e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
000-51863
VANDA PHARMACEUTICALS
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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03-0491827
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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9605 Medical Center Drive,
Suite 300
Rockville, Maryland
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20850
(Zip Code)
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(Address of Principal Executive
Offices)
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(240) 599-4500
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. Please see definition of accelerated and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 2, 2007, there were 26,579,237 shares of the
Registrants Common Stock issued and outstanding.
Vanda
Pharmaceuticals Inc.
(A Development Stage Enterprise)
Form 10-Q
Index
For the
Three Months Ended March 31, 2007
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Page
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PART I
FINANCIAL INFORMATION
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ITEM 1.
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Financial Statements (Unaudited):
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3
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Condensed Consolidated
Balance Sheets as of March 31, 2007 and December 31,
2006
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3
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Condensed Consolidated
Statements of Operations for the three months ended
March 31, 2007 and 2006 and for the period from
March 13, 2003 (inception) to March 31, 2007
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4
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Condensed Consolidated
Statements of Changes in Stockholders Equity for the three
months ended March 31, 2007
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5
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Condensed Consolidated
Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 and for the period from
March 13, 2003 (inception) to March 31, 2007
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6
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Notes to Condensed
Consolidated Financial Statements
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7
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ITEM 2.
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Managements Discussion and
Analysis of Financial Condition and Results of Operations
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19
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ITEM 3.
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Quantitative and Qualitative
Disclosure about Market Risk
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28
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ITEM 4.
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Controls and Procedures
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28
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PART II OTHER
INFORMATION
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ITEM 1A.
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Risk Factors
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29
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ITEM 2.
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Unregistered Sales of Equity
Securities and Use of Proceeds
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42
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ITEM 6.
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Exhibits
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43
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Signatures
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44
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Exhibit Index
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45
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2
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements (Unaudited)
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VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
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March 31,
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December 31,
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2007
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2006
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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64,221,338
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$
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30,928,895
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Marketable securities
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62,698,169
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941,981
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Prepaid expenses, deposits and
other current assets
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1,838,638
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1,949,466
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Total current assets
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128,758,145
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33,820,342
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Marketable securities, long-term
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3,000,181
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Property and equipment, net
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1,829,893
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1,859,704
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Deposits
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150,000
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150,000
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Restricted cash
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430,230
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430,230
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Total assets
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$
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134,168,449
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$
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36,260,276
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities
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Accounts payable
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$
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2,010,347
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$
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2,783,249
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Accrued expenses
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4,904,128
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6,322,808
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Total current liabilities
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6,914,475
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9,106,057
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Deferred rent
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246,075
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238,413
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Deferred grant revenue
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142,411
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129,950
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Other long-term liabilities
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59,683
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28,984
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Total liabilities
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7,362,644
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9,503,404
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Commitments and contingencies
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Stockholders equity
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Common stock, $0.001 par
value, 150,000,000 and 150,000,000 shares authorized as of
March 31, 2007 and December 31, 2006, respectively;
26,561,779 and 22,128,534 shares issued and outstanding as
of March 31, 2007 and December 31, 2006,
respectively
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26,562
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22,129
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Additional paid-in capital
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242,029,862
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126,578,588
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Accumulated other comprehensive
loss
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(17,283
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)
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(3,269
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)
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Deficit accumulated during the
development stage
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(115,233,336
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)
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(99,840,576
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)
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Total stockholders equity
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126,805,805
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26,756,872
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Total liabilities and
stockholders equity
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$
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134,168,449
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$
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36,260,276
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Period from
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Three Months
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Three Months
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March 13, 2003
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Ended
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Ended
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(Inception) to
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March 31, 2007
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March 31, 2006
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March 31, 2007
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Revenues from services
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$
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$
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$
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81,545
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Operating expenses:
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Research and development
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10,592,059
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15,488,554
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89,006,965
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General and administrative
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6,233,549
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2,924,948
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30,439,304
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Total operating expenses
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16,825,608
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18,413,502
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119,446,269
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Loss from operations
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(16,825,608
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)
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(18,413,502
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)
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(119,364,724
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)
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Other income (expense):
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Interest income
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|
1,433,654
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|
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293,861
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4,225,224
|
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Interest expense
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(2,809
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)
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(80,485
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)
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Other income
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|
|
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602
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|
|
|
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Total other income, net
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|
1,433,654
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|
|
291,052
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|
|
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4,145,341
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|
|
|
|
|
|
|
|
|
|
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Loss before tax provision
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|
(15,391,954
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)
|
|
|
(18,122,450
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)
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(115,219,383
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)
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Tax provision
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|
806
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|
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13,953
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Net loss
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(15,392,760
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)
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|
|
(18,122,450
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)
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|
(115,233,336
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)
|
Beneficial conversion
feature deemed dividend to preferred stockholders
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|
|
|
|
|
|
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|
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(33,486,623
|
)
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|
|
|
|
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|
|
|
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|
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Net loss attributable to common
stockholders
|
|
$
|
(15,392,760
|
)
|
|
$
|
(18,122,450
|
)
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|
$
|
(148,719,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share applicable to common stockholders
|
|
$
|
(0.61
|
)
|
|
$
|
(385.61
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)
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|
|
|
|
|
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|
|
|
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Shares used in calculation of
basic and diluted net loss per share applicable to common
stockholders
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|
25,340,455
|
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|
|
46,997
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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|
|
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Deficit
|
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|
|
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|
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Accumulated
|
|
|
Accumulated
|
|
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|
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|
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Additional
|
|
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Other
|
|
|
During the
|
|
|
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|
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|
|
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|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Loss
|
|
|
Stage
|
|
|
Loss
|
|
|
Total
|
|
|
Balances at December 31,
2006
|
|
|
22,128,534
|
|
|
$
|
22,129
|
|
|
$
|
126,578,588
|
|
|
$
|
(3,269
|
)
|
|
$
|
(99,840,576
|
)
|
|
|
|
|
|
$
|
26,756,872
|
|
Follow-on offering of common stock,
net of issuance costs
|
|
|
4,370,000
|
|
|
|
4,370
|
|
|
|
111,286,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,291,219
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,999,046
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
3,999,046
|
|
Exercise of stock options
|
|
|
63,245
|
|
|
|
63
|
|
|
|
56,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,516
|
|
Non-employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
108,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,926
|
|
Comprehensive loss:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,392,760
|
)
|
|
$
|
(15,392,760
|
)
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,785
|
)
|
|
|
|
|
|
|
(12,785
|
)
|
|
|
|
|
Net unrealized losses on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,229
|
)
|
|
|
|
|
|
|
(1,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(15,406,774
|
)
|
|
|
(15,406,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31,
2007
|
|
|
26,561,779
|
|
|
$
|
26,562
|
|
|
$
|
242,029,862
|
|
|
$
|
(17,283
|
)
|
|
$
|
(115,233,336
|
)
|
|
|
|
|
|
$
|
126,805,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
March 13, 2003
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
(Inception) to
|
|
|
|
March 31, 2007
|
|
|
March 31, 2006
|
|
|
March 31, 2007
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,392,760
|
)
|
|
$
|
(18,122,450
|
)
|
|
$
|
(115,233,336
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
148,671
|
|
|
|
120,235
|
|
|
|
1,575,431
|
|
Employee and non-employee
stock-based compensation
|
|
|
4,107,972
|
|
|
|
1,520,317
|
|
|
|
15,420,682
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
29,528
|
|
|
|
29,528
|
|
Accretion of discount on investments
|
|
|
(230,268
|
)
|
|
|
(92,261
|
)
|
|
|
(651,342
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses, deposits and
other current assets
|
|
|
109,921
|
|
|
|
(252,666
|
)
|
|
|
(1,834,523
|
)
|
Long-term deposits
|
|
|
|
|
|
|
|
|
|
|
(150,000
|
)
|
Accounts payable
|
|
|
(767,846
|
)
|
|
|
1,122,758
|
|
|
|
2,001,454
|
|
Accrued expenses
|
|
|
(1,419,185
|
)
|
|
|
4,627,273
|
|
|
|
4,901,261
|
|
Deferred grant revenue
|
|
|
|
|
|
|
|
|
|
|
129,950
|
|
Other liabilities
|
|
|
38,361
|
|
|
|
328,546
|
|
|
|
305,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(13,405,134
|
)
|
|
|
(10,718,720
|
)
|
|
|
(93,505,137
|
)
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(118,678
|
)
|
|
|
(358,048
|
)
|
|
|
(3,310,291
|
)
|
Purchases of marketable securities
|
|
|
(65,477,330
|
)
|
|
|
(1,639,702
|
)
|
|
|
(179,556,114
|
)
|
Proceeds from sales of marketable
securities
|
|
|
|
|
|
|
|
|
|
|
82,137,888
|
|
Maturities of marketable securities
|
|
|
950,000
|
|
|
|
4,270,000
|
|
|
|
32,370,000
|
|
Investments in restricted cash
|
|
|
|
|
|
|
|
|
|
|
(430,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(64,646,008
|
)
|
|
|
2,272,250
|
|
|
|
(68,788,747
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on note
payable
|
|
|
|
|
|
|
|
|
|
|
515,147
|
|
Principal payments on obligations
under capital lease
|
|
|
|
|
|
|
(344
|
)
|
|
|
(94,456
|
)
|
Principal payments on note payable
|
|
|
|
|
|
|
(45,873
|
)
|
|
|
(515,147
|
)
|
Proceeds from the issuance of
preferred stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
61,795,187
|
|
Proceeds from exercise of stock
options and warrants
|
|
|
56,516
|
|
|
|
294
|
|
|
|
215,386
|
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
111,291,219
|
|
|
|
|
|
|
|
164,625,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
111,347,735
|
|
|
|
(45,923
|
)
|
|
|
226,541,286
|
|
Effect of foreign currency
translation
|
|
|
(4,150
|
)
|
|
|
(458
|
)
|
|
|
(26,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
$
|
33,292,443
|
|
|
$
|
(8,492,851
|
)
|
|
$
|
64,221,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
30,928,895
|
|
|
$
|
21,012,815
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
64,221,338
|
|
|
$
|
12,519,964
|
|
|
$
|
64,221,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
|
|
|
$
|
3,186
|
|
|
$
|
73,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired through
obligation under capital lease
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
1.
|
Business
organization and presentation
|
Business
organization
Vanda Pharmaceuticals Inc. (Vanda or the Company) is a
biopharmaceutical company focused on the development and
commercialization of small molecule therapeutics, with exclusive
worldwide commercial rights to three product candidates in
clinical development for various central nervous system
disorders. Vanda commenced its operations on March 13,
2003. The Companys lead product candidate, iloperidone, is
a compound for the treatment of schizophrenia and bipolar
disorder, which has demonstrated positive top-line results from
a Phase III clinical trial in schizophrenia completed in
December 2006. The Company expects to file a New Drug
Application (NDA) for iloperidone in schizophrenia with the
United States Food and Drug Administration (FDA) by the end of
2007. The Companys second product candidate, VEC-162, is a
compound for the treatment of sleep and mood disorders, which
demonstrated positive top-line results from a Phase III
clinical trial in transient insomnia completed in November 2006.
VEC-162 is also ready for Phase II trials for the treatment
of depression. The Company expects to conduct another trial of
VEC-162 in the third quarter of 2007. The Companys third
product candidate, VSF-173, is a compound for the treatment of
excessive sleepiness and the Company recently initiated its
first VSF-173 Phase II clinical trial.
Initial
public and follow-on offerings
The Company completed its initial public offering in April 2006.
The offering totaled 5,964,188 shares of common stock at a
public offering price of $10.00 per share, resulting in net
proceeds to the Company of approximately $53.3 million
after deducting payments of underwriters discounts and
commissions and offering expenses.
In January 2007 the Company completed its follow-on offering.
The offering totaled 4,370,000 shares of common stock at a
public offering price of $27.29 per share, resulting in net
proceeds to the Company of approximately $111.3 million
after deducting underwriting discounts and commissions and
offering expenses.
Capital
resources
Since its inception, the Company has devoted substantially all
of its efforts to business planning, research and development,
recruiting management and technical staff, acquiring operating
assets, raising capital and market research. Accordingly, the
Company is considered to be in the development stage as defined
in Statement of Financial Accounting Standards (SFAS)
No. 7, Accounting and Reporting by Development Stage
Enterprises.
The Companys activities will necessitate significant uses
of working capital throughout 2007 and beyond. Additionally, the
Companys capital requirements will depend on many factors,
including the success of the Companys research and
development efforts, payments received under contractual
agreements with other parties, if any, and the status of
competitive products. The Company plans to continue financing
its operations with cash received from financing activities and
believes that its current capital resources will be sufficient
to meet its current operating needs into early 2008, and after
that time, the Company will require additional capital. In
budgeting for our activities, we have relied on a number of
assumptions, including assumptions that we will file an NDA for
iloperidone in schizophrenia with the FDA by the end of 2007,
that we will continue to expend funds in preparation of a
commercial launch of iloperidone, that we will expend funds on
the extended-release injectable formulation of iloperidone, that
we will initiate another VEC-162 trial in the third quarter of
2007 and that this trial will be conducted in accordance with
our expectations, that we will conduct our VSF-173 Phase II
trial for excessive sleepiness in accordance with our
expectations, that we will not engage in further in-licensing
activities, that we will not receive any proceeds from potential
partnerships, that we will not expend funds on the bipolar
indication for iloperidone, that we will continue to evaluate
pre-
7
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
clinical compounds for potential development, that we will be
able to continue the manufacturing of our product candidates at
commercially reasonable prices, that we will be able to retain
our key personnel, and that we will not incur any significant
contingent liabilities.
The Company may need to raise additional funds more quickly if
one or more of the above assumptions proves to be incorrect, if
the Company chooses to expand its product development efforts
more rapidly than presently anticipated or if the Company seeks
to acquire additional product candidates. The Company may decide
to raise additional funds even before they are needed if the
conditions for raising capital are favorable. However, the
Company may not be able to raise additional funds on acceptable
terms, or at all. If the Company is unable to secure sufficient
capital to fund its research and development activities, the
Company may not be able to continue operations, or the Company
may have to enter into collaboration agreements that could
require the Company to share commercial rights to its products
to a greater extent or at earlier stages in the drug development
process than is currently intended.
Basis of
presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States and the rules
and regulations of the Securities and Exchange Commission (SEC),
for interim financial information. Accordingly, they do not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements
and should be read in conjunction with the Companys
consolidated financial statements for the year ended
December 31, 2006 included in the Companys annual
report on the
Form 10-K.
The financial information as of March 31, 2007 and for the
periods of the three months ended March 31, 2007 and
March 31, 2006 and for the period from March 13, 2003
(inception) to March 31, 2007, is unaudited, but in the
opinion of management all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair statement of
the results of these interim periods have been included. The
results of the Companys operations for any interim period
are not necessarily indicative of the results that may be
expected for any other interim period or for a full fiscal year.
The financial information included herein should be read in
conjunction with the consolidated financial statements and notes
in the Companys annual report incorporated by reference in
Form 10-K
for calendar year 2006.
The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned Singapore
subsidiary. All inter-company balances and transactions have
been eliminated.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Cash
and cash equivalents
For purposes of the condensed consolidated balance sheets and
condensed consolidated statements of cash flows, cash
equivalents represent highly-liquid investments with a maturity
of three months or less at the date of purchase.
Marketable
securities
The Company classifies all of its marketable securities as
available-for-sale.
Available-for-sale
securities are carried at fair value, with the unrealized gains
and losses reported as a component of stockholders equity
in accumulated other comprehensive loss. Interest income,
amortization of premium and accretion of discount on marketable
securities, and realized gains and losses on securities are
included in interest income in the statements of operations.
Marketable securities with a maturity of more than one year at
the end of the period are classified as long-term securities.
8
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
cash
During 2005, in conjunction with the lease of the new office and
laboratory space in Rockville, MD, the Company provided the
landlord with a letter of credit, which was collateralized with
a deposit in the amount of $430,230. The deposit is recorded as
non-current restricted cash at March 31, 2007 since the
letter of credit is required until the lease expires in 2016.
Concentrations
of credit risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash and cash equivalents and marketable securities. The Company
places its cash and cash equivalents and marketable securities
with highly-rated financial institutions. At March 31,
2007, the Company maintained all of its cash and cash
equivalents in four financial institutions. Deposits held with
these institutions may exceed the amount of insurance provided
on such deposits. Generally, these deposits may be redeemed upon
demand, and the Company believes there is minimal risk of losses
on such balances.
Employee
stock-based compensation
The Company accounts for the employee stock-based compensation
expenses in accordance with the Financial Accounting Standards
Board (FASB) revised SFAS No. 123, Share-Based
Payment (SFAS 123(R)). Accordingly, compensation costs
for all stock-based awards to employees are measured based on
the grant date fair value of those awards and recognized over
the period during which the employee is required to perform
service in exchange for the award. The Company generally
recognizes the expense over the awards vesting period.
For stock awards granted in 2006 and 2007, expenses are
amortized under the accelerated attribution method. For stock
awards granted prior to January 1, 2006, expenses are
amortized under the accelerated attribution method for options
that were modified after the original grant date and under the
straight-line attribution method for all other options. As
stock-based compensation expense recognized in the condensed
consolidated statements of operations for the first three months
of 2006 and 2007 is based on awards ultimately expected to vest,
it has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Pre-vesting forfeitures
on the options granted during 2006 and 2007 were estimated to be
approximately 2% based on the Companys historical
experience.
Total employee stock-based compensation expense recognized
during the three months ended March 31, 2007 and 2006
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
March 13, 2003
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Inception) to
|
|
|
|
March 31, 2007
|
|
|
March 31, 2006
|
|
|
March 31, 2007
|
|
|
Research and development
|
|
$
|
1,003,370
|
|
|
$
|
142,629
|
|
|
$
|
2,536,380
|
|
General and administrative
|
|
|
2,995,676
|
|
|
|
1,344,582
|
|
|
|
12,695,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
3,999,046
|
|
|
$
|
1,487,211
|
|
|
$
|
15,231,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
per basic and diluted share of common stock
|
|
$
|
0.16
|
|
|
$
|
31.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, $38.3 million of total
unrecognized compensation costs related to non-vested awards is
expected to be recognized over a weighted average period of
3.2 years.
9
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2007, the Company had two equity incentive
plans, the Second Amended and Restated Management Equity Plan
(the 2004 Plan) and the 2006 Equity Incentive Plan (the 2006
Plan) that were adopted in December 2004 and April 2006,
respectively. An aggregate of 1,282,211 shares were subject
to outstanding options granted under the 2004 Plan as of
March 31, 2007, and no additional options will be granted
under this plan. Reserved under the 2006 Plan as of
March 31, 2007 are 2,385,141 shares of the
Companys common stock of which 1,487,500 shares were
subject to outstanding options to employees and non-employees as
of March 31, 2007.
Options are subject to terms and conditions established by the
compensation committee of the board of directors. None of the
stock-based awards are classified as a liability as of
March 31, 2007. Option awards have
10-year
contractual terms and all options granted prior to
December 31, 2006 and options granted to new employees vest
and become exercisable on the first anniversary of the grant
date with respect to the 25% of the option awards and the
remaining 75% of the option award vest and become exercisable
monthly in equal installments thereafter over three years.
Option awards granted to existing employees after
December 31, 2006 vest and become exercisable monthly in
equal installments over four years. Certain option awards
provide for accelerated vesting if there is a change in control.
The fair value of each option award is estimated on the date of
grant using a Black-Scholes option pricing model (Black-Scholes
model) that uses the assumptions noted in the following table.
Expected volatility rates are based on historical volatility of
the common stock of comparable entities and other factors due to
the lack of historic information of the Companys publicly
traded common stock. The expected term of options granted is
based on the transition approach provided by SAB 107 as the
options meet the plain vanilla criteria required by
this method. The risk-free interest rates are based on the
U.S. Treasury yield for a period consistent with the
expected term of the option in effect at the time of the grant.
The Company has not paid dividends to its stockholders since its
inception and does not plan to pay cash dividends in the
foreseeable future.
Assumptions used in the Black-Scholes model for employee stock
options granted during the three months ended March 31,
2007 were as follows:
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
73.00
|
%
|
Expected term (years)
|
|
|
6.25
|
|
Weighted average risk-free
interest rate
|
|
|
4.86
|
%
|
A summary of option activity for the 2004 Plan is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price at
|
|
|
Remaining Term
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
(Years)
|
|
|
Intrinsic Value
|
|
|
Outstanding at December 31,
2006
|
|
|
1,347,205
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,749
|
)
|
|
|
1.51
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(63,245
|
)
|
|
|
0.89
|
|
|
|
|
|
|
$
|
1,606,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
1,282,211
|
|
|
$
|
1.73
|
|
|
|
8.47
|
|
|
$
|
28,976,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
420,156
|
|
|
$
|
1.60
|
|
|
|
8.46
|
|
|
$
|
9,551,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of option activity for the 2006 Plan is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price at
|
|
|
Remaining Term
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
(Years)
|
|
|
Intrinsic Value
|
|
|
Outstanding at December 31,
2006
|
|
|
359,527
|
|
|
$
|
20.21
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,137,301
|
|
|
|
30.60
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(9,328
|
)
|
|
|
27.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
1,487,500
|
|
|
$
|
28.10
|
|
|
|
9.77
|
|
|
$
|
(5,570,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
51,324
|
|
|
$
|
28.82
|
|
|
|
9.79
|
|
|
$
|
(228,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted
during the three months ended March 31, 2007 was
$21.19 per share. For the three months ended March 31,
2007 and 2006 the Company received a total of $56,516 and $294,
respectively, in cash from options exercised under the
stock-based arrangements.
Equity
instruments issued to non-employees
The equity instruments issued to non-employees in exchange for
services are recorded at the fair value of the equity
instruments on the measurement date. The measurement of expense
is subject to periodic adjustment as the underlying equity
instruments vest and the performance by the third party is
complete. The Company recognizes the fair value of non-employee
equity instruments in the same periods and in the same manner as
if the Company had paid cash for the services.
As of March 31, 2007 an aggregate of 38,125 shares
were subject to outstanding options granted to non-employees
under the 2004 Plan and 2006 Plan of which 34,074 options are
subject to vesting. Total non-employee equity-based compensation
expense, recognized during the first three months of 2007 and
2006 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Research and development
|
|
$
|
51,606
|
|
|
$
|
33,105
|
|
General and administrative
|
|
|
57,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,926
|
|
|
$
|
33,105
|
|
|
|
|
|
|
|
|
|
|
During 2006 the Company entered into two additional consulting
agreements that may require the Company to grant options to
purchase up to 20,000 shares of common stock to consultants
subject to certain performance criteria. As of March 31,
2007 the options have not been issued as the performance
criteria have not been satisfied and the terms of the stock
option grants have not been finalized.
Recognition
of expenses from outsourced contracts
Pursuant to managements assessment of the services that
have been performed on clinical trials and other contracts, the
Company recognizes operating expenses as the services are
provided. Such management assessments include, but are not
limited to: (1) an evaluation by the project manager of the
work that has been completed during the period,
(2) measurement of progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment.
11
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research
and development expenses
The Companys research and development expenses consist
primarily of fees paid to third parties in connection with the
services they provide for our clinical trials, costs of contract
manufacturing services, license fees, costs of materials used in
clinical trials and research and development, depreciation of
capital resources used to develop our products, all related
facilities costs, and salaries, other related costs and
stock-based compensation related to our research and development
personnel. We expense research and development costs as they are
incurred, including payments made to date under our license
agreements. Manufacturing-related costs are also included in
research and development expenses as we do not yet have FDA
approval for any of our product candidates. Costs related to our
acquisitions of intellectual property have been expensed as
incurred since the underlying technology associated with these
acquisitions were made in connection with the Companys
research and development efforts and have no alternative future
use.
General
and administrative expenses
General and administrative costs consist primarily of salaries,
other related costs and stock-based compensation for personnel
serving executive, finance, accounting, information technology
and human resource functions, facility costs not otherwise
included in research and development expenses, insurance costs
and professional fees for legal, accounting and other
professional services. General and administrative costs also
include third party expenses incurred to support business
development, marketing and other business activities related to
our product candidate iloperidone, in anticipation of its
commercial launch.
Income
taxes
The Company accounts for income taxes under the liability method
in accordance with provisions of SFAS No. 109,
Accounting for Income Taxes, (SFAS 109) which
requires companies to account for deferred income taxes using
the asset and liability method. Under the asset and liability
method, current income tax expense or benefit is the amount of
income taxes expected to be payable or refundable for the
current year. A deferred income tax asset or liability is
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Tax rate
changes are reflected in income during the period such changes
are enacted. Changes in ownership may limit the amount of net
operating loss carryforwards that can be utilized in the future
to offset taxable income.
Segment
information
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
Use of
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
12
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
grant revenue
Vanda Singapore entered into an agreement with the Economic
Development Board of Singapore (EDB) to provide a grant for a
development project. During 2005, the Company received its first
reimbursement under the agreement. Given that the Company has
not met all of the conditions attached to the grant expected to
be met to date and under certain conditions EDB may reclaim
funds paid to date, the payment has been recorded as deferred
grant revenue at March 31, 2007.
Recent
accounting pronouncements
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (SFAS 157), which addresses
how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure
purposes under generally accepted accounting principles.
SFAS 157 outlines a common definition of fair value and the
new standard intends to make the measurement of fair value more
consistent and comparable and improve disclosures about those
measures. The Company will need to adopt SFAS 157 for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the
impact of SFAS 157 on its results of operations and
financial condition.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this standard the
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis (the fair value option). SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact of SFAS 159 on its
results of operations and financial condition.
Net loss attributable to common stockholders per share is
calculated in accordance with SFAS No. 128,
Earnings per Share, and Staff Accounting Bulletin (SAB)
No. 98. Basic earnings per share (EPS) is calculated by
dividing the net income or loss attributable to common
stockholders by the weighted average number of shares of common
stock outstanding, reduced by the weighted average unvested
shares of common stock subject to repurchase.
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of other potential common stock outstanding for the
period. Other potential common stock includes the Companys
Series A Preferred Stock and Series B Preferred Stock
outstanding prior to the consummation of the Companys
initial public offering, stock options and warrants to purchase
common stock, but only to the extent that their inclusion is
dilutive. The Company incurred a net loss in all periods
presented, causing inclusion of any potentially dilutive
securities to have an anti-dilutive affect, resulting in
dilutive loss per share attributable to common stockholders and
basic loss per share attributable to common stockholders being
equivalent. The Company did not have any shares of common stock
issued for nominal consideration as defined under the terms of
SAB No. 98, which would be included in EPS
calculations.
13
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2007
|
|
|
March 31, 2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(15,392,760
|
)
|
|
$
|
(18,122,450
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock outstanding
|
|
|
25,365,415
|
|
|
|
99,526
|
|
Weighted average unvested shares
of common stock subject to repurchase
|
|
|
(24,960
|
)
|
|
|
(52,529
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted
net loss per share
|
|
|
25,340,455
|
|
|
|
46,997
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share applicable to common stockholders
|
|
$
|
(0.61
|
)
|
|
$
|
(385.61
|
)
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities not
included in diluted net loss per share calculation:
|
|
|
|
|
|
|
|
|
Series A and B Preferred Stock
|
|
|
|
|
|
|
15,794,632
|
|
Options to purchase common stock
|
|
|
2,769,711
|
|
|
|
1,569,667
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
50,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,769,711
|
|
|
|
17,414,634
|
|
|
|
|
|
|
|
|
|
|
Upon consummation of the initial public offering on
April 12, 2006, all shares of the Companys
Series A Preferred Stock and Series B Preferred Stock
were converted into an aggregate of 15,794,632 shares of
common stock. Additionally, the holders of the warrants to
purchase common stock exercised theirs warrants upon the
Companys initial public offering.
The following is a summary of the Companys
available-for-sale
marketable securities as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government
agencies
|
|
$
|
16,788,621
|
|
|
$
|
2,979
|
|
|
$
|
|
|
|
$
|
16,791,600
|
|
U.S. corporate debt
|
|
|
45,454,749
|
|
|
|
4,150
|
|
|
|
(8,535
|
)
|
|
|
45,450,364
|
|
U.S. asset-based securities
|
|
|
456,199
|
|
|
|
6
|
|
|
|
|
|
|
|
456,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,699,569
|
|
|
$
|
7,135
|
|
|
$
|
(8,535
|
)
|
|
$
|
62,698,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government
agencies
|
|
$
|
3,000,000
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
3,000,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,000,000
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
3,000,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the Companys
available-for-sale
marketable securities as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. corporate debt
|
|
$
|
941,970
|
|
|
$
|
36
|
|
|
$
|
(25
|
)
|
|
$
|
941,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
941,970
|
|
|
$
|
36
|
|
|
$
|
(25
|
)
|
|
$
|
941,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Prepaid
expenses, deposits and other current assets
|
The following is a summary of the Companys prepaid
expenses, deposits and other current assets:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deposits with vendors
|
|
$
|
820,000
|
|
|
$
|
820,000
|
|
Prepaid insurance
|
|
|
106,626
|
|
|
|
337,332
|
|
Accrued interest income
|
|
|
425,387
|
|
|
|
97,575
|
|
Other prepaid expenses
|
|
|
468,281
|
|
|
|
517,629
|
|
Prepaid follow-on offering costs
|
|
|
|
|
|
|
69,064
|
|
Other receivables
|
|
|
18,344
|
|
|
|
107,866
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,838,638
|
|
|
$
|
1,949,466
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory equipment
|
|
|
5
|
|
|
$
|
1,679,760
|
|
|
$
|
1,675,375
|
|
Computer equipment
|
|
|
3
|
|
|
|
856,354
|
|
|
|
741,404
|
|
Furniture and fixtures
|
|
|
7
|
|
|
|
169,568
|
|
|
|
169,549
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
739,428
|
|
|
|
736,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,445,110
|
|
|
|
3,322,846
|
|
Less accumulated
depreciation and amortization
|
|
|
|
|
|
|
(1,615,217
|
)
|
|
|
(1,463,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,829,893
|
|
|
$
|
1,859,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the three months ended
March 31, 2007 was $148,671, for the three months ended
March 31, 2006 was $120,235 and for the period from
March 13, 2003 (inception) to March 31, 2007 was
$1,575,431.
15
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued research and development
expenses
|
|
$
|
3,788,910
|
|
|
$
|
3,552,050
|
|
License fees
|
|
|
|
|
|
|
1,000,000
|
|
Bonus accrual
|
|
|
231,425
|
|
|
|
1,084,512
|
|
Accrued professional fees
|
|
|
408,331
|
|
|
|
329,177
|
|
Employee benefits
|
|
|
185,182
|
|
|
|
78,656
|
|
Lease abandonment , current portion
|
|
|
250,529
|
|
|
|
232,388
|
|
Other accrued expenses
|
|
|
39,751
|
|
|
|
46,025
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,904,128
|
|
|
$
|
6,322,808
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Commitments
and Contingencies
|
Operating
leases
The Company has commitments totaling approximately
$4.8 million under operating real estate leases for its
current and former headquarters located in Rockville, Maryland,
expiring in 2016 and 2008, respectively, and for its research
facility in Singapore expiring in 2009.
Guarantees
and indemnifications
The Company has entered into a number of standard intellectual
property indemnification agreements in the ordinary course of
its business. Pursuant to these agreements, the Company
indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the
indemnified party, generally the Companys business
partners or customers, in connection with any U.S. patent
or any copyright or other intellectual property infringement
claim by any third party with respect to the Companys
products. The term of these indemnification agreements is
generally perpetual from the date of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited. Since inception, the Company has not incurred
costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company also indemnifies its
officers and directors for certain events or occurrences,
subject to certain limits. The Company believes that the fair
value of the indemnification agreements is minimal, and
accordingly the Company has not recognized any liabilities
relating to these agreements as of March 31, 2007.
Licensing
agreements
The Companys rights to develop and commercialize the
clinical-stage product candidates are subject to the terms and
conditions of licenses granted to the Company by other
pharmaceutical companies.
Iloperidone. The Company acquired exclusive
worldwide rights to patents for iloperidone through a sublicense
agreement with Novartis. A predecessor company of
sanofi-aventis, Hoechst Marion Roussel, Inc. (HMRI), discovered
iloperidone and completed early clinical work on the compound.
In 1996, following a review of its product portfolio, HMRI
licensed its rights to the iloperidone patents to Titan
Pharmaceuticals, Inc. on an exclusive basis. In 1997, soon after
it had acquired its rights, Titan sublicensed its rights to
iloperidone on an exclusive basis to Novartis. In June 2004, the
Company acquired exclusive worldwide rights to these patents to
develop and commercialize iloperidone through a sublicense
agreement with Novartis. In partial consideration for this
sublicense, the Company paid Novartis an initial license fee of
$500,000 and is obligated to make future milestone payments to
Novartis of less than $100 million in the aggregate (the
16
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
majority of which are tied to sales milestones), as well as
royalty payments to Novartis at a rate which, as a percentage of
net sales, is in the mid-twenties. The Company may meet a
milestone in 2007 under this license agreement, for which the
Company would be obligated to make a license payment of
$5 million.
The rights with respect to the patents to develop and
commercialize iloperidone may terminate, in whole or in part, if
the Company fails to meet certain development or
commercialization milestones relating to the time it takes for
the Company to launch iloperidone commercially following
regulatory approval, and the time it takes for the Company to
receive regulatory approval following the submission of an NDA
or equivalent foreign filing. Additionally, the Companys
rights may terminate in whole or in part if the Company does not
meet certain other obligations under the sublicense agreement to
make royalty and milestone payments, if the Company fails to
comply with requirements in the sublicense agreement regarding
its financial condition, or if the Company does not abide by
certain restrictions in the sublicense agreement regarding other
development activities.
VEC-162. In February 2004, the Company entered
into a license agreement with Bristol-Myers Squibb (BMS) under
which the Company received an exclusive worldwide license under
certain patents and patent applications, and other licenses to
intellectual property, to develop and commercialize VEC-162. In
partial consideration for the license, the Company paid BMS an
initial license fee of $500,000 and is obligated to make future
milestone payments to BMS of less than $40 million in the
aggregate (the majority of which are tied to sales milestones)
as well as royalty payments based on the net sales of VEC-162 at
a rate which, as a percentage of net sales, is in the low teens.
The Company is also obligated under this agreement to pay BMS a
percentage of any sublicense fees, upfront payments and
milestone and other payments (excluding royalties) that the
Company receives from a third party in connection with any
sublicensing arrangement, at a rate which is in the
mid-twenties. The Company has agreed with BMS in the license
agreement for VEC-162 to use commercially reasonable efforts to
develop and commercialize VEC-162 and to meet certain milestones
in initiating and completing certain clinical work. During March
2006, the Company met its first milestone relating to the
initiation of the Phase III clinical trial for VEC-162 and
recorded a license fee expense of $1,000,000.
BMS holds certain rights with respect to VEC-162 in the license
agreement. If the Company has not agreed to one or more
partnering arrangements to develop and commercialize VEC-162 in
certain significant markets with one or more third parties after
the completion of the Phase III program, BMS has the option
to exclusively develop and commercialize VEC-162 on its own on
pre-determined financial terms, including milestone and royalty
payments. If the Company seeks a co-promotion agreement for
VEC-162, BMS has a right of first negotiation to enter into such
an agreement with the Company.
Either party may terminate the VEC-162 license agreement under
certain circumstances, including a material breach of the
agreement by the other. In the event that BMS has not exercised
its option to reacquire the rights to VEC-162 and the Company
terminates the license, or if BMS terminates the license due to
the Companys breach, all rights licensed and developed by
the Company under this agreement will revert or otherwise be
licensed back to BMS on an exclusive basis.
VSF-173. In June 2004, the Company entered
into a license agreement with Novartis under which the Company
received an exclusive worldwide license to develop and
commercialize VSF-173. In consideration for the license, the
Company paid Novartis an initial license fee of $500,000. The
Company is also obligated to make future milestone payments to
Novartis of less than $50 million in the aggregate (the
majority of which are tied to sales milestones) and royalty
payments at rates which, as a percentage of net sales, range
from the
low-to-mid
teens. During the three months ended March 31, 2007, the
Company met its first milestone under this license agreement
relating to the initiation of the Phase II clinical trial
for VSF-173, and recorded a license fee expense of $1,000,000.
17
VANDA
PHARMACEUTICALS INC.
(A Development Stage Enterprise)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Novartis has the right to co-develop and exclusively
commercialize VSF-173 on its own after the completion of
Phase II and Phase III programs in exchange for
certain milestones and royalty payments. In the event that
Novartis chooses not to exercise either of these options and the
Company decides to enter into a partnering arrangement to
commercialize VSF-173, Novartis has a right of first refusal to
negotiate such an agreement with the Company, as well as a right
to submit a last matching counteroffer regarding such an
agreement. In addition, the rights with respect to VSF-173 may
terminate, in whole or in part, if the Company fails to meet
certain development and commercialization milestones described
in the license agreement relating to the time it takes the
Company to complete the development work on VSF-173. These
rights may also terminate in whole or in part if the Company
fails to make royalty or milestone payments or if the Company
does not comply with requirements in the license agreement
regarding its financial condition. In the event of an early
termination of the license agreement, all rights licensed and
developed by the Company under this agreement may revert back to
Novartis.
Future license payments. No amounts were
recorded as liabilities nor were any other contractual
obligations relating to the license agreements included in the
condensed consolidated financial statements as of March 31,
2007, since the amounts, timing and likelihood of these future
payments are unknown and will depend on the successful outcome
of future clinical trials, regulatory filings, favorable FDA
regulatory approvals, growth in product sales and other factors.
Research
and development agreements
The Company entered into agreements with several organizations
to provide services relating to clinical development and
clinical manufacturing activities under fee service
arrangements. The Companys current agreements for these
services may be terminated on no more than 60 days notice
without incurring additional charges, other than charges for
work completed but not paid for through the effective date of
termination and other costs incurred by the Companys
contractors in closing out work in progress as of the effective
date of termination.
On January 1, 2007, the Company adopted the provisions of
Financial Standards Accounting Board Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes. The adoption of FIN No. 48 did not
have a material effect on our financial position or results of
operations. In addition, there are no uncertain tax positions
whose resolution in the next 12 months is expected to
materially affect operating results. The Company accounts for
income taxes using the asset and liability method. Deferred
income taxes are recognized by applying enacted statutory tax
rates applicable to future years to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. The measurement
of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits for which future realization is
uncertain.
The Company has not recorded any tax provision or benefit for
the three months ended March 31, 2007 or December 31,
2006, except for an estimated tax expense resulting from the
research and development agreement with the Companys
subsidiary in Singapore. The Company has provided a valuation
allowance for the full amount of its net deferred tax assets
since realization of any future benefit from deductible
temporary differences and net operating loss cannot be
sufficiently assured at March 31, 2007 and
December 31, 2006. Under the Tax Reform Act of 1986, the
amounts of and benefits from the operating loss carryforwards
may be impaired in certain circumstances. Events which cause
limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50%, as defined,
over a three year period.
18
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward
Looking Statements
Various statements in this report are forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as, but
not limited to, believe, expect,
anticipate, estimate,
intend, plan, targets,
likely, will, would, and
could, and similar expressions or words, identify
forward-looking statements. Such forward-looking statements are
based upon current expectations that involve risks, changes in
circumstances, assumptions and uncertainties. Vanda is at an
early stage of development and may not ever have any products
that generate significant revenue. Important factors that could
cause actual results to differ materially from those reflected
in Vandas forward-looking statements include, among
others:
|
|
|
|
|
delays in the completion of our clinical trials;
|
|
|
|
a failure of our product candidates to be demonstrably safe
and effective;
|
|
|
|
a failure to obtain regulatory approval for our products or
to comply with ongoing regulatory requirements;
|
|
|
|
a lack of acceptance of our product candidates in the
marketplace, or a failure to become or remain profitable;
|
|
|
|
our inability to obtain the capital necessary to fund our
research and development activities;
|
|
|
|
our failure to identify or obtain rights to new product
candidates;
|
|
|
|
a failure to develop or obtain sales, marketing and
distribution resources and expertise or to otherwise manage our
growth;
|
|
|
|
a loss of any of our key scientists or management
personnel;
|
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|
losses incurred from product liability claims made against
us;
|
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|
|
a loss of rights to develop and commercialize our products
under our license and sublicense agreements; and
|
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|
|
the increased expenses and administrative workload associated
with being a public company.
|
The information in this report is provided only as of the
date of this report, and Vanda undertakes no obligation to
update any forward-looking statements contained in this report
on account of new information, future events, or otherwise,
except as required by law.
Forward-looking statements, therefore, should be considered
in light of all of the information included or referred to in
this report, including the Risk Factors section set
forth as Item 1A of Part II of this report. You should
also read the following discussion and analysis of financial
condition and results of operations together with our condensed
consolidated financial statements and related notes included
elsewhere in this report.
Our
Business
We are a biopharmaceutical company focused on the development
and commercialization of clinical-stage product candidates for
central nervous system disorders, with exclusive worldwide
commercial rights to three product candidates in clinical
development for various central nervous system disorders. Our
lead product candidate, iloperidone, is a compound for the
treatment of schizophrenia and bipolar disorder. In
December 2006 we announced positive top-line results from
our Phase III trial of iloperidone for schizophrenia. Our
second product candidate, VEC-162, is a compound for the
treatment of sleep and mood disorders. In November 2006 we
announced positive top-line results from our Phase III
trial of VEC-162 in transient insomnia. VEC-162 is also ready
for Phase II trials for the treatment of depression. We
expect to conduct another trial of VEC-162 in the third quarter
of 2007. Our third product candidate, VSF-173, is a compound for
the treatment of excessive sleepiness and we recently initiated
our first VSF-173 Phase II clinical trial.
19
We expect to file a New Drug Application (NDA) for iloperidone
in schizophrenia with the United States Food and Drug
Administration (FDA) by the end of 2007. We will have to conduct
additional trials for VEC-162 prior to our filing of an NDA for
VEC-162, and we expect to begin our next trial in the third
quarter of 2007. Assuming successful outcomes of our clinical
trials and approval by the FDA, we may commercialize iloperidone
and VSF-173 with our own sales force in the U.S., and expect to
commercialize VEC-162 through a partnership with a global
pharmaceutical company, although we have not yet identified such
a global partner.
We are a development stage enterprise and have accumulated net
losses of approximately $115.2 million since the inception
of our operations through March 31, 2007. We have no
product revenues to date and have no approved products for sale.
Since inception we have devoted substantially all of our efforts
to business planning, research and development, recruiting
management and technical staff, acquiring operating assets,
raising capital and market research. Our future operating
results will depend largely on our ability to successfully
develop and commercialize our lead product candidates,
iloperidone and VEC-162, and on the progress of other product
candidates currently in our research and development pipeline.
The results of our operations will vary significantly from
year-to-year
and
quarter-to-quarter
and depend on a number of factors, including risks related to
our business, risks related to our industry, and other risks
which are detailed in the Risk factors section of
this quarterly report on
Form 10-Q.
We completed our initial public offering in April 2006. The
offering totaled 5,964,188 shares of common stock at a
public offering price of $10.00 per share, resulting in net
proceeds to the Company of approximately $53.3 million,
after deducting underwriters discounts and commissions as
well as offering expenses.
In January 2007 we completed our follow-on offering. The
offering totaled 4,370,000 shares of common stock at the
public offering price of $27.29 per share, resulting in net
proceeds to the Company of approximately $111.3 million
after deducting underwriting discounts and commissions and
offering expenses.
Based on our current operating plans, we believe that our
existing cash, cash equivalents and marketable securities,
including the proceeds from the follow-on offering we completed
in January 2007, will be sufficient to meet our anticipated
operating needs through early 2008, and after that time we will
require additional capital. In budgeting for our activities, we
have relied on a number of assumptions, including assumptions
that we will file an NDA for iloperidone in schizophrenia with
the FDA by the end of 2007, that we will continue to expend
funds in preparation of a commercial launch of iloperidone, that
we will expend funds on the extended-release injectable
formulation of iloperidone, that we will initiate anotherVEC-162
trial in the third quarter of 2007 and that this trial will be
conducted in accordance with our expectations, that we will
conduct our VSF-173 Phase II trial for excessive sleepiness
in accordance with our expectations, that we will not engage in
further in-licensing activities, that we will not receive any
proceeds from potential partnerships, that we will not expend
funds on the bipolar indication for iloperidone, that we will
continue to evaluate pre-clinical compounds for potential
development, that we will be able to continue the manufacturing
of our product candidates at commercially reasonable prices,
that we will be able to retain our key personnel, and that we
will not incur any significant contingent liabilities.
We may need to raise additional funds more quickly if one of the
above assumptions proves to be incorrect, if we choose to expand
our product development efforts more rapidly than presently
anticipated or seek to acquire additional product candidates,
and we may also decide to raise additional funds even before
they are needed if the conditions for raising capital are
favorable. We may seek to sell additional equity or debt
securities or obtain a bank credit facility. The sale of
additional equity or debt securities, if convertible, could
result in dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and
could also result in covenants that would restrict our
operations.
Iloperidone
We reported positive top-line results from our Phase III
trial of iloperidone in schizophrenia in December 2006. The
primary endpoint of the trial was efficacy versus placebo on the
Positive and Negative Symptoms Scale (PANSS), for which
iloperidone demonstrated statistically significant improvement.
Iloperidone also demonstrated statistically significant
improvement versus placebo in several other measures of
efficacy. Iloperidone also appeared to be safe and
well-tolerated in the trial, which reinforced the results of
20
three short-term and three long-term clinical trials of
iloperidone conducted by Novartis or by Vanda and comprising a
total of over 3,000 patients, in which iloperidone
differentiated itself from currently available atypical
antipsychotics by offering a number of reduced side effects.
From inception to March 31, 2007 we incurred approximately
$50.7 million in research and development costs directly
attributable to our development of iloperidone. During the first
quarter of 2007, we held our Pre-NDA meeting with the FDA. This
meeting was largely procedural, and focused on the structure and
content of our NDA submission. Based on this meeting, we remain
confident that we will be able to file our NDA for iloperidone
in schizophrenia in the fourth quarter of 2007. We would then
expect to launch iloperidone commercially in early 2009.
However, the time it takes to receive cash inflows from the sale
of iloperidone are highly dependent on facts and circumstances
that we may not be able to control and are subject to a number
of risks. For example, delays in the approval process and
subsequent commercial launch of iloperidone following our filing
may occur if the FDA fails to attend to our filing in a timely
manner or requires further data to approve iloperidone. Please
see the Risk factors section of this quarterly
report on
Form 10-Q
for a more detailed discussion of these and other risks.
VEC-162
In November 2006 we announced positive top-line results from our
Phase III trial of VEC-162 in the treatment of transient
insomnia. VEC-162 demonstrated statistically significant
improvement in several parameters used to measure the efficacy
of insomnia therapies, including reduced duration of wake after
sleep onset, improved sleep efficiency and shortened time to
persistent sleep. In addition, VEC-162 also appeared to be safe
and well-tolerated in the trial.
From inception to March 31, 2007 we incurred approximately
$23.8 million in direct research and development costs of
VEC-162. We believe that we will have to conduct additional
trials to receive FDA approval of VEC-162. In April 2007, we
held our End of Phase II meeting with the FDA to discuss
future clinical trial designs and our path to an NDA filing for
VEC-162 in sleep disorders. We expect to initiate our next trial
in the third quarter of 2007.
VSF-173
We have recently announced the initiation of a Phase II
clinical trial for our product candidate VSF-173 in excessive
sleepiness. The trial is a randomized, double-blind,
placebo-controlled study to investigate the efficacy and safety
of three oral doses of VSF-173 for the treatment of induced
excessive sleepiness. We anticipate that approximately 60
healthy male and female subjects will participate in the study.
The primary endpoint of the study is the difference from placebo
on the Maintenance of Wakefulness Test (MWT), a standard measure
of sleepiness.
Excessive sleepiness is a common symptom that can significantly
impair a persons ability to function. The effects of
excessive sleepiness range from mild sleepiness to unrecognized
episodes of microsleeps and uncontrollable sleep
attacks. Excessive sleepiness is a symptom of many disorders,
including obstructive sleep apnea, narcolepsy, shift worker
sleep disorder, Parkinsons, and Alzheimers disease.
From inception to March 31, 2007 we incurred approximately
$4.1 million in direct research and development costs
related to VSF-173, including a milestone license fee of
$1.0 million paid upon the initiation of our first
Phase II clinical trial.
Revenues
We have not generated any other operating revenue since our
inception. Any revenue that we may receive in the near future is
expected to consist primarily of license fees, milestone
payments and research and development reimbursement payments to
be received from partners. If our development efforts result in
clinical success, regulatory approval and successful
commercialization of our products, we could generate revenue
from sales of our products and from receipt of royalties on
sales of licensed products.
21
Research
and development expenses
The Companys research and development expenses consist
primarily of fees paid to third parties in connection with the
services they provide for our clinical trials, costs of contract
manufacturing services, license fees, costs of materials used in
clinical trials and research and development, depreciation of
capital resources used to develop our products, all related
facilities costs, and salaries, benefits and stock-based
compensation expenses related to our research and development
personnel. We expense research and development costs as they are
incurred, including payments made to date under our license
agreements. We believe that significant investment in product
development is a competitive necessity and plan to continue
these investments in order to realize the potential of our
product candidates and pharmacogenetics and pharmacogenomics
expertise. From inception through March 31, 2007 we
incurred research and development expenses in the aggregate of
approximately $89.0 million, including stock-based
compensation expenses of approximately $2.5 million. We
expect our research and development expenses to increase as we
continue to develop our product candidates. We also expect to
incur substantial licensing costs in the future, as we continue
our efforts to develop our product candidates and to evaluate
potential in-license product candidates.
The following table summarizes our product development
initiatives for the three months ended March 31, 2007,
three months ended March 31, 2006 and the period from
March 13, 2003 (inception) to March 31, 2007. Included
in this table are the research and development expenses
recognized in connection with our product candidates in clinical
development. Included in Other product candidates
are the costs directly related to research initiatives for all
other product candidates.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
March 13, 2003
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
(Inception) to
|
|
|
|
2007
|
|
|
2006
|
|
|
March 31, 2007
|
|
|
Direct Project Costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Iloperidone
|
|
$
|
5,322,000
|
|
|
$
|
11,671,000
|
|
|
$
|
50,698,000
|
|
VEC-162
|
|
|
2,796,000
|
|
|
|
2,753,000
|
|
|
|
23,815,000
|
|
VSF-173
|
|
|
1,484,000
|
|
|
|
299,000
|
|
|
|
4,053,000
|
|
Other Product Candidates
|
|
|
459,000
|
|
|
|
291,000
|
|
|
|
3,493,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Product Costs
|
|
|
10,061,000
|
|
|
|
15,014,000
|
|
|
|
82,059,000
|
|
Indirect Project Costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
131,000
|
|
|
|
173,000
|
|
|
|
1,215,000
|
|
Depreciation
|
|
|
110,000
|
|
|
|
102,000
|
|
|
|
1,373,000
|
|
Other Indirect Overhead
|
|
|
290,000
|
|
|
|
199,000
|
|
|
|
4,360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Indirect Expenses
|
|
$
|
531,000
|
|
|
$
|
474,000
|
|
|
$
|
6,948,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Research &
Development Expenses
|
|
$
|
10,592,000
|
|
|
$
|
15,488,000
|
|
|
$
|
89,007,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Many of our research and development costs are not attributable
to any individual project because we share resources across
several development projects. We record direct costs, including
personnel costs and related benefits and stock-based
compensation, on a
project-by-project
basis. We record indirect costs that support a number of our
research and development activities in the aggregate. |
General
and administrative expenses
General and administrative expenses consist primarily of
salaries, other related costs and stock-based compensation
expenses for personnel serving executive, finance, accounting,
information technology and human resource functions, facility
costs not otherwise included in research and development
expenses, insurance costs and professional fees for legal,
accounting and other professional services. General and
administrative costs also include third party expenses incurred
to support business development, marketing and other business
activities related to our product candidate iloperidone in
anticipation of its commercial launch. We expect that our
general and administrative expenses will increase as we continue
to prepare the commercial
22
launch of our lead product candidates, add personnel and fulfill
our reporting obligations applicable to public companies. From
inception through March 31, 2007, we incurred general and
administrative expenses in the aggregate of approximately
$30.4 million, including stock-based compensation expenses
of approximately $12.7 million.
Critical
Accounting Policies
The preparation of our condensed consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
our financial statements as well as the reported revenues and
expenses during the reported periods. We base our estimates on
historical experience and on various other factors that we
believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
value of assets and liabilities that are not apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are described in the notes
to our audited consolidated financial statements for the year
ended December 31, 2006 included in our annual report on
the
Form 10-K.
However, we believe that the following critical accounting
policies relating to accrued expenses and stock-based
compensation expense are important to understanding and
evaluating our reported financial results, and we have
accordingly included them in this report.
Accrued
expenses
As part of the process of preparing financial statements we are
required to estimate accrued expenses. This process involves
identifying services that have been performed on our behalf and
estimating the level of service performed and the associated
cost incurred for such service as of each balance sheet date in
our financial statements. Examples of estimated accrued expenses
include professional service fees, such as lawyers and
accountants, and contract service fees such as amounts paid to
clinical monitors, data management organizations and
investigators in conjunction with clinical trials, and fees paid
to contract manufacturers in
conjunction with the production of clinical materials. In
connection with such service fees, our estimates are most
affected by our understanding of the status and timing of
services provided relative to the actual levels of services
incurred by such service providers. The majority of our service
providers invoice us monthly in arrears for services performed.
In the event that we do not identify certain costs that have
begun to be incurred or we under- or over-estimate the level of
services performed or the costs of such services, our reported
expenses for such period would be too low or too high. The date
on which certain services commence, the level of services
performed on or before a given date and the cost of such
services are often subject to our judgment. We make these
judgments based upon the facts and circumstances known to us in
accordance with generally accepted accounting principles.
Employee
stock-based compensation
We adopted SFAS 123(R) Share Based Payment,
on January 1, 2006 using the modified prospective
transition method of implementation. Accordingly, compensation
costs for all stock-based awards to employees are measured based
on the grant date fair value of those awards and recognized over
the period during which the employee is required to perform
service in exchange for the award. The Company generally
recognizes the expense over the awards vesting period, as
to date the Company granted no awards with market or performance
conditions. For stock awards granted in 2006 and 2007, expenses
are amortized under the accelerated attribution method. For
stock awards granted prior to January 1, 2006, expenses are
amortized under the accelerated attribution method for options
that were modified after the original grant date and under the
straight line attribution method for all other options.
Factors which affect charges or credits to operations related to
stock-based compensation expense are the fair value of the
common stock underlying stock options for which stock-based
compensation is recorded, the volatility of such fair value,
risk-free rate and expected dividend yield used in the
calculation of the fair value of the stock option. If our
estimates of the fair value of these equity instruments are too
high or too low, it
23
would have the effect of overstating or understating expenses.
The stock-based compensation expense for a period is based on
awards ultimately expected to vest and it is reduced for
estimated forfeitures. If our estimated forfeiture rate is too
high or too low, it would have the effect of overstating or
understating expenses for the period.
Total employee stock-based compensation expense recognized
during the first three months of 2007 and 2006 was comprised of
the following:
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|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Research and development
|
|
$
|
1,003,000
|
|
|
$
|
143,000
|
|
General and administrative
|
|
|
2,996,000
|
|
|
|
1,344,000
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
3,999,000
|
|
|
$
|
1,487,000
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
We have a limited history of operations. We anticipate that our
quarterly results of operations will fluctuate for the
foreseeable future due to several factors, including any
possible payments made or received pursuant to licensing or
collaboration agreements, progress of our research and
development efforts, and the timing and outcome of clinical
trials and related possible regulatory approvals. Our limited
operating history makes predictions of future operations
difficult or impossible. Since our inception, we have incurred
significant losses. As of March 31, 2007, we had a deficit
accumulated during the development stage of approximately
$115.2 million. We anticipate incurring additional losses,
which may increase, for the foreseeable future.
Three
months ended March 31, 2007 compared to three months ended
March 31, 2006
Research and development expenses. Research
and development expenses decreased by approximately
$4.9 million, or 32%, to approximately $10.6 million
for the three months ended March 31, 2007 compared to
approximately $15.5 million for the three months ended
March 31, 2006.
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
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|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Direct project costs:
|
|
|
|
|
|
|
|
|
Clinical trials
|
|
$
|
2,762,000
|
|
|
$
|
11,566,000
|
|
Contract research and development,
consultants, materials and other costs
|
|
|
4,242,000
|
|
|
|
1,569,000
|
|
Salaries, benefits and related
costs
|
|
|
1,054,000
|
|
|
|
736,000
|
|
License fee expense
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Stock-based compensation
|
|
|
1,003,000
|
|
|
|
143,000
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
10,061,000
|
|
|
|
15,014,000
|
|
Indirect project costs
|
|
|
531,000
|
|
|
|
474,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,592,000
|
|
|
$
|
15,488,000
|
|
|
|
|
|
|
|
|
|
|
Direct costs decreased approximately $5.0 million for the
three months ended March 31, 2007 compared to the three
months ended March 31, 2006 primarily as a result of lower
clinical trial expenses for the Companys iloperidone and
VEC-162 Phase III trials that were completed in 2006,
offset by continuing clinical manufacturing activities for both
iloperidone and VEC-162. Clinical trials expense decreased
approximately $8.8 million for the three months ended
March 31, 2007 compared to the three months ended
24
March 31, 2006 primarily due to the cost incurred during
the three months ended March 31, 2006 in our Phase III
iloperidone and VEC-162 clinical trials that were initiated in
the fourth quarter of 2005 and in the first quarter of 2006,
respectively. Contract research and development, consulting,
materials and other direct costs increased approximately
$2.7 million for the three months ended March 31, 2007
relative to the three months ended March 31, 2006,
primarily as a result of increased regulatory and
manufacturing-related development costs incurred in connection
with the manufacturing of clinical supply materials for the
iloperidone and the VEC-162 programs. Prior to FDA approval of
our products, manufacturing-related costs are included in
research and development expense. During the three months ended
March 31, 2007 we met the requirement for a
$1.0 million milestone payment to Novartis under our
license agreement for VSF-173, and during the three months ended
March 31, 2006 we met the requirements for a
$1.0 million milestone payment to BMS under our license
agreement for VEC-162. Salaries, benefits and related costs
increased approximately $318,000 for the three months ended
March 31, 2007 relative to the three months ended
March 31, 2006 due to an increase in personnel to support
the development and clinical trial activities for iloperidone,
VEC-162 and VSF-173. Stock-based compensation expense increased
by approximately $860,000 compared to the three months ended
March 31, 2006 as a result of options granted in 2007 and
the higher fair value of options granted during 2007 compared to
options granted in prior periods.
We expect to continue to incur substantial research and
development expenses due to our on-going research and
development efforts and as our existing and future product
candidates proceed through clinical trials.
General and administrative expenses. General
and administrative expenses increased approximately
$3.3 million, or 113%, to approximately $6.2 million
for the three months ended March 31, 2007 from
approximately $2.9 million for the three months ended
March 31, 2006.
The following table discloses the components of our general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Salaries, benefits and related
costs
|
|
$
|
785,000
|
|
|
$
|
589,000
|
|
Stock-based compensation
|
|
|
2,996,000
|
|
|
|
1,345,000
|
|
Marketing and related consulting
services
|
|
|
1,017,000
|
|
|
|
|
|
Legal, accounting and other
professional expenses
|
|
|
701,000
|
|
|
|
256,000
|
|
Other expenses
|
|
|
735,000
|
|
|
|
735,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,234,000
|
|
|
$
|
2,925,000
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and related costs increased approximately
$196,000 for the three months ended March 31, 2007 compared
to the three months ended March 31, 2006 due to an increase
in personnel as we continued to develop the administrative
structure to support the development and clinical trial
activities for iloperidone, VEC-162 and our other product
candidates. Stock-based compensation expense increased by
approximately $1.7 million as a result of options granted
in January 2007 and the higher fair value of options granted
during 2007 compared options granted in prior periods. Marketing
and related consulting services expenses increased by
approximately $1.0 million due to increased business and
marketing activity related to our anticipated commercial launch
of iloperidone. These increased expenses included market
research, branding, medical community cultivation and
publication planning costs. Legal, accounting and other
professional costs increased approximately $445,000 for the
three months ended March 31, 2007 compared to the three
months ended March 31, 2006 due primarily to a higher level
of consulting activity in 2007 in support of business
development and higher costs associated with our reporting and
other regulatory obligations applicable to public companies.
In 2007 and thereafter we expect our general and administrative
expenses to increase substantially. These increased expenses are
expected to be necessary to support our discovery and
development efforts and our commercial development activities.
25
Interest income, net. Net interest income in
the three months ended March 31, 2007 was approximately
$1.4 million compared to net interest income of
approximately $291,000 in the three months ended March 31,
2006. Interest income was higher in 2007 due to higher average
cash balances for the year and higher short-term interest rates
which generated substantially higher interest income than in
2006.
Liquidity
and Capital Resources
We have funded our operations through March 31, 2007
principally with the net proceeds from private preferred stock
offerings of approximately $62.0 million, with net proceeds
from our April 2006 initial public offering of approximately
$53.3 million and with net proceeds from our January 2007
follow-on offering of approximately $111.3 million.
At March 31, 2007, cash and cash equivalents and marketable
securities were approximately $129.9 million compared to
approximately $31.9 million at December 31, 2006. Our
cash and cash equivalents are highly liquid investments with a
maturity of 90 days or less at date of purchase and consist
of time deposits, investments in money market funds with
commercial banks and financial institutions, and commercial
paper of high-quality corporate issuers. At March 31, 2007
the Company also held a non-current deposit of $430,000 that is
used to collateralize a letter a credit issued for its current
office lease expiring in 2016.
As of March 31, 2007 and December 31, 2006, our
liquidity resources are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash and cash equivalents
|
|
$
|
64,221,000
|
|
|
$
|
30,929,000
|
|
U.S. Treasury and government
agencies
|
|
|
16,792,000
|
|
|
|
|
|
U.S. corporate debt securities
|
|
|
45,450,000
|
|
|
|
942,000
|
|
U.S. asset-backed securities
|
|
|
456,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, short-term
|
|
|
62,698,000
|
|
|
|
942,000
|
|
U.S. Treasury and government
agencies
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, long-term
|
|
|
3,000,000
|
|
|
|
|
|
|
|
$
|
129,919,000
|
|
|
$
|
31,871,000
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
430,000
|
|
|
$
|
430,000
|
|
|
|
|
|
|
|
|
|
|
We maintain cash balances with financial institutions in excess
of insured limits, but do not anticipate any losses with respect
to such cash balances.
Cash
Flow
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net cash (used in) provided by
Operating activities
|
|
$
|
(13,405,000
|
)
|
|
$
|
(10,719,000
|
)
|
Investing activities
|
|
|
(64,646,000
|
)
|
|
|
2,272,000
|
|
Financing activities
|
|
|
111,348,000
|
|
|
|
(46,000
|
)
|
Exchange rate effect on cash and
equivalents
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
33,292,000
|
|
|
$
|
(8,493,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operations was approximately $13.4 million
and approximately $10.7 million for the three months ended
March 31, 2007 and 2006, respectively. The net loss for the
three months ended March 31, 2007 of approximately
$15.4 million was offset primarily by non-cash charges for
depreciation and amortization of approximately $149,000,
stock-based compensation of approximately $4.1 million, a
decrease in accrued expenses and accounts payable of
approximately $2.2 million, principally related to clinical
trial expenses, and other net changes in working capital. Net
cash used in investing activities for the three months
26
ended March 31, 2007 was approximately $64.6 million
and consisted primarily of purchases of marketable securities of
approximately $65.5 million. Net cash provided by financing
activities for the three months ended March 31, 2007 was
approximately $111.3 million, consisting primarily of net
proceeds from our follow-on offering.
Contractual
Obligations and Commitments
The following table summarizes our long-term contractual cash
obligations as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
April to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Operating leases
|
|
$
|
4,784
|
|
|
$
|
534
|
|
|
$
|
612
|
|
|
$
|
521
|
|
|
$
|
441
|
|
|
$
|
454
|
|
|
$
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
Our commitments under operating leases shown above consist of
payments relating to our real estate leases for our current and
former headquarters located in Rockville, Maryland, expiring in
2016 and 2008, respectively, and for our research facility in
Singapore expiring in 2009.
Clinical
research organization contracts and other
contracts
We entered into agreements with clinical research organizations
responsible for conducting and monitoring our clinical trials
for iloperidone, VEC-162 and VSF-173. These contractual
obligations are not reflected in the table above because we may
terminate them on no more than 60 days notice without
incurring additional charges (other than charges for work
completed but not paid for through the effective date of
termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination). We also entered into agreements with clinical
manufacturing organizations and other outside contractors who
will be responsible for additional services supporting our
on-going clinical development processes. These contractual
obligations are not reflected in the table above because we may
terminate them on no more than 60 days notice without
incurring additional charges (other than charges for work
completed but not paid for through the effective date of
termination and other costs incurred by our contractors in
closing out work in progress as of the effective date of
termination).
License
agreements
In February 2004 and June 2004, we entered into separate
licensing agreements with Bristol-Myers Squibb and Novartis,
respectively, for the exclusive rights to develop and
commercialize our three compounds in clinical development. We
are obligated to make payments under the conditions in the
agreements upon the achievement of specified clinical,
regulatory and commercial milestones. If the products are
successfully commercialized we will be required to pay certain
royalties based on net sales for each of the licensed products.
Please see the notes to the condensed consolidated financial
statements included with this report for a more detailed
description of these license agreements.
As a result of the successful commencement of the Phase III
clinical study of VEC-162 in March 2006 we met the first
milestone specified in our licensing agreement with
Bristol-Myers Squibb and recorded a related license expense of
$1,000,000 during the three months ended March 31, 2006.
During March 2007, we met our first milestone under the license
agreement with Novartis for VSF-173 relating to the initiation
of the Phase II clinical trial and recorded a license fee
expense of $1,000,000 during the three months ended
March 31, 2007. We may meet another milestone in 2007 under
the license agreement with Novartis for iloperidone, for which
we would be obligated to make a license payment of $5,000,000.
No amounts were recorded as liabilities nor were any other
contractual obligations relating to the license agreements
included in the condensed consolidated financial statements as
of March 31, 2007, since the amounts, timing and likelihood
of these payments are unknown and will depend on the successful
outcome of future clinical trials, regulatory filings, favorable
FDA regulatory approvals, growth in product sales and other
factors. For a more
27
detailed description of the risks associated with the outcome of
such clinical trials, regulatory filings, FDA approvals and
product sales, please see the section Risk factors
of this report.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements, as defined in
Item 303(a)(4) of the Securities and Exchange
Commissions Regulations S-K.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Foreign
exchange
We currently incur a portion of our operating expenses in
Singapore. The reporting currency for our consolidated financial
statements is U.S. Dollars. To date, we have determined
operating expenses incurred outside of the United States have
not been significant. As a result, we have not been impacted
materially by changes in exchange rates and do not expect to be
impacted materially for the foreseeable future. However, if
operating expenses incurred outside of the United States
increase, our results of operations could be adversely impacted
by changes in exchange rates. We do not currently hedge foreign
currency positions and do not intend to do so for the
foreseeable future.
Interest
rates
Our exposure to market risk is currently confined to our cash
and cash equivalents, restricted cash and marketable securities
that have maturities of less than 12 months. We currently
do not hedge interest rate exposure. We have not used derivative
financial instruments for speculation or trading purposes.
Because of the short-term maturities of our cash and cash
equivalents, restricted cash and marketable securities, we do
not believe that an increase in market rates would have any
significant impact on the realized value of our investments.
Effects
of inflation
Our most liquid assets are cash and cash equivalents and
marketable securities. Because of their liquidity, these assets
are not directly affected by inflation. We also believe that we
have intangible assets in the value of our intellectual
property. In accordance with generally accepted accounting
principles, we have not capitalized the value of this
intellectual property on our balance sheet. Due to the nature of
this intellectual property, we believe that these intangible
assets are not affected by inflation. Because we intend to
retain and continue to use our equipment, furniture and fixtures
and leasehold improvements, we believe that the incremental
inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation
affects our expenses, such as those for employee compensation
and contract services, which could increase our level of
expenses and the rate at which we use our resources.
|
|
Item 4.
|
Controls
And Procedures
|
a) Evaluation
of Disclosure Controls and Procedures
The Companys management, under the supervision and with
the participation of the Companys Chief Executive Officer
and Chief Financial Officer, performed an evaluation of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934) as of March 31,
2007. Based upon this evaluation, management has concluded that,
as of March 31, 2007, our disclosure controls and
procedures were effective to provide reasonable assurance that
the information required to be disclosed is recorded, processed,
summarized and reported within the time periods specified under
applicable rules of the Securities and Exchange Commission.
28
b) Changes
in Internal Controls
There have been no changes in our internal controls over
financial reporting, identified in connection with the
evaluation of such internal controls that have occurred during
the quarter ended March 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Part II
OTHER INFORMATION
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this report, including the consolidated financial statements and
the related notes contained this quarterly report on
Form 10-Q,
before deciding to invest in shares of our common stock. If any
of the following risks is actually realized, our business,
financial condition, results of operations and future prospects
would likely be materially and adversely affected. In that
event, the market price of our common stock could decline and
you could lose all or part of your investment.
Risks
related to our business and industry
Our
success is dependent on the success of our three product
candidates in clinical development: iloperidone, VEC-162 and
VSF-173. If any of these product candidates are determined to be
unsafe or ineffective in humans, whether in clinical trials or
commercially, our business will be materially
harmed.
Despite the positive results of our recently completed
Phase III trials for iloperidone and VEC-162, we are
uncertain whether any of our current product candidates in
clinical development will ultimately prove to be effective and
safe in humans. Frequently, product candidates that have shown
promising results in clinical trials have suffered significant
setbacks in later clinical trials or even after they are
approved for commercial sale. Future uses of any of our product
candidates, whether in clinical trials or commercially, may
reveal that the product candidate is ineffective, unacceptably
toxic, has other undesirable side effects or is otherwise not
fit for further use. If we are unable to discover and develop
products that are safe and effective, our business will be
materially harmed.
Any
failure or delay in completing clinical trials for our product
candidates could severely harm our business.
Pre-clinical studies and clinical trials required to demonstrate
the safety and efficacy of our product candidates are
time-consuming and expensive and together take several years to
complete. The completion of clinical trials for our product
candidates may be delayed by many factors, including:
|
|
|
|
|
our inability to manufacture or obtain from third parties
materials sufficient for use in pre-clinical studies and
clinical trials
|
|
|
|
delays in patient enrollment and variability in the number and
types of patients available for clinical trials
|
|
|
|
difficulty in maintaining contact with patients after treatment,
resulting in incomplete data
|
|
|
|
poor effectiveness of product candidates during clinical trials
|
|
|
|
unforeseen safety issues or side effects
|
|
|
|
governmental or regulatory delays and changes in regulatory
requirements and guidelines
|
If we fail to successfully complete one or more clinical trials
for any of our product candidates, we may not receive the
regulatory approvals needed to market that product candidate.
Any failure or delay in commencing or completing these clinical
trials would harm our business materially.
29
We
face heavy government regulation, and FDA regulatory approval of
our products is uncertain.
The research, testing, manufacturing and marketing of drug
products such as those that we are developing are subject to
extensive regulation by federal, state and local government
authorities, including the FDA. To obtain regulatory approval of
a product, we must demonstrate to the satisfaction of the
applicable regulatory agency that, among other things, the
product is safe and effective for its intended use. In addition,
we must show that the manufacturing facilities used to produce
the products are in compliance with current Good Manufacturing
Practices regulations, or cGMP.
The process of obtaining FDA and other required regulatory
approvals and clearances will require us to expend substantial
time and capital. Despite the time and expense expended,
regulatory approval is never guaranteed. The number of
pre-clinical and clinical tests that will be required for FDA
approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for, and the
regulations applicable to that particular drug candidate. The
FDA can delay, limit or deny approval of a drug candidate for
many reasons, including that:
|
|
|
|
|
a drug candidate may not be safe or effective
|
|
|
|
they may interpret data from pre-clinical and clinical testing
in different ways than we do
|
|
|
|
they may not approve our manufacturing process
|
|
|
|
they may change their approval policies or adopt new regulations
|
For example, if certain of our methods for analyzing our trial
data are not approved by the FDA, we may fail to obtain
regulatory approval for our product candidates.
Moreover, if and when our products do obtain such approval or
clearances, the marketing, distribution and manufacture of such
products would remain subject to extensive ongoing regulatory
requirements. Failure to comply with applicable regulatory
requirements could result in:
|
|
|
|
|
warning letters
|
|
|
|
fines
|
|
|
|
civil penalties
|
|
|
|
injunctions
|
|
|
|
recall or seizure of products
|
|
|
|
total or partial suspension of production
|
|
|
|
refusal of the government to grant approvals
|
|
|
|
withdrawal of approvals
|
|
|
|
criminal prosecution
|
Any delay or failure by us to obtain regulatory approvals for
our product candidates could diminish competitive advantages
that we may attain and would adversely affect the marketing of
our products. We have not received regulatory approval to market
any of our product candidates in any jurisdiction.
Even if we do receive regulatory approval for our drug
candidates, the FDA may impose limitations on the indicated uses
for which our products may be marketed, subsequently withdraw
approval or take other actions against us or our products that
are adverse to our business. The FDA generally approves products
for particular indications. An approval for a more limited
indication reduces the size of the potential market for the
product. Product approvals, once granted, may be withdrawn if
problems occur after initial marketing.
We also are subject to numerous federal, state and local laws,
regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the
environment and the use and disposal of hazardous substances
used in connection with our discovery, research and development
work. In addition, we cannot predict the extent of government
regulations or the impact of new governmental regulations that
30
might significantly harm the discovery, development, production
and marketing of our products. We may be required to incur
significant costs to comply with current or future laws or
regulations, and we may be adversely affected by the cost of
such compliance.
We
intend to seek regulatory approvals for our products in foreign
jurisdictions, but we may not obtain any such
approvals.
We intend to market our products outside the United States with
one or more commercial partners. In order to market our products
in foreign jurisdictions, we may be required to obtain separate
regulatory approvals and comply with numerous and varying
regulatory requirements. The approval procedure varies among
countries and jurisdictions and can involve additional testing,
and the time required to obtain approval may differ from that
required to obtain FDA approval. We have no experience with
obtaining any such foreign approvals. Additionally, the foreign
regulatory approval process may include all of the risks
associated with obtaining FDA approval. For all of these
reasons, we may not obtain foreign regulatory approvals on a
timely basis, if at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries or
jurisdictions, and approval by one foreign regulatory authority
does not ensure approval by regulatory authorities in other
foreign countries or jurisdictions or by the FDA. We may not be
able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
The failure to obtain these approvals could harm our business
materially.
Our
product candidates may cause undesirable side effects or have
other properties that could delay or prevent their regulatory
approval or limit their marketability.
Undesirable side effects caused by our product candidates could
interrupt, delay or halt clinical trials and could result in the
denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications, and in turn
prevent us from commercializing our product candidates and
generating revenues from their sale. For example, like many
other drugs in its class, iloperidone is associated with a
prolongation of the hearts QTc interval, which is a
measurement of specific electrical activity in the heart as
captured on an electrocardiogram, corrected for heart rate. A
QTc interval that is significantly prolonged may result in an
abnormal heart rhythm with adverse consequences including
fainting, dizziness, loss of consciousness and death. No patient
in the controlled portion of any of iloperidones clinical
trials was observed to have an interval that exceeded a
500-millisecond threshold of particular concern to the FDA. Two
patients experienced a prolongation of 500 milliseconds or more
during the open-label extension of one trial. We will continue
to assess the side effect profile of iloperidone and our other
product candidates in our ongoing clinical development program.
In addition, if any of our product candidates receive marketing
approval and we or others later identify undesirable side
effects caused by the product, we could face one or more of the
following:
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regulatory authorities may require the addition of labeling
statements, such as a black box warning or a
contraindication
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regulatory authorities may withdraw their approval of the product
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we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product
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our reputation may suffer
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Any of these events could prevent us from achieving or
maintaining market acceptance of the affected product or could
substantially increase the costs and expenses of commercializing
the product candidate, which in turn could delay or prevent us
from generating significant revenues from its sale.
Our
product candidates may never achieve market acceptance even if
we obtain regulatory approvals.
Even if we receive regulatory approvals for the sale of our
product candidates, the commercial success of these products
will depend, among other things, on their acceptance by
physicians, patients, third-party payors
31
and other members of the medical community as a therapeutic and
cost-effective alternative to competing products and treatments.
The degree of market acceptance of any of our product candidates
will depend on a number of factors, including the demonstration
of its safety and efficacy, its cost-effectiveness, its
potential advantages over other therapies, the reimbursement
policies of government and third-party payors with respect to
the product candidate, and the effectiveness of our marketing
and distribution capabilities. If our product candidates fail to
gain market acceptance, we may be unable to earn sufficient
revenue to continue our business. If our product candidates do
not become widely accepted by physicians, patients, third-party
payors and other members of the medical community, it is
unlikely that we will ever become profitable.
If we
fail to obtain the capital necessary to fund our research and
development activities, we may be unable to continue operations
or we may be forced to share our rights to commercialize our
product candidates with third parties on terms that may not be
attractive to us.
Based on our current operating plans, we believe that our
existing cash, cash equivalents and marketable securities,
including the proceeds from the follow-on offering we completed
in January 2007, will be sufficient to meet our anticipated
operating needs through early 2008, and after that time we will
require additional capital. In budgeting for our activities, we
have relied on a number of assumptions, including assumptions
that we will file an NDA for iloperidone in schizophrenia with
the FDA by the end of 2007, that we will continue to expend
funds in preparation of a commercial launch of iloperidone, that
we will expend funds on the extended-release injectable
formulation of iloperidone, that we will initiate another
VEC-162 trial in the third quarter of 2007 and that this trial
will be conducted in accordance with our expectations, that we
will conduct our VSF-173 Phase II trial for excessive
sleepiness in accordance with our expectations, that we will not
engage in further in-licensing activities, that we will not
receive any proceeds from potential partnerships, that we will
not expend funds on the bipolar indication for iloperidone, that
we will continue to evaluate pre-clinical compounds for
potential development, that we will be able to continue the
manufacturing of our product candidates at commercially
reasonable prices, that we will be able to retain our key
personnel, and that we will not incur any significant contingent
liabilities. We may need to raise additional funds more quickly
if one or more of our assumptions proves to be incorrect or if
we choose to expand our product development efforts more rapidly
than presently anticipated or seek to acquire additional product
candidates, and we may also decide to raise additional funds
even before they are needed if the conditions for raising
capital are favorable.
We may seek to sell additional equity or debt securities or
obtain a bank credit facility. The sale of additional equity or
debt securities, if convertible, could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants
that would restrict our operations.
We cannot assure you that additional funds will be available
when we need them on terms that are acceptable to us, or at all.
The unavailability of financing may require us to delay, scale
back or eliminate expenditures for our research, development and
marketing activities necessary to commercialize our potential
biopharmaceutical products. If we are unable to secure
sufficient capital to fund our research and development
activities, we may not be able to continue operations or we may
have to enter into collaboration agreements that could require
us to share commercial rights to our products to a greater
extent or at earlier stages in the drug development process than
we currently intend. Collaborations that are consummated by us
prior to
proof-of-efficacy
and safety of a product candidate could impair our ability to
realize value from that product candidate.
We have engaged an investment bank to provide strategic and
financial advisory services to the Company, which may lead to
one or more possible transactions, including the acquisition,
licensing or sale by the Company of one or more product
candidates, or the acquisition of the Company. However, we can
not assure you that we will complete any acquisitions, sales or
licenses or that, if completed, any acquisition, sale or license
will be successful or on attractive terms.
32
We
have incurred operating losses in each year since our inception
and expect to continue to incur substantial and increasing
losses for the foreseeable future.
We have a limited operating history. We have not generated any
revenue from product sales to date and we cannot estimate with
precision the extent of our future losses. We do not currently
have any products that have been approved for commercial sale
and we may never generate revenue from selling products or
achieve profitability. We expect to continue to incur
substantial and increasing losses for the foreseeable future,
particularly as we increase our research, clinical development,
marketing and administrative activities. As a result, we are
uncertain when or if we will achieve profitability and, if so,
whether we will be able to sustain it. We have been engaged in
identifying and developing compounds and product candidates
since March 2003. As of March 31, 2007, we have accumulated
net losses of approximately $115.2 million. Our ability to
achieve revenue and profitability is dependent on our ability to
complete the development of our product candidates, obtain
necessary regulatory approvals, and have our products
manufactured and marketed. We cannot assure you that we will be
profitable even if we successfully commercialize our products.
Failure to become and remain profitable may adversely affect the
market price of our common stock and our ability to raise
capital and continue operations.
If our
contract research organizations do not successfully carry out
their duties or if we lose our relationships with contract
research organizations, our drug development efforts could be
delayed.
We are dependent on contract research organizations, third-party
vendors and investigators for pre-clinical testing and clinical
trials related to our drug discovery and development efforts and
we will likely continue to depend on them to assist in our
future discovery and development efforts. These parties are not
our employees and we cannot control the amount or timing of
resources that they devote to our programs. If they fail to
devote sufficient time and resources to our drug development
programs or if their performance is substandard, it will delay
the development and commercialization of our product candidates.
The parties with which we contract for execution of our clinical
trials play a significant role in the conduct of the trials and
the subsequent collection and analysis of data. Their failure to
meet their obligations could adversely affect clinical
development of our product candidates. Moreover, these parties
may also have relationships with other commercial entities, some
of which may compete with us.
If we lose our relationship with any one or more of these
parties, we could experience a significant delay in both
identifying another comparable provider and then contracting for
its services. We may be unable to retain an alternative provider
on reasonable terms, if at all. Even if we locate an alternative
provider, it is likely that this provider may need additional
time to respond to our needs and may not provide the same type
or level of service as the original provider. In addition, any
provider that we retain will be subject to current Good
Laboratory Practices, or cGLP, and similar foreign standards and
we do not have control over compliance with these regulations by
these providers. Consequently, if these practices and standards
are not adhered to by these providers, the development and
commercialization of our product candidates could be delayed.
If our
Common Technical Dossier (CTD) contractors do not successfully
carry out their duties or if we lose our relations with our CTD
contractors, our NDA for iloperidone could be
delayed.
We are dependent on third-party vendors for assistance in the
preparation of the Common Technical Dossier (CTD) related to the
NDA we expect to file for iloperidone by the end of 2007. These
parties are not our employees and we cannot control the amount
or timing of resources that they devote to our program. If they
fail to devote sufficient time and resources to our NDA
preparation or if their performance is substandard, it will
delay the approval of iloperidone.
If we lose our relationship with any one or more of these third
parties, we could experience a significant delay in both
identifying another comparable provider and then contracting for
its services. We may be unable to retain an alternative provider
on reasonable terms, if at all. Even if we locate an alternative
provider, it is likely that this provider may need additional
time to respond to our needs and may not provide the same type
or level of service as the original provider. Consequently, the
NDA and commercialization of iloperidone could be delayed.
33
We
rely on a limited number of manufacturers for our product
candidates and our business will be seriously harmed if these
manufacturers are not able to satisfy our demand and alternative
sources are not available.
We do not have an in-house manufacturing capability and depend
completely on a small number of third-party manufacturers and
active pharmaceutical ingredient formulators for the manufacture
of our product candidates. We do not have long-term agreements
with any of these third parties, and if they are unable or
unwilling to perform for any reason, we may not be able to
locate alternative acceptable manufacturers or formulators or
enter into favorable agreements with them. Any inability to
acquire sufficient quantities of our product candidates in a
timely manner from these third parties could delay clinical
trials and prevent us from developing our product candidates in
a cost-effective manner or on a timely basis. In addition,
manufacturers of our product candidates are subject to cGMP and
similar foreign standards and we do not have control over
compliance with these regulations by our manufacturers. If one
of our contract manufacturers fails to maintain compliance, the
production of our product candidates could be interrupted,
resulting in delays and additional costs. In addition, if the
facilities of such manufacturers do not pass a pre-approval
plant inspection, the FDA will not grant pre-market approval of
our products.
Our manufacturing strategy presents the following additional
risks:
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the manufacturing process for VSF-173 has not been tested in
quantities needed for continued clinical trials or commercial
sales, and delays in
scale-up to
commercial quantities of VEC-162 and VSF-173 could delay
clinical trials, regulatory submissions and commercialization of
these product candidates
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because most of our third-party manufacturers and formulators
are located outside of the United States, there may be
difficulties in importing our compounds or their components into
the United States as a result of, among other things, FDA import
inspections, incomplete or inaccurate import documentation or
defective packaging
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because of the complex nature of our compounds, our
manufacturers may not be able to successfully manufacture our
compounds in a cost-effective
and/or
timely manner
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Materials
necessary to manufacture our product candidates may not be
available on commercially reasonable terms, or at all, which may
delay the development, regulatory approval and commercialization
of our product candidates.
We rely on our manufacturers to purchase from third-party
suppliers the materials necessary to produce our product
candidates for our clinical trials. Suppliers may not sell these
materials to our manufacturers at the times we need them or on
commercially reasonable terms. We do not have any control over
the process or timing of the acquisition of these materials by
our manufacturers. Moreover, we currently do not have any
agreements for the commercial production of these materials. If
our manufacturers are unable to obtain these materials for our
clinical trials, product testing and potential regulatory
approval of our product candidates could be delayed,
significantly affecting our ability to develop our product
candidates. If we or our manufacturers are unable to purchase
these materials after regulatory approval has been obtained for
our product candidates, the commercial launch of our product
candidates would be delayed or there would be a shortage in
supply, which would materially affect our ability to generate
revenues from the sale of our product candidates.
We
face substantial competition which may result in others
developing or commercializing products before or more
successfully than we do.
Our future success will depend on our ability to demonstrate and
maintain a competitive advantage with respect to our product
candidates and our ability to identify and develop additional
product candidates through the application of our
pharmacogenetics and pharmacogenomics expertise. Large, fully
integrated pharmaceutical companies, either alone or together
with collaborative partners, have substantially greater
financial resources and have significantly greater experience
than we do in:
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developing products
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undertaking pre-clinical testing and clinical trials
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34
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obtaining FDA and other regulatory approvals of products
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manufacturing and marketing products
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These companies may invest heavily and quickly to discover and
develop novel products that could make our product candidates
obsolete. Accordingly, our competitors may succeed in obtaining
patent protection, receiving FDA approval or commercializing
superior products or other competing products before we do.
We believe the primary competitors for each of our product
candidates are as follows:
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For iloperidone in the treatment of schizophrenia, the atypical
antipsychotics
Risperdal®
(risperidone) by Johnson & Johnson (including the
depot formulation
Risperdal®
Consta®),
Zyprexa®
(olanzapine) by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
Abilify®
(aripiprazole) by Bristol-Myers Squibb Company/Otsuka
Pharmaceutical Co., Ltd.,
Geodon®
(ziprasidone) by Pfizer Inc.,
Invega®
(paliperidone) by Johnson & Johnson, and generic
clozapine, as well as the typical antipsychotics haloperidol,
chlorpromazine, thioridazine, and sulpiride (all of which are
generic). In addition to the approved products, compounds in
Phase III trials (or for which an NDA has been recently
filed) for the treatment of schizophrenia include bifeprunox
(Wyeth/Solvay S.A./Lundbeck A/S), and asenapine (Schering-Plough
Corporation).
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For VEC-162 in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
such as
Ambien®
(zolpidem) by sanofi-aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic compounds such
as trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia include indiplon (Neurocrine
Biosciences, Inc.) and low-dose doxepin
(Silenortm,
Somaxon Pharmaceuticals, Inc.).
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For VEC-162 in the treatment of depression, antidepressants such
as
Paxil®
(paroxetine) by GlaxoSmithKline (GSK),
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
A/S /Forest Pharmaceuticals Inc., and
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK and
Cymbalta®
(duloxetine) by Eli Lilly. In addition to the approved products,
compounds in Phase III trials for depression include
agomelatine (Novartis and Les Laboratoires Servier).
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For VSF-173 in the treatment of excessive sleepiness,
Provigil®
(modafinil) and
NuVigil®
(armodafinil) by Cephalon Inc., and
Xyrem®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
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We
have no experience selling, marketing or distributing products
and no internal capability to do so.
At present, we have limited marketing and no sales personnel. In
order for us to commercialize any of our product candidates, we
must either acquire or internally develop sales, marketing and
distribution capabilities, or enter into collaborations with
partners to perform these services for us. We may not be able to
establish sales and distribution partnerships on acceptable
terms or at all, and if we do enter into a distribution
arrangement, our success will be dependent upon the performance
of our partner. In the event that we attempt to acquire or
develop our own in-house sales, marketing and distribution
capabilities, factors that may inhibit our efforts to
commercialize our products without partners or licensees include:
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our inability to recruit and retain adequate numbers of
effective sales and marketing personnel
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the inability of sales personnel to obtain access to or persuade
adequate numbers of physicians to prescribe our product
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the lack of complementary products to be offered by our sales
personnel, which may put us at a competitive disadvantage
against companies with broader product lines
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unforeseen costs associated with creating our own sales and
marketing team or with entering into a partnering agreement with
an independent sales and marketing organization
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35
We
will need to increase the size of our organization, and we may
experience difficulties in managing our growth.
As of March 31, 2007, we had 45 full-time employees.
We will need to continue to expand our managerial, operational,
financial and other resources in order for us to manage and fund
our operations, continue our development activities and
commercialize our product candidates. Our current personnel,
systems and facilities are not adequate to support this future
growth. To manage our growth, we must:
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manage our clinical trials effectively
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manage our internal development efforts effectively
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improve our operational, financial, accounting and management
controls, reporting systems and procedures
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attract and retain sufficient numbers of talented employees
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We may be unable to successfully implement these tasks on a
larger scale and, accordingly, may not achieve our development
and commercialization goals.
If we
cannot identify, or enter into licensing arrangements for, new
product candidates, our ability to develop a diverse product
portfolio may be limited.
A component of our business strategy is acquiring rights to
develop and commercialize compounds discovered or developed by
other pharmaceutical and biotechnology companies for which we
may find effective uses and markets by using our unique
pharmacogenetics and pharmacogenomics expertise. Competition for
the acquisition of these compounds is intense. If we are not
able to identify opportunities to acquire rights to
commercialize additional products, we may not be able to develop
a diverse portfolio of products and our business may be harmed.
Additionally, it may take substantial human and financial
resources to secure commercial rights to promising product
candidates. Moreover, if other firms develop pharmacogenetics
and pharmacogenomics capabilities, we may face increased
competition in identifying and acquiring additional product
candidates.
If we
lose key scientists or management personnel, or if we fail to
recruit additional highly skilled personnel, it will impair our
ability to identify, develop and commercialize product
candidates.
We are highly dependent on principal members of our management
team and scientific staff, including our Chief Executive
Officer, Mihael H. Polymeropoulos, M.D. These executives
each have significant pharmaceutical industry experience. The
loss of any such executives, including Dr. Polymeropoulos,
or any other principal member of our management team or
scientific staff, would impair our ability to identify, develop
and market new products.
Product
liability lawsuits could divert our resources, result in
substantial liabilities and reduce the commercial potential of
our products.
The risk that we may be sued on product liability claims is
inherent in the development of pharmaceutical products. For
example, we face a risk of product liability exposure related to
the testing of our product candidates in clinical trials and
will face even greater risks upon any commercialization by us of
our product candidates. We believe that we may be at a greater
risk of product liability claims relative to other
pharmaceutical companies because our compounds are intended to
treat behavioral disorders, and it is possible that we may be
held liable for the behavior and actions of patients who use our
compounds. These lawsuits may divert our management from
pursuing our business strategy and may be costly to defend. In
addition, if we are held liable in any of these lawsuits, we may
incur substantial liabilities and may be forced to limit or
forego further commercialization of one or more of our products.
Although we maintain general liability and product liability
insurance, our aggregate coverage limit under this insurance is
$10,000,000, and while we believe this amount of insurance is
sufficient to cover our product liability exposure, these limits
may not be high enough to fully cover potential liabilities. In
addition, product liability insurance is becoming increasingly
36
expensive, and we may not be able to obtain or maintain
sufficient insurance coverage at an acceptable cost or otherwise
to protect against potential product liability claims, which
could prevent or inhibit the commercial production and sale of
our products.
Legislative
or regulatory reform of the healthcare system in the U.S. and
foreign jurisdictions may affect our ability to sell our
products profitably.
The continuing efforts of the U.S. and foreign governments,
insurance companies, managed care organizations and other payors
of health care services to contain or reduce health care costs
may adversely affect our ability to set prices for our products
which we believe are fair, and our ability to generate revenues
and achieve and maintain profitability.
Specifically, in both the United States and some foreign
jurisdictions there have been a number of legislative and
regulatory proposals to change the healthcare system in ways
that could affect our ability to sell our products profitably.
In the United States, the Medicare Prescription Drug Improvement
and Modernization Act of 2003 reforms the way Medicare will
cover and reimburse for pharmaceutical products. This
legislation could decrease the coverage and price that we may
receive for our products. Other third-party payors are
increasingly challenging the prices charged for medical products
and services. It will be time-consuming and expensive for us to
go through the process of seeking reimbursement from Medicare
and private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. Further federal and state proposals and
healthcare reforms are likely which could limit the prices that
can be charged for the drugs we develop and may further limit
our commercial opportunity. Our results of operations could be
materially adversely affected by the Medicare prescription drug
coverage legislation, by the possible effect of this legislation
on amounts that private insurers will pay and by other
healthcare reforms that may be enacted or adopted in the future.
In some foreign countries, including major markets in the
European Union and Japan, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take six to twelve months or longer after the receipt of
regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate to other available
therapies. Our business could be materially harmed if
reimbursement of our products is unavailable or limited in scope
or amount or if pricing is set at unsatisfactory levels.
Our
quarterly operating results may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. The revenues we generate, if any, and our
operating results will be affected by numerous factors,
including:
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our addition or termination of development programs
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variations in the level of expenses related to our existing
three product candidates or future development programs
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our execution of collaborative, licensing or other arrangements,
and the timing of payments we may make or receive under these
arrangements
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any intellectual property infringement lawsuit in which we may
become involved
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regulatory developments affecting our product candidates or
those of our competitors
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If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
37
Risks
related to intellectual property and other legal
matters
Our
rights to develop and commercialize our product candidates are
subject in part to the terms and conditions of licenses or
sublicenses granted to us by other pharmaceutical companies.
With respect to VEC-162 and VSF-173, these terms and conditions
include options in favor of these pharmaceutical companies to
reacquire rights to commercialize and develop these product
candidates in certain circumstances.
Iloperidone is based in part on patents and other intellectual
property owned by sanofi-aventis and Novartis. Titan
Pharmaceuticals, Inc. (Titan) holds an exclusive license from
sanofi-aventis to the intellectual property owned by
sanofi-aventis, and Titan has sublicensed its rights under such
license on an exclusive basis to Novartis. We have acquired
exclusive rights to this and other intellectual property through
a further sublicense from Novartis. Our rights with respect to
the intellectual property to develop and commercialize
iloperidone may terminate, in whole or in part, if we fail to
meet certain milestones contained in our sublicense agreement
with Novartis relating to the time it takes for us to launch
iloperidone commercially following regulatory approval, and the
time it takes for us to receive regulatory approval following
our submission of an NDA or equivalent foreign filing. We may
also lose our rights to develop and commercialize iloperidone if
we fail to pay royalties to Novartis, if we fail to comply with
certain requirements in the sublicense regarding our financial
condition, or if we fail to comply with certain restrictions
regarding our other development activities. Finally, our rights
to develop and commercialize iloperidone may be impaired if we
do not cure breaches by Novartis and Titan of similar
obligations contained in these sublicense and license
agreements, although we are not aware of any such breach by
Titan or Novartis. In the event of an early termination of our
sublicense agreement, all rights licensed and developed by us
under this agreement may be extinguished, which would have a
material adverse effect on our business.
VEC-162 is based in part on patents that we have licensed on an
exclusive basis and other intellectual property licensed from
Bristol-Myers Squibb Company (BMS). Following the completion of
the entire Phase III program for VEC-162, which may consist
of several Phase III trials, and in the event that we have
not entered into one or more development and commercialization
agreements with one or more third parties covering certain
significant markets, BMS has retained an option to reacquire the
rights it has licensed to us to exclusively develop and
commercialize VEC-162 on pre-determined financial terms,
including the payment of royalties and milestone payments to us.
BMS may terminate our license if we fail to meet certain
milestones or if we otherwise breach our royalty or other
obligations in the agreement. In the event that we terminate our
license, or if BMS terminates our license due to our breach, all
of our rights to VEC-162 (including any intellectual property we
develop with respect to VEC-162) will revert back to BMS or
otherwise be licensed back to BMS on an exclusive basis. Any
termination or reversion of our rights to develop or
commercialize VEC-162, including any reacquisition by BMS of our
rights, may have a material adverse effect on our business.
VSF-173 is based in part on patents and other intellectual
property that we have licensed on an exclusive basis from
Novartis. Novartis has the option to reacquire rights to
co-develop and exclusively commercialize VSF-173 following the
completion of the Phase II trials, and an additional option
to reacquire co-development rights and exclusive
commercialization rights following the completion of the
Phase III clinical trials, subject in each case to
Novartis payment of pre-determined royalties and other
payments to us. In the event that Novartis chooses not to
exercise either of these options and we decide to enter into a
partnering arrangement to help us commercialize VSF-173,
Novartis has a right of first refusal to negotiate such an
agreement with us, as well as a right to submit a last matching
counteroffer regarding such an agreement. In addition, our
rights with respect to VSF-173 may terminate, in whole or in
part, if we fail to meet certain development and
commercialization milestones described in our license agreement
relating to the time it takes us to complete our development
work on VSF-173. These rights may also terminate in whole or in
part if we fail to make royalty or milestone payments or if we
do not comply with requirements in our license agreement
regarding our financial condition. In the event of an early
termination of our license agreement, all rights licensed and
developed by us under this agreement may revert back to
Novartis. Any termination or reversion of our rights to develop
or commercialize VSF-173, including any reacquisition by
Novartis of our rights, may have a material adverse effect on
our business.
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If our
efforts to protect the proprietary nature of the intellectual
property related to our products are not adequate, we may not be
able to compete effectively in our markets.
In addition to the rights we have licensed from Novartis and BMS
relating to our product candidates, we rely upon intellectual
property we own relating to our products, including patents,
patent applications and trade secrets. As of December 31,
2006, we owned 27 pending provisional patent applications
in the United States and three pending Patent Cooperation Treaty
applications, which permit the pursuit of patents outside of the
United States, relating to our product candidates in clinical
development. Our patent applications may be challenged or fail
to result in issued patents and our existing or future patents
may be too narrow to prevent third parties from developing or
designing around these patents. In addition, we rely on trade
secret protection and confidentiality agreements to protect
certain proprietary know-how that is not patentable, for
processes for which patents are difficult to enforce and for any
other elements of our drug development processes that involve
proprietary know-how, information and technology that is not
covered by patent applications. While we require all of our
employees, consultants, advisors and any third parties who have
access to our proprietary know-how, information and technology
to enter into confidentiality agreements, we cannot be certain
that this know-how, information and technology will not be
disclosed or that competitors will not otherwise gain access to
our trade secrets or independently develop substantially
equivalent information and techniques. Further, the laws of some
foreign countries do not protect proprietary rights to the same
extent as the laws of the United States. As a result, we may
encounter significant problems in protecting and defending our
intellectual property both in the United States and abroad. If
we are unable to protect or defend the intellectual property
related to our technologies, we will not be able to establish or
maintain a competitive advantage in our market.
If we
do not obtain protection under the Hatch-Waxman Act and similar
foreign legislation to extend our patents and to obtain market
exclusivity for our product candidates, our business will be
materially harmed.
The United States Drug Price Competition and Patent Term
Restoration Act of 1984, more commonly known as the
Hatch-Waxman Act, provides for an extension of
patent protection for drug compounds for a period of up to five
years to compensate for time spent in development. Assuming we
gain a five-year extension for each of our current product
candidates in clinical development, and that we continue to have
rights under our sublicense and license agreements with respect
to these product candidates, we would have exclusive rights to
iloperidones United States new chemical entity
patent (the primary patent covering the compound as a new
composition of matter) until 2016, to VEC-162s United
States new chemical entity patent until 2022 and to
VSF-173s United States new chemical entity patent until
2019. In Europe, similar legislative enactments allow patent
protection in the European Union to be extended for up to five
years through the grant of a Supplementary Protection
Certificate. Assuming we gain such a five-year extension for
each of our current product candidates in clinical development,
and that we continue to have rights under our sublicense and
license agreements with respect to these product candidates, we
would have exclusive rights to iloperidones European new
chemical entity patents until 2015, to VEC-162s European
new chemical entity patents until 2022 and to VSF-173s
European new chemical entity patents until 2017. Additionally, a
recent directive in the European Union provides that companies
who receive regulatory approval for a new compound will have a
10-year
period of market exclusivity for that compound (with the
possibility of a further one-year extension) in most EU
countries, beginning on the date of such European regulatory
approval, regardless of when the European new chemical entity
patent covering such compound expires. A generic version of the
approved drug may not be marketed or sold during such market
exclusivity period. This directive may be of particular
importance with respect to iloperidone, since the European new
chemical entity patent for iloperidone will likely expire prior
to the end of this
10-year
period of market exclusivity. However, there is no assurance
that we will receive the extensions of our patents or other
exclusive rights available under the Hatch-Waxman Act or similar
foreign legislation. If we fail to receive such extensions and
exclusive rights, our ability to prevent competitors from
manufacturing, marketing and selling generic versions of our
products will be materially harmed.
39
Litigation
or third-party claims of intellectual property infringement
could require us to divert resources and may prevent or delay
our drug discovery and development efforts.
Our commercial success depends in part on our not infringing the
patents and proprietary rights of third parties. Third parties
may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain
patents in the future and claim that use of our technologies
infringes upon these patents. Furthermore, parties making claims
against us may obtain injunctive or other equitable relief,
which could effectively block our ability to develop and
commercialize one or more of our product candidates. Defense of
these claims, regardless of their merit, would divert
substantial financial and employee resources from our business.
In the event of a successful claim of infringement against us,
we may have to pay substantial damages, obtain one or more
licenses from third parties or pay royalties. In addition, even
in the absence of litigation, we may need to obtain additional
licenses from third parties to advance our research or allow
commercialization of our product candidates. We may fail to
obtain any of these licenses at a reasonable cost or on
reasonable terms, if at all. In that event, we would be unable
to develop and commercialize further one or more of our product
candidates.
In addition, in the future we could be required to initiate
litigation to enforce our proprietary rights against
infringement by third parties. Prosecution of these claims to
enforce our rights against others could divert substantial
financial and employee resources from our business. If we fail
to enforce our proprietary rights against others, our business
will be harmed.
If we
use hazardous and biological materials in a manner that causes
injury or violates applicable law, we may be liable for
damages.
Our research and development activities involve the controlled
use of potentially hazardous substances, including toxic
chemical and biological materials. We could be held liable for
any contamination, injury or other damages resulting from these
hazardous substances. In addition, our operations produce
hazardous waste products. While third parties are responsible
for disposal of our hazardous waste, we could be liable under
environmental laws for any required cleanup of sites at which
our waste is disposed. Federal, state, foreign and local laws
and regulations govern the use, manufacture, storage, handling
and disposal of these hazardous materials. If we fail to comply
with these laws and regulations at any time, or if they change,
we may be subject to criminal sanctions and substantial civil
liabilities, which may adversely affect our business.
Even if we continue to comply with all applicable laws and
regulations regarding hazardous materials, we cannot eliminate
the risk of accidental contamination or discharge and our
resultant liability for any injuries or other damages caused by
these accidents. Although we maintain pollution liability
insurance, our coverage limit under this insurance is
$2,000,000, and while we believe this amount and type of
insurance is sufficient to cover risks typically associated with
our handling of materials, the insurance may not cover all
environmental liabilities, and these limits may not be high
enough to cover potential liabilities for these damages fully.
The amount of uninsured liabilities may exceed our financial
resources and materially harm our business.
Risks
related to our common stock
Our
stock price has been volatile and may be volatile in the future,
and purchasers of our common stock could incur substantial
losses.
The stock market has from time to time experienced significant
price and volume fluctuations, and the market prices of the
securities of life sciences companies without product revenues,
such as ours, have historically been highly volatile. The
following factors, in addition to the other risk factors
described in this section, may also have a significant impact on
the market price of our common stock:
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publicity regarding actual or potential testing or trial results
or the outcome of regulatory review relating to products under
development by us or our competitors
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regulatory developments in the United States and foreign
countries
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developments concerning any collaboration or other strategic
transaction we may undertake
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40
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announcements of patent issuances or denials, technological
innovations or new commercial products by us or our competitors
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actual or anticipated variations in our quarterly operating
results
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changes in estimates of our financial results or recommendations
by securities analysts
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additions or departures of key personnel or members of our board
of directors
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economic and other external factors beyond our control
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As a result of these factors, holders of our common stock might
be unable to sell their shares at or above the price they paid
for such shares.
If
there are substantial sales of our common stock, our stock price
could decline.
A small number of early investors in our company who held our
stock prior to the sale of shares in our initial public offering
continue to hold a substantial number of shares of our common
stock. Additionally, a small number of institutional investors
and private equity funds continue to hold a significant number
of shares of our common stock. Sales by these stockholders of a
substantial number of shares, or the expectation of such sales,
could cause a significant reduction in the market price of our
common stock. Additionally, the holders of a substantial number
of shares of our common stock have rights, subject to certain
conditions, to require us to file registration statements to
permit the resale of these shares in the public market or to
include their shares in registration statements that we may file
for ourselves or other stockholders.
In addition to our outstanding common stock, as of
March 31, 2007 there were a total of 2,769,711shares of
common stock that we have registered and that we are obligated
to issue upon the exercise of currently outstanding options
granted under our Second Amended and Restated Management Equity
Plan and 2006 Equity Incentive Plan. Upon the exercise of these
options in accordance with their respective terms, these shares
may be resold freely, subject to restrictions imposed on our
affiliates under Rule 144. If significant sales of these
shares occur in short periods of time, these sales could reduce
the market price of our common stock. Any reduction in the
trading price of our common stock could impede our ability to
raise capital on attractive terms. Additionally, the sale of
additional equity securities at prices below the current market
price of our common stock could result in dilution to our
stockholders interest.
If
securities or industry analysts do not publish research or
reports or publish unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts
who covers the Company downgrades our stock, our stock price
would likely decline. If one or more of these analysts ceases to
cover us or fails to publish regular reports on us, interest in
the purchase of our stock could decrease, which could cause our
stock price or trading volume to decline.
Anti-takeover
provisions in our charter and bylaws, and in Delaware law, could
prevent or delay a change in control of our
company.
We are a Delaware corporation and the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting
us from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes
an interested stockholder, even if a change of control would be
beneficial to our existing stockholders. In addition, our
amended and restated certificate of incorporation and bylaws may
discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
amended and restated certificate of incorporation and bylaws:
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt
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41
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do not provide for cumulative voting in the election of
directors, which would allow holders of less than a majority of
the stock to elect some directors
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establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election
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require that directors only be removed from office for cause
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provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office
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limit who may call special meetings of stockholders
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prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders
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establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Use of
Proceeds from Registered Securities
We registered shares of our common stock in connection with our
initial public offering under the Securities Act. Our
Registration Statement on
Form S-1
(Reg.
No. 333-130759)
in connection with our initial public offering was declared
effective by the SEC on April 12, 2006. The offering was
consummated on April 18, 2006 with respect to
5,750,000 shares of our common stock, and on April 25,
2006 with respect to 214,188 shares pursuant to the
exercise by the underwriters of their over-allotment option. The
managing underwriters of the offering were J.P. Morgan
Securities Inc., Banc of America Securities LLC and Thomas
Weisel Partners LLC.
All 5,964,188 shares of our common stock sold in the
offering were sold to the public at the initial public offering
price of $10.00 per share. The aggregate price of the
offering was approximately $59.6 million. The net offering
proceeds to us after deducting underwriting discounts and
commissions, as well as offering expenses, were approximately
$53.3 million. We incurred total expenses in connection
with the offering of approximately $6.3 million, which
consisted of approximate direct payments of:
(i) $1,861,000 in legal, accounting and printing fees
(ii) $4,175,000 in underwriters discounts, fees and
commissions and
(iii) $276,000 in miscellaneous expenses.
We also registered shares of our common stock in connection with
our follow-on offering under the Securities Act. Our
Registration Statement on
Form S-1
(Reg.
No. 333-139485
and
No. 333-140081)
in connection with our follow-on offering was declared effective
by the SEC on January 18, 2007. The offering was
consummated on January 24, 2007 with respect to all
4,370,000 shares of our common stock that were offered,
including 570,000 of such shares that were offered pursuant to
the exercise by the underwriters of their over-allotment option.
The managing underwriters of the offering were J.P. Morgan
Securities Inc., Morgan Stanley & Co., Incorporated,
Banc of America Securities LLC and Natexis Bleichroeder Inc.
All 4,370,000 shares of our common stock sold in the
follow-on offering were sold to the public at the offering price
of $27.29 per share. The aggregate price of the offering
was approximately $119.3 million. The net offering proceeds
to us after deducting underwriting discounts and commissions, as
well as estimated offering expenses, were approximately
$111.3 million. We incurred total expenses in connection
with the offering of approximately $8.0 million which
consisted of approximate direct payments of:
(i) $772,000 in legal, accounting and printing fees
42
(ii) $7,155,000 in underwriters discounts, fees and
commissions and
(iii) $45,000 in miscellaneous expenses
We have used a portion of, and intend to continue to use, the
proceeds of our initial public offering and our follow-on
offering for general corporate and research and development
expenses, including for our clinical trials for iloperidone and
VEC-162, the generation and submission of an NDA for
iloperidone, the initiation of commercialization strategy of
iloperidone, and clinical manufacturing expenses relating to the
development of our lead product candidates. The unused net
proceeds from the initial public and follow-on offerings are
invested in investment grade securities. This use of proceeds is
not materially different from the use of proceeds described in
the final prospectuses for our initial public offering and
follow-on offering.
The amount and timing of our actual expenditures may vary
significantly depending on numerous factors, such as the
progress of our product development and commercialization
efforts and the amount of cash used by our operations.
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Exhibit
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Number
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Description
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31
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.1
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Certification of the Principal
Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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31
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.2
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Certification of the Principal
Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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32
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.1
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Certification of the Chief
Executive Officer and Chief Financial Officer, as required by
Section 906 of the Sarbanes-Oxley Act of 2002.
|
The certification attached as Exhibit 32 that accompanies
this Quarterly Report on
Form 10-Q
is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of
Vanda Pharmaceuticals Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Quarterly Report
on
Form 10-Q,
irrespective of any general incorporation language contained in
such filing.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Vanda Pharmaceuticals Inc.
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/s/ Mihael
H. Polymeropoulos, M.D.
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Mihael H. Polymeropoulos, M.D.
President and Chief Executive Officer
(Principal executive officer)
May 8, 2007
Steven A. Shallcross
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal financial and accounting officer)
May 8, 2007
44
VANDA
PHARMACEUTICALS INC.
EXHIBIT INDEX
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Exhibit
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Number
|
|
Description
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31
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.1
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Certification of the Principal
Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
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31
|
.2
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Certification of the Principal
Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
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32
|
.1
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Certification of the Chief
Executive Officer and Chief Financial Officer, as required by
Section 906 of the Sarbanes-Oxley Act of 2002.
|
The certification attached as Exhibit 32 that accompanies
this Quarterly Report on
Form 10-Q
is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of
Vanda Pharmaceuticals Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Quarterly Report
on
Form 10-Q,
irrespective of any general incorporation language contained in
such filing.
45
exv31w1
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mihael H. Polymeropoulos, certify that:
1. |
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I have reviewed this quarterly report on Form 10-Q of Vanda Pharmaceuticals Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have: |
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a. |
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designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; |
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b. |
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[Paragraph omitted in accordance with SEC Release 34-47986] |
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c. |
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evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
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d. |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
5. |
|
The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions): |
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a. |
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all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
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b. |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting. |
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Date: May 8, 2007
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/s/ Mihael H. Polymeropoulos |
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Mihael H. Polymeropoulos
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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exv31w2
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven A. Shallcross, certify that:
1. |
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I have reviewed this quarterly report on Form 10-Q of Vanda Pharmaceuticals Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report; |
|
3. |
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Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report; |
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4. |
|
The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have: |
|
a. |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; |
|
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b. |
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[Paragraph omitted in accordance with SEC Release 34-47986] |
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c. |
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evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
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d. |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
5. |
|
The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent
functions): |
|
a. |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and |
|
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b. |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting. |
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Date: May 8, 2007
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/s/ Steven A. Shallcross |
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Steven A. Shallcross
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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exv32w1
EXHIBIT 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section
1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Vanda
Pharmaceuticals Inc., (the Company), does hereby certify, to the best of such officers knowledge,
that:
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (the Form 10-Q) of the
Company fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange
Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company.
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Date: May 8, 2007
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/s/ Mihael H. Polymeropoulos |
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Mihael H. Polymeropoulos
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 8, 2007
|
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/s/ Steven A. Shallcross |
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Steven A. Shallcross
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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|
A signed original of this written statement required by Section 906 has been provided to
the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission (SEC) or its staff upon request. This certification accompanies the Form 10-Q to which
it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any
general incorporation language contained in such filing.
End of Filing