Pharmos’ business is the discovery and development of new drugs to treat a range of indications including pain, inflammation, autoimmunity and select CNS disorders, including disorders of the “CNS-gut” axis. Our discovery program is focused on capitalizing on our expertise in the biology, chemistry and manufacturing of cannabinoid-based therapeutics, with the goal of developing increasingly potent, drugable and selective cannabinoid receptor agonists and antagonists for the treatment of a variety of human diseases. Modulation of these receptors in preclinical models of disease suggests that potential areas for therapeutic intervention include the treatment of pain, autoimmune disease, osteoporosis, asthma, allergy, atherosclerosis and obesity. Based on our advanced preclinical testing of drug candidates, we are currently focused on the use of CB2-selective compounds for the treatment of pain and autoimmunity.
We have a portfolio of drug candidates and compounds in various development stages, including clinical, preclinical and discovery. To complement our own drug development platforms, the Company periodically evaluates expanding its portfolio of internally developed products with either in-licensed products or acquisitions in selected related therapeutic areas. Also, we seek to enter into targeted strategic alliances/scientific collaborations with established pharmaceutical companies to complete development and commercialization of selected products. The Company also maintains a commitment to out-license proprietary technologies and products not consistent with our primary corporate focus.
Pharmos’ lead product, Dextofisopam, has completed a double-blind, placebo-controlled Phase 2a study in patients with diarrhea-predominant or alternating IBS. In this study, Dextofisopam was well-tolerated and demonstrated significant improvement over placebo on the primary efficacy endpoint (n=141, p=0.033) of adequate relief, suggesting that Dextofisopam has the potential to become a novel firstline treatment for IBS. Pharmos plans to initiate a Phase 2b trial in mid 2007. Dextofisopam is the R-enantiomer of racemic tofisopam, a molecule marketed and used safely outside the United States for over three decades for multiple indications including IBS. It binds to specific receptors in areas of the brain affecting autonomic function, including gastrointestinal (GI) function. Unlike 5-HT3 or 5-HT4 IBS therapies currently available, both of which have significant safety concerns, Dextofisopam’s novel non-serotonergic, brain-gut mechanism offers a unique and innovative approach to IBS treatment.
In research efforts over the past decade, the Company has developed a significant expertise in cannabinoid biology and chemistry, and has generated significant know-how and an intellectual property estate pertaining to multiple areas of cannabinoid biology. The Company is focusing its preclinical research efforts in CB2-selective cannabinoids, and has generated both clinical-stage drugs and late preclinical compounds which appear promising in preclinical testing. From the CB2-selective portfolio of compounds, Cannabinor is the most advanced, having begun its clinical development in 2005 using an intravenously delivered formulation and completed a Phase I safety study in January of 2006. A Phase IIa clinical study in subjects exposed to experimentally-induced forms of pain was completed in January 2007. Although Cannabinor did not meet the primary endpoint of an analgesic effect compared to placebo against capsaicin-induced pain, it did have a statistically significant advantage over placebo in attenuating the pain induced by punctuate pressure and heat. In addition, this trial confirmed safety and tolerability observed in previous studies. In April 2007, the Company completed a Phase IIa trial of Cannabinor in patients experiencing nociceptive pain from 3rd molar extraction. The lowest dose of Cannabinor (12mg) produced a statistically significant decrease in pain versus placebo as measured by the primary endpoint, but this drug effect was not seen in the higher dose groups (24mg and 48 mg). This is an unexpected pattern of results and the Company continues to explore possible explanations.
Pharmos is conducting a clinical program to develop its proprietary NanoEmulsion (NE) drug delivery technology applied to a widely approved and used non-steroidal anti-inflammatory (NSAID) drug-diclofenac. Two Phase I studies in healthy volunteers have been completed and confirmed the safety and tolerability as well as the low systemic exposure of a diclofenac NE topical cream. The Company plans to initiate a Phase IIa clinical trial in osteoarthritis patients in mid 2007 to evaluate the analgesic effects of the topical NE cream form of diclofenac.
The results for the three months ended March 31, 2007 and 2006 were a net loss of $4.8 million and $3.0 million respectively. On a loss per share basis, this equates to $(0.19) and $(0.16) respectively.
Except for 2001, the Company has experienced operating losses every year since inception in funding the research, development and clinical testing of our drug candidates. As of March 31, 2007, the Company’s accumulated deficit was approximately $185.8 million. The Company expects to incur additional losses over the next several years as the Company’s research and development and clinical trial programs continue. The Company’s ability to achieve profitability, if ever, is dependent on its ability to develop and obtain regulatory approvals for its product candidates, to enter into agreements for product development and commercialization with strategic corporate partners and contract to develop or acquire the capacity to manufacture and sell its products.
Results of Operations
Three Months ended March 31, 2007 and 2006
Total operating expenses for the first quarter of 2007 increased by $1,642,178 or 47%, from $3,458,184 in 2006 to $5,100,362 in 2007.
During the quarter, the Company conducted clinical trials on its intravenously delivered Cannabinor drug candidate for pain. Two Phase 2a studies were conducted, one with 24 patients for experimentally-inducted pain and one for acute pain with 100 patients. The experimentally-induced pain trial results were announced in January 2007 and the acute pain results in April 2007.
Additional research and development expenses were incurred during the quarter in preparing for a Phase 2a clinical trial with NanoEmulsion for Osteoarthritis pain. This trial is targeted to commence in mid 2007. During the quarter the Company continued to conduct basic research and discovery to identify new and potentially more potent, CB2 agonists.
The Company’s Dextofisopam Phase 2b trial is planned to commence mid 2007 involving about 50 sites with 480 patients. Costs of $0.9 million incurred during the quarter were for planning with the CRO that will manage the trial, site selection and evaluation visits, investigator meeting preparations and commitments and CMC packaging of the clinical trial supplies. Dextofisopam was one of the compounds the Company obtained through the acquisition of Vela Pharmaceuticals Inc which closed on October 25, 2006. The continued development of this compound through late stage clinical testing will significantly increase the research and development expenses going forward.
The Company considers major research & development projects to be those projects that have reached at least Phase II level of clinical development. Cannabinor was in Phase II at the end of the first quarter. During the first quarter of 2007, the gross cost of development and review was approximately $0.8 million. Total costs since the Cannabinor project entered Phase II development in 2006 through March 31, 2007 were $3.3 million.
Gross expenses for other research and development projects in early stages of development for the first quarter of 2007 and 2006 were $1,235,281 and $1,130,495, respectively. Research & development (R&D) gross expenses increased by $1,039,625 or 56% from $1,867,114 to $2,906,739 in 2007, related to higher clinical study activities over 2006. The Company recorded research and development grant receivables from the Office of the Chief Scientist of Israel’s Ministry of Industry and Trade of $336,641and $300,635 during the first quarter of 2007 and 2006, respectively, which reduced research and development expenses. Total research and development expenses, net of grants, increased by $1,003,619 or 64%, from $1,566,479 in 2006 to $2,570,098 in 2007.
General and administrative expenses for the first quarter of 2007 increased by $647,475, or 36%, from $1,813,221 in 2006 to $2,460,696. The increase primarily reflects contractual payment obligations of $646,000 associated with the retirement of the Company’s former chief executive officer. Professional fees increased by $156,085 resulting from additional legal and recruitment services. The increase in professional fees is offset by reductions in investor relation costs of $55,901 and a reduction in insurance costs of $99,898 reflecting favorable renewal rates and reduced policy coverage levels.
Depreciation and amortization expenses decreased by $8,916, or 11%, from $78,484 in 2006 to $69,568 in 2007. The decrease is due to fixed assets which have become fully depreciated.
Other income (expense) net, decreased by $108,231 from $455,498 in 2006 to $347,267 in 2007. The majority of the decrease is from decreased interest income from a decline in cash, cash equivalents and short term investments. During the quarter, the Company recorded, in other income, royalties of $897 compared with $991 in 2006 per the licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv, the Company’s Chairman and former CEO.
No tax provision is required at this time since the company expects to be in a tax loss position at year-end December 31, 2007 and has net operating losses from previous years. The Company has established a 100% valuation allowance against the deferred tax asset.
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Liquidity and Capital Resources
The Company incurred cumulative operating losses since 2002 and had an accumulated deficit of $185.8 million at March 31, 2007. The Company has financed its operations with public and private offerings of securities, advances and other funding pursuant to a marketing and asset agreement with Bausch & Lomb, grants from the Office of the Chief Scientist of Israel, research contracts, the sale of a portion of its New Jersey State Net Operating Loss carryforwards, and interest income. Should the Company be unable to raise adequate financing or generate revenue in the future, operations will need to be scaled back or discontinued.
The following table describes the Company’s liquidity and financial position on March 31, 2007, and on December 31, 2006:
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| | March 31, 2007 | | December 31, 2006 | |
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Working capital | | $ | 20,055,594 | | $ | 24,168,153 | |
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Cash and cash equivalents | | $ | 9,319,810 | | $ | 12,757,013 | |
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Short term investments | | $ | 12,761,286 | | $ | 13,172,673 | |
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Total cash, cash equivalents and short term investments | | $ | 22,081,096 | | $ | 25,929,686 | |
Current working capital position
As of March 31, 2007, the Company had working capital of $20.0 million consisting of current assets of $23.3 million and current liabilities of $3.3 million. This represents a decrease of $4.2 million from its working capital of $24.2 million on current assets of $26.7 million and current liabilities of $2.5 million as of December 31, 2006. This decrease in working capital of $4.2 million was principally associated with the funding of R&D and G&A activities.
Current and future liquidity position
Management believes that the current cash, cash equivalents and short term investments, totaling $22.0 million as of March 31, 2007, will be sufficient to support the Company’s continuing operations beyond March 31, 2008. The Company routinely pursues various funding options, including additional equity offerings, equity-like financing, strategic corporate alliances, business combinations and the establishment of product related research and development limited partnerships, to obtain additional financing to continue the development of its products and bring them to commercial markets. Should the Company be unable to raise adequate financing or generate revenue in the future, long-term operations will need to be scaled back or discontinued.
Cash
At March 31, 2007, cash and cash equivalents totaled $9.3 million. At December 31, 2006 cash and cash equivalents totaled $12.8 million. This net decrease in cash of $3.5 million was due to the net conversion of $0.4 million of short term investments into cash, $4.0 million for normal operating requirements and $0.1 million for capital expenditures. The cash, cash equivalents short term investments will be used to fund Research & Development activities.
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Operating activities
Net cash used in operating activities for the first quarter of 2007 was $3.9 million compared to net cash used of $3.5 million for the first quarter of 2006. The increase in cash used of $0.4 million is primarily due to higher R&D spending related to the initiation of the Dextofisopam Phase IIb trial in the first quarter of 2007.
Investing activities
During the first quarter of 2007, the Company had a net investment proceeds in short term investments of $0.4 million, fixed asset purchases of $0.1 million and a severance pay funding benefit of $0.1 million
Capital expenditures for property, plant and equipment for the three months ended March 31, 2007 and 2006 totaled approximately $90,000 and $96,000, respectively for normal replacements and improvements.
Financing activities
There were no financing activities in the first quarter of 2007 or 2006.
Commitment and Contingencies
As of March 31, 2007, the Company had the following contractual commitments and long-term obligations:
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| | Total | | Less than
1 Year | | 1 - 3
Years | | 3 - 5
Years | | More than
5 Years | | Undetermined | |
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Operating Leases | | $ | 887,948 | | $ | 485,995 | | $ | 401,953 | | $ | 0 | | $ | — | | $ | — | |
Other long-term liabilities reflected on our balance sheet* | | | 1,261,977 | | | — | | | — | | | — | | | — | | | 1,261,977 | |
Other Commitments** | | | 150,000 | | | 150,000 | | | — | | | — | | | — | | | — | |
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Total | | $ | 2,299,925 | | $ | 635,995 | | $ | 401,953 | | $ | 0 | | $ | — | | $ | 1,261,977 | |
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* | Consists of severance benefits payable under Israeli law. Because these benefits are paid only upon termination of employment, it is not possible to allocate the liability across future years. The Company has funded $853,909. |
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** | Represents cash portion of the September 2004 Retention Award Agreement given to the CEO. The Company has accrued $150,000 through March 31, 2007. This was paid to Dr. Aviv in early April 2007 in conjunction with his March 31, 2007 retirement. |
New accounting pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. SFAS 157 applies only to fair value measurements that are already required or permitted by other accounting standards (except for measurements of share-based payments) and is expected to increase the consistency of those measurements. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS 157 to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (SFAS No. 159), which is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash, cash equivalents, short term investments and the currency impact in Israel. Due to the relatively short-term nature of these investments the Company has determined that the risks associated with interest rate fluctuations related to these financial instruments do not pose a material risk to us. The value of the warrant liability is generally based upon the Company’s stock price.
Item 4T. Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of Pharmos’ disclosure controls and procedures (as defined in Section13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of Pharmos’ Chief Executive Officer and Chief Financial Officer and several other members of Pharmos’ senior management at March 31, 2007. Based on this evaluation, Pharmos’ Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2007, Pharmos’ disclosure controls and procedures were effective, at a reasonable level of assurance, in ensuring that the information required to be disclosed by Pharmos in the reports it files or submits under the Act is (i) accumulated and communicated to Pharmos’ management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Control over Financial Reporting: There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
Item 1 Legal Proceedings
Class Action Suits
The Company and certain current officers have been named as defendants in several purported shareholder class action lawsuits alleging violations of federal securities laws. These lawsuits were filed beginning in January 2005 and are pending in the U.S. District Court for the District of New Jersey. These lawsuits assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaints allege generally that the defendants knowingly or recklessly made false or misleading statements regarding the effectiveness of dexanabinol in treating TBI (Traumatic Brain Injury) which had the effect of artificially inflating the price of the Company’s common stock. The complaints seek unspecified damages. These class actions have been consolidated by order of the court and lead plaintiffs and lead plaintiffs’ counsel have been appointed. An amended complaint was filed in September 2005.
Management intends to defend this consolidated class action lawsuit vigorously. However, we cannot assure you that we will prevail in this action, and, if the outcome is unfavorable to Pharmos, our reputation, profitability and share price could be adversely affected.
Both of the previously disclosed derivative lawsuits (which alleged, generally, breaches of fiduciary duty and other state law violations arising from the same set of underlying facts as the class actions) have been settled, court approval has been obtained, the settlements are final and the cases have been dismissed with prejudice.
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Item 1A Risk Factors
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds | NONE |
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Item 3 Defaults upon Senior Securities | NONE |
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Item 4 Submission of Matters to Vote of Security Holders | NONE |
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Item 5 Other Information | NONE |
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Item 6 Exhibits | |
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Number | | Exhibit |
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10.1 | | Employment Agreement between Pharmos Corporation and Elkan R. Gamzu, dated as of March 20, 2007 (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed March 26, 2007). |
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10.2 | | Letter Agreement between Pharmos Corporation and Haim Aviv, dated March 20, 2007 (incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K filed March 26, 2007). |
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31.1 | | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
Pursuant to the requirements 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.
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| PHARMOS CORPORATION |
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Dated: May 10, 2007 | | |
| by: | /s/ S. Colin Neill |
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| S. Colin Neill |
| Senior Vice President and Chief Financial Officer |
| (Principal Accounting and Financial Officer) |
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