The increase in expenditures for selling, general and administrative costs in the nine-month period ended June 30, 2004 was primarily due to increased insurance costs and higher utility and maintenance costs as compared with the same period in the prior fiscal year.
Other income and expenses were comprised of interest, dividends and net gains on sales of securities as follows:
The increase in interest income in the nine-month period ended June 30, 2004 was primarily attributable to a substantial increase during the period in our interest-bearing investments, mainly U.S. Treasury Notes, as compared to the nine-month period ended June 30, 2003. There was no dividend income in the nine-month period ended June 30, 2004 as compared to $66,840 in the nine-month period ended June 30, 2003 because we did not hold any dividend-paying securities during the current period. There were no net gains on the sale of securities in the nine-month period ended June 30, 2004 compared to net gains on the sale of securities of $964,310 in the nine-month period ended June 30, 2003 because we did not sell any marketable securities during the nine-month period ended June 30, 2004. Offsetting the gain of $1,413,515 in the nine-month period ended June 30, 2003, we recognized approximately $449,205 in losses. A portion of the gains realized on sales of securities in the nine-month period ended June 30, 2003 were on securities that were previously written down to a new cost basis. During the nine-month
period ended June 30, 2003, we determined that the decline in the carrying value of two securities below their original basis was an other-than-temporary decline. Accordingly, we recorded a write-down of securities of $644,310 for the period ended June 30, 2003 and established a new cost basis for these securities on our balance sheet. In making this determination, we considered, among other factors, the duration of the period that, and extent to which, the fair value of these securities was less than their original cost basis, the financial health and business outlook of the companies that issued the securities, including industry and sector performance, and overall market conditions and trends. We employed a methodology in evaluating whether a decline in the fair value of the marketable securities in our portfolio below cost basis was other-than-temporary that considered available evidence regarding such marketable securities.
Income Taxes
There were no annualized income tax provisions or benefits for the nine-month periods ended June 30, 2004 and June 30, 2003 as we incurred a loss in both periods. Due to the uncertainty of the realizability of our deferred tax assets, including loss carryforwards, a full valuation allowance has been recorded as of June 30, 2004 and June 30, 2003 against these assets. During the nine-month period ended June 30, 2003, an income tax refund was recognized in the amount of $124,752. This amount related to a refund of the alternative minimum taxes paid during fiscal 2000. We were eligible for this refund due to a change in tax law.
Earnings
For the reasons stated above, there was a net loss of ($2,284,388), or ($0.29) per share, for the nine-month period ended June 30, 2004 compared to a net loss of ($348,607), or ($0.05) per share, for the nine-month period ended June 30, 2003.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through proceeds received from our marketing and distribution partners, cash generated from our investing activities and the sale of our equity securities.
As discussed above, prior to fiscal 2004, our investments consisted mainly of marketable securities classified as available-for-sale. Since the beginning of fiscal 2004, we have invested in short-term and long-term U.S. Treasury Notes classified as held-to-maturity. As of June 30, 2004, the maturities of these investments ranged from less than one month to less than two years. In addition, we maintain our cash primarily in a money market mutual fund classified as a cash equivalent. A significant decline in value of this money market mutual fund would result in a substantial reduction in our total assets and cash available for daily operations. We have limited insurance protection for this money market account available through the Securities Investor Protection Corporation, or SIPC.
Cash, cash equivalents and short-term and long-term investments consisted of the following:
| June 30, 2004
| September 30, 2003
| $ Change
| % Change
|
| Cash and cash equivalents | $ 6,907,107 | $ 23,901,126 | $(16,994,019) | (71%) |
| Short-term investments | 8,945,728
| --
| 8,945,728
| 100%
|
| | $15,852,835
| $ 23,901,126
| $(8,048,291)
| (34%)
|
| Long-term investments | $ 4,812,370
| --
| $ 4,812,370
| 100%
|
Total cash, cash equivalents and
investments |
$20,665,205
|
$ 23,901,126
|
$(3,235,921)
|
(14%)
|
The decrease in cash and cash equivalents during the period ended June 30, 2004 is primarily the result of the purchase of our short-term and long-term investments and the funding of operating activities. The decrease in total cash, cash equivalents and investments in the period ended June 30, 2004 is primarily the result of cash used to fund operating activities.
Over the last four quarters, net cash used in operating activities was approximately $5,353,000, and we believe that our cash, cash equivalents and short-term and long-term investments as of June 30, 2004, will be sufficient to cover our future operating cash flow needs, including the anticipated increase in research and development costs related to Phase III clinical trials for ferumoxytol in iron replacement therapy, for at least eighteen months. In order to fund our longer-term cash flow needs, if necessary, we will consider from time to time various financing alternatives, including possible future strategic
17
partnerships or additional equity or debt financing. These financing arrangements may not be available to us on acceptable terms, if at all.
Net cash used in operating activities was $3,658,721 in the nine-month period ended June 30, 2004 compared to net cash used in operating activities of $3,238,021 in the nine-month period ended June 30, 2003. Cash received during the nine-month period ended June 30, 2004 included $414,979 from customers, $170,466 from royalties and $346,991 from interest income associated with our investments in various U.S. Treasury Notes. Cash used in operating activities during the nine-month period ended June 30, 2004 included $4,591,157 paid to suppliers and employees primarily in connection with our research and development activities. Cash received from customers increased as a result of increased collections from prior trade accounts receivable. In addition, interest income increased as a result of the increase in our interest-bearing investments. These increases were offset by an increase in cash paid to suppliers principally due to cash outlays for regulatory fees, insurance payments and manufacturing supplies, and a reduction in royalties received as a result of increased competition in the marketplace. Subsequent to June 30, 2004, we received a payment of approximately $520,000 from a distributor relative to trade accounts receivable originating in the third fiscal quarter of 2004. In addition, we expect to expend approximately $420,000 in the fourth fiscal quarter of 2004 in connection with the third fiscal quarter purchase of the remaining inventory from a supplier exiting the business. We do not expect inventory purchases to continue at this increased level. We also expect to expend in the fourth quarter of fiscal 2004 approximately $300,000 in connection with expenses incurred in the third quarter of fiscal 2004 for services rendered by our contract research and development service providers and $220,000 in connection with the pre-payment of our insurance obligations also recorded in the third quarter of fiscal 2004. We anticipate cash used in operating activities will increase substantially over current levels based on continued increases in research and development expenses related to the conduct of Phase III clinical trials for ferumoxytol in iron replacement therapy and expected increases in selling, general and administrative expenses, including costs related to compliance with new corporate governance requirements and additional insurance obligations.
We expect to incur continued research and development expenses, including costs related to clinical studies, and other costs, in order to commercialize products based on our core superparamagnetic iron oxide nanoparticle technology, including ferumoxytol as an iron replacement therapeutic and as an MRA contrast agent. Although we have entered into strategic relationships in the past which provided for non-refundable license fees and milestone payments while we were developing our products, we may choose not to do so or may not be able to secure similar arrangements in the future. In addition, although in the past we have generated cash through the sale of our equity securities, we may not be able to secure such financing in the future on acceptable terms, if at all. If we are unable to fund our future research and development expenses out of product sales, working capital or sales of equity securities in the manner we anticipate, we could be forced to obtain alternative sources of financing or to curtail our development activity.
Cash used in investing activities was $13,526,992 for the nine-month period ended June 30, 2004 compared with cash provided by investing activities in the nine-month period ended June 30, 2003 of $5,353,607. Cash used in investing activities in the nine-month period ended June 30, 2004 included $14,121,581 for the net purchase of U.S. Treasury Notes and $167,158 in capital expenditures, partially offset by $761,747 received relative to a short-term asset which represented the cash value of a split-dollar life insurance policy on our CEO that was terminated at the end of fiscal 2003. Cash provided by investing activities in the nine-month period ended June 20, 2003 included the sale of marketable securities of $6,845,188, partially offset by cash used for the purchase of marketable securities of $1,291,425 and $134,177 in capital expenditures. Capital expenditures in both the nine-month period ended June 30, 2004 and the same period in the prior fiscal year primarily related to the continuation of our efforts to upgrade production and computer equipment. We have no current commitment for any significant expenditures on property, plant and equipment. However, we expect future expenditures to increase as we continue our manufacturing scale-up of ferumoxytol.
Cash provided by financing activities was $191,694 from the issuance of our common stock as a result of the exercise of stock options and purchases under our employee stock purchase plan during the nine-month period ended June 30, 2004. Cash provided by financing activities was $160,659 from the issuance of our common stock during the nine-month period ended June 30, 2003. There was no cash used in financing activities during the nine-month periods ended June 30, 2004 and June 30, 2003. Since June 30, 2004 and through July 31, 2004, we received approximately $395,000 in cash from the exercise of stock options. We do not expect stock option exercises to continue at this increased level.
Our future capital requirements will depend on many factors, including, but not limited to: our ability to establish additional development and marketing arrangements or to raise additional capital through other financing activities in order to provide funding to support our research and development activities, including the conduct of clinical trials and efforts to obtain regulatory approvals; progress with clinical trials for our therapeutic and diagnostic products; the magnitude of our development programs; the time involved in obtaining regulatory approvals; the magnitude of product sales; competing technological and market developments; and the costs involved in filing, prosecuting and enforcing patent claims.
18
Contractual Obligations
We currently have no long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities reflected on our balance sheets. Our future contractual obligations as of June 30, 2004 are as follows:
| | | Payment due by period
| |
Contractual Obligations
| Total
| Less than 1 year
| 1-3 years
| 3-5 years
| More than 5 years
|
| Operating Lease Obligations | $57,010
| $28,172
| $28,838
| --
| --
|
We lease equipment under several agreements that expire in 2004, 2005 and 2006.
Certain Factors Which May Impact Future Results
The following is a summary description of some of the material risks and uncertainties that may affect our business, including our future financial and operational results. In addition to the other information in this Quarterly Report on Form 10-Q, the following statements should be carefully considered in evaluating our company.
We may not be able to obtain the necessary regulatory approvals in order to market and sell our products; the approval process is costly and lengthy.
Prior to marketing, every product candidate must undergo an extensive regulatory approval process in the United States and in every other country in which we intend to test and market our product candidates and products. This regulatory process includes testing and clinical trials of product candidates to demonstrate safety and efficacy and can require many years and the expenditure of substantial resources. Data obtained from pre-clinical testing and clinical trials are subject to varying interpretations, which can delay, limit or prevent regulatory approval by the U.S. Food and Drug Administration, or FDA, or similar regulatory bodies in foreign countries. In addition, changes in FDA or foreign regulatory approval policies or requirements may occur or new regulations may be promulgated which may result in a delay or failure to receive FDA or foreign regulatory approval. Delays and related costs in obtaining regulatory approvals could delay our product commercialization and revenue and consume our resources, both financial and managerial.
During the third fiscal quarter of 2004, we initiated Phase III multi-center clinical studies for one of our product candidates, ferumoxytol, for use in iron replacement therapy. Phase II clinical trials of ferumoxytol for use as a contrast agent in magnetic resonance angiography, or MRA, are currently ongoing. Before applying for FDA approval to market ferumoxytol, large-scale Phase III human clinical trials that demonstrate the safety and efficacy of ferumoxytol to the satisfaction of the FDA and other regulatory authorities must be completed. These clinical trials, and the support from third-party contractors necessary for us to conduct them, will entail the expenditure of significant corporate resources, both financial and managerial. We may not be able to successfully complete these clinical trials for ferumoxytol, or, if completed, we may not be able to obtain regulatory approval or obtain regulatory approval of the desired scope. We may also be required to demonstrate that ferumoxytol represents an improved form of treatment over existing therapies or diagnostics in order to receive regulatory approval and we may be unable to do so without conducting further clinical studies, if at all. These types of clinical trials could be significantly large and expensive studies. If we are unable to fund any of our clinical studies with cash generated from operations, we may need to seek other sources of financing which may not be available on acceptable terms, if at all. If we are unable to obtain such alternate financing, we may be forced to curtail our development activities.
Although we have filed a New Drug Application and received an approvable letter from the FDA forCombidex for diagnosis of metastatic lymph nodes, final approval remains subject to the satisfaction of certain conditions imposed by the FDA and labeling must be resolved. During the third fiscal quarter of 2004 we submitted a response to the approvable letter, in response to which the FDA requested that we provide certain additional details underlying the existing supporting data submitted. We may be unable to satisfactorily address the comments and concerns of the FDA contained in the approvable letter. In addition, we may be unable to provide sufficient additional details to support the data submitted in our response to the approvable letter. If we are unable to provide these details, the review by the FDA of the submission or the additional details submitted in relation thereto may be delayed. Further, the FDA could determine that the submission is not complete and could require additional information in support of the submission. In addition, even if the response is deemed complete by the FDA, the FDA could respond to this submission by issuing an additional approvable letter with additional conditions for approval or the FDA could issue a not approvable letter. If we are unable to successfully address the concerns of the FDA, the New Drug Application forCombidex may not be approved, or, if approved, it may not be approved for the application that we are seeking. If we are unable to obtain approval for this application or if the FDA requires labeling that imposes limitations on the use ofCombidex, our partner’s ability to market the product to the medical community may be hindered. Any failure to successfully
19
market and sellCombidex would reduce the amount of cash generated from operations available to fund research and development activities which could force us to seek other financing alternatives.
Final regulatory approvals may not be obtained forCombidex or ferumoxytol or any other products developed by us. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay and may preclude us or our licensees or other collaborators from marketing our products or limit the commercial use of our products. Alternatively, regulatory approvals may entail limitations on the indicated uses of our products and impose labeling requirements which may also adversely impact our ability to market our products.
We cannot predict the results and progress of our clinical trials and our ability to complete the development of our product candidates is uncertain.
The development of new pharmaceutical products is highly uncertain and subject to a variety of inherent risks of failure. For example, our products may be found to be unsafe, to have harmful side effects on humans, to be ineffective or may otherwise fail to meet regulatory standards or receive necessary regulatory approvals. Before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through extensive pre-clinical testing and human clinical trials that the product is safe and efficacious. If our products fail in human clinical trials, we will be unable to obtain regulatory approval for, and market, our products, thereby reducing our potential future revenues. Although we have received promising results from pre-clinical testing and early clinical trials of ferumoxytol, these results may not be predictive of results obtained in subsequent clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. We cannot be sure that clinical trials for ferumoxytol will demonstrate sufficient safety and efficacy to obtain regulatory approvals.
The completion rate of our clinical trials also depends on patient enrollment. We rely on third-party clinical trial sites to find suitable patients for our clinical trial programs. If these third parties do not find suitable patients in the timeframe for which we have planned, we will not be able to complete our clinical trials according to our expected schedule. Such a delay could result in an increase in development costs for ferumoxytol, a delay in making regulatory submissions and a delay in the commercialization of our products. In addition, clinical trials are often conducted with patients in the most advanced stages of disease. During the course of treatment, these patients can die or suffer adverse medical effects for reasons that may not be related to the investigational product being tested, but which can nevertheless adversely affect clinical trial results or approvals by the FDA.
Clinical testing of pharmaceutical products is itself subject to approvals by various governmental regulatory authorities. We conduct our clinical trials in accordance with specific protocols, which are filed with the FDA or other relevant authorities. We may not be permitted by regulatory authorities to commence or continue clinical trials. Any delays in, or termination of, our clinical trial efforts could negatively affect our future prospects and stock price. In addition, if the FDA requires us to perform additional studies, we could incur significant additional costs and experience significant delays in our efforts to complete our clinical trials. This could also result in delays in our ability to make regulatory submissions and delays in the commercialization of our products.
In addition, although we have dedicated significant resources to our research and development efforts, we may not be successful in finding new applications for our technology or in expanding the indications for our current products or product candidates for development into future product candidates.
As a result of these and other risks and uncertainties, our development programs may not be completed successfully. Any delays or failures in the development of our current or future product candidates will delay or prevent generation of revenue from such product candidates and may damage our ability to become profitable.
We cannot predict the results and progress of our clinical trials and our ability to complete the development of our product candidates is uncertain.
We rely on third-party contract research organizations for a variety of activities in our ferumoxytol development program, including monitoring of our clinical sites, collection and analysis of data, drafting study reports and assisting in regulatory submissions. We also rely on third-party service providers in our ferumoxytol development program for clinical laboratory testing and randomization of clinical trial subjects. If any of these third-party contractors should fail to perform or should perform inadequately or in violation of current Good Clinical Practices, our regulatory submissions could be delayed or the data in support of such submissions tainted, which could negatively impact the timing or possibility of obtaining regulatory approval for ferumoxytol. Such delays could also result in increased costs associated with the ferumoxytol development program in iron replacement therapy. Any delay in, or failure to obtain regulatory approval of ferumoxytol, would significantly impair our ability to generate future revenues from product sales.
20
We may need additional capital to achieve our business objectives.
We have expended and will continue to expend substantial funds to complete the research, development, clinical trials, regulatory approvals and other activities necessary to achieve final commercialization of our product candidates. In particular, we anticipate that the significant increase in our research and development activities over the next eighteen months due to the launch and conduct of Phase III clinical studies for ferumoxytol in iron replacement therapy will cause an appreciable increase in our cash-burn rate. We estimate that our existing cash resources will be sufficient to finance our operations at current and projected levels of development and general corporate activity for at least the next eighteen months. Thereafter, we may require additional funds to continue our research and development activities, in particular the continued development of ferumoxytol in iron replacement therapy, to prepare for submission for regulatory approval for ferumoxytol in iron replacement therapy, to conduct future clinical trials for ferumoxytol in MRA, to expand commercial-scale manufacturing capabilities, and to market and sell our products. We may seek such financing through arrangements with collaborative partners or through public or private equity or debt financings. We may not be able to obtain financing on acceptable terms, if at all. Any additional equity financings could be dilutive to our stockholders. In addition, the terms any debt financing could greatly restrict our ability to raise additional capital and may provide rights and preferences to such investors which are not available to current stockholders. If adequate additional funds are not available to us in the long-term, we may be required to curtail significantly one or more of our research and development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our products or product candidates on terms that we might otherwise find unacceptable.
Our success depends on our ability to attract and retain key employees.
Because of the specialized nature of our business, we are highly reliant on our executive officers, senior scientists and manufacturing and quality control personnel, including our CEO, Jerome Goldstein. If we fail to attract and retain key members of our manufacturing or quality control departments, our ability to manufacture our products, or to manufacture our products in a timely manner, could be hindered and our product sales and development efforts delayed. If we are unable to attract and retain qualified scientific and technical personnel for the research and development activities conducted or sponsored by us, and we lose the services of these employees as a result, our product development efforts could be delayed or curtailed. Furthermore, our possible expansion into areas and activities requiring additional expertise, such as late-stage clinical development and marketing and sales, may require the addition of new management personnel or the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our activities, and we may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. The failure to attract and retain such personnel or to develop such expertise could impose significant limits on our business operations and hinder our ability to successfully and efficiently complete our research and development projects.
We may not be able to obtain the necessary regulatory approvals in order to market and sell our products in foreign countries.
Until we or our marketing partners obtain the required regulatory approvals forCombidex or ferumoxytol in any specific foreign country, we and our marketing partners will be unable to sell these products in that country. International regulatory authorities have imposed numerous and varying regulatory requirements and the approval procedures could involve testing in addition to that required by the FDA. Furthermore, approval by one regulatory authority does not ensure approval by any other regulatory authority. In addition, in some cases, we are dependent upon some of our collaborators to conduct clinical testing and to obtain regulatory approvals. We, or our collaborators, may not be able to obtain final regulatory approvals forCombidex or ferumoxytol, or any other products developed by us, in foreign jurisdictions. Any failure to obtain the necessary governmental approvals or failure to obtain approvals of the scope requested could delay and may preclude us or our licensees or other collaborators from marketing our products or limit the commercial use of our products in these foreign jurisdictions. Alternatively, foreign regulatory approvals may entail limitations on the indicated uses of our products and impose labeling requirements which may also adversely impact our ability to market our products.
We have a limited number of customers and are dependent on our collaborative relationships.
Our strategy for the development, commercialization and marketing of our product candidates has been to enter into strategic partnerships with various corporate partners, licensees, and other collaborators. We rely on a limited number of marketing and distribution partners to market and sell our approved products,Feridex I.V. andGastroMARK, both in the U.S. and in foreign countries, and we depend on these strategic partners for a significant portion of our revenue. Two companies were responsible for approximately 84% of our revenue during the fiscal quarter ended June 30, 2004. Guerbet represented approximately 47% of our revenue in the fiscal quarter ended June 30, 2004 and Cytogen represented approximately 37% of our revenue in the quarter, the latter of which constituted recognition of previously deferred revenue. A decrease in revenue from any of our significant marketing and distribution partners could seriously impair our overall revenues. In some cases, we have granted exclusive rights to these partners. If these partners are not successful in marketing our products, or if these partners fail to meet minimum sales requirements or projections, our ability to generate revenue would be harmed. In addition, we might incur additional costs in an attempt to enforce our contractual rights, renegotiate agreements, find new partners or market our own products. In some cases, we are dependent upon some of our collaborators to manufacture and market our products. We may not be able to derive any revenues from these arrangements. If any of our collaborators breaches its agreement with us or
21
otherwise fails to perform, such event could impair our revenue and impose on us additional costs. In addition, many of our corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue technologies or products either on their own or in collaboration with competitors. Given these and other risks, our current and future collaborative efforts may not be successful. Failure of these efforts could delay our product development or impair commercialization of our products.
Due to the high cost of our research and development activities, in particular the anticipated cost of clinical trials for ferumoxytol, our inability to secure strategic partners could limit our ability to continue developing ferumoxytol or force us to raise additional capital through alternative means which may not be available to us on acceptable terms, if at all. Any delay in, or termination of, any of our research and development projects due to insufficient funds resulting from lack of revenue from strategic partners would reduce our potential revenues. In addition, if, in the future, we are unable to enter into collaborative agreements related to ferumoxytol, or choose not to enter into collaborative agreements, we would need to develop an internal sales and marketing department, including a direct sales force, or contract for these services from a third party, in order to market and sell ferumoxytol since we do not have the necessary sales and marketing expertise at this time. If we are unable to successfully recruit and retain the necessary sales and marketing personnel, to obtain the financing to support these efforts, if necessary, or to contract with third parties for these services on acceptable terms, if at all, our product marketing efforts and potential product launches would be delayed and the commercialization of ferumoxytol severely impaired.
An inability to obtain raw materials and our reliance on a sole source supplier could adversely impact our business.
We currently purchase the raw materials used to manufacture our products from third-party suppliers. We do not, however, have any long-term supply contracts with these third parties. Certain raw materials used in our products are procured from a single source with no qualified alternative supplier. In addition, we generally obtain raw materials from one vendor only, even where multiple sources are available, to maintain quality control and enhance working relationships with suppliers. If any of these third-party suppliers should cease to produce the raw materials used in our products, we would be unable to manufacture our products until we were able to qualify an alternative source. This may require repeated testing of the alternative materials and generate greater expenses to us if materials that we test do not perform in an acceptable manner. As a result of the high quality standards imposed on our raw materials, we may not be able to obtain raw materials of the quality required to manufacture our products from an alternative source on commercially reasonable terms, or in a timely manner, if at all. Any delay in or failure to obtain sufficient quantities of raw materials would prevent us from manufacturing our products. In addition, even if we are able to obtain raw materials from an alternative source, if these raw materials are not available in a timely manner or on commercially reasonable terms, we would be unable to manufacture our products on a timely and cost-effective basis. Any such difficulty in obtaining raw materials would hinder our ability to generate revenues from sales of our products or reduce the revenues realized from such sales and could impede our development efforts with respect to our product candidates.
We cannot be certain that our products will be accepted in the marketplace.
For a variety of reasons, many of which are beyond our control, our products may not achieve market acceptance or become commercially successful. If our products do not receive market acceptance for any reason, it may limit sales of our products and reduce our revenues from royalties and direct sales, if any. The degree of market acceptance of any of our products will depend on a number of factors, including:
| | • | | the establishment and demonstration in the medical community of the clinical efficacy and safety of our products, |
| | • | | our products’ potential advantage over existing treatments or diagnostic methods, and |
| | • | | reimbursement policies of government and third-party payors, including insurance companies. |
For example, even if we obtain regulatory approval to sell our products, physicians and health care payors could conclude that our products are not safe or effective and decide not to use them to treat patients. Our competitors may also develop new technologies or products which are more effective or less costly, or that are perceived as more effective or cost-effective than our products. Physicians, patients, third-party payors or the medical community in general may fail to accept or choose not to use any of the products that we develop.
To date, we have not generated significant revenues on royalties from the sale of our approved products by our marketing partners.Feridex I.V. andGastroMARK, approved in 1996 and 1997, respectively, represented an alternative technology platform for physicians to adopt.Feridex I.V. sales have decreased from their peak based on changes in magnetic resonance imaging, or MRI, technology and competition in the market.Combidex, if approved, will represent a shift in the diagnostic process that physicians could use to stage and monitor cancer patients that may not be adopted by physicians. In addition, ferumoxytol, if approved, may represent an alternative to existing products or procedures that might not be adopted by the medical community. If our approved products or future products are not adopted by physicians, revenues will be delayed or fail to materialize.
22
We lack marketing and sales experience.
We have limited experience in marketing and selling our products and product candidates and rely on our corporate partners to market and sellFeridex I.V. andGastroMARK and have agreed to permit Cytogen to do so, pending FDA approval, forCombidex. In order to achieve commercial success for any product candidate approved by the FDA for which we do not have a marketing partner, we may have to develop a marketing and sales force or enter into arrangements with others to market and sell our products. If we choose to market and sell any of our product candidates ourselves, we may encounter difficulties in attracting and retaining qualified marketing and sales personnel. In addition, in order to establish our own marketing and sales force, we would have to raise substantial amounts of additional capital to support the costs associated with such an effort. We may not be able to secure such additional financing on terms acceptable to us, if at all. If we fail to raise the necessary capital, or choose not to market and sell our product candidates ourselves, we may not be able to enter into marketing and sales agreements with others on acceptable terms, if at all. Furthermore, whether we market and sell our products ourselves or through marketing and sales arrangements, we, or our corporate partners, may not be successful in marketing and selling our products.
We may be unable to comply with continuing regulatory requirements even after our products have been approved for marketing.
Even if we obtain regulatory approval for our product candidates, a marketed product and its manufacturer are subject to continuing regulatory review. Noncompliance with the regulatory requirements of the approval process at any stage may result in adverse consequences, including the FDA’s delay in approving or its refusal to approve a product, withdrawal of an approved product from the market or, under certain circumstances, the imposition of criminal penalties. We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered. Any such adverse consequence could limit or preclude our ability to sell our products commercially which would hinder our ability to generate revenue through royalties or direct sales of our products.
Our operating results may fluctuate so you should not rely on a good or bad quarter to predict how we will perform over time.
Our future operating results may vary from quarter to quarter or from year to year depending on a number of factors including:
| | • | | the timing of our recognition of deferred revenue, which is affected by the performance of our obligations under our license agreements, |
| | • | | the timing of external research and development expenses, which may fluctuate quarter to quarter, |
| | • | | the timing and likelihood of FDA approval ofCombidex or ferumoxytol, |
| | • | | market acceptance ofCombidexor ferumoxytol, if approved, |
| | • | | the variable nature of our products sales to our marketing partners and the batch size in which our products are manufactured, |
| | • | | uneven demand for our products by end users which affects the royalties we receive from our marketing partners, and |
| | • | | the extent of reimbursement for the cost of our approved products from government health administration authorities, private health insurers and other third-party payors. |
As a result, our quarterly operating results could fluctuate, and this fluctuation could cause the market price of our common stock to decline. Results from one quarter should not be used as an indication of future performance.
We may not be successful in competing with other companies or our technology may become obsolete.
The pharmaceutical and biopharmaceutical industries are subject to intense competition and rapid technological change. We believe that our ability to compete successfully will depend on a number of factors including the implementation of effective marketing campaigns by us or our marketing and distribution partners, development of efficacious products, timely receipt of regulatory approvals and product manufacturing at commercially acceptable costs. We may not be able to successfully develop efficacious products, obtain timely regulatory approvals, manufacture products at commercially acceptable costs, market our products alone or with our partners, gain satisfactory market acceptance, or otherwise successfully compete in the future.
We have many competitors, many of whom have substantially greater capital and other resources than we do and represent significant competition for us. These companies may succeed in developing technologies and products that are more effective or less costly than any that we may develop, and may be more successful than we are in developing, manufacturing and marketing products. In addition, our collaborators are not restricted from developing and marketing certain competing products and, as a result of certain cross-license agreements with our competitors (including one of our collaborators), our competitors will be able to utilize elements of our technology in the development of certain competing contrast agents. We may
23
not be able to compete successfully with these companies. Additionally, further technological and product developments may make other iron replacement therapy products more competitive than ferumoxytol or other imaging modalities more compelling than MRI, and adversely impact sales of our iron replacement therapy and imaging products, respectively.
We may not be able to successfully complete Phase III clinical trials for ferumoxytol for iron replacement therapy, or, if completed, may not be able to obtain regulatory approval. In addition, although we believe ferumoxytol will present benefits over existing products in the iron replacement therapy market, this market is highly sensitive to several factors including, but not limited to, reimbursement, price competitiveness and product characteristics such as perceived safety profiles and dosing regimens. Competing iron replacement therapy products may receive greater market acceptance than ferumoxytol.
Market acceptance of both MRI as an appropriate technique for imaging the lymphatic system and cardiovascular imaging, and the use of our products as part of such imaging, is critical to the success of our contrast agent products. For example, many cardiovascular imaging procedures are currently being performed using other imaging modalities, such as x-ray, computed tomography, also known as CT, and other imaging methods. In addition, many contrast-enhanced MRA procedures are currently conducted with gadolinium-based contrast agents which are not specifically approved for use in MRA. Although we believe that ferumoxytol offers advantages over competing MRI contrast agents and contrast agents used in other imaging modalities, competing contrast agents might receive greater acceptance. Additionally, to the extent that other diagnostic techniques may be perceived as providing greater value than MRI, any corresponding decrease in the use of MRI could have an adverse effect on the demand for our contrast agent products.
We need to maintain, and possibly increase, our manufacturing capabilities in order to commercialize our products.
We manufacture bulkFeridex I.V. andGastroMARK, as well asFeridex I.V. finished product, for sale by our marketing partners, and ferumoxytol for use in human clinical trials, in our manufacturing facility. Pending FDA approval, we intend to manufactureCombidex formulated drug product at our manufacturing facility as well. This facility is subject to current Good Manufacturing Practices regulations prescribed by the FDA, also known as cGMP. We may not be able to continue to operate at commercial scale in compliance with cGMP regulations. Failure to operate in compliance with cGMP regulations and other applicable manufacturing requirements of various regulatory agencies could delay our development efforts and impede product sales due to the unavailability of our products and product candidates. In addition, we are dependent on contract manufacturers for the final production ofCombidex and do not currently have any long-term contracts in place with any third-party manufacturers to conduct this work. In the event that we are unable to obtain or retain final manufacturing forCombidex, we will not be able to develop and commercialize this product as planned. Additionally, we may not be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP regulations and other regulatory requirements. Furthermore, such manufacturers may not be able to deliver required quantities of product that conform to specifications in a timely manner.
We currently have only one manufacturing facility at which we produce limited quantities of ferumoxytol. Although we are currently testing scale-up for production of ferumoxytol, some aspects of our manufacturing processes may not be easily scalable to allow for production in larger volumes, resulting in higher than anticipated material, labor and overhead costs per unit. Additionally, manufacturing and quality control problems may arise as we increase our level of production. We may not be able to increase our manufacturing capacity in a timely and cost-effective manner and we may experience delays in manufacturing this product. Furthermore, if we fail to attract and retain key members of our manufacturing or quality control departments, we may be unable to manufacture our products and product candidates in a timely manner, which could delay our product sales and development efforts.
If we are unable to consistently manufacture our products on a timely basis because of these or other factors, we will not be able to meet anticipated demand. As a result, we may lose sales and fail to generate increased revenue.
Our stock price has been and may continue to be volatile, and your investment in our stock could decline in value or fluctuate significantly.
The market price of our common stock has been, and may continue to be, volatile. This price has ranged between $8.00 and $16.43 in the fifty-two week period prior to August 9, 2004. The stock market has from time to time experienced extreme price and volume fluctuations, particularly in the biotechnology sector, which have often been unrelated to the operating performance of particular companies. Various factors and events, including announcements by us or our competitors concerning results of regulatory actions, technological innovations, new products, clinical trial results, agreements with collaborators, governmental regulations, developments in patent or other proprietary rights, or public concern regarding the safety of products developed by us or others, may have a significant impact on the market price of our common stock. Thus, as a result of events both within and beyond our control, our stock price could fluctuate significantly or lose value rapidly. In addition, sales of a substantial number of shares of our common stock by stockholders could adversely affect the market price of our shares. As of August 9, 2004, our shares had an average 90 calendar day trading volume of approximately 25,400
24
shares. Bulk sales or purchases of our stock in a short period of time could cause the market price for our shares to decline or fluctuate drastically.
Our success is dependent on third-party reimbursement.
In both the United States and foreign markets, our ability to commercialize our products will depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. We expect that our products will be purchased by hospitals, clinics, doctors and other users that bill various third-party payors, such as Medicare, Medicaid and other government insurance programs, and private payors including indemnity insurers, Blue Cross Blue Shield plans and managed care organizations such as health maintenance organizations. Most of these third-party payors provide coverage for iron replacement therapeutics and for MRI for some indications but may not include a separate payment for the use of an MRI contrast agent. Third-party private payors often mirror Medicare coverage policy and payment limitations in setting their own reimbursement payment and coverage policies. Reimbursement rates vary depending on the procedure performed, the third-party payor, the type of insurance plan and other factors.
Significant uncertainty exists as to the reimbursement status of newly-approved healthcare products and products which have competitors for their approved indications. If Medicare or third-party payors do not approve our therapeutic products, MRI products and/or related MRI procedures for reimbursement, or for adequate levels of reimbursement, the adoption of our products may be limited. Sales may suffer as some physicians or their patients will opt for a competing product that is approved for sufficient reimbursement or may forgo the treatment or MRI procedure instead of paying out-of-pocket for costs associated with the treatment or procedure and contrast agent and our ability to generate revenue may be impaired. Even if third-party payors make reimbursement available, these payors’ reimbursement policies may be insufficient, which may negatively impact us and our corporate partners’ ability to sell our products on a profitable basis.
In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to reform the health care system. In December 2003, the Medicare Prescription Drug Improvement and Modernization Act, or MMA, was passed by Congress. Part of MMA is intended to reform how healthcare is reimbursed by the government. At this time we cannot be certain as to how this legislation will affect the reimbursement of our products in development. Additionally, the Centers for Medicare and Medicaid Services is seeking to reform the end-stage renal disease payment system. At this time we cannot be certain as to how this will affect potential reimbursement for ferumoxytol in iron replacement therapy in chronic kidney disease, or CKD, patients on dialysis who are receiving erythropoietin.
Health care reform is an area of continuing national and international attention and a priority of many government officials. Future changes could impose limitations on the prices that can be charged in the United States and elsewhere for our products or the amount of reimbursement available for our products from government agencies or third-party private payors. The increasing use of managed care organizations, health maintenance organizations and the growing trend in capitated coverage as well as continued legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could harm our ability to profit from product sales. In addition, recent and possible future legislation and regulations affecting the pricing of pharmaceuticals may change reimbursement in ways adverse to us that may affect the marketing of our current or future products. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if the government or a private third-party payor adopts these proposals they could limit our ability to price our products at desired levels.
Our success depends on our ability to maintain the proprietary nature of our technology.
We rely on a combination of patents, trademarks, copyrights and trade secrets in the conduct of our business. The patent positions of pharmaceutical and biopharmaceutical firms are generally uncertain and involve complex legal and factual questions. We may not be successful or timely in obtaining any patents for which we submit applications. The breadth of the claims obtained in our patents may not provide significant protection of our technology. The degree of protection afforded by patents for licensed technologies or for future discoveries may not be adequate to protect our proprietary technology. The patents issued to us may not provide us with any competitive advantage. In addition, there is a risk that others will independently develop or duplicate similar technology or products or circumvent the patents issued to us.
Moreover, patents issued to us may be contested or invalidated. Future patent interference proceedings involving either our patents or patents of our licensors may harm our ability to commercialize our products. Claims of infringement or violation of the proprietary rights of others may be asserted against us. If we are required to defend against such claims or to protect our own proprietary rights against others, it could result in substantial costs to us and distraction of our management. An adverse ruling in any litigation or administrative proceeding could prevent us from marketing and selling our products, limit our development of our product candidates or harm our competitive position and result in additional significant costs. In
25
addition, any successful claim of infringement asserted against us could subject us to monetary damages or injunction preventing us or our marketing partners from making or selling products. We also may be required to obtain licenses to use the relevant technology and licenses may not be available on commercially reasonable terms, if at all.
In the future, we may be required to obtain additional licenses to patents or other proprietary rights of others in order to commercialize our products or continue with our development efforts. Such licenses may not be available on acceptable terms, if at all. The failure to obtain such licenses could result in delays in marketing our products or our inability to proceed with the development, manufacture or sale of our products or product candidates requiring such licenses. In addition, the termination of any of our existing licensing arrangements could impair our revenues and impose additional costs which could limit our ability to sell our products commercially.
The laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In countries where we do not have or have not applied for patents on our products, we will be unable to prevent others from developing or selling similar products. In addition, in jurisdictions outside the United States where we have patent rights, we may be unable to prevent unlicensed parties from selling or importing products or technologies derived elsewhere using our proprietary superparamagnetic iron oxide nanoparticle technology.
We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our corporate partners, collaborators, employees and consultants. These agreements, however, may be breached. We may not have adequate remedies for any such breach, and our trade secrets might otherwise become known or be independently discovered by our competitors. In addition, we cannot be certain that others will not independently develop substantially equivalent or superseding proprietary technology, or that an equivalent product will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights.
We are exposed to potential liability claims and we may not be able to maintain or obtain sufficient insurance coverage.
We maintain product liability insurance coverage for claims arising from the use of our products in clinical trials and commercial use. However, coverage is becoming increasingly expensive and costs will continue to increase significantly as our Phase III clinical trial activities for ferumoxytol continue and we may not be able to maintain insurance at a reasonable cost. Furthermore, our insurance may not provide sufficient coverage amounts to protect us against liability that could deplete our capital resources. We also may not be able to obtain commercially reasonable product liability insurance for any product approved for marketing in the future. Our insurance coverage and our resources may not be sufficient to satisfy any liability or cover costs resulting from product liability claims. A product liability claim or series of claims brought against us could reduce or eliminate our resources, whether or not the plaintiffs in such claims ultimately prevail. In addition, pursuant to our certificate of incorporation and by-laws, and in order to attract competent candidates, we are obligated to indemnify our officers and directors against certain claims arising from their service to us. We maintain directors and officers liability insurance to cover such potential claims against our officers and directors. However, this insurance may not be adequate for certain claims and deductibles apply. As a result of our indemnification obligations and in instances where insurance coverage is not available or insufficient, any liability claim or series of claims brought against our officers or directors could deplete or exhaust our resources, regardless of the ultimate disposition of such claims.
We are subject to environmental laws and potential exposure to environmental liabilities.
Because we use certain hazardous materials in the production of our products, we are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of non-hazardous and hazardous wastes, and emissions and discharges into the environment. Failure to comply with these laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, and such owner or operator may incur liability to third parties impacted by such contamination. The presence of, or failure to remediate properly, these substances could adversely affect the value and the ability to transfer or encumber the property.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since the end of the fiscal year ended September 30, 2003, we acquired a significant amount of short-term and long-term investments consisting solely of U.S. Treasury Notes classified as held-to-maturity which are, as a result, recorded at amortized cost. As of June 30, 2004, the maturities of these investments ranged from less than one month to less than two years. Although we anticipate holding these investments until they mature, these investments are subject to interest rate risk and will fall in value if market interest rates increase. However, even if market interest rates for comparable investments were to increase immediately and uniformly by 10% from levels at June 30, 2004, we estimate that the fair value of our investments would decline by an immaterial amount. Subsequent to June 30, 2004, one of these Notes matured and we immediately reinvested the proceeds in another short-term U.S. Treasury Note.
Item 4. Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) with the participation of the company’s management, have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are operating in an effective manner and are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. It should be noted that any system of controls is designed to provide reasonable, but not absolute, assurances that the system will achieve its stated goals under all reasonably foreseeable circumstances. Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at a level that provides such reasonable assurances.
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit
(a) Exhibits
Exhibit Number Description
| | | 31.1 | | Certification Pursuant to Rules 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | 31.2 | | Certification Pursuant to Rules 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Current Reports on Form 8-K:
| | | | | On April 20, 2004, we furnished a Current Report on Form 8-K dated April 21, 2004 to report under Item 12 the issuance of a press release announcing our anticipated results of operations for the fiscal quarter ended March 31, 2004. |
| | | | | On June 25, 2004, we filed a Current Report on Form 8-K dated June 25, 2004 to report under Items 5 and 7 that we submitted a response to the approvable letter received from the U.S. Food and Drug Administration for Combidex®. |
28
SIGNATURES
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.
| ADVANCED MAGNETICS, INC. |
| |
| Date: August 12, 2004 | By /s/ Jerome Goldstein
Jerome Goldstein, Chief Executive Officer, President,
Treasurer and Chairman of the Board of Directors |
| |
| Date: August 12, 2004 | By /s/ Michael N. Avallone
Michael N. Avallone, CPA, Chief Financial Officer |
29
