Genaera Cp (GENR) - Description of business
Our disclosure and analysis in this Annual Report on Form 10-K contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements since they do not relate strictly to historical or current facts. Such statements may include words such as anticipate, estimate, expect, project, intend, plan, believe, hope and other words and terms of similar meaning. In particular, these include, among others, statements relating to present or anticipated scientific progress, development of potential pharmaceutical products, future revenues, capital expenditures, and research and development expenditures, future financing and collaborations, personnel, manufacturing requirements and capabilities, the impact of new accounting pronouncements and other statements regarding matters that are not historical facts or statements of current condition.
There are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including those addressed below under Risk Factors.
We undertake no obligation (and expressly disclaim any such obligation) to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our filings with the United States Securities and Exchange Commission (SEC), all of which are available in the SEC EDGAR database at www.sec.gov and from us.
Genaera Corporation is a biopharmaceutical company committed to developing medicines to address substantial unmet medical needs in major pharmaceutical markets. We were first incorporated in the state of Delaware in 1987 and are headquartered in Plymouth Meeting, Pennsylvania. Our research and development efforts are focused on obesity, anti-angiogenesis and respiratory diseases. Trodusquemine (MSI-1436) is being developed to treat obesity and metabolic disorders. Squalamine lactate is being developed as a product candidate for the treatment of malignant solid tumors. Our third product candidate, LOMUCIN (talniflumate), is being developed to treat the overproduction of mucus in chronic respiratory diseases. Our fourth product candidate, interleukin-9 (IL9) antibody, which is licensed to MedImmune, Inc. (MedImmune) for clinical development, is a respiratory treatment based on the discovery of a genetic cause of asthma.
We have no products available for sale and have incurred losses since our inception. Because substantially all of our potential products currently are in research, preclinical development or the early or middle stages of clinical testing, revenues from sales of any products will not occur for at least the next several years, if at all. As a result, we will need to raise substantial additional funds in the future to continue our research and development programs and to commercialize our potential products. We regularly explore alternative means of financing our operations and seek funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions.
Obesity Therapeutic Program
Trodusquemine (also referred to in scientific literature as MSI-1436) is a small molecule that has demonstrated the ability to prevent abnormal weight gain or induce weight reduction in several animal models. Our researchers have shown that animal food intake can be regulated in a reversible manner, leading to changes in body weight. Preclinical data on trodusquemine demonstrate that it is a potent appetite suppressant with the ability to normalize fasting blood sugar independent of its ability to induce weight loss. Additionally,
trodusquemine has been shown to reduce elevated levels of cholesterol and triglycerides in obese animals. Our preclinical studies with trodusquemine support a mixed mechanism of action that suppresses appetite via the orexigenic and neurotransmitter pathways while increasing insulin sensitivity by selective inhibition of protein phosphatase tyrosine 1B (PTP1B). The ability of trodusquemine to induce weight loss without associated toxicities in several animal models (rodent, rabbit, dog and monkey) make it an excellent candidate for evaluation in clinical studies.
With trodusquemine, we are targeting the approximately 10 to 12 million Americans who are classified medically as significantly obese. While the trodusquemine molecule is very different in function, it has a similar chemical structure to squalamine, which would enable us to make more efficient use of internal and external resources utilized for squalamine in its development. We expect to file an Investigational New Drug (IND) application with the United States Food and Drug Administration (FDA) for the use of trodusquemine in clinical trials in the first quarter of 2007.
Squalamine lactate (squalamine) is a unique, first-in-class, synthetic small molecule administered systemically that directly interrupts and reverses multiple facets of angiogenesis, a fundamental process by which new blood vessels are formed, and is considered an anti-angiogenic substance. Working within activated endothelial cells, squalamine, an aminosterol, inhibits growth factor signaling including vascular endothelial growth factor (VEGF) signaling, thereby resulting in endothelial cell inactivation and, in certain cases, apoptosis. Squalamine has exhibited reproducible anti-angiogenic properties in a number of in vitro and in vivo assays, including animal cancer and eye disease models, across independent laboratories.
Squalamine Lactate in Cancer
We have conducted Phase II clinical trials of squalamine for the treatment of solid tumors. Currently, we have an ongoing Phase II clinical study of squalamine for the treatment of prostate cancer. This cancer study will evaluate intravenously administered squalamine in combination with standard medical and surgical interventions in this indication.
EVIZON (squalamine lactate)
In January of 2007, we announced that following a comprehensive review of our development portfolio and external market conditions, we decided to terminate the EVIZON clinical development program for treatment of the wet form of age-related macular degeneration (AMD). We had been pursuing a multi-center, randomized, open-label Phase II study (MSI-1256F-212 (Study 212)) of EVIZON to determine if higher dose levels of EVIZON would produce greater and more rapid improvements in visual acuity than those seen in our previous Phase II studies. The rapid acceptance, both domestically and abroad, of new and off-label products that improve vision of wet AMD patients significantly curtailed the rate of subject enrollment in Study 212. Additionally, preliminary information on subjects enrolled in Study 212 suggested that EVIZON was unlikely to produce vision improvement with the speed or frequency necessary to compete with recently introduced treatments. With this information, as well as evolving guidance from the FDA on clinical endpoints, we concluded there was no pragmatic option for the registration and commercialization of EVIZON for the treatment of wet AMD.
Our first genomics-based program has focused on the fundamental biology of mucus over-production in patients with chronic respiratory disease. Efforts to identify specific gene targets and validate these targets for therapeutic development have led to the identification of small molecules to inhibit the over-production of mucin, or mucoregulators. Our scientists have identified hCLCA1, a chloride channel found in humans, and demonstrated a relationship between hCLCA1 and abnormal mucus production.
LOMUCIN (talniflumate) is an orally available, small molecule inhibitor of the hCLCA1 channel and potential mucoregulator. LOMUCIN is a compound that was discovered, developed and marketed as an anti-inflammatory drug by Laboratorios Bago of Buenos Aires, Argentina, an independent pharmaceutical company. The effects of talniflumate in blocking hCLCA1 and mucus over-production were first elucidated by our scientists and we have been issued a patent protecting uses of talniflumate and certain 2-aminophenyl acetic compounds to treat diseases characterized by mucin production. We have an exclusive license with Laboratorios Bago to develop and commercialize talniflumate as a mucoregulator drug in all major pharmaceutical markets, including the United States, Europe and Japan.
Our current clinical development of LOMUCIN is focused on its use in cystic fibrosis patients. Early clinical evaluation of LOMUCIN in cystic fibrosis was supported by a contingent award of up to $1.7 million from Cystic Fibrosis Foundation Therapeutics (CFFT), the nonprofit drug development affiliate of the Cystic Fibrosis Foundation. In 2005, the award was amended to provide up to $2.35 million in milestone-driven, matching funds from CFFT to support a multi-center, randomized, double-blind, placebo-controlled Phase II clinical trial of LOMUCIN in approximately 200 individuals with cystic fibrosis. This award will be paid to us from time to time upon the achievement of certain milestones. Grant amounts received would become refundable to the CFFT upon marketing approval by the FDA or if we elect to either not enter Phase III clinical trials or not commercialize the product within two years of the satisfaction of certain development milestones, without scientific reasons for doing so. CFFT is also due a royalty on any resultant product of up to 1.6% of net sales based upon the amount of funding ultimately provided by CFFT. At December 31, 2006, we had received approximately $1.7 million of this grant support.
In September 2005, we announced the start of a multi-center, randomized, double-blind, placebo-controlled Phase II clinical trial to evaluate the use of LOMUCIN in 200 individuals with cystic fibrosis. In 2006, after consultation with CFFT, the protocol for this trial was amended to decrease the number of evaluable subjects in the trial from 200 to 80. The study will assess the safety and efficacy of LOMUCIN oral tablets on pulmonary function and cystic fibrosis-related symptoms. A previous four-week exploratory Phase II study demonstrated a trend toward better lung function in subjects with cystic fibrosis who received LOMUCIN compared to those who received placebo tablets and found that LOMUCIN was well tolerated.
IL9 Antibody Therapeutics
Our second genomics-based program is focused on the development of a blocking antibody to IL9 to treat a root cause of asthma. Our functional genomic studies demonstrated the broad role of IL9 as an etiologic agent in asthma. The IL9 gene varies in structure and function among individuals and as a result may have an important role in a genetic predisposition to asthma and allergic reactions. Our scientific studies and independent peer-reviewed publications indicate that IL9 controls other well-known factors involved in promoting lung inflammation in asthma, including a group of proteins that modulate the growth and functional activities of immune cells. Genaera has developed a patent position around IL9, having first discovered and documented a role for this cytokine in asthma. Our patent position around IL9 includes patents licensed exclusively from the Ludwig Institute for Cancer Research (LICR) as well as patents owned jointly with LICR.
In April 2001, we entered into a collaborative agreement with MedImmune to develop and commercialize therapies related to our IL9 program. Pursuant to the agreement, MedImmune provided funding of $2.5 million for research and development activities over a two-year period from April 2001 through April 2003. By the end of the two-year period, licensed technology had been transferred to MedImmune, which assumed responsibility for development and commercialization efforts on the IL9 program. In addition to the research and development funding, MedImmune agreed to reimburse us for certain external costs we incur in connection with the IL9 program. Under the agreement, we received $1.0 million based on the completion of contractual milestones and we could also receive up to $54.0 million based on the successful completion of future milestones. We are also entitled to royalties on sales of commercial products resulting from the collaboration. As a result of our limited control over the development plan and the timing of milestones, we cannot estimate the timing or receipt of milestone payments and do not expect to receive a substantial portion of these milestone payments within the next five years. Each party has the right to terminate the agreement upon notice to the other party.
Infectious Disease Program
Prior to 2000, LOCILEX (pexiganan) Cream, a topical cream antibiotic for the treatment of infection in diabetic foot ulcers, had been our lead product development candidate. In July 1999, LOCILEX Cream failed to obtain approval from the FDA, and we have since terminated our manufacturing agreements required to further develop this product candidate and refocused our near-term product development efforts on our other programs. Near-term commercialization of LOCILEX Cream will not occur, and we will generate no revenues from LOCILEX Cream in the near future. We continue to seek new opportunities that will enable us to capitalize on our past development efforts in this program and related programs.
RESEARCH AND DEVELOPMENT COSTS
We have incurred costs of $17.7 million, $21.8 million and $14.0 million for research and development in the years ended December 31, 2006, 2005 and 2004, respectively. See ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and ITEM 8. Financial Statements and Supplementary Data for additional information.
We believe collaborations allow us to leverage our scientific and financial resources and gain access to markets and technologies that would not otherwise be available to us. In the long term, development and marketing arrangements with established companies in the markets in which our potential products will compete may provide us with more efficient development and marketing abilities and may, accordingly, conserve our resources. We expect that we will seek additional development and marketing arrangements for most of the products we may develop. From time to time, we hold discussions with potential collaborators.
We have no current plans to establish a commercial manufacturing facility. We depend upon various contract manufacturers for clinical trial manufacturing of our proposed products and expect to continue to rely on third parties for any commercial-scale manufacturing. We require that all of our third-party manufacturers produce our active pharmaceutical ingredients and finished products in accordance with all applicable regulatory standards.
Our development, manufacture, and potential sale of therapeutics are subject to extensive regulation by United States and foreign governmental authorities.
Regulation of Pharmaceutical Products in the United States
The FDA regulates our product candidates currently being developed as drugs or biologics in the United States. New drugs are subject to regulation under the Federal Food, Drug, and Cosmetic Act, and biological products, in addition to being subject to certain provisions of that Act, are regulated under the Public Health Service Act. Both statutes and the regulations promulgated thereunder govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, and advertising and other promotional practices involving biologics or new drugs, as the case may be. FDA approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing of new biologics and drugs.
Obtaining FDA approval historically has been a costly and time-consuming process. Generally, in order to gain FDA premarket approval, a developer first must conduct preclinical studies in the laboratory and in animal model systems to gain preliminary information on an agents effectiveness and to identify any safety problems. The results of these studies are submitted as a part of an IND for a drug or biologic which the FDA must review before human clinical trials of an investigational drug can begin. The IND includes a detailed description of the clinical investigations to be undertaken.
In order to commercialize any products, we or our collaborators must sponsor and file an IND and be responsible for initiating and overseeing the clinical studies to demonstrate the safety, effectiveness, and quality that are necessary to obtain FDA approval of any such products. For INDs sponsored by us or our collaborators, we or our collaborators will be required to select qualified investigators (usually physicians) to supervise the administration of the products, and ensure that the investigations are conducted and monitored in accordance with FDA regulations, including the general investigational plan and protocols contained in the IND.
Clinical trials of drugs normally are done in three phases, although the phases may overlap. Phase I trials are concerned primarily with the safety of the drug, involve a small group typically ranging from 15 40 subjects, and may take from six months to over one year to complete. Phase II trials typically involve 30 200 patients and are designed primarily to demonstrate safety and preliminary effectiveness in treating or diagnosing the disease or condition for which the drug is intended, although short-term side effects and risks in people whose health is impaired may also be examined. Phase III trials are expanded clinical trials with larger numbers of patients that are intended to evaluate the overall benefit-risk relationship of the drug and to gather additional information for proper dosage and labeling of the drug. Phase III clinical trials generally take two to five years to complete, but may take longer. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if it concludes that an unwarranted risk is presented to patients, or, in Phase II and III, if it concludes that the study protocols are deficient in design to meet their stated objectives.
If clinical trials of a new product are completed successfully, the sponsor of the product may seek FDA marketing approval. If the product is regulated as a biologic, the FDA will require the submission and approval of a Biologics License Application (BLA) before commercial marketing of the biologic. If the product is classified as a new drug, an applicant must file a New Drug Application (NDA) with the FDA and receive approval before commercial marketing of the drug. The BLA or NDA must include detailed information about the product and its manufacture and the results of product development, preclinical studies and clinical trials.
The testing and approval processes require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. BLAs and NDAs submitted to the FDA can take more than one to two years to receive approval. If questions arise during the FDA review process, approval can take more than five years. Notwithstanding the submission of relevant data, the FDA may ultimately decide that the BLA or NDA does not satisfy its regulatory criteria for approval and deny approval, require additional clinical studies, or require demonstration of compliance with Good Manufacturing Practices (GMPs). In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and effectiveness. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual regulatory requirements and review relating to GMPs, adverse event reporting, promotion and advertising, and other matters. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions.
Regulation of Pharmaceutical Products Outside of the United States
The development and commercialization of our product candidates outside of the United States is subject to foreign local and national regulatory requirements. The requirements that we must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in such countries can be as rigorous, costly and uncertain as those that are encountered in the United States.
In addition to the foregoing, our business is and will be subject to regulation under various state and federal environmental laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substance Control Act. These and other laws govern our use, handling and disposal of various
biological, chemical and radioactive substances used in and wastes generated by our operations. We cannot predict whether state or federal regulators and agencies will impose new regulatory restrictions on the marketing of biotechnology products.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
We actively seek to protect our product candidates and proprietary information by means of United States and foreign patents, trademarks and contractual arrangements. Our success depends, in part, on our ability to develop and maintain a strong patent position for our products and technologies both in the United States and certain other countries where patent laws are enforced and pharmaceutical markets are deemed to be meaningful to us and our current and future collaborators. As with most biotechnology and pharmaceutical companies, our patent position is highly uncertain and involves complex legal and factual questions.
To date, we own, co-own or have licensed on an exclusive basis a total of 83 patent applications and issued patents in the United States, 69 of which we own or co-own and 14 that we license on an exclusive basis. We own, co-own or have licensed on an exclusive basis a total of 134 patent applications and issued patents in countries other than the United States.
We own several patents and patent applications for the use of squalamine as an anti-angiogenic, including methods for the treatment of cancer and for neovascularization in the eye. One of these patents is to the compounds combination therapy with other anti-cancer agents and will expire in 2017, while another patent covers the treatment of age-related macular degeneration, retinopathy of prematurity and diabetic retinopathy and will expire in 2015. We also own patents covering methods and intermediates in the manufacturing process of squalamine and trodusquemine that expire in 2017 and 2018. We own a composition of matter patent for the trodusquemine compound, which expires in 2014. We also own a patent for the use of trodusquemine as an anti-obesity agent and other indications that expires in 2015. We own two patents for the use of anti-IL9 or anti-IL9 receptor antibodies for the treatment of asthma and related disorders that expire in 2016. We also have U.S. patents covering the composition of matter for a mucoregulator target and another patent covering methods for screening for mucoregulator compounds, both of which expire in 2019. We own a patent on the use of talniflumate and related mucoregulator compounds for treating various conditions where mucous is overproduced, which expires in 2021.
The expiration date of each of these patents is subject to extension depending upon the future research and development program timelines. We have filed several other applications across our research and development programs and intend to file additional applications, as appropriate, for patents on new compounds, products or processes discovered or developed through the application of our technology.
We have rights to several patents and patent applications under certain license agreements pursuant to which we expect to owe royalties on sales of products that incorporate issued valid patent claims. In particular, we have licensed from LICR specific technologies related to our IL9 program, the earliest of which expires in 2009. In addition, we have licensed from the Childrens Hospital of Philadelphia the composition of matter patent for the squalamine compound, which expires in 2012. These patents are subject to extensions by their owners depending upon the future research and development program timelines. Additionally, certain of these agreements also provide that if we elect not to pursue the commercial development of any licensed technology, or do not adhere to an acceptable schedule of commercialization, then our exclusive rights to such technology may terminate. We also conduct or collaborate on research at certain institutions, and these relationships may provide us with technology that is owned, licensed or for which we have an option to license.
In addition, our patents on anti-IL-9 and anti-IL-9 receptor as well as the patents that we license from LICR have been licensed to MedImmune. We expect to receive certain milestone payments during the development of this technology and will receive royalty payments on sales of any approved drugs. In addition, we rely on unpatented proprietary technologies, unpatentable skills, knowledge and experience of our scientific and technical personnel, as well as those of our advisors, consultants and other contractors and other intellectual
property (collectively know-how) in the development of our product candidates. To help protect our proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require employees, consultants and advisors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions that arise from their activities for us. These confidentiality agreements require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third partys proprietary technology.
We have trademark protection for the product candidate name LOMUCIN and are currently seeking U.S. registration of this trademark. We also have trademark protection for the product candidate name EVIZON and are currently seeking U.S. registration of this trademark.
The pharmaceutical industry is characterized by intense competition. Many companies, research institutions and universities are conducting research and development activities in a number of areas similar to our fields of interest. Most of these entities have substantially greater financial, technical, manufacturing, marketing, distribution and other resources. We also may face competition from companies using different or advanced techniques that could render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur at a rapid rate and expect competition to intensify as advances in this field are made. Colleges, universities, governmental agencies and other public and private research organizations are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed, some of which may be directly competitive with our technology. In addition, these institutions, along with pharmaceutical and specialized biotechnology companies, can be expected to compete with us in recruiting highly qualified scientific personnel.
Many companies are working to develop and market products intended for the disease areas we are targeting, including obesity, anti-angiogenesis and respiratory diseases. A number of major pharmaceutical companies have significant franchises in these disease areas and can be expected to invest heavily to protect their interests. With respect to obesity, products are being developed at a number of biopharmaceutical companies, including but not limited to Abbott Laboratories, Alizyme plc, Amylin Pharmaceuticals, Inc., Arena Pharmaceuticals, Inc., Bristol-Myers Squibb Company, F. Hoffman-La Roche, Ltd. and sanofi-aventis Group. For cancer, anti-angiogenic agents are under development at a number of biopharmaceutical companies, including EntreMed, Inc., Genentech, Inc. and Imclone Systems, Inc., as well as other large pharmaceutical companies. In the respiratory field, other biopharmaceutical companies also have reported the discovery of genes relating to asthma and other respiratory diseases, including Genentech, Inc., Amgen, Inc. and Vertex Pharmaceuticals, Inc., as well as other large pharmaceutical companies.
Our current executive officers are as follows:
John L. Armstrong, Jr., MBA
63 President and Chief Executive Officer
John A. Skolas, JD, MBA
54 Executive Vice President, Chief Financial Officer, General Counsel and Secretary
Michael J. Gast, MD, PhD
58 Executive Vice President, Clinical Research and Development
Mr. Armstrong has served as our President and Chief Executive Officer since January 2006. Prior to that, Mr. Armstrong had served as our President and Chief Operating Officer since July 2005. In July 2004, Mr. Armstrong was promoted to our Executive Vice President and Chief Operating Officer. Prior to that, he had served as our Executive Vice President since joining the Company in October 2003. Mr. Armstrong has over thirty-nine years of increasing responsibility in the pharmaceutical industry, with a manufacturing emphasis. Prior to joining Genaera, he served as Chief Executive Officer of Mills Biopharmaceuticals, a subsidiary of UroCor, Inc., and as Vice President of Business Development at UroCor from December 1999 to November 2001. Prior to that, Mr. Armstrong served as President and Chief Operating Officer at Oread, Inc. from February 1998 to August 1999. Mr. Armstrong spent from 1991 to 1998 with the DuPont Merck Pharmaceutical Company where he served in various executive positions, including as President of ENDO Laboratories, and President of the global manufacturing/quality division. Prior to that, Mr. Armstrong served in numerous roles of increasing responsibility in manufacturing operations at Merck, Sharp and Dohme, Stuart Pharmaceuticals and Marion Merrell Dow. Mr. Armstrong earned his MBA from Century University in 1993.
Mr. Skolas was promoted to Executive Vice President, Chief Financial Officer, General Counsel and Secretary in July 2004. Prior to that, he had served as our Senior Vice President, Chief Financial Officer, General Counsel and Secretary since October 2003. Prior to that, Mr. Skolas served as a consultant and acting chief financial officer for early stage biotechnology companies. From 2000 through 2001, Mr. Skolas was Chief Financial Officer of Valigen, a privately held genomics company. From 1999 through 2000, Mr. Skolas served as Chief Financial Officer of Coelacanth Corporation (now the pharmaceuticals division of Lexicon Genetics). From 1997 until 1999, Mr. Skolas served as Chief Financial Officer and General Counsel of Phytoworks, Inc. From 1988 until 1997, Mr. Skolas served in various executive positions with EMI Group, PLC, including five years as President and General Counsel of its subsidiary, EMI Group Inc. Mr. Skolas early career included law practice as a partner in Muchin, Muchin, Bendix & Skolas S.C. and accounting practice as a Tax Specialist for Coopers & Lybrand, CPA. Mr. Skolas obtained a CPA certificate from the State of Iowa in 1976. He earned an MBA from Harvard Business School in 1988 and a JD from the University of Wisconsin in 1977.
Dr. Gast was promoted to Executive Vice President, Clinical Research and Development on November 30, 2006, having rejoined Genaera in March 2006 as Senior Vice President, Clinical Research and Development. Dr. Gast initially served as Genaeras Executive Vice President and Chief Medical Officer from February 2005 through July 31, 2005. Dr. Gast worked for Genaera as a consultant from August 1, 2005 until he rejoined the Company in 2006. Prior to initially joining Genaera, Dr. Gast spent ten years at Wyeth, most recently serving as Vice President, Scientific Affairs within Wyeth Global Medical Affairs, where he was responsible for oversight of Phase IV clinical research programs. Previously at Wyeth, Dr. Gast served as Vice President, Womens Health Clinical Research and Development. Prior to that, Dr. Gast spent twenty-one years at the Washington University School of Medicine. During his tenure on the faculty at the Washington University Department of Obstetrics and Gynecology, Dr. Gast served as Director of the Division of Reproductive Endocrinology and Infertility and Director of the Endocrine Clinical Laboratories. Dr. Gast received his MD from The Ohio State University College of Medicine in 1973 and his PhD in Molecular Biology from Washington University in 1981.
Officers are elected or appointed by the board of directors to serve until the appointment or election and qualification of their successors or their earlier termination or resignation.
As of December 31, 2006, we had 43 full-time employees. No employees are covered by collective bargaining agreements and we consider relations with our employees to be good.
We make available free of charge on or through our internet website, www.genaera.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
Our performance and financial results, and any investment in shares of our common stock, are subject to risks and uncertainties, including, but not limited to, the following specific risks:
Risks Related to Our Business
Our efforts to identify, evaluate and consummate a transaction or other initiative to increase the value of the Company for our stockholders may not be successful. Should we consummate a strategic transaction or other strategic alternative, there is no guarantee that our stockholders will realize greater value for, or preserve existing value of, their shares of the Company.
On January 3, 2007, in conjunction with the termination of our EVIZON program, we announced that we have engaged Banc of America Securities LLC to assist the Company with a review of strategic alternatives to increase the value realizable by our stockholders for the Companys remaining programs and assets. There can be no assurance that we will identify an alternative that allows our stockholders to realize an increase in the value of the Companys stock. There can also be no assurance that a transaction or other strategic alternative, once identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price.
If we do not raise additional capital, we may not be able to continue our research and development programs. We may never commercialize any products.
We maintained cash, cash equivalents and short-term investments of $33.8 million at December 31, 2006. We believe these resources are sufficient to fund operations and meet our research and development goals through 2008, based on our intention to license trodusquemine to a suitable partner prior to commencing Phase II trials. Our strategy also includes seeking dedicated funding for our squalamine for oncology program. However, we will need to raise substantial funding in the future to continue our research and development programs and to commercialize our potential products. If we are unable to raise additional funds or enter into collaboration agreements to fund our programs, we may be unable to complete development of any of our proposed products.
We regularly explore alternative means of financing our operations and seek funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions. We currently do not have any commitments from other parties to provide us additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all. If we cannot obtain funding, we will need to delay, scale back or eliminate research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that we might otherwise seek to develop or commercialize ourselves, or seek other arrangements.
Our capital raising efforts may dilute stockholder interests.
If we raise additional capital by issuing equity securities or securities convertible into equity, the issuance would result in ownership dilution to our stockholders and our share price may decline. The extent of any such dilution will vary based upon the amount of capital raised.
Capital raising efforts through collaborations may eventually negatively impact our financial interests.
If we raise additional capital through collaborations and licensing, we may give up valuable rights in intellectual property and the value of our interest in the licensed products could be negatively impacted by competing strategic and financial interests of our collaborators or licensees. If we engage in collaborations, we may receive lower consideration upon commercialization of such products than if we had not entered into such arrangements, or if we had entered into such arrangements at later stages in the product development process.
We expect to continue to incur substantial losses in the foreseeable future. We do not now have, nor have we ever had, products available for commercial sale and we may never generate revenues or become profitable.
To date, we have engaged primarily in the research and development of drug candidates. We have not generated any revenues from product sales and have incurred losses in each year since our inception. As of December 31, 2006, we had an accumulated deficit of $260.8 million.
Our proposed products are in a relatively early developmental stage and will require significant research, development and testing. We must obtain regulatory approvals for any proposed product prior to commercialization of the product. Our operations are also subject to various competitive and regulatory risks. As a result, we are unable to predict when or if we will achieve any product revenues or become profitable. We expect to experience substantial losses for the foreseeable future as we continue our research, development and testing efforts.
Risks Related to Our Industry
Development and commercial introduction of our products will take several more years and may not be successful.
We are dedicating substantially all of our resources to research and development, do not have any marketed products and have not generated any product revenue. Because substantially all of our potential products currently are in research, preclinical development or the early and middle stages of clinical testing, revenues from sales of any products will not occur for at least the next several years, if at all. Our technologies are in relatively new fields and may not lead to commercially viable pharmaceutical products. Before we can commercially introduce any products, we will likely incur substantial expense for, and devote a significant amount of time to, preclinical testing and clinical trials. We cannot apply for regulatory approval of our potential products until we have performed additional research and development testing and demonstrated in preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. Some of our product candidates are in the early stages of research and development and we may abandon further development efforts on these product candidates before they reach clinical trials. Conducting clinical trials is a lengthy, time-consuming and expensive process. Our clinical trials may not demonstrate the safety and efficacy of our potential products, and we may encounter unacceptable side effects or other problems in the clinical trials. Should this occur, we may have to delay or discontinue development of the potential products. Further, even if we believe that any product is safe or effective, we may not obtain the required regulatory approvals, be able to manufacture our products in commercial quantities or be able to market any product successfully.
Preclinical testing and clinical development are long, expensive and uncertain processes. It may take us several years to complete our testing and failure can occur at any stage of testing. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. We may suffer significant setbacks in advanced clinical trials, even after promising results in earlier trials. We may not be able to enroll a sufficient number of patients to complete our clinical trials in a timely manner. Based on results at any stage of clinical trials, we may decide to discontinue development of our product candidates.
Failure to recruit patients could delay or prevent clinical trials of our potential products, which could delay or prevent the development of potential products.
Identifying and qualifying patients to participate in clinical trials of our potential products is critically important to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates. We have experienced delays in some of our clinical trials and we may experience similar delays in the future. If patients are unwilling to participate in our trials because of competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting trials and obtaining regulatory approval of potential products will be delayed. These delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether.
Compliance with extensive government regulations to which we are subject is expensive and time consuming, and may result in the delay, cessation or cancellation of product sales, introductions or modifications.
Extensive industry regulation has, and will continue to have, a significant impact on our business. Biopharmaceutical companies are subject to extensive, complex, costly and evolving regulation by the federal government, principally the FDA and to a lesser extent by the U.S. Drug Enforcement Administration (DEA) and foreign and state government agencies. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act and other domestic and foreign statutes and regulations govern or influence the testing, manufacturing, packing, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products. Under certain of these regulations, we and our contract suppliers and manufacturers could be subject to periodic inspection of our or their respective facilities, procedures and operations and/or the testing of our products by the FDA, the DEA and other authorities, which conduct periodic inspections to confirm that we and our contract suppliers and manufacturers are in compliance with all applicable regulations. The FDA also conducts pre-approval and post-approval reviews and plant inspections to determine whether our processes, or our contract suppliers and manufacturers processes, are in compliance with current Good Manufacturing Practices (cGMP) and other FDA regulations.
We are dependent on receiving and maintaining FDA and other governmental approvals in order to initiate and conduct clinical trials on our products. There is always a risk that the FDA or other applicable governmental authorities will not approve our products, or will take postapproval action limiting, modifying or revoking our ability to manufacture or sell our products or that the rate, timing and cost of such approvals will adversely affect our product introduction plans or results of operations.
Governmental authorities may delay or deny the approval of any of our drug candidates. In addition, governmental authorities may enact new legislation or regulations that could limit or restrict our efforts. A delay or denial of regulatory approval for any of our drug candidates will have a material adverse effect on our business. Even if we receive approval of a product candidate, approval may be conditioned upon certain limitations and restrictions as to the drugs used and may be subject to continuous review. If we fail to comply with any applicable regulatory requirements, we could be subject to penalties, including warning letters, fines, withdrawal of regulatory approval, product recalls, operating restrictions, injunctions and criminal prosecution.
We expect to rely on third parties to market any products we develop and expect to rely on third parties in connection with the development of our products; if these parties do not perform as expected, we may never successfully commercialize our products.
We do not have our own sales and marketing staff. In order to successfully develop and market our future products, we must develop this infrastructure or enter into marketing and distribution arrangements with third parties. We also expect to delegate the responsibility for all, or a significant portion, of the development and regulatory approval process for certain products to third parties. If these parties do not develop an approvable or marketable product or do not market a product successfully, we may never generate revenue or become profitable. Additionally, we may be unable to enter into successful arrangements with other parties for such products.
We currently have collaborative agreements with two primary collaborators: MedImmune, Inc. and Laboratorios Bago SA. We do not have control over the amount and timing of resources to be devoted to our products by our collaborative partners. Our collaborators may not place a high priority on their contractual arrangements with us. Collaborators may develop products independently or through third parties that could compete with our proposed products. In addition, a collaborator may decide to end a relationship with us.
We also may decide to establish our own sales force to market and sell certain products. Although some members of our management have limited experience in marketing pharmaceutical products, we have no experience with respect to marketing our products. If we choose to pursue this alternative, we will need to spend significant additional funds and devote significant management resources and time to establish a successful sales force. This effort may not be successful. Moreover, because our financial resources are limited, our sales and marketing expenditures in this area would likely be modest compared to that of our competitors.
We face formidable competition with respect to the products we are seeking to develop.
The pharmaceutical industry is characterized by intense competition. Many companies, research institutions and universities are conducting research and development activities in our fields of interest. Most of these competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than we have. We may also face competition from companies using different or advanced techniques that could render our future products obsolete. Accordingly, we must continue to devote substantial resources and efforts to research and development activities in order to maintain a competitive position in our fields. Our efforts may not be successful.
Many companies are working to develop and market products intended for additional disease areas being targeted by us, including obesity, cancer and respiratory diseases. A number of major pharmaceutical companies have significant franchises in these disease areas and can be expected to invest heavily to protect their interests. With respect to obesity, products are being developed at a number of biopharmaceutical companies, including but not limited to Abbott Laboratories, Alizyme plc, Amylin Pharmaceuticals, Inc., Arena Pharmaceuticals, Inc., Bristol-Myers Squibb Company, F. Hoffman-La Roche, Ltd. and sanofi-aventis Group. For cancer, anti-angiogenic agents are under development at a number of biopharmaceutical companies, including EntreMed, Inc., Genentech, Inc. and Imclone Systems, Inc., as well as other large pharmaceutical companies. In the respiratory field, other biopharmaceutical companies also have reported the discovery of genes relating to asthma and other respiratory diseases, including Genentech, Inc., Amgen, Inc. and Vertex Pharmaceuticals, Inc., as well as other large pharmaceutical companies. Many of the companies developing or marketing competing products have significantly more experience than we do in undertaking preclinical testing and human clinical trials of new or improved therapeutic products and obtaining regulatory approvals of such products. Some of these companies may be in advanced phases of clinical testing of various drugs that may be competitive with our proposed products.
We expect technological developments in the biopharmaceutical field to occur at a rapid rate and expect competition to intensify as advances in this field are made. Some of these companies are currently involved in research and development activities focused on the pathogenesis of diseases similar to those on which we are working and the competition among companies attempting to find mechanisms responsible for disease is intense.
Colleges, universities, governmental agencies and other public and private research organizations are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed, some of which may be directly competitive with our technology.
If we are unable to recruit and retain skilled employees, we may not be able to achieve our objectives.
Retaining our current employees and recruiting qualified scientific personnel to perform future research and development work will be critical to our success. In addition to pharmaceutical and specialized biotechnology companies, colleges, universities, governmental agencies and other public and private research organizations can be expected to compete with us in recruiting highly qualified scientific personnel. Competition is intense for experienced scientists, and we may not be able to retain or recruit sufficient skilled personnel to allow us to pursue collaborations and develop our products and core technologies to the extent otherwise possible.
If we do not develop and maintain relationships with contract manufacturers, we may not successfully commercialize our products.
We currently do not have the resources, facilities or technical capabilities to manufacture any of our proposed products in the quantities and quality required for commercial sale. We have no plans to establish a manufacturing facility. We expect to depend upon contract manufacturers for commercial scale manufacturing of our proposed products in accordance with regulatory standards. For example, we are currently working with outside contractors for the chemical production of trodusquemine. This dependence on contract manufacturers may restrict our ability to develop and deliver products on a timely, profitable and competitive basis especially because the number of companies capable of producing our proposed products is limited. These contract manufacturers generally have multiple projects and they may give ours a lower priority. As a result of contract manufacturing mishaps, our product could be lost or delivered late, delaying our clinical and preclinical programs, or may not be produced in accordance with all current applicable regulatory standards. Product not produced in accordance with all current applicable regulatory standards may lead to adverse outcomes for patients and/or product recalls. Furthermore, the development of a robust, low-cost manufacturing process for the commercial production of trodusquemine and other proposed products will require significant time and expenditure by us. We may be unable to maintain arrangements with qualified outside contractors to manufacture materials at costs that are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology or technology acquired or licensed from third parties in developing a manufacturing process. In order to engage another manufacturer, we may need to obtain a license or other technology transfer from the original contract manufacturer. Even if a license is available from the original contract manufacturer on acceptable terms, we may be unable to successfully effect the transfer of the technology to the new contract manufacturer. Any such technology transfer may also require the transfer of requisite data for regulatory purposes, including information contained in a proprietary drug master file held by a contract manufacturer. If we rely on a contract manufacturer that owns the drug master file, our ability to change contract manufacturers may be more limited.
We depend on our intellectual property. If we are unable to protect our intellectual property, our business may be harmed.
Our success depends, in part, on our ability to develop and maintain a strong patent position for our products and technologies, both in the United States and other countries. As with most biotechnology and pharmaceutical companies, our patent position is highly uncertain and involves complex legal and factual questions. Without patent and other protections, other companies could offer substantially identical products for sale without incurring the sizeable development and testing costs that we have incurred. As a result, our ability to recover these expenditures and realize profits upon commercialization would likely be diminished.
The process of obtaining patents can be time consuming and expensive. Even after significant expenditure, a patent may not issue. We can never be certain that we were the first to develop the technology or that we were the first to file a patent application for the particular technology. U.S. patent applications are maintained in secrecy by the U.S. Patent and Trademark Office until a patent issues and publications in the scientific or patent literature concerning new technologies occur some time after actual discoveries of the technologies are made.
We cannot be certain that:
patents will issue from any of our patent applications;
our patent rights will be sufficient to protect our technology;
others may not file patents ahead of us in time and prevent the issuing of our patent claims;
others will not design around the patented aspects of our technology; or
our patents will not be successfully challenged or circumvented by our competitors. The cost of litigation related to patents can be substantial, regardless of the outcome.
We own several patents and patent applications for the use of squalamine as an anti-angiogenic, including methods for the treatment of cancer and for neovascularization in the eye. One of these patents is to the compounds combination therapy with other anti-cancer agents and will expire in 2017, while another patent covers the treatment of age-related macular degeneration, retinopathy of prematurity and diabetic retinopathy and will expire in 2015. We also own patents covering methods and intermediates in the manufacturing process of squalamine and trodusquemine that expire in 2017, 2018 and 2021. We own a composition of matter patent for the trodusquemine compound, which expires in 2014. We also own a patent for the use of trodusquemine as an anti-obesity agent and other indications that expires in 2015. We own two patents for the use of anti-IL9 or anti-IL9 receptor antibodies for the treatment of asthma and related disorders that expire in 2016. We also have U.S. patents covering the composition of matter for a mucoregulator target and another patent covering methods for screening for mucoregulator compounds that both expire in 2019. We own a patent on the use of talniflumate and related mucoregulator compounds for treating various conditions where mucous is overproduced, which expires in 2021.
The expiration date of each of these patents is subject to extension depending upon the future research and development program timelines. We have filed several other applications across our research and development programs and intend to file additional applications, as appropriate, for patents on new compounds, products or processes discovered or developed through the application of our technology.
We have rights to several patents and patent applications under certain license agreements pursuant to which we expect to owe royalties on sales of products that incorporate issued valid patent claims. In particular, we have licensed from LICR specific technologies related to our IL9 program, the earliest of which expires in 2009. We have licensed from the Childrens Hospital of Philadelphia the composition of matter patent for the squalamine compound, which expires in 2012. These patents are subject to extensions by their owners depending upon the future research and development program timelines. Additionally, certain of these agreements also provide that if we elect not to pursue the commercial development of any licensed technology, or do not adhere to an acceptable schedule of commercialization, our exclusive rights to such technology may terminate.
In addition, our patents on anti-IL-9 and anti-IL-9 receptor as well as the patents that we license from LICR have been licensed to MedImmune. We expect to receive certain milestone payments during the development of this technology and will receive royalty payments on sales of any approved drugs.
Third Party Intellectual Property Rights
We cannot be sure that our products do not infringe on the intellectual property rights of others and we may have infringement claims asserted against us. These claims may harm our reputation, cost us money and prevent us from offering some products. Any claims or litigation in this area may be costly and could result in large awards against us and, whether we ultimately win or lose, could be time-consuming, may injure our reputation, may result in costly delays or may require us to enter into royalty or licensing arrangements. If there is a successful claim of infringement against us or if we fail to develop non-infringing technology or license the proprietary rights on a timely basis, our ability to use certain technologies, products, services and brand names may be limited and our business may be harmed.
Other Intellectual Property
We have trademark protection for the product candidate names EVIZON and LOMUCIN and have applied for U.S. registration of these trademarks. In order to protect our proprietary technology and processes, we also rely on trade secrets and confidentiality agreements with our employees, consultants, outside scientific collaborators and other advisors. We may find that these agreements have been breached or that our trade secrets have otherwise become known or independently developed or discovered by our competitors.
Certain of our exclusive rights to patents and patent applications are governed by contract. Generally, these contracts require that we undertake certain obligations including the payment of royalties on sales of any products that are covered by patent claims. If we do not meet those obligations, we may lose our rights. Additionally, some of these agreements also require that we develop the licensed technology or meet certain milestones within a given timeframe. If we do not adhere to an acceptable schedule of commercialization, we may lose our rights.
Potential Ownership Disputes
Disputes may arise as to the ownership of our technology. Most of our research and development personnel have previously worked at other biotechnology companies, pharmaceutical companies, universities or research institutions. These entities may raise questions as to when technology was developed and assert rights to the technology. These kinds of disputes have occurred in the past at our company and were resolved. However, we may not prevail in any such disputes in the future.
Similar technology ownership disputes may arise in the context of consultants, vendors or third parties, such as contract manufacturers. For example, our consultants are employed by or have consulting agreements with third parties. There may be disputes as to the capacity in which consultants are operating when they make certain discoveries. We may not prevail in any such disputes.
If we cannot recruit and retain qualified management, we may not be able to successfully develop and commercialize our products.
We depend to a considerable degree on a limited number of key personnel. Most significant responsibilities have been assigned to a relatively small number of individuals. In particular, it would be difficult to replace our President and Chief Executive Officer, John L. Armstrong, Jr. We entered into an evergreen employment agreement with Mr. Armstrong, dated October 21, 2003, that can be terminated by either party. This employment agreement contains non-compete and non-solicitation clauses. All of our executive officers have executed individual employment agreements with us. We do not maintain key man insurance on any of our employees. The loss of certain management and technical personnel could adversely affect our ability to develop and commercialize products.
We are subject to potential product liability claims that could result in significant costs.
We are subject to significant potential product liability risks inherent in the testing, manufacturing and marketing of human therapeutic products, including the risk that:
our proposed products cause some undesirable side effects or injury during clinical trials;
our products cause undesirable side effects or injury in the market; or
third parties that we have agreed to indemnify incur a related liability. We currently maintain primary products and completed operations liability insurance with per occurrence and aggregate coverage limits of $8.0 million. The coverage limits of our insurance policies may be inadequate to protect us from any liabilities we might incur in connection with clinical trials, manufacturing and marketing of our products. Product liability insurance is expensive and in the future may not be available on commercially acceptable terms, or at all. A successful claim or claims brought against us in excess of our insurance coverage could materially harm our business and financial condition.
If we do not receive adequate third-party reimbursement for our drug candidates, some patients may be unable to afford our products and sales could suffer.
In both the United States and elsewhere, the availability of reimbursement from third-party payers, such as government health administration authorities, private health insurers and other organizations, can impact
prescription pharmaceutical sales. These organizations are increasingly challenging the prices charged for medical products and services, particularly where they believe that there is only an incremental therapeutic benefit that does not justify the additional cost. If any of our products ever obtain marketing approval, coverage and reimbursement may not be available for these products or, if available, may not be adequate. Without insurance coverage, many patients may be unable to afford our products, in which case sales of the products would be adversely affected.
There also has been a trend toward government reforms intended to contain or reduce the cost of health care. In certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, there have been a number of federal and state proposals to implement similar government control. We expect this trend to continue, but we cannot predict the nature or extent of any reform that results. These reforms could adversely affect our ability to obtain financing for the continued development of our proposed products or to market any of our products that are successfully developed. Furthermore, reforms could have a broader impact by limiting overall growth of health care spending, such as Medicare and Medicaid spending, which could also adversely affect our business.
Risks Related to Our Stock
Our stock price is extremely volatile and your investment in our stock could decline in value. We may become involved in securities class action litigation.
The market prices and trading volumes for securities of biopharmaceutical and biotechnology companies, including ours, have historically been, and will likely continue to be, highly volatile. Future events affecting our business, or that of our competitors, may have a significant impact on our stock price. Among these events are the following:
product testing results from us or our competitors;
technological innovations by us or our competitors;
new commercial products from us or our competitors;
whether and when we or our collaborators achieve specified development or commercialization milestones;
regulatory developments in the United States and foreign countries;
developments concerning proprietary rights, including patents;
economic and other external factors or other disasters or crises;
period-to-period fluctuations in our financial results; and
the general performance of the equity markets and, in particular, the biotechnology sector of the equity markets. In 2006, our stock price fluctuated from $0.36 per share to $1.74 per share, with an average price of approximately $0.82 per share.
In the past, following periods of volatility in the market price of a particular companys securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often extremely expensive and diverts managements attention and resources.
We may be unable to maintain the standards for listing on the Nasdaq Capital Market, which could adversely affect the liquidity of our common stock and could subject our common stock to the penny stock rules.
Our common stock is currently listed on the Nasdaq Capital Market. There are several requirements that we must satisfy in order for our common stock to continue to be listed on the Nasdaq Capital Market. These requirements include, but are not limited to, maintaining a minimum per share price of our common stock of $1.00 and a minimum level of stockholders equity of $2.5 million. On June 26, 2006, we received notification from the National Association of Securities Dealers Automated Quotations (NASDAQ) that the bid price of our common stock had closed below the minimum $1.00 per share requirement under NASDAQ Marketplace Rule 4310(c)(4) (the Rule) for 30 consecutive trading days. In accordance with NASDAQ rules, we were afforded 180 calendar days, or until December 26, 2006, to regain compliance with the minimum bid price requirements. Compliance would be achieved by the bid price of our common stock closing at $1.00 per share or more for a minimum of ten consecutive trading days during the 180 day period. We did not regain compliance with the minimum bid price requirements prior to December 26, 2006. On December 28, 2006, we received a NASDAQ Staff Determination letter indicating the grant of an additional 180 calendar days, or until June 22, 2007, to demonstrate compliance with the minimum $1.00 bid price per share requirement in accordance with Marketplace Rule 4310(c)(8)(D). If at any time before June 22, 2007, the bid price of our common stock closes at $1.00 per share for a minimum of ten consecutive trading days, NASDAQ will provide written notification that we comply with the Rule. If compliance with this rule cannot be demonstrated by June 22, 2007, NASDAQ will provide written notification that our securities will be delisted. At that time, we may appeal NASDAQs determination to a Listing Qualifications Panel.
Delisting from the Nasdaq Capital Market could adversely affect the liquidity and the price of our common stock and could have a long-term adverse impact on our ability to raise future capital through a sale of our common stock.
If our common stock were delisted, our common stock would be traded on an electronic bulletin board established for securities that are not included on NASDAQ, traded on a national securities exchange or traded in quotations published by the National Quotation Bureau, Inc., commonly referred to as the pink sheets. If this occurs, it could be difficult to sell our securities or obtain the same level of market information as to the price of our common stock as is currently available.
In addition, if our common stock were delisted, it would be subject to the so-called penny stock rules. The SEC has adopted regulations that define a penny stock to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange or quoted on NASDAQ. For any transaction involving a penny stock, unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must make a special suitability determination for the purchaser and must have received the purchasers written consent to the transaction prior to the transaction. The penny stock rules also require broker-dealers to deliver monthly statements to penny stock investors disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Prior to the transaction, a broker-dealer must provide a disclosure schedule relating to the penny stock market. In addition, the broker-dealer must disclose the following:
commissions payable to the broker-dealer and the registered representative; and
current quotations for the security as mandated by the applicable regulations. If our common stock were delisted and determined to be a penny stock, a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
If our board of directors effects a reverse stock split, as approved by our stockholders at the Special Meeting of Stockholders, there can be no assurance that the total market capitalization of our common stock (the aggregate value of all our common stock at the then market price) after the reverse stock split will be equal to or greater than the total market capitalization before the reverse stock split or that the per share market price of our common stock following the reverse stock split will increase in proportion to the reduction in the number of shares.
At a Special Meeting of Stockholders held on October 3, 2006 (the Special Meeting), our stockholders approved a potential amendment to our Fifth Amended and Restated Certificate of Incorporation to effect, at the future election of our board of directors, a reverse stock split at one of the five following ratios: one-for-six; one-for-seven; one-for-eight; one-for-ten; or one-for-twelve. As of March 14, 2007, our board of directors has not yet elected to effect any such reverse stock split. There can be no assurance that the market price per new share of our common stock after a reverse stock split, if effected, will increase in proportion to the reduction in the number of old shares of our common stock outstanding before the reverse stock split. For example, based on the closing price of our common stock on January 31, 2007 of $0.25 per share, if the board of directors decided to implement the reverse stock split and selects a reverse stock split ratio of one-for-six, there can be no assurance that the post-split market price of our common stock would be $1.50 per share or greater. Accordingly, the total market capitalization of our common stock after the proposed reverse stock split may be lower than the total market capitalization before the proposed reverse stock split and, in the future, the market price of our common stock following the reverse stock split may not exceed or remain higher than the market price prior to the proposed reverse stock split.
If our board of directors effects a reverse stock split, as approved by our stockholders at the Special Meeting, the resulting per share stock price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors and, consequently, the trading liquidity of our common stock may not improve.
While the board of directors believes that a higher stock price may help generate investor interest, there can be no assurance that a reverse stock split will result in a per share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not necessarily improve.
If our board of directors effects a reverse stock split, as approved by our stockholders at the Special Meeting, a decline in the market price of our common stock after the reverse stock split may result in a greater percentage decline than would occur in the absence of a reverse stock split, and the liquidity of our common stock could be adversely affected following such a reverse stock split.
If a reverse stock split is effected and the market price of our common stock declines, the percentage decline may be greater than would occur in the absence of a reverse stock split. The market price of our common stock will, however, also be based on our performance and other factors, which are unrelated to the number of shares outstanding. Furthermore, the liquidity of our common stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split.
The exercise of options and warrants and other issuances of shares will likely have a dilutive effect on our stock price.
As of December 31, 2006, there were outstanding options to purchase an aggregate of 6,862,375 shares of our common stock at prices ranging from $0.37 per share to $7.88 per share, of which options to purchase 2,690,875 shares were exercisable as of such date. As of December 31, 2006, there were outstanding warrants to purchase 31,269,743 shares of our common stock. Of this total, warrants to purchase 167,166 shares of our common stock are currently exercisable at $3.22 per share, subject to adjustment under the anti-dilution provisions of the warrants. Warrants to purchase 990,100, 3,420,000 and 26,692,477 shares are currently exercisable at $5.38, $3.15 and
$0.6101 per share, respectively. In connection with an April 2002 private placement of our common stock, we granted to the placement agent warrants to purchase 100,000 shares of our common stock at an exercise price of $2.75 per share. As of December 31, 2006, these warrants have not yet been issued.
The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the issuance of shares of our capital stock in connection with collaborations or manufacturing arrangements or in connection with other financing efforts.
Our certificate of incorporation and Delaware law contain provisions that could discourage a takeover and entrench management.
Our certificate of incorporation provides our board of directors the power to issue shares of preferred stock without stockholder approval. This preferred stock could have voting rights, including voting rights that could be superior to that of our common stock. In addition, Section 203 of the Delaware General Corporation Law contains provisions that impose restrictions on stockholder action to acquire control of us. The effect of these provisions of our certificate of incorporation and Delaware law make it more difficult to remove management and could discourage third parties from seeking to obtain control, even though the price at which such third parties seek to acquire our common stock is in excess of the market price for our stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS