[GPC Biotech AG Letterhead]
GPC Biotech AG, Fraunhoferstr. 20, D-82152 Martinsried
Mr. Jim B. Rosenberg
Senior Assistant Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 6010 September 29, 2006
Washington, DC 20549
Re: GPC Biotech AG
Form 20-F for Fiscal Year Ended December 31, 2005
File No. 0-50825
Dear Mr. Rosenberg:
GPC Biotech AG (the "Company") recently received comments of the staff (the
"Staff") of the Securities and Exchange Commission in a letter, dated
dateYear2006Day16Month8lstransAugust 16, 2006 (the "Comment Letter") addressed
to Bernd Seizinger, the Company's Chief Executive Officer. Set forth below are
the Company's responses to the Comment Letter. The numbered paragraphs and
headings below correspond to the headings and numbers set forth in the Comment
Letter, the text of which is copied below in italics for your reference.
Form 20-F for the year ended December 31, 2005
Operating and Financial Review and Prospects
Results of Operations and Related Information, page 55
1. We acknowledge your disclosures on page 57 regarding the costs incurred
on your research and development projects during each of the past three
years and your disclosures on page 55 regarding your inability to
determine the period in which you might generate revenues from these
projects. Please provide in a disclosure-type format, a revised
discussion regarding your research and development projects that
quantifies the costs incurred since inception on each project and the
estimated costs to complete each project. Otherwise, please tell us
where you have disclosed this information in your filings.
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In addition to the disclosures the Staff references in its question, we also
like to refer the Staff to the Annual Report for the fiscal year ended December
31, 2004 (the "2004 20-F"), pages 55 and 56. The referenced pages contain a
disclosure of the costs incurred with respect to the Company's research and
development projects for each year since 2002. For the Staff's convenience, the
Company has aggregated this information in the table below:
Year Ended December 31,
--------------------------------------------------
Total
2005 2004 2003 2002 2002-
2005
--------------------------------------------------
Project Costs:
Satraplatin 23,087 14,907 9,819 2,581 50,394
1D09C3 1,660 3,092 1,401 4,148 10,301
Cost of performing research and development for others 910 1,371 3,565 3,724 9,570
Other projects 8,475 5,196 5,723 9,834 29,228
- --------------------------------------------------------------------------------------------------------
Total project cost 34,132 24,566 20,508 20,287 99,493
Other costs to arrive at total research and
development 7,419 6,445 6,466 6,234 26,564
Stock-based compensation 3,259 1,982 1,290 2,675 9,206
Building and facilities 3,468 3,882 4,060 2,731 14,141
Depreciation 3,350 1,253 1,361 1,904 7,868
Intellectual property expenses 593 891 845 1,620 3,949
Other expenses 3,463 936 3,005 2,602 10,006
- --------------------------------------------------------------------------------------------------------
Total research and development expenses 55,684 39,955 37,535 38,053 171,227
- --------------------------------------------------------------------------------------------------------
In its future reports on Form 20-F, the Company proposes to include a column,
substantially similar to the last column in the table above that presents
aggregate costs incurred for each project from 2002 through the end of the
period covered by the report. "Other projects" include our various pre-clinical
and earlier stage projects.
The Company acknowledges the Staff's request for disclosure of costs incurred
since the inception of each project, which may include periods prior to 2002.
The Company respectfully submits, however, that there were no costs related to
satraplatin prior to 2002 (when satraplatin was licensed in) and that other
project costs prior to 2002 cannot be presented in a meaningful manner on a
project basis because the Company did not have its project systems fully
implemented at all of its sites in periods prior to 2002. The Company further
submits that it cannot reliably estimate the costs to complete its drug
development projects due to uncertainties associated with clinical trials. As a
result, the Company proposes to include the following disclosure in its future
reports on Form 20-F after the tabular presentation referred to above:
There were no costs related to satraplatin in 2001 and/or prior years. Other
project costs in 2001 and prior years cannot be presented in a meaningful
manner on a project basis because we did not have our project systems fully
implemented at all of our sites in these years.
We are unable to reliably estimate the costs to complete our drug development
projects due to uncertainties associated with clinical trials. Therefore, any
estimates to complete a research and development project are highly
speculative and may differ materially from actual expenses incurred for such
projects. There are many factors outside of our control that could delay or
possibly prevent successful completion of our research and development
projects. Furthermore,
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all estimates are subjective due to the numerous risks and uncertainties
associated with developing biopharmaceutical products, including but not
limited to significant changes of government regulations, the uncertainty of
future preclinical and clinical study results and uncertainties and the
unpredictability associated with regulatory approvals, product development,
manufacturing and marketing.
Contractual Obligations, page 66
2. Please provide us, in a disclosure-type format, a revised contractual
obligations discussion regarding your contingent milestone obligations.
In this revised disclosure, please provide at a minimum the nature of
the events triggering your payment obligations, the aggregate dollar
value of your milestone payments and the aggregate amount of milestone
payments you are reasonably likely to incur within the next year.
We refer the Staff to page 67 of the Company's 2005 20-F, which includes the
following disclosure:
The contractual obligations table does not include amounts for milestone
payments to various collaboration partners resulting from the achievement of
defined contractual milestones, as the payments are contingent on the
achievement of defined contractual milestones.
In response to the Staff's comments, the Company would have made the following
disclosure as of December 31, 2005 and is planning to include equivalent
disclosure in its future filings on Form 20-F:
The contractual obligations table does not include amounts for milestone
payments. We have entered, and from time to time we may enter, into
agreements under which we are or may be obligated to make payments which are
contingent upon the occurrence of certain events. As of December 31, 2005,
the total maximum amount of milestone payments we may be obligated to make
under these agreements was approximately (euro)108 million. However, this
number includes obligations related to pre-clinical and earlier stage
projects, as well as projects that may be discontinued and, therefore, it is
unlikely that all of these milestones will be achieved. In 2005, we made
actual payments of approximately (euro)0.4 million under these agreements,
all of which were in connection with milestones relating to preclinical
studies and clinical trials.
The actual amounts and the timing of these contingent payments depend on
numerous factors outside of our control, including the success of our
preclinical and clinical development efforts with respect to the
listsproducts being developed under these agreements, the substance and
timing of decisions made by the Food and Drug Administration, the United
States Patent and Trademark Office and other regulatory authorities, and the
volume of sales or gross margin of a listsproduct in a specified territory
and as well as certain other factors. These events are subject to numerous
risks and uncertainties, including those discussed under "Risk Factors" in
Item 3 and, therefore we cannot accurately predict the timing, probability
and amounts of these payments. Accordingly, costs related to these payments
are only reflected in our consolidated financial statements when the
achievement of the underlying milestone is deemed probable which, in the
past, has been when the related milestone is achieved.
The Staff is supplementally advised that the amount of individual milestone
payments, the amount of royalties payable as well as sublicense income contained
in its agreements with Spectrum Pharmaceuticals, Inc. (formerly Neotherapeutics,
Inc.) ("Spectrum") and with MorphoSys AG ("MorphoSys") received confidential
treatment by the Staff on June 23, 2004 until May 6, 2007). The Company believes
that any more detailed disclosure of
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payments due to Spectrum and MorphoSys would jeopardize the confidentiality of
this information.
Critical Accounting Policies
Accrued Expenses, page 69
3. You indicate that you make judgments and estimates in determining your
accrual balances for contract research and professional service fees.
Please provide us, in a disclosure-type format, a revised discussion
that quantifies how accurate your estimates have been in the past. If
true, please indicate that no material adjustments to your estimates
have been made for each of the periods presented in the financial
statements.
In response to the Staff's comments, the Company proposes to include the
following disclosure in its future reports on Form 20-F:
For the periods presented in our consolidated financial statements we have
made no material adjustments to our estimates of contract research and
professional service fees.
The Staff is supplementally advised that:
o Subsequent estimate revisions related to our year end contract
research accruals and accrued professional service fees amounted to
approximately 0.5 %, 0.3% and 0.9 % of our consolidated net loss for
the years ended dateYear2005Day31Month12lstransDecember 31, 2005, 2004
and 2003, respectively.
o Subsequent estimate revisions related to our year end contract
research accruals amounted to approximately 0.7%, 0.2%, and 0.5% of
consolidated research and development expenses for the years ended
dateYear2005Day31Month12lstransDecember 31, 2005, 2004 and 2003,
respectively.
o Subsequent estimate revisions related to our year end accrued
professional service fees amounted to approximately 0.1%, 0.1%, and
0.1% of our consolidated operating expenses for the years ended
dateYear2005Day31Month12lstransDecember 31, 2005, 2004 and 2003,
respectively.
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 3: Collaboration Agreements, page F-14
4. You disclose that you used the residual method to assess the fair
values of the multiple contractual elements of your December 19, 2005
agreement with Pharmion GmbH. Although you do not disclose your
anticipated accounting for any future milestone payments to be received
from Pharmion, your revenue recognition policy on page F-10 indicates
that you recognize revenue for substantive milestones when achieved.
Please provide us, in a disclosure-type format, a revised discussion of
your Pharmion collaboration agreement that indicates your anticipated
revenue recognition for your milestones. If you anticipate recognizing
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milestone revenues upon attainment, please explain to us how you are
able to determine under the residual methods that the undelivered
milestone consideration is at fair value and appears to be commensurate
with the effort expended.
We advise the Staff that we account for our milestones under the
"milestone-based method" as described in the 2005 Miller Revenue Recognition
Guide. The milestone-based method distinguishes between up-front and milestone
payments for accounting purposes instead of combining them. The up-front fee in
the milestone-based method is deemed to relate to the entire performance period,
since no discrete earnings process culminated upon receipt of the up-front fee.
As such, the up-front fee is recognized over the performance period in a
systematic and rational way. The milestone payments, however, are deemed to be
related to the portion of the performance period dedicated to achieving that
specific milestone. In substance, each milestone is treated as if it is a
separate contract and recognized entirely and immediately when achieved.
The milestone-based method is predicated upon the milestones being substantive.
We consider milestones to be substantive when there is substantive effort
required to reach the milestone and the milestones are contingent upon future
events for which there is reasonable uncertainty as to their achievement. All
milestones pursuant to our agreement with Pharmion GmbH are for future
significant clinical, regulatory or sales achievements and as such are
considered to be substantive.
In response to the Staff's comment, we will revise the disclosure related to our
revenue recognition policy in our future reports on Form 20-F to clarify the
anticipated revenue recognition treatment for milestones, as follows:
All milestones pursuant to our co-development and licensing agreements are
for future significant clinical, regulatory or sales achievements and as such
are considered to be substantive. We expect to recognize revenues from
milestones achieved, if any, under such agreements under the milestone-based
method. The milestone-based method distinguishes between up-front and
milestone payments for accounting purposes instead of combining them. The
milestone payments are deemed to be related to the portion of the performance
period dedicated to achieving that specific milestone. In substance, each
substantive milestone is treated as if it is a separate contract and
recognized entirely and immediately when achieved.
In addition, we will revise our disclosure in our future reports on Form 20-F to
clarify the accounting under the Pharmion co-development and license agreement
as follows:
Based on the guidance included in EITF 00-21, the Company has used the
residual method to assess the fair value of the multiple contractual elements
in this agreement. The $18 million upfront cost reimbursement will be
recognized as revenue on a straight-line basis over the period of substantial
involvement of the Company in the development activities. The $19.1 million
for shared development costs will be treated as prepaid development costs and
will be recognized as shared development costs are incurred. Revenues
resulting from the supply agreement will be recognized when earned.
Revenues, if any, from substantive milestones achieved under our agreement
with Pharmion GmbH will be recognized immediately when achieved pursuant to
the milestone-based method.
Note 5: Acquisition of Significant Assets, page F-15
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5. Please explain to us why your acquisition of the significant assets of
Axxima Pharmaceuticals AG does not constitute the acquisitions of a
business under SFAS 141. In your response please ensure you address
your hiring of 40 employees of Axxima. In addition, please explain to
us why you have accounted for the acquisition of the cash of Axxima in
exchange for your common stock as a financing activity instead of an
investing activity.
In March, 2005, the Company acquired substantially all of the assets of Axxima
Pharmaceuticals AG ("Axxima"), a development stage company (as defined in FAS 7
"Accounting and Reporting" by Development Stage Companies") in bankruptcy
proceedings, and hired 40 of its former employees. Following the guidance in
footnote 4 to paragraph 9. of SFAS 141 "Business Combinations", the Company
reviewed EITF 98-3 "Determining Whether a Non-monetary Transaction involves
Receipt of Productive Assets or of a Business" to determine if the acquisition
should be recorded as an acquisition of assets or a business combination. In
accordance with paragraph 6 of EITF 98-3, which states that if the acquisition
"...is in the development stage and has not commenced planned principal
operations, the set [acquisition] is presumed not to be a business," Axxima
Pharmaceuticals was deemed to be a development stage company and therefore the
set of assets acquired and the hiring of 40 employees were presumed not to
represent an acquisition of a business.
When reflecting this transaction in its consolidated statement of cash flows,
the Company evaluated whether all elements of this transaction were a financing
activity and or an investing activity. As disclosed on page 107 of the Company's
2005 20-F, the acquisition of the assets of Axxima was accompanied by a
financing transaction of (euro)10.4 million, net of transaction costs. As an
initial step in the acquisition, certain private and institutional investors
contributed cash of (euro)10.7 million to a holding or "shell" company. In a
subsequent step, the shell company then acquired substantially all of the assets
of Axxima for a total of (euro)2.0 million. Subsequently, the Company acquired
the shell company through issuing shares to the aforementioned private and
institutional investors.
Thus, the cash acquired as part of the overall transaction was not, in
substance, considered to be assets transferred from Axxima. Rather, the
transaction was, in substance, an exchange of cash for shares of the Company
issued to the aforementioned investors. Accordingly, the acquisition of cash was
considered a financing activity rather than an investing activity. The Company
presented amounts paid for the acquired assets out of proceeds from the
aforementioned share issuance in cash flows from investing activities. The
non-cash acquisition of assets through the assumption of liabilities was
disclosed separately as a non-cash transaction.
********
In responding to the Staff's comments, please be advised that the Company hereby
acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosures in the filing;
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o Staff comments or changes to disclosures in response to Staff comments
do not foreclose the Commission from taking any action under federal
securities law of the United States; and
o the Company may not assert the Staff's comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the country-regionplaceUnited States.
If you or another member of the Staff has any further questions or comments
concerning these responses or if you require additional information, please feel
free to contact Mirko Scherer, Senior Vice President and Chief Financial Officer
at +49 (89) 85652600 or Kristina Beirne, Assistant General Counsel, (609)
524-1028.
Very truly yours,
The Management Board of GPC Biotech AG
represented by:
/s/ Sebastian Meier-Ewert
- -----------------------------
Name: Sebastian Meier-Ewert
Title: SVP & CEO
/s/ Elmar Maier
- -----------------------------
Name: Elmar Maier
Title: SBP BD
cc: Mark Brunhofer, Senior Staff Accountant
Brent Hatzis-Schoch, Vice President and General Counsel
Danielle Carbone, Shearman & Sterling LLP
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