The Company also issued an additional 41,140 shares during the six months ended June 30, 2005 as a result of exercises related to the Company’s stock option plan and employee stock purchase plan, none of which was issued during the three months ended June 30, 2005.
Since our inception in 1986, we have been engaged in research and development activities and organizational efforts, including:
We have incurred operating losses since our inception. Our accumulated deficit at June 30, 2005 was $137.1 million. We will require substantial expenditures relating to the development of our current and future drug candidates. During the three years ended December 31, 2004, we spent 45.5% of our research and development expenses on contract research and development, including:
| • | engaging investigators to conduct clinical trials; |
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| • | hiring contract research organizations for regulatory and clinical functions; and |
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| • | using statisticians to evaluate the results of clinical trials. |
The above expenditures for contract research and development for our current and future drug candidates will vary from quarter-to-quarter depending on the status of our research and development projects. For example, during the first quarter of 2004, we entered a Phase II trial for our lead drug candidate, Fodosine™ (“forodesine hydrochloride”, or “BCX-1777”), an inhibitor of purine nucleoside phosphorylase. In addition, during the fourth quarter of 2004, we initiated a Phase I trial for Fodosine™ in cutaneous T-cell lymphoma (“CTCL”) and a Phase I clinical trial with BCX-4208 in healthy volunteers. As these trials progress and additional trials are started in other indications, our costs for clinical studies will increase significantly. In addition, the costs associated with the manufacturing of Fodosine™ and BCX-4208 will increase as we scale up to the larger production runs required for both clinical development and additional toxicology studies.
Changes in our existing and future research and development and collaborative relationships also will impact the status of our research and development projects. Although we may, in some cases, be able to control the timing of development expenses, in part by accelerating or decelerating certain of these costs, many of these costs will be incurred irrespective of whether we are able to discover drug candidates or obtain collaborative partners for commercialization. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. If we fail to meet the research, clinical and financial expectations of securities analysts and investors, it could have a material adverse effect on the price of our common stock.
Results of Operations (three months ended June 30, 2005 compared to the three months ended June 30, 2004)
Collaborative and other research and development revenues increased 34.9% to $58,000 in the three months ended June 30, 2005 compared to $43,000 in the three months ended June 30, 2004, due to an increase in revenue from the National Institutes of Health related to an SBIR grant for support of our hepatitis C program. Interest and other income increased 63.2% to $284,000 in the second quarter of 2005 compared to $174,000 in the second quarter of 2004, primarily due to a more favorable interest rate environment during 2005.
Research and development expenses increased 21.0% to $5,263,000 in the three months ended June 30, 2005 from $4,348,000 in the three months ended June 30, 2004. The increase is primarily attributable to additional toxicology studies supporting the clinical development for the oral formulation of our lead drug candidate, Fodosine™, plus other expenses related directly to the clinical development for both Fodosine™ and BCX-4208.
General and administrative expenses for the three months ended June 30, 2005 decreased 21.5% to $727,000 as compared to $926,000 for the same period in 2004, primarily due to a non-cash expense in 2004 related to stock options as a result of the amendment to our stock option plan approved by the shareholders in May 2004, which was partially offset by an increase in salary expense.
Results of Operations (six months ended June 30, 2005 compared to the six months ended June 30, 2004)
Collaborative and other research and development revenue increased 130.2% to $99,000 for the six months ended June 30, 2005 from $43,000 for the six months ended June 30, 2004, due to an increase in revenue from the National Institutes of Health related to the grant received for our hepatitis C inhibitor program. Interest and other income increased 32.1% to $469,000 for the six months ended June 30, 2005 compared to $355,000 for the six months ended June 30, 2004, primarily due to a more favorable interest rate environment in 2005.
Research and development expenses increased 11.9% to $10,438,000 in the six months ended June 30, 2005 from $9,331,000 for the six months ended June 30, 2004. The increase is primarily attributed to the costs associated with the continued clinical development of Fodosine™ and the clinical development for BCX-4208, our second generation inhibitor of PNP, which started in the fourth quarter of 2004.
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General and administrative expenses for the six months ended June 30, 2005 decreased 10.3% to $1,423,000 as compared to $1,586,000 for the same period in 2004, primarily due to a non-cash expense in 2004 related to stock options as a result of the amendment to our stock option plan approved by the shareholders in May 2004, which was partially offset by an increase in salary expense.
Liquidity and Capital Resources
Cash expenditures have exceeded revenues since the Company’s inception. Our operations have principally been funded through public offerings and private placements of equity and debt securities. For example, during February 2005, we raised $23.9 million (approximately $22.7 million net of expenses) through the sale of 4,350,000 shares of our common stock. Other sources of funding have included the following:
| • | equipment lease financing, |
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| • | facility leases, |
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| • | collaborative and other research and development agreements (including licenses and options for licenses), |
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| • | research grants and |
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| • | interest income. |
In addition, we have attempted to contain costs and reduce cash flow requirements by renting scientific equipment and facilities, contracting with other parties to conduct certain research and development and using consultants. We expect to incur additional expenses, potentially resulting in significant losses, as we continue to pursue our research and development activities and undertake additional preclinical studies and clinical trials of compounds which have been or may be discovered. We also expect to incur substantial expenses related to the filing, prosecution, maintenance, defense and enforcement of patent and other intellectual property claims and additional regulatory costs as our clinical products advance through later stages of development.
The Company invests its excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and mature within three years. The Company has not realized any losses from such investments. In addition, at June 30, 2005, approximately $7.5 million was invested in the Merrill Lynch Premier Institutional Fund, which invests primarily in commercial paper, U.S. government and agency bills and notes, corporate notes, certificates of deposit and time deposits. The Merrill Lynch Premier Institutional Fund is not insured. At June 30, 2005, our cash, cash equivalents and securities held-to-maturity were $40.0 million, which included a $1.0 million certificate of deposit at a large financial institution.
We have financed some of our equipment purchases with lease lines of credit. In July 2000, we renegotiated our lease for our current facilities, which will expire on June 30, 2010. We have an option to renew the lease for an additional five years at the current market rate in effect on June 30, 2010 and a one-time option to terminate the lease on June 30, 2008 for a termination fee of approximately $124,000. The lease, as amended effective July 1, 2001 for an additional 7,200 square feet, requires us to pay monthly rent starting at $33,145 per month in July 2001 and escalating annually to a minimum of $47,437 per month in the final year, plus our pro rata share of operating expenses and real estate taxes in excess of base year amounts. As part of the lease, we have deposited a U.S. Treasury security in escrow for the payment of rent and performance of other obligations specified in the lease. This pledged amount is currently $196,000, which can be decreased by $65,000 annually throughout the term of the lease. Currently, we have approximately 14,000 square feet of space available for sublease, of which 3,600 square feet are currently being leased.
We have not incurred any significant charges related to new equipment or building renovations since 2001 and currently have no plans for any significant additional purchases or renovations.
At December 31, 2004, we had long-term operating lease obligations, which provide for aggregate minimum payments of $622,105 in 2005, $580,027 in 2006 and $535,746 in 2007. These obligations include the future rental of our operating facility.
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We plan to finance our needs principally from the following:
| • | our existing capital resources and interest earned on that capital; |
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| • | payments under collaborative and licensing agreements with corporate partners; and |
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| • | lease or loan financing and future public or private financing. |
We believe that our available funds will be sufficient to fund our operations at least through 2006. However, this is a forward looking statement, and there may be changes that would consume available resources significantly before such time. Our long-term capital requirements and the adequacy of our available funds will depend upon many factors, including:
| • | the progress of our research, drug discovery and development programs; |
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| • | changes in existing collaborative relationships; |
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| • | our ability to establish additional collaborative relationships; |
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| • | our ability to negotiate favorable development and marketing strategic alliances for our drug candidates; |
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| • | the magnitude of our research and development programs; |
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| • | the scope and results of preclinical studies and clinical trials to identify drug candidates; |
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| • | competitive and technological advances; |
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| • | the time and costs involved in obtaining regulatory approvals; |
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| • | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; |
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| • | our dependence on others for development and commercialization of our product candidates, and |
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| • | successful commercialization of our products consistent with our licensing strategy. |
In 2004, our operations consumed approximately $1.5 million per month, and the run rate at the end of the second quarter 2005 was approximately $2 million. We expect that our monthly cash used by operations will continue to increase for the next several years. During the second half of 2005, we plan to both expand our existing clinical programs and initiate clinical programs for several new disease indications. These additional trials and the related manufacturing, personnel resources and testing required to support these studies will consume significant capital resources and will increase our expenses and our net loss. As of June 30, 2005, we had $40.0 million in cash, cash equivalents and securities. We raised cash totaling $23.9 million gross (approximately $22.7 million net of expenses) through the sale of equity during February 2005 to provide the resources necessary to continue the development of our existing programs, while prudently maintaining our cash position. We expect our monthly burn rate to increase to approximately $2.5 million during the second half of 2005, as our lead candidates advance through the clinical trials currently ongoing and planned for 2005. This monthly burn rate could vary significantly depending on many factors, including our ability to raise additional capital, our ability to establish partnerships for our drug candidates, the progress of our current and proposed clinical trials for Fodosine™, BCX-4208 and BCX-4678 and the progression of our other programs.
We will be required to raise additional capital to complete the development and commercialization of our current product candidates. Additional funding, whether through additional sales of securities or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to us. The issuance of preferred or common stock or convertible securities, with terms and prices significantly more favorable than those of the currently outstanding common stock, could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. In addition, collaborative arrangements may require us to transfer certain material rights to such corporate partners. Insufficient funds may require us to delay, scale-back or eliminate certain of our research and development programs.
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Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2005, we are not involved in any material unconsolidated SPE or off-balance sheet arrangements.
Contractual Obligations
A summary of our obligations to make future payments under contracts existing as of December 31, 2004 is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2004. For the six months ended June 30, 2005, the Company has entered into various contracts in the ordinary course of business for several R&D related items, including manufacturing of various compounds, additional toxicology studies and clinical trials and has already paid for some of the obligations disclosed at December 31, 2004. The net effect of these changes was to decrease the purchase obligations disclosed at December 31, 2004 by a total of approximately $0.2 million. These obligations could change during the course of the year depending on the status of each of our development programs.
Critical Accounting Policies
We have established various accounting policies that govern the application of accounting principles generally accepted in the United States, which were utilized in the preparation of our financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with SAB No. 104. Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB No. 104. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and recognized as earned over the estimated drug development period. Revisions to revenue or profit estimates as a result of changes in the estimated drug development period are recognized prospectively.
Valuation of Financial Instruments
We carry our held-to-maturity securities at amortized cost, as adjusted for other-than-temporary declines in market value. In determining if and when a decline in market value below amortized cost is other-than-temporary, we evaluate the market conditions and other key measures for our held-to-maturity investments. Future adverse changes in market conditions could result in losses or an inability to recover the carrying value of the held-to-maturity investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. We have not incurred any other-than-temporary declines in market value that would require an impairment charge.
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Deferred Taxes
We have not had taxable income since incorporation and, therefore, we have not paid any income tax. We have deferred tax assets related to net operating loss carryforwards and research and development credit carryforwards, and have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. For the current year, the Company has recorded a valuation allowance equivalent to the amount of deferred tax assets.
Patents and Licenses
Patents and licenses are recorded at cost and amortized on a straight-line basis over their estimated useful lives or 20 years, whichever is less. These costs are reviewed periodically in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets to determine any impairment that needs to be recognized. For 2004, we recognized an impairment charge of $8,339.
Research and Development Expenses
Major components of R&D expenses consist of personnel costs, including salaries and benefits, clinical, regulatory and toxicology services performed by contract research organizations (“CRO’s”), materials and supplies, and overhead allocations consisting of various administrative and facilities related costs. We charge clinical and preclinical study costs to expense when incurred, consistent with Statement of Financial Accounting Standards No. 2, Accounting for Research and Development Costs. These costs are a significant component of R&D expenses. Most of our clinical and preclinical studies are performed by third-party CRO’s. We accrue costs for studies performed by CRO’s over the service periods specified in the contracts and adjust our estimates, if required, based upon our on-going review of the level of services actually performed by the CRO.
Certain Risk Factors That May Affect Future Results, Financial Condition and the Market Price of Securities
An investment in our stock involves a high degree of risk. You should consider carefully the following risks, along with all of the other information included in our other filings with the Securities and Exchange Commission, before deciding to buy our common stock. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our business operations. If we are unable to prevent events that have a negative effect from occurring, then our business may suffer. Negative events are likely to decrease our revenue, increase our costs, make our financial results poorer and/or decrease our financial strength, and may cause our stock price to decline. In that case, you may lose all or a part of your investment in our common stock.
Risks Relating to Our Business
We have incurred substantial losses since our inception in 1986, expect to continue to incur such losses and may never be profitable
Since our inception in 1986, we have not been profitable. We expect to incur additional losses for the foreseeable future, and our losses could increase as our research and development efforts progress. As of June 30, 2005, our accumulated deficit was approximately $137.1 million. To become profitable, we must successfully develop drug candidates, enter into profitable agreements with other parties and our drug candidates must receive regulatory approval. We or these other parties must then successfully manufacture and market our drug candidates. It could be several years, if ever, before we receive royalties from any future license agreements or revenues directly from product sales.
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If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates or continue our research and development programs.
To date, we have financed our operations primarily from sale of our equity securities and, to a lesser extent, revenues from collaborations and interest. In 2004, our operations consumed approximately $1.5 per month and the run rate at the end of the second quarter was approximately $2.0 million. We expect that our monthly cash used by operations will continue to increase for the next several years. During the second half of 2005, we plan to both expand our existing clinical programs and initiate clinical programs for several new disease indications. These additional trials and the related manufacturing, personnel resources and testing required to support these studies will consume significant capital resources and will increase our expenses and our net loss.
As of June 30, 2005, we had $40.0 million in cash, cash equivalents and securities. We raised cash totaling $23.9 million gross (approximately $22.7 million net of expenses) through the sale of equity during February 2005 to provide the resources necessary to continue the development of our existing programs, while prudently maintaining our cash position. We expect our monthly burn rate to increase to approximately $2.5 million during the second half of 2005, as our lead candidates advance through the clinical trials currently ongoing and planned for 2005. This monthly burn rate could vary significantly depending on many factors, including our ability to raise additional capital, our ability to establish partnerships for our drug candidates, the progress of our current and proposed clinical trials for Fodosine™ , BCX-4208 and BCX-4678, and the progression of our other programs. Our long-term capital requirements and the adequacy of our available funds will depend upon many factors, including:
| • | the progress of our research, drug discovery and development programs; |
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| • | changes in existing collaborative relationships; |
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| • | our ability to establish additional collaborative relationships; |
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| • | our ability to negotiate favorable development and marketing alliances for our drug candidates; |
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| • | the magnitude of our research and development programs; |
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| • | the scope and results of preclinical studies and clinical trials to identify drug candidates; |
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| • | competitive and technological advances; |
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| • | the time and costs involved in obtaining regulatory approvals; |
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| • | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; |
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| • | our dependence on others for development and commercialization of our product candidates; and |
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| • | successful commercialization of our products consistent with our licensing strategy. |
We will be required to raise additional capital to complete the development and commercialization of our current product candidates. Additional funding, whether through additional sales of securities or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to us. The issuance of preferred or common stock or convertible securities, with terms and prices significantly more favorable than those of the currently outstanding common stock, could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. In addition, collaborative arrangements may require us to transfer certain material rights to such corporate partners. Insufficient funds may require us to delay, scale-back or eliminate certain of our research and development programs.
We have not commercialized any products or technologies and our future revenue generation is uncertain
We have not yet commercialized any products or technologies, and we may never be able to do so. Our revenue from collaborative agreements is dependent upon the status of our preclinical and clinical programs. If we fail to advance these programs to the point of being able to enter into successful collaborations, we will not receive any future milestone or other collaborative payments.
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Any future revenue directly from product sales would depend on our ability to successfully complete clinical studies, obtain regulatory approvals, manufacture, market and commercialize any approved drugs.
If our development collaborations with other parties fail, the development of our drug candidates will be delayed or stopped
We rely heavily upon other parties for many important stages of our drug development programs, including:
| • | discovery of proteins that cause or enable biological reactions necessary for the progression of the disease or disorder, called enzyme targets; |
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| • | licensing or design of enzyme inhibitors for development as drug candidates; |
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| • | execution of some preclinical studies and late-stage development for our compounds and drug candidates; |
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| • | management of our clinical trials, including medical monitoring and data management; |
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| • | management of our regulatory function; and |
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| • | manufacturing, sales, marketing and distribution of our drug candidates. |
Our failure to engage in successful collaborations at any one of these stages would greatly impact our business. If we do not license enzyme targets or inhibitors from academic institutions or from other biotechnology companies on acceptable terms, our product development efforts would suffer. Similarly, if the contract research organizations that conduct our initial or late-stage clinical trials or manage our regulatory function breached their obligations to us, this would delay or prevent the development of our drug candidates.
Even more critical to our success is our ability to enter into successful collaborations for the late-stage clinical development, regulatory approval, manufacturing, marketing, sales and distribution of our drug candidates. Our general strategy is to rely upon other parties for all of these steps so that we can focus exclusively on the key areas of our expertise. For some smaller niche markets, we may perform these steps ourselves and outsource those functions where we do not have the internal expertise. This heavy reliance upon third parties for these critical functions presents several risks, including:
| • | we may not be able to negotiate favorable arrangements with collaborators for later stage clinical development, marketing, sales and distribution of our drug candidates; |
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| • | these contracts may expire or the other parties to the contract may terminate them; |
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| • | our partners may choose to pursue alternative technologies, including those of our competitors; |
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| • | we may have disputes with a partner that could lead to litigation or arbitration; |
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| • | our partners may not devote sufficient capital or resources towards our drug candidates; |
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| • | our partners may not comply with applicable government regulatory requirements; and |
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| • | our manufacturing partners may not be able to manufacture our compounds in the quantities required or to the specifications required by the regulatory authorities. |
Any problems encountered with our current or future partners could delay or prevent the development of our compounds, which would severely affect our business, because if our compounds do not reach the market in a timely manner, or at all, we may never receive any milestone, product or royalty payments.
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If the clinical trials of our drug candidates fail, our drug candidates will not be marketed, which would result in a complete absence of product related revenue
To receive the regulatory approvals necessary for the sale of our drug candidates, we or our licensees must demonstrate through preclinical studies and clinical trials that each drug candidate is safe and effective. If we or our licensees are unable to demonstrate that our drug candidates are safe and effective, our drug candidates will not receive regulatory approval and will not be marketed, which would result in a complete absence of product related revenue. The clinical trial process is complex and uncertain. Because of the cost and duration of clinical trials, we may decide to discontinue development of product candidates that are either unlikely to show good results in the trials or unlikely to help advance a product to the point of a meaningful collaboration. Positive results from preclinical studies and early clinical trials do not ensure positive results in clinical trials designed to permit application for regulatory approval, called pivotal clinical trials. We may suffer significant setbacks in pivotal clinical trials, even after earlier clinical trials show promising results. Any of our drug candidates may produce undesirable side effects in humans. These side effects could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a drug candidate. These side effects could also result in the FDA or foreign regulatory authorities refusing to approve the drug candidate for any targeted indications. We, our licensees, the FDA or foreign regulatory authorities may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks. Clinical trials may fail to demonstrate that our drug candidates are safe or effective.
Clinical trials are lengthy and expensive. We or our licensees incur substantial expense for, and devote significant time to, preclinical testing and clinical trials, yet cannot be certain that the tests and trials will ever result in the commercial sale of a product. For example, clinical trials require adequate supplies of drug and sufficient patient enrollment. Delays in patient enrollment can result in increased costs and longer development times. Even if we or our licensees successfully complete clinical trials for our product candidates, we or our licensees might not file the required regulatory submissions in a timely manner and may not receive regulatory approval for the drug candidate.
If we or our licensees do not obtain and maintain governmental approvals for our products under development, we or our partners will not be able to sell these potential products, which would significantly harm our business because we will receive no revenue
We or our licensees must obtain regulatory approval before marketing or selling our future drug products. If we or our licensees are unable to receive regulatory approval and do not market or sell our future drug products, we will never receive any revenue from such product sales. In the United States, we or our partners must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. The FDA or foreign regulatory agencies have not approved any of our drug candidates. If we or our licensees fail to obtain regulatory approval we will be unable to market and sell our future drug products. We have several drug products in various stages of preclinical and clinical development; however, we are unable to determine when, if ever, any of these products will be commercially available. Because of the risks and uncertainties in biopharmaceutical development, our drug candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval. If the FDA delays regulatory approval of our drug candidates, our management’s credibility, our company’s value and our operating results may suffer. Even if the FDA or foreign regulatory agencies approve a drug candidate, the approval may limit the indicated uses for a drug candidate and/or may require post-marketing studies.
The FDA regulates, among other things, the record keeping and storage of data pertaining to potential pharmaceutical products. We currently store most of our preclinical research data at our facility. While we do store duplicate copies of most of our clinical data offsite, we could lose important preclinical data if our facility incurs damage. If we get approval to market our potential products, whether in the United States or internationally, we will continue to be subject to extensive regulatory requirements. These requirements are wide ranging and govern, among other things:
| • | adverse drug experience reporting regulations; |
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| • | product promotion; |
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| • | product manufacturing, including good manufacturing practice requirements; and |
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| • | product changes or modifications. |
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Our failure to comply with existing or future regulatory requirements, or our loss of, or changes to, previously obtained approvals, could have a material adverse effect on our business because we will not receive product or royalty revenues if we or our licensees do not receive approval of our products for marketing.
In June 1995, we notified the FDA that we submitted incorrect data for our Phase II studies of BCX-34 applied to the skin for CTCL and psoriasis. The FDA inspected us in November 1995 and issued us a List of Inspectional Observations, Form FDA 483, which cited our failure to follow good clinical practices. The FDA also inspected us in June 1996. The focus was on the two 1995 Phase II dose-ranging studies of topical BCX-34 for the treatment of CTCL and psoriasis. As a result of the investigation, the FDA issued us a Form FDA 483, which cited our failure to follow good clinical practices. We are no longer developing BCX-34; however, as a consequence of these two investigations, our ongoing and future clinical studies may receive increased scrutiny, which may delay the regulatory review process.
We may be unable to establish sales, marketing and distribution capabilities necessary to successfully commercialize products we may successfully develop
We currently have no marketing capability and no direct or third-party sales or distribution capabilities. If we successfully develop a drug candidate and decide to commercialize it ourselves rather than relying on third parties, as we are considering doing in the United States for Fodosine™, we may be unable to establish marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for that product.
If our drug candidates do not achieve broad market acceptance, our business may never become profitable
Our drug candidates may not gain the market acceptance required for us to be profitable even if they successfully complete initial and final clinical trials and receive approval for sale by the FDA or foreign regulatory agencies. The degree of market acceptance of any drug candidates that we or our partners develop will depend on a number of factors, including:
| • | cost-effectiveness of our drug candidates; |
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| • | their safety and effectiveness relative to alternative treatments; |
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| • | reimbursement policies of government and third-party payers; and |
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| • | marketing and distribution support for our drug candidates. |
Physicians, patients, payers or the medical community in general may not accept or use our drug candidates even after the FDA or foreign regulatory agencies approve the drug candidates. If our drug candidates do not achieve significant market acceptance, we will not have enough revenues to become profitable.
We face intense competition, and if we are unable to compete effectively, the demand for our products, if any, may be reduced
The biotechnology and pharmaceutical industries are highly competitive and subject to rapid and substantial technological change. We face, and will continue to face, competition in the licensing of desirable disease targets, licensing of desirable drug candidates, and development and marketing of our product candidates from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies. Competition may also arise from, among other things:
| • | other drug development technologies; |
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| • | methods of preventing or reducing the incidence of disease, including vaccines; and |
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| • | new small molecule or other classes of therapeutic agents. |
Developments by others may render our product candidates or technologies obsolete or noncompetitive.
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We are performing research on or developing products for the treatment of several disorders including T-cell mediated disorders (T-cell cancers, psoriasis, and rheumatoid arthritis), cardiovascular, oncology, and hepatitis C, and there are a number of competitors to products in our research pipeline. If one or more of our competitors’ products or programs are successful, the market for our products may be reduced or eliminated.
Compared to us, many of our competitors and potential competitors have substantially greater:
| • | capital resources; |
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| • | research and development resources, including personnel and technology; |
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| • | regulatory experience; |
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| • | preclinical study and clinical testing experience; |
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| • | manufacturing and marketing experience; and |
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| • | production facilities. |
Any of these competitive factors could reduce demand for our products.
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of those rights would diminish
Our success will depend in part on our ability and the abilities of our licensors to obtain patent protection for our products, methods, processes and other technologies to preserve our trade secrets, and to operate without infringing the proprietary rights of third parties. If we or our partners are unable to adequately protect or enforce our intellectual property rights for our products, methods, processes and other technologies, the value of the drug candidates that we license to derive revenue would diminish. Additionally, if our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs. The U.S. Patent and Trademark Office has issued to us a number of U.S. patents for our various inventions and we have in-licensed several patents from various institutions. We have filed additional patent applications and provisional patent applications with the U.S. Patent and Trademark Office. We have filed a number of corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications, as appropriate. We cannot assure you as to:
| • | the degree and range of protection any patents will afford against competitors with similar products; |
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| • | if and when patents will issue; or |
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| • | whether or not others will obtain patents claiming aspects similar to those covered by our patent applications. |
If the U.S. Patent and Trademark Office upholds patents issued to others or if the U.S. Patent and Trademark Office grants patent applications filed by others, we may have to:
| • | obtain licenses or redesign our products or processes to avoid infringement; |
| | |
| • | stop using the subject matter claimed in those patents; or |
| | |
| • | pay damages. |
We may initiate, or others may bring against us, litigation or administrative proceedings related to intellectual property rights, including proceedings before the U.S. Patent and Trademark Office. Any judgment adverse to us in any litigation or other proceeding arising in connection with a patent or patent application could materially and adversely affect our business, financial condition and results of operations. In addition, the costs of any such proceeding may be substantial whether or not we are successful.
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Our success is also dependent upon the skills, knowledge and experience, none of which is patentable, of our scientific and technical personnel. To help protect our rights, we require all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside of our company and require disclosure and assignment to us of their ideas, developments, discoveries and inventions. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information, and if any of our proprietary information is disclosed, our business will suffer because our revenues depend upon our ability to license our technology and any such events would significantly impair the value of such a license.
If we fail to retain our existing key personnel or fail to attract and retain additional key personnel, the development of our drug candidates and the expansion of our business will be delayed or stopped
We are highly dependent upon our senior management and scientific team, the loss of whose services might impede the achievement of our development and commercial objectives. Competition for key personnel with the experience that we require is intense and is expected to continue to increase. Our inability to attract and retain the required number of skilled and experienced management, operational and scientific personnel, will harm our business because we rely upon these personnel for many critical functions of our business. In addition, we rely on members of our scientific advisory board and consultants to assist us in formulating our research and development strategy. All of the members of the scientific advisory board and all of our consultants are otherwise employed and each such member or consultant may have commitments to other entities that may limit their availability to us.
If users of our drug products are not reimbursed for use, future sales of our drug products will decline
The lack of reimbursement for the use of our product candidates by hospitals, clinics, patients or doctors will harm our business. Medicare, Medicaid, health maintenance organizations and other third-party payers may not authorize or otherwise budget for the reimbursement of our products. Governmental and third-party payers are increasingly challenging the prices charged for medical products and services. We cannot be sure that third-party payers would view our product candidates as cost-effective, that reimbursement will be available to consumers or that reimbursement will be sufficient to allow our product candidates to be marketed on a competitive basis. Changes in reimbursement policies, or attempts to contain costs in the health care industry could limit or restrict reimbursement for our product candidates and would materially and adversely affect our business, because future product sales would decline and we would receive less product or royalty revenue.
If we face clinical trial liability claims related to the use or misuse of our compounds in clinical trials, our management’s time will be diverted and we will incur litigation costs
We face an inherent business risk of liability claims in the event that the use or misuse of our compounds results in personal injury or death. We have not experienced any clinical trial liability claims to date, but we may experience these claims in the future. After commercial introduction of our products we may experience losses due to product liability claims. We currently maintain clinical trial liability insurance coverage in the amount of $5.0 million per occurrence and $5.0 million in the aggregate, with an additional $2.0 million potentially available under our umbrella policy. The insurance policy may not be sufficient to cover claims that may be made against us. Clinical trial liability insurance may not be available in the future on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our financial condition, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management.
If our computer systems fail, our business will suffer
Our drug development activities depend on the security, integrity and performance of the computer systems supporting them, and the failure of our computer systems could delay our drug development efforts. We currently store most of our preclinical and clinical data at our facility. Duplicate copies of most critical data are stored off-site in a bank vault. Any significant degradation or failure of our computer systems could cause us to inaccurately calculate or lose our data. Loss of data could result in significant delays in our drug development process and any system failure could harm our business and operations.
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If, because of our use of hazardous materials, we violate any environmental controls or regulations that apply to such materials, we may incur substantial costs and expenses in our remediation efforts
Our research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and some waste products. Accidental contamination or injury from these materials could occur. In the event of an accident, we could be liable for any damages that result and any liabilities could exceed our resources. Compliance with environmental laws and regulations could require us to incur substantial unexpected costs, which would materially and adversely affect our results of operations.
Risks Relating to Our Common Stock
Our stock price is likely to be highly volatile and the value of your investment could decline significantly
The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. Moreover, our stock price has fluctuated frequently, and these fluctuations are often not related to our financial results. For the twelve months ended June 30, 2005, the 52-week range of the market price of our stock was from $3.68 to $7.56 per share. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:
| • | announcements of technological innovations or new products by us or our competitors; |
| | |
| • | developments or disputes concerning patents or proprietary rights; |
| | |
| • | status of new or existing licensing or collaborative agreements; |
| | |
| • | we or our licensees achieving or failing to achieve development milestones; |
| | |
| • | publicity regarding actual or potential medical results relating to products under development by us or our competitors; |
| | |
| • | regulatory developments in both the United States and foreign countries; |
| | |
| • | public concern as to the safety of pharmaceutical products; |
| | |
| • | actual or anticipated fluctuations in our operating results; |
| | |
| • | changes in financial estimates or recommendations by securities analysts; |
| | |
| • | economic and other external factors or other disasters or crises; and |
| | |
| • | period-to-period fluctuations in our financial results. |
Because stock ownership is concentrated, you and other investors will have limited influence on stockholder decisions
As of June 30, 2005, our directors, executive officers and some principal stockholders and their affiliates beneficially owned approximately 43.9% (directors and officers, together with their relevant affiliates owned 25.5%) of our outstanding common stock and common stock equivalents. As a result, these holders, if acting together, are able to significantly influence matters requiring stockholder approval, including the election of directors. This concentration of ownership may delay, defer or prevent a change in our control.
We have anti-takeover provisions in our corporate charter documents that may result in outcomes with which you do not agree
Our board of directors has the authority to issue up to 3,178,500 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock.
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In addition, our certificate of incorporation provides for staggered terms for the members of the board of directors and supermajority approval of the removal of any member of the board of directors and prevents our stockholders from acting by written consent. Our certificate also requires supermajority approval of any amendment of these provisions. These provisions and other provisions of our by-laws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us.
In June 2002, our board of directors adopted a stockholder rights plan and, pursuant thereto, issued preferred stock purchase rights (“Rights”) to the holders of our common stock. The Rights have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons who acquires more than 15% (19.9% for William W. Featheringill, a Director who owned approximately 11% as of June 30, 2005, but owned more than 15% at the time the Rights were put in place) of our common stock on terms not approved by the board of directors.
We have never paid dividends on our common stock and do not anticipate doing so in the foreseeable future
We have never paid cash dividends on our stock. We currently intend to retain all future earnings, if any, for use in the operation of our business. Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future.
Information Regarding Forward-Looking Statements
This discussion contains forward-looking statements, which are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” the negative of these words or similar expressions. Statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Discussions containing these forward-looking statements are principally contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above, as well as any amendments we make to those sections in filings with the SEC.
These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail in “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this document.
You should read this discussion completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing our risk. We invest excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and by policy, limit the amount of credit exposure at any one institution. Some of the securities we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we schedule our investments to have maturities that coincide with our expected cash flow needs, thus avoiding the need to redeem an investment prior to its maturity date. Accordingly, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.
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Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures that are designed to ensure that information relating to BioCryst Pharmaceuticals, Inc. required to be disclosed in our periodic filings under the Securities Exchange Act is recorded, processed, summarized and reported in a timely manner under the Securities Exchange Act of 1934. We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2005, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by BioCryst in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by BioCryst in such reports is accumulated and communicated to the Company’s management, including the Chairman and Chief Executive Officer and Chief Financial Officer of BioCryst, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, BioCryst’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
| (a) | The Company’s annual meeting of stockholders was held on May 11, 2005. |
| | |
| (b) | Messrs. Featheringill, Sherrill, and Spencer were elected as directors for three-year terms expiring in 2008. Messrs. Bennett, Horovitz, Steer, Bugg, Gordon and Higgins continue as directors. |
| | |
| (c) | Motion before stockholders: |
| | |
| | 1. | Election of three directors as follows - |
Name | | Votes For | | Abstentions/
Withheld | |
| |
|
| |
|
| |
William W. Featheringill | | | 23,352,091 | | | 83,005 | |
Joseph H. Sherrill, Jr. | | | 23,351,391 | | | 83,705 | |
William M. Spencer, III | | | 23,346,391 | | | 88,705 | |
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Item 5. Other Information:
None
Item 6. Exhibits:
a. Exhibits:
| Number | | Description |
|
| |
|
| 3.1 | | Composite Certificate of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. |
| 3.2 | | Bylaws of Registrant as amended March 7, 2005. Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 9, 2005. |
| 4.1 | | Rights Agreement, dated as of June 17, 2002, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes the Certificate of Designation for the Series B Junior Participating Preferred Stock as Exhibit A and the form of Rights Certificate as Exhibit B. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A dated June 17, 2002. |
| 10.1 | | 1991 Stock Option Plan, as amended and restated effective March 8, 2004. Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the second quarter ending June 30, 2004 dated August 10, 2004. |
| 10.2# | | License Agreement dated April 15, 1993 between Ciba-Geigy Corporation (now merged into Novartis) and the Registrant. Incorporated by reference to Exhibit 10.40 to the Company’s Form S-1 Registration Statement (Registration No. 33-73868). |
| 10.3 | | Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 14, 2002 (Registration No. 333-90582). |
| 10.4# | | Stock Purchase Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.24 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. |
| 10.5# | | Stockholder’s Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.25 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. |
| 10.6 | | Warehouse Lease dated July 12, 2000 between RBP, LLC an Alabama Limited Liability Company and the Registrant for office/warehouse space. Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q for the second quarter ending June 30, 2000 dated August 8, 2000. |
| 10.7 | | Termination Agreement dated as of September 21, 2001 between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the second quarter ending June 30, 2002 dated August 7, 2002. |
| 10.8 | | Stock Purchase Agreement, dated as of February 17, 2004, by and among BioCryst Pharmaceuticals, Inc., Caduceus Private Investments II, LP, Caduceus Private Investments II (QP), LP and UBS Juniper Crossover Fund, L.L.C. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated February 17, 2004. |
| 10.9 | | Employment Agreement dated March 17, 2004 between the Registrant and Charles E. Bugg, Ph.D. Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the first quarter ending March 31, 2004 dated May 11, 2004. |
| 10.10 | | Employment Letter Agreement dated February 1, 2005 between the Registrant and Randall B. Riggs. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated February 7, 2005. |
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| 10.11 | | Stock Purchase Agreement, dated as of February 17, 2005, by and among BioCryst Pharmaceuticals, Inc., Baker Bros. Investments, L.P., Baker Biotech Fund II, L.P., Baker Bros. Investments II, L.P., Baker Biotech Fund II (Z), L.P., Baker/Tisch Investments, L.P., Baker Biotech Fund III, L.P., Baker Biotech Fund I, L.P., Baker Biotech Fund III (Z), L.P. and 14159, L.P. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K dated February 17, 2005. |
| 10.12 | | Employment Letter Agreement dated May 4, 2005 between the Registrant and Jonathan M. Nugent. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated May 10, 2005. |
| 10.13 | | Officer salaries 2005 Term Sheet. |
| 31.1 | | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | Certification of the Chief Financial Officer 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. |
|
# Confidential treatment granted. |
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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 on this 5th day of August, 2005.
| BIOCRYST PHARMACEUTICALS, INC. |
| |
| /s/CHARLES E. BUGG |
|
|
| Charles E. Bugg, Ph.D. |
| Chairman and Chief Executive Officer |
| |
| /s/MICHAEL A. DARWIN |
|
|
| Michael A. Darwin |
| Chief Financial Officer (Principal Financial and Accounting Officer), Secretary and Treasurer |
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