UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
___________________
|X| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
or
|_| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the transition period from ___________ to ___________
Commission File Number: 0-28272
AVIGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware | 13-3647113 |
(State or other jurisdiction of | (I.R.S. Employer |
1301 Harbor Bay Parkway
Alameda, California 94502
(Address of principal executive offices and zip code)
(510) 748-7150
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
As of May 2, 2003, the number of outstanding shares of the registrant’s Common Stock, $.001 par value, was 20,124,765.
AVIGEN, INC.
FORM 10-Q
Quarter Ended March 31, 2003
INDEX
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Item 1.Financial Statements
AVIGEN, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
(in thousands, except for share and per share information)
March 31, 2003 | December 31, 2002 | |||||
(Unaudited) | Note 1 | |||||
ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | 8,568 | $ | 7,879 | ||
Available-for-sale securities | 95,933 | 99,845 | ||||
Accrued interest | 1,191 | 993 | ||||
Prepaid expenses and other current assets | 490 | 458 | ||||
Total current assets | 106,182 | 109,175 | ||||
Restricted investments | 11,500 | 11,500 | ||||
Property and equipment, net | 17,921 | 18,726 | ||||
Deposits and other assets | 1,231 | 1,285 | ||||
Total assets | $ | 136,834 | $ | 140,686 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current Liabilities: | ||||||
Accounts payable and other accrued liabilities | $ | 839 | $ | 1,156 | ||
Accrued compensation and related expenses | 632 | 621 | ||||
Deferred revenue – current | 500 | — | ||||
Total current liabilities | 1,971 | 1,777 | ||||
Long-term loan payable | 8,000 | 8,000 | ||||
Deferred rent | 864 | 852 | ||||
Deferred revenue | 2,000 | — | ||||
Stockholders’ Equity: | ||||||
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, | ||||||
none issued and outstanding | — | — | ||||
Common Stock, $0.001 par value, 50,000,000 shares authorized, | ||||||
20,124,765 and 20,100,546 shares issued and outstanding at | ||||||
March 31, 2003 and December 31, 2002, respectively | 20 | 20 | ||||
Additional paid-in capital | 235,437 | 235,337 | ||||
Accumulated other comprehensive income | 1,401 | 1,582 | ||||
Deficit accumulated during the development stage | (112,859 | ) | (106,882 | ) | ||
Total stockholders’ equity | 123,999 | 130,057 | ||||
Total liabilities and stockholders’ equity | $ | 136,834 | $ | 140,686 | ||
See accompanying notes.
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AVIGEN, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share information)
(unaudited)
Period from October 22, 1992 (inception) Through March 31, 2003 | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2003 | 2002 | |||||||||||
Revenue | $ | 30 | $ | — | $ | 817 | ||||||
Operating expenses: | ||||||||||||
Research and development | 5,152 | 6,126 | 91,508 | |||||||||
General and administrative | 1,814 | 2,054 | 38,238 | |||||||||
In-license fees | — | — | 5,034 | |||||||||
Total operating expenses | 6,966 | 8,180 | 134,780 | |||||||||
Loss from operations | (6,936 | ) | (8,180 | ) | (133,963 | ) | ||||||
Interest expense | (60 | ) | (73 | ) | (1,981 | ) | ||||||
Interest income | 1,023 | 1,333 | 23,146 | |||||||||
Other (expense) income, net | (4 | ) | (27 | ) | (61) | |||||||
Net loss | $ | (5,977 | ) | $ | (6,947 | ) | $ | (112,859 | ) | |||
Basic and diluted net loss per share | $ | (0.30 | ) | $ | (0.35 | ) | ||||||
Shares used in basic and diluted net | ||||||||||||
loss per share calculation | 20,121,267 | 20,052,721 | ||||||||||
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See accompanying notes.
AVIGEN, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31, | Period from October 22, 1992 (inception) through March 31, 2003 | |||||||||||
2003 | 2002 | |||||||||||
Operating Activities | ||||||||||||
Net cash used in operating activities | $ | (2,944 | ) | $ | (5,533 | ) | $ | (94,487 | ) | |||
Investing Activities | ||||||||||||
Purchases of property and equipment and construction | ||||||||||||
progress | (165 | ) | (3,201 | ) | (27,321 | ) | ||||||
Increase in restricted investments | 0 | (1,500 | ) | (11,500 | ) | |||||||
Purchase of available-for-sale securities | (11,458 | ) | (5,134 | ) | (552,039 | ) | ||||||
Maturities of available-for-sale securities | 15,190 | 19,131 | 457,510 | |||||||||
Net cash provided by (used in) investing activities | 3,567 | 9,296 | (133,350 | ) | ||||||||
Financing Activities | ||||||||||||
Proceeds from long-term obligations | — | — | 10,133 | |||||||||
Payments on capital lease obligations | — | — | (2,154 | ) | ||||||||
Proceeds from warrants and options exercised | 66 | 788 | 12,899 | |||||||||
Proceeds from issuance of common stock, net of | ||||||||||||
issuance costs and repurchases | — | — | 205,619 | |||||||||
Other financing activities | — | — | 9,908 | |||||||||
Net cash provided by financing activities | 66 | 788 | 236,405 | |||||||||
Net increase in cash and cash equivalents | 689 | 4,551 | 8,568 | |||||||||
Cash and cash equivalents, beginning of period | 7,879 | 13,211 | — | |||||||||
Cash and cash equivalents, end of period | $ | 8,568 | $ | 17,762 | $ | 8,568 | ||||||
Supplemental disclosures | ||||||||||||
Issuance of warrants in connection with building lease | ||||||||||||
extension | $ | — | $ | — | $ | 1,738 | ||||||
Cash paid for interest | $ | 60 | $ | 73 | $ | 1,488 |
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See accompanying notes.
AVIGEN, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
Our accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and accruals, considered necessary for a fair presentation of the results for the periods presented have been included.Operating results reported for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These unaudited interim financial statements should be read in conjunction with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the period ended December 31, 2002, filed with the Securities and Exchange Commission.
The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
2. Cash and Cash Equivalents, Available-for-sale Securities, and Restricted Investments
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. These amounts are recorded at cost, which approximates fair market value.
Available-for-sale Securities
We invest our excess cash balances in marketable securities, primarily corporate debt securities, federal agency obligations, asset-backed securities, and municipal bonds, with the primary investment objectives of preservation of principal, a high degree of liquidity, and maximum total return. In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” we have classified our investments in marketable securities as available-for-sale. Available-for-sale securities are reported at market value and unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in other comprehensive income and as a separate component of stockholders’ equity until realized. A decline in the market value of a security below its cost that is deemed other than temporary is charged to earnings, and would result in the establishment of a new cost basis for the security.
Our available-for-sale securities consist principally of obligations with a minimum short-term rating of A1/P1 and a minimum long-term rating of A– and with effective maturities of less
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than three years. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income.
Restricted Investments
In June 2000, we entered into a financing arrangement to support construction related activities. Under this arrangement, we have pledged $10.0 million of our portfolio of available-for-sale securities to secure this long-term obligation.
In January 2002, we also entered into equipment operating leases for certain research and development equipment. Under the terms of these leases, we have pledged $1.5 million of our portfolio of available-for-sale securities to secure these equipment operating leases.
At March 31, 2003 and December 31, 2002, $11.5 million were classified as restricted investments in long-term assets, representing the combined aggregate portion of our portfolio for available-for-sale securities that were pledged in connection with these two long-term liabilities.
The following is a summary of cash, restricted investments, and available-for-sale securities as of March 31, 2003 (in thousands):
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Cash | $ | 4,060 | $ | — | $ | — | $ | 4,060 | ||||||||
Corporate debt securities | 49,857 | 477 | (7 | ) | 50,327 | |||||||||||
Federal agency obligations | 36,790 | 602 | — | 37,392 | ||||||||||||
Asset-backed and other securities | 21,445 | 324 | — | 21,769 | ||||||||||||
Short-term municipals | 1,000 | — | — | 1,000 | ||||||||||||
Treasury obligations | 1,448 | 5 | — | 1,453 | ||||||||||||
Total | 114,600 | 1,408 | (7 | ) | 116,001 | |||||||||||
Amounts reported as | ||||||||||||||||
Cash and cash equivalents | 8,568 | — | — | 8,568 | ||||||||||||
Restricted investments | 11,500 | — | — | 11,500 | ||||||||||||
Available-for-sale securities | $ | 94,532 | $ | 1,408 | $ | (7 | ) | $ | 95,933 | |||||||
The weighted average maturity of investments held at March 31, 2003 was 392 days, with $56.6 million carrying a weighted average maturity of less than twelve months, and $59.4 million carrying a weighted average maturity of between one and three years.
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The following is a summary of cash, restricted investments, and available-for-sale securities as of December 31, 2002 (in thousands):
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Cash | $ | 3,578 | $ | — | $ | — | $ | 3,578 | |||||||
Corporate debt securities | 47,780 | 437 | (11 | ) | 48,206 | ||||||||||
Federal agency obligations | 42,977 | 855 | — | 43,832 | |||||||||||
Asset-backed and other securities | 23,307 | 301 | — | 23,608 | |||||||||||
Total | 117,642 | 1,593 | (11 | ) | 119,224 | ||||||||||
Amounts reported as | |||||||||||||||
Cash and cash equivalents | 7,879 | — | — | 7,879 | |||||||||||
Restricted investments | 11,500 | — | — | 11,500 | |||||||||||
Available-for-sale securities | $ | 98,263 | $ | 1,593 | $ | (11 | ) | $ | 99,845 | ||||||
The weighted average maturity of investments held at December 31, 2002 was 421 days, with $56.3 million carrying a weighted average maturity of less than twelve months, and $62.9 million carrying a weighted average maturity of between one and three years.
3. Deferred Revenue
In March 2003, we received a $2.5 million milestone payment from Bayer Corporation under the terms of our collaboration agreement for the development of Coagulin-B, our product candidate for the treatment of hemophilia B. This amount has been recorded as deferred revenue at March 31, 2003 and will be recognized as revenue in our statement of operations ratably over the estimated remaining development period for this product of five years, or approximately $125,000 per quarter, beginning on April 1, 2003.
4. Comprehensive Loss
Comprehensive loss is comprised of net loss and unrealized holding gains and losses available-for-sale securities, in accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income.”
(Amounts in thousands) | Three Months Ended March 31, | ||||||
2003 | 2002 | ||||||
Net loss | $ | (5,977 | ) | $ | (6,947 | ) | |
Net unrealized loss on available-for-sale securities | (181) | (971 | ) | ||||
Comprehensive loss | $ | (6,158 | ) | $ | (7,918 | ) | |
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5. Basic and Diluted Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of common shares outstanding during the year. Securities that could potentially dilute basic earnings per share in the future, have been excluded from the diluted net loss per share computation because their inclusion would have been anti-dilutive, and were as follows:
Three Months Ended March 31, | |||
2003 | 2002 | ||
Stock options outstanding | 4,026,844 | 3,882,336 | |
Warrants to purchase common stock | 1,324,322 | 1,324,322 | |
5,351,166 | 5,206,658 | ||
6. Reclassifications
We have reclassified certain prior year amounts to conform to our current year’s presentation of restricted investments to a long-term asset. The reclassification had no impact on our results of operations.
7. Stock-Based Compensation
In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” FAS 148 amends FAS 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
We have elected to continue to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, to account for stock options granted to our employees and directors. Under APB 25, using the prescribed intrinsic value method of accounting, no compensation expense is recognized because the exercise price of the stock options equals the market price of the underlying stock on the date of the option grant.
The information regarding net loss and loss per share as required by FAS 123 has been determined as if we had accounted for our employee stock options under the fair value method prescribed by FAS 123. The resulting effect on net loss and loss per share pursuant to FAS 123 is not likely to be representative of the effects on net loss and loss per share pursuant to FAS 123 in future years, since future years are likely to include additional grants and the irregular impact of future years’ vesting.
No stock-based employee compensation is reflected in our net loss as all options granted had an exercise price equal to the market value of our underlying common stock on the date of
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grant. The following table illustrates the effect on our net loss and loss per share if we had applied the fair value recognition provisions of FAS 123 to our stock-based employee compensation (in thousands, except for per share data):
Three Months Ended March 31, | ||||||||||
2003 | 2002 | |||||||||
Net loss — as reported | $ | (5,977 | ) | $ | (6,947 | ) | ||||
Less: Total stock-based employee | ||||||||||
compensation expense determined under | ||||||||||
the fair-value-based method for all awards | (3,349 | ) | (4,014 | ) | ||||||
Net loss — pro forma | $ | (9,326 | ) | $ | (10,961 | ) | ||||
Net loss per share basic and diluted — as reported | $ | (0.30 | ) | $ | (0.35 | ) | ||||
Net loss per share basic and diluted — pro forma | $ | (0.46 | ) | $ | (0.55 | ) | ||||
For purposes of disclosure pursuant to FAS 123 as amended by FAS 148, the estimated fair value of our employee stock options is amortized to expense over the vesting period of the options. We use the Black-Scholes option valuation model to estimate the fair value of our options on the date of grant with the following assumptions:
Three Months Ended March 31, | |||||
2003 | 2002 | ||||
Expected volatility | 1.9387 | 2.0901 | |||
Risk free interest rate | 3.00 | % | 4.00 | % | |
Expected life of options in years | 5 | 5 | |||
Expected dividend yield | — | — |
For equity awards to non-employees, including lenders, lessors and consultants, we apply the Black-Scholes method to determine the fair value of such investments. The options and warrants granted to non-employees are re-measured as they vest and the resulting value is recognized as an expense over the period of services received or the term of the related financing.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion may be understood more fully by reference to the financial statements, notes to the financial statements, and management’s discussion and analysis of financial conditions and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, but are not limited to, statements about future events regarding our drug development programs, clinical trials, receipt of regulatory approval, expense savings and cash burn rate resulting from the implementations of our revised strategic plan, capital needs, intellectual property, and other events. In some cases, you can identify forward-looking statements by such terms as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “intend,” and similar expressions intended to identify these statements as forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that might cause or contribute to such differences include uncertainties and delays in obtaining regulatory approval to proceed with clinical trials or market products, the occurrence of extraordinary transactions or events and those discussed under the caption “Risk Factors” below.
Overview
Since our inception in 1992, we have focused on the development of adeno-associated-virus-based gene therapy products for the treatment of serious, chronic diseases. We have developed a proprietary gene delivery platform technology based on adeno-associated virus vectors, known as “AAV vectors”. We have assembled a broad base of proprietary intellectual property covering methods of transferring genes into cells, high-yield processes to manufacture contaminant-free AAV vectors, specific genes of interest and other proprietary technologies and processes. In addition, we have built the manufacturing capacity necessary to produce clinical-grade AAV vectors for our lead product candidates through commercial launch. We have also established expertise in preclinical research, manufacturing and manufacturing process scale-up, quality control, quality assurance, regulatory affairs and clinical trial design and implementation.
Our proposed gene delivery products are designed for the direct administration of DNA into the cells of patients in order to achieve expression of therapeutic proteins within the body as an alternative to existing pharmaceutical and surgical treatments. Traditional medicine primarily focuses on treating the symptoms of disease. We believe that our gene-based products, by targeting the root cause of the disease at the fundamental cellular level, have the potential to treat a wide variety of diseases and conditions that are not adequately addressed by current medical science.
Solving complex biological responses in the developing field of human genetics makes product development challenging; however, we believe that our AAV vectors have the potential to effectively deliver genes that will promote therapeutic responses in patients suffering from many types of diseases. Our efforts are primarily focused on our two lead product candidates.
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We are conducting a phase I clinical trial for our first lead product candidate, Coagulin-B®, for the treatment of hemophilia B. We intend to submit an investigational new drug (IND) application with the Food and Drug Administration (FDA) for our second lead product candidate for the treatment of Parkinson’s disease later in 2003. Our product candidate for the treatment of hemophilia A, Coagulin-A™, is currently in preclinical development and based on those studies and the results of our clinical trials for hemophilia B, we expect to submit an IND with the FDA for Coagulin-A in 2004. We also have active research programs underway to explore certain potential neurologic, metabolic and cardiac disease targets.
Since our inception, we have devoted substantially all of our resources to research and development activities. We are a development stage company and have not received any revenue from the sale of products, and we do not anticipate generating revenue from the sale of products in the foreseeable future. We expect our sources of revenue, if any, for the next several years to consist of the amortization of deferred revenue, additional payments under collaborative arrangements, government grants, and license fees. We have incurred losses since our inception and expect to incur substantial losses over the next several years due to ongoing and planned research and development efforts, including preclinical studies and clinical trials. There can be no assurance that we will successfully develop, commercialize, manufacture, or market our products or ever achieve or sustain product revenues for profitability. At March 31, 2003, we had an accumulated deficit of $112.9 million.
Critical Accounting Policies.
There have been no material changes to our critical accounting policies which are described in our Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 31, 2003.
Results of Operations
Three Months Ended March 31, 2003 and 2002
Revenue
Revenue was $30,000 for the three months ended March 31, 2003. We did not record any revenue for the three months ended March 31, 2002. Revenue for the quarter ended March 31, 2003 consisted of $2,000 in royalties and $28,000 in new and annual maintenance research license fees. Research license agreements allow the licensee to make or use products using our patented AAV technologies for research purposes only, and do not allow for the use of our technologies in products for commercial sale. These licenses usually include initiation fees and annual maintenance fees. Royalty revenue is from a single royalty license, which allows for the development, manufacture, use and sale of products using our patented AAV technologies. We entered into this license agreement in July 2000. Future revenues are expected to consist primarily of the recognition of deferred revenue from the $2.5 million milestone payment received from Bayer in March 2003, which we will recognize ratably over the estimated remaining development period of five years, or approximately $125,000 per quarter. In the event that we enter a phase III clinical trial with our Coagulin-B product, we expect to earn additional revenues in connection with our collaboration agreement with Bayer; however, we cannot be certain when or if we will enter a phase III clinical trial with this product. We do not expect to earn any other significant revenues for the foreseeable future.
Operating expenses
Our research and development expenses totaled $5.2 million for the three months ended March 31, 2003, and $6.1 million for the same period in 2002. The decrease was primarily the result of strategic steps we took in the second half of 2002 to focus the work of our research and development organizations on our lead product development programs. This included a reduction in staff in October 2002 and the adoption of improvements in our manufacturing processes that achieved significant operating efficiencies and reduced the quantities of materials consumed without limiting our production
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capabilities. Our staff count dedicated to research and development activities totaled 85 at March 31, 2003 compared to 130 at March 31, 2002, or a decrease of approximately 35%. As a result, personnel costs decreased by approximately $560,000. Also as a result of the decrease in our staff count as well as the adoption of new manufacturing efficiencies in our processes, the costs associated with the use of materials to produce our AAV vector and perform our in-house research decreased by approximately $500,000 in the current quarter compared to the same quarter in the prior year. Our research and development expenses also declined by approximately $240,000 in lower expenses for preclinical activities with third-party collaborations, primarily based on the near completion of our primary animal study for Parkinson’s disease, approximately $150,000 in lower expenses for consulting services from third parties, including the non-cash charge of $70,000 for options granted to non-employees, and approximately $95,000 for validation services for newly-built facilities in early 2002 that did not impact 2003. These expense declines were partially offset by severance payments made to two executives that resigned in February 2002 of approximately $235,000 and higher depreciation expense for assets placed in service between March 31, 2002 and March 31, 2003.
As we continue to benefit from the cost reductions associated with the strategic steps we took in the second half of 2002, as described above, and including our expectations of further efficiencies in our vector production processes, we expect total research and development spending for the year ending December 31, 2003 to decline from the levels reported for the full year of 2002 without adversely affecting the progress of those product development programs. We also expect that total research and development spending in subsequent years will begin to increase from our 2003 levels as we continue to conduct our clinical trials and to the extent we enhance our manufacturing capabilities and expand our research programs for additional gene therapy applications.
General and administrative expenses totaled $1.8 million for the three months ended March 31, 2003 and $2.1 million for the same period in 2002. The decrease between the two periods was primarily due to decreased personnel costs of approximately $160,000, primarily related to lower bonus accruals in the first quarter of 2003, decreased litigation-related legal fees of approximately $110,000, primarily related to the settlement of our lawsuit with Research Corporation Technologies, Inc., and decreased costs for facilities-related and other corporate expenses of approximately $150,000. These lower costs were partially offset by an increase of $160,000 for patent-related legal fees and other professional services and information services. We expect our general and administrative expenses for the year ending December 31, 2003 to continue to decline below the levels reported for the 2002 year and to remain steady or increase slightly in subsequent years from the 2003 full-year levels.
Interest Income
Interest income totaled $1.0 million for the three months ended March 31, 2003, down from $1.3 million for the three months ended March 31, 2002. Almost all of our interest income comes from our investments in high-grade marketable securities of government and corporate debt with an average maturity of approximately one year.
The decrease in interest income for the quarter ended March 31, 2003 as compared to the prior year quarter was primarily due to the decline in market interest rates between the two periods, as well as the decrease in outstanding cash and securities balances due to resources having been used to fund our on-going operations and finance construction for additional research and development facilities.
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Research and development expenses
Our research and development expenses can be divided into two primary functions, representing costs to support research and preclinical development and costs to support clinical development for human clinical trials. Research and preclinical development costs include activities associated with general research and exploration, animal studies, production of vector for use by external collaborators in general research and exploration, and development of processes to translate research achievements into commercial scale capabilities. During the three-month periods ended March 31, 2003 and 2002, our programs in the research and preclinical phase were directed primarily at our targeted potential treatments of both hemophilia A and B, Parkinson’s disease and congestive heart failure. Clinical development costs include activities associates with maintaining regulated and controlled processes, manufacturing vector for use in human clinical trials, and supporting patient accrual and patient administration within clinical trials. During the three-month periods ended March 31, 2003 and 2002, our programs in the clinical development phase were directed at our targeted potential treatments of both hemophilia B and Parkinson’s disease.
We estimate that the split in costs associated with these two categories approximate the following (in thousands):
Three Months ended | |||||||||
March 31, 2003 | March 31, 2002 | ||||||||
Research and preclinical development | $ | 3,021 | $ | 3,624 | |||||
Clinical development | 2,131 | 2,502 | |||||||
Total research and development expenses | $ | 5,152 | $ | 6,126 | |||||
Because a significant percentage of our research and development resources are dedicated to activities that focus on fundamental AAV vector characteristics and production and administration techniques, which are considered platform technologies that may be used in many different product applications, the majority of our costs are not directly attributed to individual projects. Decisions regarding our project management and resource allocation are primarily based on interpretations of scientific data, rather than cost allocations. Our estimates of costs between research and preclinical development and clinical development are primarily based on staffing roles within our research and development departments. As such, costs allocated to specific projects may not necessarily reflect the actual costs of those efforts and, therefore, we do not generally evaluate actual costs incurred on a project-by-project basis. In addition, we are unable to estimate the future costs to complete any specific projects.
The decrease of approximately $600,000 in our research and preclinical development expenses for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 primarily reflected our efforts to focus on our lead programs, and included lower personnel costs of approximately $130,000 due to the reduction in staff level, lower payments to third-party collaborators of approximately $240,000, primarily to support the progress in our preclinical animal study for the treatment of Parkinson’s disease, lower costs associated with the use of materials to produce our AAV vector and perform our in-house research of approximately $290,000, lower facilities-related expenses of approximately $70,000, and a lower non-cash charge for options granted to non-employees of
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approximately $70,000. These decreases were partially offset by increased charges for depreciation of approximately $200,000.
Clinical development expenses decreased by approximately $370,000 for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 primarily reflecting the impact of the staff reduction that occurred in October 2002 and the time delay since treating our last patient in our hemophilia B clinical trial in November 2002. The decrease in expenses included approximately $160,000 in lower personnel costs, approximately $210,000 in lower costs associated with the use of materials to produce our AAV vector, and $160,000 in lower costs for consulting services from third parties and validation services for our pilot plant in early 2002 that did not impact 2003. These decreases were partially offset by increased expenses of approximately $70,000 associated with monitoring the progress of previously treated patients and approximately $90,000 for higher depreciation.
Liquidity and Capital Resources
Since our inception in 1992, we have funded our operations primarily through public offerings and private placements of our equity securities. Since our initial public offering in May 1996, we have completed private placements and two public offerings of equity securities raising net proceeds of approximately $186.3 million, including a sale of common stock to Bayer AG in February 2001 pursuant to a collaboration agreement that raised net proceeds of $15.0 million. Also, during the period since May 1996, as a result of exercises of warrants and options to purchase our common stock, we raised an additional $12.9 million. The timing of and amounts realized from the exercise of these warrants and options are determined by the decisions of the respective warrant and option holders, and are not controlled by us. Therefore, funds raised from exercises of stock options and warrants in past periods should not be considered an indication of additional funds to be raised in the future periods.
In addition to funding our operations through sales of our common stock, we have attempted to contain costs and reduce cash flow requirements by renting scientific equipment and facilities, contracting with third parties to conduct research and development and using consultants, where appropriate. We expect to incur additional future expenses, resulting in significant additional cash expenditures, as we continue to expand our research and development activities and undertake additional preclinical studies and clinical trials of our gene therapy product candidates. We also expect to incur substantial additional expenses relating to the filing, prosecution, maintenance, defense and enforcement of patent and other intellectual property claims.
At March 31, 2003, we had cash, cash equivalents, available-for-sale securities, and restricted investments of approximately $116.0 million, compared to approximately $119.2 million at December 31, 2002. At both dates, $11.5 million was pledged to secure the long-term liabilities of our line of credit and equipment operating leases and is reported as a long-term asset and would not be considered a current source of additional liquidity.
The following are contractual commitments at March 31, 2003 associated with debt obligations, lease obligations, and contractual commitments to fund third-party research (in thousands):
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Payments Due by Period | |||||||||||||||||||
Contractual Commitment | TOTAL | Less Than 1 YEAR | 2-3 YEARS | 4-5 YEARS | After 5 YEARS | ||||||||||||||
Revolving line of credit | $ | 8,000 | $ | — | $ | 8,000 | $ | — | $ | — | |||||||||
Operating leases | 17,300 | 2,053 | 5,112 | 5,018 | 5,117 | ||||||||||||||
Research funding for third parties | 660 | 660 | — | — | — | ||||||||||||||
Total Contractual Commitments | $ | 25,960 | $ | 2,713 | $ | 13,112 | $ | 5,018 | $ | 5,117 |
We enter into commitments to fund collaborative research and clinical work performed by third parties. While these contracts are cancelable by either party, we expect the research studies and clinical work to be completed as defined in the terms of the agreements, and all amounts paid when due. Payments scheduled under these contracts are included in the table above under research funding for third parties.
During the three-month period ended March 31, 2003, net cash used in operating activities was $2.9 million compared to $5.5 million for the same period in the prior year. This change in cash used in operating activities between the two periods was primarily due to the $2.5 million milestone payment from Bayer Corporation received in March 2003 and recorded as deferred income, and approximately $1.0 million in lower net loss in the 2003 period, offset by additional cash used to make payments against accounts payable and other accrued liabilities.
During the three-month period ended March 31, 2003, approximately $3.6 million and $66,000, respectively, were provided by investing and financing activities, primarily to fund ongoing operations. The cash provided by investing activities consisted of maturities, net of purchases, of available-for-sale securities, offset in part by purchases of property and equipment of $165,000. The cash provided by financing activities consisted of proceeds from the exercise of options during the year.
During the three-month period ended March 31, 2002, approximately $9.3 million and $788,000, respectively, were provided by investing and financing activities, primarily to fund ongoing operations. The cash provided by investing activities consisted of maturities, net of purchases, of available-for-sale securities, offset in part by purchases of property, equipment and construction in progress of $3.2 million and increases in restricted investments of $1.5 million. The cash provided by financing activities consisted of proceeds from the exercise of options and warrants during the year.
We believe we will continue to require substantial additional funding in order to complete the research and development activities currently contemplated and to commercialize our proposed products. We believe that with the implementation of our current strategic plan, our cash burn rate should not exceed $25 million in 2003, and we anticipate that our capital resources at March 31, 2003 will be adequate to fund our future needs over the next four years. However, this forward-looking statement is based upon our current plans and assumptions regarding our future operating and capital requirements, which may change. Our future operating and capital requirements will depend on many factors, including:
- continued scientific progress in research and development programs;
- the scope and results of preclinical studies and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
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- the costs involved in filing, prosecuting and enforcing patent claims and other intellectual property rights;
- competing technological developments;
- the cost of manufacturing scale-up;
- the cost of commercialization activities; and
- other factors which may not be within our control.
We intend to continue to seek additional funding through public or private equity or debt financing, when market conditions allow, or through additional collaborative arrangements with corporate partners. If we raise additional funds by issuing equity securities, there may be further dilution to existing stockholders. We cannot assure our investors that we will be able to enter into such financing arrangements on acceptable terms or at all. Without such additional funding, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs.
RISK FACTORS
This section discusses certain risks that should be considered by stockholders and prospective investors in Avigen. Some of these risks are discussed in other contexts in other sections of this report.
We expect to continue to operate at a loss and we may never achieve profitability
Since our inception in 1992, we have not been profitable, and we cannot be certain that we will ever achieve or sustain profitability. To date, we have been engaged in research and development activities and have not generated any revenues from product sales. As of March 31, 2003, we had an accumulated deficit of $112.9 million. Developing our products will require significant additional research and development, preclinical testing and clinical trials, as well as regulatory approval. We expect these activities, together with our general and administrative expenses, to result in operating losses for the foreseeable future. Our ability to achieve profitability will depend, in part, on our ability to successfully complete development of our proposed products, obtain required regulatory approvals and manufacture and market our products directly or through business partners.
Our clinical trials to date for Coagulin-B for the treatment of hemophilia B have been conducted with a small number of patients over a short period of time, and the results reported may not be indicative of future results in a larger number of patients or have lasting effects
Our current Coagulin-B clinical trial studies are based upon the evaluations of very small groups of patients and any reported progress or results may not be indicative of subsequent progress or results achieved from larger populations. As our Coagulin-B clinical trial is still in a very early stage, we do not yet know if any favorable results achieved will have a lasting effect. If a larger population of patients does not experience positive results, or any favorable results do not demonstrate a lasting effect, this product candidate may not receive approval from the FDA
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for further studies or commercialization. If we are not able to proceed with or decide to abandon our Coagulin-B development program, our business prospects would be substantially impaired.
The success of our technology in animal models does not guarantee that the same results will be replicated in humans
Even though our product candidates have shown successful results in mouse and dog models, animals are different than humans and results in animal models may not be replicated in our clinical trials with humans. For example, while the results of our gene therapy treatment for hemophilia B were favorable and demonstrated sustained long-term expression in both dogs and mice for multiple years, one human subject who demonstrated therapeutic levels of circulating factor IX when given a comparable dose size to that used in the successful animal studies was not able to sustain steady factor IX expression beyond five weeks. In addition, this human subject experienced a mild, temporary elevation of two liver enzymes, which was not seen in any of the animal models. Consequently, you should not rely on the results in any of our animal models as being predictive of the results that we will see in our clinical trials with humans.
Adverse events in the field of gene therapy may negatively impact regulatory approval or public perception of our potential products
The commercial success of our potential products will depend in part on public acceptance of the use of gene therapy for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and consequently our products may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy in general could result in greater government regulation and stricter labeling requirements of gene therapy products, including any of our products, and could cause a decrease in the demand for any products we may develop.
Our stock price is also influenced by public perception. For example, the recent report of serious adverse events in a retroviral trial for infants with severe combined immune deficiency (SCID) in France and subsequent FDA actions putting related trials on hold in the United States had a significant impact on the public perception and stock price of all companies involved in gene therapy. Avigen’s stock declined despite the fact that we do not work with retroviruses or with infants with SCIDS and our clinical trial was not affected by the FDA’s actions in this case.
Other potential adverse events in the field of gene therapy may occur in the future that could result in greater governmental regulation of our potential products and potential regulatory delays relating to the testing or approval of our potential products.
AAV technology is new and developing rapidly; there is limited clinical data and new information may arise which may cause delays in designing our protocols, submitting applications that satisfy all necessary regulatory review requirements, and ultimately completing the clinical trials of our products
Clinical trials are governed by regulations enforced by the FDA. Our technology is fairly new, and we have limited historical data from preclinical studies or clinical trials that are often necessary to satisfy the FDA’s regulatory review process. In addition, as new information about the technology becomes available, it may change perceptions of previously accepted data, which could require additional periods of time to review and interpret these data. For example, while animals in preclinical studies do not appear to develop antibodies to the AAV vector or the
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expressed protein, it remains to be seen whether our product candidates cause patients to develop antibodies to these potential products or the proteins produced by these potential products. Such antibodies could make our product ineffective or lead to unwanted side effects. In addition, as previously discussed, one human subject in our clinical trial experienced a mild, temporary elevation of two liver enzymes, which was not seen in any of the animal models, and was not able to sustain steady factor IX expression beyond five weeks. Consequently, we may encounter deficiencies in the design or application stages while developing our clinical trial studies, or in the subsequent implementation stages of such studies, which could cause us or the FDA to delay, suspend or terminate our trials at any time.
Because our product candidates are in an early state of development, there is a high risk that they may never be commercialized
All of our product candidates are in early stages of development. We do not have any product candidates that have received regulatory approval for commercial sale, and we face the risk that none of our product candidates will ever receive regulatory approval. We have only one product candidate, Coagulin-B for the treatment of hemophilia B, in clinical trials, and this product candidate is only in phase I of the clinical trial process. We are not aware of any other gene therapy products of other companies that have received regulatory approval for commercial sale, and do not expect any of our prospective products, including Coagulin-B, to be commercially available for at least several years. As results of future stages of clinical trials become available and are evaluated, we may decide at any time to discontinue any further development of one or more of our product candidates.
The testing of our potential products relies heavily on the voluntary participation of patients in our clinical trials, which is not within our control, and could substantially delay or prevent us from completing development of such products
The development of our potential products is dependent upon collecting sufficient data from human clinical trials to demonstrate safe and effective results. At times, we have experienced delays in enrolling patients in our clinical trials for treatment at sub-therapeutic dose levels. We may experience similar difficulties in the future. Any delay or failure to recruit sufficient numbers of patients to satisfy the level of data required to be collected under our clinical trial protocols could prevent us from developing any products we may target.
Our potential products must undergo rigorous clinical testing and regulatory approvals, which could substantially delay or prevent us from marketing any products
Prior to marketing in the United States, any product developed by us must undergo rigorous preclinical testing and clinical trials as well as an extensive regulatory approval process implemented by the FDA. This process is lengthy, complex and expensive, and approval is never certain. Positive results from preclinical studies and early clinical trials do not ensure positive results will be demonstrated in clinical trials designed to permit application for regulatory approval.
Potential problems we may encounter in the implementation stages of our studies include the chance that we may not be able to conduct clinical trials at preferred sites, obtain sufficient test subjects or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, the FDA may temporarily suspend clinical trials at any time if it believes the subjects participating in trials are being exposed to unacceptable health risks, if it finds
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deficiencies in the clinical trial process or conduct of the investigation, or to better analyze data surrounding any unexpected developments. For example, progress in our current Coagulin-B clinical trial has been interrupted twice to better analyze data from unexpected observations. These included the identification of vector fragments in the seminal fluid of two early patients beyond an expected timeframe and the development of the temporary elevation in the levels of two liver enzymes in one patient treated with a higher dose.
Because of the risks and uncertainties in biopharmaceutical development, our gene therapy products could take a significantly longer time to gain regulatory approval than we expect or may never gain FDA approval. If we do not receive these necessary approvals from the FDA, we will not be able to generate substantial revenues and will not become profitable.
Failure to comply with applicable FDA or other regulatory requirements may result in criminal prosecution, civil penalties and other actions that would seriously impair our ability to conduct our business. Even if regulatory approval is granted for a product, this approval will be limited to those disease states and conditions for which the product is proven to be useful, as demonstrated through clinical trials.
We may not be successful in obtaining required foreign regulatory approvals, which would prevent us from marketing our products internationally
We cannot be certain that we will obtain any regulatory approvals in other countries. In order to market our products outside of the United States, we must comply with numerous and varying foreign regulatory requirements implemented by foreign regulatory authorities. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the regulatory authorities of any other country.
Our success is dependent upon our ability to effectively protect our patents and proprietary rights, which we may not be able to do
Our success will depend to a significant degree on our ability to obtain patents and licenses to patent rights, preserve trade secrets, and to operate without infringing on the proprietary rights of others. If we are not successful in these endeavors, our business will be substantially impaired.
To date, we have filed a number of patent applications in the United States relating to technologies we have developed or co-developed. In addition, we have acquired exclusive and non-exclusive licenses to certain issued patents and pending patent applications. We cannot be assured that patents will issue from these applications or that any patent will issue on technology arising from additional research or, if patents do issue, that claims allowed will be sufficient to protect our technologies.
The patent application process takes several years and entails considerable expense. The failure to obtain patent protection on the technologies underlying our proposed products may have a material adverse effect on our competitive position and business prospects. Important legal issues remain to be resolved as to the scope of patent protection for biotechnology products, and we expect that administrative proceedings, litigation or both may be necessary to
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determine the validity and scope of our and others’ biotechnology patents. These proceedings or litigation may require a significant commitment of our resources in the future.
If patents can be obtained, we cannot assure you that any of these patents will provide us with any competitive advantage. For example, others may independently develop similar technologies or duplicate any technology developed by us, and patents may be invalidated in litigation.
In addition, several of our patents and patent applications are co-owned with co-inventors or institutions. To date, we have negotiated exclusive licenses for many of our co-invented technologies. However, if we cannot negotiate exclusive rights to other co-owned technology, each co-inventor may have rights to independently make, use, offer to sell or sell the patented technology. Commercialization, assignment or licensing of the technology by a co-inventor could harm our business.
We also rely on a combination of trade secret and copyright laws, employee and third-party nondisclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies. We cannot be certain that these measures will provide meaningful protection of our trade secrets, know-how or other proprietary information. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We cannot assure you that we will be able to protect our intellectual property successfully.
Other persons may assert rights to our proprietary technology, which could be costly to contest or settle
Third parties may assert patent or other intellectual property infringement claims against us with respect to our products, technologies, or other matters. Any claims against us, with or without merit, as well as claims initiated by us against third parties, can be time-consuming and expensive to defend or prosecute and resolve. There may be third-party patents and other intellectual property relevant to our products and technology which are not known to us. We have not been accused of infringing any third party’s patent rights or other intellectual property, but we cannot assure you that litigation asserting claims will not be initiated, that we would prevail in any litigation, or that we would be able to obtain any necessary licenses on reasonable terms, if at all. If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in interference proceedings declared by the Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us, even if the outcome is favorable to us. In addition, to the extent outside collaborators apply technological information developed independently by them or by others to our product development programs or apply our technologies to other projects, disputes may arise as to the ownership of proprietary rights to these technologies.
We may be required to obtain rights to proprietary genes and other technologies to further develop our business, which may not be available or may be costly
We currently investigate and use certain gene sequences or proteins encoded by those sequences, including the factor VIII gene, and manufacturing processes that are or may become patented by others. As a result, we may be required to obtain licenses to these gene sequences or proteins or other technology in order to test, use or market products. We may not be able to obtain these licenses on terms favorable to us, if at all. In connection with our efforts to obtain
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rights to these gene sequences or proteins or other technology, we may find it necessary to convey rights to our technology to others. Some of our gene therapy products may require the use of multiple proprietary technologies. Consequently, we may be required to make cumulative royalty payments to several third parties. These cumulative royalties could become commercially prohibitive. We may not be able to successfully negotiate these royalty adjustments to a cost effective level, if at all.
If we do not achieve certain milestones, we may not be able to retain certain licenses to our intellectual property
We have entered into license agreements with third parties for technologies related to our gene therapy product development programs. Some of these license agreements provide for the achievement of development milestones. If we fail to achieve these milestones or to obtain extensions, the licensor may terminate these license agreements with relatively short notice to us. Termination of any of our license agreements could harm our business.
If Research Corporation Technologies is able to enforce patent protection for certain formulation technologies, the rights to which were previously licensed to us, the commercializing of our Coagulin-B product may be prevented or delayed
In May 1992, we entered into a license agreement with Research Corporation Technologies, Inc. (RCT) for rights to an invention related to a cell-specific promotor in AAV vectors. The invention was the subject of a pending U.S. patent application at the time the license agreement was entered into. Two U.S. patents relating to the invention subsequently issued: U.S. Patent Nos. 5,252,479 and 6,261,834. In February 2002, we filed a complaint against RCT for breach of contract in connection with the license agreement and exercised our right to terminate the license agreement. In our complaint, we sought financial damages and a determination by the court that RCT’s actions rendered U.S. Patent No. 6,261,834 unenforceable and that this was a breach of the terms of the license agreement. RCT then filed a counter-claim alleging our failure to pay royalties under the license agreement and seeking $100,000 in damages. In February 2003, we entered into an agreement with RCT resulting in the dismissal of both our complaint and RCT’s counterclaim; however, this agreement and dismissal do not affect our rights to assert unenforceability and/or invalidity of any of RCT’s patents in any future proceedings or suit. If RCT is successful in enforcing these patent rights against us in the future, we may be forced to develop alternative technologies to replace the functions of the technologies covered by the RCT patents. Any requirements to modify the formulation of our Coagulin-B product from what is being tested in clinical trials could cause substantial delays in our current and future clinical trials, which would delay our ability to market our Coagulin-B product. In addition, if we are unable to develop alternative technologies to replace the functions of the technologies covered by the RCT patents, we may be forced to seek a new license from RCT to market our Coagulin-B product, which we may not be able to do, or may only be able to do on unfavorable terms.
If we are able to bring our potential products to market, we continue to face a number of risks including our inexperience in marketing or selling our potential products, the acceptance of AAV gene therapy products by physicians and insurers, our ability to price our products effectively and to obtain adequate reimbursement for sales of our products.
Even if we are able to develop our potential products and obtain necessary regulatory approvals, we have no experience in marketing or selling any of our proposed products. We
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intend to enter into distribution and marketing agreements with other companies for our products and do not anticipate establishing our own sales and marketing capabilities for any of our potential products in the foreseeable future. For example, we have entered into an exclusive worldwide marketing and distribution agreement with Bayer Corporation for Coagulin-B. However, if Bayer Corporation does not perform under this agreement, we would need to market this product ourselves, and we may not be able to establish adequate marketing capabilities for this product. Similarly, we may not be able to develop adequate marketing capabilities for our other potential products, either on our own or through other third parties.
Our success is dependent on acceptance of our gene therapy products. We cannot assure you that our products will achieve significant market acceptance among patients, physicians or third-party payors, even if we obtain necessary regulatory and reimbursement approvals. Failure to achieve significant market acceptance will harm our business. In addition, we cannot assure you that these products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a profitable basis. In both the United States and elsewhere, sales of medical products and treatments are dependent, in part, on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. We cannot predict whether any legislative or regulatory proposals will be adopted or the effect of such potential proposals or managed care efforts may have on our business.
We expect that we will face intense competition, which may limit our ability to become profitable
Our competitors may develop more effective or more affordable products, or commercialize products earlier than we do, which would limit the prices that we could charge for the products that we are able to market, and prevent us from becoming profitable. We expect increased competition from fully integrated pharmaceutical companies and more established biotechnology companies. Most of these companies have significantly greater financial resources and expertise than we do in research and development, preclinical studies, clinical trials, obtaining regulatory approvals, manufacturing, and marketing and distribution.
Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. Academic institutions, government agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for product development and marketing. In addition, these companies and institutions compete with us in recruiting and retaining highly qualified scientific and management personnel. We are aware that other companies are conducting preclinical studies and clinical trials for viral and non-viral gene therapy products that could compete with products we are developing.
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We have limited experience in manufacturing our potential products at a commercial scale, which raises uncertainty about our ability to manufacture our potential products cost-effectively
Even if we are able to develop our potential products and obtain necessary regulatory approvals, we have limited experience in manufacturing any of our proposed products on a commercial basis. If we are unable to manufacture our products in a cost-effective manner, we are not likely to become profitable. We have not yet received a license from the FDA for our manufacturing facilities, and cannot apply for one until we submit our product for commercial approval. Even if we do receive a manufacturing license, we may fail to maintain adequate compliance with the FDA’s regulations concerning current good manufacturing practices, in which case the license, and our authorization to manufacture product, could be revoked.
We may lose access to critical materials from single source suppliers, which is not within our control and could delay us from manufacturing vector needed to support our clinical trials or future commercialization
We obtain materials used in the manufacture of our clinical vector products from a number of suppliers, some of whom are our sole qualified source of these materials. We qualify the suppliers of our clinical materials according to cGMP regulations. If we were to lose access to critical materials from any of these sole-source suppliers, we would be required to obtain a new source of the materials. It could take us several months to qualify new suppliers before we could use their materials in the manufacture of our clinical vector products.
We may be unable to attract and retain the qualified employees, consultants and advisors we need to be successful
We are highly dependent on key members of our senior management and scientific staff. The loss of any of these persons could substantially impair our research and development efforts and impede our ability to develop and commercialize any of our products. Recruiting and retaining qualified scientific, technical and managerial personnel will also be critical to our success. Biotechnology personnel with these skills are in high demand. As a result, competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for these people can be high.
In addition, we rely on consultants and advisors to assist us in formulating our research and development strategy. A majority of our scientific advisors are engaged by us on a consulting basis and are employed on a full-time basis by others. We have limited control over the activities of these scientific collaborators which often limit their availability to us. Failure of any of these persons to devote sufficient time and resources to our programs could delay our progress and harm our business. In addition, some of these collaborators may have consulting or other advisory arrangements with other entities that may conflict or compete with their obligations to us.
We may need to secure additional financing to complete the development and commercialization of our products
We anticipate that our existing capital resources as of March 31, 2003, will be adequate to fund our needs for at least the next four years. However, we may require additional funding to complete the research and development activities currently contemplated and to commercialize our products. Our future capital requirements will depend on many factors, including:
- continued scientific progress in research and development programs;
- the scope and results of preclinical studies and clinical trials;
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- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent claims;
- the cost of manufacturing scale-up;
- the cost of commercialization activities; and
- other factors which may not be within our control.
We intend to continue to seek additional funding through public or private equity or debt financing, when market conditions allow, or through additional collaborative arrangements with corporate partners. If we raise additional funds by issuing equity securities, there may be further dilution to existing stockholders. We cannot assure our investors that we will be able to enter into such financing arrangements on acceptable terms or at all. Without such additional funding, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs.
We face the risk of liability claims which may exceed the scope or amount of our insurance coverage
The manufacture and sale of medical products entail significant risk of liability claims. We currently carry liability insurance; however, we cannot assure you that this coverage will remain in place or that this coverage will be adequate to protect us from all liabilities which we might incur in connection with the use of our products in clinical trials or the future use or sale of our products upon commercialization. In addition, we may require increased liability coverage as additional products are used in clinical trials and commercialized. This insurance is expensive and may not be available on acceptable terms in the future, if at all. A successful liability claim or series of claims brought against us in excess of our insurance coverage could harm our business. We must indemnify certain of our licensors against any liability claims brought against them arising out of products developed by us under these licenses.
Our use of hazardous materials exposes us to the risk of environmental liabilities, and we may incur substantial additional costs to comply with environmental laws in connection with the operation of our research and manufacturing facilities
We use radioactive materials and other hazardous substances in our research and development and manufacturing operations. As a result, we are potentially subject to substantial liabilities related to personal injuries or property damages they may cause. In addition, clean up costs associated with radioactivity or other hazardous substances, and related damages or liabilities could be significant and could harm our business. We are required to comply with increasingly stringent laws and regulations governing environmental protection and workplace safety which could impose substantial fines and criminal sanctions for violations. Maintaining compliance with these laws and regulations could require substantial additional capital.
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Risks Related to Our Stock
Anti-takeover effects of certain charter provisions and Delaware law may negatively affect the ability of a potential buyer to purchase some or all of our stock at an otherwise advantageous price, which may limit the price investors are willing to pay for our common stock
Certain provisions of our charter and Delaware law may negatively affect the ability of a potential buyer to attempt a takeover of Avigen, which may have a negative effect on the price investors are willing to pay for our common stock. For example, our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, and privileges of those shares without any further vote or action by the stockholders. This would enable the Board of Directors to establish a shareholder rights plan, commonly referred to as a “poison pill,” which would have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of Avigen. In addition, our board of directors is divided into three classes, and each year on a rotating basis the directors of one class are elected for a three-year term. This provision could have the effect of making it less likely that a third party would attempt to obtain control of Avigen through Board representation.
Furthermore, certain other provisions of our restated certificate of incorporation may have the effect of delaying or preventing changes in control or management, which could adversely affect the market price of our common stock. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law.
Our stock price is volatile, and as a result investing in our common stock is very risky
From January 1, 2001 to April 30, 2003, our stock price has fluctuated between a range of $22.50 and $2.75 per share. We believe that various factors may cause the market price of our common stock to continue to fluctuate, perhaps substantially, including announcements of:
- technological innovations or regulatory approvals;
- results of clinical trials;
- new products by us or our competitors;
- developments or disputes concerning patents or proprietary rights;
- achieving or failing to achieve certain developmental milestones;
- public concern as to the safety of gene therapy, recombinant biotech or traditional pharmaceutical products;
- health care or reimbursement policy changes by governments or insurance companies;
- developments in relationships with corporate partners; or
- a change in financial estimates or securities analysts’ recommendations.
In addition, in recent years, the stock market in general, and the shares of biotechnology and health care companies in particular, have experienced extreme price fluctuations. These broad market and industry fluctuations may cause the market price of our common stock to decline dramatically.
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Item 3.Quantitative and Qualitative Disclosure About Market Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. We do not hold derivative financial investments, derivative commodity investments or other financial investments or engage in foreign currency hedging or other transactions that exposes us to other market risks. Our investment objectives are focused on preservation of principal and liquidity. By policy, we manage our exposure to market risks by limiting our investments to high quality issuers and highly liquid instruments with effective maturities of less than three years, and an average aggregate portfolio duration of approximately one year. Our entire portfolio is classified as available-for-sale and, as of March 31, 2003, consisted of approximately 85% fixed-rate securities and 15% variable-rate securities.
We have evaluated the risk associated with our portfolios of investments in marketable securities and have deemed this market risk to be immaterial. If market interest rates were to increase by 100 basis points, or 1%, from their March 31, 2003 levels, we estimate that the fair value of our securities portfolio would decline by approximately $1.1 million. Our estimated exposure at March 31, 2003 is lower than our estimated $1.3 million exposure at December 31, 2002 due to the reduction is size of the overall portfolio and the reduction in average aggregate duration of the instruments. The modeling technique used measures duration risk sensitivity to estimate the potential change in fair value arising from an immediate hypothetical shift in market rates and quantifies the ending fair market value including principal and accrued interest.
Our long-term debt includes a $10.0 million revolving line of credit due June 1, 2005, of which we have drawn down $8.0 million in cash that would need to be repaid. Interest charged on the borrowing is based on LIBOR and is reset in three-month increments based on the date of each original drawdown. As of March 31, 2003, the average annual rate of interest charged on the borrowing was approximately 2.88%.
Item 4.Controls and Procedures
Within 90 days prior to the date of this quarterly report, our president and chief executive officer and our chief financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)). Based upon that evaluation, our president and chief executive officer, along with our chief financial officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company that is required to be disclosed by us in this quarterly report. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in our internal controls. Accordingly, no corrective actions were required or undertaken.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
On February 12, 2003, we settled a lawsuit that we had filed on February 21, 2002 in the United States District Court for the Northern District of California alleging that Research Corporation Technologies, Inc. (RCT) engaged in a breach of contract as a result of RCT’s failure to disclose material information to the Patent and Trademark Office in connection with the prosecution of U.S. Patent Application No. 07/789,917 relating to a cell-specific promoter in
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AAV vectors which issued as U.S. Patent No. 6,261,834 on July 17, 2001. In May 1992, we entered into a license agreement with RCT for rights to the invention that was covered by the claims of U.S. Patent No. 6,261,834. The license was exclusive and worldwide and included two issued U.S. patents as well as foreign counterparts. In consideration for the license, we paid an initial license fee and issued 247,949 shares of our common stock to RCT. On June 20, 2002, RCT filed an answer to the complaint and a counterclaim alleging our failure to pay royalties under the license agreement and seeking $100,000 in damages. The parties agreed to the dismissal of both our complaint and RCT’s counterclaim with prejudice except that the parties’ agreement and the dismissal does not affect our rights to assert unenforceability and/or invalidity of any of RCT’s patents, including U.S. Patent No. 6,261,834 (and any co-pending applications, continuations, continuations in part, reexaminations, reissues, and divisionals thereof, and any foreign counterparts thereof, if applicable) in any future proceeding or suit. On February 21, 2003, the United States District Court for the Northern District of California, having learned of the parties’ agreement to dismiss our complaint and RCT’s counterclaim, dismissed the lawsuit without prejudice.
As of April 30, 2003, we were not involved in any material legal proceedings.
Item 2.Changes in Securities and Use of Proceeds
None.
Item3. Defaults Upon Senior Securities
None.
Item 4.Submission of Matters to a Vote of Security Holders
None.
Item 5.Other Information
Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non-audit services approved by our Audit Committee to be performed by Ernst & Young LLP, our external auditor. Non-audit services are defined as services other than those provided in connection with an audit or a review of our financial statements. The Audit Committee has approved our recurring engagements of Ernst & Young for the following non-audit services: (1) preparation of tax returns, and tax advice in preparing for and in connection with such filings; and (2) all work required to be performed by Ernst & Young in connection with preparing and giving consents required to be given in connection with our filings with the Securities and Exchange Commission.
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Item 6.Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit No. | Description | ||
3.1* | Amended and Restated Certificate of Incorporation | ||
3.1.1** | Certificate of Amendment to Certificate of Incorporation | ||
3.2* | Restated Bylaws of the Registrant | ||
4.1* | Specimen Common Stock Certificate | ||
99.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed as an exhibit to Avigen’s Registration Statement on Form S-1 (No. 333-3220) and incorporated herein by reference. |
** | Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 (Commission file number 0-28272), as filed with the SEC on September 27, 2000. |
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AVIGEN, INC. | ||
Date: May 9, 2003 | By: | /s/ JOHN MONAHAN |
John Monahan | ||
Chief Executive Officer and President | ||
Date: May 9, 2003 | By: | /s/ THOMAS J. PAULSON |
Thomas J. Paulson | ||
Vice President Finance, | ||
Chief Financial and Accounting Officer, and | ||
Secretary |
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CERTIFICATION
I, John Monahan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avigen, Inc.;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ JOHN MONAHANJohn Monahan
Chief Executive Officer and President
(Principal Executive Officer)
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CERTIFICATION
I, Thomas J. Paulson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avigen, Inc.;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ THOMAS J. PAULSONThomas J. Paulson
Vice President, Finance,
Chief Financial and Accounting Officer, and Secretary
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. | Description | |
3.1* | Amended and Restated Certificate of Incorporation | |
3.1.1** | Certificate of Amendment to Certificate of Incorporation | |
3.2* | Restated Bylaws of the Registrant | |
4.1* | Specimen Common Stock Certificate | |
99.1 | Certificate of Chief Executive Officer and Chief Financial Officer – Section 906 | |
* | Filed as an exhibit to Avigen’s Registration Statement on Form S-1 (No. 333-3220) and incorporated herein by reference. |
** | Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 (Commission file number 0-28272), as filed with the SEC on September 27, 2000. |
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