PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
ImmunoGen’s Common Stock is quoted on The Nasdaq National Market under the symbol IMGN. The table below sets forth the high and low bid prices on the Nasdaq National Market for our Common Stock for each of the quarters indicated.
|
|
Fiscal Year 2005 |
|
Fiscal Year 2004 |
|
||||||||
|
High |
|
Low |
|
High |
|
Low |
|
||||
First Quarter |
$ |
6.210 |
|
$ |
4.090 |
|
$ |
6.040 |
|
$ |
3.500 |
|
Second Quarter |
9.390 |
|
4.940 |
|
5.550 |
|
4.250 |
|
||||
Third Quarter |
8.990 |
|
4.950 |
|
7.290 |
|
5.000 |
|
||||
Fourth Quarter |
6.560 |
|
4.590 |
|
12.40 |
|
5.670 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 23, 2005, there were approximately 614 holders of record of the Company’s common stock and, according to the Company’s estimates, approximately 18,000 beneficial owners of the Company’s common stock.
The Company has not paid any cash dividends on its Common Stock since its inception and does not intend to pay any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth consolidated financial data with respect to the Company for each of the five years in the period ended June 30, 2005. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report on Form 10-K.
|
|
|
Year ended June 30, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
In thousands, except per share data |
|
|||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenues |
|
$ |
35,718 |
|
$ |
25,956 |
|
$ |
7,628 |
|
$ |
5,883 |
|
$ |
4,479 |
|
Total expenses |
|
48,540 |
|
34,514 |
|
32,220 |
|
26,438 |
|
20,291 |
|
|||||
Other income, net |
|
1,900 |
|
2,687 |
|
4,645 |
|
6,053 |
|
6,339 |
|
|||||
Income tax expense |
|
29 |
|
46 |
|
35 |
|
128 |
|
83 |
|
|||||
Loss before cumulative effect of a change in accounting principle |
|
(10,951 |
) |
(5,917 |
) |
(19,982 |
) |
(14,630 |
) |
(9,556 |
) |
|||||
Cumulative effect of a change in accounting principle |
|
— |
|
— |
|
— |
|
— |
|
(5,734 |
) |
|||||
Net loss |
|
$ |
(10,951 |
) |
$ |
(5,917 |
) |
$ |
(19,982 |
) |
$ |
(14,630 |
) |
$ |
(15,291 |
) |
Basic and diluted net loss per common share |
|
$ |
(0.27 |
) |
$ |
(0.15 |
) |
$ |
(0.48 |
) |
$ |
(0.37 |
) |
$ |
(0.42 |
) |
Basic and diluted weighted average common shares outstanding |
|
40,868 |
|
40,646 |
|
41,912 |
|
39,624 |
|
36,675 |
|
|||||
Pro Forma Amounts Assuming SAB 101 Followed Since Inception: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenues |
|
|
|
|
|
|
|
|
|
4,479 |
|
|||||
Net loss |
|
|
|
|
|
|
|
|
|
$ |
(9,556 |
) |
||||
Basic and diluted net loss per common share |
|
|
|
|
|
|
|
|
|
$ |
(0.26 |
) |
||||
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total assets |
|
$ |
110,132 |
|
$ |
122,630 |
|
$ |
118,032 |
|
$ |
152,156 |
|
$ |
159,161 |
|
Stockholders’ equity |
|
86,842 |
|
97,137 |
|
102,680 |
|
134,215 |
|
142,447 |
|
|||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Since the Company’s inception, we have been principally engaged in
the development of antibody-based cancer therapeutics and novel treatments
in the field of oncology. We believe that the combination of our expertise
in antibodies and cancers has resulted in the development of both proprietary
product candidates and technologies. Our lead, proprietary, tumor-activated
certain prodrug, or TAP, technology combines extremely potent, small molecule
cytotoxic agents with monoclonal antibodies that recognize and bind specifically
to tumor cells. Our targeted delivery technology is designed to increase
the potency of these cancer-specific antibodies, which allows our drugs to
kill cancer cells with the potential to cause only modest damage to healthy
tissue. The cytotoxic agents we currently use in our TAP compounds involved
in clinical testing are the maytansinoid DM1 and DM4 molecules, chemical
derivatives of a naturally occurring substance called maytansine. We also
use our expertise in antibodies and cancer to develop other types of therapeutics,
such as naked antibody anticancer products.
We have entered into collaborative agreements that enable companies to use
our TAP technology to develop commercial product candidates containing their
antibodies. We have also used our proprietary TAP technology in conjunction
with our in-house antibody expertise to develop our own anticancer product
candidates. Under the terms of our collaborative agreements, we are entitled
to upfront fees, milestone payments and royalties on any commercial product
sales. In July 2003, we announced a discovery, development and commercialization
collaboration with the sanofi-aventis Group (formerly Aventis Pharmaceuticals,
Inc). Under the terms of this agreement, sanofi-aventis gained commercialization
rights to three of the most advanced product candidates in our preclinical
pipeline and the commercialization rights to certain new product candidates
developed during the research program portion of the collaboration. This
collaboration allows us to access sanofi-aventis’ cancer targets and
their clinical development and commercialization capabilities. Under the
terms of the sanofi-aventis agreement, we also are entitled to receive committed
research funding of approximately $50.7 million during the three-year
research program. Should sanofi-aventis elect to exercise its contractual
right to extend the term of the research program, we will receive additional
research funding. In August 2004, Aventis completed its merger with
Sanofi-Synthelabo and is now part of the sanofi-aventis Group. To this date,
this merger has not had any adverse effect on our collaboration. We cannot
predict, however, the effect, if any, that this merger may have on our collaboration
with sanofi-aventis in the future. Sanofi-aventis must notify us no later
than August 31, 2005 if they intend to extend the research program for the
first additional 12-month period that begins in September, 2006.
Under certain agreements, we receive our fully
burdened cost to manufacture preclinical and clinical materials
plus a profit margin. Currently, our collaborative partners include
Abgenix, Inc., Biogen Idec, Boehringer Ingelheim International
GmbH, Centocor, Inc., Genentech, Inc., Millennium Pharmaceuticals, Inc.,
and sanofi-aventis. We expect that substantially all of our revenue
for the foreseeable future will result from payments under our
collaborative arrangements.
In August 2003, Vernalis completed its acquisition of British Biotech.
In connection with this acquisition, the merged company, called Vernalis
plc, announced that it intended to review its merged product candidate portfolio,
including its collaboration with ImmunoGen on huN901-DM1. After discussion
with Vernalis, in January 2004, we announced that we would take over
further development of the product candidate, which will include the advancement
of huN901-DM1 into our own clinical trial. Pursuant to the terms of the termination
agreement executed on January 7, 2004, Vernalis, which relinquished
its rights to the product, will, at its own expense, complete Study 002 and
was responsible for Study 001 through June 30, 2004. We are responsible
for the further development of huN901-DM1.
On January 8, 2004, we announced that we intended to advance our lead
product candidates, cantuzumab mertansine and huN901-DM1, into clinical trials
to assess the clinical utility of the compound in certain indications. In
addition to continuation of the Phase I/II study of huN901-DM1 for SCLC (Study 001),
we have initiated a clinical trial of huN901-DM1 in multiple myeloma (Study
003). In October 2004, we decided to move forward with an earlier version
of cantuzumab mertansine that we call huC242-DM4. We initiated a Phase I
clinical trial with huC242-DM4 in June 2005. Based upon the results
of such clinical trials, if and when they are completed, we will evaluate
whether to continue clinical development of these compounds, and, if so,
whether we will seek a collaborative partner or partners to continue the
clinical development and commercialization of either or both of these compounds.
To date, we have not generated revenues from commercial product sales and we expect to incur significant operating losses over the foreseeable future. We do not anticipate that we will have a commercially approved product within the foreseeable future. Research and development expenses are expected to increase significantly in the near term as we continue our development efforts to include expanded clinical trials. As of June 30, 2005, we had approximately $90.6 million in cash and marketable securities. We anticipate that our current capital resources and future collaboration payments, including the committed research funding due us under the sanofi-aventis collaboration over the remainder of the three-year research program, will enable us to meet our operational expenses and capital expenditures for at least the next three to four fiscal years.
We anticipate that the increase in total cash expenditures will be partially offset by collaboration-derived proceeds including milestone payments and the committed research funding we will receive pursuant to the sanofi-aventis collaboration. Accordingly, period-to-period operational results may fluctuate dramatically based upon the timing of receipt of the proceeds. We believe that our established collaborative agreements, while subject to specified milestone achievements, will provide funding to assist us in meeting obligations under our collaborative agreements while also assisting in providing funding for the development of internal product candidates and technologies. However, we can give no assurances that such collaborative agreement funding will, in fact, be realized. Should we or our partners not meet some or all of the terms and conditions of our various collaboration agreements, we may be required to pursue additional strategic partners, secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses
and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to our collaborative
agreements and inventory. We base our estimates on historical experience
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We estimate the period of our significant involvement during development
for each of our collaborative agreements. We recognize any upfront fees
received from our collaborators ratably over this estimated period of significant
involvement. We generally believe our period of significant involvement
occurs between the date we sign a collaboration agreement and projected
FDA approval of our collaborators’ product that is the subject of
the collaboration agreement. We estimate that this time period is generally
six years. The actual period of our involvement could differ significantly
based upon the results of our collaborators’ preclinical and clinical
trials, competitive products that are introduced into the market and the
general uncertainties surrounding drug development. Any difference between
our estimated period of involvement during development and our actual period
of involvement could have a material effect upon our results of operations.
We recognize the $12.0 million upfront fee we received from sanofi-aventis ratably over our estimated period of significant involvement of five years. This estimated period includes the term of the collaborative research program and two 12-month extensions that sanofi-aventis may exercise. In the event our period of involvement is less than we estimated, the remaining deferred balance of the upfront fee will be recognized over this shorter period.
In January 2004, our shared product license with Vernalis plc terminated. As a result we recognized $1.5 million of revenue during the year ended June 30, 2004, related to the upfront fee that we received upon signing the original collaboration agreement with Vernalis, which was deferred for accounting purposes.
In February 2003, our full product license with GlaxoSmithKline terminated. During the year ended June 30, 2003, we recognized $348,000 of revenue related to the GlaxoSmithKline upfront fee that remained in deferred revenue as of the termination date.
Inventory
We review our estimates of the net realizable value of our inventory at each
reporting period. Our estimate of the net realizable value of our inventory
is subject to judgment and estimation. The actual net realizable value
of our inventory could vary significantly from our estimates and could
have a material effect on our financial condition and results of operations
in any reporting period. We consider quantities of DM1 and DM4, collectively
referred to as DMx, or ansamitocin P3 in excess of 12 months’ projected
usage that is not supported by collaborators’ firm fixed orders to
be excess. We fully reserve any such material identified as excess with
a corresponding charge to research and development expense. Our estimate
of 12 months’ usage of DMx and ansamitocin P3 raw material inventory
is based upon our collaborators’ estimates of their future clinical
material requirements. Our collaborators’ estimates of their clinical
material requirements are based upon expectations of their clinical trials,
including the timing, size, dosing schedule and maximum tolerated dose
of each clinical trial. Our collaborators’ actual requirements for
clinical materials may vary significantly from their projections. Significant
differences between our collaborators’ actual manufacturing orders
and their projections could result in our actual 12 months’ usage
of DMx and ansamitocin P3 varying significantly from our estimated usage
at an earlier reporting period. During the year ended June 30, 2005,
we recorded expense of $2.3 million covering quantities of ansamitocin
P3 and DMx that we have identified as excess based upon our inventory policy,
and $369,000 to write down certain P3 and DMx batches to their net realizable
value.
Results of Operations
Revenues
Our total revenues for the year ended June 30, 2005 were $35.7 million
compared with $26.0 million and $7.6 million for the years ended June 30,
2004 and 2003, respectively. The $9.8 million increase in revenues from 2004
to 2005 is primarily attributable to higher revenues from clinical materials
reimbursement and research development support, as well as increases in license
and milestone fees, and development fees, as discussed below. The $18.3 million
increase in revenues from 2003 to 2004 is primarily attributable to committed
research funding earned under our discovery and commercialization agreement
with sanofi-aventis, in addition to higher revenues from license fees and
higher clinical materials reimbursement.
Research and development support was $17.4 million for the year ended June 30, 2005 compared with $13.6 million for the year ended June 30, 2004. These amounts primarily represent committed research funding earned based on actual resources utilized under our discovery, development and commercialization agreement with sanofi-aventis. During the year ended June 30, 2005, this revenue also includes amounts earned for resources utilized under our development and license agreements with Biogen Idec and Centocor. The sanofi-aventis agreement provides that we will receive a minimum of $50.7 million of committed research funding during a three-year research program. We entered into the agreement with sanofi-aventis in July 2003; initiation of the committed research funding began on September 1, 2003.
Revenue from license and milestone fees for the year ended June 30, 2005 increased $1.2 million to $6.8 million from $5.5 million in the year ended June 30, 2004. Revenue from license and milestone fees for the year ended June 30, 2003 was $4.2 million. The increase in license and milestone fees from 2004 to 2005 is primarily attributable to the recognition of $2.5 million related to the achievement of milestones under the sanofi-aventis agreement from the initiation of clinical testing of AVE9633, the anti-CD33 TAP compound, and for the preclinical advancement of the compound for certain B-cell malignancies.
Included in license and milestone fees for the year ended June 30, 2004 was $1.75 million of revenue related to our termination agreement with Vernalis which was executed in January 2004. Revenue of $1.5 million was related to the upfront fee that we received upon signing the original collaboration agreement with Vernalis, which was deferred for accounting purposes. The remaining $250,000 was recognized in June 2004 pursuant to our termination agreement with Vernalis. Total revenue recognized from license and milestone fees from each of our collaborative partners in the years ended June 30, 2005, 2004 and 2003 is included in the following table:
|
|
Year ended June 30, |
|||||||
|
2005 |
|
2004 |
|
2003 |
|||
|
In thousands |
|||||||
Collaborative Partner: |
|
|
|
|
|
|||
Abgenix |
$ |
471 |
|
$ |
546 |
|
$ |
500 |
sanofi-aventis |
4,900 |
|
2,000 |
|
— |
|||
Boehringer Ingelheim |
97 |
|
166 |
|
1,166 |
|||
Centocor |
83 |
|
— |
|
— |
|||
Genentech |
782 |
|
643 |
|
643 |
|||
GlaxoSmithKline |
— |
|
— |
|
431 |
|||
Millennium |
443 |
|
443 |
|
1,443 |
|||
Vernalis |
— |
|
1,750 |
|
— |
|||
Total |
$ |
6,776 |
|
$ |
5,548 |
|
$ |
4,183 |
Deferred revenue of $18.8 million at June 30, 2005 represents payments received from our collaborators pursuant to our license agreements with them which we have yet to earn pursuant to our revenue recognition policy.
Clinical materials reimbursement increased by approximately $4.0 million to $10.5 million in the year ended June 30, 2005 compared to $6.6 million in the year ended June 30, 2004. We earned clinical materials reimbursement of $3.2 million during the year ended June 30, 2003. During the years ended June 30, 2005, 2004 and 2003, we shipped clinical materials in support of the huN901-DM1, bivatuzumab mertansine, MLN2704, and AVE9633 clinical trials, as well as preclinical materials in support of the development efforts of certain other collaborators. The increase in clinical materials reimbursement in 2005 as compared to 2004 and 2003 is primarily related to the advancement of the clinical trials of bivatuzumab mertansine and MLN2704, along with the initiation of clinical trials of AVE9633. Millennium initiated a second clinical trial, a multi-dose Phase I/II study, with its compound MLN2704 during the year ended June 30, 2004. Under certain collaborative agreements, we are reimbursed for our fully burdened cost to produce clinical materials plus a profit margin. The amount of clinical materials reimbursement we earn, and the related cost of clinical materials reimbursed, is directly related to (i) the number of on-going clinical trials our collaborators have underway, the speed of enrollment in those trials, the dosage schedule of each clinical trial and the time period, if any, during which patients in the trial receive clinical benefit from the clinical materials, and (ii) our production of clinical grade material on behalf of our collaborators, either in anticipation of clinical trials, or for process development and analytical purposes. As such, the amount of clinical materials reimbursement and the related cost of clinical materials reimbursed may vary significantly from quarter to quarter and year to year.
Development fees increased $795,000 to $1.1 million in the year ended June 30, 2005 compared to $274,000 for the year ended June 30, 2004. Development fees were $275,000 in the year ended June 30, 2003. To date, our development fees represent the fully burdened reimbursement of costs incurred in producing research-grade materials in accordance with Good Laboratory Practices and developing antibody-specific conjugation processes on behalf of our collaborators and potential collaborators during the early evaluation and preclinical testing stages of drug development. The amount of development fees we earn is directly related to the number of our collaborators and potential collaborators, the stage of development of our collaborators’ products and the resources our collaborators allocate to the development effort. As such, the amount of development fees may vary widely from quarter to quarter and year to year.
Research and Development Expenses
We report research and development expense net of certain reimbursements we receive from our collaborators. Our net research and development expenses consist of (i) research to identify and evaluate new targets and to develop and evaluate new antibodies and cytotoxic drugs, (ii) preclinical testing of our own and, in certain instances, our collaborators’ product candidates, and the cost of our own clinical trials, (iii) development related to clinical and commercial manufacturing processes and (iv) manufacturing operations. During the three fiscal years ended June 30, 2005, our research efforts have been primarily focused in the following areas:
DM1 and DM4 are the cytotoxic agents that we currently use in the manufacture of our two TAP product candidates in clinical testing. We have also investigated the viability of other maytansinoid effector molecules, which, collectively with DM1 and DM4, we refer to as DMx. In order to make commercial manufacture of DMx conjugates viable, we have devoted substantial resources to improving the strain of the microorganism that produces ansamitocin P3, the precursor to DMx, to enhance manufacturing yields. We also continue to devote considerable resources to improve other DMx manufacturing processes.
On January 8, 2004, we announced that pursuant to the terms and conditions of a termination agreement between Vernalis and ourselves, Vernalis relinquished its rights to develop and commercialize huN901-DM1. As a result, we regained the rights to develop and commercialize huN901-DM1. Vernalis will complete Study 002. As of July 1, 2004, we assumed responsibility for Study 001. We are taking steps to expedite the patient enrollment in Study 001. Additionally, we currently plan to initiate a clinical trial of huN901-DM1 in CD56-positive multiple myeloma. We intend to evaluate whether to out license all or part of the development and commercial rights to this compound as we move through the clinical trial process.
In January 2003, we announced that we would regain the development and commercialization rights to cantuzumab mertansine from GlaxoSmithKline, thereby terminating our collaborative agreement with this company. In January 2004, we announced that we planned to advance cantuzumab mertansine, or an improved version of the compound, into a clinical trial that we expected to manage. In October 2004, we decided to move forward in developing a modified version of cantuzumab mertansine called huC242-DM4. Patient dosing was initiated for the Phase I study of huC242-DM4 in June 2005. We intend to evaluate whether to out license all or part of the development and commercial rights to this compound as we move through the clinical trial process for this compound.
We licensed our three most advanced product candidates to sanofi-aventis in 2003 under the terms of our discovery, development and commercialization collaboration. These three product candidates are AVE9633, an anti-CD33 TAP compound for acute myeloid leukemia, an anti-IGF-1R antibody, and a TAP compound for certain B-cell malignancies. In December 2004, sanofi-aventis filed an Investigational New Drug Application (IND) for the anti-CD33 TAP compound AVE9633. Clinical testing of this compound was initiated in February 2005.
The anti-IGF-1R antibody is a naked antibody directed against a target found on various solid tumors, including certain breast, lung and prostate cancers. At June 30, 2005, pursuant to our collaboration research program with sanofi-aventis, we continued to perform preclinical experiments to evaluate candidate antibodies and had identified a lead antibody product candidate and several alternate product candidates. The third potential product candidate is directed at certain B-cell malignancies, including non-Hodgkin’s lymphoma, and is in development.
The cost to develop new products and advance those products to the IND stage of development can be significant. Under the terms of our discovery, development and research collaboration with sanofi-aventis, they licensed three of our most advanced preclinical product candidates. With the exception of those antibodies or antibody targets that are the subject of our preexisting or future collaboration and license agreements, during the term of our collaborative research program, we are required to propose for inclusion in the collaborative research program certain antibodies or antibody targets that we believe will have utility in oncology. Sanofi-aventis then has the right to either include in or exclude from the collaborative research program these proposed antibodies and antibody targets. If sanofi-aventis elects to exclude any antibodies or antibody targets, we may elect to develop the products. Furthermore, sanofi-aventis may only include a certain number of antibody targets in the research program at any one time. Sanofi-aventis must therefore exclude any proposed antibody or antibody target in excess of this number. Over the original, three-year term of the research program, we will receive a minimum of $50.7 million of committed research funding and will devote a significant amount of our internal research and development resources to advancing the research program. Under the terms of the agreement, we may advance any
TAP or antibody products that sanofi-aventis has elected not to either initially include or later advance in the research program.
The potential product candidates that may eventually be excluded from the sanofi-aventis collaboration are in an early stage of discovery research and we are unable to accurately estimate which potential products, if any, will eventually move into our internal preclinical research program. We are unable to reliably estimate the costs to develop these products as a result of the uncertainties related to discovery research efforts as well as preclinical and clinical testing. Our decision to move a product candidate into the clinical development phase is predicated upon the results of preclinical tests. We cannot accurately predict which, if any, of the discovery research stage product candidates will advance from preclinical testing and move into our internal clinical development program. The clinical trial and regulatory approval processes for our product candidates that have advanced or we intend to advance to clinical testing are lengthy, expensive and uncertain in both timing and outcome. As a result, the pace and timing of the clinical development of our product candidates is highly uncertain and may not ever result in approved products. Completion dates and development costs will vary significantly for each product candidate and are difficult to predict. A variety of factors, many of which are outside our control, could cause or contribute to the prevention or delay of the successful completion of our clinical trials, or delay or failure to obtain necessary regulatory approvals. The costs to take a product through clinical trials are dependent upon, among other things, the medical indications, the timing, size and dosing schedule of each clinical trial, the number of patients enrolled in each trial, and the speed at which patients are enrolled and treated. Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to progress through clinical trials than anticipated, may fail to receive necessary regulatory approvals or may prove impracticable to manufacture in commercial quantities at reasonable cost or with acceptable quality.
The lengthy process of securing FDA approvals for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate, with any degree of certainty, the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of our clinical trials, we are currently unable to estimate when, if ever, our product candidates that have advanced into clinical testing will generate revenues and cash flows.
Research and development expense for the year ended June 30, 2005 increased $8.8 million to $30.5 million from $21.7 million for the year ended June 30, 2004. Research and development expense was $22.9 million for the year ended June 30, 2003. The number of research and development personnel increased to 137 at June 30, 2005 compared to 116 at June 30, 2004. We had 94 research and development personnel at June 30, 2003. Research and development salaries and related expenses increased by $3.8 million in the year ended June 30, 2005 compared to the year ended June 30, 2004 and increased by $1.8 million in the year ended June 30, 2004 compared to the year ended June 30, 2003. Facilities expense, including depreciation, also increased by $1.0 million during the year ended June 30, 2005 as compared to the same period in 2004 and increased $1.5 million in the year ended June 30, 2004 compared to the year ended June 30, 2003. The increase in 2005 as compared to 2004 was due to the addition of two manufacturing suites that were placed into service during 2005. The increase in 2004 as compared to 2003 was due to an increase in rent for the 128 Sidney Street lease and expenses related to our 2003 expansion at 148 Sidney Street, Cambridge, Massachusetts. We expect future research and development expenses to increase as we continue development of our product candidates and technologies.
Research and Development
|
|
2005 |
|
2004 |
|
2003 |
|||
|
In thousands |
|||||||
Research |
$ |
12,273 |
|
$ |
10,015 |
|
$ |
8,137 |
Preclinical and Clinical Testing |
5,000 |
|
3,198 |
|
2,505 |
|||
Process and Product Development |
4,501 |
|
3,739 |
|
4,464 |
|||
Manufacturing Operations |
8,765 |
|
4,741 |
|
7,798 |
|||
|
$ |
30,539 |
|
$ |
21,693 |
|
$ |
22,904 |
Research: Research includes expenses associated with activities to identify and evaluate new targets and to develop and evaluate new antibodies and cytotoxic agents for our products and in support of our collaborators. Such expenses primarily include personnel, fees to in-license certain technology, facilities and lab supplies. Research expenses increased $2.3 million to $12.3 million in 2005 and increased $1.9 million to $10.0 million in 2004. The increase in research expenses in both 2005 and 2004 was primarily the result of an increase in salaries and related expenses. The increase in salaries and related expenses was the result of an increase in personnel required to support the sanofi-aventis collaboration.
Preclinical and Clinical Testing: Preclinical and clinical testing includes expenses related to preclinical testing of our own and, in certain instances, our collaborators’ product candidates, and the cost of our own clinical trials. Such expenses include personnel, patient enrollment at our clinical testing sites, consultant fees, contract services, and facility expenses. Preclinical and clinical testing expenses increased $1.8 million to $5.0 million in 2005 and $693,000 to $3.2 million in 2004. The increase in 2005 is substantially due to the cost of our clinical trials for huN901-DM1. Also contributing to the increase in 2005 was an increase in contract services for certain preclinical studies related to huC242-DM4. Additionally, in both 2005 and 2004 there was an increase in salaries and related expense, the result of an increase in personnel to support both our own as well as our collaborators’ preclinical and clinical activities.
Process and Product Development: Process and product development expenses include costs for development of clinical and commercial manufacturing processes. Such expenses include the costs of personnel, contract services and facility expenses. Total development expenses increased $762,000 to $4.5 million in 2005 and decreased $725,000 to $3.7 million in 2004. The increase in 2005 as compared to 2004 is primarily the result of an increase in salaries and related expenses due to an increase in personnel. The decrease in 2004 as compared to 2003 is primarily due to a decrease of $1.9 million in contract services substantially related to reduced ansamitocin P3 and DMx process development activity. This decrease was partially offset by an increase in salaries and related expenses due to an increase in personnel and higher facilities expense.
Manufacturing Operations: Manufacturing operations expense includes costs to manufacture preclinical and clinical materials for our own product candidates and cost to support the operation and maintenance of our pilot scale manufacturing plant. Such expenses include personnel, raw materials for our own preclinical and clinical trials, manufacturing supplies, and facilities expense. Manufacturing costs related to the production of material for our collaborators are recorded as “Costs of Clinical Materials Reimbursed” in our Statement of Operations. Manufacturing operations expense increased $4.0 million to $8.8 million in 2005 and decreased $3.1 million to $4.7 million in 2004. The increase in 2005 as compared to 2004 was primarily the result of (i) an increase in salaries and related expenses, (ii) an increase in expenses to reserve for excess quantities of ansamitocin P3 and DMx in accordance with our inventory reserve policy, (iii) an increase in facilities expense related to the addition of two manufacturing suites that were placed into service during the year and (iv) lower overhead utilization from the manufacture of clinical materials on behalf of our collaborators. The decrease in 2004 as compared to 2003 was primarily the result of (i) lower contract service expenses for antibody production, (ii) higher overhead utilization from the manufacture of clinical materials on behalf of our collaborators and (iii) lower expenses to reserve for excess quantities of ansamitocin P3 and DMx in accordance with our inventory reserve policy. These decreases were partially offset by an increase in salaries and related expenses.
Antibody purchased in anticipation of potential future clinical trials was $1.3 million in 2005 and $1.2 million in 2004 as compared to $3.4 million in 2003 resulting in lower contract services in 2004, as noted above. Approximately $818,000, $98,000, and $433,000 of the antibody expense during 2004, 2003 and 2002, respectively, related to the purchase of antibody in support of one of the preclinical product candidates that was licensed by sanofi-aventis. We received reimbursement of the total $1.3 million amount in 2004 from sanofi-aventis, as discussed below in Other Income. The process of antibody production is lengthy as is the lead time to establish a satisfactory production process at a vendor. Accordingly, amounts incurred related to antibody production have fluctuated from period to period and we expect that these period fluctuations will continue in the future.
During fiscal 2005, 2004 and 2003, we recorded research and development expenses of $2.3 million, $307,000 and $1.7 million, respectively, related to ansamitocin P3 and DMx inventory that we identified as excess based upon our inventory policy. The higher write-off in 2005 as compared to 2004 contributed to the increase in manufacturing operations expense in 2005, as noted above. Reserve requirements for excess quantities of P3 and DMx are principally determined based on our collaborators’ forecasted demand compared to our inventory position. Due to the lead times required to secure material and the changing requirements of our collaborators, expenses to provide for excess quantities have fluctuated from period to period and we expect that these period fluctuations will continue in the future. (See “Inventory” within our Critical Accounting Policies for future discussion of our inventory reserve policy).
General and Administrative Expenses
General and administrative expenses for the year ended June 30, 2005 increased $1.6 million to $8.8 million from $7.2 million for the year ended June 30, 2004. General and administrative expenses for the year ended June 30, 2003 were $6.5 million. The increases in both years primarily relate to increases in salaries and related expenses. There was an increase of approximately $886,000 in salaries and related expenses in 2005 compared to 2004, as well as an increase of $412,000 in 2004 as compared to 2003. The increases in salaries and related expenses were substantially related to increases in personnel. Additionally, accounting, legal and audit related fees increased by approximately $736,000 in 2005 compared to 2004 primarily as a result of Sarbanes-Oxley Section 404 implementation and attestation-related expenses as well as increased patent-related expenses.
Interest Income
Interest income for the year ended June 30, 2005 increased $610,000 to $2.0 million from $1.4 million for the year ended June 30, 2004. Interest income for the year ended June 30, 2003 was $2.7 million. The increase in interest income in 2005 from 2004 is primarily the result of higher rates of return resulting from higher yields on investments. The decline in interest income from 2003 to 2004 is attributable to a lower average cash and investments balance combined with lower rates of return.
Net Realized (Losses) Gains on Investments
Net realized (losses) gains on investments were $(81,000), $(58,000), and $540,000 for the years ended June 30, 2005, 2004, and 2003, respectively. The net realized losses in both 2005 and 2004 are attributable to the timing of investment sales, as is the gain recorded in 2003.
Other Income
Other income for the year ended June 30, 2005 decreased $1.4 million to $8,000 as compared to $1.4 million for the year ended June 30, 2004. During the year ended June 30, 2004, we recorded in otherncome reimbursement of approximately $1.3 million from sanofi-aventis for the GMP production of antibody manufactured in support of one of the preclinical product candidates that was licensed by sanofi-aventis. Included in other income during the year ended June 30, 2003 is $1.4 million, which represents the final financial settlement of the GlaxoSmithKline collaboration.
Liquidity and Capital Resources
|
|
June 30, |
||||
|
2005 |
|
2004 |
||
|
In thousands |
||||
Cash and short-term investments |
$ |
90,565 |
|
$ |
94,610 |
Working capital |
90,710 |
|
101,302 |
||
Stockholders’ equity |
86,842 |
|
97,137 |
||
|
|
|
|
|
|
Cash Flows
We require cash to fund our operating expenses, including the advancement of our own clinical programs, and to make capital expenditures. Historically, we have funded our cash requirements primarily through equity financings in public markets and payments from our collaborators, including equity investments, license and milestone fees and research funding. As of June 30, 2005, we had approximately $90.6 million in cash and marketable securities. Net cash used in operations was $2.1 million, $5.0 million and $21.9 million during the years ended June 30, 2005, 2004 and 2003, respectively. The principal use of cash in operating activities for all periods presented was to fund our net loss. The decrease in operational cash use from 2004 to 2005 is substantially due to a reduction in working capital that partially offset our fiscal 2005 net loss. The principal changes in working capital were decreases in our accounts receivable and inventories due primarily to reduced demand by our collaborators for clinical material. Also contributing to the decrease in 2005 was $5.0 million of upfront fees received for which revenue has been deferred. The decrease in operational cash use from 2003 to 2004 was substantially due to amounts received from sanofi-aventis, including the $12.0 million upfront fee received in August 2003 and $9.4 million of the $13.6 million of committed research funding we earned during the year ended June 30, 2004.
Net cash used in investing activities was $1.8 million for the year ended June 30, 2005, and primarily represents cash outflows for capital purchases partially offset by proceeds from the sales and maturities of marketable securities. Net cash provided by investing activities was $1.1 million and $26.8 million for the years ended June 30, 2004 and 2003, respectively, and primarily represents cash inflows from the sale and maturities of marketable securities partially offset by capital expenditures. Capital purchases were $2.4 million, $2.0 million and $3.7 million for the fiscal years ended June 30, 2005 , 2004 and 2003, respectively. Capital purchases for the year ended June 30, 2005 consisted primarily of the build-out of our existing development and pilot scale manufacturing facility located in Norwood, Massachusetts. For the years ended June 30, 2004 and 2003, capital purchases consisted primarily of the renovation of our new laboratory and office facility at 148 Sidney Street, Cambridge, Massachusetts.
Net cash provided by financing activities was $529,000 and $599,000 for the years ended June 30, 2005 and June 30, 2004, respectively. Net cash used for financing activities was $11.1 million for the year ended June 30, 2003. For the years ended June 30, 2005 and 2004, net cash provided by financing activities represents the proceeds from the exercise of 231,000 and 194,000 stock options, respectively. For the year ended June 30, 2003, net cash used for financing activities principally represents the repurchase of 3.675 million shares of common stock for $11.1 million.
We anticipate that our current capital resources and future collaborator payments, including committed research funding that we expect to receive from sanofi-aventis pursuant to the terms of our collaboration agreement, will enable us to meet our operational expenses and capital expenditures for at least the next three to four fiscal years. We believe that our existing capital resources in addition to our established collaborative agreements will provide funding sufficient to allow us to meet our obligations under all collaborative agreements while also allowing us to develop product candidates and technologies not covered by collaborative agreements. However, we cannot provide assurance that such collaborative agreement funding will, in fact, be received. Should we not meet some or all of the terms and conditions of our various collaboration agreements, we may be required to pursue additional strategic partners, secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.
Contractual Obligations
Below is a table that presents our contractual obligations and commercial commitments as of June 30, 2005:
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|
|
Payments Due by Period |
|||||||||||||||||||||
|
|
Total |
|
Less than One Year |
|
1-3 Years |
|
4-5 Years |
|
More than 5 Years |
|||||||||||||
|
|
In thousands |
|||||||||||||||||||||
Operating lease obligations |
|
$ |
11,328 |
|
|
$ |
3,375 |
|
|
|
$ |
7,001 |
|
|
|
$ |
714 |
|
|
|
$ |
238 |
|
Unconditional Purchase Obligations |
|
1,993 |
|
|
1,993 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||||
Total |
|
$13,321 |
|
|
$5,368 |
|
|
|
$ |
7,001 |
|
|
|
$ |
714 |
|
|
|
$ |
238 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
In addition to the above, we have committed to make potential future milestone payments to a third party as part of an in-licensing arrangement. Payments under this arrangement generally become due and payable only upon achievement of certain developmental, regulatory and/or commercial milestones. Because such milestones have not been achieved, such contingencies have not been included in the table above.
Certain Factors That May Affect Future Results of Operations
This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on our current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: the success of our and our collaborators’ research and clinical development processes; the difficulties inherent in the development of pharmaceuticals, including uncertainties as to the timing, expense and results of preclinical studies and clinical trials; our dependence upon existing and potential collaborative partners; uncertainty as to whether our TAP compounds or those of our collaborators will succeed in entering human clinical trials and uncertainty as to the results of such trials; the risk that we and/or our collaborators may not be able to obtain regulatory approvals necessary to commercialize product candidates; the potential development by competitors of competing products and technologies; uncertainty whether our TAP technology will produce safe, effective and commercially viable products; the lack of assurance regarding patent and other protection for our proprietary technology; governmental regulation of our activities, facilities, products and personnel; the dependence on key personnel; uncertainties as to the extent of reimbursement for the costs of our potential products and related treatments by government and private health insurers and other organizations; the potential adverse impact of government-directed health care reform; the risk of product liability claims; and economic conditions, both generally and those specifically related to the biotechnology industry. As a result, our future development efforts involve a high degree of risk. For further information, refer to the more specific risks and uncertainties discussed throughout this Annual Report on Form 10-K.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of Statement of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be expensed based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted in the first annual period beginning after June 15, 2005, irrespective of the entity’s fiscal year. The Company must adopt Statement 123(R) on July 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of two methods: a “modified prospective method” in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date or a “modified retrospective” method, which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company intends to apply the Modified Prospective Method of adoption in its application of Statement 123(R).
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. We currently estimate that the impact of adoption of SFAS 123(R) in fiscal 2006 will result in compensation expense of $1.9 million. The impact of adoption of Statement 123(R) beyond fiscal 2006 cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net loss per share in this note to our consolidated financial statements.
On November 29, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment to ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities.
The FASB and the International Accounting Standard Board (IASB) noted that ARB 43, Chapter 4 and IAS 2, Inventories, are both based on the principle that the primary basis of accounting for inventory is cost. Both of those accounting standards also require that abnormal amounts of idle freight, handling costs and wasted materials be recognized as period costs; however, the Boards noted that differences in the wording of the two standards could lead to inconsistent application of those similar requirements. The FASB concluded that clarifying the existing requirements in ARB 43 by adopting language similar to that used in IAS 2 is consistent with its goals of improving financial reporting in the United States and promoting convergence of accounting standards internationally. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of SFAS 151 will have a material impact on its results of operations or financial position.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We maintain an investment portfolio in accordance with our Investment Policy. The primary objectives of our Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Although our investments are subject to credit risk, our Investment Policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the conservative nature of our investments and relatively short duration, interest rate risk is mitigated. We do not own derivative financial instruments in our investment portfolio.
Accordingly, we do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.