Pfizer, we expect Pfizer’s significance as a customer will grow. As of December 31,
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2008 and 2007, we had approximately $21.5 million and $12.6 million, respectively, of deferred revenue under the Pfizer Collaboration. The original term of the Collaboration Agreement with Pfizer will expire on December 31, 2009, subject to Pfizer’s right to renew the Agreement for up to five one year extensions upon notice to Monogram six months prior to term expiration. Although certain of our agreements with pharmaceutical company customers have provisions for minimum purchases, these provisions are generally subject to annual renewal or cancellation provisions. The loss of any major customer, a slowdown in the pace of increasing physician and physician group sales as a percentage of sales, cancellation or non-renewal of agreements with pharmaceutical company customers, the delay of significant orders from any significant customer, even if only temporary, or delays or terminations of clinical trials by pharmaceutical company customers, could have a significant negative impact on our revenues and our ability to fund operations from revenues, generate cash from operations or achieve profitability.
We may be unable to perform under our Collaboration Agreement with Pfizer, which could adversely affect our business.
Our Collaboration Agreement with Pfizer requires us to make our Trofile Assay available in the United States and to perform the assay for Pfizer in accordance with agreed upon performance standards. We are also obligated to undertake certain efforts to plan for, establish and maintain an infrastructure to support the availability of the assay in countries outside the United States as designated by Pfizer.
We have never been subject to breach remedies in the case of failure to meet performance standards like those in the Pfizer Collaboration Agreement, and we may be unable to meet them should they occur. The performance standards include standards regarding shipment times, assay turnaround times, percent of unscreenable samples and assay sensitivity. In addition, patient blood samples originating outside the United States will be included in the overall performance standards. We anticipate that under the Collaboration Agreement, we will receive patient samples from countries and laboratories that we have not previously dealt with. Although individual sites and countries must meet minimum volume and performance standards before they are included in the overall performance standard calculations, samples from these sources may not be consistently collected or maintained in accordance with our requirements, which could make a sample unscreenable or lead to unacceptable variability in the assay results. While we and Pfizer have agreed to exclude third party sample collection problems from the measurement of our performance under the Collaboration Agreement, there may be instances where we are unable to identify a sample collection problem, or where we and Pfizer disagree as to whether or not a performance issue is attributable to such a problem. In performing under the Collaboration Agreement, we will need to contract with third party laboratories outside the United States. We do not have experience in negotiating and managing relationships with overseas laboratories, and may have difficulty doing so. In addition, we anticipate that certain HIV variants will be more prevalent in patient populations in some countries from which we will be receiving patient samples under the collaboration, and with which we do not have extensive prior experience. Our assay may not work effectively with these variants, or may require additional enhancements. The foregoing and other factors may make us unable to perform under our collaboration with Pfizer, which could constitute a material breach of the Collaboration Agreement.
Following certain uncured material breaches by us under the Collaboration Agreement, including our failure to achieve the performance standards, Pfizer will be entitled to establish its own facility, with our assistance, to perform the assay in support of its human clinical trials, and to perform the assay with respect to patient blood samples. For these purposes, we have granted Pfizer a license to use intellectual property rights and proprietary materials related to the assay, secured by a security interest in favor of Pfizer, in intellectual property rights and proprietary materials related to the assay. Pfizer would pay us a royalty for each such assay that it performs. If we materially default under the Collaboration Agreement, including failing to achieve the performance standards, and Pfizer becomes entitled to use our intellectual property and proprietary materials to establish its own facility, our business could be significantly and adversely impacted by this potential loss in product revenue from Pfizer.
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Products based on theVeraTagtechnology could be delayed or precluded by regulatory, clinical or technical obstacles, thereby delaying or preventing the development, introduction and commercialization of these new products and adversely impacting our revenue and profitability.
In July 2008, our firstVeraTag product,HERmark Breast Cancer Assay, became available to physicians throughout the U.S. for assessment of HER2 status in patients with breast cancer. We continue to develop other testing products for use in connection with the treatment of cancer patients. These products will also be based on our proprietaryVeraTag technology and are expected to leverage our experience in patient testing for HIV. The completion of these research and development activities is subject to a number of risks and uncertainties including the extent of clinical trials required for regulatory and marketing purposes, the timing and results of clinical trials, inability to access tumor samples on which to conduct studies of the correlation between measurements byVeraTag assays and clinical outcomes, failure or delay in validating the technology in clinical trials, failure to have results of clinical studies published in peer reviewed journals, and failure to achieve necessary regulatory approvals. These factors make it impossible to predict with any degree of certainty whether we will be able to complete the development of commercial products utilizingVeraTag technology or if we are able to do so what the cost and timing of such completion may be.
The FDA may impose medical device regulatory requirements on our tests, including possible pre-market approval requirements, which could be expensive and time-consuming and could prevent us from marketing these tests.
In September 2006, the FDA issued draft guidance related to the regulation of certain kinds of tests, multivariate index assays (“IVDMIAs”) provided by CLIA labs. Following public comment, the FDA issued revised draft guidance in July 2007. The revised guidance was again subject to public comment and may be further revised before being finalized. The draft guidance states that it applies to those tests provided by CLIA laboratories and that are categorized as IVDMIAs where the values of multiple variables are combined using an interpretation function to yield a single patient-specific result that is intended for use in diagnosis, cure, mitigation, treatment or prevention of disease. It is not clear which tests may be covered by the final guidance when issued, when such guidance may be issued or what form of approval process may be required, although in certain cases a full premarket approval may be required. There is no assurance that some or all of our current products and products in development, including those for HIV or for cancer based on theVeraTag technology, will not be covered by the final guidance, or by other FDA regulation. In addition, certain members of Congress have announced that they may introduce proposed legislation regarding laboratory testing, which may apply to current or future products.
As our Trofile Assay has been used in phase III trials of CCR5 antagonist drug candidates, we filed a master file with the FDA providing information about the specification and validation of the assay. We have had discussions with the FDA regarding this information and the use of our HIV tests as a patient selection tool in such trials. While we have initiated commercial sales of our Trofile as a CLIA-based service,there is no guarantee that the FDA will not seek to regulate such services.
In the past, the FDA has not required that genotypic or phenotypic resistance testing for HIV conducted at a clinical laboratory be subject to pre-marketing clearance or approval, although the FDA has stated that it believes its jurisdiction extends to tests generated in a clinical laboratory. We received a letter from the FDA in September 2001, that asserted such jurisdiction over in-house tests like our HIV resistance tests, but which also stated the FDA was not currently requiring pre-market approval for HIV monitoring tests such as ours provided that the promotional claims for such tests are limited to its analytical capabilities and do not mention the benefit of making treatment decisions on the basis of test results. The FDA letter to us also asserted that our GeneSeq test had been misbranded due to the use of purchased analyte specific reagents, or ASRs, if test reports did not include a statement disclosing that the test has not been cleared or approved by the FDA. Since 2002, we have utilized in-house prepared ASRs in our products. The FDA indicated in those discussions that the focus of the letter was our genotypic tests and not our phenotypic tests. On August 8, 2007, the FDA issued final guidance
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regarding classification of HIV genotypic resistance testing devices as class II devices. We do not believe that this guidance impacts our genotypic products all of which are conducted in our clinical laboratory. The recent draft IVDMIA guidance described above indicates that genotypic testing, such as our HIV genotypic resistance testing, does not fall within the scope of that IVDMIA draft guidance. We believe that our phenotypic resistance tests and ourHERmark Breast Cancer Assay, as direct biological measurements, do not fall within the definition of IVDMIA. However, there is no assurance that the FDA will not seek to regulate our products.
Either as a result of a decision to produce future test kits, or as a result of FDA regulation or other regulation, of our laboratory testing business, we may become subject to Good Manufacturing Practice Regulation, or GMP, under the auspices of the FDA. Our facilities are not GMP compliant. If our operations are subject to GMP regulation, then we will be required to establish a GMP compliant facility, or to enter into a relationship with a third party manufacturer that operates a GMP compliant facility. We do not have experience with GMP compliance. GMP compliance, or entry into a manufacturing relationship with a third party manufacturer, would be time-consuming and expensive. We anticipate that if we are required to establish our own GMP compliant facility, or we elect to enter into a relationship with a GMP compliant third party, either process would require significant start-up costs and would significantly increase on-going overhead costs.
We cannot be sure that the FDA will accept the steps we take, or that the FDA will not require us to alter our promotional claims or undertake the expensive and time-consuming process of seeking premarket approval with clinical data demonstrating the sensitivity and specificity of our currently offered tests or tests in development, including tests for oncology based on ourVeraTag technology. If premarket approval is required, we cannot be sure that we will be able to obtain it in a timely fashion or at all; and in such event the FDA would have authority to require us to cease marketing tests until such approval is granted.
In general, we cannot predict the extent of future FDA or other regulation, including congressional regulation, of our business. In the future, we might be subject to greater or different regulations that could have a material effect on our finances and operations. If we fail to comply with existing or additional FDA regulations, it could cause us to incur civil or criminal fines and penalties, increase our expenses, prevent us from increasing revenues, or hinder our ability to conduct our business.
We could lose key personnel, which could materially affect our business and require us to incur substantial costs to recruit replacements for lost personnel.
Any of our key personnel could terminate their employment at any time and without notice. We do not maintain key person life insurance on any of our key employees. Any failure to attract and retain key personnel could have a material adverse effect on our business.
Charges to operations resulting from the possible future impairment of goodwill and intangible assets may adversely affect the market value of our common stock.
If we are unable to successfully develop new products based on ourVeraTag technology, our financial results, including net income (loss) per common share, could be adversely affected. In accordance with United States generally accepted accounting principles, we have accounted for the merger with ACLARA as a business combination. We have allocated the total purchase price to the acquired net tangible assets, amortizable intangible assets, and in-process research and development based on their fair values as of the date of completion of the merger, and have recorded the excess of the purchase price over those fair values as goodwill.
To the extent the value of goodwill becomes impaired; we may be required to incur material non-cash charges relating to the impairment of those assets. The additional charges could adversely affect our financial results, including net income (loss) per common share, which could cause the market price of our common stock to decline.
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Our current products may not continue to receive market acceptance and our potential future products may not achieve market acceptance, which could limit our future revenue.
Our ability to establish our testing products, both current and potential, as the standard of care to guide and improve the treatment of viral diseases and cancer will depend on continued acceptance and use of our current testing products by physicians and clinicians and pharmaceutical companies, similar acceptance and use of our potential future products and the development and commercialization of new drugs and drug classes that require or could benefit from testing services such as ours. While certain testing products for viral diseases are established, others are still relatively new, and testing products for the treatment of cancer have not yet been developed. We cannot predict the extent to which physicians and clinicians will accept and use these testing products. They may prefer competing technologies and products. The commercial success of these testing products will require demonstrations of their advantages and potential clinical and economic value in relation to the current standard of care, as well as to competing products. Market acceptance of our products will depend on:
• | the success of Pfizer’sSelzentry and the adoption of our Trofile Assay to select patients forSelzentry; |
• | the development and commercialization of competitive products for the assessment of tropism related to the use ofSelzentry and other CCR5 antagonists in development; |
• | the availability of third party reimbursement by Medicare, Medicaid and other public and private payers of healthcare costs; |
• | the success of clinical trials of additional CCR5 antagonists for HIV in which our testing services are being used, whether those drugs get approved by the FDA and whether our tests are required or recommended after those drugs are approved; |
• | our marketing efforts and continued ability to demonstrate the utility of PhenoSense products in guiding anti-viral drug therapy, especially in relation to genotyping technology; |
• | the effectiveness of Pfizer in developing the market and commercializing our Trofile Assay outside of the United States; |
• | our ability to demonstrate to potential customers the clinical benefits and cost effectiveness of ourVeraTag technology, relative to competing technologies and products; |
• | the extent to which opinion leaders in the scientific and medical communities publish supportive scientific papers in reputable academic journals; |
• | the extent and success of our efforts to market, sell and distribute our testing products; |
• | the timing and willingness of potential collaborators to commercialize our virology andVeraTag products and other future testing product candidates; |
• | general and industry-specific economic conditions, which may affect our pharmaceutical customers’ research and development, clinical trial expenditures and the use of our products, including Trofile andVeraTag; |
• | progress of clinical trials conducted by our pharmaceutical customers; |
• | our ability to generate clinical data indicating correlation between data recognized byVeraTagassays, includingHERmark and clinical responses to particular drugs; |
• | changes in the cost, quality and availability of equipment, reagents and components required to manufacture or use our PhenoSense, Trofile,HERmark and futureVeraTag products and other future testing product candidates; |
• | the development by the pharmaceutical industry of anti-viral drugs and targeted medicines for specific patient populations, the success of these targeted medicines in clinical trials and the adoption of our technological approach in these development activities; and |
• | our ability to develop new products. |
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If the market does not continue to accept our existing testing products, such as our PhenoSense andHERmark products or does not accept our future testing products, our ability to generate revenue will be limited.
Our indebtedness and debt service obligations have increased as a result of the issuance of our convertible note to Pfizer in the principal amount of $25 million, our issuance of 0% convertible senior unsecured notes, in the principal amount of $30 million, and our entry into a credit and security agreement with General Electric Capital Corporation (“GE”), which individually or in the aggregate, may adversely affect our cash flow, cash position and stock price.
As a result of the sale and issuance of $30 million principal amount of 0% convertible senior unsecured notes in January 2007, to a single qualified institutional buyer, our entry into a credit and security agreement with GE, in September 2006, which provides us with a revolving credit line of up to $10 million, and our issuance of a convertible note to Pfizer in the principal amount of $25 million in May 2006, we increased our total debt and debt service obligations. If we issue other debt securities or enter into other debt obligations in the future, our debt service obligations will increase further.
We intend to fulfill our debt service obligations. In the future, if we are unable to generate cash or raise additional cash through financings sufficient to meet these obligations and need to use existing cash in order to fund these obligations, we may have to delay or curtail research, development and commercialization programs.
Our indebtedness could have significant additional negative consequences, including, without limitation:
• | requiring the dedication of a portion of our expected cash flow to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including funding our research and development programs and other capital expenditures; |
• | increasing our vulnerability to general adverse economic conditions; |
• | limiting our ability to obtain additional financing; |
• | placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources; and |
• | requiring us to reflect adjustments in our statement of operations to reflect changes in the fair value of the embedded derivatives in our outstanding convertible debt. |
Our outstanding senior indebtedness to Pfizer and GE imposes restrictions on how we conduct our business, and if we fail to meet our obligations under this indebtedness, our payment obligations may be accelerated and collateral for our loans may be forfeited.
In May 2006, in connection with our entry into a Collaboration Agreement, we and Pfizer entered into a Note Purchase Agreement, which we amended in January 2007, pursuant to which we sold to Pfizer a 3% Senior Secured Convertible Note in the principal amount of $25 million, which we refer to as the Pfizer Note. The Pfizer Note is secured by a first priority security interest in favor of Pfizer in our assets related to our HIV testing business.
Under the terms of the Pfizer Note, we are prohibited from incurring certain types of indebtedness, from permitting certain liens on our assets, from entering into transactions with affiliates and from entering into certain capital transactions such as dividends, stock repurchases, capital distributions or other similar transaction without Pfizer’s prior consent. We are also subject to certain other covenants as set forth in the Pfizer Note, including limitations on our ability to enter into new lines of business. These limitations imposed by the Pfizer Note could impair our ability to operate or expand our business.
In addition, in September 2006, we entered into a credit and security agreement with GE. Our agreement with GE provides us with a $10 million revolving credit line and grants GE a security interest over certain of our
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assets, including our accounts receivable, intellectual property used or held for use in connection with our oncology testing business, and our inventory. Under the terms of this agreement, we are also prohibited from incurring certain types of indebtedness and certain liens on our assets.
If an event of default occurs under either of these loan arrangements, Pfizer or GE, as the case may be, may declare the outstanding principal balance and accrued but unpaid interest owed to them immediately due and payable, which would have a material adverse affect on our financial position. A default under either our Pfizer or GE indebtedness would also trigger a default under the terms of our convertible senior unsecured notes, in the principal amount of $30 million. We may not have sufficient cash to satisfy these obligations. If a default occurs under the Pfizer Note, and we are unable to repay Pfizer, Pfizer could seek to enforce its rights under its first priority security interest in our assets related to our HIV testing business. If this were to happen, Pfizer may receive some or all of the assets related to our HIV testing business in satisfaction of our debt, which could cause our business to fail. Similarly, if a default occurs under our agreement with GE, and we are unable to repay GE, GE could seek to enforce its security interest in the assets it has secured, including our accounts receivable, intellectual property used or held for use in connection with our oncology testing business, and our inventory, which could also cause our business to fail.
Billing complexities associated with health care payers could delay our accounts receivable collection, impair our cash flow and limit our ability to reach profitability.
Billing for laboratory services is complex. Laboratories must bill various payers, such as Medicare, Medicaid, insurance companies, doctors, employer groups and patients, all of whom have different requirements. Our revenue derived from tests performed for beneficiaries of the Medicare and Medicaid programs represented approximately 21%, 20% and 16% of our revenue for the years ended December 31, 2008, 2007 and 2006, respectively. In addition, gross accounts receivable balances from Medicare and Medicaid represented 35% and 32% of our gross accounts receivable balance at December 31, 2008 and 2007, respectively. Billing difficulties often result in a delay in collecting, or ultimately an inability to collect, the related receivable. This impairs cash flow and ultimately reduces profitability if we are required to record bad debt expense and/or contractual adjustments for these receivables. We recorded bad debt expense of $0.9 million, $0.8 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Among many other factors complicating billing are:
• | complexity of procedures, and changes in procedures, for electronic processing of insurance claims; |
• | complications related to use of new or miscellaneous codes, as with Trofile andHERmark, for new products based on new technologies; |
• | cumbersome nature of manual processes at payers for processing claims where electronic processing is not possible; |
• | pricing or reimbursement differences between our fee schedules and those of the payers; |
• | changes in or questions about how products are to be identified in the requisitions; |
• | disputes between payers as to which party is responsible for payment; |
• | disparity in coverage among various payers; and |
• | difficulties of adherence to specific compliance requirements and procedures mandated by various payers. |
Ultimately, if such issues are not resolved in a timely manner, our cash flows could be impaired and our ability to reach profitability could be limited.
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We face intense competition, and if our competitors’ existing products or new products are more effective than our products, the commercial opportunity for our products will be reduced or eliminated.
The commercial opportunity for our products will be reduced or eliminated if our competitors develop and market new testing products that are superior to, or are less expensive than, the testing products that we develop using our proprietary technology. The markets for life science research and diagnostic products are highly competitive and are subject to rapid technological change. In particular, approaches to personalized medicine are rapidly evolving and there are many companies attempting to establish their technological approaches and products as the standard of care.
For our HIV resistance testing products, genotypic tests are available through national laboratories such as Quest Diagnostics and Laboratory Corporation of America, as well as regional and hospital laboratories and commercial laboratories such as Mayo Laboratories and Kaiser Permanente. These tests are supplied by a number of manufacturers including Applied Biosystems Group, and Visible Genetics, a division of Siemens. While alternate approaches to phenotypic testing are commercialized, we believe that the primary competition for our phenotypic resistance tests is the alternate approach of genotyping. For our Trofile Co-Receptor Tropism Assay, we are not aware of any other clinically validated products currently available for this application. However, we are aware of efforts by third parties to develop competitive assays using phenotypic and genotypic approaches. We believe that genotypic approaches to the identification of tropism are significantly less precise than our phenotypic approach. Nevertheless, we expect that reference laboratories and academics may develop products based on genotypic approaches.
For diagnostic testing used for cancer therapies, we expect to compete with existing mass protein and RNA based technologies as well as with companies that are developing alternative technological approaches for patient testing in the cancer field. There are likely to be many technological approaches in the emerging field of testing for likely responsiveness to the new class of targeted cancer therapies, potentially from companies that currently commercialize testing products for guiding therapy of cancer patients, such as DakoCytomation A/S, Genzyme, Abbott Laboratories and Roche Diagnostics. Established national clinical laboratories such as Quest Diagnostics and Laboratory Corporation of America may also develop or commercialize services or products that are competitive with those that we anticipate developing and commercializing. In addition, there are likely alternative technology approaches being developed by competitors and evaluated by pharmaceutical and biotechnology companies as well as being studied by the oncology community. In particular, while products based on ourVeraTag technology are based on the identification of protein-based differences among patients, there is significant interest in the oncology community for gene-based approaches that may be available from other companies.
We believe that the principal competitive factors in our markets are product capability supported by clinical validation, scientific credibility and reputation, customer service, cost effectiveness of the technology and the sales and marketing strength of the supplier.
Each of these competitors is attempting to establish its own test as the standard of care. Our competitors may successfully develop and market other testing products that are either superior to those that we may develop or that are marketed prior to marketing of our testing products. One or more of our competitors may render our technology obsolete or uneconomical by advances in existing technological approaches or the development of different approaches. Some of these competitors have substantially greater financial resources, market presence and research and development staffs than we do. In addition, some of these competitors have significantly greater experience in developing products, and in obtaining the necessary regulatory approvals of products and processing and marketing products.
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Various testing materials that we use are purchased from single qualified suppliers, which could result in our inability to secure sufficient materials to conduct our business.
We purchase some of the testing materials used in our laboratory operations from single qualified suppliers. Although these materials could be purchased from other suppliers, we would need to qualify the suppliers prior to using their materials in our commercial operations. Although we believe we have ample inventory to allow validation of another source, in the event of a material interruption of these supplies, the quantity of our inventory may not be adequate.
Any extended interruption, delay or decreased availability of the supply of these testing materials could prevent us from running our business as contemplated and result in failure to meet our customers’ demands. If significant customer relationships were harmed by our failure to meet customer demands, our revenues may decrease. We might also face significant additional expenses if we are forced to find alternate sources of supplies, or change materials we use. Such expenses could make it more difficult for us to attain profitability, offer our products at competitive prices and continue our business as currently contemplated or at all.
The intellectual property protection for our technology and trade secrets may not be adequate, allowing third parties to use our technology or similar technologies, and thus reducing our ability to compete in the market.
The strength of our intellectual property protection is uncertain. In particular, we cannot be sure that:
• | we were the first to invent the technologies covered by our patents or pending patent applications; |
• | we were the first to file patent applications for these inventions; |
• | others will not independently develop similar or alternative technologies or duplicate any of our technologies; |
• | any of our pending patent applications will result in issued patents; or |
• | any patents issued to us will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties. |
With respect to our viral disease portfolio, we have approximately 91 granted, issued, allowed and pending patent applications in the United States and in other countries, including 27 issued patents as of December 31, 2008. With respect to ourVeraTag technology, including our current and planned oncology products, we have approximately 78 granted, issued, allowed and pending patent applications in the United States and in other countries, including 34 issued patents as of December 31, 2008.
We have 101 granted, issued, allowed and pending patent applications in the United States and in other countries as of December 31, 2008, including 80 issued or allowed patents, relating to the historic microfluidics business of ACLARA. These microfluidics patents and patent applications have been licensed to Caliper Life Sciences, Inc. and we may receive certain royalties pursuant to this license agreement. We have received and will receive cash payments, including up-front and annual payments for the outlicense. In addition, we will receive royalty payments relevant to exactly which of the outlicensed patents are implicated. For some of the outlicensed patents, we will receive a flat royalty on all products for which Caliper grants a sublicense. On others, we will share sublicensing revenue based upon a formula determined according to the quality and quantity of Caliper patents implicated in the Caliper sublicense.
Other companies may have patents or patent applications relating to products or processes similar to, competitive with or otherwise related to our current and planned products. Patent law relating to the scope of claims in the technology fields in which we operate, including biotechnology and information technology, is still evolving and, consequently, patent positions in these industries are generally uncertain. We will not be able to assure you that we will prevail in any lawsuits regarding the enforcement of patent rights or that, if successful, we will be awarded commercially valuable remedies. In addition, it is possible that we will not have the required resources to pursue offensive litigation or to otherwise protect our patent rights.
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In addition to patent protection, we also rely on protection of trade secrets, know-how and confidential and proprietary information. We generally enter into confidentiality agreements with our employees, consultants and their collaborative partners upon commencement of a relationship with them. However, we cannot assure you that these agreements will provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information or that adequate remedy would exist if unauthorized use or disclosure were to occur. The unintended disclosure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. Further, we cannot assure you that others have not or will not independently develop substantially equivalent know-how and technology.
In addition, there is a risk that some of our confidential information could be compromised during the discovery process of any litigation. During the course of any lawsuit, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our common stock.
Our products could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if we are not successful defending any such litigation or cannot obtain necessary licenses, we may have to pay substantial damages and/or be prohibited from selling our products.
Our commercial success depends upon our ability to develop, manufacture, market and sell our products and use our proprietary technologies without infringing the proprietary rights of others. Companies in our industry typically receive a higher than average number of claims and threatened claims of infringement of intellectual property rights. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we are selling and/or developing or expect to sell and/or develop products. We may be exposed to future litigation by third parties based on claims that our products, technologies or activities infringe the intellectual property rights of others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products or technologies may infringe. There also may be existing patents, of which we are not aware, that our products or technologies may inadvertently infringe. Further, there may be issued patents and pending patent applications in fields relevant to our business, of which we may become aware from time to time, that we believe we do not infringe or that we believe are invalid or relate to immaterial portions of our overall business. We will not be able to assure you that third parties holding any of these patents or patent applications will not assert infringement claims against us for damages or seeking to enjoin our activities. We will also not be able to assure you that, in the event of litigation, we will be able to successfully assert any belief we may have as to non-infringement, invalidity or immateriality, or that any infringement claims will be resolved in our favor. Third parties have from time to time threatened to assert infringement or other intellectual property claims against us based on our patents or other intellectual property rights or informed us that they believe we required one or more licenses in order to perform certain of our tests. For instance, we were informed in 2004 by Bayer Diagnostics (now a unit of Siemens AG), or Bayer, that it believed we require one or more licenses to patents controlled by Bayer in order to conduct certain of our current and planned operations and activities. We, in turn, believe that Bayer may require one or more licenses to patents controlled by us. Although we believe we do not need a license from Bayer for our HIV products, we held preliminary discussions with Bayer, in 2004, concerning the possibility of entering into a cross-licensing or other arrangement. However, in the future, we may have to pay substantial damages, possibly including treble damages; for infringement if it is ultimately determined that our products infringe a third party’s patents. Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if infringement claims against us are without merit, defending a lawsuit will take significant time, and may be expensive and divert management attention from other business concerns.
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Our business operations and the operation of our clinical laboratory facility are subject to stringent regulations and if we are unable to comply with them, we may be prohibited from accepting patient samples or may incur additional expense to attain and maintain compliance, which would have an adverse impact on our revenue and profitability.
The operation of our clinical laboratory facilities is subject to a stringent level of regulation under the Clinical Laboratory Improvement Amendments of 1988. Laboratories must meet various requirements, including requirements relating to quality assurance, quality control and personnel standards. Our laboratories are also subject to regulations by the State of California and various other states. We have received accreditation by the College of American Pathologists and therefore are subject to their requirements and evaluation. Our failure to comply with applicable requirements could result in various penalties, including loss of certification or accreditation, and we may be prevented from conducting our business as we currently do or as we may wish to in the future.
If we do not comply with laws and regulations governing the confidentiality of medical information, we may lose the state licensure we need to operate our business, and may be subject to civil, criminal or other penalties. Compliance with such laws and regulations could be expensive.
The Department of Human Health and Services, or HHS, has issued final regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, designed to improve the efficiency and effectiveness of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions, while protecting the privacy and security of the information exchanged. Three principal regulations have been issued:
• | privacy regulations; |
• | security regulations; and |
• | standards for electronic transactions, or transaction standards. |
We have implemented the HIPAA privacy regulations. In addition, we implemented measures we believe will reasonably and appropriately meet the specifications of the security regulations and the transaction standards.
These standards are complex, and subject to differences in interpretation. We will not be able to guarantee that our compliance measures will meet the specifications for any of these regulations. In addition, certain types of information, including demographic information not usually provided to us by physicians, could be required by certain payers. As a result of inconsistent application of requirements by payers, or our inability to obtain billing information, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues. We cannot estimate the potential impact of payers implementing (or failing to implement) the HIPAA transaction standards on our cash flows and results of operations.
In addition to the HIPAA provisions described above, there are a number of state laws regarding the confidentiality of medical information, some of which apply to clinical laboratories. These laws vary widely, and new laws in this area are pending, but they most commonly restrict the use and disclosure of medical information without patient consent. Penalties for violation of these laws include sanctions against a laboratory’s state licensure, as well as civil and/or criminal penalties. Compliance with such rules could require us to spend substantial sums, which could negatively impact our profitability.
We may be unable to build brand loyalty because our trademarks and trade names may not be protected. We may not be able to build brand loyalty in the new markets that we are entering and may enter in the future.
Our registered or unregistered trademarks or trade names such as the names PhenoSense, PhenoSense GT, PhenoScreen, Integrase, GeneSeq, Trofile,HERmark andVeraTag may be challenged, canceled, infringed,
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circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build brand loyalty. Brand recognition is critical to our short-term and long-term marketing strategies especially as we commercialize future enhancements to our products. In particular as we broaden our commercial focus from viral diseases to oncology and other serious diseases, we may not be able to establish any brand recognition and loyalty in oncology and other new markets that we may enter in the future.
Clinicians or patients using our products or services may sue us and our insurance may not sufficiently cover all claims brought against us, which would increase our expenses.
Clinicians, patients and others may at times seek damages from us if drugs are incorrectly prescribed for a patient based on testing errors or similar claims. Although we have obtained product liability insurance coverage of up to $6 million, and expect to continue to maintain product liability insurance coverage, we will not be able to guarantee that insurance will continue to be available to us on acceptable terms or that our coverage will be sufficient to protect us against all claims that may be brought against us. We may not be able to maintain our current coverage, or obtain new insurance coverage for our planned future testing services and products, such as planned testing service and kits for use in connection with the treatment of cancer patients, on acceptable terms with adequate coverage, or at reasonable costs. We may incur significant legal defense expenses in connection with a liability claim, even one without merit or for which we have coverage.
We may be subject to litigation, which would be time consuming and divert our resources and the attention of our management.
ACLARA, with which we merged in December 2004, and certain of its former officers and directors, referred to together as the ACLARA defendants, are named as defendants in a securities class action lawsuit filed in the United States District Court for the Southern District of New York. This action, which was filed on November 13, 2001, and is now captioned ACLARA BioSciences, Inc. Initial Public Offering Securities Litigation, also names several of the underwriters involved in ACLARA’s initial public offering, or IPO, as defendants. This class action is brought on behalf of a purported class of purchasers of ACLARA common stock from the time of ACLARA’s March 20, 2000 IPO through December 6, 2000. The central allegation in this action is that the underwriters in the ACLARA IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased ACLARA stock in the IPO and the after-market, and that the ACLARA defendants violated the federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 300 issuers who went public between 1998 and 2000 have been named in similar lawsuits. In February 2003, after the issuer defendants (including the ACLARA defendants) filed an omnibus motion to dismiss, the court dismissed the Section 10(b) claim as to the Company, but denied the motion to dismiss the Section 11 claim as to the Company and virtually all of the other issuer-defendants.
On June 26, 2003, the plaintiffs in the consolidated class action lawsuits announced a proposed settlement with ACLARA and the other issuer defendants. This proposed settlement was terminated on June 25, 2007, following the ruling by the United States Court of Appeals for the 2nd Circuit on December 5, 2006, reversing the District Court’s granting of class certification in the six focus cases currently being litigated in this proceeding. The proposed settlement, which had been approved by ACLARA’s board of directors, provided that the insurers of all settling issuers would guarantee that the plaintiffs recover $1 billion from non-settling defendants. Under the proposed settlement, the maximum amount that could have been charged to ACLARA’s insurance policy in the event that the plaintiffs recovered nothing from the investment banks would have been approximately $3.9 million. We believe that ACLARA had sufficient insurance coverage to cover the maximum amount that we may be responsible for under the proposed settlement.
On August 14, 2007, Plaintiffs filed Amended Master Allegations. On September 27, 2007, the Plaintiffs filed a renewed Motion for Class Certification. Defendants filed a Motion to Dismiss the focus cases on
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November 9, 2007. On March 26, 2008, the Court ruled on the Motion to Dismiss, holding that the plaintiffs had adequately pleaded their Section 10(b) claims against both the Issuer Defendants and the Underwriter Defendants. As to the Section 11 claim, the Court dismissed the claims brought by those plaintiffs who sold their securities for a price in excess of the initial offering price, on the grounds that they could not show cognizable damages, and by those who purchased outside the previously certified class period, on the grounds that those claims were time barred. This ruling, while not binding on the ACLARA IPO case, does provide strong guidance to all of the parties involved in this litigation.
Due to the inherent uncertainties of litigation and assignment of claims against the underwriters and because a final settlement has not yet been approved by the District Court, the ultimate outcome of the matter cannot be predicted.
The Company may be subject to other claims or litigation. In the past, the Company has received demand letters threatening possible legal action. We cannot be certain whether litigation will or will not be filed. Due to the inherent uncertainties of litigation the outcome of any such potential action cannot be predicted.
Our operating results may fluctuate from quarter to quarter, making it likely that, in some future quarter or quarters, we will fail to meet estimates of operating results or financial performance, causing our stock price to fall.
If revenue declines in a quarter, our losses will likely increase or our earnings will likely decline because many of our expenses are relatively fixed. Though our revenues may fluctuate significantly as we continue to build the market for our products, expenses such as research and development, sales and marketing and general and administrative are not affected directly by variations in revenue. The cost of our product revenue could also fluctuate significantly due to variations in the demand for our products and the relatively fixed costs to produce them. We may also experience operational difficulties in our clinical laboratory with interruption of test completion, which could adversely affect revenues. In addition, we could experience significant fluctuations in our consolidated statement of operations for stock-based compensation and fair value adjustments to our 0% Notes and Pfizer Note. We will not be able to accurately predict how volatile our future operating results will be because our past and present operating results, which reflect moderate sales activity, are not indicative of what we might expect in the future. Additionally, our revenues may fluctuate due to the timing of clinical trials utilizing our assays. As a result, it will be very difficult for us to forecast our revenues accurately and it is likely that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In this event, the market price of our common stock may fall abruptly and significantly. Because our revenue and operating results will be difficult to predict, period-to-period comparisons of our results of operations may not be a good indication of our future performance.
We may lose some or all of the value of some of our marketable securities.
We engage one or more third parties to manage some of our cash consistent with an investment policy that allows a range of investments and maturities. The investments are intended to preserve principal while providing liquidity adequate to meet projected cash requirements. Risks of principal loss are intended to be minimized through diversified short and medium term investments of high quality, but the investments are not, in every case, guaranteed or fully insured. In light of recent changes in the credit market, some high quality short-term investment securities, similar to the types of securities that we invest in, have suffered illiquidity or events of default. From time to time, we may suffer losses on our marketable securities, which could have a material adverse impact on our operations. Due to current market conditions, our cash available for investing has been placed in short-term U.S. Government Treasury Bills and money market accounts as of December 31, 2008.
If a natural disaster strikes our clinical laboratory facilities and we are unable to receive and or process our customers’ samples for a substantial amount of time, we would lose revenue.
We rely on a single clinical laboratory facility to process patient samples for our tests, which are received via delivery service or mail, and have no alternative facilities. We will also use this facility for conducting other
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tests we develop, includingVeraTag assays, and even if we move into different or additional facilities they will likely be in close proximity to our current clinical laboratory. Our clinical laboratories and some pieces of processing equipment are difficult to replace and could require substantial replacement lead-time. Our facilities may be affected by natural disasters such as earthquakes and floods. Earthquakes are of particular significance because our facilities are located in the San Francisco Bay Area, an earthquake-prone area, and we do not have insurance against earthquake loss. Our insurance coverage, if any, may not be adequate to cover total losses incurred in a natural disaster. However, even if covered by insurance, in the event our clinical laboratory facilities or equipment is affected by natural disasters, we would be unable to process patient samples and meet customer demands or sales projections. If our patient sample processing operations were curtailed or ceased, we would not be able to perform tests, which would reduce our revenues, and may cause us to lose the trust of our customers or market share.
We use hazardous chemicals and biological materials in our business, and any claims relating to any alleged improper handling, storage, use or disposal of these materials could adversely harm our business.
Our research and development and manufacturing processes involve the use of hazardous materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We will not be able to eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We do not maintain insurance coverage for damage caused by accidental release of hazardous chemicals, or exposure of individuals to hazardous chemicals off of our premises. We could be subject to damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use, or the use by third parties, of these materials, and our liability under a claim of this nature may exceed our total assets. Compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development or production efforts.
Concentration of ownership among some of our stockholders may prevent other stockholders from influencing significant corporate decisions.
As of December 31, 2008, approximately 50% of our common stock is beneficially held by our directors, our executive officers, and greater than five percent stockholders. Consequently, a small number of our stockholders may be able to substantially influence our management and affairs. If acting together, they would be able to influence most matters requiring the approval by our stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The concentration of ownership may also delay or prevent a change in control of Monogram Biosciences at a premium price if these stockholders oppose it.
If our stockholders or convertible note holders sell substantial amounts of our common stock, the market price of our common stock may fall.
If our stockholders or convertible note holders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, or conversion of our outstanding convertible debt, the market price of our common stock may fall. As of December 31, 2008, we had outstanding options under our employee stock options plan to purchase approximately 4.0 million shares of our common stock, which represents 17% of our common stock outstanding on December 31, 2008, at a weighted-average price of $12.42 per share. Our outstanding convertible notes are convertible at the option of the holders into shares of our common stock. We registered both the shares of common stock issuable upon conversion of the 0% Notes and the shares issuable upon conversion of the Pfizer Note. Accordingly, so long as these registration statements are effective, the common stock issued upon conversion of the 0% Notes and the Pfizer Note will be freely tradable in the public markets without restriction. The conversion of these notes into common stock could result in the issuance of a substantial number of shares and substantial dilution to our stockholders. Sales of substantial
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amounts of our common stock, including hedging activities by our convertible note holders, or the perception that such sales could occur, whether currently outstanding, or issued as the result of option exercises or conversion of convertible debt, might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Sales of a substantial number of shares could occur at any time. This may decrease the price of our common stock and may impair our ability to raise capital in the future.
Provisions of our charter documents and Delaware law may make it difficult for our stockholders to replace our management and may inhibit a takeover, either of which could limit the price investors might be willing to pay in the future for our common stock.
Provisions in our certificate of incorporation and bylaws may make it difficult for our stockholders to replace or remove our management, and may delay or prevent an acquisition or merger in which we are not the surviving company. In particular:
• | Our board of directors is classified into three classes, with only one of the three classes elected each year, so that it would take at least two years to replace a majority of our directors; |
• | Our bylaws contain advance notice provisions that limit the business that may be brought at an annual meeting and place procedural restrictions on the ability to nominate directors; and |
• | Our common stockholders are not permitted to call special meetings or act by written consent. |
Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions could discourage changes of our management and acquisitions or other changes in our control and otherwise limit the price that investors might be willing to pay in the future for our common stock.
We could adopt a stockholder rights plan, commonly referred to as a “poison pill,” at any time without seeking the approval of our stockholders. Stockholder rights plans can act through a variety of mechanisms, but typically would allow our board of directors to declare a dividend distribution of preferred share purchase rights on outstanding shares of our common stock. Each such share purchase right would entitle our stockholders to buy a newly created series of preferred stock in the event that the purchase rights become exercisable. The rights would typically become exercisable if a person or group acquires over a predetermined portion of our common stock or announces a tender offer for more than a predetermined portion of our common stock. Under such a stockholder rights plan, if we were acquired in a merger or other business combination transaction which had not been approved by our board of directors, each right would entitle its holder to purchase, at the right’s then-current exercise price, a number of the acquiring company’s common shares at a price that is preferential to the holder of the right. If adopted by the our board of directors, a stockholder rights plan may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us.
Our stock price may be volatile, and our common stock could decline in value or may be delisted from the NASDAQ Global Market.
The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. Our stock price has fluctuated widely during the last few years from a low closing price of $1.64 per share in December 2008 to a high of $26.10 per share in January 2004. The following factors, in addition to other risk factors described in this section, may have a significant negative impact on the market price of our common stock:
• | period-to-period fluctuations in financial results; |
• | financing activities; including investor’s perceptions of our future financing needs; |
• | hedging activities by holders of our convertible notes; |
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• | litigation; |
• | delays in product introduction, launches or enhancements, including delays in completing the development of theVeraTag technology and products based on that technology; |
• | announcements of technological innovations or new commercial products by our competitors; |
• | results from clinical studies; |
• | adverse developments in the clinical trials of drugs under development by our pharmaceutical company customers; |
• | adverse clinical or regulatory developments related to drugs, such as Pfizer’sSelzentry, for which our tests are used in patient selection or monitoring; |
• | developments concerning proprietary rights, including patents; |
• | publicity regarding actual or potential clinical results relating to products under development by our competitors or our own products or products under development; |
• | regulatory developments in the United States and foreign countries; |
• | changes in payer reimbursement policies or developments related to the potential reimbursement of new products such as Trofile; |
• | limitations on the ability to recognize revenue from complex collaborations; and |
• | economic and other external factors or other disaster or crisis. |
A low or volatile stock price may negatively impact our ability to raise capital and to attract and maintain key employees. Additionally, in order for our common stock to continue to be quoted on the NASDAQ Global Market, or NASDAQ, we must satisfy various listing maintenance standards established by the NASDAQ, including, among other things, requirements that our stock price consistently trades at or above $1.00 per share and that the total market value of our common stock exceed $50,000,000. We have had and may continue to have periods when our stock has not traded at, or the market value of our common stock has been below, the levels required by NASDAQ rules.
If we were to be delisted from the NASDAQ and move to an alternative market, which may be less efficient and less broad-based, we may have difficulty accessing capital markets for additional funding, and our stockholders may experience reduced liquidity. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. In addition, if at any time we are not listed on the NASDAQ, or approved for trading and/or eligible for quotation on an established automated over-the-counter trading market in the United States, including the OTC Bulletin Board, our outstanding convertible notes are subject to repurchase, which could have a severe adverse affect to our financial position.
Unstable market conditions may have serious adverse consequences on our business.
The recent economic downturn and market instability has made the business climate more volatile and more costly. Our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements, a radical economic downturn or increase in our expenses could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans or plans to acquire additional technology.
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There is a risk that one or more of our current service providers, manufacturers and other partners may encounter difficulties during challenging economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.
Item 1B.Unresolved Staff Comments
There were no unresolved Securities and Exchange Commission (“SEC”) staff comments regarding our periodic or current reports under the Exchange Act as of December 31, 2008.
As of December 31, 2008, we held leases of buildings and a sublease of office space in South San Francisco, California as follows:
• | Two leases of approximately 41,000 and 40,000 square feet, respectively, of laboratory and office space through April 2018; and |
• | A sublease of approximately 27,000 square feet of office space through May 2011. |
ACLARA, with which we merged, and certain of its former officers and directors, referred to together as the ACLARA defendants, are named as defendants in a securities class action lawsuit filed in the United States District Court for the Southern District of New York. See “Commitments and Contingencies” Note 7 to the financial statements for further discussion.
Item 4.Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on December 17, 2008. The matters voted upon and the related voting results were as follows:
1. | Two Class II directors were elected to our board to hold office until the 2011 Annual Meeting of Stockholders, or until their successors are elected and qualified. The nominees and the voting for each were as follows: |
Edmon R. Jennings: | ||||
For | 19,577,028 | |||
Withheld | 474,488 | |||
Cristina H. Kepner: | ||||
For | 19,622,591 | |||
Withheld | 428,925 |
The term of office of directors David H. Persing, M.D., Ph.D. and Christine A. White, M.D., continues until our annual meeting of stockholders in 2009. The term of office of directors William Jenkins, M.D., John D. Mendlein, J.D., Ph.D. and William D. Young continues until our annual meeting of stockholders in 2010.
2. | The appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008, was ratified. |
For | 20,007,451 | |||
Against | 22,980 | |||
Abstain | 21,082 |
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a)Market Data; Dividends
Our Common Stock trades on the NASDAQ Global Market under the symbol “MGRM.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the NASDAQ Global Market:
High | Low | |||||
2008 | ||||||
Fourth Quarter | $ | 5.04 | $ | 1.44 | ||
Third Quarter | $ | 7.44 | $ | 4.20 | ||
Second Quarter | $ | 7.50 | $ | 6.12 | ||
First Quarter | $ | 9.78 | $ | 6.06 | ||
2007 | ||||||
Fourth Quarter | $ | 9.72 | $ | 6.90 | ||
Third Quarter | $ | 11.22 | $ | 8.46 | ||
Second Quarter | $ | 15.66 | $ | 9.36 | ||
First Quarter | $ | 13.02 | $ | 9.00 |
On October 27, 2008, the Company’s Board of Directors approved a 6-to-1 reverse stock split, as previously authorized and approved by the Company’s stockholders at the September 19, 2007 annual meeting, which became effective on November 4, 2008. The reverse stock split resulted in a reduction in the number of shares of common stock issuable upon the exercise of stock options or warrants and the conversion ratios of the respective convertible notes were automatically adjusted to reflect the reverse stock split. The accompanying financial statements and footnotes have been adjusted retroactively to reflect the reverse stock split. The last reported sale price of our common stock on the NASDAQ Global Market on February 6, 2009 was $4.00. As of February 6, 2009, there were approximately 300 stockholders of record of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends on our common stock will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under our agreements and other such factors as the board of directors deems relevant. Additionally, under our credit and security agreement with GE, so long as any loan commitment or obligation remains outstanding under the agreement, we cannot pay cash dividends without the consent of GE. Under our Amended and Restated 3% Senior Secured Convertible Note issued to Pfizer, we cannot pay dividends without the consent of Pfizer.
Recent Sales of Unregistered Securities.
The following sets forth the number of shares of our common stock issued in the fourth quarter of 2008. For these issuances, we relied on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”):
On December 31, 2008, we issued 242,357 shares of common stock with a market value of $0.6 million as of the date of such issuance, to the Monogram Biosciences, Inc. 401(k) Profit Sharing Plan as a matching contribution under the terms of the plan.
Equity Compensation Plans
Information about our equity compensation plans is incorporated by reference into Item 12 of Part III of this Annual Report.
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Item 6.Selected Financial Data
The following selected financial information is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K in order to fully understand factors that may affect the comparability of the information presented below. The statements of operations data for the years ended December 31, 2008, 2007 and 2006, and the balance sheet data as of December 31, 2008 and 2007, are derived from our audited consolidated financial statements included in Item 8 of this Report. The statement of operations data for the years ended December 31, 2005 and 2004 and the balance sheet data as of December 31, 2006, 2005 and 2004, are derived from our financial statements not included in this Report.
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||
Product revenue | $ | 59,487 | $ | 39,482 | $ | 45,150 | $ | 43,468 | $ | 34,811 | ||||||||||
Contract revenue | 2,404 | 2,064 | 2,808 | 4,784 | 1,990 | |||||||||||||||
License revenue | 302 | 1,683 | — | — | — | |||||||||||||||
Total revenue | 62,193 | 43,229 | 47,958 | 48,252 | 36,801 | |||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Cost of product revenue | 27,777 | 22,926 | 22,703 | 20,001 | 17,794 | |||||||||||||||
Research and development | 23,825 | 19,385 | 18,981 | 18,996 | 7,839 | |||||||||||||||
Purchased in-process research and development charge | — | — | — | — | 100,600 | |||||||||||||||
Sales and marketing | 16,669 | 15,927 | 14,735 | 12,588 | 10,056 | |||||||||||||||
General and administrative | 15,473 | 15,686 | 15,042 | 10,200 | 10,192 | |||||||||||||||
Lease termination charge | — | — | — | — | 433 | |||||||||||||||
Total operating costs and expenses | 83,744 | 73,924 | 71,461 | 61,785 | 146,914 | |||||||||||||||
Operating loss | (21,551 | ) | (30,695 | ) | (23,503 | ) | (13,533 | ) | (110,113 | ) | ||||||||||
Convertible debt valuation adjustments and interest income, net | 9,768 | 4,687 | 1,250 | 2,243 | 164 | |||||||||||||||
Contingent value rights revaluation | 120 | 218 | (16,450 | ) | (26,296 | ) | 28,519 | |||||||||||||
Preferred stock dividend | — | — | — | (162 | ) | (324 | ) | |||||||||||||
Net loss before cumulative effect of change in accounting principle | (11,663 | ) | (25,790 | ) | (38,703 | ) | (37,748 | ) | (81,754 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | 2,242 | — | — | — | |||||||||||||||
Net loss after cumulative effect of change in accounting principle applicable to common shareholders | $ | (11,663 | ) | $ | (23,548 | ) | $ | (38,703 | ) | $ | (37,748 | ) | $ | (81,754 | ) | |||||
Basic and diluted net loss per common share before cumulative effect of change in accounting principle | $ | (0.52 | ) | $ | (1.17 | ) | $ | (1.78 | ) | $ | (1.83 | ) | $ | (8.56 | ) | |||||
Cumulative effect per common share of change in accounting principle | — | 0.10 | — | — | — | |||||||||||||||
Basic and diluted net loss per common share after cumulative effect of change in accounting principle | $ | (0.52 | ) | $ | (1.07 | ) | $ | (1.78 | ) | $ | (1.83 | ) | $ | (8.56 | ) | |||||
Shares used in computing basic and diluted loss per common share | 22,453 | 22,047 | 21,741 | 20,588 | 9,549 | |||||||||||||||
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Our results for the year ended December 31, 2004, include the acquired operations of ACLARA for the period from December 10, 2004 to December 31, 2004. Our results for the years ended December 31, 2006-2008, include the impact of the adoption of SFAS 123(R), “Share-Based Payments,” on January 1, 2006.
On October 27, 2008, our Board of Directors approved a 6-to-1 reverse stock split, as previously authorized and approved by our stockholders at the September 19, 2007 annual meeting, which became effective on November 4, 2008. The reverse stock split resulted in a reduction in the number of shares of common stock issuable upon the exercise of stock options or warrants and the conversion ratios of the respective convertible notes were automatically adjusted to reflect the reverse stock split. See notes to the consolidated financial statements for a description of the number of shares used in the computation of the basic and diluted net loss per common share.
We recorded a cumulative effect of change in accounting principle of $2.2 million in the year ended December 31, 2007, as a result of an election by the Company to early adopt SFAS No. 159 on January 1, 2007, to measure the fair value of the Pfizer Note as a hybrid debt instrument in its entirety with adjustments to the fair value reflected as non-operating income in the consolidated statement of operations.
December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents, and short-term investments | $ | 15,965 | $ | 30,590 | $ | 31,130 | $ | 65,014 | $ | 78,848 | ||||||||||
Accounts receivable, net | 15,883 | 9,100 | 6,849 | 9,063 | 7,251 | |||||||||||||||
Working capital | 13,056 | 26,075 | 21,603 | 23,984 | 73,463 | |||||||||||||||
Deferred costs relating to collaboration agreement | 17,275 | 8,043 | 1,783 | — | — | |||||||||||||||
Total assets | 70,032 | 69,311 | 60,845 | 97,678 | 107,635 | |||||||||||||||
Current portion of contingent value rights | 1,935 | 2,119 | 2,813 | 42,676 | — | |||||||||||||||
Long-term deferred revenue | 24,769 | 13,622 | 1,783 | — | — | |||||||||||||||
Long-term portion of contingent value rights | — | — | — | — | 15,269 | |||||||||||||||
Long-term portion of restructuring costs | — | 289 | 868 | 1,916 | 1,710 | |||||||||||||||
Long-term convertible promissory notes | 29,062 | 39,297 | 25,000 | — | — | |||||||||||||||
Long-term portion of loans payable | — | — | — | 233 | 311 | |||||||||||||||
Long-term portion of capital lease obligations | 9 | 98 | 92 | 212 | 36 | |||||||||||||||
Redeemable convertible preferred stock | — | — | — | — | 1,810 | |||||||||||||||
Accumulated deficit | (299,202 | ) | (287,539 | ) | (263,991 | ) | (225,288 | ) | (187,702 | ) | ||||||||||
Total stockholders’ (deficit) equity | $ | (6,686 | ) | $ | (1,240 | ) | $ | 13,908 | $ | 41,771 | $ | 72,673 |
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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto included in this Annual Report on Form 10-K. The estimates and certain other statements below are forward-looking statements that involve risks and uncertainties. Our actual future capital requirements and the adequacies of our available funds will depend on many factors, including those under “Risk Factors.”
OVERVIEW
We are a life sciences company committed to advancing personalized medicine and improving patient outcomes through the development of innovative molecular diagnostic products that guide and target the most appropriate treatments. Through a comprehensive understanding of the genetics, biology and pathology of particular diseases, we have pioneered and are developing molecular diagnostics and laboratory services that are designed to:
• | enable physicians to better manage infectious diseases and cancers by providing the critical information that helps them prescribe personalized treatments for patients by matching the underlying molecular features of an individual patient’s disease to the drug expected to have maximal therapeutic benefit; and |
• | enable pharmaceutical companies to develop new and improved anti-viral therapeutics and targeted cancer therapeutics more efficiently and cost effectively by providing enhanced patient selection and monitoring capabilities throughout the development process. |
Through this approach, we have become a leader in developing and commercializing innovative products that help guide and improve the treatment of infectious diseases and cancer. In the future, we plan to seek opportunities to address an even broader range of serious diseases. Our goal with personalized medicine is to enable the management of diseases at the individual patient level through the use of sophisticated diagnostics that permit the targeting of therapeutics to those patients most likely to respond to or benefit from them, thereby offeringthe right treatment tothe right patient atthe right time.
Over the last several years, we have built a business based on the personalized medicine approach to human immunodeficiency virus (“HIV”) with drug resistance testing products and, more recently, with a unique patient selection test, Trofile. With the commercialization in 2008 of the first product based on our proprietaryVeraTag™ technology, we have begun to leverage the experience and infrastructure we built in the HIV market to the larger market opportunity in cancer.
In HIV, our phenotypic and genotypic resistance testing products provide a practical method for measuring the impact of genetic mutations on HIV drug resistance. This information is used to optimize treatment options for the individual patient. We currently market these resistance testing products to assess in individual HIV patients, their susceptibility to HIV drugs in the drug classes of reverse transcriptase inhibitors, protease inhibitors, entry (fusion) inhibitors and integrase inhibitors. In addition to these resistance tests, in 2007, we initiated commercial sales of the Trofile Co-Receptor Tropism Assay. Trofile is a patient selection assay for the new class of CCR5 antagonists. The first drug in this class,Selzentry (maraviroc) from Pfizer Inc (“Pfizer”), was approved by the U.S. Food and Drug and Administration (“FDA”) and by the European Commission in 2007. Upon approval ofSelzentry in the U.S., we introduced our Trofile Assay commercially and it is now available to help physicians select patients for clinical use ofSelzentry. Outside of the U.S., we are making Trofile available through a global collaboration with Pfizer. In HIV, combination therapy, where a patient is treated with a regimen of several drugs, is the standard of care. Tests to properly construct the optimal regimen, such as our phenotypic resistance tests and our Trofile Assay for patient selection are critical to the successful management of combination therapy.
In oncology, numerous targeted drug therapies for the treatment of cancer are being marketed and many additional targeted therapies are in development. Increasingly, combination therapy, where multiple drugs are
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used in combination to treat a patient, is being evaluated for cancer patients. Our proprietaryVeraTag technology provides an assay platform for analyzing very small amounts of tumor samples recovered and prepared in a variety of methods, including formalin fixation, the current standard technique in hospital pathology laboratories. We believe this analytical platform may be well suited for currently marketed drugs such as Herceptin as well as the next generation of targeted cancer therapeutics. Conventional tests provide a qualitative measure of the presence of genes or proteins. In contrast, theVeraTag technology permits the quantitative and accurate measurement of proteins, and proteins in their activated form of homodimers and heterodimers. We believe that by making these measurements closer to the target of drugs we can provide a more reliable indicator of likely drug response or drug resistance, and thereby may permit the prediction, with a high degree of accuracy, of the likelihood of a patient’s cancer responding to a given therapy, facilitating the selection of more precise and effective therapeutic options. Our first product,HERmark, is approved for routine testing in our Clinical Laboratory Improvement Amendments, or CLIA, certified clinical reference laboratory and was introduced commercially in July 2008.HERmark measures a patient’s HER2 status through the level of HER2 total protein and HER2 homodimer that are present. Clinical data has been presented during 2008 and additional clinical studies are in progress to confirmHERmark’sclinical utility and to optimize its commercial value. Additional assays are in development related to other proteins, protein complexes and signaling pathways that are key drivers of proliferation or survival in cancer cells, both in breast cancer and other cancers.
We have incurred losses each year since inception. As of December 31, 2008, we had an accumulated deficit of approximately $299.2 million. We expect to incur additional operating losses at least for the next twelve months as we commercializeHERmark, expand and further develop theVeraTag technology, transfer additional assays into the clinical laboratory, conduct clinical studies and expand our oncology commercial infrastructure to serve the oncology market.
REVERSE STOCK SPLIT
On October 27, 2008, our Board of Directors approved a 6-to-1 reverse stock split, as previously authorized and approved by our stockholders at the September 19, 2007 annual meeting, which became effective on November 4, 2008. The reverse stock split resulted in a reduction in the number of shares of common stock issuable upon the exercise of stock options or warrants and the conversion ratios of the respective convertible notes were automatically adjusted to reflect the reverse stock split.
ISSUANCE OF 0% CONVERTIBLE SENIOR UNSECURED NOTES
In January 2007, we issued $30 million principal amount of 0% Convertible Senior Unsecured Notes, due 2026 (the “0% Notes”). Although the 0% Notes are due in December 2026, the 0% Notes may be called at the holder’s option at December 31, 2011, December 31, 2016 or December 31, 2021, at a price equal to 100% of the accreted value. The aggregate purchase price for the 0% Notes was approximately $22.5 million. The 0% Notes do not bear interest and are convertible, at the option of the holder, into shares of our common stock, at a conversion price of $15.12 per share, which is equivalent to an initial conversion rate of approximately 66.14 shares per $1,000 principal amount of the 0% Notes. The conversion price will adjust automatically upon certain changes to our capitalization.
We have the option to cause all or any portion of the 0% Notes to automatically convert at such time as the closing price of our common stock is greater than $18.90 for twenty out of thirty consecutive trading days, provided that certain conditions are met. The 0% Notes are subordinated to all of our present senior debt, including the $25 million 3% Senior Secured Convertible Note, due May 19, 2010, issued to Pfizer in May 2006, as amended as described below, and our $10 million line of credit with General Electric Capital (“GE”), due March 27, 2010.
In accordance with SFAS 155, “Accounting for Certain Hybrid Financial Instruments” the Company elected to initially and subsequently measure the 0% Notes as a hybrid debt instrument in its entirety with adjustments to
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fair value reflected in the consolidated statement of operations. For the year ended December 31, 2008, the valuation resulted in a $8.0 million favorable convertible debt valuation adjustment to the carrying value of the 0% Notes. This net adjustment is reflected as non-operating income in the consolidated statement of operations. As of December 31, 2008, the fair value and unpaid principal balance of the 0% Notes were $10.5 million and $25.2 million, respectively.
AGREEMENTS WITH PFIZER INC
In May 2006, we entered into a non-exclusive Collaboration Agreement (the “Collaboration Agreement”) with Pfizer Inc (“Pfizer”) to facilitate the global availability for patient use of our proprietary co-receptor tropism assay, Trofile™ (“Trofile Assay”). Our Trofile Assay is used to identify which co-receptor a patient’s HIV uses for entry to cells and has been used in connection with phase III clinical trials of Pfizer’s investigational CCR5 antagonist,Selzentry (maraviroc). In August 2007,Selzentry was approved by the FDA for use in CCR5-tropic treatment-experienced patients. The FDA-approved label for Selzentry indicates that tropism testing should be used for patient selection and we expect that the Trofile Assay will be used to select patients forSelzentry. In October 2007,Selzentry was approved by the European Commission. Under the Collaboration Agreement we are responsible for making our Trofile Assay available in the U.S. Pfizer has responsibility for sales, marketing and regulatory matters outside of the U.S. and reimburses us for our expenses incurred to establish and maintain the logistics infrastructure necessary to make the assay available internationally as required by Pfizer. The Collaboration Agreement’s initial term expires on December 31, 2009, and is renewable by Pfizer for five successive one year terms. We and Pfizer also extended the Trofile pricing provisions of our services agreement to support potential additional Pfizer clinical trials through December 31, 2009. This services agreement covers the provisions of Monogram assays for use by Pfizer in clinical studies.
We also entered into a note purchase agreement with Pfizer under which Pfizer purchased a Senior Secured Convertible Note in the principal amount of $25 million (the “Pfizer Note”). The Pfizer Note bears a 3% annual interest rate, payable quarterly in cash or shares of our common stock, at our option, and matures in May 2010, unless converted earlier. The Pfizer Note is convertible at Pfizer’s option into shares of our common stock at a conversion price of $16.23 per share and will automatically convert into shares of our common stock should the closing price of our common stock be greater than 150%, of the conversion price, or $24.36 per share, for twenty out of thirty consecutive trading days. In addition, the Pfizer Note is secured by certain assets related to our HIV testing business, subject to certain covenants and is senior in right of payment to all existing and future indebtedness, subject to certain limited exceptions. In connection with the sale of the 0% Notes, as described above, Pfizer, U.S. Bank and National Association, as trustee, and we entered into a subordination agreement in January 2007, setting forth the terms under which the 0% Notes are subordinated to the Pfizer Note. We also amended our note purchase agreement with Pfizer, and amended and restated the Pfizer Note, to conform to certain terms of the subordination agreement. As amended, the Pfizer Note provides that Monogram will be in default if (i) an event of default occurs and is continuing under the 0% Notes and (ii) the Trustee or any holders of the Notes gives notice to us of its or their intent to either accelerate the 0% Notes or exercise any other remedies thereunder (subject to certain limited exceptions).
As a result of the issuance of the 0% Notes, we were required to value and account for certain derivative instruments that are embedded in the Pfizer Note. We elected to early adopt SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” to measure the Pfizer Note as a hybrid debt instrument in its entirety with adjustments to the fair value reflected in the consolidated statement of operations. At the initial adoption of SFAS 159, we recorded a cumulative-effect of a change in accounting principle for the Pfizer Note of $2.2 million, resulting in a fair value of $22.8 million at January 1, 2007. For the year ended December 31, 2008, this valuation resulted in a $2.2 million decrease to the carrying value of the Pfizer Note, which is reflected as non-operating income in the consolidated statement of operations. As of December 31, 2008 the carrying value of the Pfizer Note was $18.6 million and the unpaid principal balance was $25 million.
In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements entered into after June 15, 2003, that include multiple
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element arrangements are analyzed to determine whether the deliverables are divided into separate units of accounting or as a single unit of accounting. Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If all of the three required criteria under EITF 00-21 are met, then the deliverables would be accounted for separately, completed as performed. Otherwise, the arrangement would be accounted for as a single unit of accounting and the payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. If we cannot reasonably estimate when a performance obligation either ceases or becomes inconsequential, then revenue is deferred until we can reasonably estimate when the performance obligation ceases or becomes inconsequential.
The Pfizer collaboration is a multiple element arrangement, including supply of the Trofile Assay in additional clinical studies (including expanded access programs in both the U.S. and outside the U.S.), supply of the Trofile Assay for use outside of the U.S., reimbursement of costs to establish and operate the supply infrastructure outside of the U.S. and potential assistance to Pfizer in the establishment and operation of a second facility to process tropism assays. Under the guidelines of EITF 00-21, we have determined that the collaboration with Pfizer be accounted for as a single unit of accounting due to the absence of established fair values of certain undelivered elements. Accordingly, we have deferred revenue under this collaboration until the earlier of establishment of fair values or completion of the deliverables. Additionally, related direct costs to establish and operate the supply infrastructure outside of the U.S. that are contractually reimbursable on a non-refundable basis under are deferred. As of December 31, 2008, we had $21.5 million of deferred revenue and $17.3 million of deferred costs relating to the Collaboration Agreement, within the U.S. and internationally.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the financial statements describes the significant accounting policies used to prepare our consolidated financial statements. Certain of these significant accounting policies are considered critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) requirement to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates that we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or consolidated results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and are included in the financial statements as soon as they become known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and consolidated results of operations.
We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:
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Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) “Share-Based Payment” (“SFAS 123R”) under provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) using the modified prospective approach, and therefore, has not restated results for prior periods. Under this approach, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award. Upon adoption of SFAS 123R, the Company records stock-based compensation as a charge to income, net of the estimated impact of forfeited awards. As such, the Company recognized stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The Company has no awards with market or performance conditions.
Prior to the adoption of SFAS 123R, we accounted for stock-based awards under the intrinsic method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and made pro forma footnote disclosures as required by Statement of Financial Accounting Standards No. 148, “Accounting For Stock-Based Compensation—Transition and Disclosure,” which amended Statement of Financial Accounting Standards No. 123, “Accounting For Stock-Based Compensation.” Under the intrinsic method, no stock-based compensation expense had been recognized in the consolidated statement of operations because the exercise price of the stock options granted equaled the fair market value of the underlying stock on the date of grant. Pro forma net loss and pro forma net loss per share disclosed in the footnotes to the financial statements were estimated using the Black-Scholes option-pricing model.
In accordance with SFAS 123R, we used the Black-Scholes option-pricing valuation model to estimate the grant date fair value of our stock-based awards. The determination of fair value for stock-based awards on the date of grant using an option-pricing model requires management to make certain assumptions regarding: (i) the expected volatility in the market price of our common stock over the expected term of the awards; (ii) dividend yield; (iii) risk-free interest rates; and (iv) actual and projected employee exercise behaviors (referred to as the expected term). The expected volatility is based on the historical volatilities from our stock for the expected term in effect on the date of grant with considerations to similar public entities in similar markets. The risk-free interest rate is based on the U.S. Zero Coupon Treasury yield for the expected term in effect on the date of grant. The expected term of options represents the period of time that options granted are expected to be outstanding and is derived from actual historical exercise data with considerations to the contractual and vesting terms. The expected term of employee stock purchase plans is equal to the offering period. In addition, SFAS 123R requires us to estimate the expected impact of forfeited awards and recognize stock-based compensation expense only for those awards expected to vest. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate will be recognized as compensation cost in earnings in the period of the revision. If actual forfeiture rates are materially different from our estimates or factors change and we employ different assumptions, stock-based compensation expense could be significantly different from what we have recorded in the current period. We periodically review actual forfeiture experience and revise our estimates, as considered necessary.
In addition, we accounted for stock option grants to non-employees in accordance with the Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires the options subject to vesting to be periodically re-valued over their service periods, which approximates the vesting period.
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Revenue Recognition
Product revenue is recognized upon completion of tests made on samples provided by customers and the shipment of test results to those customers. Services are provided to certain patients covered by various third-party payer programs, such as Medicare and Medicaid. Billings for services under third-party payer programs are included in product revenue, net of allowances, for differences between the amounts billed and estimated receipts under such programs. We estimate these allowances based on historical payment information and current reimbursement rates. If the government and other third-party payers significantly change their reimbursement policies, an adjustment to the allowance may be necessary. Revenue generated from our database of resistance test results is recognized when earned under the terms of the related agreements, generally upon shipment of the requested reports.
Contract revenue consists of revenue generated from National Institutes of Health (“NIH”) grants, commercial assay development and other non-product revenue. NIH grant revenue is recorded on a reimbursement basis as grant costs are incurred. The costs associated with contract revenue are included in research and development expenses. For commercial and research collaborations, we recognize non-refundable milestone payments received related to substantive at-risk milestones when performance of the milestone under the terms of the collaboration is achieved and there are no further performance obligations. Research and development fees from commercial collaboration agreements are generally recognized as revenue on a straight-line basis over the life of the collaboration agreement or as the research work is performed. Up front payments received in advance of meeting the revenue recognition criteria described above are deferred.
License revenue consists of up-front license fees when the earnings process is complete and no further obligations exist. If further obligations exist, the up-front license fee is recognized ratably over the obligation period. Royalties received are recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured.
In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements entered into after June 15, 2003, that include multiple element arrangements are analyzed to determine whether the deliverables are divided into separate units of accounting or as a single unit of accounting. Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If all of the three required criteria under EITF 00-21 are met, then the deliverables would be accounted for separately, completed as performed. Otherwise, the arrangement would be accounted for as a single unit of accounting and the payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. If we cannot reasonably estimate when our performance obligation either ceases or becomes inconsequential, then revenue is deferred until we can reasonably estimate when the performance obligation ceases or becomes inconsequential.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, other accrued expenses and short-term obligations approximate fair value based on the highly liquid, short-term nature of these instruments. We also have long-term instruments consisting of debt obligations in the form of convertible promissory notes, which are subject to interest rate and market risk due to the convertible features of those notes. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. We value debt obligations in accordance with the guidelines set forth in SFAS 155, “Accounting for Certain Hybrid Financial Instruments” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” using the framework established by SFAS 157, “Fair Value Measurements” to measure fair value.
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We use a binomial lattice model as the valuation technique to determine fair value of our convertible notes using management assessment and inputs, which utilize inputs other than observable quoted prices that are observable either directly or indirectly. Inputs derived from quoted prices include our stock price, the average yield of B- bonds and the prices of Treasury instruments. Input from management assessments includes the probability of certain events occurring during the term of the debt. Such adjustments could be substantial in certain circumstances, such as if our common stock price is higher or lower than at December 31, 2008, which could adversely affect the Company’s future consolidated results of operations.
Accounts Receivable
The process for estimating the collectibility of receivables involves significant assumptions and judgments. Billings for services under third-party payer programs are recorded as revenue, net of allowances, for differences between amounts billed and the estimated receipts under such programs. Adjustments to the estimated receipts, based on final settlement with the third-party payers, are recorded upon settlement as an adjustment to net revenue.
In addition, we have an established process to review and estimate the collectibility of our receivables. Receivables are reserved based on their respective aging categories. Historical collection and payer reimbursement experience is an integral part of the estimation process related to reserves for doubtful accounts. Our process for determining the appropriate level of allowance for doubtful accounts involves judgment, and considers the age of the underlying receivables, type of payer, historical and projected collection experience, and current economic and business conditions that could affect the collectibility of our receivables. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. An account is written-off against the allowance for doubtful accounts when reasonable collection efforts have been unsuccessful and it is probable the receivable will not be recovered or the account has been transferred to a third party collection agency. In addition, we assess the current state of our billing functions to identify any known collection or reimbursement issues in order to assess the impact, if any, on our reserve estimates.
We believe that the collectibility of our receivables is directly linked to the quality of our billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we provide. As such, we have procedures to reduce the number of requisitions received from healthcare providers with missing or incorrect billing information. Changes in the allowance for doubtful accounts are recorded as an adjustment to bad debt expense within general and administrative expenses. We believe that our collection and reserves processes, along with closely monitoring our billing processes, helps to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in collection and reimbursement experience and billing operations. We write off accounts against the allowance for doubtful accounts when they are deemed to be uncollectible.
Goodwill, Other Intangible Assets and Impairment of Long-Lived Assets
Goodwill represents the excess of the purchase consideration over the fair values of the identifiable assets acquired and liabilities assumed from our merger with ACLARA BioSciences, Inc. (“ACLARA”) in 2004. In accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets,” or SFAS 142, we are required to test for impairment of goodwill on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could indicate impairment and require us to perform impairment tests more frequently than annually include significant adverse changes in legal factors or market and economic conditions; adverse regulatory action; unanticipated competition and significant adverse change in perceived revenue potential.
Measurement of fair value is determined using the income approach. The income approach focuses on the income-producing capability of the entity, measuring the current value of the entity by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from
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disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the Company. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss will be recorded in operating income (loss).
Other intangible assets may include acquired developed product technology, costs of patents and patent applications related to products and products in development, which are capitalized and amortized on a straight-line basis over their estimated useful lives. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business or legal factors; an adverse action or assessment by a regulator; unanticipated competition or loss of key personnel.
Contingent Value Rights
As part of the merger with ACLARA, we issued Contingent Value Rights (“CVR”) to ACLARA stockholders and were obligated to issue CVRs to holders of assumed ACLARA stock options upon future exercise of those options. In June 2006, the amount payable related to the outstanding CVRs was determined at $5.28 per CVR and a cash payment of approximately $57.0 million was made to CVR holders on June 14, 2006. Holders of assumed ACLARA options are entitled to receive a cash payment of $5.28, upon future exercise of those options, for each CVR that would have been issuable to them had the option been exercised prior to the CVR maturity date.
The liability under the CVRs was recorded at the closing of the merger with ACLARA at fair value, estimated using a calculation based on a Black-Scholes valuation of the underlying CVR securities of $3.96 per CVR. Subsequent to the closing of the merger, an active trading market had been established and as a result, this liability was revalued based on the actual closing price of the CVRs on the OTC Bulletin Board at the end of each quarter. In addition, we record an additional liability each quarter for additional CVRs related to assumed ACLARA stock options as they vest during each quarter.
Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. We have not provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries’ undistributed earnings as calculated for income tax purposes in accordance with the provisions of Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes—Special Areas” (“APB 23”) since we intend to reinvest these earnings outside the U.S. indefinitely.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (FIN 48) on January 1, 2007. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of adopting FIN 48.
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CONSOLIDATED RESULTS OF OPERATIONS
Year Ended December 31, 2008 Compared to Years Ended December 31, 2007 and 2006
2008 | 2007 | 2006 | |||||||
(In thousands) | |||||||||
Product revenue | $ | 59,487 | $ | 39,482 | $ | 45,150 | |||
Contract revenue | 2,404 | 2,064 | 2,808 | ||||||
License revenue | 302 | 1,683 | — | ||||||
Total revenue | $ | 62,193 | $ | 43,229 | $ | 47,958 | |||
Revenue. Revenue for the year ended December 31, 2008, increased $19.0 million to $62.2 million compared to $43.2 million in 2007. The increase in total revenue was driven primarily by a $20 million increase in product revenue from the use of our Trofile Co-Receptor Tropism Assay for selecting HIV patients to be treated with Pfizer’sSelzentry,and from the use of our virology products, including Trofile in a customer’s clinical trials.
Revenue for the year ended December 31, 2007, decreased $4.7 million to $43.2 million, compared to $48.0 million for the year ended December 31, 2006. The decrease in total revenue was due primarily to the substantial completion in 2006 of Pfizer’s phase III clinical trial ofSelzentry. The use of our testing services, including our Trofile Assay in Pfizer’s phase III clinical trial ofSelzentry, generated significant revenue in the first half of 2006. The decreased revenue of the phase III clinical trial ofSelzentry, was partially offset by revenue generated from the commercialization of our Trofile Assay during 2007, excluding Trofile Assay revenue earned under the Collaboration Agreement with Pfizer, which is deferred.
Our product revenue consists primarily of revenue generated from our HIV resistance testing, Tropism testing and HIV pharmaceutical testing. Our Trofile Co-Receptor Tropism Assay was launched in 2007. In August 2007,Selzentry,the first drug in a new class of HIV drugs called CCR5 antagonists, was approved by the FDA for use in CCR5-tropic treatment-experienced patients. The FDA-approved label forSelzentry indicates that tropism testing should be used for patient selection and we expect that the Trofile Assay will continue to be used to select patients forSelzentry. However, if our test is not used to select patients forSelzentry, this could have a significant negative impact on our potential future revenues. We recorded nominal revenue in 2008 withHERmark, our first oncology test that was made commercially available in July 2008. We expect that additional adoption of HERmark by physicians will occur in 2009 and that revenue will increase once reimbursement is established by third party payers.
Contract revenue is earned from HIV research grants with the National Institutes of Health (“NIH”), and from other non-product and non-license revenue. For the year ended December 31, 2008, these sources of revenue increased $0.3 million to $2.4 million from $2.1 million in 2007, primarily due to increased grant-related activity. In 2007, these sources of revenue decreased by $0.7 million compared to $2.8 million in 2006 as we focused our oncology development efforts on enhancing the operational reproducibility and sensitivity of theVeraTag assays and studies designed to clinically validate theHERmark assay, which was launched in July 2008. We have an active program of applying for NIH funding and currently have a number of active grants that we believe will support the development of analytical and database tools to facilitate the identification and characterization of drug resistant strains of HIV, and assays that will aid in the pre-clinical and clinical evaluation of the next generation of anti-viral therapeutics.
We recorded $0.3 million in license revenue for the year ended December 31, 2008, compared to $1.7 million for the year ended December 31, 2007. The higher license revenue in 2007 was primarily due to a non-recurring, upfront royalty for the Caliper license, which was paid in 2007. License revenue consists of revenue from Caliper Life Sciences, Inc. for the microfluidics patent portfolio acquired in our merger with ACLARA in 2004. Under a license agreement, Caliper is obligated to pay ongoing royalties related to product
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and service revenues that encompass the use of our patents, and royalty sharing for any sublicense revenue generated by Caliper. We did not earn any license revenues for the year ended December 31, 2006.
We anticipate quarterly variations in product revenue due primarily to fluctuations in the timing of various planned and ongoing clinical studies conducted by pharmaceutical companies. Revenue from pharmaceutical company customers are expected to be reduced in 2009 due to the timing of customers’ clinical trials. We have significant customer concentration and the loss of any major customer or the reduced use of our products by a major customer could have a significant negative impact on our revenue. In 2008, 2007 and 2006, approximately 21%, 20%, and 16%, respectively, of our revenues were derived from tests performed for the beneficiaries of the Medicare and Medicaid programs. Additionally, in 2008, 2007 and 2006, Schering-Plough represented approximately 13%, 5% and 4%; Quest Diagnostics Incorporated represented approximately 10%, 11% and 11%; Laboratory Corporation of America represented approximately 7%, 11% and 6%; and Pfizer Inc represented approximately 3%, 6% and 19% of our total revenue, respectively.
Cost of product revenue. Cost of product revenue was $27.8 million, $22.9 million and $22.7 million in 2008, 2007 and 2006, respectively. Included in these costs are materials, supplies, labor and overhead related to product revenue. Product revenue gross margins were 53% in 2008, 42% in 2007 and 50% in 2006. The increase in product costs and product gross margin for the year ended December 31, 2008 as compared to 2007, was primarily due to the commercial introduction in the second half of 2007 of Trofile and the related increase in Trofile revenue as well as increased HIV pharmaceutical testing revenue, which carry a higher gross margin than our HIV resistance testing. The decrease in gross margin percentage in 2007, as compared to 2006, was primarily due to the benefit of higher volumes provided by the use of our Trofile Assay in Pfizer’s phase III trial ofmaraviroc during the first half of 2006. Gross margin was higher than the yearly average in the fourth quarter of 2007, due to the commercial introduction of Trofile and the related increase in revenue. We anticipate that gross margins on product revenue will continue to be affected by increases or decreases in our different product revenues. We believe thatHERmark and other potential oncology products will have a higher gross margin than our HIV products.
Research and development. Research and development costs increased to $23.8 million for the year ended December 31, 2008, as compared to $19.4 million for the same period in 2007. The $4.4 million increase in 2008 of research and development expenses was primarily due to increased contracting expenses, facilities and personnel costs relating to our oncology programs. In 2007, research and development expenses were approximately the same as those for the year ended December 31, 2006, which were $19.0 million. The successful development of our products is highly uncertain. Completion dates and research and development expenses can vary significantly for each product and are difficult to predict.
Our products in development overlap and most of our research and development activities in infectious disease and oncology are advancing multiple potential product lines. Due to substantial overlap, we do not track costs on a project by project basis, except for the costs related to contract revenue. A portion of our infectious disease research and development expenses are funded by grants and development contracts.
A substantial portion of our research and development expenditures are directed at continuing the development and clinical validation of ourVeraTag technology. In 2008 and 2007, approximately 70% and 65%, respectively, of our research and development employees were focused on oncology programs.VeraTag assays are designed to detect proteins and protein complexes, including protein dimers and modified forms of these proteins. These analytes are not readily discernible with other technologies, especially in human tissue samples that have been stored in the standard clinical method of formalin-fixed/paraffin embedded (“FFPE”). Measurements of activated proteins are expected to provide valuable information with respect to the activation states of key signaling pathways that drive cell proliferation and survival in tumors, and serve as biomarkers that indicate the likelihood of response to particular targeted therapeutics in individual patients and specific patient sub-groups. Importantly, ourVeraTag assays require only a very small amount of biological sample and are designed to be performed directly on FFPE tissue samples, as well as other sample formats. This ability to utilize small amounts of human clinical samples in a wide range of formats, without extensive and time-consuming sample preparation, makesVeraTag assays well suited to diagnostic applications in human disease management.
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TheVeraTag platform is not specific to cancer. Measurements of proteins and activated proteins may be clinically relevant in a wide range of disease areas. Our focus in developing the technology to date has been on cancer, specifically on the EGFR/HER family of protein receptors. The following table summarizes ongoing and planned development activities for the assays that have been developed or are in development.
Assay | Development Status | Ongoing and Planned Development Activities | ||
HER2 total protein | CLIA validated | • Clinical studies are ongoing and planned to evaluate these assays in breast cancer patient tissue samples, to evaluate their correlation with response to Herceptin treatment | ||
HER2:HER2 homodimer
| CLIA validated | |||
HER1 total protein
| Research use | • Clinical studies are ongoing and planned to evaluate these assays in breast cancer patient tissue samples, to evaluate their correlation with resistance to Herceptin treatment
• Clinical studies are planned to evaluate these assays in patient tissue samples in other cancers, including lung, head and neck and others, to evaluate their correlation with clinical outcomes to targeted cancer drugs
• Additional development to optimize assay performance
• On establishment of clinical utility, assays may be validated in the clinical reference laboratory to enable availability as CLIA-validated tests | ||
HER3 total protein
| Research use | |||
HER1:HER1 homodimer
| Research use | |||
HER1:HER2 heterodimer
| Research use | |||
HER2:HER3 heterodimer
| Research use | |||
HER3:PI3K complex (a downstream signaling complex in the Akt pathway)
| Research use | |||
p95 (a proteolytically truncated form of the HER2 protein) | Research use |
Our infectious disease programs are primarily focused on support and continued development of our portfolio of HIV resistance tests and Trofile, our tropism patient selection test. In addition to these HIV tests, we continue to develop, with grant funding, our HIV Antibody Neutralization assay. This assay is validated for research purposes, is available to pharmaceutical company customers and additional development work is ongoing related to the use of our assays in vaccine development. We also continue to develop, with funding from a grant and from a pharmaceutical company partner, resistance assays for HCV. A GeneSeq HCV (NS5B) assay has been validated for research use and is available to pharmaceutical company customers. GeneSeq HCV (NS3) and PhenoSense HCV assays are also in development. In 2008 and 2007, approximately 30% and 35%, respectively, of our research and development employees were focused on these infectious disease programs.
The completion of our research and development projects is subject to a number of risks and uncertainties, including unplanned delays or expenditures during product development, the extent of clinical testing required for market adoption and regulatory approvals, the timing and results of clinical trials, failure to validate our technology and products in clinical trials and failure to receive any necessary regulatory approvals. Because of these uncertainties, the nature, timing and estimated costs of the efforts necessary to complete our research and development projects cannot be determined or estimated with any degree of certainty. Any delays or additional research and development efforts may also require us to obtain additional sources of funding to complete development of our products. Our failure to complete development of our products would have a material adverse impact on our ability to increase revenue and on our financial position and liquidity.
Sales and marketing. Sales and marketing expenses were $16.7 million, $15.9 million and $14.7 million in 2008, 2007 and 2006, respectively. The increase of $0.8 million for the year ended December 31, 2008, as compared to the corresponding period in 2007, was primarily attributed to the expansion of our oncology sales force. The increase of $1.2 million in 2007 as compared to 2006, was also primarily due to the expansion of our
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sales force and increased marketing programs related to our products, offset by lower stock-based compensation expenses. We expect that our sales and marketing expenses for promotional programs as well as for sales and marketing personnel will increase with the commercialization ofHERmark and in preparation for the introduction of future oncology products.
General and administrative. General and administrative expenses were $15.5 million, $15.7 million and $15.0 million in 2008, 2007 and 2006, respectively. The $0.7 million increase for the year ended December 31, 2007 over 2006, was primarily due to an increase in overall headcount.
Stock-Based Compensation. Stock-based compensation expense related to employee stock options and employee stock purchases recognized under SFAS 123R and CVR charges related to options that vested in the year was $4.3 million in 2008, as compared to $4.2 million in 2007 and $6.9 million in 2006. As of December 31, 2008, the total remaining unrecognized compensation cost related to the unvested stock options amounted to $6.2 million, which will be amortized over the weighted-average remaining requisite service period of 2.37 years.
The table below sets out stock-based compensation expenses recognized primarily under SFAS 123R, including CVR expenses related to vested options of $0.1 million in 2008, a reversal of $0.4 million in 2007 and expense of $0.8 million in 2006.
Year Ended December 31, | |||||||||
2008 | 2007 | 2006 | |||||||
(In thousands) | |||||||||
Cost of product revenue | $ | 555 | $ | 487 | $ | 597 | |||
Research & development | 1,068 | 718 | 2,075 | ||||||
Sales & marketing | 1,026 | 1,150 | 1,653 | ||||||
General & administrative | 1,609 | 1,829 | 2,536 | ||||||
$ | 4,258 | $ | 4,184 | $ | 6,861 | ||||
Stock-based compensation expense under SFAS 123R is expected to continue to have an effect on results of future operations of which impact may be material.
In addition, we accounted for stock option grants to non-employees in accordance with the Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires the options subject to vesting to be periodically re-valued over their service periods, which approximates the vesting period. The impact of these options has not been material for all periods presented.
Convertible debt valuation adjustments and interest income, net. Convertible debt valuation adjustments were favorable by $10.2 million and $4.2 million for the years ended December 31, 2008 and 2007, respectively. In January 2007, we issued $30 million principal amount of the 0% Notes for an aggregate purchase price of approximately $22.5 million. Pursuant to the guidelines set forth in SFAS 155, “Accounting for Certain Hybrid Financial Instruments,” we elected to initially and subsequently measure the 0% Notes as a hybrid debt instrument in its entirety with adjustments to the fair value reflected in the consolidated statement of operations. As a result of the issuance of the 0% Notes, we were required to value and account for certain derivative instruments embedded in the Pfizer Note with adjustments to the fair value reflected in the consolidated statement of operations. We elected to early adopt SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” to measure the Pfizer Note as a hybrid debt instrument in its entirety using the framework established by SFAS 157 for measuring fair value. For the years ended December 31, 2008 and 2007, this valuation resulted in a $2.2 million and $2.0 million decrease to the carrying value of the Pfizer Note with a corresponding credit to the consolidated statement of operations and a $8.0 million and $2.2 million decrease to
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the carrying value of the 0% Notes, with a corresponding credit to the consolidated statement of operations. Such adjustments, primarily due to the Company’s common stock price, could be substantial in the future.
Interest expense, net was $0.4 million in 2008 and interest income, net was $0.5 million and $1.3 million in 2007 and 2006, respectively. The change of $0.9 million in 2008 as compared to 2007, and the $0.8 million decrease of interest income in 2007 as compared to 2006, were primarily due to lower interest income as a result of lower average cash and investment balances.
Cumulative effect of change in accounting principle. We elected to early adopt SFAS 159, effective January 1, 2007, to measure the fair value of the Pfizer Note as a hybrid debt instrument, in its entirety, with adjustments to the fair value reflected as a non-operating expense in the statement of operations. The impact of adopting SFAS 159 resulted in a cumulative effect adjustment of a change in accounting principle of $2.2 million for the year ended December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2008, we incurred a net loss from operations of $11.7 million. Cash, cash equivalents and short-term investments declined from $30.6 million at December 31, 2007 to $16.0 million at December 31, 2008, and borrowings under our Credit and Security Agreement (“Credit Agreement”) increased from $4.3 million to $9.6 million, respectively, during the same periods. Under the terms of the Credit Agreement, we are prohibited from incurring certain types of indebtedness and certain liens on its assets. It is also subject to certain other affirmative and negative covenants as set forth in the Credit Agreement. An event of default under the indebtedness to GE will occur if, among other things, the Company: is delinquent in making payments of principal, interest or fees on the revolving credit line; fails, following notice, to cure a breach of a covenant under the Credit Agreement; a representation or warranty under the Credit Agreement is materially inaccurate; certain liquidation or bankruptcy proceedings are commenced or certain orders are granted against us; the security interests granted by us in favor or GE fail, in certain circumstances, to constitute valid security interests; or an acceleration event occurs under certain types of our other secured indebtedness outstanding from time to time. If an event of default occurs, the indebtedness to GE under the Credit Agreement could be accelerated, such that it becomes immediately due and payable. We are in compliance with all covenants under the Credit Agreement as of December 31, 2008.
The decline in our cash, cash equivalents and short-term investment positions were primarily driven by cash used to fund losses from operations, cash used to fund working capital and cash used to purchase property and equipment, partially offset by net proceeds from short-term borrowings. We actively review our cash requirements, working capital changes, capital expenditures and borrowing availability.
We have funded our operations, since inception, primarily through public and private sales of common and preferred stock, issuance of convertible debt, equipment financing arrangements, product revenue, contract revenue, advances by pharmaceutical company customers and borrowings under a revolving line of credit under the Company’s Credit Agreement. The Credit Agreement provides us with borrowings against eligible accounts receivable up to a maximum of $10 million. While the Credit Agreement expires on March 27, 2010, we anticipate that our sources of liquidity will be sufficient to meet our obligations without the disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through the next twelve months. However, significant changes in the credit limit or payment terms of the existing Credit Agreement or the lack of access to the credit market could adversely impact our liquidity. If such funds are not available on commercially reasonable terms, we may be required to curtail operations, or sell significant assets and could adversely impact our liquidity. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe that we have sufficient funds for current or future operating plans. These funds may not be available on favorable terms, or may not be available at all. We expect negative cash flow from operations to continue through at least 2009 and expect that our available cash and cash equivalents of $16.0 million at December 31, 2008, as well as funds provided by the sale of its products, contract
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revenue, and borrowings under accounts receivable and equipment financing arrangements will be adequate to fund operations at least for the next twelve months.
Net cash used in operating activities of $17.9 million for the year ended December 31, 2008, was primarily to fund our operating losses of $12.8 million, including expenditures related to the research and development of our oncology products and from $5.1 million of cash used to fund working capital, which includes impact from timing of our accounts receivable collections. Net cash used in operating activities of $18.6 million for the year ended December 31, 2007, was primarily to fund operating losses of $20.0 million for our HIV and oncology activities offset by net cash proceeds of $1.4 million from working capital, which includes a $4.4 million advance from a pharmaceutical company customer related to anticipated 2008 activity and timing of accounts receivable collections. Net cash used in operating activities of $24.2 million for the year ended December 31, 2006, was primarily to fund operating losses of $24.7 million, which includes a payment of approximately $57 million in settlement of the CVR liability of which $14.3 million was reflected in operating activities and offset by net cash proceeds of $0.5 million from working capital. Cash flows from operating activities primarily relates to net operating losses and can vary significantly due to various factors including changes in accounts receivable, accrued liabilities and deferred revenue related to arrangements with customers. The average collection period of our accounts receivable is dependent on various factors, including the type of revenue (i.e. patient testing, pharmaceutical company testing or contract revenue), reimbursement processes, payment terms related to that revenue, whether the related revenue was recorded at the beginning or end of a period, and general economic conditions.
Net cash provided by investing activities of $9.3 million for the year ended December 31, 2008, resulted primarily from net maturities of short-term investments of $11.9 million offset by capital expenditures of $2.6 million. Net cash provided by investing activities in 2007 of $8.6 million, resulted primarily from proceeds of $11.1 million from net maturities of short-term investments, offset by capital expenditures of $2.5 million. Net cash provided by investing activities in 2006 of $33.0 million, resulted primarily from proceeds of $34.9 million from net maturities of short-term investments, offset by capital expenditures of $1.8 million.
Net cash provided by financing activities of $5.8 million for the year ended December 31, 2008, resulted primarily from net proceeds of $5.1 million from loans payable and $0.7 million in proceeds from common stock issuance under our employee stock benefit plans. Net cash provided by financing activities in 2007 of $20.5, million resulted primarily from $20.7 million in proceeds from the issuance of a 0% convertible promissory note, offset by a $2.1 million decline in net proceeds primarily from loans payable and a $1.9 million increase in net proceeds from the issuance of common stock and exercises of stock options under various employee benefit plans. Net cash used in financing activities in 2006 of $8.2 million, resulted primarily from $25 million in proceeds from the issuance of a convertible promissory note to Pfizer, $5.6 million in proceeds from the revolving credit line and $3.3 million in proceeds from the exercise of stock options, offset by the settlement of the CVR liability of approximately $57 million of which $42.8 million was recorded in financing activities.
Leases. As of December 31, 2007, we held several building leases and a sublease of office space in South San Francisco, California as follows:
• | Two leases of approximately 41,000 and 40,000 square feet, respectively, of laboratory and office space through April 2018; and |
• | A sublease of approximately 27,000 square feet of office space through May 2011. |
As a result of the merger with ACLARA at December 31, 2004, we assumed the lease for a facility of approximately 44,200 square feet of office and laboratory space in Mountain View, California. On February 7, 2007, we entered into a lease termination agreement with the landlord to terminate the lease prior to its scheduled expiry. The termination of the lease was subject to a specified third party executing a new lease with the landlord on terms and conditions satisfactory to the landlord and the landlord has subsequently notified us that this occurred. We have an obligation to pay the landlord specified amounts over the remainder of the former lease
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term, or through June 2009. As of December 31, 2008, the remaining obligation was $0.3 million, which is included in the table below.
Contractual Obligations.At December 31, 2008, our contractual obligations for the next five years and thereafter are as follows (in thousands):
Purchase Obligations | Operating Leases | Loans Payable | 0% Convertible Promissory Note | 3% Convertible Promissory Note | 3% Convertible Promissory Note Interest Payment (1) | Equipment Financing Arrangements | Total | |||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Year ending December 31: | ||||||||||||||||||||||||
2009 | $ | 913 | $ | 3,297 | $ | 9,606 | $ | — | $ | — | $ | 750 | $ | 93 | $ | 14,659 | ||||||||
2010 | 347 | 3,424 | — | — | 25,000 | 473 | 9 | 29,253 | ||||||||||||||||
2011 | 125 | 3,606 | — | 30,000 | — | — | — | 33,731 | ||||||||||||||||
2012 | — | 3,681 | — | — | — | — | — | 3,681 | ||||||||||||||||
2013 | 3,800 | — | — | — | — | — | 3,800 | |||||||||||||||||
Thereafter | — | 17,911 | — | — | — | — | — | 17,911 | ||||||||||||||||
Total | $ | 1,385 | $ | 35,719 | $ | 9,606 | $ | 30,000 | $ | 25,000 | $ | 1,223 | $ | 102 | $ | 103,035 | ||||||||
(1) | Subject to certain limitations, we are entitled to make such interest payments using shares of our common stock. |
The contractual obligations discussed above are fixed costs. If we are unable to generate sufficient cash from operations to meet these contractual obligations, we may have to raise additional funds. These funds may not be available on favorable terms or at all. Additionally, our existing debt obligations may limit our ability to obtain certain types of indebtedness.
In connection with the merger with ACLARA, we issued CVRs to ACLARA stockholders. In June 2006, the amount payable related to the outstanding CVRs was determined to be $5.28 per CVR and a cash payment of approximately $57.0 million was made to CVR holders on June 14, 2006. Holders of assumed ACLARA options are entitled to receive a cash payment of $5.28, upon future exercise of those options, for each CVR that would have been issuable to them had the option been exercised prior to the CVR maturity date. At December 31, 2008, assumed ACLARA options to purchase approximately 350,000 shares of our common stock were vested and outstanding. The aggregate potential liability related to all these options at December 31, 2008, was $1.9 million, which is reflected on the consolidated balance sheet at December 31, 2008. Upon exercise of these options, we will receive aggregate exercise proceeds of $4.7 million. See Note 6, “Contingent Value Rights,” of the financial statements for further discussion.
Off-balance sheet arrangements. In June 2002, the Company assigned a lease of excess laboratory and office space and sold the related leasehold improvements and equipment to a third party. In October 2007, we extended the terms of the subleased office space relating to this lease assignment, which decreases our payment obligation in the event of default by the assignee. In the event of default by the assignee, the Company would be contractually obligated for payments under the lease of: $0.6 million in 2009; $0.7 million in 2010 and $0.3 million in 2011.
Long term capital and liquidity considerations. We expect that we will have to make substantial investments in operating and capital expenditures as we develop and commercialize new clinical testing products and expand the availability of our current testing products. During 2008, we made capital expenditures of approximately $2.6 million. While we do not currently have any additional material commitments for future capital expenditures, we expect to incur capital expenditures for our existing facilities. In the future, we also may incur additional capital expenditures to expand our clinical laboratory to accommodate commercial availability of
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VeraTag assays for oncology, expand our commercial infrastructure in anticipation of the introduction of oncology products, potentially establish an FDA compliant manufacturing facility and make our HIV and oncology assays available globally in support of drugs for which our tests may be important diagnostics. At December 31, 2008, we held two building leases of approximately 41,000 and 40,000 square feet and subleased office space of approximately 27,000 square feet in South San Francisco, California.
From time to time, we may consider possible strategic transactions, including the potential acquisitions of products, technologies and companies, with the goal of growing our business and maximizing stockholder value. Such transactions, if any, could materially affect our future liquidity and capital resources. We may need to obtain additional funding by entering into new collaborations and strategic partnerships to enable us to develop and commercialize our products. Even if we receive funding from future collaborations and strategic partnerships, we may need to raise additional capital in the public equity markets, through private equity financing or through debt financing. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve additional restrictive covenants. Our failure to raise capital when needed, may harm our business and operating results.
Income taxes.We have incurred net operating losses since inception. At December 31, 2008, we had federal and state net operating loss carryforwards of approximately $265.5 million and $149.2 million, respectively. The federal net operating loss and credit carryforwards will expire at various dates between the years 2010 and 2028, if not utilized. The state of California net operating losses will expire at various dates between the years 2014 and 2019, if not utilized. The federal and state operating loss carryforwards include deductions for stock options. Utilization of the federal and state net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. When utilized, the portion related to stock options deductions will be accounted for as a credit to stockholders’ equity rather than as a reduction of the income tax provision.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a full description of recently issued accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated therein.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
Our exposure to interest rate risk relates primarily to our debt obligations primarily in the form of convertible notes and our investment portfolio. Our debt obligations are subject to interest rate and market risk due to the convertible features of our notes. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Our investment portfolio may consist of fixed rate securities, which may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principle if forced to sell securities that have declined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than two years.
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As of December 31, 2008, the Company has moved its funds available for investing into cash equivalents such as short-term U.S. Government Treasury Bills. However, we may continue to have risk exposure to our holdings in cash, money market accounts and cash equivalents, which may adversely impact the fair value of our holdings. As of December 31, 2008, there were no indicators of credit risk impact to the valuation of our current cash, money market accounts and other cash equivalents.
The following table presents the hypothetical changes in fair values in our cash, cash equivalents and U.S. Treasury bills held at December 31, 2008, that are sensitive to the changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. Fair values represent the market principal at December 31, 2008 (in thousands).
Given an Interest Rate Decrease of X Basis Points | Given an Interest Rate Increase of X Basis Points | ||||||||||||||||||||
Issuer | 150 BPS | 100 BPS | 50 BPS | 0 BPS | 50 BPS | 100 BPS | 150 BPS | ||||||||||||||
Money Market | $ | 53 | $ | 53 | $ | 53 | $ | 53 | $ | 53 | $ | 53 | $ | 53 | |||||||
US Treasury Bills | 4,002 | 4,001 | 4,001 | 4,000 | 3,999 | 3,999 | 3,998 | ||||||||||||||
$ | 4,055 | $ | 4,054 | $ | 4,054 | $ | 4,053 | $ | 4,052 | $ | 4,052 | $ | 4,051 | ||||||||
The weighted-average maturity of our marketable investments at December 31, 2008, was 13 days.
The fair market value of the 0% Notes, Pfizer Note and interest cost to us under the revolving credit line with General Electric Capital Corporation (“GE”) are also subject to interest rate risk. Generally, the fair market value of the 0% Notes and the Pfizer Note will increase as interest rates fall and decrease as the interest rates rise, but the interest rate changes do not impact our financial position, cash flows or results of operations. Additionally, the fair market value of our debt obligations includes input from management regarding the probability of certain events occurring during the term of the debt. Assuming a hypothetical increase of two percentage points in probability of fundamental change and one percentage point in the probability of default, the fair value of our Pfizer Note and 0% Note, as of December 31, 2008, would have potentially increased by approximately $0.1 million and $0.6 million, respectively. We also have exposure to changes in interest rates on our revolving credit line with GE, which bears interest at a rate per annum equal to a published LIBOR rate plus 4.75%. As of December 31, 2008, $9.6 million was outstanding under the revolving credit line.
We do not utilize derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion.
We operate primarily in the United States and all sales to date have been made in U.S. Dollars, including sales to Pfizer under our Collaboration Agreement. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.
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Item 8.Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Monogram Biosciences, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Monogram Biosciences, Inc. and its subsidiaries at December 31, 2008 and December 31, 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. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective 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 (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated 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 audits 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, and 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.
As discussed in Note 11 and Note 13 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible notes in fiscal year 2007.
A company’s internal control over financial reporting is a process designed 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 12, 2009
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CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, | ||||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 15,965 | $ | 18,762 | ||||
Short-term investments | — | 11,828 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,400 and $1,121 at December 31, 2008 and 2007, respectively | 15,883 | 9,100 | ||||||
Prepaid expenses | 1,123 | 1,279 | ||||||
Inventory | 1,623 | 1,250 | ||||||
Other current assets | 324 | 917 | ||||||
Total current assets | 34,918 | 43,136 | ||||||
Property and equipment, net | 7,874 | 7,665 | ||||||
Deferred costs relating to collaboration agreement | 17,275 | 8,043 | ||||||
Goodwill | 9,927 | 9,927 | ||||||
Other assets | 38 | 540 | ||||||
Total assets | $ | 70,032 | $ | 69,311 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,637 | $ | 2,116 | ||||
Accrued compensation | 2,911 | 3,324 | ||||||
Accrued liabilities | 4,015 | 3,818 | ||||||
Contingent value rights | 1,935 | 2,119 | ||||||
Loans payable | 9,704 | 4,469 | ||||||
Other current liabilities | 660 | 1,215 | ||||||
Total current liabilities | 21,862 | 17,061 | ||||||
Long-term 3% convertible promissory note | 18,594 | 20,786 | ||||||
Long-term 0% convertible promissory note | 10,468 | 18,511 | ||||||
Long-term deferred revenue | 24,769 | 13,622 | ||||||
Other long-term liabilities | 1,025 | 571 | ||||||
Total liabilities | 76,718 | 70,551 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Stockholders’ deficit: | ||||||||
Common stock, $0.001 par value, 84,000,000 shares authorized; 22,871,670 and 22,339,746 shares issued and outstanding at December 31, 2008 and 2007, respectively | 23 | 22 | ||||||
Additional paid-in capital | 292,493 | 286,308 | ||||||
Accumulated other comprehensive loss | — | (31 | ) | |||||
Accumulated deficit | (299,202 | ) | (287,539 | ) | ||||
Total stockholders’ deficit | (6,686 | ) | (1,240 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 70,032 | $ | 69,311 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Revenue: | ||||||||||||
Product revenue | $ | 59,487 | $ | 39,482 | $ | 45,150 | ||||||
Contract revenue | 2,404 | 2,064 | 2,808 | |||||||||
License revenue | 302 | 1,683 | — | |||||||||
Total revenue | 62,193 | 43,229 | 47,958 | |||||||||
Operating costs and expenses: | ||||||||||||
Cost of product revenue | 27,777 | 22,926 | 22,703 | |||||||||
Research and development | 23,825 | 19,385 | 18,981 | |||||||||
Sales and marketing | 16,669 | 15,927 | 14,735 | |||||||||
General and administrative | 15,473 | 15,686 | 15,042 | |||||||||
Total operating costs and expenses | 83,744 | 73,924 | 71,461 | |||||||||
Operating loss | (21,551 | ) | (30,695 | ) | (23,503 | ) | ||||||
Convertible debt valuation adjustments and interest income, net | 9,768 | 4,687 | 1,250 | |||||||||
Contingent value rights revaluation | 120 | 218 | (16,450 | ) | ||||||||
Net loss before cumulative effect of change in accounting principle | (11,663 | ) | (25,790 | ) | (38,703 | ) | ||||||
Cumulative effect of change in accounting principle | — | 2,242 | — | |||||||||
Net loss applicable to common stockholders after cumulative effect of change in accounting principle applicable to common stockholders | $ | (11,663 | ) | $ | (23,548 | ) | $ | (38,703 | ) | |||
Basic and diluted net loss per common share before cumulative effect of change in accounting principle applicable to common stockholders | $ | (0.52 | ) | $ | (1.17 | ) | $ | (1.78 | ) | |||
Cumulative effect per share of change in accounting principle | — | 0.10 | — | |||||||||
Basic and diluted net loss per common share after cumulative effect of change in accounting principle applicable to common stockholders | $ | (0.52 | ) | $ | (1.07 | ) | $ | (1.78 | ) | |||
Weighted-average shares used in computing basic and diluted loss per common share | 22,453 | 22,047 | 21,741 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(In thousands)
Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Deferred Compensation | Accumulated Deficit | Total Stockholders’ (Deficit) Equity | |||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||
Balance as of December 31, 2005 | 21,278 | 21 | 267,633 | (514 | ) | (81 | ) | (225,288 | ) | 41,771 | |||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | (38,703 | ) | (38,703 | ) | ||||||||||||||||
Changes in unrealized loss on securities available-for-sale | — | — | — | 390 | — | — | 390 | ||||||||||||||||||
Comprehensive loss | (38,313 | ) | |||||||||||||||||||||||
Exercise of warrants | 77 | — | — | — | — | — | — | ||||||||||||||||||
Reclassification of deferred compensation | — | — | (81 | ) | — | 81 | — | — | |||||||||||||||||
Issuance of common stock | 497 | 1 | 4,070 | — | — | — | 4,071 | ||||||||||||||||||
Stock-based compensation | — | — | 6,103 | — | — | — | 6,103 | ||||||||||||||||||
Convertible promissory note interest payment in stock | 33 | — | 276 | — | — | — | 276 | ||||||||||||||||||
Balance as of December 31, 2006 | 21,885 | 22 | $ | 278,001 | $ | (124 | ) | $ | — | $ | (263,991 | ) | 13,908 | ||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | (23,548 | ) | (23,548 | ) | ||||||||||||||||
Changes in unrealized loss on securities available-for-sale | — | — | — | 93 | — | — | 93 | ||||||||||||||||||
Comprehensive loss | (23,455 | ) | |||||||||||||||||||||||
Exercise of warrants | 105 | — | 687 | — | — | — | 687 | ||||||||||||||||||
Issuance of common stock | 268 | — | 2,236 | — | — | — | 2,236 | ||||||||||||||||||
Stock-based compensation | — | — | 4,635 | — | — | — | 4,635 | ||||||||||||||||||
Convertible promissory note interest payment in stock | 82 | — | 749 | — | — | — | 749 | ||||||||||||||||||
Balance as of December 31, 2007 | 22,340 | $ | 22 | $ | 286,308 | $ | (31 | ) | $ | — | $ | (287,539 | ) | (1,240 | ) | ||||||||||
Comprehensive loss: | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | (11,663 | ) | (11,663 | ) | ||||||||||||||||
Changes in unrealized loss on securities available-for-sale | — | — | — | 31 | — | — | 31 | ||||||||||||||||||
Comprehensive loss | (11,632 | ) | |||||||||||||||||||||||
Issuance of common stock | 443 | 1 | 1,291 | — | — | — | 1,292 | ||||||||||||||||||
Stock-based compensation | — | — | 4,331 | — | — | — | 4,331 | ||||||||||||||||||
Convertible promissory note interest payment in stock | 89 | — | 563 | — | — | — | 563 | ||||||||||||||||||
Balance as of December 31, 2008 | 22,872 | $ | 23 | $ | 292,493 | $ | — | $ | — | $ | (299,202 | ) | $ | (6,686 | ) | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (11,663 | ) | $ | (23,548 | ) | $ | (38,703 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Contingent value rights revaluation | (120 | ) | (218 | ) | 17,248 | |||||||
Contingent value rights payment | — | — | (14,324 | ) | ||||||||
Convertible debt valuation adjustment | (10,235 | ) | (4,207 | ) | — | |||||||
Cumulative effect of change in accounting principle | — | (2,242 | ) | — | ||||||||
Depreciation and amortization | 2,769 | 3,001 | 3,905 | |||||||||
Stock-based compensation expense | 4,331 | 4,635 | 6,102 | |||||||||
401(k) stock matching compensation expense | 620 | 1,046 | 487 | |||||||||
Convertible promissory note interest payment in stock | 563 | 749 | 276 | |||||||||
Provision for doubtful accounts | 941 | 784 | 357 | |||||||||
Change in assets and liabilities: | ||||||||||||
Accounts receivable | (7,724 | ) | (3,035 | ) | 1,857 | |||||||
Prepaid expenses | 156 | (45 | ) | (127 | ) | |||||||
Inventory | (373 | ) | (289 | ) | 209 | |||||||
Other assets | 723 | (402 | ) | 412 | ||||||||
Accounts payable | 521 | 845 | (480 | ) | ||||||||
Accrued compensation | (413 | ) | 1,066 | (13 | ) | |||||||
Accrued liabilities | 195 | (957 | ) | (104 | ) | |||||||
Accrued restructuring costs | (591 | ) | (1,097 | ) | (1,337 | ) | ||||||
Contingent value rights | (64 | ) | (476 | ) | — | |||||||
Deferred revenue, net of deferred costs | 1,662 | 5,780 | 21 | |||||||||
Other long-term liabilities | 832 | (6 | ) | 36 | ||||||||
Net cash used in operating activities | (17,870 | ) | (18,616 | ) | (24,178 | ) | ||||||
INVESTING ACTIVITIES: | ||||||||||||
Purchases of short-term investments | (6,134 | ) | (36,767 | ) | (15,066 | ) | ||||||
Maturities and sales of short-term investments | 17,993 | 47,900 | 49,987 | |||||||||
Capital expenditures | (2,606 | ) | (2,461 | ) | (1,781 | ) | ||||||
Other assets | — | (55 | ) | (100 | ) | |||||||
Net cash provided by investing activities | 9,253 | 8,617 | 33,040 | |||||||||
FINANCING ACTIVITIES: | ||||||||||||
Principal payments on loans payable and capital lease obligations | (34,852 | ) | (20,087 | ) | (1,101 | ) | ||||||
Proceeds from loans payable | 40,000 | 17,962 | 6,325 | |||||||||
Proceeds from 0% convertible promissory note | — | 20,746 | — | |||||||||
Proceeds from 3% convertible promissory note | — | — | 25,000 | |||||||||
Proceeds from issuance of common stock | 672 | 1,877 | 4,348 | |||||||||
Contingent value rights payment | — | — | (42,787 | ) | ||||||||
Net cash provided by (used in) financing activities | 5,820 | 20,498 | (8,215 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (2,797 | ) | 10,499 | 647 | ||||||||
Cash and cash equivalents at the beginning of the period | 18,762 | 8,263 | 7,616 | |||||||||
Cash and cash equivalents at the end of the period | $ | 15,965 | $ | 18,762 | $ | 8,263 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||
Cash paid for interest | $ | 278 | $ | 111 | $ | 129 | ||||||
SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES | ||||||||||||
Assets acquired under capital leases | $ | — | $ | 245 | $ | — |
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Monogram Biosciences, or the Company, is a life sciences company committed to advancing personalized medicine and improving patient outcomes through the development of innovative molecular diagnostics products that guide and target the most appropriate treatments. Through a comprehensive understanding of genetics, biology and pathology of particular diseases, Monogram Biosciences has pioneered and is developing molecular diagnostics and laboratory services that are designed to:
• | enable physicians to better manage infectious diseases and cancers by providing the critical information that helps them prescribe personalized treatments for patients by matching the underlying molecular features of an individual patient’s disease to the drug expected to have maximal therapeutic benefit; and |
• | enable pharmaceutical companies to develop new and improved anti-viral therapeutics and targeted cancer therapeutics more efficiently and cost effectively by providing enhanced patient selection and monitoring capabilities throughout the development process. |
Through this approach, the Company has become a leader in developing and commercializing innovative products that help guide and improve the treatment of infectious diseases, cancer and other serious diseases. The Company’s goal with personalized medicine is to enable the management of diseases at the individual patient level through the use of sophisticated diagnostics that permit the targeting of therapeutics to those patients most likely to respond to or benefit from them, thereby offeringthe right treatment to the right patient at the right time.
Over the last several years, Monogram Biosciences has built a business based on the personalized medicine approach to human immunodeficiency virus (“HIV”) with drug resistance testing and, more recently, with a unique patient selection test, Trofile. With the commercialization in 2008 of the first product based on the Company’s proprietaryVeratag technology, the Company has begun to leverage the experience and infrastructure built in the HIV market to the larger market opportunity in cancer. In the future, the Company plans to seek opportunities to address an even broader range of serious diseases. Monogram Biosciences was incorporated in the state of Delaware, in November 1995, and commenced commercial operations in 1999.
The Company’s consolidated financial statements contemplate the conduct of the Company’s operations in the normal course of business. The Company has incurred net losses since inception and there can be no assurance that the Company will attain profitability. The Company had a net loss of $11.7 million for the year ended December 31, 2008 and an accumulated deficit of approximately $299.2 million as of December 31, 2008. Cash, cash equivalents and short-term investments declined from $30.6 million at December 31, 2007 to $16.0 million at December 31, 2008. If the Company’s losses continue, its liquidity may be impaired.
The Company has funded its operations, since inception, primarily through public and private sales of common and preferred stock, issuance of convertible debt, equipment financing arrangements, product revenue, contract revenue, advances by pharmaceutical company customers and borrowings under a revolving line of credit under the Company’s Credit and Security Agreement (“Credit Agreement”). See Note 12 “Credit and Security Agreement” for further discussion. Borrowings under the Credit Agreement increased from $4.3 million at December 31, 2007 to $9.6 million at December 31, 2008. The Credit Agreement provides the Company with borrowings against eligible accounts receivable up to a maximum of $10 million. While the Credit Agreement expires on March 27, 2010, the Company anticipates that its sources of liquidity will be sufficient to meet its
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December 31, 2008
obligations without the disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through the next twelve months. However, significant changes in the credit limit or payment terms of the existing Credit Agreement or the lack of access to the credit market could adversely impact the Company’s liquidity. If such funds are not available on commercially reasonable terms, the Company may be required to curtail operations, or sell significant assets and could adversely impact the Company’s liquidity. In addition, the Company may choose to raise additional capital due to market conditions or strategic considerations even if the Company believes that it has sufficient funds for current or future operating plans. These funds may not be available on favorable terms, or may not be available at all. The Company expects negative cash flow from operations to continue through at least 2009 and expects that its available cash and cash equivalents of $16.0 million at December 31, 2008, as well as funds provided by the sale of its products, contract revenue, and borrowings under accounts receivable and equipment financing arrangements will be adequate to fund operations at least for the next twelve months.
Reverse Stock Split
On October 27, 2008, the Company’s Board of Directors approved a 6-to-1 reverse stock split, as previously authorized and approved by the Company’s stockholders at the September 19, 2007 annual meeting, which became effective on November 4, 2008. The reverse stock split resulted in a reduction in the number of shares of common stock issuable upon the exercise of stock options or warrants and the conversion ratios of the respective convertible notes were automatically adjusted to reflect the reverse stock split. The accompanying financial statements and footnotes have been adjusted retroactively to reflect the reverse stock split.
Principles of Consolidation
In November 2007 and January 2008, the Company established Monogram France SAS and Monogram UK Ltd., respectively, in connection with a collaboration agreement with Pfizer Inc. See Note 11 “Collaboration and Note Purchase Agreement” for further discussion. The Company’s consolidated financial statements include the accounts of Monogram Biosciences, Inc. and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currencies
The Company’s international subsidiaries operate in a U.S. dollar functional environment, and therefore, the foreign currency assets and liabilities are remeasured into the U.S. dollar at current exchange rates, except for non-monetary assets and liabilities, which are measured at historical exchange rates. Revenues and expenses are generally remeasured at an average exchange rate in effect during each period. Any gains or losses resulting from foreign currency remeasurement are included in other income (expense), and such gains or losses have not been significant for any period presented.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, other accrued expenses and short-term obligations approximate fair value based on the highly liquid,
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December 31, 2008
short-term nature of these instruments. The Company also has long-term instruments consisting of debt obligations in the form of convertible promissory notes, which are subject to interest rate and market risk due to the convertible features of those notes. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The Company values its outstanding debt obligations in accordance with the guidelines set forth in SFAS 155, “Accounting for Certain Hybrid Financial Instruments” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” using the framework established by SFAS 157, “Fair Value Measurements” for measuring fair value.
The Company uses a binomial lattice model as the valuation technique to determine fair value using management assessment and inputs, which utilize inputs other than observable quoted prices that are observable either directly or indirectly. Inputs derived from quoted prices include the Company’s stock price, the average yield of B- bonds and the prices of Treasury instruments. Input from management assessments includes the probability of certain events occurring during the term of the debt. Such adjustments could be substantial in certain circumstances, such as if the Company’s common stock price is higher or lower than at December 31, 2008, which could adversely affect the Company’s future consolidated results of operations.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Management determines the appropriate classification of its cash equivalents and investment securities at the time of purchase and re-evaluates such determination as of each balance sheet date.
Short-Term Investments
Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in comprehensive income (loss). The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The Company did not have any short-term investments as of December 31, 2008.
Accounts Receivable
The process for estimating the collectibility of receivables involves significant assumptions and judgments. Billings for services under third-party payer programs are recorded as revenue net of allowances for differences between amounts billed and the estimated receipts under such programs. Adjustments to the estimated receipts, based on final settlement with the third-party payers, are recorded upon settlement as an adjustment to net revenue.
In addition, the Company has an established process to review and estimate the collectibility of its receivables. Receivables are reserved based on their respective aging categories. Historical collection and payer reimbursement experience is an integral part of the estimation process related to reserves for doubtful accounts. The Company’s process for determining the appropriate level of allowance for doubtful accounts involves judgment, and considers the age of the underlying receivables, type of payer, historical and projected collection experience, and current economic and business conditions that could affect the collectibility of receivables. The
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December 31, 2008
allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. An account is written-off against the allowance for doubtful accounts when reasonable collection efforts have been unsuccessful and it is probable the receivable will not be recovered or the account has been transferred to a third party collection agency. In addition, the Company assesses the current state of its billing functions to identify any known collection or reimbursement issues in order to assess the impact, if any, on its reserve estimates.
The Company believes that the collectibility of its receivables is directly linked to the quality of its billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services the Company provides. As such, the Company has procedures to reduce the number of requisitions received from healthcare providers with missing or incorrect billing information. Changes in the allowance for doubtful accounts are recorded as an adjustment to bad debt expense within general and administrative expenses. The Company believes that its collection and reserves processes, along with closely monitoring its billing processes, helps to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in collection and reimbursement experience and billing operations. The Company writes off accounts against the allowance for doubtful accounts when they are deemed to be uncollectible.
Significant Concentrations
The Company invests its cash, cash equivalents and short-term investments in U.S. government and agency securities, debt instruments of financial institutions and corporations, and money market funds with strong credit ratings. Pursuant to the Company’s investment guidelines, the investment portfolio should have an overall weighted-average maturity of less than twelve months with no one individual security having a maturity of greater than 24 months. Management believes that its investment guidelines limit credit risk and maintain liquidity.
The Company has significant customer concentration and the loss of any major customer or the reduced use of its products by a major customer could have a significant negative impact on the Company’s revenue. In 2008, 2007 and 2006, approximately 21%, 20% and 16%, respectively, of the Company’s revenues were derived from tests performed for the beneficiaries of Medicare and Medicaid programs. Additionally, gross accounts receivable balances from Medicare and Medicaid represented 35% and 32% of the Company’s total accounts receivable balance at December 31, 2008 and 2007, respectively. Other significant customers included: Schering-Plough representing approximately 13%, 5% and 4%; Quest Diagnostics Incorporated representing approximately 10%, 11% and 11%; Laboratory Corporation of America representing approximately 10%, 11% and 11%; Pfizer Inc representing approximately 3%, 6% and 19%; Laboratory Corporation of America representing approximately 7%, 11% and 6%; of the Company’s revenues for the years ended December 31, 2008, 2007 and 2006, respectively. It is likely that we will continue to have significant customer concentration in the future.
The Company purchases various testing materials from single qualified suppliers. Any extended interruption in the supply of these materials could result in the Company’s inability to secure sufficient materials to conduct business and meet customer demand.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. If inventory costs exceed expected market value due to obsolescence or lack of demand, reserves are recorded for the difference between the cost and the market value. These reserves are based on estimates.
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December 31, 2008
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, generally five years. Capitalized software includes software and external consulting costs incurred to implement new information systems. Computer hardware and capitalized software are depreciated over three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or the lease term. Assets under development represent property and equipment in various stages of completion as of the balance sheet date.
Goodwill, Other Intangible Assets and Impairment of Long-Lived Assets
Goodwill represents the excess of the purchase consideration over the fair values of the identifiable assets acquired and liabilities assumed from the Company’s merger with ACLARA. Goodwill is not amortized but, in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company tests for impairment of goodwill on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could indicate impairment and require the Company to perform impairment tests more frequently than annually include significant adverse changes in legal factors or market and economic conditions; adverse regulatory action; unanticipated competition and significant adverse change in perceived revenue potential.
Other intangible assets may include acquired developed product technology, costs of patents and patent applications related to products and products in development, which are capitalized and amortized on a straight-line basis over their estimated useful lives. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business or legal factors; an adverse action or assessment by a regulator; unanticipated competition or loss of key personnel.
Contingent Value Rights
As part of the merger with ACLARA BioSciences, Inc. (“ACLARA”), the Company issued Contingent Value Rights (“CVR”) to ACLARA stockholders and was obligated to issue CVRs to holders of assumed ACLARA stock options upon future exercise of those options. In June 2006, the amount payable related to the outstanding CVRs was determined at $5.28 on a post 6-to-1 reverse stock split basis, per CVR and a cash payment of approximately $57.0 million was made to CVR holders on June 14, 2006. Holders of assumed ACLARA options are entitled to receive a cash payment of $5.28, upon future exercise of those options, for each CVR that would have been issuable to them had the option been exercised prior to the CVR maturity date. The Company records an additional liability each quarter for additional CVRs related to assumed ACLARA stock options as they vest during each quarter.
Income Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The Company has not provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries’ undistributed earnings as calculated for income tax purposes in accordance with the provisions of Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes—Special Areas” (“APB 23”) since the Company intends to reinvest these earnings outside the U.S. indefinitely.
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December 31, 2008
Revenue Recognition
Product revenue is recognized upon completion of tests made on samples provided by customers and the shipment of test results to those customers. Services are provided to certain patients covered by various third-party payer programs, such as Medicare and Medicaid. Billings for services under third-party payer programs are included in product revenue, net of allowances, for differences between the amounts billed and estimated receipts under such programs. The Company estimates these allowances based on historical payment information and current reimbursement rates. If the government and other third-party payers significantly change their reimbursement policies, an adjustment to the allowance may be necessary. Revenue generated from the Company’s database of resistance test results is recognized when earned under the terms of the related agreements, generally upon shipment of the requested reports.
Contract revenue consists of revenue generated from National Institutes of Health (“NIH”) grants, commercial assay development and other non-product revenue. NIH grant revenue is recorded on a reimbursement basis as grant costs are incurred. The costs associated with contract revenue are included in research and development expenses. For commercial and research collaborations, the Company recognizes non-refundable milestone payments received related to substantive at-risk milestones when performance of the milestone under the terms of the collaboration is achieved and there are no further performance obligations. Research and development fees from commercial collaboration agreements are generally recognized as revenue on a straight-line basis over the life of the collaboration agreement or as the research work is performed. Up front payments received in advance of meeting the revenue recognition criteria described above are deferred.
License revenue consists of up-front license fees when the earnings process is complete and no further obligations exist. If further obligations exist, the up-front license fee is recognized ratably over the obligation period. Royalties received are recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured.
In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements entered into after June 15, 2003, that include multiple element arrangements are analyzed to determine whether the deliverables are divided into separate units of accounting or as a single unit of accounting. Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If all of the three required criteria under EITF 00-21 are met, then the deliverables would be accounted for separately, completed as performed. Otherwise, the arrangement would be accounted for as a single unit of accounting and the payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. If the Company cannot reasonably estimate when the Company’s performance obligation either ceases or becomes inconsequential, then revenue is deferred until the Company can reasonably estimate when the performance obligation ceases or becomes inconsequential.
Research and Development
The Company expenses research and development costs as incurred. Research and development expenses consist primarily of salaries and related personnel costs, materials, supply costs for prototypes, and include costs associated with contract revenue. In addition, research and development expenses include costs related to clinical trials and validation of the Company’s testing processes and procedures and related overhead expenses.
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December 31, 2008
Advertising Expenses
The Company expenses the costs of advertising, which include promotional expenses, as incurred. Advertising expenses were $4.6 million, $6.5 million and $4.7 million for the years ended December 31, 2008, 2007 and 2006, respectively, and were recorded as sales and marketing expenses. Certain advertising expenses, included in total advertising expenses, are reimbursable under the Pfizer Collaboration Agreement, which were $1.1 million, $3.0 million and $1.2 million as of December 31, 2008, 2007 and 2006, respectively. These reimbursable advertising expenses were included in deferred costs in the balance sheet.
Loss Per Common Share
Basic loss per common share is calculated based on the weighted-average number of common shares outstanding during the periods presented. Diluted loss per common share would give effect to the dilutive impact of potential common shares, which consists of convertible preferred stock (using the as-if converted method), and stock options and warrants (using the treasury stock method). Potentially dilutive securities have been excluded from the diluted loss per common share computations in all years presented as such securities have an anti-dilutive effect on loss per common share due to the Company’s net loss.
The following outstanding convertible promissory notes, on an as if converted basis, and options and warrants, were excluded from the computation of diluted loss per common share as these potentially dilutive securities had an anti-dilutive effect:
December 31, | ||||||
2008 | 2007 | 2006 | ||||
(In thousands) | ||||||
3% Convertible promissory note (as if converted basis) | 1,540 | 1,540 | 1,540 | |||
0% Convertible promissory note (as if converted basis) | 1,984 | 1,984 | — | |||
Outstanding warrants | 4 | 10 | 136 | |||
Outstanding stock options | 3,954 | 3,386 | 3,201 | |||
Total | 7,482 | 6,920 | 4,877 | |||
Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R “Share Based Payment” (“SFAS 123R”) under provisions of Staff Accounting Bulletin No. 107 (“SAB 107”), using the modified prospective approach. Under this approach, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award. Pursuant to the provisions of SFAS 123R, the Company records stock-based compensation as a charge to earnings, net of the estimated impact of forfeited awards. As such, the Company recognized stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The Company has no awards with market or performance conditions.
In November 2005, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized
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subsequent to the adoption of SFAS 123R. There was no tax benefit realized upon exercise of stock options in 2008 and 2007.
The Company accounts for stock option grants to non-employees in accordance with the Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires the options subject to vesting to be periodically re-valued over their service periods, which approximates the vesting period. The impact of these options has not been material for any periods presented.
Cumulative Effect of Change in Accounting Principle
The Company elected to early adopt SFAS 159, effective January 1, 2007, to measure the fair value of the Pfizer Note as a hybrid debt instrument in its entirety with adjustments to the fair value reflected as a non-operating expense in the statement of operations. The impact of adopting SFAS 159 resulted in an adjustment for the cumulative effect of change in accounting principle of $2.2 million for the year ended December 31, 2007.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are recorded within accumulated other income (loss), including unrealized gains (losses) on available-for-sale securities.
Segment Reporting
The Company currently operates as a single business segment as there is only one measurement of profit (loss) for its operations. The Company’s long-lived assets and revenues generated from contracts and customers are primarily based in the United States of America.
Recent Accounting Pronouncements
In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). The FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and early adoption is prohibited. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company is currently evaluating the potential financial impact, if any, of the adoption of this statement.
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). The standard was issued by the FASB to enhance the current disclosure framework in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“FAS 133”). FAS 161 addresses concerns that the disclosures required by FAS 133 do not provide adequate information about the impact derivative instruments can have on an entity’s financial position, results of operations, and cash flows. FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer
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December 31, 2008
in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. FAS 141R determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R applies prospectively and is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the potential financial impact, if any, of the adoption of this statement.
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), an amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). FAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. FAS 160 is effective for fiscal years beginning after December 15, 2008. The Company plans to adopt FAS 160 beginning in the first quarter of fiscal year 2009. The Company is currently evaluating the potential financial impact, if any, of the adoption of this statement.
2. SHORT-TERM INVESTMENTS
As of December 31, 2008, the Company had approximately $16.0 million in cash and cash equivalents and had no short-term investments. As of December 31, 2007, the amortized cost, gross unrealized losses, and estimated fair value for available-for-sale securities, consisting primarily of commercial paper, was $11.9 million, $0.1 million and $11.8 million, respectively. Realized gains and losses upon sale of short-term investments have generally not been significant.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Machinery, equipment and furniture | $ | 13,497 | $ | 14,978 | ||||
Equipment under capital lease | 245 | 375 | ||||||
Leasehold improvements | 7,845 | 7,672 | ||||||
Capitalized software | 5,084 | 4,639 | ||||||
Assets under development | 996 | 1,580 | ||||||
27,666 | 29,244 | |||||||
Less accumulated depreciation and amortization | (19,792 | ) | (21,579 | ) | ||||
Property and equipment, net | $ | 7,874 | $ | 7,665 | ||||
Amortization of assets under capital leases as of December 31, 2008 was $140,000, $74,000 and $88,000 in 2008, 2007 and 2006, respectively. Accumulated amortization of those leased assets was $65,000 and $174,000 at December 31, 2008 and 2007, respectively. The Company recorded depreciation expense of $2.4 million, $2.4 million and $2.9 million, for the years ended December 31, 2008, 2007 and 2006, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase consideration over the fair values of the identifiable assets acquired and liabilities assumed from the Company’s merger with ACLARA, which closed in December 2004. Goodwill was $9.9 million at December 31, 2008 and 2007, respectively. The Company tests for impairment of goodwill on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could indicate impairment and require the Company to perform impairment tests more frequently than annually include significant adverse changes in legal factors or market and economic conditions; adverse regulatory action; unanticipated competition and significant adverse change in perceived revenue potential.
Measurement of fair value is determined using the income approach. The income approach focuses on the income-producing capability of the entity, measuring the current value of the entity by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the Company. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss will be recorded in operating income (loss).
Patents represent costs of patents and patent applications related to products and products in development, which are capitalized and amortized on a straight-line basis over their estimated useful lives. Remaining patent costs were fully amortized in September 2008. In 2007, patent costs were considered short-term in nature and included in other current assets. Amortization expense of other intangible assets was $0.4 million, $0.5 million and $1.0 million in 2008, 2007 and 2006, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, | ||||||
2008 | 2007 | |||||
(In thousands) | ||||||
Accrued royalty | $ | 555 | $ | 607 | ||
Accrued professional fees | 594 | 736 | ||||
Accrued marketing expenses | 776 | 530 | ||||
Accrued materials and supplies | 552 | 590 | ||||
Accrued facilities expenses | 227 | 257 | ||||
Other | 1,311 | 1,098 | ||||
Total accrued liabilities | $ | 4,015 | $ | 3,818 | ||
6. CONTINGENT VALUE RIGHTS
As part of the merger with ACLARA, the Company issued CVR to ACLARA stockholders and was obligated to issue CVRs to holders of assumed ACLARA stock options upon future exercise of those options. In June 2006, the amount payable related to the outstanding CVRs was determined at $5.28 per CVR and a cash payment of approximately $57.0 million was made to CVR holders on June 14, 2006. Holders of assumed ACLARA options are entitled to receive a cash payment of $5.28, upon future exercise of those options. At December 31, 2008 and 2007, assumed ACLARA options to purchase 350,000 and 389,000 shares, respectively,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
of the Company’s common stock were outstanding. As of December 31, 2008, all 350,000 shares were vested and outstanding. As of December 31, 2007, approximately 2,400 shares were unvested. The Company recorded a $0.1 million and $0.4 million favorable adjustment during the years ended December 31, 2008 and 2007, for options that were forfeited and recorded $0.8 million for additional CVRs related to the stock options assumed that vested during the year ended December 31, 2006.
The aggregate potential liability related to all these options at December 31, 2008 and 2007, was $1.9 million and $2.1 million, respectively. Upon exercise of the remaining options outstanding subsequent to December 31, 2008, the Company will receive aggregate exercise proceeds of $4.1 million.
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 2008, the Company held several leases and a sublease of buildings and office space in South San Francisco, California as follows:
• | Two leases of approximately 41,000 and 40,000 square feet, respectively, of laboratory and office space through April 2018; and |
• | A sublease of approximately 27,000 square feet of office space through May 2011. |
In June 2002, the Company assigned a lease of excess laboratory and office space and sold the related leasehold improvements and equipment to a third party. In October 2007, the Company extended the terms of the subleased office space relating to this lease assignment, which decreases the Company’s payment obligation in the event of default by the assignee. In the event of default by the assignee, the Company would be contractually obligated for payments under the lease of: $0.6 million in 2009; $0.7 million in 2010; and $0.3 million in 2011.
As of December 31, 2008 and 2007, the Company had amounts outstanding under equipment financing arrangements, which bear interest at a weighted-average fixed rate of approximately 9.0% and 8.3%, respectively. Payments are due, in monthly installments, through March 2010. The carrying amount of the equipment approximates the corresponding loan balance.
As a result of the merger with ACLARA, at December 31, 2004, the Company assumed the lease for a facility of approximately 44,200 square feet of office and laboratory space in Mountain View, California. On February 7, 2007, the Company entered into a lease termination agreement with the landlord to terminate the lease prior to its scheduled expiry. The termination of the lease was subject to a specified third party executing a new lease with the landlord on terms and conditions satisfactory to the landlord and the landlord subsequently notified the Company that this occurred. The Company has an obligation to pay the landlord specified amounts over the remainder of the former lease term, or through June 2009. As of December 31, 2008, the remaining obligation was $0.3 million, which is included in the table below. See Note 10 “Restructuring” for further analysis of restructuring charges.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
As of December 31, 2008, future minimum payments, excluding the lease assignment guarantee described above, are as follows:
Purchase Obligations | Operating Leases | Loans Payable | 0% Convertible Promissory Note | 3% Convertible Promissory Note | 3% Convertible Promissory Note Interest Payment (1) | Equipment Financing Arrangements | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Year ending December 31: | ||||||||||||||||||||||||
2009 | $ | 913 | $ | 3,297 | $ | 9,606 | $ | — | $ | — | $ | 750 | $ | 93 | ||||||||||
2010 | 347 | 3,424 | — | — | 25,000 | 473 | 9 | |||||||||||||||||
2011 | 125 | 3,606 | — | 30,000 | — | — | — | |||||||||||||||||
2012 | — | 3,681 | — | — | — | — | — | |||||||||||||||||
Thereafter | — | 21,711 | — | — | — | — | — | |||||||||||||||||
Total minimum lease and principal payments | $ | 1,385 | $ | 35,719 | 9,606 | 30,000 | 25,000 | 1,223 | 102 | |||||||||||||||
Amount representing interest | (19 | ) | — | — | (1,223 | ) | (5 | ) | ||||||||||||||||
Present value of future payments | 9,587 | 30,000 | 25,000 | — | 97 | |||||||||||||||||||
Current portion of loans and leases | (9,587 | ) | — | — | — | (93 | ) | |||||||||||||||||
Long-term portion | $ | — | $ | 30,000 | $ | 25,000 | $ | — | $ | 4 | ||||||||||||||
(1) | Subject to certain limitations, the Company is entitled to make such interest payments using shares of its common stock. |
Rental expense was approximately $4.7 million, $2.5 million and $2.3 million in 2008, 2007 and 2006, respectively.
In connection with the merger with ACLARA, the Company issued CVRs to ACLARA stockholders. See Note 6 “Contingent Value Rights,” above for further discussion.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
In 2002, the Company was informed by Bayer Diagnostics, or Bayer, that it believes the Company requires one or more licenses to patents controlled by Bayer in order to conduct certain of the Company’s current and planned operations and activities. The Company, in turn, believes that Bayer may require one or more licenses to patents controlled by the Company. Although the Company believes it does not need a license from Bayer for its HIV products, the Company has had discussions with Bayer concerning the possibility of entering into a cross-licensing or other arrangement, and believes that if necessary, licenses from Bayer would be available to the Company on commercial terms.
ACLARA, with which the Company merged in December 2004, and certain of its former officers and directors, referred to together as the ACLARA defendants, are named as defendants in a securities class action
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December 31, 2008
lawsuit filed in the United States District Court for the Southern District of New York. This action, which was filed on November 13, 2001, and is now captioned ACLARA BioSciences, Inc. Initial Public Offering Securities Litigation, also names several of the underwriters involved in ACLARA’s initial public offering, or IPO, as defendants. This class action is brought on behalf of a purported class of purchasers of ACLARA common stock from the time of ACLARA’s March 20, 2000 IPO through December 6, 2000. The central allegation in this action is that the underwriters in the ACLARA IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased ACLARA stock in the IPO and the after-market, and that the ACLARA defendants violated the federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 300 issuers who went public between 1998 and 2000 have been named in similar lawsuits. In February 2003, after the issuer defendants (including the ACLARA defendants) filed an omnibus motion to dismiss, the court dismissed the Section 10(b) claim as to the Company, but denied the motion to dismiss the Section 11 claim as to the Company and virtually all of the other issuer-defendants.
On June 26, 2003, the plaintiffs in the consolidated class action lawsuits announced a proposed settlement with ACLARA and the other issuer defendants. This proposed settlement was terminated on June 25, 2007, following the ruling by the United States Court of Appeals for the 2nd Circuit on December 5, 2006, reversing the District Court’s granting of class certification in the six focus cases currently being litigated in this proceeding. The proposed settlement, which had been approved by ACLARA’s board of directors, provided that the insurers of all settling issuers would guarantee that the plaintiffs recover $1 billion from non-settling defendants. Under the proposed settlement, the maximum amount that could have been charged to ACLARA’s insurance policy in the event that the plaintiffs recovered nothing from the investment banks would have been approximately $3.9 million. The Company believes that ACLARA had sufficient insurance coverage to cover the maximum amount that we may be responsible for under the proposed settlement.
On August 14, 2007, Plaintiffs filed Amended Master Allegations. On September 27, 2007, the Plaintiffs filed a renewed Motion for Class Certification. Defendants filed a Motion to Dismiss the focus cases on November 9, 2007. On March 26, 2008, the Court ruled on the Motion to Dismiss, holding that the plaintiffs had adequately pleaded their Section 10(b) claims against both the Issuer Defendants and the Underwriter Defendants. As to the Section 11 claim, the Court dismissed the claims brought by those plaintiffs who sold their securities for a price in excess of the initial offering price, on the grounds that they could not show cognizable damages, and by those who purchased outside the previously certified class period, on the grounds that those claims were time barred. This ruling, while not binding on the ACLARA IPO case, does provide strong guidance to all of the parties involved in this litigation.
Due to the inherent uncertainties of litigation and assignment of claims against the underwriters and because a final settlement has not yet been approved by the District Court, the ultimate outcome of the matter cannot be predicted.
Indemnification
During the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
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December 31, 2008
License Agreements
In September 2007, the Company also licensed technology from The NSABP Foundation, Inc. (“NSABP”), which provides the Company access to tissue samples from up to 1,600 breast cancer patients treated with Herceptin in the adjuvant setting as participants in the NSABP B 31 study. The Company will pay annual license fees to NSABP and additional royalties if the Company successfully develops and commercializes certain products resulting from the licensed rights.
8. CAPITAL STOCK
Authorized Common Stock
On October 27, 2008, the Company’s Board of Directors approved a 6-to-1 reverse stock split, as previously authorized and approved by the Company’s stockholders at the September 19, 2007 annual meeting, which became effective on November 4, 2008. In addition, the Company reduced the number of authorized shares of common stock from 200,000,000 shares to 84,000,000 shares of which 22,871,670 shares were outstanding at December 31, 2008.
Warrants
In connection with a loan agreement signed in January 1998, the Company issued the lender warrants to purchase an aggregate of 5,805 shares of common stock at a price of $48.00 per share. The value of the warrants was deemed to be insignificant and, therefore, no value was recorded. The warrants expired in January 2008.
In connection with loan agreements signed in 2000, the Company issued the lender warrants to purchase an aggregate of 4,465 shares of the Company’s common stock for $25.44 per share. The warrants expire in February 2010 and were valued at $318,000 using the Black-Scholes option valuation model. There were 4,465 warrants outstanding as of December 31, 2008.
401(k) Plan
The Company’s 401(k) Plan covers substantially all employees. Employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. The Company matches employee contributions in the form of Company common shares. In 2000, the 401(k) Plan was amended to increase the matching percentage to 25% of the employee contribution. The match is effective December 31 of each year and is fully vested when made. The Company recorded 401(k) matching expense of $0.6 million, $0.6 million and $0.5 million in 2008, 2007 and 2006, respectively. As of December 31, 2008 and 2007, the Company had issued approximately 0.2 million and 0.1 million shares, respectively, under the matching provisions of the 401(k) Plan.
Stock Options
In December 2004, the Company’s stockholders approved the 2004 Equity Incentive Plan (“EIP”) with 2.1 million shares reserved for future issuance. In September 2007, stockholders approved an additional 833,333 shares under the 2004 EIP. In October 2008, the Company’s Board of Directors approved a 6-to-1 reverse stock split and an additional 1.3 million shares under the 2004 EIP, as previously authorized and approved by the Company’s stockholders at the September 19, 2007 annual meeting, which became effective on November 4, 2008. In addition, the Company has the 2000 Equity Incentive Plan, which had been previously adopted in 1996
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December 31, 2008
and was amended and renamed in February 2000. In December 2004, the Company assumed the following ACLARA plans upon the merger with ACLARA: (i) the 1995 Stock Plan, (ii) the Amended and Restated 1997 Stock Plan, and (iii) a non-qualified option agreement. Together these plans are referred to as (the “Plans”). The Plans provide for the granting of options to purchase common stock and other stock awards to employees, officers, directors and consultants of the Company. The Company generally grants shares of common stock for issuance under the Plans at no less than the fair value of the stock on the grant date; however, management is permitted to grant non-statutory stock options at a price not lower than 85% of the fair value of common stock on the date of grant. Options granted under the Plans generally vest over four years at a rate of 25% one year from the grant date and ratably monthly thereafter.
A summary of activity under the Plans is as follows:
Stock Options | |||||||||
Shares Available | Shares Outstanding | Weighted- Average Price Per Share | |||||||
Balances at December 31, 2005 | 1,063,143 | 3,056,372 | $ | 14.52 | |||||
Options granted | (682,550 | ) | 682,550 | 10.08 | |||||
Options exercised | — | (407,426 | ) | 7.98 | |||||
Options forfeited | 130,153 | (130,153 | ) | 16.76 | |||||
Balances at December 31, 2006 | 510,746 | 3,201,343 | 14.34 | ||||||
Additional shares authorized | 833,333 | — | — | ||||||
Options granted | (565,454 | ) | 565,454 | 10.98 | |||||
Options exercised | — | (40,007 | ) | 7.89 | |||||
Options forfeited | 340,668 | (340,668 | ) | 15.20 | |||||
Balances at December 31, 2007 | 1,119,294 | 3,386,122 | 13.75 | ||||||
Additional shares authorized | 1,333,333 | — | — | ||||||
Options granted | (761,818 | ) | 761,818 | 6.88 | |||||
Options exercised | — | (867 | ) | 1.44 | |||||
Options forfeited | 193,288 | (193,288 | ) | 13.96 | |||||
Balances at December 31, 2008 | 1,884,097 | 3,953,785 | $ | 12.42 | |||||
Stock options vested and exerciseable at December 31, 2008 and 2007, are summarized as follows:
December 31, | ||||
2008 | 2007 | |||
Options vested and expected to vest | 3,874,709 | 3,318,400 | ||
Options exerciseable | 2,684,809 | 2,182,201 |
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December 31, 2008
The following table summarizes information about the stock options outstanding under the Plans at December 31, 2008:
Options Outstanding | Options Exercisable | |||||||||
Range of Exercise Price | Number Outstanding | Weighted- Average Remaining Contractual Life (in years) | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||
$ 1.44—$ 7.08 | 659,215 | 7.19 | $ 6.73 | 22,254 | $ 6.16 | |||||
$ 7.09—$ 7.68 | 240,112 | 4.42 | 7.49 | 225,329 | 7.50 | |||||
$ 7.69—$ 9.06 | 231,608 | 5.55 | 8.50 | 140,247 | 8.79 | |||||
$ 9.07—$ 13.56 | 1,166,658 | 5.65 | 10.60 | 712,309 | 10.60 | |||||
$13.57—$ 13.68 | 856,200 | 4.16 | 13.68 | 802,570 | 13.68 | |||||
$13.69—$ 14.40 | 63,337 | 3.72 | 14.27 | 60,946 | 14.28 | |||||
$14.41—$ 15.42 | 168,983 | 3.82 | 15.12 | 158,949 | 15.15 | |||||
$15.43—$ 17.88 | 105,927 | 3.73 | 16.35 | 100,460 | 16.37 | |||||
$17.89—$ 18.60 | 167,709 | 5.19 | 18.00 | 167,709 | 18.00 | |||||
$18.61—$ 18.84 | 119,828 | 0.86 | 18.84 | 119,828 | 18.84 | |||||
$18.85—$ 32.40 | 73,799 | 2.23 | 22.29 | 73,799 | 22.29 | |||||
$32.41—$ 48.00 | 75,735 | 2.02 | 38.06 | 75,735 | 38.06 | |||||
$48.01—$132.78 | 24,674 | 1.80 | 74.24 | 24,674 | 74.24 | |||||
3,953,785 | 2,684,809 | |||||||||
The weighted-average grant date fair value of options granted in 2008 and 2007 was $3.4 million $4.3 million, respectively. The weighted-average remaining contractual term of the exercisable stock options at December 31, 2008 and 2007, was 4.3 and 5.5 years, respectively. As of December 31, 2008 and 2007, the aggregate intrinsic value of outstanding stock options was minimal and $0.3 million, and the aggregate intrinsic value of exercisable stock options was minimal and $0.3 million, respectively.
For the year ended December 31, 2008, there were minimal options exercised, therefore the intrinsic value of options exercised and proceeds from options exercised were minimal. For the year ended December 31, 2007, the intrinsic value of options exercised was $0.3 million and proceeds from options exercised were $0.4 million. There was no tax benefit realized upon exercise of stock options for the years ended December 31, 2008 and 2007. The total fair value of stock options vested for both years ended December 31, 2008 and 2007, was $5.5 million.
Employee Stock Purchase Plan
In February 2000, the board of directors adopted the 2000 Employee Stock Purchase Plan (the “Stock Plan”). The Stock Plan permits eligible employees to acquire shares of the Company’s common stock through payroll deductions of up to 15% of their eligible earnings. All full-time employees of the Company, except 5% stockholders, are eligible to participate in the Stock Plan. The purchase price of the shares is the lesser of 85% of the fair value of the shares at the offering date or purchase date, as defined by the Stock Plan. The Stock Plan has an annual automatic share increase provision. The amount of the automatic increase may be reduced to a lesser amount, as determined by the board of directors. For the years ended December 31, 2008 and 2007, the Company added 0.1 million and 0.2 million shares to the Stock Plan under this provision. Of the 0.8 million shares of common stock authorized for issuance under the Stock Plan, 0.7 million shares were issued as of December 31, 2008. In November 2008, the Company suspended future offerings under the Stock Plan due to volatility of the Company’s stock price and limitation on the number of shares that may be issued under the Stock Plan.
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December 31, 2008
The fair value of employee stock purchases in 2008 and 2007, was based on an offering period starting June 2, 2008 and December 1, 2007, respectively, which was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate from 3.31% to 4.31% and 4.5% to 4.7%, respectively; expected term from 0.5 year to 2.0 years for both years; volatility factor from 53% to 61% and 43% to 54%, respectively; and a dividend yield of zero for both years. The expected term of employee stock purchase plans is equal to the offering period. As of December 31, 2008 and 2007, the unrecognized compensation cost related to employee stock purchases was zero and $0.7 million, respectively.
Reserved Shares
At December 31, 2008, the Company had authorized and reserved shares of common stock for issuances as follows:
Shares Authorized | Shares Reserved | |||
(In thousands) | ||||
3% Convertible promissory note (as if converted basis) | 1,540 | 1,540 | ||
0% Convertible promissory note (as if converted basis) | 1,984 | 1,984 | ||
Stock options | 5,839 | 4,506 | ||
Warrants | 4 | 4 | ||
Employee Stock Purchase Plan | 767 | 650 | ||
10,134 | 8,684 | |||
Stock-Based Compensation
The Company uses the Black-Scholes option-pricing valuation model to estimate the grant date fair value of its stock-based awards in accordance with SFAS 123R. The determination of fair value for stock-based awards on the date of grant using an option-pricing model requires management to make certain assumptions regarding: (i) the expected volatility in the market price of the Company’s common stock over the expected term of the awards; (ii) dividend yield; (iii) risk-free interest rates; and (iv) actual and projected employee exercise behaviors (referred to as the expected term). The expected volatility is based on the historical volatilities of our stock for the expected term in effect on the date of grant with considerations to similar public entities in similar markets. The risk-free interest rate is based on the U.S. Zero Coupon Treasury yield for the expected term in effect on the date of grant. The expected term of options represents the period of time that options granted are expected to be outstanding and is derived from actual historical exercise data with considerations to the contractual and vesting terms. In addition, SFAS 123R requires the Company to estimate the expected impact of forfeited awards and recognize stock-based compensation cost only for those awards expected to vest. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized in the period of the revision.
The weighted-average estimated fair value of options granted during 2008 and 2007, was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Weighted-average fair value | $ | 4.49 | $ | 11.04 | ||||
Risk-free interest rate | 2.99 | % | 4.55 | % | ||||
Expected term (in years) | 6.7 | 6.3 | ||||||
Volatility | 67.3 | % | 76.7 | % |
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In both years ended December 31, 2008 and 2007, respectively, forfeitures were estimated to be approximately 2% over the expected term, based on historical experience. If actual forfeiture rates are materially different from estimates or factors change and we employ different assumptions, future stock-based compensation expense could be significantly different from what the Company has recorded in the current period. Management periodically reviews actual forfeiture experience and revises estimates, as necessary.
Stock-based compensation expenses related to stock options and employee stock purchases recognized under SFAS 123R, excluding CVR expenses related to vested options, were as follows:
Year Ended December 31, | ||||||
2008 | 2007 | |||||
(In thousands) | ||||||
Cost of product revenue | $ | 555 | $ | 487 | ||
Research and development | 1,136 | 1,168 | ||||
Sales and marketing | 1,023 | 1,110 | ||||
General and administrative | 1,604 | 1,815 | ||||
$ | 4,318 | $ | 4,580 | |||
As of December 31, 2008 and 2007, the unrecognized compensation cost related to the unvested stock options amounted to $6.2 million and $7.1 million, respectively, which are expected to be recognized over the weighted-average remaining requisite service period of 2.37 years and 2.13 years, respectively.
9. INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of adopting FIN 48. The Company is subject to taxation in the United States and various state jurisdictions. The tax years from 1995 through 2008, are subject to examination by the Internal Revenue Service due to the net operating losses generated in those years. The Company is currently not under any federal or state audits.
Interest and penalties are zero and the Company’s policy is to expense interest and penalties, if any, to income tax expense as incurred. Since the Company has a full valuation on all the deferred tax assets and does not expect to be profitable at least through December 2009, FIN 48 is not expected to have a material impact on the Company’s effective tax rate in the next twelve months. Additionally, the Company does not expect any material changes in unrecognized tax benefits in the next twelve months. The Company has zero unrecognized tax benefits as of December 1, 2008, and as of December 31, 2007.
At December 31, 2008, the Company had federal and state net operating loss carryforwards of approximately $265.5 million and $149.2 million, respectively. Additionally, the Company had federal and state
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research and development credits of approximately $3.1 million and $3.4 million, respectively. The federal net operating loss carryforwards and research and development credit will expire at various dates between the years 2010 and 2028, if not utilized. The state of California net operating loss carryforwards will expire at various dates between the years 2014 and 2019, if not utilized. The California research and development credits can be carried forward indefinitely.
Utilization of the federal and state net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company completed section 382 studies through December 31, 2008, and concluded that an ownership change occurred in 2004, resulting in a reduction of its net operation loss and credits carryforwards which is reflected in the table below. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows:
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 62,700 | $ | 57,700 | ||||
Research and other credits | 5,300 | 4,300 | ||||||
Capitalized research and development | 2,800 | 2,300 | ||||||
Other | 2,400 | 3,300 | ||||||
Deferred tax assets as a result of merger with ACLARA: | ||||||||
Acquired net operating loss carryforwards | 36,300 | 36,300 | ||||||
Capitalized research and development | 1,200 | 1,600 | ||||||
Other | 1,200 | 1,400 | ||||||
Total deferred tax assets | 111,900 | 106,900 | ||||||
Valuation allowance | (111,900 | ) | (106,900 | ) | ||||
Net deferred taxes | $ | — | $ | — | ||||
Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $5.0 million in 2008, decreased by $15.1 million in 2007 and increased by $5.0 million in 2006, respectively. The Company has not provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries’ undistributed earnings, as calculated for income tax purposes, as of December 31, 2008. Such earnings are intended to be reinvested outside of the U.S. indefinitely. Unrecognized deferred taxes on these undistributed earnings are minimal in 2008.
The Company had $32,000 and zero in provision for income taxes at December 31, 2008 and 2007, respectively, relating to current foreign income taxes. These foreign income taxes are reimbursable under the Collaboration Agreement with Pfizer. See Note 11, “Collaboration and Note Purchase Agreement” for further discussion.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
A reconciliation of the statutory tax rates and the effective tax rates for the periods ended:
December 31, | |||||||||
2008 | 2007 | 2006 | |||||||
Tax at federal statutory rate | (34.00 | )% | (34.00 | )% | (34.00 | )% | |||
State, net of federal benefit | (5.83 | ) | (5.83 | ) | (5.83 | ) | |||
Research & development credits | (7.89 | ) | (3.65 | ) | (2.47 | ) | |||
Valuation allowance | 35.16 | 39.57 | 13.09 | ||||||
Stock-based compensation | 10.39 | 5.15 | 6.09 | ||||||
CVR revaluation | (0.62 | ) | (1.04 | ) | 17.75 | ||||
Others | 3.07 | (0.20 | ) | 5.22 | |||||
Provision for taxes | 0.28 | % | — | % | — | % | |||
10. RESTRUCTURING
In connection with the Company’s merger with ACLARA in 2004, the Company took action to integrate and restructure the former ACLARA operations. A restructuring accrual of $3.0 million was established for the costs of vacating and subleasing the Mountain View facility, which includes an estimate of the excess of our lease costs over the anticipated sublease. In addition, an accrual for ACLARA employee severance costs of approximately $1.1 million was established as a result of the merger. Prior to 2007, additional restructuring accruals of approximately $1.9 million were recorded due to delays in vacating and subleasing the Mountain View facility of which $1.6 million was recorded in goodwill and $0.3 million was recorded in the Company’s results of operations. In 2007, the Company executed a lease termination agreement in exchange for a reduced but fixed payment commitment over the remainder of the previous lease term.
The following table sets forth the components of the restructuring charges reflected as a current liability in the consolidated balance sheet and the remaining lease obligation as of December 31, 2008. As of December 31, 2007, approximately $0.6 million of the total $0.9 million was reflected as a current liability in the consolidated balance sheet.
Abandonment of Facilities | Severance | Total | ||||||||||
(In thousands) | ||||||||||||
Liabilities assumed in merger with ACLARA | $ | 3,000 | $ | 1,054 | $ | 4,054 | ||||||
Amounts paid in cash | (2,968 | ) | (1,054 | ) | (4,022 | ) | ||||||
Change in estimate for restructuring costs related to Mountain View facility | 1,964 | — | 1,964 | |||||||||
Balance at December 31, 2006 | $ | 1,996 | $ | — | $ | 1,996 | ||||||
Amounts paid in cash | (1,097 | ) | — | (1,097 | ) | |||||||
Balance at December 31, 2007 | $ | 899 | $ | — | $ | 899 | ||||||
Amounts paid in cash | (591 | ) | — | (591 | ) | |||||||
Balance at December 31, 2008 | $ | 308 | $ | — | $ | 308 | ||||||
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
11. COLLABORATION AND NOTE PURCHASE AGREEMENT
On May 5, 2006, the Company entered into a Collaboration Agreement with Pfizer regarding the Company’s Trofile Co-Receptor Tropism Assay (the “Collaboration Agreement”). The Collaboration Agreement has an initial term that expires on December 31, 2009, and is renewable by Pfizer for five successive one-year terms.
Under the agreement, the Company and Pfizer collaborate to make the Company’s Trofile Co-Receptor Tropism Assay available globally. The Company is responsible for making the assay available in the U.S. and performing the assay in accordance with agreed upon performance standards. The Company undertakes certain efforts to plan, establish and maintain an infrastructure to support the commercial availability of the assay outside the U.S., in countries designated by Pfizer, and, it is obligated to perform the assay with respect to patient blood samples originating outside of the U.S., in accordance with agreed upon performance standards. Pfizer is responsible for sales, marketing and regulatory matters related to the assay outside of the U.S. Pfizer reimburses the Company for costs incurred to establish and maintain the necessary logistics infrastructure to make the assay available outside of the U.S., and Pfizer pays the Company for each assay that the Company performs with respect to patient blood samples originating outside of the U.S.
Subject to certain limitations, Pfizer is entitled to establish its own facility to perform the assay in support of its human clinical trials, and to perform the assay in respect of patient blood samples following certain uncured material breaches of the Collaboration Agreement (including the performance standards) by the Company. For such purposes, the Company granted Pfizer a license to use certain intellectual property rights and proprietary materials related to the Company’s Trofile Co-Receptor Tropism Assay. The Company will be obligated in such a case to assist Pfizer in establishing and operating such facility, for which Pfizer will reimburse the Company for costs incurred in providing such assistance. To secure the Company’s obligations under the license described above, the Company has granted Pfizer a security interest in certain of its intellectual property rights and proprietary materials related to the Company’s Trofile Co-Receptor Tropism Assay. Pfizer and the Company have also extended the co-receptor portion of their existing services agreement for support of potential additional Pfizer clinical trials through December 31, 2009.
In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements entered into after June 15, 2003 that include multiple element arrangements are analyzed to determine whether the deliverables are divided into separate units of accounting or as a single unit of accounting. Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and, (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If all of the three required criteria under EITF 00-21 are met, then the deliverables would be accounted for separately, completed as performed. Otherwise, the arrangement would be accounted for as a single unit of accounting and the payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. If the Company cannot reasonably estimate when its performance obligation either ceases or becomes inconsequential, then revenue is deferred until the Company can reasonably estimate when the performance obligation ceases or becomes inconsequential.
The Collaboration Agreement is a multiple element arrangement, including supply of the Trofile Assay in additional clinical studies (including expanded access programs in both the U.S. and outside the U.S.), supply of the Trofile Assay for clinical use outside of the U.S., reimbursement of costs for the establishment and operation
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
of supply infrastructure outside of the U.S. and potential assistance to Pfizer in the establishment and operation of a second facility for processing of tropism assays. Under the guidelines of EITF 00-21, the Company accounts for the collaboration with Pfizer as a single unit of accounting due to the absence of established fair values of certain undelivered elements. Accordingly, the Company has deferred revenue under this collaboration until the earlier of establishment of fair values or completion of the deliverables. Additionally, related direct costs for the establishment and operation of supply infrastructure outside of the U.S. that are contractually reimbursable on a non-refundable basis under this collaboration have been deferred.
The following table sets forth the deferred infrastructure costs and related deferred revenue under the Collaboration Agreement as of December 31, 2008 and 2007, respectively.
December 31, | ||||||
2008 | 2007 | |||||
(In thousands) | ||||||
Deferred Costs | $ | 17,275 | $ | 8,043 | ||
Deferred Revenue | $ | 21,546 | $ | 12,622 | ||
On May 5, 2006, the Company also entered into a Note Purchase Agreement with Pfizer, which was amended in January 2007, as described in the “0% Convertible Senior Unsecured Notes” Note below, pursuant to which it sold to Pfizer a 3% Senior Secured Convertible Note in the principal amount of $25 million (the “Pfizer Note”). The closing of the sale and issuance of the Pfizer Note occurred on May 19, 2006 and matures on May 5, 2010. The Company pays interest quarterly, in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing on June 30, 2006. Subject to certain limitations, the Company is entitled to make such interest payments using shares of its common stock instead of cash.
The Pfizer Note is convertible into shares of the Company’s common stock at the election of its holder at a per share conversion price of $16.23. Following the effectiveness of the registration statement covering the estimated number of common shares underlying the Pfizer Note, which occurred June 23, 2006, the Pfizer Note will automatically convert into shares of the Company’s common stock should the closing price of the Company’s common stock be greater than 150% of the conversion price, or $24.36 per share, for twenty out of thirty consecutive trading days. The conversion price will adjust automatically upon certain changes to the Company’s capitalization. The Company will be required, under the terms of the Pfizer Note, to repurchase the outstanding amount of the Pfizer Note at the election of the holder upon certain change of control events described in the Pfizer Note, or if its common stock is no longer listed or quoted on the NASDAQ Global Market or an established automated over-the-counter trading market (including, if applicable, the OTC Bulletin Board). The Pfizer Note is secured by a first priority security interest in favor of Pfizer in certain of the Company’s assets related to its HIV testing business.
Under the terms of the Pfizer Note, the Company is prohibited from incurring certain types of indebtedness, from permitting certain liens on its assets, entering into transactions with affiliates and entering into certain capital transactions such as dividend payments, stock repurchases, capital distributions or other similar transactions. It is also subject to certain other covenants as set forth in the Pfizer Note, including limitations on its ability to enter into new lines of business after issuance of the Pfizer Note. An event of default under the Pfizer Note will occur if the Company: is delinquent in making payments of principal or interest; fails, following notice, to cure a breach of a covenant under the Pfizer Note, the related security agreement or the Note Purchase Agreement; a representation or warranty under the Pfizer Note, the related security agreement or the Note Purchase Agreement is materially inaccurate; an acceleration event occurs under certain types of its other secured
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
indebtedness outstanding from time to time; certain bankruptcy proceedings are commenced or orders granted or an event of default occurs or is continuing under the 0% Notes issued in January 2007. If an event of default occurs, the indebtedness under the Pfizer Note could be accelerated, such that it becomes immediately due and payable.
As a result of the issuance of the 0% Notes, the Company is required to value and account for certain derivative instruments that are embedded in the Pfizer Note with adjustments to the fair value reflected in the statement of operations in accordance with SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) and SFAS 157, “Fair Value Measurements” (“SFAS 157”). The Company elected to early adopt SFAS 159 to measure the Pfizer Note as a hybrid debt instrument in its entirety using the framework established by SFAS 157, for measuring fair value. At the initial adoption of SFAS 159, the Company recorded a favorable cumulative effect of a change in accounting principle adjustment to beginning accumulated deficit for the Pfizer Note of $2.2 million, resulting in a fair value of $22.8 million at January 1, 2007. The Company uses a binomial lattice model as the valuation technique to determine fair value using management assessments and inputs, which utilize inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
The following table sets forth the impact of the net favorable valuation adjustments to the Pfizer Note, which are reflected in the consolidated statement of operations for the year ended December 31, 2008 and 2007, respectively.
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Outstanding Carrying Value at beginning of year | $ | 20,786 | $ | 22,758 | ||||
Fair value adjustment recorded in: | ||||||||
“Convertible debt valuation adjustment and interest income, net” | (2,192 | ) | (1,972 | ) | ||||
Outstanding Fair Value at end of year | $ | 18,594 | $ | 20,786 | ||||
Unpaid Principal Balance at end of year | $ | 25,000 | $ | 25,000 | ||||
12. CREDIT AND SECURITY AGREEMENT
In December 2007, the Company amended its Credit and Security Agreement with General Electric Capital Corporation (“GE”) entered into on September 29, 2006. The Credit and Security Agreement (the “Credit Agreement”), which expires on March 27, 2010, provides the Company with a revolving credit line, with borrowings against eligible accounts receivable up to a maximum of $10 million. GE has been granted a security interest over certain of the Company’s assets, including its accounts receivable, intellectual property used or held for use in connection with its oncology testing business and inventory. As of December 31, 2008 and December 31, 2007, respectively, there was approximately $9.6 million and $4.3 million outstanding under the revolving credit line, recorded as a loan payable in the financial statements.
Amounts borrowed under the Credit Agreement bear interest at a rate per annum equal to a published LIBOR rate plus 4.75%. As of December 31, 2008, the 1-month LIBOR rate was 0.44%. Amounts borrowed under the revolving credit line are repaid as the Company receives payment on its outstanding accounts receivable. The Credit Agreement also provides for the payment by the Company of an unused line fee, a collateral fee, a commitment fee and, in certain circumstances, a deferred commitment fee.
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
Under the terms of the Credit Agreement, the Company is prohibited from incurring certain types of indebtedness and certain liens on its assets. It is also subject to certain other affirmative and negative covenants as set forth in the Credit Agreement. An event of default under the indebtedness to GE will occur if, among other things, the Company: is delinquent in making payments of principal, interest or fees on the revolving credit line; fails, following notice, to cure a breach of a covenant under the Credit Agreement; a representation or warranty under the Credit Agreement is materially inaccurate; certain liquidation or bankruptcy proceedings are commenced or certain orders are granted against the Company; the security interests granted by the Company in favor or GE fail, in certain circumstances, to constitute valid security interests; or an acceleration event occurs under certain types of the Company’s other secured indebtedness outstanding from time to time. If an event of default occurs, the indebtedness to GE under the Credit Agreement could be accelerated, such that it becomes immediately due and payable.
13. 0% CONVERTIBLE SENIOR UNSECURED NOTES
In January 2007, the Company entered into a Securities Purchase Agreement to sell $30 million principal amount of 0% Convertible Senior Unsecured Notes (the “0% Notes”) to a single qualified institutional buyer. The aggregate purchase price for the 0% Notes was approximately $22.5 million. Although due in 2026, the 0% Notes may be called by the holder of the 0% Notes at December 31, 2011, December 31, 2016 or December 31, 2021, at a price equal to 100% of the accreted value. Prior to the fifth year anniversary of the issuance of the Notes, the accreted value includes (a) the issue price of each Note and (b) the portion of the excess of the principal amount of each note over the issue price, which has been amortized, in accordance with the indenture under which the 0% Notes are governed, at the rate of 5.84% per annum from the issue date through the date of determination. After the fifth anniversary of the issue date of the Notes, the accreted value will be equal to the principal amount of the Notes.
The 0% Notes do not bear interest and will be convertible, at the option of the holder of such 0% Notes, into shares of the Company’s common stock at an initial conversion price of $15.12 per share, which is equivalent to an initial conversion rate of approximately 66.14 shares per $1,000 principal amount of 0% Notes. The conversion price will adjust automatically upon certain changes to the Company’s capitalization.
Pursuant to a Registration Rights Agreement, dated as of January 11, 2007, by and between the Company and the qualified institutional buyer (“Registration Rights Agreement”), the Company filed a shelf registration statement with respect to the resale of the 0% Notes and the common stock issuable upon conversion thereof. This registration statement became effective on July 9, 2007. In the event the Company fails to comply with its ongoing obligations under the Registration Rights Agreement, it will be obligated to make additional payments to the holders of the 0% Notes.
The Company has the option to cause all or any portion of the 0% Notes to automatically convert at such time as the closing price of the Company’s common stock is greater than $18.90 for twenty out of thirty consecutive trading days and provided that certain other conditions are satisfied. Upon any such automatic conversion, the Company initially will pay the holders a premium make-whole amount equal to $14.13 per $1,000 principal amount of 0% Notes so converted, such premium make-whole being reduced over the initial three-year period following the closing. The premium make-whole amount may be paid in shares of common stock upon any such automatic conversion, provided that certain additional conditions are satisfied.
The 0% Notes are subordinated to all of the Company’s present senior debt, including the $25 million 3% Senior Secured Convertible Note, due May 19, 2010, issued to Pfizer Inc (“Pfizer”) in May 2006 (“the Pfizer Note”), as amended as described below, and the Company’s revolving credit line with GE.
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
Beginning December 31, 2009, the Company may redeem the 0% Notes in whole or in part at any time at a redemption price equal to the accreted value of the principal amount of the 0% Notes to be redeemed, plus liquidated damages, if any, and certain other amounts, provided that certain conditions are satisfied and the market price of the Company’s common stock exceeds the conversion price of the 0% Notes leading up to and at the time of redemption.
The Company will be required, under the terms of the 0% Notes, to repurchase the outstanding accreted value of the 0% Notes, at the election of the holder, upon certain change of control events described in the 0% Notes, or if the Company’s common stock is no longer listed on a United States national securities exchange, quoted on The NASDAQ Global Market, or approved for trading and/or eligible for quotation on an established automated over-the-counter trading market in the United States, including the OTC Bulletin Board but excluding the “pink sheets”, or any similar quotation system. In addition, under such circumstances, the Company would also be obligated to pay the premium make-whole amount described above and certain other amounts.
An event of default under the 0% Notes will occur if the Company: is delinquent in making certain payments due under the 0% Notes; fails to deliver shares upon conversion of the 0% Notes; fails to deliver certain required notices under the 0% Notes; fails, following notice, to cure a breach of any covenant under the 0% Notes, the securities purchase agreement, the registration rights agreement, the subordination agreement with Pfizer described below, or the indenture described below (together, the “Transaction Documents”); certain events of default occur with respect to other indebtedness; certain bankruptcy proceedings are commenced or orders granted; a representation or warranty made under the Transaction Documents is materially inaccurate and continues uncured following notice; the Company fails to file certain periodic reports with the Securities and Exchange Commission (subject to certain grace periods); or the Company incurs certain types of indebtedness prohibited under the terms of the 0% Notes. If an event of default occurs, the indebtedness under the 0% Notes could be accelerated, such that it becomes immediately due and payable.
In connection with the sale of the 0% Notes, the Company, Pfizer and U.S. Bank, National Association, as trustee, entered into a subordination agreement. The subordination agreement sets forth the terms under which the 0% Notes are subordinated to the Pfizer Note. As a condition of entry into the subordination agreement, the Company and Pfizer amended the Note Purchase Agreement, dated May 5, 2006, between Pfizer and the Company, and amended and restated the Pfizer Note, to conform to certain terms of the subordination agreement. As amended, the Pfizer Note provides that the Company will be in default, thereof, if (i) an event of default occurs and is continuing under the 0% Notes and (ii) the trustee or any holders of the 0% Notes give notice to the Company of its or their intent to either accelerate the 0% Notes or exercise any other remedies, thereunder (subject to certain limited exceptions).
In accordance with SFAS 155, “Accounting for Certain Hybrid Financial Instruments”, the Company elected to initially and subsequently measure the 0% Notes as a hybrid debt instrument in its entirety with adjustments to the fair value reflected in the consolidated statement of operations. Accordingly, the change in the net carrying amount to the fair value recognized includes unamortized debt issuance costs. The Company used a binomial lattice model as the valuation technique to determine fair value using management assessments and inputs, which utilize inputs other than observable quoted prices that are observable for the asset or liability, either directly or indirectly. Inputs derived from quoted prices include the Company’s stock price, the average yield of B- bonds and the prices of Treasury instruments. Input from management assessment includes the probability of certain events occurring during the term of the debt.
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
The following table sets forth the impact of the net favorable valuation adjustments of the 0% Notes, which are reflected in the consolidated statement of operations for the year ended December 31, 2008 and 2007, respectively.
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Outstanding Fair Value at beginning of year | $ | 18,511 | $ | 22,542 | ||||
Fair value adjustment recorded in: | ||||||||
“Convertible debt valuation adjustment and interest income, net” | (8,043 | ) | (4,031 | ) | ||||
Outstanding Fair Value at end of year | $ | 10,468 | $ | 18,511 | ||||
Unpaid Principal Balance at end of year | $ | 25,246 | $ | 23,832 | ||||
14. FAIR VALUE OF ASSETS AND LIABILITIES
The Company’s financial assets and liabilities are valued utilizing the market approach to measure fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value which are the following:
• | Level 1—Quoted prices in active exchange markets involving identical assets or liabilities. |
• | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
• | Level 3—Unobservable inputs for the asset or liability, either directly or indirectly, and management assessments and inputs using a binomial lattice model as the valuation technique. |
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with FAS 157 as of December 31, 2008:
(Level 2) | (Level 3) | Total | |||||||
(In thousands) | |||||||||
Assets: | |||||||||
Cash equivalents: | |||||||||
US Government Treasury Bills | $ | 4,000 | $ | — | $ | 4,000 | |||
Total financial assets | $ | 4,000 | $ | — | $ | 4,000 | |||
Liabilities: | |||||||||
3% Convertible promissory note | $ | — | $ | 18,594 | $ | 18,594 | |||
0% Convertible promissory note | — | 10,468 | 10,468 | ||||||
Total financial liabilities | $ | — | $ | 29,062 | $ | 29,062 | |||
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MONOGRAM BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2008
The fair market value of the 0% Notes and Pfizer Note are subject to interest rate risk. Generally, the fair market value of these 0% Notes and the Pfizer Note will increase as interest rates fall and decrease as the interest rates rise, but the interest rate changes do not impact the Company’s financial position, cash flows or results of operations. Additionally, the fair market value of the Company’s debt obligations includes input from management regarding the probability of certain events occurring during the term of the debt. Assuming a hypothetical increase of two percentage points in probability of fundamental change and one percentage point in the probability of default, the fair value of our Pfizer Note and 0% Note, as of December 31, 2008, would have potentially increased by approximately $0.1 million and $0.6 million, respectively. See Footnote 11, “Collaboration and Note Purchase Agreement” and Footnote 13, “0% Convertible Senior Unsecured Notes” for summary of the Company’s Level 3 financial liabilities as of December 31, 2008 and 2007, respectively.
As of December 31, 2008, the carrying value of the Company’s cash and cash equivalents approximated their fair value and consists of bank deposits, money market accounts and U.S. Government Treasury Bills. The Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarter Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
2008 | ||||||||||||||||
Product revenue | $ | 14,007 | $ | 15,440 | $ | 15,550 | $ | 14,490 | ||||||||
Contract revenue | 820 | 687 | 484 | 413 | ||||||||||||
License revenue | 10 | 5 | 108 | 179 | ||||||||||||
Total revenue | 14,837 | 16,132 | 16,142 | 15,082 | ||||||||||||
Gross profit | 8,473 | 9,008 | 8,493 | 8,442 | ||||||||||||
Contingent value rights revaluation (1) | — | 72 | — | 48 | ||||||||||||
Convertible debt valuation adjustments | 4,736 | 66 | 1,498 | 3,935 | ||||||||||||
Net income (loss) | (1,727 | ) | (5,518 | ) | (4,930 | ) | 512 | |||||||||
Basic and diluted income (loss) per common share | $ | (0.08 | ) | $ | (0.25 | ) | $ | (0.22 | ) | $ | 0.02 | |||||
2007 | ||||||||||||||||
Product revenue | $ | 9,099 | $ | 8,907 | $ | 8,745 | $ | 12,731 | ||||||||
Contract revenue | 318 | 485 | 463 | 798 | ||||||||||||
License revenue | — | 300 | 1,186 | 197 | ||||||||||||
Total revenue | 9,417 | 9,692 | 10,394 | 13,726 | ||||||||||||
Gross profit | 3,712 | 4,365 | 4,620 | 7,606 | ||||||||||||
Contingent value rights revaluation (1) | — | — | 218 | — | ||||||||||||
Convertible debt valuation adjustments | (4,055 | ) | 4,463 | 4,244 | (447 | ) | ||||||||||
Cumulative effect of change in accounting principle (2) | 2,242 | — | — | — | ||||||||||||
Net loss | (11,558 | ) | (3,872 | ) | (3,080 | ) | (5,037 | ) | ||||||||
Basic and diluted (loss) per common share | $ | (0.52 | ) | $ | (0.18 | ) | $ | (0.14 | ) | $ | (0.23 | ) |
(1) | Reduction of CVR liability as the result of forfeited stock options assumed from merger with ACLARA. |
(2) | Early adoption impact of SFAS 159 to measure the fair value of the Pfizer Note as a hybrid debt instrument. |
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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that are filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, have evaluated our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report, and have concluded based on that evaluation that those disclosure controls and procedures are effective.
Our management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Monogram Biosciences have been detected.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included under Item 8.
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On December 18, 2008, the Compensation Committee of the Board of Directors of Monogram Biosciences, Inc. (“Monogram” or the “Company”) approved an amendment to the form of Executive Severance Benefits Agreement that the Company utilizes with each of its executive officers, other than its chief executive officer (as amended, the “Agreement”). Pursuant to the Agreement, upon a specified termination, an executive will be entitled to receive a severance payment equal to (i) the greater of the executive’s annual salary for 2008 (or initial salary, for new executives) or the executive’s annual base salary for the last completed fiscal year immediately preceding the termination, plus (ii) the amount of the target bonus established for the executive for the last completed fiscal year immediately preceding the termination.
The Compensation Committee also approved an amendment to the Employment Agreement between the Company and William D. Young, Monogram’s chief executive officer, (the “CEO Agreement”). As amended, the CEO Agreement reduced Mr. Young’s annual base salary to $449,100, commencing on January 5, 2009. It also provides that, upon a specified termination, Mr. Young will be entitled to receive a severance payment equal to (i) the greater of his annual salary for 2008 or his then current base salary, plus (ii) in certain circumstances, the amount of the target bonus established for Mr. Young for the last completed fiscal year immediately preceding the termination.
The foregoing description is qualified in its entirety by reference to the Agreement, which is attached hereto as Exhibit 10.8, and the CEO Agreement, which is attached hereto as Exhibit 10.4.
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PART III
Item 10.Directors, Executive Officers and Corporate Governance
We have adopted a Code of Business Conduct and Ethics Policy that applies to our directors and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller), and have posted the text of the policy on our website (www.monogrambio.com) in connection with “Investor” materials. In addition, we intend to promptly disclose (i) the nature of any amendment to the policy that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of the policy that is granted to one of these specified individuals, the name of such person who is granted the waiver and the date of the waiver on our website in the future.
The other information required by this item is incorporated by reference to the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2009 annual meeting.
Item 11.Executive Compensation
The information required by this item is incorporated by reference to the information under the caption “Executive Compensation” to be contained in our 2009 proxy statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is incorporated by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” to be contained in our 2009 proxy statement.
Item 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the information under the caption “Certain Transactions” to be contained in our 2009 proxy statement.
Item 14.Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the information under the captions “Principal Accounting Fees” and “Pre-Approval Policies and Procedures” to be contained in our 2009 proxy statement.
Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non-audit services approved by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Non-audit services are defined as services other than those provided in connection with an audit or a review of our financial statements. The Audit Committee has approved our recurring engagements of PricewaterhouseCoopers LLP for the following non-audit services: (1) preparation of tax returns, and tax advice in preparing for and in connection with such filings; and (2) all work required to be performed by PricewaterhouseCoopers LLP in connection with preparing and providing consents required to be given in connection with our filings with the Securities and Exchange Commission.
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PART IV
Item 15.Exhibits and Financial Statement Schedule
(a)(1)Index to Financial Statements
Reference is made to the Index to Financial Statements under Item 8 in Part II hereof, where these documents are listed.
(a)(2)Financial Statement Schedule—The following schedule is filed as part of this Form 10-K:
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2008, 2007 and 2006.
All other schedules have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Financial Statements or notes thereto included in Item 8 (“Financial Statements and Supplementary Data”).
(a)(3)Index to Exhibits—See (c) below.
(c)Exhibits
Exhibit | Exhibit Number | ||||
(11 | ) | 2.1 | Agreement and Plan of Merger and Reorganization, dated as of May 28, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc. | ||
(12 | ) | 2.2 | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated as of October 18, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc. | ||
(8 | ) | 3.1 | Amended and Restated Certificate of Incorporation, filed July 17, 2000. | ||
(8 | ) | 3.1.1 | Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed February 4, 2003. | ||
(14 | ) | 3.1.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed December 10, 2004. | ||
(19 | ) | 3.1.3 | Certificate of Ownership and Merger, filed September 6, 2005. | ||
(31 | ) | 3.1.4 | Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed November 3, 2008. | ||
(8 | ) | 3.2 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed June 29, 2001. | ||
(8 | ) | 3.2.1 | Certificate of Correction to Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed July 23, 2001. | ||
(8 | ) | 3.3 | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock, filed March 22, 2002. | ||
(8 | ) | 3.4 | Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed November 15, 2002. | ||
(8 | ) | 3.4.1 | Certificate of Amendment to Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed February 4, 2003. | ||
(28 | ) | 3.5 | Amended and Restated Bylaws. |
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Exhibit | Exhibit Number | ||||
4.1 | Reference is made to Exhibits 3.1 through 3.5. | ||||
(31 | ) | 4.2 | Specimen Common Stock Certificate. | ||
(14 | ) | 4.3 | Contingent Value Rights Agreement, dated December 10, 2004, by and between ViroLogic, Inc., and U.S. Bank National Association as trustee. | ||
(26 | ) | 4.4 | Form of Indenture by and between Monogram Biosciences, Inc. and U.S. Bank National Association, as trustee. | ||
(6 | ) | 4.5 | Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock. | ||
(1 | ) | 10.1 | Office Lease by and between ViroLogic and Oyster Point Tech Center LLC dated as of May 25, 1999. | ||
(1 | ) | 10.2 | Office Lease by and between ViroLogic and Trammell Crow Northern California Development, Inc. dated as of November 23, 1999. | ||
(1 | ) | 10.3 | Loan and Security Agreement by and between ViroLogic and MMC/ GATX Partnership No. 1 dated as of January 30, 1998. | ||
† | 10.4 | Second Amended and Restated Employment Agreement by and between Monogram Biosciences, Inc. and William D. Young, dated December 18, 2008. | |||
(29 | )† | 10.5 | 2000 Employee Stock Purchase Plan and related offering documents. | ||
(1 | ) | 10.6 | Equipment Financing Agreement dated March 28, 2000 with Pentech Financial Services, Inc. | ||
(2 | )† | 10.7 | ViroLogic, Inc. 2000 Equity Incentive Plan, as amended. | ||
† | 10.8 | Form of Executive Severance Benefits Agreement. | |||
(3 | ) | 10.9 | Master Lease Agreement dated September 14, 2000 by and between ViroLogic, Inc. and General Electric Capital Corporation. | ||
(4 | ) | 10.10 | Equipment Financing Agreement by and between ViroLogic and De Lage Landen Financial Services, Inc. dated as of January 29, 2001. | ||
(5 | ) | 10.11 | Equipment Schedule No. 4 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation. | ||
(5 | ) | 10.12 | Sublease by and between ViroLogic, Inc. and Raven Biotechnologies, Inc. | ||
(1 | )† | 10.13 | Form of Indemnity Agreement between the Company and its directors and officers. | ||
(1 | )† | 10.14 | Form of Stock Option Agreement under the 2000 Equity Incentive Plan for options granted prior to May 1, 2000. | ||
(1 | )† | 10.15 | Form of Stock Option Agreement Pursuant to the 2000 Equity Incentive Plan for options granted after May 1, 2000. | ||
(9 | ) | 10.16 | Equipment Schedule No. 5 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation. | ||
(7 | ) | 10.17 | Sublease, dated as of June 1, 2002, by and between ViroLogic, Inc. and diaDexus, Inc. | ||
(10 | ) | 10.18 | First Amendment to Sublease, dated as of August 21, 2003, by and between diaDexus, Inc and ViroLogic, Inc. | ||
(13 | ) | 10.19 | Second Amendment to Sublease, dated as of October 1, 2004, between diaDexus, Inc and ViroLogic, Inc. |
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Exhibit | Exhibit Number | ||||
(27 | )† | 10.20 | Monogram Biosciences, Inc. 2004 Equity Incentive Plan. | ||
(15 | )† | 10.21 | Form of Option Agreement under the ViroLogic, Inc. 2004 Equity Incentive Plan. | ||
(16 | )† | 10.22 | ACLARA BioSciences, Inc. Amended and Restated 1997 Stock Plan. | ||
(17 | )† | 10.23 | ACLARA BioSciences, Inc. NQ03 Stock Plan Non-Statutory Stock Option Agreement. | ||
(18 | )† | 10.24 | Form of Amendment to Stock Option Agreement between ACLARA BioSciences, Inc. and each of Alfred Merriweather and Michael Dunn. | ||
(20 | )† | 10.25 | ViroLogic, Inc. 2005 Bonus Plan Description. | ||
(20 | )† | 10.26 | ViroLogic, Inc. Non-Employee Director Cash Compensation Arrangements. | ||
(21 | )* | 10.27 | Referral Testing Agreement, between Monogram Biosciences, Inc. and Quest Diagnostics Incorporated, dated October 1, 2005. | ||
(26 | ) | 10.28 | Form of First Amendment to Note Purchase Agreement and Senior Note by and between Pfizer Inc., and Monogram Biosciences, Inc. | ||
(22 | ) | 10.29 | Note Purchase Agreement, dated May 5, 2006, by and between Pfizer Inc. and Monogram Biosciences, Inc. | ||
(26 | ) | 10.30 | Form of Amended and Restated Monogram Biosciences, Inc. 3.0% Senior Secured Convertible Note Due May 19, 2010, issued to Pfizer, Inc. | ||
(22 | ) | 10.31 | Note Security Agreement, dated May 5, 2006, by and between Monogram Biosciences, Inc. and Pfizer, Inc. | ||
(23 | )* | 10.32 | Collaboration Agreement, dated May 5, 2006, by and between Pfizer Inc. and Monogram Biosciences, Inc. | ||
(23 | ) | 10.33 | Collaboration Security Agreement, dated May 5, 2006, by and between Pfizer Inc. and Monogram Biosciences, Inc. | ||
(24 | ) | 10.34 | Credit and Security Agreement, dated September 29, 2006, by and between Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc. and Monogram Biosciences, Inc. | ||
(25 | )† | 10.35 | Monogram Non-Qualified Deferred Compensation Plan, effective January 1, 2007. | ||
(26 | ) | 10.36 | Securities Purchase Agreement, dated January 11, 2007, by and between Monogram Biosciences, Inc., and a qualified institutional buyer party thereto. | ||
(26 | ) | 10.37 | Registration Rights Agreement, dated January 11, 2007, by and between Monogram Biosciences, Inc. and a qualified institutional buyer party thereto. | ||
(26 | ) | 10.38 | Form of Subordination Agreement among Monogram Biosciences, Inc. and U.S. Bank National Association, as trustee. | ||
† | 10.39 | Summary of Non-Employee Director Compensation. | |||
(30 | ) | 10.40 | Summary of 2008 Bonus Plan. | ||
(29 | ) | 10.41 | Master Lease Agreement dated October 5, 2007 by and between Monogram Biosciences, Inc. and Oyster Point Tech Center LLC. | ||
(29 | ) | 10.42 | First Amendment to Lease, dated as of October 5, 2007, by and between Oyster Point Tech Center, LLC and Monogram Biosciences, Inc. | ||
(29 | ) | 10.43 | First Amendment to Lease, dated as of December 21, 2007, by and between Oyster Point Tech Center, LLC and Monogram Biosciences, Inc. |
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Exhibit | Exhibit Number | ||||
(29 | ) | 10.44 | Second Amendment to Lease, dated as of December 21, 2007, by and between Oyster Point Tech Center, LLC and Monogram Biosciences, Inc. | ||
(29 | ) | 10.45 | Fourth Amendment to Sublease, dated as of October 12, 2007, by and between DiaDexus, Inc. and Monogram Biosciences, Inc. | ||
(29 | ) | 10.46 | Consent to Fourth Sublease Amendment, dated as of October 12, 2007, by and between Are-Technology Center SSF, LLC, DiaDexus, Inc. and Monogram Biosciences, Inc. | ||
(29 | )* | 10.47 | Second Amendment to Credit and Security Agreement, dated as of December 19, 2007, by and between Monogram Biosciences, Inc. and Merrill Lynch Capital. | ||
21.1 | List of Subsidiaries. | ||||
23.1 | Consent of Independent Registered Public Accounting Firm. | ||||
24.1 | Power of Attorney is contained on the signature page. | ||||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(A) or Rule 15d-14(A) promulgated under the Securities Exchange Act of 1934. | ||||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(A) or Rule 15d-14(A) promulgated under the Securities Exchange Act of 1934. | ||||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(B) or Rule 15d-14(B) promulgated under the Securities Exchange Act of 1934. |
† | Indicates management or compensatory plan or arrangement. |
(*) | Confidential treatment has been requested for portions of this document, which are omitted and filed separately with the SEC. |
(1) | Filed as an exhibit to our Registration Statement on Form S-1 (No. 333-30896) or amendments thereto and incorporated herein by reference. |
(2) | Filed as an exhibit to our Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference. |
(3) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. |
(4) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference. |
(5) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference. |
(6) | Filed as an exhibit to our Current Report on Form 8-K filed on March 26, 2002 and incorporated herein by reference. |
(7) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference. |
(8) | Filed as an exhibit to our Registration Statement on Form S-3 (No. 333-102995) filed on February 5, 2003 and incorporated herein by reference. |
(9) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. |
(10) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003 and incorporated herein by reference. |
(11) | Filed as an exhibit to our Current Report on Form 8-K filed on June 1, 2004 and incorporated herein by reference. |
(12) | Filed as an exhibit to our Current Report on Form 8-K filed on October 19, 2004 and incorporated herein by reference. |
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(13) | Filed as an exhibit to our Current Report on Form 8-K filed on November 4, 2004 and incorporated herein by reference. |
(14) | Filed as an exhibit to our Current Report on Form 8-K filed on December 10, 2004 and incorporated herein by reference. |
(15) | Filed as an exhibit to our Current Report on Form 8-K filed on December 22, 2004 and incorporated herein by reference. |
(16) | Filed as an exhibit to ACLARA BioSciences, Inc. Registration Statement on Form S-1 (No. 333-95107) or amendments thereto and incorporated herein by reference. |
(17) | Filed as an exhibit to ACLARA BioSciences, Inc. Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. |
(18) | Filed as an exhibit to ACLARA BioSciences, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference. |
(19) | Filed as an exhibit to our Current Report on Form 8-K filed on September 8, 2005 and incorporated herein by reference. |
(20) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005 and incorporated herein by reference. |
(21) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference. |
(22) | Filed as an exhibit to our Registration Statement on Form S-3 (No. 333-135096) filed on June 16, 2006 and incorporated herein by reference. |
(23) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference. |
(24) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference. |
(25) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference. |
(26) | Filed as an exhibit to our Current Report on Form 8-K filed on January 12, 2007 and incorporated herein by reference. |
(27) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference. |
(28) | Filed as an exhibit to our Current Report on Form 8-K on December 10, 2007 and incorporated herein by reference. |
(29) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference. |
(30) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference. |
(31) | Filed as an exhibit to our Current Report on Form 8-K filed on November 4, 2008 and incorporated herein by reference. |
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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.
Monogram Biosciences, Inc. | ||
By: | /s/ WILLIAM D. YOUNG | |
William D. Young Chief Executive Officer |
Date: February 12, 2009
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William D. Young, Kathy L. Hibbs and Alfred G. Merriweather, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof.
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.
Signatures | Title | Date | ||
/s/ WILLIAM D. YOUNG William D. Young | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | February 12, 2009 | ||
/s/ ALFRED G. MERRIWEATHER Alfred G. Merriweather | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | February 12, 2009 | ||
/s/ WILLIAM JENKINS, M.D. William Jenkins, M.D. | Director | February 12, 2009 | ||
/s/ EDMON JENNINGS Edmon Jennings | Director | February 12, 2009 | ||
/s/ CRISTINA H. KEPNER Cristina H. Kepner | Director | February 12, 2009 | ||
/s/ JOHN D. MENDLEIN, PH.D., J.D. John D. Mendlein, Ph.D., J.D. | Director | February 12, 2009 | ||
David H. Persing, M.D., Ph.D. | Director | |||
/s/ CHRISTINE A. WHITE, M.D. Christine A. White, M.D. | Director | February 12, 2009 |
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Classification | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||||
Allowance for doubtful accounts: | |||||||||||||
Year ended December 31, 2008 | $ | 1,121 | $ | 941 | $ | (662 | ) | $ | 1,400 | ||||
Year ended December 31, 2007 | $ | 965 | $ | 784 | $ | (628 | ) | $ | 1,121 | ||||
Year ended December 31, 2006 | $ | 1,044 | $ | 357 | $ | (436 | ) | $ | 965 | ||||
Valuation allowance for deferred tax assets: | |||||||||||||
Year ended December 31, 2008 | $ | 106,900 | $ | 5,000 | $ | — | $ | 111,900 | |||||
Year ended December 31, 2007 | $ | 122,000 | $ | — | $ | (15,100 | ) | $ | 106,900 | ||||
Year ended December 31, 2006 | $ | 117,000 | $ | 5,000 | $ | — | $ | 122,000 |
S-1
Table of Contents
EXHIBIT INDEX
Exhibit | Exhibit Number | ||||
(11 | ) | 2.1 | Agreement and Plan of Merger and Reorganization, dated as of May 28, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc. | ||
(12 | ) | 2.2 | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated as of October 18, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc. | ||
(8 | ) | 3.1 | Amended and Restated Certificate of Incorporation, filed July 17, 2000. | ||
(8 | ) | 3.1.1 | Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed February 4, 2003. | ||
(14 | ) | 3.1.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed December 10, 2004. | ||
(19 | ) | 3.1.3 | Certificate of Ownership and Merger, filed September 6, 2005. | ||
(31 | ) | 3.1.4 | Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed November 3, 2008. | ||
(8 | ) | 3.2 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed June 29, 2001. | ||
(8 | ) | 3.2.1 | Certificate of Correction to Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed July 23, 2001. | ||
(8 | ) | 3.3 | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock, filed March 22, 2002. | ||
(8 | ) | 3.4 | Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed November 15, 2002. | ||
(8 | ) | 3.4.1 | Certificate of Amendment to Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed February 4, 2003. | ||
(28 | ) | 3.5 | Amended and Restated Bylaws. | ||
4.1 | Reference is made to Exhibits 3.1 through 3.5. | ||||
(31 | ) | 4.2 | Specimen Common Stock Certificate. | ||
(14 | ) | 4.3 | Contingent Value Rights Agreement, dated December 10, 2004, by and between ViroLogic, Inc., and U.S. Bank National Association as trustee. | ||
(26 | ) | 4.4 | Form of Indenture by and between Monogram Biosciences, Inc. and U.S. Bank National Association, as trustee. | ||
(6 | ) | 4.5 | Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock. | ||
(1 | ) | 10.1 | Office Lease by and between ViroLogic and Oyster Point Tech Center LLC dated as of May 25, 1999. | ||
(1 | ) | 10.2 | Office Lease by and between ViroLogic and Trammell Crow Northern California Development, Inc. dated as of November 23, 1999. | ||
(1 | ) | 10.3 | Loan and Security Agreement by and between ViroLogic and MMC/ GATX Partnership No. 1 dated as of January 30, 1998. | ||
† | 10.4 | Second Amended and Restated Employment Agreement by and between Monogram Biosciences, Inc. and William D. Young, dated December 18, 2008. |
Table of Contents
Exhibit | Exhibit Number | ||||
(29 | )† | 10.5 | 2000 Employee Stock Purchase Plan and related offering documents. | ||
(1 | ) | 10.6 | Equipment Financing Agreement dated March 28, 2000 with Pentech Financial Services, Inc. | ||
(2 | )† | 10.7 | ViroLogic, Inc. 2000 Equity Incentive Plan, as amended. | ||
† | 10.8 | Form of Executive Severance Benefits Agreement. | |||
(3 | ) | 10.9 | Master Lease Agreement dated September 14, 2000 by and between ViroLogic, Inc. and General Electric Capital Corporation. | ||
(4 | ) | 10.10 | Equipment Financing Agreement by and between ViroLogic and De Lage Landen Financial Services, Inc. dated as of January 29, 2001. | ||
(5 | ) | 10.11 | Equipment Schedule No. 4 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation. | ||
(5 | ) | 10.12 | Sublease by and between ViroLogic, Inc. and Raven Biotechnologies, Inc. | ||
(1 | )† | 10.13 | Form of Indemnity Agreement between the Company and its directors and officers. | ||
(1 | )† | 10.14 | Form of Stock Option Agreement under the 2000 Equity Incentive Plan for options granted prior to May 1, 2000. | ||
(1 | )† | 10.15 | Form of Stock Option Agreement Pursuant to the 2000 Equity Incentive Plan for options granted after May 1, 2000. | ||
(9 | ) | 10.16 | Equipment Schedule No. 5 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation. | ||
(7 | ) | 10.17 | Sublease, dated as of June 1, 2002, by and between ViroLogic, Inc. and diaDexus, Inc. | ||
(10 | ) | 10.18 | First Amendment to Sublease, dated as of August 21, 2003, by and between diaDexus, Inc and ViroLogic, Inc. | ||
(13 | ) | 10.19 | Second Amendment to Sublease, dated as of October 1, 2004, between diaDexus, Inc and ViroLogic, Inc. | ||
(27 | )† | 10.20 | Monogram Biosciences, Inc. 2004 Equity Incentive Plan. | ||
(15 | )† | 10.21 | Form of Option Agreement under the ViroLogic, Inc. 2004 Equity Incentive Plan. | ||
(16 | )† | 10.22 | ACLARA BioSciences, Inc. Amended and Restated 1997 Stock Plan. | ||
(17 | )† | 10.23 | ACLARA BioSciences, Inc. NQ03 Stock Plan Non-Statutory Stock Option Agreement. | ||
(18 | )† | 10.24 | Form of Amendment to Stock Option Agreement between ACLARA BioSciences, Inc. and each of Alfred Merriweather and Michael Dunn. | ||
(20 | )† | 10.25 | ViroLogic, Inc. 2005 Bonus Plan Description. | ||
(20 | )† | 10.26 | ViroLogic, Inc. Non-Employee Director Cash Compensation Arrangements. | ||
(21 | )* | 10.27 | Referral Testing Agreement, between Monogram Biosciences, Inc. and Quest Diagnostics Incorporated, dated October 1, 2005. | ||
(26 | ) | 10.28 | Form of First Amendment to Note Purchase Agreement and Senior Note by and between Pfizer Inc., and Monogram Biosciences, Inc. | ||
(22 | ) | 10.29 | Note Purchase Agreement, dated May 5, 2006, by and between Pfizer Inc. and Monogram Biosciences, Inc. | ||
(26 | ) | 10.30 | Form of Amended and Restated Monogram Biosciences, Inc. 3.0% Senior Secured Convertible Note Due May 19, 2010, issued to Pfizer, Inc. |
Table of Contents
Exhibit | Exhibit Number | ||||
(22 | ) | 10.31 | Note Security Agreement, dated May 5, 2006, by and between Monogram Biosciences, Inc. and Pfizer, Inc. | ||
(23 | )* | 10.32 | Collaboration Agreement, dated May 5, 2006, by and between Pfizer Inc. and Monogram Biosciences, Inc. | ||
(23 | ) | 10.33 | Collaboration Security Agreement, dated May 5, 2006, by and between Pfizer Inc. and Monogram Biosciences, Inc. | ||
(24 | ) | 10.34 | Credit and Security Agreement, dated September 29, 2006, by and between Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc. and Monogram Biosciences, Inc. | ||
(25 | )† | 10.35 | Monogram Non-Qualified Deferred Compensation Plan, effective January 1, 2007. | ||
(26 | ) | 10.36 | Securities Purchase Agreement, dated January 11, 2007, by and between Monogram Biosciences, Inc., and a qualified institutional buyer party thereto. | ||
(26 | ) | 10.37 | Registration Rights Agreement, dated January 11, 2007, by and between Monogram Biosciences, Inc. and a qualified institutional buyer party thereto. | ||
(26 | ) | 10.38 | Form of Subordination Agreement among Monogram Biosciences, Inc. and U.S. Bank National Association, as trustee. | ||
† | 10.39 | Summary of Non-Employee Director Compensation. | |||
(30 | ) | 10.40 | Summary of 2008 Bonus Plan. | ||
(29 | ) | 10.41 | Master Lease Agreement dated October 5, 2007 by and between Monogram Biosciences, Inc. and Oyster Point Tech Center LLC. | ||
(29 | ) | 10.42 | First Amendment to Lease, dated as of October 5, 2007, by and between Oyster Point Tech Center, LLC and Monogram Biosciences, Inc. | ||
(29 | ) | 10.43 | First Amendment to Lease, dated as of December 21, 2007, by and between Oyster Point Tech Center, LLC and Monogram Biosciences, Inc. | ||
(29 | ) | 10.44 | Second Amendment to Lease, dated as of December 21, 2007, by and between Oyster Point Tech Center, LLC and Monogram Biosciences, Inc. | ||
(29 | ) | 10.45 | Fourth Amendment to Sublease, dated as of October 12, 2007, by and between DiaDexus, Inc. and Monogram Biosciences, Inc. | ||
(29 | ) | 10.46 | Consent to Fourth Sublease Amendment, dated as of October 12, 2007, by and between Are-Technology Center SSF, LLC, DiaDexus, Inc. and Monogram Biosciences, Inc. | ||
(29 | )* | 10.47 | Second Amendment to Credit and Security Agreement, dated as of December 19, 2007, by and between Monogram Biosciences, Inc. and Merrill Lynch Capital. | ||
21.1 | List of Subsidiaries. | ||||
23.1 | Consent of Independent Registered Public Accounting Firm. | ||||
24.1 | Power of Attorney is contained on the signature page. | ||||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(A) or Rule 15d-14(A) promulgated under the Securities Exchange Act of 1934. | ||||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(A) or Rule 15d-14(A) promulgated under the Securities Exchange Act of 1934. | ||||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(B) or Rule 15d-14(B) promulgated under the Securities Exchange Act of 1934. |
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† | Indicates management or compensatory plan or arrangement. |
(*) | Confidential treatment has been requested for portions of this document, which are omitted and filed separately with the SEC. |
(1) | Filed as an exhibit to our Registration Statement on Form S-1 (No. 333-30896) or amendments thereto and incorporated herein by reference. |
(2) | Filed as an exhibit to our Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference. |
(3) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. |
(4) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference. |
(5) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference. |
(6) | Filed as an exhibit to our Current Report on Form 8-K filed on March 26, 2002 and incorporated herein by reference. |
(7) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference. |
(8) | Filed as an exhibit to our Registration Statement on Form S-3 (No. 333-102995) filed on February 5, 2003 and incorporated herein by reference. |
(9) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. |
(10) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the Quarter ended September 30, 2003 and incorporated herein by reference. |
(11) | Filed as an exhibit to our Current Report on Form 8-K filed on June 1, 2004 and incorporated herein by reference. |
(12) | Filed as an exhibit to our Current Report on Form 8-K filed on October 19, 2004 and incorporated herein by reference. |
(13) | Filed as an exhibit to our Current Report on Form 8-K filed on November 4, 2004 and incorporated herein by reference. |
(14) | Filed as an exhibit to our Current Report on Form 8-K filed on December 10, 2004 and incorporated herein by reference. |
(15) | Filed as an exhibit to our Current Report on Form 8-K filed on December 22, 2004 and incorporated herein by reference. |
(16) | Filed as an exhibit to ACLARA BioSciences, Inc. Registration Statement on Form S-1 (No. 333-95107) or amendments thereto and incorporated herein by reference. |
(17) | Filed as an exhibit to ACLARA BioSciences, Inc. Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. |
(18) | Filed as an exhibit to ACLARA BioSciences, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference. |
(19) | Filed as an exhibit to our Current Report on Form 8-K filed on September 8, 2005 and incorporated herein by reference. |
(20) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005 and incorporated herein by reference. |
(21) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference. |
(22) | Filed as an exhibit to our Registration Statement on Form S-3 (No. 333-135096) filed on June 16, 2006 and incorporated herein by reference. |
(23) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference. |
(24) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference. |
(25) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference. |
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(26) | Filed as an exhibit to our Current Report on Form 8-K filed on January 12, 2007 and incorporated herein by reference. |
(27) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference. |
(28) | Filed as an exhibit to our Current Report on Form 8-K on December 10, 2007 and incorporated herein by reference. |
(29) | Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference. |
(30) | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference. |
(31) | Filed as an exhibit to our Current Report on Form 8-K filed on November 4, 2008 and incorporated herein by reference. |