FORM 1O-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[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
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-19732
CORVAS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0238812
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3030 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
(858) 455-9800
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (l) 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 Securities Exchange Act of 1934).
Yes [ ] No [X]
At May 5, 2003, there were 27,590,647 shares of Common Stock, $0.001
par value, of the registrant issued and outstanding.
CORVAS INTERNATIONAL, INC.
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 1
Condensed Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 (unaudited) 2
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (unaudited) 3
Notes to Condensed Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
None
Item 3. Defaults Upon Senior Securities 24
None
Item 4. Submission of Matters to a Vote of Security Holders 24
None
Item 5. Other Information 24
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 25
(b) Reports on Form 8-K 25
SIGNATURES 26
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CORVAS INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
In thousands
(unaudited)
MARCH 31, 2003 DECEMBER 31, 2002
---------------- -----------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 8,207 $ 4,428
Short-term debt securities held to maturity
and time deposits, partially restricted 59,421 73,860
Receivables 875 1,172
Other current assets 2,388 2,541
---------------- ----------------
Total current assets 70,891 82,001
---------------- ----------------
Debt issuance costs, net 65 70
Long-term debt securities held to maturity 18,712 12,186
Property and equipment, net 2,393 2,336
---------------- ----------------
$ 92,061 $ 96,593
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 384 $ 601
Accrued liabilities 1,195 789
Accrued leave 459 430
Accrued restructuring charges 84 426
---------------- ----------------
Total current liabilities 2,122 2,246
---------------- ----------------
Convertible notes payable 12,770 12,558
Deferred rent 260 258
Stockholders' equity:
Common stock 28 28
Additional paid-in capital 227,684 227,681
Accumulated deficit (150,803) (146,178)
---------------- ----------------
Total stockholders' equity 76,909 81,531
Commitments and contingencies
---------------- ----------------
$ 92,061 $ 96,593
================ ================
See accompanying notes to condensed financial statements.
1
CORVAS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
In thousands, except per share data
(unaudited)
Three Months Ended
March 31,
-------------------------------
2003 2002
------------- -------------
REVENUES:
Royalties $ 38 $ 27
------------- -------------
Total revenues 38 27
------------- -------------
COSTS AND EXPENSES:
Research and development 3,163 4,724
General and administrative 1,781 1,267
------------- -------------
Total costs and expenses 4,944 5,991
------------- -------------
Loss from operations (4,906) (5,964)
------------- -------------
OTHER INCOME (EXPENSE):
Interest income 498 980
Interest expense (217) (206)
------------- -------------
281 774
------------- -------------
Net loss and other comprehensive loss $ (4,625) $ (5,190)
============= =============
Basic and diluted net loss per share $ (0.17) $ (0.19)
============= =============
Shares used in calculation of basic and
diluted net loss per share 27,591 27,503
============= =============
See accompanying notes to condensed financial statements.
2
CORVAS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
In thousands
(unaudited)
Three Months Ended
March 31,
-----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,625) $ (5,190)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 209 222
Amortization of premiums and discounts on investments 347 273
Amortization of debt issuance costs 5 5
Non-cash interest expense on convertible notes payable 212 201
Net gain on sale of property and equipment -- (5)
Stock compensation expense 3 17
Changes in assets and liabilities:
(Increase) decrease in receivables 297 (258)
(Increase) decrease in other current assets 153 (592)
Increase in accounts payable, accrued
liabilities, accrued benefits and accrued leave 218 157
Decrease in accrued restructuring charges (342) --
Increase in deferred rent 2 14
------------ ------------
Net cash used in operating activities (3,521) (5,156)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (17,918) (9,020)
Proceeds from maturity of investments held to maturity 25,484 10,115
Proceeds from sale of investments held to maturity -- 5,089
Proceeds from sale of property and equipment -- 5
Purchases of property and equipment (266) (663)
------------ ------------
Net cash provided by investing activities 7,300 5,526
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 18
------------ ------------
Net cash provided by financing activities -- 18
------------ ------------
Net increase in cash and cash equivalents 3,779 388
Cash and cash equivalents at beginning of period 4,428 4,332
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,207 $ 4,720
============ ============
See accompanying notes to condensed financial statements.
3
CORVAS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) The Company
-----------
Corvas International, Inc. (the "Company") was incorporated on March
27, 1987 under the laws of the State of California. In July 1993, the Company
reincorporated in the State of Delaware. The Company is focused on the
development of new biotherapeutics that address large medical markets, including
cardiovascular disease and cancer.
(2) Basis of Presentation
---------------------
The interim financial information contained herein is unaudited but, in
management's opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Following the rules
and regulations of the Securities and Exchange Commission (the "SEC"), we have
omitted footnote disclosures that would substantially duplicate the disclosures
contained in the annual audited financial statements. The condensed financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 2002 included in
the Company's Annual Report on Form 10-K. Results for the interim periods are
not necessarily indicative of results for other interim periods or for the full
year.
(3) Restructuring
-------------
In July 2002, the Company announced a workforce reduction which
resulted in the termination of 42 research and administrative employees. This
restructuring was part of an extensive strategic realignment of research
programs designed to focus the Company's resources on the continued development
of its most-advanced cardiovascular and cancer programs.
Information related to the restructuring charges is included in the
table below (in thousands).
Accrued Cash Accrued
at Payments at
December 31, 2002 Made March 31, 2003
----------------- ----------------- -----------------
Severance and related $ 277 $ 193 $ 84
Contractual obligations 149 149 --
------- ------- -------
$ 426 $ 342 $ 84
======= ======= =======
(4) Net Loss Per Share
------------------
Net loss per share for the three months ended March 31, 2003 and 2002
is computed using the weighted-average number of common shares outstanding.
Options totaling 3,609,000 and 3,196,000 shares were excluded from the
calculation of diluted net loss per share for the three months ended March 31,
2003 and 2002 respectively. In addition, 3,733,000 and 3,312,000 shares from the
assumed conversion of the 5.5% convertible senior subordinated notes issued in
1999 have been excluded from this calculation for the three months ended March
31, 2003 and 2002, respectively.
4
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(5) Accounting for Stock-Based Compensation
---------------------------------------
The Company accounts for its stock-based plans in accordance with the
recognition provisions of APB 25 and related interpretations. Stock compensation
expense is recorded on the date of grant only when options are granted to
outside consultants in accordance with the provisions of SFAS 123 and the
Emerging Issues Task Force consensus Issue 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
If the Company had determined compensation cost for its stock-based
plans based on the fair value at the grant date, the Company's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data).
Three Months Ended
March 31,
-------------------------------
2003 2002
-------------- --------------
Net loss - As reported $ (4,625) $ (5,190)
Net loss - Pro forma $ (5,377) $ (6,561)
Basic and diluted net loss per share - As reported $ (0.17) $ (0.19)
Basic and diluted net loss per share - Pro forma $ (0.19) $ (0.24)
The per share weighted-average fair market value of options to purchase
the Company's common stock granted to employees during the three months ended
March 31, 2002 was $4.93, using the Black-Scholes option-pricing model. No
options to purchase the Company's common stock were granted to employees during
the three months ended March 31, 2003. The per share weighted-average fair
market value of options to purchase the Company's common stock granted to
members of the board of directors during the three months ended March 31, 2003
and 2002 was $1.33 and $5.06, respectively, on the date of grant.
The following weighted-average assumptions were used in calculating
compensation cost for stock-based plans under SFAS 123:
Three Months Ended
March 31,
-----------------------------
2003 2002
------------- -------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.96% 4.18%
Expected life 10.00 years 7.27 years
Expected volatility 79.50% 81.67%
(6) Proposed Merger
---------------
On February 24, 2003, the Company executed a definitive merger
agreement under which Dendreon Corporation will acquire Corvas, subject to
various closing conditions including approval by the stockholders of each
company. Under the terms of this agreement, each share of Corvas common stock
will be exchanged for a fixed ratio of 0.45 shares of Dendreon common stock in a
tax-free reorganization. The transaction is currently anticipated to close in
the second quarter of 2003, subject to approval by stockholders of both
companies. Upon completion of the proposed merger, the holder of the convertible
notes payable may require the redemption of the convertible notes within 30
business days following the change of control. If the holder exercises this
right, as is currently expected following the closing of the proposed merger,
then the Company will have an obligation to pay the principal of the notes in
cash and the Company will have the option of paying the accreted interest in
cash or in Dendreon common stock priced at the average closing price for the 20
trading days immediately prior to the redemption.
5
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(7) Litigation
----------
On March 4, 2003 the Asset Value Fund Limited Partnership ("AVF") filed
a purported class action complaint against Corvas and its directors in Delaware
state court alleging that the board of directors violated its fiduciary duties
when it approved the merger agreement. Specifically, the complaint alleges that
(1) the directors failed to consider all available information when deciding to
pursue the combination, (2) the directors failed to negotiate a mechanism to
protect stockholders from the effects of a decline in Dendreon's common stock
price before the combination, and (3) a minority of the directors were
furthering their own interests in approving the combination instead of the
interests of Corvas' stockholders. AVF is seeking to enjoin Corvas from
proceeding with the combination, and also seeks compensatory damages and
reimbursement of the costs of bringing suit. Corvas was served with the
complaint on March 13, 2003. Corvas denies the allegations in the complaint and
intends to defend the action vigorously. Corvas is obligated to advance the
costs of defense to its directors, subject to their undertaking to repay the
advanced costs under specified circumstances. The insurer has yet not indicated
whether it will provide coverage with respect to this claim.
On April 10, 2003, AVF filed a books and records action under Section
220 of the Delaware General Corporation Law seeking to inspect Corvas' books and
records. Corvas has provided AVF with some documents responsive to its
inspection demand, but AVF is seeking additional books and records. To the
extent that the purposes AVF stated in its request to review Corvas' books and
records are improper or insufficiently stated or AVF seeks documents unrelated
to purposes it has properly stated, if any, Corvas will vigorously defend the
action.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM WHAT IS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK
FACTORS."
THE TERMS "CORVAS," "WE," "US" AND "OUR" REFER TO CORVAS
INTERNATIONAL, INC.
OVERVIEW
We are a biopharmaceutical company focused on the development of new
biotherapeutics that address large medical markets, including cardiovascular
disease and cancer. In November 2002 we initiated a Phase II clinical program
for rNAPc2 in patients with acute coronary syndromes, which include unstable
angina and non-ST-segment elevation myocardial infarction, or UA/NSTEMI. Our
cancer research programs are focused on the development of new biotherapies,
including monoclonal antibodies and synthetic pro-drugs, that target serine
proteases associated with the growth and spread of cancerous tumors.
On February 24, 2003, we executed a definitive merger agreement under
which Dendreon Corporation will acquire us, subject to various closing
conditions including approval by the stockholders of each company. Under the
terms of this agreement, each share of our common stock will be exchanged for a
fixed ratio of 0.45 shares of Dendreon common stock in a tax-free
reorganization. The transaction is currently anticipated to close in the second
quarter of 2003, subject to approval by stockholders of both companies. All of
the projections, trends and forward-looking statements included herein are based
on Corvas operating as a stand-alone entity. In the event that this proposed
merger is completed, these projections, trends and forward-looking statements
will likely change, and the changes may be significant.
We currently have no products for sale and are focused on research and
development and clinical trial activities. We have not been profitable on an
annual basis since inception and we anticipate that we will incur substantial
additional operating losses over the next several years as we progress in our
cardiovascular and cancer programs. To date, we have funded our operations
primarily through the sale of equity and debt securities, payments received from
collaborators and interest income. At March 31, 2003, we had an accumulated
deficit of $150.8 million. Unless we enter into any new collaborative agreements
that include funding for research and development or funding for the continued
development of our drug candidates, we expect that our major source of income,
if any, for the next several years will continue to primarily be interest
income. We may not enter into any additional collaborative agreements and may
not recognize any associated revenue.
Our research and development costs are comprised of direct costs as
well as indirect costs allocated to research and development. Our direct costs
include wages, payroll taxes and benefits for our employees engaged in research
and development and clinical development activities as well as laboratory
supplies, license fees payable to third parties, clinical manufacturing costs,
costs incurred for consultants and other outside services, and clinical trial
expenses, including patient enrollment fees and amounts paid to the TIMI Group
for coordinating the ANTHEM/TIMI-32 trial. Our indirect costs include
facility-related costs such as rent, utilities and facilities maintenance,
administrative costs associated with our research and development programs and a
portion of our general and administrative overhead, each of which is allocated
to research and development based upon time expended.
7
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
REVENUES. Our operating revenues increased to $38,000 for the three
months ended March 31, 2003 from $27,000 in the corresponding period of 2002.
Our only source of revenues during these periods was attributable to royalties
from license agreements related to sales of recombinant tissue factor, which
increased by $11,000 in the quarter ended March 31, 2003 over one year earlier.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $3.2 million, or 64% of our total expenses, in the quarter ended
March 31, 2003 compared to $4.7 million, or 79%, in the corresponding quarter of
2002. This $1.5 million decrease was primarily attributable to our July 2002
workforce reduction, which resulted in a realignment of our ongoing preclinical
research programs.
Our research and development related activities during the quarters
ended March 31, 2003 and 2002 related to discovery research in our preclinical
cancer programs and our clinical program for rNAPc2, as detailed below:
Three Months Ended
March 31,
---------------------------
2003 2002
------------ ------------
Clinical programs:
Cardiovascular $ 884 $ 1,282
Indirect costs 444 575
------------ ------------
Total clinical programs 1,328 1,857
Discovery research 1,835 2,867
------------ ------------
Total research and development expenses $ 3,163 $ 4,724
============ ============
We expect that our 2003 research and development expenses will continue
to be comprised of costs associated with rNAPc2 development as well as our
preclinical cancer research programs. Although we expect to incur costs related
to our rNAPc2 Phase II clinical program in UA/NSTEMI patients, we expect our
2003 research and development costs to be lower than those in 2002 as a result
of our workforce reduction. As of March 31, 2003, we had paid approximately $2.9
million of costs associated with the first part of this trial and we have not
prepaid any significant expenses for subsequent parts of this three-part trial,
which we refer to as the ANTHEM/TIMI-32 trial. Since we pay a per patient fee
and associated costs for each patient enrolled, we will continue to incur
expenses for the first part of this trial until patient enrollment has been
completed. We cannot reasonably estimate the timeframe in which the clinical
development of rNAPc2 will be completed or the timeframe for advancing any of
our preclinical cancer programs into clinical development.
8
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended March 31, 2003 increased by $500,000 to $1.8
million from $1.3 million in the same quarter of 2002. This increase, primarily
due to legal and accounting fees and due diligence associated with our proposed
merger with Dendreon, was partially offset by headcount reductions from our July
2002 restructuring.
NET OTHER INCOME. Net other income in the first quarter of 2003 was
$281,000, compared to $774,000 one year earlier. This $493,000 decrease was
attributable to both lower balances available for investment and lower
prevailing interest rates.
We expect that we will continue to incur substantial additional
operating losses for at least the next several years as we pursue our clinical
trials and research and development efforts. We also expect both our expenses
and losses to fluctuate from quarter to quarter and that the fluctuations may,
at times, be substantial.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our operations have been financed primarily through
public offerings and private placements of our equity and debt securities,
payments received through collaborative agreements, and interest income earned
on cash and investment balances. Our principal sources of liquidity are cash and
cash equivalents, time deposits and short- and long-term held to maturity debt
securities, which, net of $303,000 in restricted time deposits, totaled $86.0
million as of March 31, 2003. As of March 31, 2003, our current assets were
$70.9 million and our current liabilities were $2.1 million. Working capital,
which is our current assets minus our current liabilities, was $68.8 million at
March 31, 2003. We invest available cash in accordance with an investment policy
set by our board of directors.
During the quarter ended March 31, 2003, we used net cash of $3.5
million in our operating activities, all of which was provided by our investing
activities.
In August and October of 1999 we issued and sold, in two private
financings, a total of 2,000,000 shares of our common stock for $2.50 per share
and 5.5% convertible senior subordinated notes due in August 2006, or the
convertible notes, in an aggregate principal amount of $10.0 million. Net
proceeds of $14.8 million were raised in these financings. At the option of the
note holder, the principal balance of both notes is convertible into shares of
our common stock at $3.25 per share, subject to certain adjustments. Interest on
the outstanding principal amounts of these notes accretes at 5.5% per annum,
compounded semi-annually, with interest payable upon redemption or conversion.
Upon maturity, these notes will have an accreted value of $14.6 million. At our
option, the accreted interest portion of both notes may be paid in cash or in
our common stock priced at the then-current market price. We have agreed to pay
any applicable withholding taxes on behalf of the note holder that may be
incurred in connection with the accreted interest, which are estimated and
accrued at 30% of the annual accretion. We may redeem the notes at any time upon
payment of the outstanding principal and accreted interest. In the event we are
acquired by Dendreon, the note holder may require the redemption of the
convertible notes within 30 business days following the change of control. If
the holder exercises this right, as we currently expect following the closing of
the proposed merger with Dendreon, then we will have an obligation to pay the
principal of the notes in cash and we will have the option of paying the
accreted interest in cash or in Dendreon common stock priced at the average
closing price for the 20 trading days immediately prior to the redemption. We
expect to use our existing cash resources to fund the redemption of the notes.
9
In April 2002, we entered into an exclusive collaboration agreement
with Abgenix, Inc. to discover, develop and commercialize fully-human monoclonal
antibodies against two selected antigens from our portfolio of membrane-bound
serine proteases. Under the terms of the collaboration, Abgenix will use its
human antibody technologies to generate and select antibodies against the Corvas
targets. Both companies will have the right to co-develop and commercialize, or,
if co-development is not elected, to solely develop and commercialize any
antibody products discovered during the collaboration. Both companies will share
equally in the product development costs and any profits from product sales of
products successfully commercialized from any co-development efforts.
In September 2001, we entered into a collaboration agreement with Dyax
Corp. to discover, develop and commercialize novel cancer therapeutics focused
on serine protease inhibitors for two targets that we isolated and
characterized. Under the terms of this agreement, both companies will assume
joint development of any product candidates that may be identified and will
share commercialization rights and profits from any marketed products.
For at least the next several years, we expect additional operating
losses and negative cash flows from operations. As a stand-alone company, we
would currently expect our burn rate for 2003 to be in the $20 million range.
Our current estimate does not account for any potential strategic transactions
and assumes that we proceed with the second and third parts of the
ANTHEM/TIMI-32 trial without having a corporate partner in place to fund any of
the trial costs. We expect to fund our working capital and capital expenditure
requirements during the next 12 months from our available cash and investments.
Based on our current estimates, we believe that our available cash and
investments should be sufficient to satisfy our anticipated funding requirements
for at least the next several years as a stand-alone company.
10
Our material contractual obligations are as follows (in thousands):
Payments Due/Estimated by Period
--------------------------------
Less than After 5
1 year 1-3 years 4-5 years years
Total (2003) (2004-2006) (2007-2008) (2009 +)
----- ------ ----------- ----------- --------
Commitments(1)
- --------------
Operating lease $ 4,987 $ 1,012 $ 3,975 $ -0- $ -0-
Capital expenditures (2) 4 4 -0- -0- -0-
Committed research and development (3) 19,712 2,998 16,447 178 89
Workforce reduction and related costs 84 84 -0- -0- -0-
------- ------- ------- ------- -------
Total contractual obligations $24,787 $ 4,098 $20,422 $ 178 $ 89
======= ======= ======= ======= =======
- ------------------
(1) Does not include payment of outstanding principal and accreted interest on
the convertible notes as we expect they will be converted into shares of our
common stock or, in the event we are acquired by Dendreon, paid in cash
post-acquisition. This may change for many reasons including, but not limited
to, the reasons listed below and in the Risk Factors section.
(2) Based on 2003 capital purchases and purchase commitments. This estimate is
less than our approved capital budget for 2003. This estimate may change for
many reasons including, but not limited to, the reasons listed below and in the
Risk Factors section.
(3) Includes committed costs for rNAPc2, assuming that we complete all three
parts of our ANTHEM/TIMI-32 trial, as well as for our preclinical cancer
programs. We can elect not to proceed with the ANTHEM/TIMI-32 trial at the end
of part one or part two. Further, assumes various license agreements are not
terminated prior to the time period indicated and are renewed annually. These
future estimates may change for many reasons including, but not limited to, the
reasons listed below and in the Risk Factors section.
Our current estimate of our future burn rate, our research and
development expenditures and capital requirements will change in the event we
are acquired by Dendreon. In addition, our estimates may change for many other
reasons, some of which are beyond our control, including, but not limited to:
o the costs associated with our ANTHEM/TIMI-32 trial, including the
timing of the initiation of various parts of the program;
o the rate of patient enrollment in all parts of our ANTHEM/TIMI-32
trial;
o the timing and magnitude of expenses incurred to further develop
and potentially commercialize rNAPc2;
o our success in entering into future collaborative agreements, if
any;
o the progress on, and scope of, our internally-funded cancer
programs including the timing of selection of a clinical drug
candidate from our synthetic pro-drug program;
o the progress related to our collaboration agreements with Abgenix
and Dyax, including the selection of any preclinical candidates;
o competing technological and market developments;
o the costs we incur in obtaining and enforcing our patents and
other proprietary rights;
o the costs we incur in defending against potential infringement of
the patents of others or in obtaining a license to operate under
such patents;
o the timing and form of payment (cash or common stock) related to
repayment of our outstanding convertible notes; and
o costs associated with our pending combination with Dendreon,
including, but not limited to, proxy solicitation expenses, legal
fees and costs associated with the class action complaint filed in
Delaware state court.
11
In the future we may need to raise additional capital through strategic
or other financings or through collaborative relationships. Our ability to raise
additional funds through the sale of securities depends in part on investors'
perceptions of the biotechnology industry, in general, and of Corvas, in
particular. Market prices for securities of biotechnology companies, including
Corvas, have historically been highly volatile and may continue to be volatile
in the future. Accordingly, additional funding may not be available on
acceptable terms or at all. If additional funds are raised by issuing
securities, our stockholders will experience dilution, which may be substantial,
especially if our stock price remains at the current low levels. If we are not
able to raise adequate funds in the future, we may be required to significantly
delay, scale back or discontinue one or more of our drug discovery programs,
clinical trials or other aspects of our operations.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in accordance with
accounting principles generally accepted in the United State of America requires
us to make estimates and assumptions that affect the amounts reported in our
financial statements and accompanying notes. These estimates include, among
others, revenue recognition, stock-based compensation and research and
development expenses. We typically base our estimates on historical experience,
terms of existing contracts, trends in the industry, information available from
other outside sources, and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary from these
estimates under different assumptions or conditions.
Our significant accounting policies, which have been consistently
applied in all material respects, are more fully described in Note 2 of our
Notes to Financial Statements included in our Annual Report on Form 10-K. We
consider certain of these policies to be critical.
REVENUE RECOGNITION. Revenues from collaborative agreements are
recognized as the related research and development activities are performed
under the terms of our agreements consistent with the completion of research and
development objectives in the agreement. Advance payments received in excess of
amounts earned are recorded as deferred revenue and recognized as revenue as the
research and development objectives of the agreements are met. Non-refundable
license fees are recognized when we receive such payments, absent any continuing
involvement as required by Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." We recognize milestone payments as revenue
upon achievement of the milestones specified in our agreements. The milestones
specified in our collaborative agreements coincide with the completion of
substantive research and development objectives of the agreements. Research
grant revenues are recognized as the related research is performed under the
terms of the grant. Aside from our license agreements related to sales of
recombinant tissue factor from which we recognize modest royalties, we do not
currently have any agreements in place under which we expect to recognize
revenues in 2003.
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STOCK-BASED COMPENSATION. As permitted by Statement of Financial
Accounting Standards No. 123, or SFAS 123, "Accounting for Stock-Based
Compensation," as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123," we have elected to continue to apply the
provisions of Accounting Principles Board, or APB, Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for our
employee stock option and stock purchase plans. Accordingly, we recognize no
compensation expense in connection with our employee stock option and stock
purchase plans. We are required by SFAS 123 to disclose the pro forma effects of
our reported net loss and loss per share as if compensation expense had been
recognized for these items based on the fair value method of accounting
prescribed by SFAS 123. In connection with stock options granted to certain
consultants, we must make various valuation assumptions for purposes of
recording compensation expense.
RESEARCH AND DEVELOPMENT EXPENSES. We expense all research and
development costs as they are incurred. Our research and development costs
include, but are not limited to, payroll and related costs, lab supplies,
clinical and preclinical studies, manufacturing costs for clinical supplies,
sponsored research at other labs, consulting, legal patent fees and
research-related overhead charges. Our accrued liabilities for research and
development expenses are based, in part, on a number of estimates that are
related to our clinical, preclinical and other studies.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In accordance with our investment policy, we do not invest in
derivative financial instruments or any other market risk sensitive instruments.
Our available cash is invested in high quality fixed income investments that we
intend to hold to maturity. We believe that our interest rate market risk is
limited, and that we are not exposed to significant changes in fair value
because our investments are held to maturity and are primarily short-term in
nature. The fair value of each investment approximates its amortized cost.
For purposes of measuring interest rate sensitivity, we have assumed
that the similar nature of our investments allow us to aggregate their value.
The carrying amount of all held to maturity investments as of March 31, 2003 is
$77.8 million and they have a weighted-average interest rate of 2.2%.
Considering our investment balances as of March 31, 2003, rates of
return and the fixed rate nature of the convertible notes payable that were
issued in the second half of 1999, an immediate 10% change in interest rates
would not have a material impact on our financial condition or results of
operations.
Since the $10.0 million aggregate principal of the 5.5% convertible
senior subordinated notes that we issued is convertible into common stock at
$3.25 per share at the option of the holder, there is underlying market risk
related to an increase in our stock price or an increase in interest rates that
may make conversion of these notes into common stock beneficial to the holder.
Conversion of these convertible notes will have a dilutive effect on our common
stock.
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Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Vice President and Controller, we
performed an evaluation of the effectiveness of our disclosure controls and
procedures within 90 days before the filing date of this quarterly report. Based
on that evaluation, our management, including our Chief Executive Officer and
Vice President and Controller, concluded that our disclosure controls and
procedures are effective.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we completed our evaluation.
RISK FACTORS
OUR PROPOSED ACQUISITION BY DENDREON CORPORATION MAY NOT BE COMPLETED.
Although we executed a definitive merger agreement with Dendreon, it is
subject to various closing conditions including approval by the stockholders of
both companies and it is possible that the merger may not be completed in the
stated timeframe or at all. Two of our stockholders have publicly stated that
they are opposed to the merger and intend to vote against it. Another
stockholder has filed a class action lawsuit, seeking to enjoin us from
proceeding with the merger. If the proposed merger is not completed or is
delayed, our business may suffer for a number of reasons including, but not
limited to, other opportunities foregone while the transaction was pending,
additional costs incurred in support of the proposed merger, loss of employees
due to uncertainty surrounding the acquisition and a further reduction in our
cash balances. Even if the proposed merger is completed, we may fail to realize
the anticipated benefits of the merger.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY NEVER BECOME PROFITABLE.
We have experienced significant operating losses since our inception in
1987. At March 31, 2003, we had an accumulated deficit of approximately $150.8
million. We have not earned any revenues from commercial sales of any
therapeutic products. We have funded our operations principally from sales of
our equity and debt securities, payments received from collaborators and
interest income. Currently, we do not have any committed sources of external
funding. We will continue to incur substantial additional operating losses for
at least the next several years as we pursue our clinical trials and research
and development efforts. To become profitable as a stand-alone company, we,
either alone or with collaborators, would have to successfully identify,
develop, manufacture and market new product candidates. We do not expect to
generate revenues from product sales or royalties from commercial sales of our
products for at least a number of years, and it is possible that we will never
have product sales revenue or receive significant royalties from sales of any of
our licensed products.
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WE HAVE NEVER HAD A PRODUCT CANDIDATE ADVANCE BEYOND PHASE II CLINICAL TRIALS
AND WE DO NOT HAVE, AND MAY NEVER DEVELOP, ANY COMMERCIAL DRUGS OR OTHER
PRODUCTS THAT GENERATE REVENUES.
We are at an early stage of development as a biopharmaceutical company,
and we do not have any commercial products. In November 2002, we initiated the
ANTHEM/TIMI-32 trial for our only clinical stage product candidate, rNAPc2.
rNAPc2 will require significant additional development, clinical trials,
regulatory clearances and additional investment before it can be commercialized.
Our product development efforts may not lead to commercial drugs, either because
our product candidates fail to be safe and effective in clinical trials or
because we have inadequate financial or other resources to pursue the program
through the clinical trial process. We do not expect to be able to market rNAPc2
or any future product candidates for a number of years, if at all. If we remain
a stand-alone company and we are unable to develop any commercial drugs, or if
such development is delayed, we may be required to raise additional capital
through financings, scale back or discontinue some part of our operations, or
cease our operations entirely.
WE ARE DEPENDENT ON THE SUCCESSFUL OUTCOME OF THE CLINICAL TRIALS FOR OUR rNAPc2
PRODUCT CANDIDATE.
Because we currently have only one product in clinical development, our
business prospects depend in large part on our ability, alone or with
collaborators, to successfully commercialize rNAPc2. Many factors will affect
our current and future clinical trials for rNAPc2 including patient enrollment,
which is affected by the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the trial, competing
clinical trials and new drug approvals. Delays in patient enrollment in our
current or any future trials may result in increased costs, program delays, or
both, which could slow down our product development and approval process. If
clinical trials for rNAPc2 are not completed or conducted as planned, due to any
reason including, but not limited to, rNAPc2 not being safe or effective, the
commercialization of rNAPc2 would likely be delayed or prevented, our business
would likely be materially harmed and, if we remain a stand-alone company, our
stock price would likely decline. In addition, if we do not receive required
regulatory approvals, we may never commercialize rNAPc2 and therefore may never
be profitable. Finally, if rNAPc2 were to fail in the ANTHEM/TIMI-32 trial prior
to the closing of the proposed merger with Dendreon, then Dendreon would have
the right to terminate the merger agreement due to the occurrence of a material
adverse event.
OUR rNAPc2 CLINICAL TRIALS MAY TAKE LONGER TO COMPLETE THAN WE PROJECT.
Many factors including, but not limited to, difficulty recruiting and
enrolling patients who meet our trial eligibility criteria, regulatory
requirements, and problems at the clinical sites may cause delays that would
extend the duration of any of the three parts of the ANTHEM/TIMI-32 trial, or
prevent the completion of any part of this trial. Further, we are relying
primarily upon third parties to conduct, supervise and monitor our rNAPc2
clinical trials under the oversight of our clinical group and, therefore, we
have less control over the timing and other aspects of this program than if we
conducted the trials on our own. If such delays are significant, we may never
commercialize rNAPc2 and therefore may never be profitable.
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OUR PRECLINICAL AND CLINICAL TESTING RESULTS ARE UNCERTAIN. IF TRIAL RESULTS ARE
NEGATIVE, WE MAY BE FORCED TO STOP DEVELOPING PRODUCT CANDIDATES IMPORTANT TO
OUR FUTURE.
The results of preclinical studies and initial clinical trials of our
product candidates will not necessarily predict the results obtained from
later-stage clinical trials. Product candidates in later stages of clinical
trials may fail to show the desired safety and efficacy endpoints despite having
progressed through initial clinical testing. In addition, the data collected
from clinical trials of our product candidates may not be sufficient to support
FDA or other regulatory approval. Although we have completed a Phase IIa
clinical trial of rNAPc2 in patients undergoing elective coronary angioplasty to
establish safety prior to conducting additional clinical trials in patients with
UA/NSTEMI, results from our ANTHEM/TIMI-32 trial may not support the continued
development of rNAPc2.
rNAPc2, or any future product candidates we may develop, may not be
safe for human use. Administering any of our product candidates to humans may
produce undesirable side effects. These side effects could interrupt, delay or
cause us or the FDA to halt clinical trials of our product candidates and could
result in the FDA or other regulatory authorities denying approval of our
product candidates for any or all targeted indications. Along with the FDA or
other regulatory authorities, we, or our collaborators, may suspend or terminate
clinical trials at any time.
THE FDA HAS NEVER APPROVED ANY CORVAS PRODUCT CANDIDATE AND WE MAY NEVER BE
PERMITTED TO COMMERCIALIZE ANY PRODUCT WE DEVELOP.
We have never had a product candidate advance beyond the early stages
of development and none have received the regulatory clearance required from the
FDA or any other regulatory body to be commercially marketed and sold. While our
goal is to commence commercial sales of rNAPc2 and any other product candidate
we may develop, we may not achieve this goal for rNAPc2 or any other product
candidate in the expected timeframe, or at all. The regulatory clearance process
typically takes many years and is extremely expensive, and regulatory clearance
is never guaranteed. If we fail to obtain regulatory clearance for our current
or future product candidates, we will be unable to market and sell any products
and therefore may never be profitable.
As part of the regulatory clearance process, for each of our product
candidates we must conduct, at our own expense or a collaborator's expense,
preclinical research and clinical trials to demonstrate safety and efficacy. In
addition, it is difficult to predict if the FDA will agree with the design of
our clinical trials. Even though earlier clinical trial results for a particular
compound and a specific indication may indicate that the compound appears to be
safe and effective, the FDA may suggest or even require that additional clinical
trials be completed before advancing to later-stage trials. The number of
preclinical studies and clinical trials that will be required varies depending
on many factors including the product, disease or condition that the product is
in development for and regulations applicable to a particular product.
The FDA can delay, limit or not grant approval for many reasons,
including:
o a product candidate may not demonstrate sufficient safety or
efficacy;
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o FDA officials may interpret data from preclinical testing and
clinical trials in different ways than we interpret it, or require
data that is different from what was obtained in our clinical
trials;
o the FDA may not approve our manufacturing processes or facilities,
or the processes or facilities of our collaborators; and
o the FDA may change its approval policies or adopt new regulations.
The FDA also may approve a product candidate for fewer indications than
requested or may condition approval on the performance of post-marketing studies
for a product candidate. Even if we receive FDA and other regulatory approvals,
our product candidates may later exhibit adverse effects that limit or prevent
their widespread use or that force us to withdraw those product candidates from
the market. In addition, any marketed product and its manufacturer continue to
be subject to strict regulations after approval. Any unforeseen problems with an
approved product or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market.
The process of obtaining approvals in foreign countries is subject to
delay and failure for many of the same reasons. Any delay in, or failure to
receive approval for, any of our products could materially harm our business,
financial condition and results of operations.
IF WE FAIL TO ENTER INTO FUNDED COLLABORATION AGREEMENTS FOR OUR DRUG PROGRAMS,
WE MAY BE UNABLE TO COMPLETE THE DEVELOPMENT AND COMMERCIALIZATION OF rNAPc2 AND
ANY OTHER PRODUCT CANDIDATES WE MAY DEVELOP, OR TO CONTINUE OUR RESEARCH AND
DEVELOPMENT PROGRAMS.
Our operations have consumed substantial amounts of cash since
inception. Our sources of revenue have been primarily limited to research
funding, license fees and milestone payments from corporate collaborators. In
2002, we had a net loss of approximately $21.2 million and we anticipate that
our 2003 net loss will be comparable as a stand-alone company. Further, we
expect that we will continue to spend substantial amounts on research and
development, including the costs of our ongoing ANTHEM/TIMI-32 trial as well as
clinical trials for future product candidates, if any. Our future burn rate and
capital needs will depend on many factors, including, but not limited to, the
outcome of the first part of the ongoing ANTHEM/TIMI-32 trial and those factors
outlined in "Liquidity and Capital Resources."
We do not have committed external sources of funding. If we are unable
to enter into future collaboration agreements, including co-development and
marketing agreements, or raise additional capital when required or on acceptable
terms, we may have to significantly delay, scale back or discontinue one or more
of our drug discovery programs, clinical trials or other aspects of our
operations. We also could be required to:
o seek corporate collaborators for programs at an earlier stage than
would be desirable to maximize the rights that we retain to future
product candidates; and/or
o relinquish or license rights to technologies, product candidates
or products that we would otherwise seek to develop or
commercialize ourselves on terms that are less favorable to us
than might otherwise be available.
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IF WE DO NOT FIND COLLABORATORS FOR rNAPc2 AND FOR ANY OTHER PRODUCT CANDIDATES
WE MAY DEVELOP, WE MAY HAVE TO REDUCE OR DELAY OUR RATE OF PRODUCT DEVELOPMENT
AND/OR INCREASE OUR EXPENDITURES.
Our strategy for developing, manufacturing and commercializing our
products includes entering into various relationships with pharmaceutical and/or
biotechnology companies to advance our programs and reduce our expenditures on
each program. We may not be able to negotiate additional collaborations on
acceptable terms or at all. If we are not able to establish additional
collaborative arrangements, we may have to reduce or delay further development
of rNAPc2 or some of our cancer programs in the future and/or increase our
expenditures and undertake further development activities at our own expense.
Beyond completion of the ongoing ANTHEM/TIMI-32 trial, future clinical
development of rNAPc2 may depend on securing an appropriate development partner.
If we elect to increase our expenditures to fund our development programs, we
will need to obtain additional capital, which may not be available on acceptable
terms or at all.
We may have to rely on our collaborators for all aspects of partnered
programs, including the conduct of research and development that the
collaborator chooses to conduct, clinical trials and the regulatory approval
process. We may have no control over the amount and timing of resources that our
collaborators dedicate to the development of our licensed product candidates, if
any. Our ability to generate royalties from our collaborators depends on their
abilities to establish the safety and efficacy of our product candidates, obtain
regulatory approvals and achieve market acceptance of our products.
Collaborative agreements generally pose the following risks:
o collaborators may not pursue further development and
commercialization of compounds resulting from collaborations or
may elect not to renew research and development programs;
o collaborators may delay clinical trials, underfund a clinical
trial program, stop a clinical trial or abandon a product
candidate, repeat or conduct new clinical trials, require a new
formulation or encounter other manufacturing difficulties of a
product candidate for clinical testing;
o collaborators could independently develop, or develop with third
parties, products that could compete with our future products;
o the terms of our agreements with current or future collaborators
may not be favorable to us in the future;
o a collaborator with marketing and distribution rights to one or
more products may not commit enough resources to the marketing and
distribution of our products, limiting our potential revenues from
the commercialization of a product;
o disputes may arise delaying or terminating the research,
development or commercialization of our product candidates, or
result in significant litigation or arbitration;
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o collaborations through which our collaborator is funding all or a
portion of the research and development may be terminated and we
will experience increased capital requirements if we elect to
pursue further development of the product candidate; and
o collaborators may not have the financial or other resources to
fund the research, development or commercialization of our product
candidates, and we will experience increased capital requirements
if we elect to pursue further development of these candidates.
In addition, there have been a significant number of business
consolidations among and between large pharmaceutical and biopharmaceutical
companies that have resulted in a reduced number of potential future
collaborators. If business combinations involving our existing or potential
collaborators were to occur, the effect could be to diminish, terminate or cause
delays in one or more of our product development programs.
OUR COMPETITORS MAY DEVELOP AND MARKET DRUGS THAT ARE LESS EXPENSIVE, MORE
EFFECTIVE, OR SAFER, OR REACH THE MARKET SOONER, WHICH MAY DIMINISH OR ELIMINATE
THE COMMERCIAL SUCCESS OF ANY PRODUCTS WE MAY COMMERCIALIZE.
The biopharmaceutical market is highly competitive. We expect that
competition from other biopharmaceutical companies, pharmaceutical companies,
universities and public and private research institutions will increase. Almost
all of the larger biopharmaceutical companies have developed, or are attempting
to develop, products that will compete with products we may develop, including
some that are in advanced stage clinical trials. In particular, many other
companies and institutions have active programs for cardiovascular disease and
cancer against which ours may compete. It is possible that our competitors will
develop and market products that are less expensive, more effective or safer
than our future products, if any, or that will render our products obsolete. It
is also possible that our competitors will commercialize competing products
before any of our products are approved and marketed. Many of our competitors
have substantially greater financial, technical, research and other resources
than we do. We may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully.
MARKET ACCEPTANCE OF rNAPc2 AND FUTURE PRODUCT CANDIDATES, IF ANY, IS UNCERTAIN.
If approved, we intend for rNAPc2 to be used in combination with the
current treatment regimen for UA/NSTEMI. However, physicians may not ultimately
use rNAPc2. Physicians will only prescribe rNAPc2 or any of our future products
if they determine, based on experience, clinical data, side effect profiles and
other factors, that they are beneficial in combination with other products or
preferable to other products then in use. Recommendations and endorsements by
influential physicians will be essential for market acceptance of rNAPc2 or
future products, if any, and we may not be able to obtain these recommendations
and endorsements. In addition, many other factors influence the adoption of new
drugs, including marketing and distribution restrictions, adverse publicity,
product pricing and reimbursement by third-party payers. Even if rNAPc2 and our
future product candidates, if any, achieve market acceptance, the market may not
be sufficiently large to result in significant revenues. If any of our products
do not achieve adequate sales, we may never be profitable and our business and
financial condition would be adversely affected.
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FAILURE TO RETAIN KEY SCIENTIFIC PERSONNEL COULD DECREASE OUR ABILITY TO DEVELOP
OUR PRODUCT CANDIDATES AND, IF WE REMAIN A STAND-ALONE COMPANY, TO CONTINUE TO
OBTAIN NEW COLLABORATIONS OR OTHER SOURCES OF FUNDING.
We depend, to a significant extent, on the efforts of our key
employees. The loss of these individuals may delay or prevent us from achieving
our business objective of commercializing our product candidates. Our future
success will also depend in large part on our continued ability to attract and
retain other highly qualified scientific, technical and management personnel, as
well as personnel with expertise in clinical testing and governmental
regulation. We face intense competition for personnel from other companies,
universities, public and private research institutions, government entities and
other organizations. If we are unsuccessful in our recruitment and retention
efforts, our business operations will be harmed.
BECAUSE WE HAVE LIMITED MANUFACTURING EXPERIENCE AND WE RELY ON THIRD-PARTY
MANUFACTURERS, WE ARE UNABLE TO CONTROL THE AVAILABILITY OF, AND MANUFACTURING
COSTS FOR, OUR PRODUCT CANDIDATES.
In order to be successful, our product candidates must be capable of
being manufactured in sufficient quantities, in compliance with regulatory
requirements, and at an acceptable cost. We have only limited experience in
pilot scale manufacturing. For larger-scale production, which is required for
clinical testing, we expect to continue to rely on third parties to manufacture
our product candidates. There are only a limited number of contract
manufacturers capable of manufacturing rNAPc2. If we cannot continue to contract
for large-scale manufacturing capabilities on acceptable terms, or if we
encounter delays or difficulties with manufacturers, we may not be able to
conduct clinical trials as planned. This would delay or cause us to halt
submission of our product candidates for regulatory clearance, and may prevent
us from selling our products and achieving profitability. Also, our third-party
manufacturers may be unable to manufacture any product candidate we develop in
commercial quantities on a cost-effective basis.
We may need to expand our existing relationships or establish new
relationships with third-party manufacturers for rNAPc2 and for future product
candidates, if any. We may be unable to establish or maintain relationships with
third-party manufacturers on acceptable terms, or at all. Our dependence on
third parties may reduce our profit margins and delay or limit our ability to
develop and commercialize our products on a timely and competitive basis.
Furthermore, third-party manufacturers may encounter manufacturing or quality
control problems in connection with the manufacture of our product candidates
and may be unable to obtain or maintain the necessary governmental licenses and
approvals to manufacture our product candidates. Any such failure could delay or
preclude receiving regulatory approvals to sell our product candidates.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE MAY NOT BE ABLE TO
COMPETE AS EFFECTIVELY.
Our success depends in part on our ability to obtain and enforce patent
protection for our products, both in the United States and other countries, and
operate without infringing the proprietary rights of third parties. The scope
and extent of patent protection for our product candidates is uncertain and
frequently involves complex legal and factual questions. We cannot predict the
breadth of claims that will be allowed and issued in patents related to
biotechnology or pharmaceutical applications. Once patents have issued, we
cannot predict how the claims will be construed or enforced. In addition,
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statutory differences between countries may limit the protection we can obtain
on some of our inventions outside of the United States. For example, methods of
treating humans are not patentable in many countries outside of the United
States. We rely on patent and other intellectual property protection to prevent
our competitors from developing, manufacturing and marketing products based on
our technology. Our patents may not be enforceable and they may not afford us
protection against competitors, especially since there is a lengthy lead time
between when a patent application is filed and when it is actually issued.
Because of this, we may infringe on intellectual property rights of others
without being aware of the infringement. If a patent holder believes that one of
our product candidates infringes on their patent, they may sue us even if we
have applied, or received patent protection, for our technology. If another
party claims we are infringing their technology, we could face a number of
issues, including the following:
o defending a lawsuit, which is very expensive and time consuming;
o paying a large sum for damages if we are found to be infringing;
o being prohibited from selling or licensing our products or product
candidates until we obtain a license from the patent holder, who
may refuse to grant us a license or only agree to do so on
unfavorable terms. Even if we are granted a license, we may have
to pay substantial royalties or grant cross-licenses to our
patents; and
o redesigning our drug so it does not infringe on the patent
holder's technology. This may not be possible and, even if
possible, it would require substantial additional capital, FDA
approval, and would delay commercialization.
The coverage claimed in a patent application can be significantly
narrowed before a patent is issued, either in the United States or abroad. We do
not know whether any of our pending or future patent applications will result in
the issuance of patents. To the extent patents have been issued or will be
issued, we do not know whether these patents will be subjected to further
proceedings limiting their scope, will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Furthermore, patents already issued to us, or patents that may issue on our
pending applications, may become subject to dispute, including interference
proceedings in the United States to determine priority of invention or
opposition proceedings in foreign countries contesting the validity of issued
patents.
We also rely on trade secrets, proprietary know-how and continuing
inventions to develop and maintain our competitive position. While we believe
that we have protected our trade secrets, some of our current or former
employees, consultants or scientific advisors, or current or prospective
corporate collaborators, may unintentionally or willfully disclose our
confidential information to competitors or use our proprietary technology for
their own benefit. Furthermore, enforcing a claim alleging the infringement of
our trade secrets would be expensive and difficult to prove, making the outcome
uncertain. Our competitors may also independently develop equivalent knowledge,
methods and know-how or gain access to our proprietary information through some
other means.
Because we collaborate with third parties on some of our technology,
there is also the risk that disputes may arise as to the rights to technology or
drugs developed in collaboration with other parties.
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IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, THE DAMAGES MAY EXCEED OUR
INSURANCE.
It is impossible to fully predict the potential adverse effects that a
product candidate may have in humans from the results of studies in animals.
Because we conduct clinical trials on humans, we face the risk that the use of
our product candidates will result in adverse effects. These risks will exist
even for products that may be cleared for commercial sale. Although we maintain
liability insurance of $10.0 million for our product candidates in clinical
trials, the amount of insurance coverage we currently hold may not be adequate
to protect us from any liabilities we may incur. Furthermore, coverage is
becoming increasingly more expensive and we may not be able to maintain or
obtain insurance at a reasonable cost or in sufficient amounts to protect us
against potential losses. We may not have sufficient resources to pay for any
liabilities resulting from a claim beyond the limit of our insurance coverage.
CHANGES IN, OR INTERPRETATIONS OF, ACCOUNTING RULES AND REGULATIONS COULD RESULT
IN UNFAVORABLE ACCOUNTING CHARGES.
Accounting regulations and corporate governance practices are receiving
increased scrutiny and continue to be subject to further review, interpretation
and guidance from relevant accounting authorities, including the Securities and
Exchange Commission, or the SEC. Although we believe that our accounting
practices are consistent with current accounting regulations, changes to, or
interpretations of, accounting methods or policies in the future may require us
to reclassify, restate or otherwise change or revise our financial statements,
which may adversely affect our results of operations and business.
THE REIMBURSEMENT STATUS OF NEWLY APPROVED HEALTHCARE DRUGS IS UNCERTAIN AND
FAILURE TO OBTAIN ADEQUATE REIMBURSEMENT COULD LIMIT OUR ABILITY TO MARKET ANY
PRODUCTS WE MAY DEVELOP AND DECREASE OUR ABILITY TO GENERATE REVENUE.
There is significant uncertainty related to the reimbursement of newly
approved pharmaceutical products. Our ability, and that of our collaborators, to
commercialize our products in both domestic and foreign markets will partially
depend on the reimbursements obtained from third-party payers such as government
health administration authorities, private health insurers, managed care
programs and other organizations. Third-party payers are increasingly attempting
to contain healthcare costs by limiting both coverage and the level of
reimbursement of new pharmaceutical products. Cost control initiatives could
decrease the price that we, or our collaborators, would receive for our products
and affect our ability to commercialize any products we may develop so that the
sale of our drugs would not be economically feasible. If third parties fail to
provide reimbursement for any drugs we may develop, consumers and physicians may
not choose to use our products, and we may not realize an acceptable return on
our investment in product development.
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IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE OUR PRODUCTS.
Because we do not have any marketed products, we have virtually no
experience in sales, marketing and distribution. To directly market and
distribute any products we may develop, we must build a substantial marketing
and sales force with appropriate technical expertise and supporting distribution
capabilities. Alternatively, we may obtain the assistance of a pharmaceutical
company or other entity with a large distribution system and a large direct
sales force. We may not be able to establish sales, marketing and distribution
capabilities of our own or enter into such arrangements with third parties in a
timely manner or on acceptable terms. To the extent that we enter into
co-promotion or other licensing arrangements, our product revenues are likely to
be lower than if we directly marketed and sold our products, and some or all of
the revenues we receive will depend upon the efforts of third parties, which
efforts may not be successful.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS AND WE MUST COMPLY WITH ENVIRONMENTAL
LAWS AND REGULATIONS, WHICH CAN BE EXPENSIVE.
Our research and development activities involve the controlled use of
hazardous materials, including chemicals and radioactive and biological
materials. Our operations also produce hazardous waste products. We are subject
to a variety of federal, state and local regulations relating to the use,
handling, storage and disposal of these materials. We generally contract with
third parties for the disposal of such substances, and store our low level
radioactive waste at our facility until the materials are no longer considered
radioactive because there are no facilities permitted to accept such waste in
California or neighboring states. We cannot eliminate the risk of accidental
contamination or injury from these materials. We may be required to incur
substantial costs to comply with current or future environmental and safety
regulations. In the event of an accident or contamination, we would likely incur
significant costs associated with civil penalties or criminal fines and in
complying with environmental laws and regulations.
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PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 4, 2003, the Asset Value Fund Limited Partnership, or AVF,
filed a purported class action complaint against us and our directors in
Delaware state court alleging that our board of directors violated their
fiduciary duties when they approved the proposed combination of us and Dendreon
Corporation. Specifically, the complaint alleges that (1) the directors failed
to consider all available information when deciding to pursue the combination,
(2) the directors failed to negotiate a mechanism to protect stockholders from
the effects of a decline in Dendreon's stock price before the combination, and
(3) a minority of the directors were furthering their own interests in approving
the combination instead of the interests of stockholders. AVF is seeking to
enjoin us from proceeding with the combination, and also seeks compensatory
damages and reimbursement of the costs of bringing suit. We were served with the
complaint on March 13, 2003. We deny the allegations in the complaint and intend
to defend the action vigorously. We are obligated to advance the costs of
defense to our directors, subject to their undertaking to repay the advanced
costs under specified circumstances. The insurer has not yet indicated whether
it will provide coverage with respect to this claim.
On April 10, 2003, AVF filed a books and records action under Section
220 of the Delaware General Corporations Law seeking to inspect our books and
records. We have provided AVF with some documents responsive to its inspection
demand, but AVF is seeking additional books and records. To the extent that the
purposes AVF stated in its request to review our books and records are improper
or insufficiently stated or AVF seeks documents unrelated to purposes it has
properly stated, if any, we will vigorously defend the action.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
-------------- -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
Reference is made to a Current Report filed on Form 8-K dated February
25, 2003 pertaining to the proposed merger with Dendreon Corporation.
Reference is made to a Current Report filed on Form 8-K dated March 4,
2003 pertaining to a letter from Biotechnology Value Fund to Corvas' board of
directors.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CORVAS INTERNATIONAL, INC.
Date: May 7, 2003 By: /s/ RANDALL E. WOODS
-------------------------------------
Randall E. Woods
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 2003 By: /s/ CAROLYN M. FELZER
-------------------------------------
Carolyn M. Felzer
Vice President and Controller
(Principal Financial Officer)
26