e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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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 |
For the quarterly period ended: September 30, 2006
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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 |
Commission File Number: 000-51768
VALERA PHARMACEUTICALS, Inc.
(Exact name of Registrant as specified in its charter)
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|
Delaware
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13-4119931 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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7 Clarke Drive |
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Cranbury, New Jersey
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08512 |
(Address of principal executive offices)
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(Zip Code) |
(609) 235-3000
(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 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. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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 November 1, 2006, there were 14,934,807 shares of the registrants common stock, $0.001
par value outstanding.
TABLE OF CONTENTS
Index
2
Cautionary Statement Regarding Forward-Looking Statements
We have included, and from time to time may make in our public filings, press releases or
other public statements, certain statements, including (without limitation) those under
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part
I, Item 2 (MD&A), and Quantitative and Qualitative Disclosures about Market Risk in Part I,
Item 3 that may constitute forward-looking statements. In addition, our management may make
forward-looking statements to analysts, investors, representatives of the media and others.
These forward-looking statements are not historical facts and represent only Valera
Pharmaceuticals beliefs regarding future events, many of which, by their nature, are
inherently uncertain and beyond our control.
The nature of Valera Pharmaceuticals business makes predicting the future trends of our
revenues, expenses and net income difficult. The risks and uncertainties involved in our
business could affect the matters referred to in such statements and it is possible that our
actual results may differ from the anticipated results indicated in these forward looking
statements. Important factors that could cause actual results to differ from those in the
forward-looking statements include (without limitation):
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changes in reimbursement policies and/or rates for Vantas and any future products; |
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the actions and initiatives of current and potential competitors; |
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the impact of current, pending and future legislation, regulation and legal actions
in the United States and worldwide affecting the pharmaceutical and healthcare
industries; |
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our ability to manufacture our Vantas product; and |
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our ability to develop products, receive regulatory approvals, and market our products. |
Accordingly, you are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date on which they are made. Valera Pharmaceuticals undertakes no
obligation to update publicly or revise any forward-looking statements to reflect the impact of
circumstances or events that arise after the dates they are made, whether as a result of new
information, future events or otherwise except as required by applicable law. You should,
however, consult further disclosures Valera Pharmaceuticals may make in future filings of its
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
and any amendments thereto.
3
VALERA PHARMACEUTICALS, INC
BALANCE SHEETS
(in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited |
|
|
|
|
|
ASSETS
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,891 |
|
|
$ |
2,340 |
|
Investments held-to-maturity |
|
|
2,982 |
|
|
|
|
|
Accounts receivable, net of allowances of $318 at September 30, 2006 and $385 at December 31, 2005 |
|
|
2,311 |
|
|
|
4,488 |
|
Inventories, net |
|
|
5,569 |
|
|
|
3,191 |
|
Prepaid expenses and other current assets |
|
|
841 |
|
|
|
726 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
27,594 |
|
|
|
10,745 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation of $1,788 at September 30, 2006 and
$1,374 at December 31, 2005 |
|
|
7,513 |
|
|
|
4,194 |
|
Deferred offering costs |
|
|
|
|
|
|
1,378 |
|
Intangible assets, net of accumulated amortization of $52 at September 30, 2006 |
|
|
473 |
|
|
|
|
|
Other non current assets |
|
|
169 |
|
|
|
215 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
35,749 |
|
|
$ |
16,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,233 |
|
|
$ |
1,421 |
|
Accrued liabilities |
|
|
2,314 |
|
|
|
4,607 |
|
Note payable |
|
|
|
|
|
|
1,525 |
|
Deferred revenue current |
|
|
|
|
|
|
329 |
|
Capital lease obligations current |
|
|
11 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,558 |
|
|
|
7,900 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations long term |
|
|
15 |
|
|
|
|
|
Deferred revenue long term |
|
|
300 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A 6% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 7,000 shares issued and
outstanding; liquidation preference $0 and $7,598 at September 30, 2006 and December 31, 2005,
respectively
|
|
|
|
|
|
|
13,604 |
|
Series B 10% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 22,069 shares issued and
outstanding; liquidation preference$0 and $20,221 at September 30, 2006 and December 31, 2005
respectively |
|
|
|
|
|
|
15,082 |
|
Series C 6% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 11,600 shares issued and
outstanding; liquidation preference $0 and $12,590 at September 30, 2006 and December 31, 2005,
respectively |
|
|
|
|
|
|
11,239 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 30,000 authorized, 14,935 and 1,667 issued and outstanding at
September 30, 2006 and December 31, 2005, respectively |
|
|
15 |
|
|
|
2 |
|
Additional paid-in-capital |
|
|
79,060 |
|
|
|
8,696 |
|
Deferred stock-based compensation |
|
|
|
|
|
|
(630 |
) |
Accumulated deficit |
|
|
(49,199 |
) |
|
|
(39,661 |
) |
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
29,876 |
|
|
|
(31,593 |
) |
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit) |
|
$ |
35,749 |
|
|
$ |
16,532 |
|
|
|
|
|
|
|
|
The accompanying notes to the financial statements are an integral part of these statements.
4
VALERA PHARMACEUTICALS, INC
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net product
sales |
|
$ |
2,909 |
|
|
$ |
3,668 |
|
|
$ |
14,649 |
|
|
$ |
21,633 |
|
Licensing
revenue |
|
|
104 |
|
|
|
10 |
|
|
|
116 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net
revenue |
|
|
3,013 |
|
|
|
3,678 |
|
|
|
14,765 |
|
|
|
21,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
sales |
|
|
883 |
|
|
|
809 |
|
|
|
3,997 |
|
|
|
4,783 |
|
Research and
development |
|
|
1,880 |
|
|
|
1,490 |
|
|
|
5,714 |
|
|
|
4,411 |
|
Selling and
marketing |
|
|
3,226 |
|
|
|
2,911 |
|
|
|
9,705 |
|
|
|
8,232 |
|
General and
administrative |
|
|
1,987 |
|
|
|
1,595 |
|
|
|
5,598 |
|
|
|
4,128 |
|
Amortization of
intangible
assets |
|
|
26 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and
expenses |
|
|
8,002 |
|
|
|
6,805 |
|
|
|
25,066 |
|
|
|
21,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
operations |
|
|
(4,989 |
) |
|
|
(3,127 |
) |
|
|
(10,301 |
) |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
269 |
|
|
|
20 |
|
|
|
774 |
|
|
|
49 |
|
Interest
expense
|
|
|
|
|
|
|
(1 |
) |
|
|
(27 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income
taxes |
|
|
(4,720 |
) |
|
|
(3,108 |
) |
|
|
(9,554 |
) |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from income
taxes |
|
|
(36 |
) |
|
|
(300 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(4,684 |
) |
|
$ |
(2,808 |
) |
|
$ |
(9,538 |
) |
|
$ |
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per
share |
|
$ |
(0.31 |
) |
|
$ |
(1.68 |
) |
|
$ |
(0.73 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income
per
share |
|
$ |
(0.31 |
) |
|
$ |
(1.68 |
) |
|
$ |
(0.73 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average
number of shares
outstanding |
|
|
14,906 |
|
|
|
1,667 |
|
|
|
13,123 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
number of shares
outstanding |
|
|
14,906 |
|
|
|
1,667 |
|
|
|
13,123 |
|
|
|
11,358 |
|
The accompanying notes to the financial statements are an integral part of these statements.
5
VALERA PHARMACEUTICALS, INC
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2006
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Deferred |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Equity (Deficit) |
|
Balances at December 31, 2005 |
|
|
1,667 |
|
|
$ |
2 |
|
|
$ |
8,696 |
|
|
$ |
(630 |
) |
|
$ |
(39,661 |
) |
|
$ |
(31,593 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,538 |
) |
|
|
(9,538 |
) |
Issuance of common stock from
initial public offering |
|
|
3,863 |
|
|
|
4 |
|
|
|
30,201 |
|
|
|
|
|
|
|
|
|
|
|
30,205 |
|
Conversion of preferred stock
into common stock |
|
|
9,356 |
|
|
|
9 |
|
|
|
39,916 |
|
|
|
|
|
|
|
|
|
|
|
39,925 |
|
Exercise of stock options |
|
|
49 |
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
Elimination of deferred
compensation related to adoption
of FAS 123(R) |
|
|
|
|
|
|
|
|
|
|
(630 |
) |
|
|
630 |
|
|
|
|
|
|
|
|
|
Expense related to options
granted to non-employees |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Compensation expense related to
employee stock options |
|
|
|
|
|
|
|
|
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2006 |
|
|
14,935 |
|
|
$ |
15 |
|
|
$ |
79,060 |
|
|
$ |
|
|
|
$ |
(49,199 |
) |
|
$ |
29,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the financial statements are an integral part of these statements.
6
VALERA PHARMACEUTICALS, INC
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,538 |
) |
|
$ |
151 |
|
Adjustments to reconcile net (loss) income to net cash used in operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
466 |
|
|
|
352 |
|
Amortization of deferred financing fees |
|
|
51 |
|
|
|
|
|
Allowances for accounts receivable |
|
|
40 |
|
|
|
206 |
|
Expense related to options granted to non-employees |
|
|
(1 |
) |
|
|
72 |
|
Stock based compensation |
|
|
727 |
|
|
|
(56 |
) |
Changes in assets and liabilities which provided (used) cash |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,137 |
|
|
|
(859 |
) |
Inventories |
|
|
(2,378 |
) |
|
|
(1,564 |
) |
Restricted cash |
|
|
|
|
|
|
100 |
|
Prepaid expenses and other current assets |
|
|
(115 |
) |
|
|
(403 |
) |
Security
deposits |
|
|
|
|
|
|
(46 |
) |
Accounts payable |
|
|
1,812 |
|
|
|
(458 |
) |
Accrued liabilities |
|
|
(2,293 |
) |
|
|
2,712 |
|
Deferred revenue |
|
|
(329 |
) |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(9,421 |
) |
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(3,705 |
) |
|
|
(1,722 |
) |
Purchase of product rights |
|
|
(525 |
) |
|
|
|
|
Purchase of investment in Spepharm |
|
|
(5 |
) |
|
|
|
|
Purchase of investments held-to-maturity |
|
|
(5,982 |
) |
|
|
|
|
Proceeds from the sale of investment held-to-maturity |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7,217 |
) |
|
|
(1,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
31,734 |
|
|
|
1 |
|
Payment of capital lease obligations |
|
|
(20 |
) |
|
|
(13 |
) |
Payment of notes payable |
|
|
(1,525 |
) |
|
|
|
|
Deferred financing costs |
|
|
|
|
|
|
(75 |
) |
Deferred offering costs |
|
|
|
|
|
|
(1,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
30,189 |
|
|
|
(1,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
13,551 |
|
|
|
(2,484 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
2,340 |
|
|
|
5,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,891 |
|
|
$ |
2,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock |
|
$ |
39,925 |
|
|
$ |
|
|
Acquisition of an asset through a capital lease |
|
$ |
28 |
|
|
$ |
|
|
The accompanying notes to the financial statements are an integral part of these statements.
7
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED
Note 1. Organization and Description of Business
Valera Pharmaceuticals, Inc. (Valera or the Company) is a specialty pharmaceutical company
concentrating on the development, acquisition and commercialization of products for the treatment
of urological and endocrine conditions, diseases and disorders, including products that utilize its
Hydron implant proprietary technology. The Companys headquarters and manufacturing operations are
located in Cranbury, New Jersey. Valera was incorporated in the state of Delaware on May 30, 2000.
Recent Developments
On September 7, 2006, the Company announced that the Food and Drug Administration (FDA) had
accepted the submission of its New Drug Application (NDA) for Supprelin®-LA, a 12-month implant for
treating central precocious puberty (CPP) or the early onset of puberty in children. Accordingly,
under the Prescription Drug User Fee Act (PDUFA) guidelines, the FDA is expected to complete its
review and act upon this NDA submission by the PDUFA required date of May 3, 2007. In November
2005, the FDA granted Supprelin®-LA orphan drug designation, which provides seven years marketing
exclusivity from date of marketing approval as well as certain economic benefits and tax credits.
The Company also announced in September 2006 that its Supprelin®-LA manufacturing facilities in
Cranbury, New Jersey successfully passed a recent FDA pre-approval inspection.
On September 27, 2006, the Company entered into a License and Distribution Agreement with
Spepharm Holding B.V. (Spepharm). Under the terms of the agreement, the Company will give
Spepharm the exclusive licensing and distributing rights to its products under the trademarks
Vantas® and Supprelin® in the European Union as well as Norway and Switzerland for a period of ten
years, unless sooner terminated as provided by the agreement. Spepharm will pay the Company for
the Companys supply and Spepharms distribution of the products under the agreement an aggregate
amount equal to forty percent (40%) of Net Sales (the Royalty Amount) as defined by the agreement
based on an established transfer price. In addition, following the end of each quarter, Spepharm
will pay to the Company an amount equal to the difference between (a) the aggregate Royalty Amount
for such calendar quarter minus (b) the aggregate transfer prices paid by Spepharm during such
calendar quarter.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with
the Securities and Exchange Commissions regulations for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the information and notes
required by U.S. generally accepted accounting principles (GAAP) for complete financial statements.
The accounting policies the Company follows are set forth in Note 2, Summary of Significant
Accounting Policies, to the Companys financial statements in its Annual Report on Form 10-K for
the year ended December 31, 2005. The following notes should be read in conjunction with such
policies and other disclosures in the Form 10-K. Interim results are not necessarily indicative of
results for a full year.
In the opinion of management, the accompanying unaudited interim financial statements contain
all material adjustments (consisting of normal, recurring accruals) necessary to fairly present the
Companys financial position as of September 30, 2006, the results of the Companys operations for
the three and nine months ended September 30, 2006 and 2005, and the Companys cash flows for the
nine months ended September 30, 2006 and 2005.
Reclassifications
Certain reclassifications have been made to the prior periods financial information to
conform to the September 30, 2006 presentation.
8
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Use of Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months
or less to be cash and cash equivalents.
Investments Held-to-Maturity
The Company has investments in certain debt securities that have been classified on the
balance sheet as investments held-to-maturity in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Investments held-to-maturity are recorded on
the balance sheet at cost. Realized gains and losses on sales of investments are determined using
the specific identification method.
Allowances for Accounts Receivable
The Company maintains allowances for accounts receivable, which include an allowance for
doubtful accounts related to the estimated losses that may result from the inability of its
customers to make required payments. This allowance is determined based upon historical experience
and any specific customer collection issues that have been identified. The Company began selling
its first product on November 8, 2004 and has not experienced significant credit losses related to
an individual customer or groups of customers in any particular industry or geographic area. Also
included in the allowances for accounts receivable is an allowance for early payment discounts.
Inventory
The Company values its inventory at the lower of cost (determined by the first-in, first-out
method) or market. The Company regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based primarily on estimated forecasts of product
demand and production requirements. The Companys estimate of future product demand may prove to
be inaccurate, in which case it may have understated or overstated the provision required for
excess and obsolete inventory. In the future, if the Companys inventory is determined to be
overvalued, the Company would be required to recognize such costs in costs of product sales at the
time of such determination. Likewise, if the inventory is determined to be undervalued, the
Company may have recognized excess cost of product sales in previous periods and would be required
to recognize such additional operating income at the time of sale.
In November 2004, the FASB issued SFAS No. 151, Inventory Costsan Amendment of ARB No. 43,
Chapter 4. The standard requires abnormal amounts of idle facility and related expenses to be
recognized as current period charges and also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company adopted SFAS No 151 on January 1, 2006. The adoption of SFAS No. 151 did not
have a material impact on the Companys financial statements.
Property, Plant and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated useful lives of the
respective assets, generally three to seven years. Leasehold improvements and capitalized leases
are recorded at the fair market value at the inception of the leases and are amortized over the
shorter period of their estimated useful life or the lease ranging from five to ten years.
Amortization of assets recorded under capital leases is included in depreciation and amortization
expense.
9
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Deferred Offering and Financing Costs
Costs incurred in relation to the Companys initial public offering were deferred at December
31, 2005 and have been subsequently netted against gross proceeds raised from the initial public
offering of the Companys common stock, which closed on February 7, 2006. Costs incurred in
relation to the Companys line of credit were deferred and are being amortized over the two-year
term of the loan and are included in other non current assets.
Investment Spepharm
On July 17, 2006, the Company entered into an Investment and Shareholders Agreement in which
the Company received a 19.9% ownership interest in a newly created Dutch company called Spepharm
Holding B.V. (Spepharm) for a nominal amount of approximately $5,000. Spepharm and its European
specialty pharmaceutical group of companies are focusing on becoming one of the leading suppliers
of specialty urology and endocrinology products to the European market place. The investment is included in other non current assets.
Net Product Sales
Net product sales are presented net of estimated returns and price adjustments, early payment
discounts, group purchasing fees and credit card fees.
Revenue Recognition
The Companys revenue recognition policies are in accordance with Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements
(SAB 104), and SFAS No. 48, Revenue Recognition When Right of Return Exists (SFAS 48), which
provides guidance on revenue recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and Exchange Commission. SFAS 48 and SAB
104 require that four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the sellers
price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on managements judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the collectibility of
those fees. Should changes in conditions cause management to determine that these criteria are not
met for certain future transactions, revenue recognition for those transactions will be delayed and
the Companys revenue could be adversely affected.
Allowances have been recorded for any potential returns or adjustments in accordance with the
Companys policy. Returns are allowed for damaged or outdated goods. As of September 30, 2006,
the Company had a reserve of approximately $214,000 for returns and adjustments, all of which
related to sales made in 2006. As of September 30, 2006 and at December 31, 2005, there was
approximately $20,000 and $300,000 of retail value of Vantas, respectively, at distributors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributors |
|
|
Physicians |
|
|
Total |
|
For the nine months ended September 30, 2006 |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Allowance balance at December 31, 2005 |
|
$ |
19 |
|
|
$ |
320 |
|
|
$ |
339 |
|
Provision related to sales for Fiscal 2006 |
|
|
15 |
|
|
|
954 |
|
|
|
969 |
|
Returns and adjustments related sales in Fiscal 2004 |
|
|
|
|
|
|
(50 |
) |
|
|
(50 |
) |
Returns and adjustments related sales in Fiscal 2005 |
|
|
(1 |
) |
|
|
(325 |
) |
|
|
(326 |
) |
Returns and adjustments related sales in Fiscal 2006 |
|
|
(11 |
) |
|
|
(707 |
) |
|
|
(718 |
) |
|
|
|
|
|
|
|
|
|
|
Allowance balance at September 30, 2006 |
|
$ |
22 |
|
|
$ |
192 |
|
|
$ |
214 |
|
|
|
|
|
|
|
|
|
|
|
10
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributors |
|
|
Physicians |
|
|
Total |
|
For the nine months ended September 30, 2005 |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Allowance balance at December 31, 2004 |
|
$ |
28 |
|
|
$ |
316 |
|
|
$ |
344 |
|
Provision related to sales for Fiscal 2005 |
|
|
|
|
|
|
1,784 |
|
|
|
1,784 |
|
Returns and adjustments related sales in Fiscal 2004 |
|
|
|
|
|
|
(288 |
) |
|
|
(288 |
) |
Returns and adjustments related sales in Fiscal 2005 |
|
|
(4 |
) |
|
|
(1,089 |
) |
|
|
(1,093 |
) |
|
|
|
|
|
|
|
|
|
|
Allowance balance at September 30, 2005 |
|
$ |
24 |
|
|
$ |
723 |
|
|
$ |
747 |
|
|
|
|
|
|
|
|
|
|
|
Customer Sales Urologists
The Companys revenue from product sales is recognized when there is persuasive evidence an
arrangement exists, the price is fixed in accordance with the Companys Customer Price List and/or
approved exception pricing, or determinable from executed contracts, delivery to the customer has
occurred and collectibility is reasonably assured. The Company uses contracts, purchase orders,
sales orders directly taken by product specialists and sales order confirmations to determine the
existence of an arrangement. Title to the product is taken upon delivery of the product, at which
time risk of loss shifts to the customer. Billing does not take place until the day after shipment
has occurred. The Company uses shipping documents and is provided with third party proof of
delivery to verify delivery to its customers.
Customer Sales Distributors Sales
With respect to sales to distributors, revenue is recognized upon shipment, as the title,
risks and rewards of ownership of the products pass to the distributors and the selling price of
the Companys product is fixed and determinable at that point, as long as the Company believes the
product will be sold by the distributor within one to three months from the shipment of the product
by the Company to the distributor. If the Company believes the product will not be resold within
three months, revenue will be deferred until the product is sold and the product held by the
distributor will be classified as an asset on the Companys financial statements until it is sold
by the distributor. As of September 30, 2006 and at December 31, 2005, the Company deferred
approximately $0 and $329,000 of revenue and recorded $0 and $44,000 of inventory on consignment,
respectively, The 2005 amounts related to product sold to distributors in the fourth quarter of
2005 that were not resold by distributors in accordance with the Companys policy. Payment is due
based upon the terms of the contract. The distributor is responsible for selling and distributing
the product to its customer base and the rights for return are restricted to the Companys
published return policy in effect for all customers.
Royalties
Licensing revenue from royalty arrangements are recorded on a cash basis due to the
uncertainties regarding calculations, timing and collections. Royalty expense is recorded as the
corresponding revenue is recognized. Royalty expense is included in cost of product sales in the
statement of operations.
Shipping and Handling Costs
Shipping and handling costs incurred for inventory purchases and product shipments are
included within cost of product sales in the statements of operations.
Research and Development
Costs incurred in connection with research and development activities are expensed as
incurred. These costs consist of direct and indirect costs associated with specific projects as
well as fees paid to various entities that perform research for the Company.
Pre-clinical Study and Clinical Trial Expenses
Research and development expenditures are charged to operations as incurred. The Companys
expenses related to clinical trials are based on actual and estimates of the services received and
efforts expended pursuant to contracts with multiple research institutions and clinical research
organizations that conduct and manage clinical trials on the Companys behalf. The financial terms
of these agreements are subject to negotiation and vary from contract to contract and may result in
uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a
fixed fee or unit price. Payments under the contracts depend on factors such as the successful
enrollment of patients or the completion of clinical trial milestones. Expenses related to
clinical trials generally
11
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
are accrued based on contracted amounts applied to the level of patient enrollment and activity
according to the protocol. If timelines or contracts are modified based upon changes in the
clinical trial protocol or scope of work to be performed, the Company modifies its estimates
accordingly on a prospective basis.
Advertising Costs
The Company charges advertising costs to selling and marketing expense as incurred.
Intangible Assets
On March 31, 2006, the Company completed its acquisition of the product rights associated with
the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada. As of
September 30, 2006, the Company has an intangible asset of approximately $473,000 associated with
such product rights. The intangible asset was recorded at its original cost of $525,000, less
accumulated amortization of approximately $52,000. Intangible assets are stated at cost, less
accumulated amortization, and are amortized over their estimated useful lives using the
straight-line method. The Company estimates that the useful life of the Valstar product rights is
5 years. The Company periodically reviews the original estimated useful lives of long-lived assets
and makes adjustments when appropriate.
Stock-Based Compensation
The Company adopted SFAS No. 123(R), Shared-Based Payment on January 1, 2006. SFAS 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure is no longer
an alternative. Under SFAS 123(R), the options the Company granted in prior years as a non-public
company (prior to the initial filing of its Registration Statement in March 2005) that were valued
using the minimum value method, will not be expensed in 2006 or future periods. Options granted as
a non-public company and accounted for using the intrinsic value method (cheap stock), will
continue to be expensed over the vesting period. The Company adopted the prospective transition
method for these options. Options granted as a public company will be expensed under the modified
prospective method.
SFAS No. 123(R) does not change the accounting guidance for how the Company accounts for
options issued to non employees. The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. As such, the value of such options is periodically re-measured and income or
expense is recognized during their vesting terms.
Deferred Compensation
At December, 31 2005, the Company had deferred compensation of approximately $630,000. In
accordance with the adoption of FAS 123(R), all deferred compensation related to employee stock
options has been eliminated. As of September 30, 2006, the deferred compensation balance was $0.
Income Taxes
The Company utilizes the asset and liability method specified by Statement of Financial
Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance is provided when it is
more likely than not that some portion or all of a deferred tax asset will not be realized.
Long-lived Assets
The Company assesses the recoverability of long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future operating cash flows.
If impairment is indicated, the Company measures the amount of such impairment by comparing the
fair value to the carrying value. There have been no indicators of impairment through September
30, 2006.
12
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Concentration Risks
The financial instrument that potentially subjects the Company to concentration of credit risk
is cash. The Company places its cash with high-credit quality financial institutions.
Concentrations of credit risk, with respect to this financial instrument, exist to the extent of
amounts presented in the financial statements.
The Company generated all of its product sales for the nine months ended September 30, 2006
and 2005 from its product Vantas. In addition, for the three months ended September 30, 2006 and
2005, one customer accounted for 2.4% and 11.4%, respectively of the Companys net unit sales. The
same customer accounted for 6.0% and 7.8% respectively, of the Companys net unit sales for the
nine months ended September 30, 2006 and 2005 and 0% of its outstanding receivables as of September
30, 2006 and at December 31, 2005, respectively.
The Company is dependent on single suppliers for certain raw materials, including histrelin,
the active pharmaceutical ingredient in Vantas. The Company does not have an agreement with the
supplier of histrelin.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair
values.
Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48 Accounting for Uncertainty in Income Taxes which
clarifies the accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
requires an entity to recognize the benefit of tax positions only when it is more likely than not,
based on the positions technical merits, that the position would be sustained upon examination by
the respective taxing authorities. The tax benefit is measured as the largest benefit that is more
than fifty-percent likely of being realized upon final settlement with the respective taxing
authorities. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 is
not expected to have a material effect on the results of operations or financial position of the
Company.
In September 2006, the FASB issued Statement of Accounting Standards No. 157 (SFAS 157),
Fair Value Measurements, which defines fair value, establishes guidelines for measurements but
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted,
provided the company has not yet issued financial statements, including for interim periods, for
that fiscal year. The Company is evaluating the impact of SFAS 157, but does not expect the
adoption of SFAS 157 to have a material impact on the Companys financial position, results of
operations or cash flows.
Note 3. Investments
The Company has investments in certain debt securities that have been classified on the
balance sheet as investments held-to-maturity in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Investments held-to-maturity have been
recorded on the balance sheet at cost. Realized gains and losses on sales of investments are
determined using the specific identification method. In August 2006, one U.S. government and
agency security matured and was sold by the Company for $3,000,000. No realized gains or losses
were recognized on the transaction. The Company did not have any investments as of December 31,
2005.
13
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
The amortized cost, gross unrecognized gains and losses, and fair value of the Companys
held-to-maturity investments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
Held-to-Maturity |
|
|
(in thousands) |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrecognized |
|
Unrecognized |
|
Fair |
Description of Securities |
|
Cost |
|
Gains |
|
Losses |
|
Value |
U.S. government and agencies securities |
|
$ |
2,982 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
2,984 |
|
The fair value of the Companys held to maturity securities as of September 30, 2006, by
contractual maturity, is shown below. Expected maturities may differ from contract maturities
because borrowers may have the right to prepay and creditors may have the right to call certain
obligations.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
Held-to-Maturity |
|
|
|
(in thousands) |
|
|
|
Amortized |
|
|
Fair |
|
Maturity |
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
2,982 |
|
|
$ |
2,984 |
|
Due after one year through five years |
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
|
|
|
|
|
|
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,982 |
|
|
$ |
2,984 |
|
|
|
|
|
|
|
|
Note 4. Inventory
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
870 |
|
|
$ |
463 |
|
Work-in-process |
|
|
4,004 |
|
|
|
2,426 |
|
Finished goods |
|
|
695 |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
$ |
5,569 |
|
|
$ |
3,191 |
|
|
|
|
|
|
|
|
The preceding amounts are net of inventory reserves of approximately $1.1 million and $1.2
million as of September 30, 2006 and at December 31, 2005, respectively, for certain raw materials
and for certain products that failed to meet the Companys quality control specifications.
14
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Note 5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
Useful Lives |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Laboratory equipment |
|
5 years |
|
$ |
1,794 |
|
|
$ |
1,531 |
|
Furniture and Fixtures |
|
7 years |
|
|
185 |
|
|
|
161 |
|
Office equipment |
|
5 years |
|
|
136 |
|
|
|
108 |
|
Computer equipment |
|
3 years |
|
|
481 |
|
|
|
417 |
|
Computer software |
|
3 years |
|
|
301 |
|
|
|
200 |
|
Construction in process |
|
|
|
|
|
|
5,650 |
|
|
|
2,526 |
|
Leasehold improvements |
|
1-10 years |
|
|
754 |
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,301 |
|
|
|
5,568 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(1,788 |
) |
|
|
(1,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
$ |
7,513 |
|
|
$ |
4,194 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense and amortization for the three months ended September 30, 2006 and 2005
was approximately $148,000 and $153,000, respectively. Depreciation expense and amortization for
the nine months ended September 30, 2006 and 2005 was approximately $414,000 and $352,000,
respectively. There were property, plant and equipment assets totaling approximately $96,000 as of
September 30, 2006 and $68,000 at December 31, 2005, respectively, subject to capital lease
obligations with accumulated amortization of approximately $66,000 and $54,000 as of September 30,
2006 and at December 31, 2005, respectively.
The Company is currently in the process of expanding its manufacturing facilities in order to
support current and future product candidates. The costs related to the expansion are captured in
the table above as Construction in process. The expansion is expected to be completed in the
fourth quarter of 2006.
Note 6. Deferred Offering and Financing Costs
The Company had deferred offering costs of $0 and approximately $1.4 million as of September
30, 2006 and at December 31, 2005, respectively. The Company netted its deferred offering costs
against the gross proceeds raised from the initial public offering which closed on February 7,
2006. In connection with the Companys line of credit, the Company had deferred financing costs of
approximately $73,000 and $124,000 as of September 30, 2006 and at December 31, 2005, respectively.
Deferred financing costs are being amortized through interest expense over the two year term of
the loan and are included in other non current assets.
Note 7. Credit Line Agreement (Note Payable)
In October 2005, the Company entered into a two-year, $7,500,000 line of credit with Merrill
Lynch Capital. Under the line of credit, the amount the Company may borrow at any given time is
dependent upon its accounts receivable balance and related aging of such accounts. In June 2006,
the line of credit was amended for interest, covenant and operational terms. Borrowings under the
amended line of credit bear an initial interest rate at the sum of the one-month LIBOR rate plus
3.25% (8.57% as of September 30, 2006). The Company is subject to certain covenants under the
amended line of credit. In connection with the amended line of credit, the Company pledged all of
its assets, with the exception of intellectual property, to Merrill Lynch. As of September 30,
2006 and at December 31, 2005, the Company had $0 and approximately $1.5 million outstanding under
the amended line of credit, respectively. In February 2006, the Company used a portion of the net
proceeds from its initial public offering to repay amounts outstanding under the line of credit.
15
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Note 8. Capitalization
Common Stock
The Company had 14,934,807 and 1,667,082 shares of common stock, par value $0.001, outstanding
as of September 30, 2006 and at December 31, 2005, respectively. The Company is authorized to
issue 30,000,000 shares of common stock with a par value of $0.001 per share. Each holder of
common stock is entitled to one vote of each share of common stock held of record on all matters on
which stockholders generally are entitled to vote.
In February 2006, the Company closed its IPO in which it issued 3,862,500 shares of its common
stock at $9.00 per share. In conjunction with this offering all of the Companys outstanding
preferred stock converted into 9,355,714 shares of common stock. As a result, the Company had
14,885,296 shares of common stock outstanding after closing its initial public offering. During
the nine months ended September 30, 2006, 49,511 shares of common stock were issued as a result of
stock option exercises.
Convertible Preferred Stock
All of the Companys outstanding preferred stock was converted into common stock in
conjunction with the initial public offering. In February 2006, the Company filed an amended and
restated Certificate of Incorporation that removed the designations, rights and preferences of the
convertible preferred stock.
Note 9. Stock-Based Compensation
The Company adopted SFAS No. 123(R), Shared-Based Payment on January 1, 2006. SFAS 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure is no longer
an alternative. Under SFAS 123(R), the options the Company granted in prior years as a non-public
company (prior to the initial filing of its Registration Statement in March 2005) that were valued
using the minimum value method, will not be expensed in 2006 or future periods. Options granted as
a non-public company and accounted for using the intrinsic value method (cheap stock), will
continue to be expensed over the vesting period. The Company adopted the prospective transition
method for these options. Options granted as a public company will be expensed under the modified
prospective method.
SFAS No. 123(R) does not change the accounting guidance for how the Company accounts for
options issued to non employees. The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As such, the
value of such options is periodically re-measured and income or expense is recognized during their
vesting terms.
Under the modified-prospective-transition method, under SFAS No. 123(R), the Company is
required to record compensation expense for all awards granted after the date of adoption and for
the unvested portion of previously granted awards that remain outstanding as of the beginning of
the period of adoption. The Company measured stock-based compensation using the Black Scholes
option pricing model.
The following ranges of assumptions were used to compute employee stock-based compensation:
|
|
|
|
|
Risk- free interest rate |
|
|
3.90% - 5.01 |
% |
Expected volatility |
|
|
61.1% - 66.15 |
% |
Expected dividend yield |
|
|
0.0 |
% |
Expected life (in years) |
|
|
6.25 |
|
Forfeiture rate |
|
|
0% - 4.0 |
% |
Weighted average fair value at date of grant |
|
$ |
6.20 |
|
Expected volatility is based upon an appropriate peer group within the Companys industry
sector. The expected life of the awards represents the period of time that options granted are
expected to be outstanding.
The Company used historical information to estimate forfeitures within the valuation model.
The risk-free rate for periods within the expected life of the option is based on implied yields on
U.S. Government Issues in effect at the time of grant. Compensation cost is recognized using a
straight-line method over the vesting or service period and net of estimated forfeitures.
16
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
The following table presents all employee stock based compensation costs recognized in the
Companys statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended
September 30, |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Employee
stock-based compensation under intrinsic value method |
|
$ |
42 |
|
|
$ |
127 |
|
|
$ |
151 |
|
|
$ |
(56 |
) |
Employee
stock-based
compensation under fair value method |
|
|
261 |
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Employee stock-based compensation |
|
$ |
303 |
|
|
$ |
127 |
|
|
$ |
727 |
|
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, as a result of the Companys marked to market of previous repriced options, the
Company had to reverse previous recorded stock-based compensation.
The
incremental stock-based compensation expense recognized in connection
with the adoption of FAS 123(R) increased the net loss for the
three and nine month periods ended September 30, 2006, by
approximately $261,000 and $576,000, respectively, and increased the
loss per share, basic and diluted, $(0.02), and $(0.04), respectively.
The following table illustrates the pro-forma effect on net income per share if the Company
recorded compensation expense based on the fair value method for all employee stock-based
compensation awards:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
|
|
(in thousands, except per |
|
|
(in thousands, except per |
|
|
|
share amounts) |
|
|
share amounts) |
|
Net income to common stock holders as reported |
|
$ |
(2,808 |
) |
|
$ |
151 |
|
Add: non-cash employee compensation as reported |
|
|
127 |
|
|
|
(56 |
) |
Deduct: total employee stock-based compensation
expense determined under fair value based method for
all awards |
|
|
(218 |
) |
|
|
(527 |
) |
|
|
|
|
|
|
|
Net income to common stockholders pro-forma |
|
$ |
(2,899 |
) |
|
$ |
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share as reported |
|
$ |
(1.68 |
) |
|
$ |
0.09 |
|
Basic income per share pro-forma |
|
$ |
(1.74 |
) |
|
$ |
(0.26 |
) |
Diluted income per share as reported |
|
$ |
(1.68 |
) |
|
$ |
0.01 |
|
Diluted income per share pro-forma |
|
$ |
(1.74 |
) |
|
$ |
(0.26 |
) |
The following table is a summary of stock option activity under the Companys Equity Incentive
Plan (the Plan) for the Companys common stock at December 31, 2005, and changes during the nine
months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Common |
|
|
Average |
|
|
Aggregate |
|
|
Average |
|
|
|
Stock |
|
|
Exercise |
|
|
Intrinsic Value |
|
|
Contractual |
|
|
|
Options |
|
|
Price |
|
|
(in thousands) |
|
|
Life |
|
Outstanding at December 31, 2005 |
|
|
1,265,849 |
|
|
$ |
4.25 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
350,200 |
|
|
$ |
9.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(49,511 |
) |
|
$ |
3.05 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(101,784 |
) |
|
$ |
6.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
1,464,754 |
|
|
$ |
5.26 |
|
|
$ |
611 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
617,146 |
|
|
$ |
3.59 |
|
|
$ |
155 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of the options exercised during the nine months ended September 30,
2006 was $123,729. As of September 30, 2006, there was approximately $2.7 million of total
employee unrecognized compensation cost related to non-vested stock-based compensation awards
granted under the Plan. That cost is expected to be recognized over a weighted average period of
three years.
17
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
For the nine months ended September 30, 2006 and 2005, the Company granted a total of 0 and
10,833 options, respectively, to certain consultants. The Company has accounted for non-employee
options in accordance with EITF 96-18 and, accordingly, recorded non-cash (income) expense of
approximately $(6,000) and $14,000 for the three months ended September 30, 2006 and 2005,
respectively. The Company recorded a non-cash (income) expense of approximately $(1,000) and
$72,000 for the nine months ended September 30, 2006 and 2005, respectively.
For the three months ended September 30, 2006 and 2005, the company granted stock options with
exercise prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of |
|
Weighted Average |
|
Weighted Average |
|
Intrinsic Value |
Grants Made During Quarter Ended |
|
Options Granted |
|
Exercise Price |
|
Fair Value per Share |
|
per Share |
September 30, 2006
|
|
|
7,500 |
|
|
$ |
7.36 |
|
|
$ |
4.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
4,334 |
|
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
|
Note 10. Income Taxes
The benefit for federal, state and local income taxes for the three months ended September 30,
2006 and 2005 was $36,000 and $300,000, respectively. The benefit for federal, state and local
income taxes for the nine months ended September 30, 2006 and 2005 was $16,000 and $0,
respectively. Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting and the amount used for
income tax purposes. The Companys net deferred tax assets relate primarily to net operating loss
carry forwards, research and development tax credits, non-cash stock-based compensation, and
depreciation and amortization. As of September 30, 2006 and at December 31, 2005, a valuation
allowance was recorded to fully offset the net deferred tax asset.
Note 11. Net Income (Loss) Per Share
The Company computes its basic net income (loss) per share by dividing net income (loss) by the
weighted-average number of shares of common stock outstanding. Diluted net income (loss) per share
of common stock (Diluted EPS) is computed by dividing net income (loss) by the weighted-average
number of shares of common stock and dilutive common equivalent shares then outstanding as long as
such impact would not be anti-dilutive. All of the common stock equivalent shares for the three
and nine months ended September 30, 2006 have been excluded from the computation of diluted net
income (loss) per share as their effect would be anti-dilutive. All of the common stock equivalent
shares for the three months ended September 30, 2005 have been excluded from the computation of
diluted net income (loss) per share as their effect would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Net (loss) |
|
|
Shares |
|
|
Net (loss) |
|
|
Shares |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
|
(in thousands, except per share amounts) |
|
Basic net (loss) per share factors |
|
$ |
(4,684 |
) |
|
|
14,906 |
|
|
$ |
(2,808 |
) |
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred stock conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) per share factors |
|
$ |
(4,684 |
) |
|
|
14,906 |
|
|
$ |
(2,808 |
) |
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) per share |
|
$ |
(0.31 |
) |
|
|
|
|
|
$ |
(1.68 |
) |
|
|
|
|
Diluted net (loss) per share |
|
$ |
(0.31 |
) |
|
|
|
|
|
$ |
(1.68 |
) |
|
|
|
|
18
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Net (loss) |
|
|
Shares |
|
|
Net income |
|
|
Shares |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
|
(in thousands, except per share amounts) |
|
Basic net (loss) income per share factors |
|
$ |
(9,538 |
) |
|
|
13,123 |
|
|
$ |
151 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred stock conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,834 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share factors |
|
$ |
(9,538 |
) |
|
|
13,123 |
|
|
$ |
151 |
|
|
|
11,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share |
|
$ |
(0.73 |
) |
|
|
|
|
|
$ |
0.09 |
|
|
|
|
|
Diluted net (loss) income per share |
|
$ |
(0.73 |
) |
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
Note 12. Related Party Transactions
Sanders Morris Harris Inc. (SMH) and its affiliates own approximately 40% of BioPro
Pharmaceutical, Inc. and over 90% of Alpex Pharma S.A., two companies with which the Company has
agreements to distribute, develop and market its Vantas product. The Company received payments of
$100,000 and $0 during the three months ended September 30, 2006 and 2005, respectively, from
BioPro. The Company received payments of $100,000 and $300,000 during the nine months ended
September 30, 2006 and 2005, respectively, from BioPro. The Company made payments of $84,000 and
$241,000 during the three months ended September 30, 2006 and 2005, respectively, to Alpex. The
Company made payments of $145,000 and $393,000 during the nine months ended September 30, 2006 and
2005, respectively, to Alpex.
On July 17, 2006, the Company entered into the Shareholders Agreement pursuant to which the
Company received a 19.9% ownership in a newly created Dutch company called Spepharm Holding B.V.
In accordance with the Shareholders Agreement, David S. Tierney, M.D., Valeras President and
Chief Executive Officer and Mr. James Gale, the Companys Chairman of the Board of Directors, were
appointed as members of Spepharms initial supervisory board. Additional investors in Spepharm
include Life Sciences Opportunities Fund (Institutional) II, L.P and Life Sciences Opportunities
Fund II, L.P. Both funds are funds managed by, and affiliates of, SMH, whose affiliates own
approximately 36% of the outstanding common stock of the Company. Mr. Gale is a Managing Director
of SMH and the investment manager of such funds that hold shares of Valera and has sole voting and
dispositive power over such shares. SMH, along with a third party unaffiliated with the Company,
have committed EUR 20,000,000 to the Spepharm venture. As discussed in Note 1 to these Financial
Statements, on September 27, 2006, the Company entered into a License and Distribution Agreement
with Spepharm.
Note 13. Acquisition of Product
In March 2006, the Company completed the acquisition of certain assets of Anthra
Pharmaceuticals associated with its valrubicin business in the United States and Canada. The
Company will make: (i) installment payments totaling approximately $0.5 million; (ii) additional
payments of up to 13.5% of net sales depending upon the products formulation, indication and
market share; and (iii) certain milestone payments based upon achieving certain sales levels.
Anthras valrubicin business involved the manufacture and sale of valrubicin for use in the
treatment of bladder cancer. The product was distributed in the U.S. and Canada by third party
partners of Anthra. In the United States, the product was distributed under the trademark Valstar.
Product rights are stated at cost, less accumulated amortization, and are amortized over their
estimated useful lives using the straight-line method. The Company estimates that the useful life
of the Valstar product rights is 5 years. For the three and nine months ended September 30, 2006,
the Company recorded approximately $26,000 and $52,000, respectively, of amortization expense
associated with such product rights. The Company periodically reviews the original estimated
useful lives of long-lived assets and makes adjustments when appropriate. There were no such
adjustments made as of September 30, 2006.
Note 14. Purchase Commitments
On May 17, 2006, the Company entered into a supply agreement with Plantex USA Inc. whereby
Plantex would supply the Company with the active pharmaceutical ingredient (API)
N-Trifluroacetyl-adriamycin-14 valerate, otherwise known as Valrubicin,
19
in connection with the Companys anticipated launch of the product Valstar for the treatment
of bladder cancer. Under the agreement, the Company will only source API from Plantex in
connection with the development, manufacture or sale of, and securing regulatory approval for,
Valstar in the United States, its territories and possessions, and Canada (the Territory).
Plantex will manufacture and supply all of the Companys requirements for API for commercial sale
of Valstar in the Territory. Under the terms of the agreement, beginning in the calendar year
following the year in which the Company receives regulatory approval for the Valstar product in the
United States, the Company will be required to purchase a minimum of $1,000,000 of Valrubicin each
calendar year until the agreement expires. The agreement will expire ten years after the date of
the first commercial sale of Valstar.
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Introduction
The following information should be read in conjunction with the financial statements and
related notes in Part I, Item 1 of this Quarterly Report and with Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in the our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005. In addition to historical information, this
Form 10-Q contains forward-looking information. This forward-looking information is subject to
certain risks and uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in the following section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect managements
analysis only as of the date of this Form 10-Q. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances which arise later.
Readers should carefully review the risk factors described in our Annual Report on Form 10-K filed
with the SEC, as modified in our Quarterly Report on Form 10-Q filed with the SEC on August 9,
2006.
Overview
We are a specialty pharmaceutical company concentrating on the development, acquisition and
commercialization of products for the treatment of urological and endocrine conditions, diseases
and disorders, including products that utilize our proprietary technology. Our first product,
Vantas, was approved by the FDA in October 2004. Vantas is a 12-month hydrogel implant based on
our patented Hydron Technology indicated for the palliative treatment of advanced prostate cancer
that delivers histrelin, a luetinizing hormone-releasing hormone agonist, or LHRH agonist. We
began selling Vantas in November 2004 utilizing our sales force that is currently calling on
urologists in the United States that account for the majority of LHRH agonist product sales. Total
U.S. sales of LHRH agonist products for the palliative treatment of prostate cancer were
approximately $900 million in 2005 based on our estimates and IMS Health Incorporated data, with
the leading products being the three and four-month injection formulations. We believe that total
U.S. sales of LHRH agonist products declined by 10% in 2005, primarily as a result of lower prices
due to changes in Medicare reimbursement rates. We expect future reimbursement levels to continue
to decline, which will have an adverse effect on our net product sales. We believe that Vantas has
a competitive advantage over other LHRH agonist products because it delivers an even, controlled
dose of a LHRH agonist over a 12-month period, and is the only product indicated for the palliative
treatment of advanced prostate cancer that delivers histrelin, the most potent LHRH agonist
available.
We plan to seek marketing approvals for Vantas in various countries throughout the world. In
November 2005, we announced that we received approval to market Vantas in Denmark. In March 2006,
we announced that Paladin Labs received approval from Health Canada to market our Vantas product in
Canada. In July 2006, we submitted an application for regulatory approval in Germany, Ireland,
Italy, Spain and the United Kingdom. In July 2006, we announced a partnership with Spepharm to
market Vantas in Denmark and throughout Europe. As of September 30, 2006, in conjunction with one
of our marketing partners, Vantas has been submitted for regulatory approval in Thailand,
Singapore, Malaysia, Taiwan, Korea and Hong Kong.
In June 2006, we submitted a New Drug Application (NDA) to the U.S. Food and Drug
Administration for Supprelin-LA, a twelve-month implant for the treatment of central precocious
puberty. In September 2006, the FDA accepted our submission of our NDA for Supprelin-LA.
Accordingly, under the Prescription Drug User Fee Act (PDUFA) guidelines, the FDA is expected to
complete its review and act upon this NDA submission by the PDUFA required date of May 3, 2007.
In March 2006, we acquired Valstar a product for the treatment of bladder cancer that is no
longer responsive to conventional treatment such as surgery or topical drug application. We expect
to launch this product in the first quarter of 2007. In addition to Supprelin-LA, Valstar and
Vantas, we are developing a pipeline of proprietary product candidates for indications that include
acromegaly, opioid addiction, interstitial cystitis and nocturnal enuresis. Several of our product
candidates also utilize our Hydron
20
Technology delivery system. We intend to leverage our existing specialized sales force to
market certain of our product candidates, if approved, since the indications of these product
candidates are treated by many of the same physicians we are calling on for Vantas.
We expect to continue to spend significant amounts on the development and commercialization of
our product candidates. While we will be focusing on the clinical development of our later stage
product candidates in the near term, we expect to increase our spending on earlier stage clinical
candidates as well. We also aim to build our urological and endocrine product portfolio and
opportunistically acquire or in-license later-stage urological and endocrine products that are
currently on the market or require minimal development expenditures, or have some patent protection
or potential for market exclusivity or product differentiation. Further, we intend to collaborate
with major and specialty pharmaceutical companies to develop and commercialize products that are
outside of our core urology and endocrinology focus. Accordingly, we will need to generate
significant revenues or else need additional financing to fund these efforts.
Drug development in the United States and most countries throughout the world is a multi-stage
process controlled by the FDA and similar regulatory authorities in foreign countries. In the
United States, the FDA approval process for a new drug involves completion of pre-clinical studies
and the submission of the results of these studies to the FDA, together with proposed clinical
protocols, manufacturing information, analytical data and other information in an investigational
new drug application, which must become effective before human clinical trials may begin. Clinical
development typically involves three phases of study: Phase I, II and III. The most significant
expenses associated with clinical development are the Phase III clinical trials as they tend to be
the longest and largest studies conducted during the drug development stage. In responding to a
new drug application, the FDA may refuse to accept the application, or if accepted for filing, the
FDA may grant marketing approval, request additional information or deny the application if it
determines that the application does not provide an adequate basis for approval. In order to
commence clinical trials or marketing of a product outside the United States, we must obtain
approval of the applicable foreign regulatory authorities. Although governed by the laws and
regulations of the applicable country, clinical trials conducted outside the United States
typically are administered in a similar three-phase sequential process.
The successful development of our product candidates is highly uncertain. We cannot reasonably
estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the
development of, or the period in which material net cash inflows are expected to commence from any
of our product candidates due to the numerous risks and uncertainties associated with developing
drugs, including the uncertainty of:
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the scope, rate of progress and expense of our clinical trials and other research and development activities; |
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future clinical trial results; |
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the expense of clinical trials for additional indications; |
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the terms and timing of any collaborative, licensing and other arrangements that we may establish; |
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the expense and timing of regulatory approvals; |
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the expense of establishing clinical and commercial supplies of our product candidates and any
products that we may develop; |
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the effect of competing technological and market developments; and |
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the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. |
Research and development expenses consist primarily of costs incurred for clinical trials and
manufacturing development costs related to our clinical product candidates, personnel and related
costs related to our research and product development activities and outside professional fees
related to clinical development and regulatory matters. We do not disclose estimated research and
development costs for product candidates that are not yet in Phase III clinical trials.
Recent Events
On September 7, 2006, we announced that the FDA had accepted the submission of our NDA for
Supprelin®-LA, a 12-month implant for treating central precocious puberty (CPP) or the early onset
of puberty in children. Accordingly, under the Prescription Drug User Fee Act (PDUFA) guidelines,
the FDA is expected to complete its review and act upon this NDA submission by the PDUFA required
date of May 3, 2007. In November 2005, the FDA granted Supprelin®-LA orphan drug designation which
provides seven years marketing exclusivity from date of marketing approval as well as certain
economic benefits and tax credits. We also announced that our Supprelin-LA manufacturing
facilities in Cranbury, New Jersey successfully passed a recent FDA pre-approval inspection.
On September 27, 2006, we entered into a License and Distribution Agreement with Spepharm
Holding B.V. (Spepharm). Under the terms of the agreement, we will give Spepharm the exclusive
licensing and distributing rights to our products under the trademark Vantas® and Supprelin® in the
European Union as well as Norway and Switzerland for a period of ten years, unless sooner
terminated as provided by the agreement. Spepharm will pay us for our supply and Spepharms
distribution of the products under the
21
agreement an aggregate amount equal to forty percent (40%) of Net Sales (the Royalty Amount)
as defined by the agreement based on an established transfer price. In addition, following the end
of each quarter, Spepharm will pay us an amount equal to the difference between (a) the aggregate
Royalty Amount for such calendar quarter minus (b) the aggregate transfer prices paid by Spepharm
during such calendar quarter.
On
November 6, 2006, we announced that we finalized arrangements
with Johns Hopkins to begin clinical studies for our Naltrexone implant.
This is a subcutaneous implant that utilizes our Hydron technology to
deliver Naltrexone, over an extended period of time, for the treatment of
opioid addiction.
On November 8, 2006, we announced that we completed proof-of-concept studies on a flexible,
biodegradable polymer-based ureteral stent. Ureteral stents are plastic tubes inserted into the
ureter to allow urine to drain from the kidney to the bladder when the flow of urine may be
obstructed due to a number of conditions, including kidney stones and inflammation. Current
available ureteral stents require physician intervention for removal from the body. A
biodegradable ureteral stent could be naturally voided by the body, a potentially important
advantage over existing stents. We expect to move this program into larger porcine model studies
during the fourth quarter which, if successful, could lead to a 510K filing with the FDA in 2007.
Product Sales and Costs
We generate revenues from sales of Vantas, our lead product. We began commercial sales of
Vantas in November 2004. Prior to June 2006, all sales were in the United States. In June 2006,
we made our first international shipment of Vantas to Paladin Labs in Canada. In the United
States, we distribute Vantas directly to physicians, or through Besse Medical Distribution Company,
or Besse Medical, which is a subsidiary of AmerisourceBergen Corporation.
Our business is affected by physician utilization, pricing pressure from our competition and
Medicare or third party reimbursement, as well as other factors which may cause variances in our
revenue. Our sales of Vantas from launch in November 2004 through June 30, 2005 were supported, in
part, by favorable reimbursement rates, which decreased beginning in the third quarter of 2005.
Our initial favorable reimbursement rates were due to the fact that Vantas was a new product that
did not yet have an established average selling price or ASP, in connection with Medicare
reimbursement. As a result, Vantas was reimbursed at wholesale acquisition price, which is
typically higher than ASP. Vantas received an established ASP effective July 2005, which resulted
in lower reimbursement rates and a corresponding lower sales price to our customers. Our
historical net average selling prices to our customers are:
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For the three months ended: |
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Net Average Selling Price |
December 31, 2004 |
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2,520 |
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March 31, 2005 |
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$ |
2,628 |
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June 30, 2005 |
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$ |
2,586 |
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September 30, 2005 |
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$ |
2,099 |
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December 31, 2005 |
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$ |
1,801 |
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March 31, 2006 |
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$ |
1,620 |
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June 30, 2006 |
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$ |
1,562 |
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September 30, 2006 |
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$ |
1,478 |
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We expect future Medicare reimbursement levels to continue to decline for Vantas, which will
have an adverse effect on our net product sales. Reimbursement levels are currently set by the
twenty-three Medicare carriers in the United States which, in the aggregate, cover all fifty
states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based
on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or
LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by Medicare to be medically equivalent.
Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain
Medicare carriers have a policy which segregates twelve-month products from all other dosages,
including one, three, four and six month injectable products, and reimburses at different rates for
these two groups of products, sometimes referred to as a split policy. Finally, there are certain
Medicare carriers which state they have a policy which reimburses on an ASP or LCA methodology, but
which we believe make payments based upon a split policy.
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable products which are
reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies
with the Medicare carriers. We will deploy our sales resources in markets where we can sell our
products on an even par with the other products in the class. Nevertheless, we expect our net
product sales to continue to decline in the foreseeable future as a result of the declining
reimbursement rates for Vantas.
We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of
Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas
than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers
may alleviate the downward pressure on our net average selling price from the Medicare customers.
In addition, we are currently reviewing a number of strategic options to broaden the penetration of
Vantas into the LHRH market, including the evaluation of co-promotion opportunities.
22
Our cost of product sales are all related to the production of Vantas and represent the cost
of materials, overhead associated with the manufacture of Vantas, direct labor, distribution
charges and royalties. For a complete description of our royalty agreements please review our
Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Prior to approval of
Vantas in October 2004, we expensed all of our manufacturing costs as research and development.
Research and Development Expenses
Our research and development expenses consist of costs incurred for company-sponsored and
collaborative research and development activities including clinical trials. These expenses consist
primarily of direct and research related allocated overhead expenses such as facilities costs,
salaries and benefits and material supply costs. We do not track or report our research and
development expenses on a project basis as we do not have the internal resources or systems to do
so. To date, the vast majority of our research and development resources have been devoted to the
development of Vantas.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of sales and marketing personnel
compensation, sales force incentive compensation, travel, tradeshows, promotional materials and
programs, advertising and healthcare provider education materials and events.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel expenses for
accounting, human resources, outside consulting, information technology and corporate
administration functions. Other costs include administrative facility costs, regulatory fees, and
professional fees for legal and accounting services.
Amortization of Intangible Assets
The amortization of intangible assets relates to the acquisition of the product rights
associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in
Canada. The Company is amortizing the product rights over 5 years using the straight-line method.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The preparation of these financial statements requires us to make
judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported revenue and expenses during the reporting periods. We continually evaluate our
judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements,
the expected course of development, historical experience and 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 readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. The
list below is not intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically dictated by GAAP.
There are also areas in which our managements judgment in selecting any available alternative
would not produce a materially different result.
Revenue Recognition
Our revenue recognition policies are in accordance with Securities and Exchange Commission
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements (SAB
104), and SFAS No. 48, Revenue Recognition When Right of Return Exists (SFAS 48), which
provides guidance on revenue recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and Exchange Commission. SFAS 48 and SAB
104 require that four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the sellers
price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on managements judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the collectibility of
those fees. Should changes in conditions cause management to determine that these criteria are not
met for certain future transactions, revenue recognition for those transactions will be delayed and
our revenue could be adversely affected.
23
Allowances have been recorded for any potential returns or adjustments in accordance with our
policies. We historically have recorded allowances based upon a percentage of gross sales. We
distribute our product directly to physicians or through our distributor, Besse Medical. The
majority of our sales are made directly to physicians by our product specialists. We believe that
physicians typically order product on an as needed basis, and, therefore, typically maintain
inventory of our product only to cover their immediate and short-term future requirements. In
addition, our product specialists routinely confirm product utilization and inventory levels, if
any, as part of their normal sales calls with physicians. We continue to monitor our distribution
channels in order to assess the adequacy of our allowances. We do not believe that it is
reasonably likely that a material change will occur in the allowance as of September 30, 2006.
Pre-clinical Study and Clinical Trial Expenses
Research and development expenditures are charged to operations as incurred. Our expenses
related to clinical trials are based on actual and estimates of the services received and efforts
expended pursuant to contracts with multiple research institutions and clinical research
organizations that conduct and manage clinical trials on our behalf. The financial terms of these
agreements are subject to negotiation and vary from contract to contract and may result in uneven
payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed
fee or unit price. Payments under the contracts depend on factors such as the successful
enrollment of patients or the completion of clinical trial milestones. Expenses related to
clinical trials generally are accrued based on contracted amounts applied to the level of patient
enrollment and activity according to the protocol. If timelines or contracts are modified based
upon changes in the clinical trial protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
Stock-Based Compensation
We adopted SFAS No. 123(R), Shared-Based Payment on January 1, 2006. SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma disclosure is no longer an
alternative. Under SFAS 123(R), the options we granted in prior years as a non-public company
(prior to the initial filing of our Registration Statement in March 2005) that were valued using
the minimum value method, will not be expensed in 2006 or future periods. Options granted as a
non-public company and accounted for using the intrinsic value method (cheap stock), will continue
to be expensed over the vesting period. We adopted the prospective transition method for these
options. Options granted as a public company will be expensed under the modified prospective
method.
SFAS No. 123(R) does not change the accounting guidance for how we account for options issued
to non employees. We account for options issued to non-employees under SFAS No. 123 and EITF Issue
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. As such, the value of such options
is periodically re-measured and income or expense is recognized during their vesting terms.
Results of Operations
Three months ended September 30, 2006 compared with three months ended September 30, 2005
Net Product Sales. Net product sales for the three months ended September 30, 2006 and 2005
were approximately $2.9 and $3.7 million, respectively. The 21% decrease in net product sales was
primarily due to lower net average selling prices due to decreased Medicare reimbursement rates for
our Vantas product as well as increased competitive pricing in the class of LHRH drugs. For the
three months ended September 30, 2006, we sold 1,968 units of Vantas in the United States at a net
average selling price of $1,478 per unit as compared to 1,747 units at a net average selling price
of $2,099 for the same period in 2005.
Vantas is currently eligible for insurance reimbursement coverage. We expect future Medicare
reimbursement levels to continue to decline for Vantas, which will have an adverse effect on our
net product sales. Reimbursement levels are currently set by the twenty- three Medicare carriers
in the United States which, in the aggregate, cover all fifty states. Certain Medicare carriers
have a policy which sets the reimbursement rate for Vantas based on our ASP. Other Medicare
carriers have a policy that applies the least costly alternative, or LCA, methodology to Vantas.
LCA is a payment methodology that allows Medicare carriers to pay the same reimbursement for drugs
that have been determined by Medicare to be medically equivalent. Vantas is currently the least
costly alternative in the class of LHRH drugs. Further, certain Medicare carriers have a policy
which segregates twelve-month products from all other dosages, including one, three, four and six
month injectable products, and reimburses at different rates for these two groups of products, or a
split policy. Finally, there are certain Medicare carriers which state they have a policy which
reimburses on an ASP or LCA methodology, but which we believe make payments based upon a split
policy.
24
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable products which are
reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies
with the Medicare carriers. We will deploy our sales resources in markets where we can sell our
products on an even par with the other products in the class.
We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of
Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas
than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers
may alleviate the downward pressure on our net average selling price from the Medicare customers.
In addition, we are currently reviewing a number of strategic options to broaden the penetration of
Vantas into the LHRH market, including the evaluation of co-promotion opportunities.
Licensing Revenue. For the three months ended September 30, 2006 and 2005, we recorded
licensing revenues of approximately $104,000 and $10,000, respectively. In September 2006, we
received $100,000 from BioPro for licensing revenue related to the submission of Vantas for
regulatory approval in Taiwan. This payment is in accordance with the exclusive license and
distribution agreement with BioPro to sell Vantas in various countries in Asia. The remaining
$4,000 licensing revenue for the three months ended September 30, 2006 was from Hydron
Technologies. The entire $10,000 in licensing revenue during the three months ended September 30,
2005 was from Hydron Technologies.
Cost of Product Sales. Our cost of product sales for the three months ended September 30,
2006 and 2005 was approximately $0.9 million and $0.8 million, respectively. Gross margins as a
percentage of net product sales for the three months ended September 30, 2006 and 2005 were 70% and
78%, respectively. The decrease in gross margin percentage was primarily due to a decrease in the
net average selling prices of Vantas.
Research and Development Expense. Research and development expense for the three months ended
September 30, 2006 and 2005, was approximately $1.9 million and $1.5 million, respectively. The
27% increase was primarily due to expenses related to Valstar,
Supprelin, Octreotide and European filing fees
for Vantas. Expenses related to clinical trials and research projects pursuant to contracts with
research institutions and clinical research organizations represented 56% of our total research and
development expense for the three months ended September 30, 2006 compared to 50% of our research
and development expense for the three months ended September 30, 2005. Internal research and
development expense was approximately 44% and 50% of our total research and development expense for
the three months ended September 30, 2006 and 2005, respectively. We expect to continue to spend
significant amounts, including clinical trial costs, on the development for our product candidates.
In August 2006, the FDA requested an additional Phase I/II study for our Octreotide implant which
is expected to cost approximately $0.9 million. We expect to commence a Phase III trial for the
Octreotide implant in the first half of 2007. The Octreotide Phase III trial is expected to last
approximately eighteen months and is expected to cost approximately $6.0 million to $7.0 million.
Selling and Marketing Expense. Selling and marketing expense for the three months ended
September 30, 2006 and 2005 was approximately $3.2 million and $2.9 million, respectively. The 10%
increase was attributable to an increase in salaries, employee benefits, and travel related to an
increase in the number of employees dedicated to our sales efforts.
General Administrative Expense. General administrative expense for the three months ended
September 30, 2006 and 2005 was approximately $2.0 million and $1.6 million, respectively. The 25%
increase was primarily due to an increase in non-cash stock based compensation expense of
approximately $0.2 million, $0.1 million in directors and officers liability insurance expense,
and $0.1 million in rent.
Amortization of Intangible Assets. Amortization expense for the three months ended September
30, 2006 was approximately $26,000. The amortization of intangible assets relates to product
rights associated with the product known as Valstar (valrubicin) in the United States and Valtaxin
in Canada, which the Company acquired in March of 2006. As such, there was no amortization expense
for the three months ended September 30, 2005.
Net Interest Income. Net interest income for the three months ended September 30, 2006 and
2005, was approximately $269,000 and $19,000, respectively. The increase was primarily due to the
increased cash and investments balance resulting from the proceeds of the initial public offering
of our common stock in February 2006.
Income Taxes. Income tax benefit for the three months ended September 30, 2006 and 2005 was
approximately $36,000 and $300,000, respectively. As a result of the loss of approximately $4.7
million for the three months ended September 30, 2006, as well as the previous net operating losses
since our inception, we did not record any federal provision for income taxes during the period
ended September 30, 2006. We did record a benefit of $2,000 during the period to adjust for state
taxes subject to alternative minimum tax. An additional benefit of $34,000 was recorded as a
result of the finalizing and filing of our 2005 federal and state tax
25
returns. The $300,000 benefit for taxes at September 30, 2005 was a result of the loss before
income taxes of approximately $3.1 million for the three months ended September 30, 2005. Our
deferred tax assets primarily consist of net operating loss carry forwards and research and
development tax credits. We have recorded a valuation allowance for the full amount of our
deferred tax asset, as the realization of the deferred tax asset is uncertain.
Nine months ended September 30, 2006 compared with nine months ended September 30, 2005
Net Product Sales. Net product sales for the nine months ended September 30, 2006 and 2005
were approximately $14.6 million and $21.6 million, respectively. The 32% decrease in net product
sales was primarily due to lower net average selling prices due to decreased Medicare reimbursement
rates for our Vantas product as well as increased competition around pricing in the class of LHRH
drugs. For the nine months ended September 30, 2006, we sold 9,339 units of Vantas in the United
States at a net average selling price of $1,549 per unit as compared to 8,646 units at a net
average selling price of $2,502 for the same period in 2005. As a result of our pre-launch
shipment of Vantas to Paladin Labs, we sold 115 units of Vantas in Canada. Thus, worldwide unit
sales of Vantas increased by 9%, or 808 units, for the nine months ended September 30, 2006, as
compared to the same period in the prior year.
Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the
nine months ended September 30, 2005 were supported, in part by favorable reimbursement rates, due
to the fact Vantas was a new product that did not yet have an established average selling price, or
ASP, it was reimbursed at wholesale acquisition price, which is typically higher than ASP.
Effective July 2005, Vantas received an established ASP, which resulted in a lower reimbursement
rate.
We expect future Medicare reimbursement levels to continue to decline for Vantas, which will
have an adverse effect on our net product sales. Reimbursement levels are currently set by the
twenty-three Medicare carriers in the United States which, in the aggregate, cover all fifty
states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based
on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or
LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by Medicare to be medically equivalent.
Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain
Medicare carriers have a policy which segregates twelve-month products from all other dosages,
including one, three, four and six month injectable products, and reimburses at different rates for
these two groups of products, or a split policy. Finally, there are some Medicare carriers which
state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make
payments based upon a split policy.
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable products which are
reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies
with the Medicare carriers. We will deploy our sales resources in markets where we can sell our
products on an even par with the other products in the class.
We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of
Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas
than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers
may alleviate the downward pressure on our net average selling price from the Medicare customers.
In addition, we are currently reviewing a number of strategic options to broaden the penetration of
Vantas into the LHRH market, including the evaluation of co-promotion opportunities.
Licensing Revenue. For the nine months ended September 30, 2006 and 2005, we recorded
licensing revenues of approximately $116,000 and $26,000, respectively. In September 2006, we
received $100,000 from BioPro for licensing revenue related to the submission of Vantas for
regulatory approval in Taiwan. This payment is in accordance with the exclusive license and
distribution agreement with BioPro to sell Vantas in various countries in Asia. The remaining
$16,000 licensing revenue during the nine months ended September 30, 2006 was from Hydron
Technologies. The entire $26,000 in licensing revenue during the nine months ended September 30,
2005 was from Hydron Technologies.
Cost of Product Sales. Our cost of product sales for the nine months ended September 30, 2006
and 2005 was approximately $4.0 million and $4.8 million, respectively. Gross margins as a
percentage of net product sales for the nine months ended September 30, 2006 and 2005 were 73% and
78%, respectively. The decrease in gross margin percentage was primarily due to a decrease in the
net average selling prices which was slightly offset by an inventory reserve charge recorded in
prior year. During the nine months ended September 30, 2005, a $1.0 million inventory reserve was
recorded for certain products that failed to meet our quality control specifications.
Research and Development Expense. Research and development expense for the nine months ended
September 30, 2006 and 2005 was approximately $5.7 million and $4.4 million, respectively. The 30%
increase was primarily due to expenses related to Valstar,
26
Supprelin,
Octreotide and European filing fees for Vantas. Expenses related to clinical trials and
research projects pursuant to contracts with research institutions and clinical research
organizations represented 48% of our total research and development expense for the nine months
ended September 30, 2006 compared to 44% of our research and development expense for the nine
months ended June 30, 2005. Internal research and development expense was approximately 52% and
56% of our total research and development expense for the nine months ended September 30, 2006 and
2005, respectively. We expect to continue to spend significant amounts, including clinical trial
costs, on the development for our product candidates. In August 2006, the FDA requested an
additional Phase I/II study for our Octreotide implant which is expected to cost approximately $0.9
million. We expect to commence a Phase III trial for the Octreotide implant in the first half of
2007. The Octreotide Phase III trial is expected to last approximately eighteen months and is
expected to cost approximately $6.0 million to $7.0 million.
Selling and Marketing Expense. Selling and marketing expense for the nine months ended
September 30, 2006 and 2005 was approximately $9.7 million and $8.2 million, respectively. The 18%
increase was attributable to an increase in salaries, employee benefits, and travel related to an
increase in the number of employees dedicated to our sales efforts.
General Administrative Expense. General administrative expense for the nine months ended
September 30, 2006 and 2005 was approximately $5.6 million and $4.1 million, respectively. The 37%
increase was primarily due to an increase in non-cash stock based compensation expense of
approximately $0.6 million, $0.3 million in directors and officers liability insurance expense,
$0.2 million in rent, $0.2 million in professional service fees and $0.2 in director fees.
Amortization of Intangible Assets. Amortization expense for the nine months ended September
30, 2006 was approximately $52,000. The amortization of intangible assets relates to product
rights associated with the product known as Valstar (valrubicin) in the United States and Valtaxin
in Canada, which the Company acquired in March of 2006. As such, there was no amortization expense
for the nine months ended September 30, 2005.
Net Interest Income. Net interest income was approximately $747,000 and $46,000 for the nine
months ended September 30, 2006 and 2005, respectively. The increase was primarily due to the
increased cash and investments balance resulting from the proceeds of the initial public offering
of our common stock in February 2006.
Income Taxes. Income tax benefit for the nine months ended September 30, 2006 and 2005 was
approximately $16,000 and $0, respectively. As a result of the loss of approximately $9.6 million
for the nine months ended September 30, 2006, as well as the previous net operating losses since
our inception, we did not record any federal provision for income taxes during the period ended
September 30, 2006. We did record a provision of $18,000 during the period for state taxes subject
to alternative minimum tax. The provision was offset by approximately $34,000 of tax benefits
recorded as a result of the finalizing and filing of our 2005 federal and state tax returns. Our
deferred tax assets primarily consist of net operating loss carry forwards and research and
development tax credits. We have recorded a valuation allowance for the full amount of our
deferred tax asset, as the realization of the deferred tax asset is uncertain.
Liquidity and Capital Resources
As of September 30, 2006, cash and cash equivalents were approximately $15.9 million, as
compared to $2.3 million at December 31, 2005. Investments consisting of U.S. government and
agency securities were approximately $3.0 million, as compared to $0 at December 31, 2005. These
net increases were primarily due to the proceeds we received from the initial public offering of
our common stock.
Net cash used in operating activities was approximately $9.4 million for the nine months ended
September 30, 2006. The net cash used in operating activities was attributable to a net loss of
approximately $9.5 million, as adjusted for the effect of non-cash items of $1.3 million and
changes in operating assets and liabilities of approximately $1.2 million. The changes in
operating assets and liabilities consisted of cash inflows from the decrease in accounts receivable
and increase in accounts payable, which were more than offset by the building of inventory,
increase in prepaid expenses, and decreases in accrued expenses and deferred liabilities.
Net cash used in investing activities was approximately $7.2 million for the nine months ended
September 30, 2006. The net cash used in investing was attributable to capital expenditures of
$3.7 million related to the construction project to expand our manufacturing capabilities, plus
equipment for the increase in production demand. We expect to spend an additional $0.5 million in
the next twelve months to complete the expansion project and to purchase related equipment. In
addition, we purchased the product rights associated with Valstar for $0.5 million. We purchased
approximately $5.9 million in investments consisting of U.S government and agency securities. We
sold approximately $3.0 million in investments in U.S government and agency securities.
Net cash provided by financing activities was approximately $30.1 million for the nine months
ended September 30, 2006. As a result of our initial public offering in February 2006, we
generated approximately $31.6 million of proceeds net of underwriter fees from the issuance of our
common stock and approximately $100,000 from the issuance of stock as a result of stock option
exercises.
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We paid approximately $1.3 million in offering fees during 2005, resulting in total net
proceeds from the initial public offering of $30.3 million. Subsequent to the initial public
offering of our common stock, we repaid in full the approximately $1.5 million outstanding amount
under our line of credit with Merrill Lynch.
We anticipate that cash flows from sales of Vantas may reduce our need for additional
financing. However, we expect our cash requirements to continue to increase in the foreseeable
future as we continue to sponsor additional clinical trials, seek regulatory approvals, and
develop, manufacture and market our current product candidates. As we continue to expand our
commercial organization, expand our research and development efforts and pursue additional
opportunities, we anticipate significant cash requirements for the hiring of personnel, capital
expenditures and investment in additional internal systems and infrastructure. The amount and
timing of cash requirements will depend on market acceptance of our lead product, Vantas, as well
as regulatory approval and market acceptance of our product candidates, if any. The resources we
devote to researching, developing, formulating, manufacturing, commercializing and supporting our
product candidates, and our ability to enter into third-party collaborations will also affect our
cash requirements.
We believe that our existing cash, the cash generated from our initial public offering, cash
generated from future sales of Vantas, and our line of credit will be sufficient to fund our
operations for at least the next 12 months. Until we can generate significant cash from our
operations, we expect to continue to fund our operations with existing cash resources that were
primarily generated from the proceeds of offerings of our equity securities. In addition, we may
receive revenue from our sublicense agreement.
We may finance future cash needs through strategic collaboration agreements, the sale of
equity securities or additional debt financing. We may not be successful in obtaining
collaboration agreements, additional debt or equity financing or in receiving milestone or royalty
payments under those agreements. In addition, we cannot be sure that in the future our existing
cash resources will be adequate or that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or our stockholders. Insufficient
funds may require us to delay, scale back or eliminate some or all of our research or development
programs or delay the launch of our product candidates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
To date, all of our sales have been denominated in U.S. dollars. Although we do conduct some
clinical and safety studies with vendors located outside the United States, all of these expenses
are paid in U.S. dollars. If the exchange rate undergoes a change of 10%, we do not believe that
it would have a material impact on our results of operations or cash flows. Accordingly, we
believe that there is no material exposure to risk from changes in foreign currency exchange rates.
We hold no derivative financial instruments and do not currently engage in hedging activities.
Our exposure to interest rate risk is related to the investment of our excess cash in highly
liquid financial investments with original maturities of three months or less. We invest in money
market funds in accordance with our investment policy, which is designed to preserve principal,
maintain proper liquidity to meet operating needs and maximize yields. Our investment policy also
specifies credit quality standards for our investments. Due to the short term nature of our
investments, we believe that there is no material exposure to interest rate risk arising from them.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of September 30, 2006 and, based
on that evaluation, our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures are effective. Disclosure controls and procedures are
our controls and other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as
amended (the Securities Exchange Act), is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we file
under the Securities Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter
ended September 30, 2006 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2006, we were not subject to any pending or, to our knowledge, threatened
litigation.
Item 1A. Risk Factors
We have not updated any risk factors in our Form 10-Q for the quarterly period ended September
30, 2006. The last update was included in our Form 10-Q for the quarterly period ended June 30,
2006. The complete list of risk factors are disclosed in our Form 10-K for the fiscal year ended
December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith:
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10.1
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Investment and Shareholders Agreement Spepharm Holding B.V.
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31-51 |
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10.2
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License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Spepharm Holding B.V.
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52-69 |
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
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70 |
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
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71 |
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Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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72 |
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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.
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VALERA PHARMACEUTICALS, INC |
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Dated: November 9, 2006
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By:
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/s/ David S. Tierney, M.D. |
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David S. Tierney, M.D. |
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President, Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Dated: November 9, 2006 |
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By:
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/s/ Andrew T. Drechsler |
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Andrew T. Drechsler |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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