UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
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QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
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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 FOR THE TRANSITION PERIOD FROM TO
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COMMISSION
FILE NUMBER: 0-23930
TARGETED
GENETICS CORPORATION
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Washington
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91-1549568
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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1100 Olive Way,
Suite 100 Seattle, WA 98101
(Address
of principal executive offices)(Zip Code)
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements
for
at least the past 90 days. Yes x
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):
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o
Yes
x
No
Shares
of
Common Stock, par value $0.01 per share, outstanding as of November 4, 2008:
20,003,865
TARGETED
GENETICS CORPORATION
Quarterly
Report on Form 10-Q
For
the
quarter ended September 30, 2008
TABLE
OF
CONTENTS
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Page No.
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PART I
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FINANCIAL
INFORMATION
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Item 1.
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Unaudited
Financial Statements
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a)
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Condensed
Consolidated Balance Sheets at September 30, 2008 and December 31,
2007
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1
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b)
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Condensed
Consolidated Statements of Operations for the three and nine months
ended
September 30, 2008 and 2007
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2
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c)
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Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2008 and 2007
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3
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d)
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Notes
to Condensed Consolidated Financial
Statements (Unaudited)
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4
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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7
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Item
4T.
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Controls
and Procedures
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12
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PART
II
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OTHER
INFORMATION
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13
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Item
1.
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Legal
Proceedings
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13
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Item
1A.
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Risk
Factors
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13
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Item
2.
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Unregistered
Sales of Securities and Use of Proceeds
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25
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Item
3.
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Defaults
Upon Senior Securities
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25
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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25
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Item
5.
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Other
Information
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25
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Item
6.
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Exhibits
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25
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SIGNATURES
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26
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INDEX
TO EXHIBITS
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27
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PART
I FINANCIAL INFORMATION
Item
1. Unaudited Financial
Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30,
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December 31,
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2008
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2007
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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9,183,000
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$
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16,442,000
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Accounts
receivable
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368,000
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2,611,000
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Prepaid
expenses and other
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215,000
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243,000
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Total
current assets
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9,766,000
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19,296,000
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Property
and equipment, net
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1,292,000
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1,052,000
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Goodwill
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7,926,000
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7,926,000
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Other
assets
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200,000
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200,000
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Total
assets
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$
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19,184,000
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$
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28,474,000
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable and accrued expenses
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$
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2,144,000
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$
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2,161,000
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Accrued
employee expenses
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512,000
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1,507,000
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Accrued
restructure charges
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619,000
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574,000
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Deferred
revenue
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1,865,000
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79,000
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Current
portion of long-term obligations
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—
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336,000
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Total
current liabilities
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5,140,000
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4,657,000
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Accrued
restructure charges
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7,099,000
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7,569,000
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Deferred
rent
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4,000
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8,000
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Commitments
and contingencies
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Shareholders’
equity: |
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Preferred
stock, $0.01 par value, 10,000,000 shares authorized:
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Series
A preferred stock, 180,000 shares designated, none issued and
outstanding
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—
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—
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Common
stock, $0.01 par value, 45,000,000 shares authorized, 20,003,198
shares issued and outstanding at September 30, 2008 and 19,814,161
shares
issued and outstanding at December 31, 2007
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200,000
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198,000
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Additional
paid-in capital
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316,766,000
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316,196,000
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Accumulated
deficit
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(310,025,000
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)
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(300,154,000
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)
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Total
shareholders’ equity
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6,941,000
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16,240,000
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Total
liabilities and shareholders’ equity
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$
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19,184,000
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$
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28,474,000
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See
accompanying notes to condensed consolidated financial statements
TARGETED
GENETICS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended
September 30,
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Nine months ended
September 30,
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2008
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2007
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2008
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2007
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Revenue:
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Collaborative
revenue
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$
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1,742,000
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$
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1,943,000
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$
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6,478,000
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$
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6,612,000
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Licensing
revenue
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—
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500,000
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—
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500,000
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Total
revenue
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1,742,000
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2,443,000
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6,478,000
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7,112,000
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Operating
expenses:
|
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Research
and development
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3,192,000
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3,874,000
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11,294,000
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12,840,000
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General
and administrative
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1,224,000
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1,694,000
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4,865,000
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4,821,000
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Restructure
charges
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196,000
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183,000
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597,000
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809,000
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Total
operating expenses
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4,612,000
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5,751,000
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16,756,000
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18,470,000
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Loss
from operations
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(2,870,000
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)
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(3,308,000
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)
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(10,278,000
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)
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(11,358,000
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)
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Investment
income
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53,000
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277,000
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251,000
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305,000
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Other
income
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79,000
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—
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79,000
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—
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Gain
on debt restructure
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77,000
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—
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77,000
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—
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Interest
expense
|
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|
—
|
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—
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—
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(1,000
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)
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Net
loss
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$
|
(2,661,000
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)
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$
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(3,031,000
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)
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$
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(9,871,000
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)
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$
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(11,054,000
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)
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Net
loss per common share (basic and diluted)
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$
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(0.13
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)
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$
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(0.15
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)
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$
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(0.50
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)
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$
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(0.72
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)
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Shares
used in computation of basic and diluted net loss per common
share
|
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20,002,000
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19,814,000
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19,906,000
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15,388,000
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|
See
accompanying notes to condensed consolidated financial statements
TARGETED
GENETICS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine months ended
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September 30,
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2008
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2007
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Operating
activities:
|
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|
|
|
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Net
loss
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|
$
|
(9,871,000
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)
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$
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(11,054,000
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)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
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Depreciation
|
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399,000
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447,000
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Stock-based
compensation
|
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582,000
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514,000
|
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Loss
on investments
|
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|
—
|
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|
251,000
|
|
Gain
on sale of property and equipment
|
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|
(76,000
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)
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|
(22,000
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)
|
Gain
on debt restructure
|
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|
(77,000
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)
|
|
—
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Other
|
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|
(10,000
|
)
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
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Change
in accounts receivable
|
|
|
2,243,000
|
|
|
(46,000
|
)
|
Change
in prepaid expenses and other
|
|
|
28,000
|
|
|
(12,000
|
)
|
Change
in other assets
|
|
|
—
|
|
|
6,000
|
|
Change
in current liabilities
|
|
|
(1,012,000
|
)
|
|
(1,000
|
)
|
Change
in deferred revenue
|
|
|
1,786,000
|
|
|
(33,000
|
)
|
Change
in deferred rent
|
|
|
(5,000
|
)
|
|
(2,000
|
)
|
Change
in accrued restructure charges
|
|
|
(424,000
|
)
|
|
(228,000
|
)
|
Net
cash used in operating activities
|
|
|
(6,437,000
|
)
|
|
(10,180,000
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(639,000
|
)
|
|
(333,000
|
)
|
Proceeds
from the sale of equipment
|
|
|
76,000
|
|
|
22,000
|
|
Proceeds
from sale of investments
|
|
|
—
|
|
|
16,000
|
|
Net
cash used in investing activities
|
|
|
(563,000
|
)
|
|
(295,000
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
proceeds from sales of capital stock (and warrants)
|
|
|
—
|
|
|
25,956,000
|
|
Proceeds
from the exercise of stock options
|
|
|
—
|
|
|
39,000
|
|
Payments
under debt and equipment financing
arrangements
|
|
|
(259,000
|
)
|
|
(1,195,000
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(259,000
|
)
|
|
24,800,000
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(7,259,000
|
)
|
|
14,325,000
|
|
Cash
and cash equivalents, beginning of period
|
|
|
16,442,000
|
|
|
6,206,000
|
|
Cash
and cash equivalents, end of period
|
|
$
|
9,183,000
|
|
$
|
20,531,000
|
|
See
accompanying notes to condensed consolidated financial statements
TARGETED
GENETICS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary
of Significant Accounting Policies
Basis
of Presentation
The
condensed consolidated financial statements included in this quarterly report
have been prepared by Targeted Genetics Corporation, or Targeted Genetics,
according to the rules and regulations of the Securities and Exchange
Commission, or SEC, and according to accounting principles generally accepted
in
the United States of America, or GAAP, for interim financial statements. The
accompanying balance sheet information as of December 31, 2007 is derived from
our audited consolidated financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been omitted in accordance with the SEC’s rules and regulations.
Our condensed consolidated financial statements include the accounts of Targeted
Genetics and our inactive, wholly owned subsidiaries, Genovo, Inc. and TGCF
Manufacturing Corporation.
All
significant intercompany transactions have been eliminated in consolidation.
The
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments, which consist solely of normal recurring
adjustments necessary to present fairly our financial position and results
of
operations as of and for the periods indicated.
We
do not
believe that our results of operations for the three and nine months ended
September 30, 2008 are necessarily indicative of the results to be expected
for
the full year.
The
condensed consolidated financial statements included in this quarterly report
should be read in conjunction with our audited consolidated financial statements
and related footnotes included in our annual report on Form 10-K for the year
ended December 31, 2007.
Our
combined cash and cash equivalents totaled $9.2 million at September 30, 2008.
We believe that our current resources and the cash we expect to receive from
our
collaborative partners are only sufficient to fund our planned operations into
the first quarter of 2009. This estimate is based on our ability to perform
planned research and development activities and the receipt of planned funding
from our collaborators and actual results could differ from our estimates.
We
intend to seek additional financing in order to fund our operations through
2009; however, we cannot provide assurances that we will be successful in
obtaining additional financing when and as needed in the future. If we do not
raise additional funds, we would be forced to preserve our cash position through
a combination of cost reduction measures, which may include a reduction in
workforce, termination of our product development programs, monetization of
technology assets or intellectual property, sales of assets, likely at values
significantly below their potential worth, or the pursuit of alternative
financing transactions that would likely be on terms disadvantageous to us
and
dilutive to our shareholders. We have prepared the accompanying condensed
consolidated financial statements assuming that we will continue as a going
concern notwithstanding the fact that there is no assurance that we will be
able
to secure the financial resources we require in the near term to continue as
a
going concern and our condensed consolidated financial statements do not reflect
adjustments that may impact the amount and classifications of assets or
liabilities that may result from these liquidity uncertainties.
Recently
Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 157, “Fair
Value Measurements,”
or SFAS
No. 157. SFAS No. 157 provides guidance for using fair value to measure assets
and liabilities and requires expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used
to
measure fair value, and the effect of fair value measurements on earnings.
SFAS
No.
157 applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value. SFAS No. 157 does not expand the use of fair
value
in any new circumstances. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 157 did not have an
effect on our financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—including an
amendment of FASB Statement No. 115,”
or SFAS
No. 159. SFAS No. 159 permits entities to choose to measure certain financial
assets and liabilities at fair value. Unrealized gains and losses on items
for
which the fair value option has been elected are reported in earnings. SFAS
No.
159 is effective for fiscal years beginning after November 15, 2007. The
adoption of SFAS No. 159 did not have an effect on our financial position or
results of operations.
In
July
2007, FASB’s Emerging Issues Task Force, or EITF, reached a consensus on Issue
No. 07-3, “Accounting
for Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities,”
or
EITF
07-3. The consensus requires companies to defer and capitalize prepaid,
nonrefundable research and development payments to third parties over the period
that the research and development activities are performed or the services
are
provided, subject to an assessment of recoverability. EITF 07-3 is effective
for
fiscal years beginning after December 15, 2007 and early adoption was not
permitted.
The
adoption of EITF 07-3 changed our policy on nonrefundable prepayments for
research and development services whereby such costs will be deferred and
recognized as the services are rendered as compared to the existing policy
whereby such payments are charged to research and development expense as paid.
This change did not have a material impact on the three or nine months ended
September 30, 2008.
In
December 2007, FASB’s EITF reached a consensus on Issue No. 07-1,“Accounting
for Collaborative Arrangements,”
or
EITF 07-1. EITF 07-1 defines collaborative arrangements and establishes
reporting requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties.
It
also establishes the appropriate income statement presentation and
classification for joint operating activities and payments between participants,
as well as the sufficiency of the disclosures related to these arrangements.
EITF 07-1 is effective for fiscal years beginning after December 15, 2008.
EITF 07-1 is effective for all of our collaborations in place after
January 1, 2009. We are in the process of evaluating the effect of the
adoption of EITF 07-1.
In
April
2008, the FASB issued Staff Position No. 142-3, “Determination
of the Useful Life of Intangible Assets,”
or SFAS
No. 142-3. This standard amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of
a recognized intangible asset under FASB Statement No. 142, “Goodwill
and Other Intangible Assets.”
SFAS
No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. We are in the process of evaluating the
effect of the adoption of SFAS No. 142-3.
2. Accrued
Restructure Charges
We
apply
the provisions of SFAS No. 146, “Accounting
for Costs Associated with Exit or Disposal Activities,”
or SFAS
No. 146, as
it
relates to our facility in Bothell, Washington and record restructure charges
on
the operating lease for the facility as a result of our 2003 decision to
discontinue use of the facility. Accrued restructure charges represent our
best
estimate of the fair value of the liability as determined under SFAS No. 146
and
are computed as the fair value of the difference between the remaining lease
payments, net of any assumed sublease income and expense. In 2007, based on
a
number of factors, including continued high vacancy rates in the Bothell market
and an increase in available office space in the competing downtown real estate
markets, we concluded that we would most likely not be able to successfully
sublease the facility. Therefore, we assume no sublease income and related
tenant improvement costs in our restructuring accrual calculation. We
record
accretion expense based upon changes in the accrued liability that results
from
the passage of time at an assumed discount rate of 10%. Accretion expense is
recorded on an ongoing basis through the end of the lease term in September
2015
and is reflected as a restructuring charge in the accompanying condensed
consolidated statements of operations.
The
table
below presents a reconciliation of the accrued restructure liability for the
nine month period ended September 30, 2008:
|
|
Restructure
Liability
|
|
December
31, 2007 accrued liability
|
|
$
|
8,143,000
|
|
Adjustments
to the liability (accretion)
|
|
|
597,000
|
|
Amount
paid
|
|
|
(1,022,000
|
)
|
September
30, 2008 accrued liability
|
|
$
|
7,718,000
|
|
Adjustments
to the accrued restructure liability include accretion expense of $196,000
for
the three months ended September 30, 2008 and $597,000 for the nine months
ended
September 30, 2008.
Through
September 30, 2008, we have recorded restructure charges totaling $12.7 million
for our Bothell facility. We expect to incur an additional $3.2 million in
accretion expense through the expiration of the Bothell lease in September
2015.
We
periodically evaluate our restructuring estimates and assumptions and record
restructure charges as necessary. Because restructure charges are estimates
based upon assumptions regarding the timing and amounts of future events,
significant adjustments to the accrual may be necessary in the future based
on
the actual outcome of events and as we become aware of new facts and
circumstances.
3.
Equity
Stock
Compensation
The
following table summarizes stock-based compensation expense related to employee
stock options and restricted stock units under SFAS No. 123(R), “Share-Based
Payment,”
for the
three and nine months ended September 30, 2008 and 2007:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Stock
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expense
|
|
$
|
6,000
|
|
$
|
1,000
|
|
$
|
99,000
|
|
$
|
195,000
|
|
General
and administrative expense
|
|
|
6,000
|
|
|
7,000
|
|
|
41,000
|
|
|
157,000
|
|
Restricted
stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expense
|
|
|
71,000
|
|
|
38,000
|
|
|
231,000
|
|
|
55,000
|
|
General
and administrative expense
|
|
|
54,000
|
|
|
73,000
|
|
|
211,000
|
|
|
107,000
|
|
Total
stock-based compensation expense
|
|
$
|
137,000
|
|
$
|
119,000
|
|
$
|
582,000
|
|
$
|
514,000
|
|
We
determine the fair value of each restricted stock unit on the date of the grant
using the closing market price of our traded securities. We estimate the fair
value of each stock option award on the date of the grant using the
Black-Scholes-Merton option pricing model. There were no stock options granted
in the nine months ended September 30, 2008. The weighted average assumptions
for stock options granted in the nine months ended September 30, 2007 were:
a)
expected dividend rate of zero,
b)
expected stock price volatility ranged from 1.047 to 1.114,
c)
risk
free interest rate ranged from 4.54% to 4.58%,
d)
expected life of options ranged from 4 to 5 years.
Expected
Dividend: We
do not
anticipate paying any dividends.
Expected
Life: Expected
life represents the period that our stock-based awards are expected to be
outstanding based on historical experience and vesting schedules of similar
awards.
Expected
Volatility: Expected
volatility represents the weighted average historical volatility of the shares
of our common stock for the most recent four-year and five-year periods.
Risk-Free
Interest Rate: We
base the risk-free interest rate used on the implied yield currently available
on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Where the expected term of our stock-based awards does not correspond with
the
terms for which interest rates are quoted, we perform a straight-line
interpolation to determine the rate from the available term
maturities.
Forfeiture
Rate: We
apply an estimated forfeiture rate that we derived from historical employee
termination behavior. If the actual number of forfeitures differs from our
estimates, we may record additional adjustments to compensation expense in
future periods.
4.
Investments
Effective
January 1, 2008, we implemented SFAS No. 157 for our financial assets and other
items that are recognized or disclosed at fair value on a recurring basis.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
GAAP and expands disclosures about fair-value measurements. SFAS No. 157
requires that fair value measurements be classified and disclosed in one of
the
following three categories in the fair value hierarchy:
Level
1. Observable
inputs such as quoted prices in active markets;
Level
2. Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; or
Level
3. Unobservable
inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.
As
of
September 30, 2008, we held approximately 2.4 million shares of Chromos
Molecular Systems Inc., or Chromos, a publicly traded company whose common
stock
was listed on the Toronto Stock Exchange. The Chromos securities were delisted
from the Toronto Stock Exchange at the close of the market on May 8, 2008,
and
as a result there is not an active market for the stock. In October 2008,
Chromos entered into a restructure agreement under which all assets, liabilities
and equity are now controlled by a newly formed company, Calyx Bio-ventures.
We
are currently waiting for information regarding the conversion of our existing
Chromos shares to determine the value of our investment in the newly formed
company. Through December 31, 2007, we recorded our common stock investment
in
Chromos at fair market value and recorded changes in the fair market value
of
the Chromos stock in accumulated other comprehensive loss. We also periodically
evaluated our Chromos stock for signs of impairment that may be
other-than-temporary, which would necessitate a reduction in the carrying value
of the investment and charge to expense. During 2007, we determined that our
investment was other-than-temporarily impaired and the fair value of our
investment was zero due to the declining market value of the Chromos stock
and a
decline in Chromos’ financial position. Accordingly, we wrote the asset down to
the fair market value of the Chromos stock on both March 31, 2007 and June
30,
2007 and recognized a realized loss of $208,000 in the first quarter of 2007
and
an additional realized loss of $44,000 in the second quarter of 2007. This
investment is classified as a Level 3 on the fair value hierarchy and there
were
no changes to the balance during the three and nine month periods ended
September 30, 2008.
Our
cash
equivalents are recorded at cost, which approximates fair market value, and
consist primarily of money market investments. Our money market investments
are
classified as Level 1 on the fair value hierarchy.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Forward-looking statements include statements about
our
product development and commercialization goals and expectations, potential
market opportunities, our plans for and anticipated results of our clinical
development activities and the potential advantage of our product candidates,
our future cash requirements and the sufficiency of our cash and cash
equivalents to meet these requirements, our ability to raise capital when needed
and other statements that are not historical facts. Words such as “may,” “will,”
“believes,” “estimates,” “expects,” “anticipates,” “plans” and “intends,” or
statements concerning “potential” or “opportunity” and other words of similar
meaning or the negative thereof, may identify forward-looking statements, but
the absence of these words does not mean that a statement is not
forward-looking. In making these statements, we rely on a number of assumptions
and make predictions about the future. Our actual results could differ
materially from those stated in, or implied by, forward-looking statements
for a
number of reasons, including the risks described in the section “Risk Factors”
in Part II, Item 1A of this quarterly report.
You
should not unduly rely on these forward-looking statements, which speak only
as
of the date of this quarterly report. We undertake no obligation to publicly
revise any forward-looking statement after the date of this quarterly report
to
reflect circumstances or events occurring after the date of this quarterly
report or to conform the statement to actual results or changes in our
expectations. You should, however, review the risk factors and other information
we provide in the reports we file from time to time with the SEC.
BUSINESS
OVERVIEW
We
are a
clinical-stage therapeutic biotechnology company. We are at the forefront of
developing, with the goal of commercializing, a new class of therapeutic
products called gene therapeutics. We believe that a wide range of diseases
may
potentially be treated or prevented with gene therapeutics. In addition to
treating diseases for which there is no treatment, we believe that there is
a
significant opportunity to use gene therapeutics to more effectively treat
diseases that are currently treated using other therapeutic classes of drugs
such as protein-based drugs, monoclonal antibodies or small molecule
drugs.
Gene
therapeutics consist of a delivery vehicle, called a vector, and genetic
material. The role of the vector is to carry the genetic material into a target
cell. Once delivered into the cell, the gene can express or direct production
of
the specific proteins encoded by the gene. Gene therapeutics may be used to
treat disease facilitating the normal protein production or gene regulation
capabilities of cells. Gene therapeutics may be used to enable cells to produce
more of a certain protein or different proteins than they normally produce,
thereby treating a disease state. Vectors can also be used to deliver specific
sequences that once delivered and expressed as interfering RNA, or RNAi, can
shut down or interfere with messenger RNA production of disease specific
genes.
From
time
to time we have evaluated a range of opportunities that include strategic
combinations and product diversification with a particular focus on product
candidates to which we can apply our significant development expertise. For
example, in the third quarter of 2008 the U.S. Department of Defense, or DOD,
Amyotrophic Lateral Sclerosis Research Program awarded us up to $2.4 million
of
grant funding to be applied toward preclinical development of new therapies
for
amyotrophic lateral sclerosis, or ALS. Under this program, we are developing
a
small-molecule based on the observations by our collaborator, Dr. John
Engelhardt, at the University of Iowa, that over-activation of nicotinamide
adenine dinucleotide phosphate, or NADPH oxidase is associated with pathogenesis
of ALS. Further, inhibition of NADPH oxidase activity significantly increases
survival of mice with ALS. The work under this grant includes formulation
development and preclinical pharmacokinetic and safety studies.
We
and
our partners, Celladon Corporation, or Celladon, the National Institute of
Allergy and Infectious Diseases, or NIAID, the International AIDS Vaccine
Initiative, or IAVI, the Children’s Hospital of Philadelphia, or CHOP, and The
Research Institute at Nationwide Children’s Hospital (formerly known as the
Columbus Children’s Research Institute), or NCH, are primarily focused on the
following adeno-associated viral vectors, or AAV, based product development
programs:
Description
|
|
Indication
|
|
Funding
Partners
|
|
Development
Status
|
AAV
delivery of TNF-alpha inhibitor
|
|
Inflammatory
Arthritis
|
|
None
|
|
Phase
I/II
|
AAV
delivery of HIV antigens
|
|
HIV/AIDS
|
|
IAVI,
CHOP and NCH
|
|
Phase
II
|
AAV
delivery of SERCA2a
|
|
Heart
Failure
|
|
Celladon
|
|
Phase
I
|
AAV
delivery of HIV antigens
|
|
HIV/AIDS
|
|
CHOP,
NCH and NIAID
|
|
Preclinical
|
AAV
expression of htt shRNA (RNAi)
|
|
Huntington’s
disease, or HD
|
|
None
|
|
Preclinical
|
AAV
delivery of RPE 65
|
|
Leber’s
congenital amaurosis, or LCA
|
|
None
|
|
Phase
I/II
|
Our
now
complete Phase I/II clinical trial of our tgAAC94 product candidate for
inflammatory arthritis evaluated multiple doses of tgAAC94 administered directly
to affected joints with or without concurrent systemic TNF antagonist therapies.
The study achieved its primary endpoint of safety and tolerability. In addition,
we reported encouraging data on improvement of the injected joint based on
patient-reported outcome measures considered a gauge of efficacy. These
data suggests further study is warranted. Robin Ali, our collaborator at
the University of College London plans to expand the current ongoing LCA
clinical trial to include younger patients and a higher dose cohort. We
and our HIV/AIDS vaccine collaborators are supporting the NIAID as it prepares
to initiate a Phase I clinical trial of our AAV1-based vaccine product candidate
currently anticipated for the first half of 2009. Our HD program academic
collaborator, Bev Davidson, Ph.D., is conducting the necessary mice studies
that
are required prior to the initiation of safety studies in a large animal model.
We, with our collaborator, Dr. John Engelhardt at the University of Iowa, are
moving forward with planned activities to implement the ALS program plan.
Most
of
our expenses are related to our research and development programs, the conduct
of preclinical studies and clinical trials and general and administrative
support for these activities. We have financed the company primarily through
proceeds from public and private sales of our equity securities, through cash
payments received from our collaborative partners for product development and
manufacturing activities, and through proceeds from the issuance of debt and
loan funding under equipment financing arrangements.
As
of
September 30, 2008, our accumulated deficit totaled $310.0 million. We expect
to
generate substantial additional losses for the foreseeable future, primarily
due
to the costs associated with funding our product development programs,
developing and maintaining our manufacturing capabilities and developing our
intellectual property assets.
We
will
require access to significantly higher amounts of capital than we currently
have
in order to successfully develop our product candidates or our partnered product
candidates. We may be unable to obtain required funding when needed or on
acceptable terms, obtain or maintain corporate partnerships, or complete
acquisition transactions necessary or desirable to complete the development
of
our product candidates and, as a result, we may be required to delay or
terminate some or all of our development programs.
CRITICAL
ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
There
have been no material changes from the critical accounting policies, estimates
and assumptions as disclosed in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained in our annual report on
Form 10-K for the year ended December 31, 2007.
RESULTS
OF OPERATIONS
Revenue
Revenue
decreased to $1.7 million for the three months ended September 30, 2008 as
compared to $2.4 million for the same period in 2007. Revenue decreased to
$6.5
million for the nine months ended September 30, 2008 as compared to $7.1 million
for the same period in 2007. The decrease in revenue reflects a decrease in
research and development and manufacturing activities under the NIAID-funded
HIV/AIDS vaccine project in collaboration with CHOP and NCH and decreased
licensing revenue from a milestone payment received in the third quarter of
2007. This is partially offset by higher research and development activities
under our collaboration with Celladon. Based upon the terms specified in our
collaboration agreements, we receive advance payments from some of our
collaboration partners before the project work has been performed. These
payments are deferred and recognized as revenue when the costs are incurred.
We
expect that our revenue for the remainder of 2008 will consist primarily of
research and development revenue earned from our collaboration with Celladon
and
the NIAID-funded HIV/AIDS subcontract with CHOP and NCH. We expect that our
revenue for 2008 will decrease from 2007 as our partnered programs emphasize
clinical development in 2008 which results in fewer resources devoted to the
manufacturing aspects of development. We expect our 2008 revenue generated
from
our Celladon collaboration to be higher than in 2007. Our HIV/AIDS vaccine
development revenue from the IAVI and NIAID-funded projects fluctuates year
to
year depending upon the scope of development efforts underway within each
separate but complementary program. For 2008, our HIV/AIDS efforts are focused
on advancing the NIAID-funded HIV/AIDS vaccine efforts. Accordingly, we expect
no activity within the IAVI-funded portion of our HIV/AIDS development work
and
we expect revenue under our NIAID-funded HIV/AIDS vaccine collaboration to
decrease compared to 2007 due to less development and manufacturing activity
in
2008, as the project is focused primarily on preparing for the initiation of
an
National Institutes of Health, or NIH, sponsored clinical study in 2009.
Operating
Expenses
Research
and Development Expenses. Research
and development expenses decreased to $3.2 million for the three months ended
September 30, 2008 compared to $3.9 million for the same period in 2007.
Research and development expenses decreased to $11.3 million for the nine months
ended September 30, 2008 compared to $12.8 million for the same period in 2007.
This decrease reflects lower clinical trial costs for our inflammatory arthritis
program as we have completed our Phase I/II clinical trial. This decrease was
partially offset by increased activity on our partnered heart failure product
candidate during 2008.
The
following is an allocation of our total research and development costs between
our programs that are in clinical development and those that are in research
or
preclinical stages of development:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Programs
in clinical development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflammatory
arthritis
|
|
$
|
269,000
|
|
$
|
1,091,000
|
|
$
|
1,157,000
|
|
$
|
2,948,000
|
|
Heart
failure (1)
|
|
|
833,000
|
|
|
170,000
|
|
|
2,298,000
|
|
|
373,000
|
|
IAVI
HIV/AIDS vaccine
|
|
|
—
|
|
|
33,000
|
|
|
—
|
|
|
202,000
|
|
Indirect
costs and other
|
|
|
1,212,000
|
|
|
631,000
|
|
|
3,531,000
|
|
|
2,161,000
|
|
Total
clinical development program expense
|
|
|
2,314,000
|
|
|
1,925,000
|
|
|
6,986,000
|
|
|
5,684,000
|
|
Research
and preclinical development program expense
|
|
|
878,000
|
|
|
1,949,000
|
|
|
4,308,000
|
|
|
7,156,000
|
|
Total
research and development expense
|
|
$
|
3,192,000
|
|
$
|
3,874,000
|
|
$
|
11,294,000
|
|
$
|
12,840,000
|
|
(1)
Includes costs incurred after the trial was initiated in May 2007. Costs
incurred prior to that are included as research and preclinical development
program expense.
Research
and development costs attributable to programs in clinical development include
the costs of salaries and benefits, clinical trial costs, outside services,
materials and supplies incurred to support the clinical programs. Indirect
costs
allocated to clinical programs include facility and occupancy costs, research
and development administrative costs, and license and royalty payments. These
costs are further allocated between clinical and preclinical programs based
on
relative levels of program activity. Celladon separately manages and funds
the
clinical trial costs of the heart failure program and IAVI separately managed
and funds the clinical trial costs of the HIV/AIDS vaccine program for the
developing world. As a result, we do not include those costs in our research
and
development expenses.
Costs
attributed to research and preclinical programs represent our earlier-stage
development activities and include costs incurred for development activities
for
the NIAID-funded HIV/AIDS vaccine under a subcontract with CHOP and NCH and
the
heart failure programs, as well as other programs prior to their transition
into
clinical trials. Research and preclinical program expense also includes costs
that are not allocable to a clinical development program, such as unallocated
manufacturing infrastructure costs. Because we conduct multiple research
projects and utilize resources across several programs, our research and
preclinical development costs are not directly assigned to individual programs.
For
purposes of reimbursement from our collaboration partners, we capture the level
of effort expended on a program through our project management system, which
is
based primarily on human resource time allocated to each program, supplemented
by an allocation of indirect costs and other specifically identifiable costs,
if
any. As a result, the costs allocated to programs identified in the table above
reflect the relative costs of the program.
General
and Administrative Expenses. General
and administrative expenses decreased to $1.2 million for the three months
ended
September 30, 2008 from $1.7 million for the same period in 2007. This decrease
reflects lower intellectual property charges for the quarter related to the
timing of patent issuances in Europe, lower shareholder costs and decreased
use
of external consultants. General and administrative expense increased to $4.9
million for the nine months ended September 30, 2008 compared to $4.8 million
for the same period in 2007.
This
increase reflects higher intellectual property charges related to patent costs
and higher legal fees as compared to the first nine months of 2007.
Restructure
Charges. Restructure
charges increased to $196,000 for the three months ended September 30, 2008
compared to $183,000 for the same period in 2007and consists entirely of
accretion expense. Restructure charges decreased to $597,000 for the nine months
ended September 30, 2008 compared to $809,000 for the same period in 2007.
Restructure charges include accretion expense of $597,000 for the nine months
ended September 30, 2008 and $549,000 for the nine months ended September 30,
2007. Restructuring charges in 2007 also includes $260,000 related to changes
in
our estimates of the anticipated lead time to sublease the Bothell facility.
Other
Income and Expense
Investment
Income.
Investment income reflects interest income earned on our short term investments
and realized gains or losses on our investment in Chromos. Investment income
decreased to $53,000 for the three months ended September 30, 2008 compared
to
$277,000 for the same period in 2007. Investment income decreased to $251,000
for the nine months ended September 30, 2008 compared to $305,000 for the same
period in 2007. Investment income has decreased due to lower average cash
balances and lower interest rates compared to the prior year. For the nine
month
period ended September 30, 2007, investment income reflects a $251,000 realized
loss related to an other-than-temporary impairment loss on our investment in
Chromos due to the declining market value of the Chromos securities combined
with a decline in Chromos’ financial condition.
Other
Income.
Other income reflects proceeds from the sale of obsolete capital
assets.
Gain
on debt restructure. In
2006,
we signed an agreement to restructure $8.15 million of debt payable to Biogen
Idec. Under the agreement, we exchanged $5.65 million of debt for one million
shares of our common stock with a fair value of $2.9 million with Biogen Idec.
Inherent in our determination of the gain on debt restructure is an estimate
of
the amounts and timing of future principal and interest payments. To the extent
that changes in our estimates result in decreases in estimated future interest
payments such gain was deferred until realized. In August 2008, we made our
final principal and interest payment to Biogen Idec. The difference between
the
final principal and interest payment and the estimated liability established
in
2006 was recognized as a realized gain of $77,000.
Liquidity
and Capital Resources
We
had
cash and cash equivalents balances of $9.2 million at September 30, 2008
compared to $16.4 million at December 31, 2007. Our cash and cash
equivalents decreased $7.3 million in the nine months ended September 30, 2008
primarily reflecting cash used in operations of $6.4 million, capital purchases
of $639,000 and payments under debt arrangements of $259,000 primarily related
to the final principal and interest payment of the Biogen Idec note.
Our
primary sources of capital are proceeds from public and private sales of our
equity securities and through cash payments received from our collaborative
partners and through proceeds from the issuance of debt. To a lesser degree,
we
have also financed our operations through interest earned on our cash and loan
funding under equipment leasing agreements and in the last two years from
licensing revenue. These
financing sources have historically allowed us to maintain adequate levels
of
cash and cash equivalents but, particularly in the current market environment,
they may not continue to do so.
Our
primary expenses are related to the development of our research and development
programs, the conduct of preclinical studies and clinical trials and general
and
administrative support for these activities. We will require substantial
additional financial resources to fund the development and commercialization
of
our clinical stage and other pre-clinical product candidates. We currently
fund
all costs of these programs from our working capital, although our strategy
is
to ultimately seek a partner to fund later-stage development of some of our
self-funded programs.
In
addition to the funding necessary to advance our product development and fund
our ongoing operating costs, we also have lease commitments that draw on our
cash resources. Our most significant obligations are approximately $10.9 million
of remaining lease payments on our Bothell facility, which we are obligated
to
pay at $1.4 million to $1.6 million per year until the year 2015.
We
expect
the level of our future operating expenses to be driven by the needs of our
product development programs and our lease obligations. The size, scope and
pace
of our product development activities depend on the availability of the sources
of capital described above. Our future cash requirements will depend on many
factors, including:
|
• |
whether
we decide to continue to pursue all or a portion of our research
and
development programs;
|
|
• |
the
timing, costs and scope of, and our success in, conducting clinical
trials, obtaining regulatory approvals and maintaining and expanding
our
patent portfolio;
|
|
• |
the
rate and extent of scientific progress in our research and development
programs;
|
|
• |
the
availability and success of development collaborations with third
parties;
|
|
• |
competing
technological and market developments;
|
|
• |
the
existence and outcome of any litigation or administrative proceedings,
including those involving product liability or intellectual property;
and
|
|
• |
the
timing and costs of, and our success in, any product commercialization
activities and facility expansions, if and as
required.
|
We
have
financed our product development activities and general corporate functions
primarily through proceeds from public and private sales of our equity
securities, through cash payments received from our collaborative partners
and
proceeds from the issuance of debt. To a lesser degree, we have also financed
our operations through interest earned on cash and cash equivalents and loan
funding under equipment financing agreements and, in the last two years, from
license revenue. The size, scope and pace of our product development activities
depend on the availability of these resources. These financing sources have
historically allowed us to maintain adequate levels of cash and cash equivalents
but, particularly in the current market environment, they may not continue
to do
so.
Our
development collaborations have typically provided us with funding in several
forms, including purchases of our equity securities, loans, payments for
reimbursement of research and development costs and milestone fees and payments.
We and our partners typically agree on a target disease and create a development
plan for the product candidate, which generally spans several years and is
subject to termination or extension. For example, when the Celladon
collaboration was initiated in 2005, it originally had a research and
development work plan that was established and funded based on quarterly costs.
In March 2008, we and Celladon agreed to a research and development work plan
extending through January 2010. Also, in 2005, we extended the scope of our
IAVI-funded HIV/AIDS vaccine program activities to the developed world via
our
collaboration with CHOP and NCH through a subcontract with NIAID. To date we
have received $9.7 million under this subcontract and our portion of the
remaining total project funding of up to $8.5 million depends on annual renewal
of government funding and the scope of product development work plans agreed
upon by us, CHOP, NCH and the NIAID. The funding is awarded to us in annual
installments based on an approved work plan and achievement of milestones.
In
August 2008, we were officially awarded $3.9 million in additional funding
for
the fourth plan year covering the time period from August 31, 2008 through
August 30, 2009. For 2008, this program comprises substantially all of our
current HIV/AIDS product development activities.
The
funding from each of our collaborative partners fully offsets our incremental
program costs incurred by each collaboration and our overhead and fixed costs.
Our revenue from collaborative agreements and licenses totaled $10.3 million
in
2007 and, assuming that we complete all of the planned development activities
for each of these funded projects, we expect revenue from our collaborative
partners of approximately $8.5 million to $9.0 million in 2008. Our revenue
plan
for 2008 includes the expectation that we accomplish our current Celladon heart
failure and NIAID-funded HIV/AIDS vaccine work plans.
The
terms
of each of our collaborations include provisions that allow our partners the
right to terminate both the underlying collaboration and the obligation to
provide research funding at any time with as little as 90 days’ notice. As an
example, in 2008 Sirna, a wholly-owned subsidiary of Merck & Co., Inc.,
decided not to continue its collaboration with us on our HD program and instead
we acquired the rights necessary to continue that program on our own. If we
were
to lose the collaborative funding expected from the Celladon collaboration
or
the NIAID subcontract and were unable to obtain alternative sources of funding,
we would be unable to continue our research and development program for that
product candidate and/or we would not have sufficient resources available to
fund our ongoing operations for as long as currently expected.
Our
financing strategy is focused around the advancement of our programs in clinical
development, the advancement of our LCA program, RNAi initiatives such as our
HD
program, new product development and broader RNAi initiatives, leveraging our
intellectual property assets and capabilities into additional capital raising
opportunities, including through potential strategic transactions, and accessing
the public and private capital markets. Our ability to raise capital depends
in
part on product development success and how the public capital markets perceive
the promise of our products and platform. There is a low percentage of success
in biopharmaceutical product development of all types, and current capital
markets have tended to discount the value of biopharmaceutical companies with
early-stage products.
We
are
currently focusing on additional sources of financing that could involve one
or
more of the following:
|
·
|
mergers
and acquisitions;
|
|
·
|
selling
or licensing our technology, product candidates or other assets;
|
|
·
|
entering
into additional product development or manufacturing
collaborations;
|
|
·
|
issuing
equity in the public or private markets;
|
|
·
|
extending
or expanding our current
collaborations;
|
|
·
|
borrowing
under loan or equipment financing arrangements;
and/or
|
Additional
funding may not be available to us on reasonable terms, if at all. The capital
markets have been experiencing extreme volatility and disruption for more than
12 months. In recent weeks, the volatility and disruption have reached
unprecedented levels. The scope and extent of this disruption in the capital
markets could make it difficult or impossible to raise additional capital in
public or private capital markets until conditions stabilize and conditions
may
not stabilize before we reach the end of our financial resources and are forced
to go out of business.
We
expect
that our total cash requirements for the fiscal year ending December 31, 2008
will range from $11.5
million to $12.5 million and that our cash and cash equivalents at September
30,
2008, plus the anticipated funding from our product development collaborations
and contracts will only be sufficient to fund our current level of operations
into the first quarter of 2009. This estimate is based on our ability to
perform, and success of, planned research and development activities and the
receipt of planned funding from our collaborators and actual results could
differ from our estimates.
Depending
on our ability to successfully access additional funding, we may be forced
to
implement cost reduction measures, which could include a reduction in workforce,
suspension or termination of our product development programs, sales of assets,
technologies or programs likely at values significantly below their potential
worth, or the pursuit of alternative financing transactions that would likely
be
on terms disadvantageous to us and/or dilutive to our shareholders.
Evaluation
of disclosure controls and procedures. Based
on
our management’s evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are effective in ensuring that
information we are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is properly recorded,
processed, summarized and reported within the time periods specified in the
SEC
rules and forms.
Changes
in internal control over financial reporting. There
was
no change in our internal control over financial reporting that occurred during
the period covered by this quarterly report that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
In
July
2007, we were notified that a patient experienced a serious adverse event,
or
SAE, while enrolled in the clinical trial of tgAAC94, our product candidate
to
treat arthritis. Although the patient subsequently died, as a result of a review
of the SAE, both the National Institutes of Health Recombinant DNA Advisory
Committee, or RAC, and the trial’s independent data safety monitoring board, or
Safety Board, concluded that the patient’s death was not caused by the tgAAC94
product, as described in our Form 8-K filed on December 6, 2007. In addition,
after the U.S. Food and Drug Administration, or FDA reviewed the safety data
on
all 127 patients in the trial and data from the SAE, the hold originally put
on
the clinical trial was removed, permitting the clinical trial to resume. In
September 2008, we were made aware, although we have not been formally served
notice, that we, among others, were named in a lawsuit filed by the patient’s
spouse. The complaint relating to the lawsuit alleges that the named parties’
negligence was the proximate cause of the patient’s death and seeks unspecified
damages in excess of $50,000.
Item
1A. Risk
Factors.
In
addition to the other information contained in this quarterly report and our
annual report on Form 10-K for the year ended December 31, 2007, you should
carefully read and consider the following risk factors. If any of these risks
actually occur, our business, operating results or financial condition could
be
harmed. This could cause the trading price of our stock to decline, and you
could lose all or part of your investment.
Risks
Related to Our Business
If
we are unable to raise additional capital or secure additional sources of
funding in the near term, we will be unable to conduct our operations and
develop our potential products.
Because
our internally generated cash flow will not fund development and
commercialization of our product candidates, we will require substantial
additional financial resources. Our future capital requirements will depend
on
many factors, including:
|
·
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whether
we decide to continue to pursue all or a portion of our research
and
development programs;
|
|
·
|
the
timing, costs and scope of, and our success in, conducting clinical
trials, obtaining regulatory approvals and maintaining and expanding
our
patent portfolio;
|
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·
|
the
rate and extent of scientific progress in our research and development
programs;
|
|
·
|
the
availability and success of development collaborations with third
parties;
|
|
·
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competing
technological and market
developments;
|
|
·
|
the
existence and outcome of any litigation or administrative proceedings
involving intellectual property;
and
|
|
·
|
the
timing and costs of, and our success in, any product commercialization
activities and facility expansions, if and as
required.
|
We
currently expect that our existing financial resources will only be sufficient
to fund our current level of operations into the first quarter of 2009 and
actual results could differ from this estimate. Additional sources of financing
could involve one or more of the following:
|
·
|
mergers
and acquisitions;
|
|
·
|
selling
or licensing our technology or product
candidates;
|
|
·
|
entering
into additional product development or manufacturing
collaborations;
|
|
·
|
issuing
equity in the public or private
markets;
|
|
·
|
extending
or expanding our current
collaborations;
|
|
·
|
borrowing
under loan or equipment financing arrangements;
and
|
Additional
funding may not be available to us on reasonable terms, if at all.
The
capital markets have been experiencing extreme volatility and disruption for
more than 12 months. In recent weeks, the volatility and disruption have reached
unprecedented levels. The scope and extent of this disruption in the capital
markets could make it difficult or impossible to raise additional capital in
public or private capital markets until conditions stabilize and conditions
may
not stabilize before we reach then end of our financial resources and are forced
to go out of business.
The
perceived risk associated with the possible sale of a large number of shares
of
our common stock could cause some of our shareholders to sell their stock,
thus
causing the price of our stock to decline. In addition, actual or anticipated
downward pressure on our stock price due to actual or anticipated sales of
stock
could cause some institutions or individuals to engage in short sales of our
common stock, which may itself cause the price of our stock to
decline.
If
our
stock price continues to decline, or does not increase sufficiently, we may
be
unable to raise additional capital. As our existing financial resources are
only
expected to be sufficient to fund our current level of operations into the
first
quarter of 2009, an inability to raise capital in the near term could force
us
to go out of business. Additional declines in the price of our common stock,
or
a failure of the price of our common stock to increase sufficiently, could
also
impair our ability to attract and retain qualified employees, reduce the
liquidity of our common stock and result in the delisting of our common stock
from the NASDAQ Capital Market.
Debt
financing, if available, may require that we pledge our assets, including our
intellectual property, or may require restrictive covenants that would restrict
our business activities.
The
funding that we expect to receive from our collaborations depends on continued
scientific progress under the collaborations and our collaborators’ ability and
willingness to continue or extend the collaboration. If we are unable to
successfully access sufficient additional capital, we may need to scale back,
delay or terminate one or more of our development programs, curtail capital
expenditures or reduce other operating activities or workforce. We may also
be
required to sell or relinquish some rights to our technology or product
candidates or grant or take licenses on unfavorable terms, either of which
would
reduce the ultimate value to us of our technology or product
candidates.
We
expect to continue to operate at a loss and may never become
profitable.
Substantially
all of our revenue since 2005 has been derived from collaborative research
and
development agreements in connection with the development of our potential
product candidates including our collaborations with Celladon and IAVI and
our
NIAID-funded subcontract with NCH and CHOP. We have incurred, and will continue
to incur for the foreseeable future, significant expense to develop our research
and development programs, conduct preclinical studies and clinical trials,
seek
regulatory approval for our product candidates and provide general and
administrative support for these activities. As a result, we have incurred
significant net losses since inception, and we expect to continue to incur
substantial additional losses in the future.
As
of
September
30, 2008,
we had
an accumulated deficit of $310.0 million. We may never be able to commercialize
our products or generate profits and, if we do become profitable, we may be
unable to sustain or increase profitability.
We
cannot
predict whether we will encounter problems with any of our completed, ongoing
or
planned clinical trials that will cause regulatory agencies, institutional
review boards or us to delay our clinical trials or suspend or delay the
analysis of the data from those trials. Clinical trials can be delayed for
a
variety of reasons, including:
|
·
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the
placement of a clinical hold on a trial,
such as the
four month
clinical hold
placed
on
our Phase I/II clinical trial of tgAAC94, our inflammatory arthritis
product candidate, in
2007 after
a patient participating in the clinical trial experienced a serious
adverse event, or SAE,
and subsequently died;
|
|
·
|
the
occurrence of drug-related side effects or adverse events experienced
by
participants in our clinical trials;
|
|
·
|
discussions
with the U.S. Food and Drug Administration, or FDA, or comparable
foreign
authorities regarding the scope or design of our clinical
trials;
|
|
·
|
delays
or the inability to obtain required approvals from institutional
review
boards or other governing entities at clinical sites selected for
participation in our clinical
trials;
|
|
·
|
delays
in enrolling patients into clinical
trials;
|
|
·
|
lower
than anticipated retention rates of patients in clinical
trials;
|
|
·
|
the
need to repeat or conduct additional clinical trials as a result
of
problems such as inconclusive or negative results, poorly executed
testing
or unacceptable design;
|
|
·
|
an
insufficient supply of product candidate materials or other materials
necessary to conduct our clinical
trials;
|
|
·
|
the
need to qualify new suppliers of product candidate materials for
FDA and
foreign regulatory approval;
or
|
|
·
|
an
unfavorable FDA inspection or review of a clinical trial site or
records
of any clinical
investigation.
|
If
our
clinical trials are delayed, we may be unable to develop our product candidates
on a timely basis, which may increase our development costs and could delay
the
potential commercialization of our products and the subsequent receipt of
revenue from sales, if any.
In
addition, a clinical trial may be suspended or terminated by us, the FDA or
other regulatory authorities due to a number of factors, including:
|
·
|
failure
to conduct the clinical trial in accordance with regulatory requirements
or our clinical protocols;
|
|
·
|
inspection
of the clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical
hold;
|
|
·
|
unforeseen
safety issues or any determination that a trial presents unacceptable
health risks; or
|
|
·
|
lack
of adequate funding to continue the clinical trial, including the
incurrence of unforeseen costs due to enrollment delays, requirements
to
conduct additional trials and studies and increased expenses associated
with the services of our contract research organizations, or CROs,
and
other third parties.
|
Changes
in regulatory requirements and guidance may occur and we may need to amend
clinical trial protocols to reflect these changes. Amendments may require us
to
resubmit our clinical trial protocols to institutional review boards for
reexamination, which may impact the costs, timing or successful completion
of a
clinical trial. If the results of our clinical trials are not available when
we
expect or if we encounter any delay in the analysis of data from our clinical
trials, we may be unable to file for regulatory approval or conduct additional
clinical trials on the schedule we currently anticipate. Any delays in
completing our clinical trials may increase our development costs, slow down
our
product development and approval process, delay our receipt of product revenue
and make it difficult to raise additional capital. Many of the factors that
cause, or lead to, a delay in the commencement or completion of clinical trials
may also ultimately lead to the denial of regulatory approval of a product
candidate, which would seriously harm our business. In addition, significant
clinical trial delays also could allow our competitors to bring products to
market before we do and impair our ability to commercialize our future products
and may seriously harm our business.
All
of our product candidates are in early-stage clinical trials or preclinical
development, and if we and our partners are unable to successfully develop
and
commercialize our product candidates we will be unable to generate sufficient
capital to maintain our business.
As
of
September 30, 2008, our partnered heart failure product candidate in
collaboration with Celladon is in a Phase I clinical trial, we have completed
a
Phase I/II trial of our inflammatory arthritis candidate, our HIV/AIDS product
candidate in collaboration with IAVI completed both a Phase I and Phase II
trial
and we have no product candidates in Phase III trials. Of the product candidates
that we are currently developing, we will not generate any product revenue,
commercial manufacturing revenue, revenue sharing or royalties for at least
several years, and then only if we and/or our partners can successfully
commercialize our product candidates. Commercializing our potential products
depends on successful completion of additional research and development and
testing, in both preclinical development and clinical trials. Clinical trials
may take several years or more to complete. The commencement, cost and rate
of
completion of our clinical trials may vary or be delayed for many reasons.
If we
are unable to successfully complete preclinical and clinical development of
some
or all of our product candidates in a timely manner, we may be unable to
generate sufficient product revenue to maintain our business.
Even
if
our potential products succeed in clinical trials and are approved for
marketing, these products may never achieve market acceptance. If we are
unsuccessful in marketing or commercializing our product candidates for any
reason, including greater effectiveness or economic feasibility of competing
products or treatments, the failure of the medical community or the public
to
accept or use any products based on gene delivery, inadequate marketing and
distribution capabilities or other reasons discussed elsewhere in this section,
we will be unable to generate sufficient product revenue to maintain our
business.
Litigation
involving intellectual property, product liability or other claims and product
recalls could strain our resources, subject us to significant liability, damage
our reputation or result in the invalidation of our proprietary
rights.
As
our
product development efforts progress, most particularly in potentially
significant markets such as HIV/AIDS, heart failure or inflammatory arthritis
therapies, the risk increases that others may claim that our processes and
product candidates infringe on their intellectual property rights. In addition,
administrative proceedings, litigation or both may be necessary to enforce
our
intellectual property rights or determine the rights of others. Defending or
pursuing these claims, regardless of their merit, would be costly and would
likely divert management’s attention and resources away from our operations. If
there were to be an adverse outcome in litigation or an interference proceeding,
we could face potential liability for significant damages or be required to
obtain a license to the patented process or technology at issue, or both. If
we
are unable to obtain a license on acceptable terms, or to develop or obtain
alternative technology or processes, we may be unable to manufacture or market
any product or potential product that uses the affected process or
technology.
Clinical
trials and the marketing of any potential products may expose us to liability
claims resulting from the testing or use of our products. Gene therapy
treatments are new and unproven, and potential known and unknown side effects
of
gene therapy may be serious and potentially life-threatening. Product liability
claims may be made by clinical trial participants, consumers, healthcare
providers or other sellers or users of our products. For example, a patient
in
one of our clinical trials experienced an SAE and subsequently died, and the
spouse of that patient filed a lawsuit alleging that various named parties’
negligence, including ours, was the proximate cause of the patient’s death.
Although we currently maintain liability insurance, the costs of product
liability and other claims against us may exceed our insurance coverage. In
addition, we may require increased liability coverage as additional product
candidates are used in clinical trials or commercialized. Liability insurance
is
expensive and may not continue to be available on acceptable terms. A product
liability or other claim or product recall not covered by or exceeding our
insurance coverage could significantly harm our financial condition. In
addition, adverse publicity resulting from a product recall or a liability
claim
against us, one of our partners or another gene therapy company could
significantly harm our reputation and make it more difficult to obtain the
funding and collaborative partnerships necessary to maintain our
business.
Failure
to recruit subjects could delay or prevent clinical trials of our potential
products, which could delay or prevent the development of potential
products.
Identifying
and qualifying subjects to participate in clinical trials of our potential
products is critically important to our success. The timing of our clinical
trials depends on the speed at which we can recruit subjects to participate
in
testing our product candidates. We have experienced delays in some of our
clinical trials, and we may experience similar delays in the future. If subjects
are unwilling to participate in our gene therapy trials because of negative
publicity from or
concerns about the death of a subject in one of our trials who suffered an
SAE,
even though it was subsequently determined to be unrelated to our drug, or
adverse
events in the biotechnology or gene therapy industries
in
general
or for
other reasons, including competitive clinical trials for similar patient
populations, the timeline for recruiting subjects, conducting trials and
obtaining regulatory approval of potential products will be delayed. These
delays could result in increased costs, delays in advancing our product
development, delays in testing the effectiveness of our technology or
termination of the clinical trials altogether
which
could seriously harm our business.
Because
our product candidates involve
new and unproven technologies, the
regulatory approval
process may proceed more slowly compared to clinical trials involving
new
candidates in already proven drug classes.
No
gene
therapy products have received regulatory approval for marketing from the FDA.
Because our product candidates involve new and unproven technologies, we believe
that the regulatory approval process may proceed more slowly compared to
clinical trials involving new
candidates in already proven drug classes.
The FDA
and applicable state and foreign regulators must conclude at each stage of
clinical testing that our clinical data suggest acceptable levels of safety
in
order for us to proceed to the next stage of clinical trials. In addition,
gene
therapy clinical trials conducted at institutions that receive funding for
recombinant DNA research from the National Institutes of Health, or NIH, are
subject to review by the NIH’s Office of Biotechnology (OBA) Recombinant DNA
Advisory Committee, or RAC. Although the RAC does not have regulatory status,
the RAC review process can impede the initiation of the trial, because no
research participant can be enrolled until the RAC review process has been
completed and Institutional Biosafety Committee approval (from the clinical
trial site) has been obtained, even if the FDA has reviewed and approved the
protocol and initiation of clinical trial.
The
regulatory approval
process
for our product candidates is costly, time-consuming
and subject to unpredictable changes
and delays, and our product candidates may
never receive regulatory approval
or be found safe and effective.
Both
before and after approval of our product candidates, we, our product candidates
and our suppliers are subject to extensive regulation by governmental
authorities in the United States and other countries, covering, among other
things, testing, manufacturing, quality control, labeling, advertising,
promotion, distribution, and import and export. Failure to comply with
applicable requirements could result in, among other things, one or more of
the
following actions: warning letters; fines and other monetary penalties;
unanticipated expenditures; delays in approval or refusal to approve a product
candidate; product recall or seizure; interruption of manufacturing or clinical
trials; operating restrictions; injunctions; and criminal prosecution. We or
the
FDA may suspend or terminate human clinical trials at any time on various
grounds. The hold on our Phase I/II clinical trial of tgAAC94 was lifted in
November 2007 after several months of in depth review of data by the FDA.
Although the SAE was not considered to be related to our product, completion
of
the trial was delayed by approximately six months because of the
hold.
All
of
our product candidates are in development, and will have to be approved by
the
FDA before they can be marketed in the United States. The FDA has not approved
any of our product candidates for sale in the United States and no company
has
sought FDA approval of a gene therapy based product.
The
clinical trial requirements of the FDA and other regulatory agencies and the
criteria these regulators use to determine the safety and efficacy of a product
candidate vary substantially according to the type, complexity, novelty and
intended use of the potential products. In addition, regulatory requirements
governing gene therapy products have changed frequently and may change in the
future.
Obtaining
FDA approval requires substantial time, effort, and financial resources, and
may
be subject to both expected and unforeseen delays, and we can not assure you
that any approval will be granted on a timely basis, if at all.
The
FDA
may decide that our data are insufficient for approval of our product candidates
and may require additional preclinical, clinical or other studies. As we develop
our product candidates, we periodically discuss with the FDA clinical,
regulatory and manufacturing matters, and our views may, at times, differ from
those of the FDA.
If
we are
required to conduct additional clinical trials or other testing
of our
product candidates beyond
those that we currently contemplate for regulatory approval, if we are unable
to
successfully complete our clinical trials or other testing, or if the results
of
these and other trials or tests fail to demonstrate efficacy or raise safety
concerns, we may be delayed in obtaining marketing approval for our product
candidates, or may never be able to obtain marketing approval.
Should
this occur, we may have to delay or discontinue development of the product
candidate, and the partner, if any, that supports development of such product
candidate may terminate its support.
Even
a
product
candidate that appears promising at an early stage of research or development
may not result in a commercially successful product.
Delay
or
failure to obtain, or unexpected costs in obtaining, the regulatory approval
necessary to bring a potential product to market will decrease our ability
to
generate sufficient product revenue to maintain our business.
Even
if
regulatory approval of a product candidate is obtained, such approval may be
subject to significant limitations on the indicated uses for which that product
may be marketed, conditions of use, and/or significant post approval
obligations, including additional clinical trials. These regulatory requirements
may, among other things, limit the size of the market for the product. Even
after approval, discovery of previously unknown problems with a product,
manufacturer or facility, such as previously undiscovered side effects, may
result in restrictions on any product, manufacturer or facility, including,
among other things, a possible withdrawal of approval of the product, which
would seriously harm our business.
If
we are unable to obtain or maintain licenses for necessary third-party
technology on acceptable terms or to develop alternative technology, we may
be
unable to develop and commercialize our product
candidates.
We
have
entered into exclusive and nonexclusive license agreements that give us and
our
partners rights to use technologies owned or licensed by commercial and academic
organizations in the research, development and commercialization of our
potential products. We
believe that we will need to obtain additional licenses to use patents and
unpatented technology owned or licensed by others for use, compositions,
methods, processes to manufacture compositions, processes to manufacture and
purify gene therapeutics candidates and other technologies and processes for
our
present and potential product candidates. If we are unable to maintain our
current licenses for third-party technology or obtain additional licenses on
acceptable terms, we may be required to expend significant time and resources
to
develop or license replacement technology. If we are unable to do so, we may
be
unable to develop or commercialize the affected product candidates. In addition,
the license agreements for technology for which we hold exclusive licenses
typically contain provisions that require us to meet minimum development
milestones in order to maintain the license on an exclusive basis for some
or
all fields of the license. We also have license agreements for some of our
technologies that may require us to sublicense certain of our rights. If we
do
not meet these requirements, our licensor may convert all or a portion of the
license to a nonexclusive license or, in some cases, terminate the
license.
In
many
cases, patent prosecution of our licensed technology is controlled solely by
the
licensor. If our licensors fail to obtain and maintain patent or other
protection for the proprietary intellectual property we license from them,
we
could lose our rights to the intellectual property or our exclusivity with
respect to those rights, and our competitors could market competing products
using the intellectual property. Licensing of intellectual property is of
critical importance to our business and involves complex legal, business and
scientific issues and is complicated by the rapid pace of scientific discovery
in our industry. Disputes may arise regarding intellectual property subject
to a
licensing agreement, including:
|
·
|
the
scope of rights granted under the license agreement and other
interpretation-related issues;
|
|
·
|
the
extent to which our technology and processes infringe on intellectual
property of the licensor that is not subject to the licensing
agreement;
|
|
·
|
the
sublicensing of patent and other rights under our collaborative
development relationships;
|
|
·
|
the
ownership of inventions and know-how resulting from the joint creation
or
use of intellectual property by our licensors and us and our partners;
and
|
|
·
|
the
priority of invention of patented
technology.
|
If
disputes over intellectual property that we have licensed prevent or impair
our
ability to maintain our current licensing arrangements on acceptable terms,
we
may be unable to successfully develop and commercialize the affected product
candidates,
which
could seriously harm our business.
If
we lose our collaborative partners, we may be unable to develop our potential
products.
A
portion
of our operating expenses are funded through our collaborative agreements with
third parties. Our HIV/AIDS vaccine collaboration with CHOP and NCH is funded
through a subcontract with NIAID, which is a U.S. government agency. We also
have contracts with a biotechnology company, Celladon, and one public health
organization, IAVI. Each of these collaborations provides for funding,
collaborative development, intellectual property rights or expertise to develop
certain of our product candidates. With limited exceptions, each collaborator
has the right to terminate its obligation to provide research funding at any
time for scientific or business reasons. For example, Sirna, a wholly-owned
subsidiary of Merck & Co., Inc., recently ceased collaborating with us on
our HD program and instead transferred the rights necessary to conduct the
program to us. In addition, to the extent that funding is provided by a
collaborator for non-program-specific uses, the loss of significant amounts
of
collaborative funding could result in the delay, reduction or termination of
additional research and development programs, a reduction in capital
expenditures or business development and other operating activities, or any
combination of these measures,
which
could seriously harm our business.
If
we do not attract and retain qualified personnel, we may be unable to develop
and commercialize some of our potential products.
Our
future success depends in large part on our ability to attract and retain key
technical and management personnel. All of our employees, including our
executive officers, can terminate their employment with us at any time. We
have
programs in place designed to retain personnel, including competitive
compensation packages and programs to create a positive work environment. Other
companies, research and academic institutions and other organizations in our
field compete intensely for employees, however, and we may be unable to retain
our existing personnel or attract additional qualified employees and
consultants. If we experience significant turnover or difficulty in recruiting
new personnel, our research and development of product candidates could be
delayed and we could experience difficulty in generating sufficient revenue
to
maintain our business.
If
our partners or scientific consultants terminate, reduce or delay our
relationships with them, we may be unable to develop our potential
products.
Our
partners provide funding, manage regulatory filings, aid and augment our
internal research and development efforts and provide access to important
intellectual property and know-how. Their activities include, for example,
support in processing the regulatory filings of our product candidates and
funding clinical trials. Our outside scientific consultants and contractors
perform research, develop technology and processes to advance and augment our
internal efforts and provide access to important intellectual property and
know-how. Their activities include, for example, clinical evaluation of our
product candidates, product development activities performed under our research
collaborations, research under sponsored research agreements and contract
manufacturing services. Collaborations with established pharmaceutical and
biotechnology companies and academic, research and public health organizations
often provide a measure of validation of our product development efforts in
the
eyes of securities analysts, investors and the medical community. The
development of certain of our potential products, and therefore the success
of
our business, depends on the performance of our partners, consultants and
contractors. If they do not dedicate sufficient time, regulatory or other
technical resources to the research and development programs for our product
candidates or if they do not perform their obligations as expected, we may
experience delays in, and may be unable to continue, the preclinical or clinical
development of those product candidates. Each of our collaborations and
scientific consulting relationships concludes at the end of the term specified
in the applicable agreement unless we and our partners agree to extend the
relationship. Any of our partners may decline to extend the collaboration,
or
may be willing to extend the collaboration only with a significantly reduced
scope. Competition for scientific consultants and partners in gene therapy
is
intense. We may be unable to successfully maintain our existing relationships
or
establish additional relationships necessary for the development of our product
candidates on acceptable terms, if at all. If we are unable to do so, our
research and development programs may be delayed or we may lose access to
important intellectual property or know-how.
We
rely on third parties to conduct our preclinical research and clinical trials.
If these third parties do not perform as contractually required or otherwise
expected, we may not be able to obtain regulatory approval for or commercialize
our product candidates.
We
rely
on third parties, such as CROs and research institutions, to conduct a portion
of our preclinical research. We also rely on third parties, such as medical
institutions, clinical investigators and CROs, to assist us in conducting our
clinical trials. Nonetheless, we are responsible for confirming that our
preclinical research is conducted in accordance with applicable regulations,
and
that our clinical trials are conducted in accordance with applicable
regulations, the relevant protocol and within the context of approvals by an
institutional review board. Our reliance on these third parties does not relieve
us of responsibility for ensuring compliance with FDA regulations and standards
for conducting, monitoring, recording and reporting the results of preclinical
research and clinical trials to ensure that data and reported results are
credible and accurate and that the trial participants are adequately protected.
If these third parties do not successfully carry out their contractual duties
or
regulatory obligations or meet expected deadlines, if the third parties need
to
be replaced or if the quality or accuracy of the data they obtain is compromised
due to their failure to adhere to our clinical protocols or regulatory
requirements or for other reasons, our preclinical and clinical development
processes may be extended, delayed, suspended or terminated, and we may not
be
able to obtain regulatory approval for our product candidates.
We
may not be able to obtain and maintain the additional third party relationships
that are necessary to develop, commercialize and manufacture some or all of
our
product candidates or to expand our pipeline by adding new
candidates.
We
expect
to depend on collaborators, partners, licensees, CROs, manufacturers and other
third parties and strategic partners to support our discovery efforts, to
formulate product candidates, to conduct clinical trials for some or all of
our
product candidates, to manufacture clinical and commercial scale quantities
of
our product candidates and products and to market, sell, and distribute any
products we successfully develop.
We
cannot
guarantee that we will be able to successfully negotiate agreements for or
maintain relationships with collaborators, partners, licensees, clinical
investigators, manufacturers and other third parties on favorable terms, if
at
all. If we are unable to obtain or maintain these agreements, we may not be
able
to clinically develop, formulate, manufacture, obtain regulatory approvals
for
or commercialize our product candidates, which will in turn adversely affect
our
business.
We
expect
to expend substantial management time and effort to enter into relationships
with third parties and, if we successfully enter into such relationships, to
manage these relationships. In addition, substantial amounts of our expenditures
will be paid to third parties in these relationships. We can not, however,
control the amount or timing of resources our contract partners will devote
to
our research and development programs, product candidates or potential product
candidates, and we cannot guarantee that these parties will fulfill their
obligations to us under these arrangements in a timely fashion, if at
all.
Any
success of our clinical trials and preclinical studies may not be indicative
of
results in a large number of subjects of either safety or
efficacy.
The
successful results of our technology in preclinical studies using animal models
may not be predictive of the results that we will see in our clinical trials
with human subjects. In addition, results in early-stage clinical trials
generally test for drug safety rather than efficacy and are based on limited
numbers of subjects. Drug development involves a high degree of risk and our
reported progress and results from our early phases of clinical testing of
our
product candidates may not be indicative of progress or results that will be
achieved from larger populations, which could be less favorable. Moreover,
we do
not know if any favorable results we achieve in clinical trials will have a
lasting or repeatable effect. If a larger group of subjects does not experience
positive results or if any favorable results do not demonstrate a beneficial
effect, our product candidates that we advance to clinical trials may not
receive approval from the FDA for further clinical trials or commercialization.
For example, in March 2005, we discontinued the development of tgAAVCF, our
product candidate for the treatment of cystic fibrosis, following the analysis
of Phase II clinical trial data in which tgAAVCF failed to achieve the efficacy
endpoints of the trial.
We
may be unable to adequately protect our proprietary rights domestically or
overseas, which may limit our ability to successfully market any product
candidates.
Our
success depends substantially on our ability to protect our proprietary rights
and operate without infringing on the proprietary rights of others. We own
or
license patents and patent applications and will need to license additional
patents for genes, processes, practices and techniques critical to our present
and potential product candidates. If we fail to obtain and maintain patent
or
other intellectual property protection for this technology, our competitors
could market competing products using those genes, processes, practices and
techniques. The patent process takes several years and involves considerable
expense. In addition, patent applications and patent positions in the field
of
biotechnology are highly uncertain and involve complex legal, scientific and
factual questions. Our patent applications may not result in issued patents
and
the scope of any patent may be reduced both before and after the patent is
issued. Even if we secure a patent, the patent may not provide significant
protection and may be circumvented or invalidated.
We
also
rely on unpatented proprietary technology and technology that we have licensed
on a nonexclusive basis. While we take precautions to protect our proprietary
unpatented technology, we may be unable to meaningfully protect this technology
from unauthorized use or misappropriation by a third party. Our competitors
could also obtain rights to our nonexclusively licensed proprietary technology.
In any event, other companies may independently develop equivalent proprietary
information and techniques. If our competitors develop and market competing
products using our unpatented or nonexclusively licensed proprietary technology
or substantially similar technology, our products, if successfully developed,
could suffer a reduction in sales or be forced out of the market.
If
we do not develop adequate development, manufacturing, sales, marketing and
distribution capabilities, either alone or with our business partners, we will
be unable to generate sufficient product revenue to maintain our
business.
Our
potential products require significant development of new processes and design
for the advancement of the product candidate through manufacture, preclinical
and clinical testing. We may be unable to continue development or meet critical
milestones with our partners due to technical or scientific issues related
to
manufacturing or development. We currently do not have the physical capacity
to
manufacture large-scale quantities of our potential products. This could limit
our ability to conduct large clinical trials of a product candidate and to
commercially launch a successful product candidate. In order to manufacture
product at such scale, we will need to expand or improve our current facilities
and staff or supplement them through the use of contract providers. If we are
unable to obtain and maintain the necessary manufacturing capabilities, either
alone or through third parties, we will be unable to manufacture our potential
products in quantities sufficient to sustain our business. Moreover, we are
unlikely to become profitable if we, or our contract providers, are unable
to
manufacture our potential products in a cost-effective manner.
In
addition, we have no experience in sales, marketing and distribution. To
successfully commercialize any products that may result from our development
programs, we will need to develop these capabilities, either on our own or
with
others. We intend to enter into collaborations with other entities to utilize
their mature marketing and distribution capabilities, but we may be unable
to
enter into marketing and distribution agreements on favorable terms, if at
all.
If our current or future collaborative partners do not commit sufficient
resources to timely marketing and distributing our future products, if any,
and
we are unable to develop the necessary marketing and distribution capabilities
on our own, we will be unable to generate sufficient product revenue to sustain
our business.
Our
product candidates may never achieve market acceptance even if we obtain
regulatory approvals.
Even
if
we obtain regulatory approvals for the commercial sale of our product
candidates, the commercial success of these product candidates will depend
on,
among other things, their acceptance by physicians, patients, third-party payors
and other members of the medical community as a therapeutic and cost-effective
alternative to competing products and treatments. If our product candidates
fail
to gain market acceptance, we may be unable to earn sufficient revenue to
continue our business. Market acceptance of, and demand for, any product that
we
may develop and commercialize will depend on many factors, including:
·
the
prevalence of adverse side effects;
·
availability,
relative cost, and relative efficacy of alternative and competing
treatments;
·
the
effectiveness of our marketing and distribution strategy;
·
publicity
concerning our products or competing products and treatments; and
·
our
ability to obtain sufficient third-party insurance coverage or
reimbursement.
If
our
product candidates do not become widely accepted by physicians, patients,
third-party payors, and other members of the medical community, we would be
unable to generate sufficient revenue to sustain our business.
Post-approval
manufacturing or product problems or failure to satisfy applicable regulatory
requirements could prevent or limit our ability to market our
products.
Commercialization
of any products will require continued compliance with the FDA and other
federal, state and local regulations. For example, our current manufacturing
facility, which is designed for manufacturing our AAV vectors for clinical
and
development purposes, is subject to the Good Manufacturing Practices
requirements and other regulations of the FDA, as well as to other federal,
state and local regulations such as the Occupational Health and Safety Act,
the
Toxic Substances Control Act, the Resource Conservation and Recovery Act and
the
Environmental Protection Act. Any future manufacturing facility that we may
construct for large-scale commercial production will also be subject to
regulation. We may be unable to obtain regulatory approval for or maintain
in
operation this or any other manufacturing facility. In addition, we may be
unable to attain or maintain compliance with current or future regulations
relating to manufacture, safety, handling, storage, record keeping or marketing
of potential products. If we fail to comply with applicable regulatory
requirements or discover previously unknown manufacturing, contamination,
product side effects or other problems after we receive regulatory approval
for
a potential product, we may suffer restrictions on our ability to market the
product or be required to withdraw the product from the market.
We
rely on single third-party suppliers for some of our raw materials; if these
third parties fail to supply these items, development of affected product
candidates may be delayed or discontinued.
Certain
raw materials necessary for the manufacturing and formulation of our
product candidates are provided by single-source unaffiliated third-party
suppliers. We would be unable to obtain these raw materials for an indeterminate
period of time if these third-party single-source suppliers were to cease or
interrupt production or otherwise fail to supply these materials to us for
any
reason, including:
·
regulatory
requirements or action by the FDA or others;
·
adverse
financial developments at or affecting the supplier;
·
unexpected
demand for or shortage of raw materials;
·
labor
disputes or shortages; and
·
failure
to comply with our quality standards, which results in quality failures, product
contamination and/or recall.
For
example, we have experienced issues in the past with obtaining certain raw
materials we use for vector production due to quality problems at the suppliers.
These events could adversely affect our ability to continue development on
affected product candidates, which could seriously harm our
business.
Risks
Related to Our Industry
Adverse
events in the field of gene therapy could damage public perception of our
potential products and negatively affect governmental approval and
regulation.
Public
perception of our product candidates could be harmed by negative events in
the
field of gene transfer. For example, in 2003, 14 subjects in a French academic
clinical trial being treated for x-linked severe combined immunodeficiency
in a
gene therapy trial using a retroviral vector showed correction of the disease,
although three of the subjects subsequently developed leukemia.
A
subject
in one of our trials died in 2007 after suffering a serious adverse event that
ultimately was attributed to an invasive fungal infection.
Adverse
events in our clinical trials,
such as
happened in 2007, even if not ultimately attributable to our drug
candidates,
and the
resulting publicity, as well as any other adverse events in the field of gene
therapy that may occur in the future, could result in a decrease in demand
for
any products that we may develop. The commercial success of our product
candidates will depend in part on public acceptance of the use of gene therapy
for preventing or treating human diseases. If public perception is influenced
by
claims that gene therapy is unsafe, our product candidates may not be accepted
by the general public or the medical community, which may conclude that our
technology is unsafe.
Future
adverse events in gene therapy or the biotechnology industry could also result
in greater governmental regulation, unfavorable public perception, stricter
labeling requirements and potential regulatory delays in the testing or approval
of our potential products. Any increased scrutiny could delay or increase the
costs of our product development efforts or clinical trials.
Our
use of hazardous materials exposes us to liability risks and regulatory
limitations on their use, either of which could reduce our ability to generate
product revenue.
Our
research and development activities involve the controlled use of hazardous
materials, including chemicals, biological materials and radioactive compounds.
Our safety procedures for handling, storing and disposing of these materials
must comply with federal, state and local laws and regulations, including,
among
others, those relating to solid and hazardous waste management, biohazard
material handling, radiation and air pollution control. We may be required
to
incur significant costs in the future to comply with environmental or other
applicable laws and regulations. In addition, we cannot eliminate the risk
of
accidental contamination or injury from hazardous materials. If a hazardous
material accident were to occur, we could be held liable for any resulting
damages, and this liability could exceed our insurance and financial resources.
Accidents unrelated to our operations could cause federal, state or local
regulatory agencies to restrict our access to hazardous materials needed in
our
research and development efforts, which could result in delays in our research
and development programs. Paying damages or experiencing delays caused by
restricted access could reduce our ability to generate revenue and make it
more
difficult to fund our operations.
The
intense competition and rapid technological change in our market may result
in
failure of our potential products to achieve market
acceptance.
We
face
increasingly intense competition from a number of commercial entities and
institutions that are developing gene therapy technologies. Our competitors
include early-stage and more established gene delivery companies, other
biotechnology companies, pharmaceutical companies, universities, research
institutions and government agencies developing gene therapy products or other
biotechnology-based therapies designed to treat the diseases on which we focus.
We also face competition from companies using more traditional approaches to
treating human diseases, such as surgery, medical devices and pharmaceutical
products. If our product candidates become commercial gene therapy products,
they may affect commercial markets of the analogous protein or traditional
pharmaceutical therapy. This may result in lawsuits, demands, threats or patent
challenges by others in an effort to reduce our ability to compete. In addition,
we compete with other companies to acquire products or technology from research
institutions or universities. Many of our competitors have substantially more
resources, including research and development personnel, capital and
infrastructure, than we do. Many of our competitors also have greater experience
and capabilities than we do in:
·
research
and development;
·
clinical
trials;
·
obtaining
FDA and other regulatory approvals;
·
manufacturing;
and
·
marketing
and distribution.
In
addition, the competitive positions of other companies, institutions and
organizations, including smaller competitors, may be strengthened through
collaborative relationships. Consequently, our competitors may be able to
develop, obtain patent protection for, obtain regulatory approval for, or
commercialize new products more rapidly than we do, or manufacture and market
competitive products more successfully than we do. This could limit the prices
we could charge for the products that we are able to market or result in our
products failing to achieve market acceptance.
Gene
therapy is a rapidly evolving field and is expected to continue to undergo
significant and rapid technological change and competition. Rapid technological
development by our competitors, including development of technologies, products
or processes that are more effective or more economically feasible than those
we
have developed, could result in our actual and proposed technologies, products
or processes losing market share or becoming obsolete.
Healthcare
reform measures and the unwillingness of third-party payors to provide adequate
reimbursement for the cost of our products could impair our ability to
successfully commercialize our potential products and become
profitable.
Sales
of
medical products and treatments, both domestically and abroad, substantially
depend on the availability of reimbursement to the consumer from third-party
payors. Our potential products may not be considered cost-effective by
third-party payors, who may not provide coverage at the price set for our
products, if at all. If purchasers or users of our products are unable to obtain
adequate reimbursement, they may forego or reduce their use of our products.
Even if coverage is provided, the approved reimbursement amount may not be
high
enough to allow us to establish or maintain pricing to realize a sufficient
return on our investment.
Increasing
efforts by governmental and third-party payors, such as Medicare, private
insurance plans and managed care organizations, to cap or reduce healthcare
costs will affect our ability to commercialize our product candidates and become
profitable. We believe that third-party payors will attempt to reduce healthcare
costs by limiting both coverage and level of reimbursement for new products
approved by the FDA. There have been and will continue to be a number of federal
and state proposals to implement government controls on pricing, the adoption
of
which could affect our ability to successfully commercialize our product
candidates. Even if the government does not adopt any such proposals or reforms,
their announcement could impair our ability to raise capital.
Risks
Related to Our Common Stock
If
we are unable to comply with the minimum requirements for quotation on the
NASDAQ Capital Market and are delisted from the NASDAQ Capital Market, the
liquidity and market price of our common stock would
decline.
Our
stock
is listed on the NASDAQ Capital Market. In order to continue to be listed on
the
NASDAQ Capital Market, we must meet specific quantitative standards, including
maintaining a minimum bid price of $1.00 for our common stock. On April 23,
2008, we received a staff deficiency notice from the NASDAQ Stock Market
informing us that for 30 consecutive business days the bid price of our common
stock had closed below the minimum $1.00 per share requirement for continued
inclusion under Marketplace Rule 4310(c)(4).
The
letter stated that under Marketplace Rule 4310(c)(8)(d), we will be provided
with 180 calendar days, or until October 20, 2008, to regain compliance with
Marketplace Rule 4310(c)(4). On October 22, 2008, the NASDAQ Stock Market
notified us that it had suspended enforcement of the bid price and market value
of publicly held shares requirements effective October 16, 2008 through January
16, 2009, and that we have until January 26, 2009 to regain compliance. To
regain compliance, the bid price of our common stock must close at $1.00 or
more
per share for a minimum of 10 business days. If, on January 26, 2009, we meet
The NASDAQ Capital Market initial inclusion criteria set forth in Marketplace
Rule 4310(c), but have not regained bid price compliance, we may be provided
with an additional 180 calendar day compliance period to demonstrate compliance.
If we are not eligible for the additional compliance period at that time, NASDAQ
Staff will provide written notification that Targeted Genetics' securities
will
be delisted. Upon such notice, we may appeal the NASDAQ Staff’s Determination to
a Listing Qualifications Panel, pursuant to the procedures set forth in the
NASDAQ Marketplace Rule 4800 Series. There can be no assurance that if we
were to appeal such a determination that such appeal would be
successful.
If
we
were to be delisted from the NASDAQ Capital Market, trading, if any, in our
shares may continue to be conducted on the Over the Counter Bulletin Board
or in
a non-NASDAQ over-the-counter market, such as the “pink sheets.” Delisting of
our shares would result in limited release of the market price of those shares
and limited analyst coverage and could restrict investors’ interest in our
securities. Also, a delisting could have a material adverse effect on the
trading market and prices for our shares and our ability to issue additional
securities or to secure additional financing. In addition, if our shares were
not listed and the trading price of our shares was less than $5.00 per share,
our shares could be subject to Rule 15g-9 under the Securities Exchange Act
of
1934, as amended, which, among other things, requires that broker/dealers
satisfy special sales practice requirements, including making individualized
written suitability determinations and receiving a purchaser’s written consent
prior to any transaction. In such case, our securities could also be deemed
to
be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act
of 1990, which would require additional disclosure in connection with trades
in
those shares, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could severely
limit the liquidity of our securities and our ability to raise additional
capital in an already challenging capital market.
If
we sell additional shares, our stock price may decline as a result of the
dilution that will occur to existing shareholders.
Until
we
are profitable, we will need significant additional funds to develop our
business and sustain our operations. Any additional sales of shares of our
common stock are likely to have a dilutive effect on our then-existing
shareholders. Subsequent sales of these shares in the open market could also
have the effect of lowering our stock price, thereby increasing the number
of
shares we may need to issue in the future to raise the same dollar amount and
consequently further diluting our outstanding shares. These future sales could
also have an adverse effect on the market price of our shares and could result
in additional dilution to the holders of our shares.
The
perceived risk associated with the possible sale of a large number of shares
could cause some of our shareholders to sell their stock, thus causing the
price
of our stock to decline. In addition, actual or anticipated downward pressure
on
our stock price due to actual or anticipated sales of stock could cause some
institutions or individuals to engage in short sales of our common stock, which
may itself cause the price of our stock to decline.
If
our
stock price declines, we may be unable to raise additional capital. As our
existing financial resources are only expected to be sufficient to fund our
current level of operations into the first quarter of 2009, an inability to
raise capital could force us to go out of business. Significant declines in
the
price of our common stock could also impair our ability to attract and retain
qualified employees, reduce the liquidity of our common stock and result in
the
delisting of our common stock from the NASDAQ Capital Market.
Concentration
of ownership of our common stock may give certain shareholders significant
influence over our business and may result in certain decisions that are
contrary to your interests.
A
small
number of investors own a significant number of shares of our common stock.
As
of September
30, 2008,
Special
Situations held approximately 2.5
million
shares, Biogen Idec held approximately 2.2 million
shares, OrbiMed Advisors LLC, or OrbiMed held approximately 1.3
million
shares and Elan International services, Ltd., or Elan, held approximately
1.2
million
shares, of our common stock. Together these holdings represent approximately
36%
of our
common shares outstanding as of September
30, 2008.
This
concentration of stock ownership may allow these shareholders to exercise
significant control over our strategic decisions and block, delay or
substantially influence all matters requiring shareholder approval, such
as:
|
·
|
approval
of significant corporate transactions, such as a change of control
of
us;
|
|
·
|
election
of directors; or
|
|
·
|
amendment
of our charter documents.
|
The
interests of these shareholders may conflict with your interests or the
interests of other holders of our common stock with regard to such matters.
Furthermore, this concentration of ownership of our common stock could allow
these shareholders to delay, deter or prevent a third party from acquiring
control of us at a premium over the then-current market price of our common
stock, which could result in a decrease in our stock price and a reduction
in
the value of your investment.
Special
Situations, Biogen Idec, OrbiMed and Elan have all sold shares of our common
stock and may continue to do so. Sales of significant value of stock by these
investors may introduce increased volatility to the market price of our common
stock. In accordance with the termination agreement that we entered into with
Elan in March 2004, Elan is only permitted to sell quantities of our stock
equal
to 175% of the volume limitation set forth in Rule 144(e)(1) promulgated under
the Securities Act of 1933, as amended, subject to certain exceptions.
Market
fluctuations or volatility could cause the market price of our common stock
to
decline and limit our ability to raise capital or cause impairment
issues.
The
stock
market in general and the market for biotechnology-related companies in
particular have experienced extreme price and volume fluctuations, often
unrelated to the operating performance of the affected companies. The market
price of the securities of biotechnology companies, particularly companies
such
as ours without earnings and product revenue, has been highly volatile and
is
likely to remain so in the future. Any report of clinical trial results that
are
below the expectations of financial analysts or investors could result in a
decline in our stock price. We believe that in the past, similar levels of
volatility have contributed to the decline in the market price of our common
stock, and may do so again in the future. Trading volumes of our common stock
can increase dramatically, resulting in a volatile market price for our common
stock. The trading price of our common stock could decline significantly as
a
result of sales of a substantial number of shares of our common stock, or the
perception that significant sales could occur. In addition, the sale of
significant quantities of stock by Special Situations, Biogen Idec, OrbiMed,
Elan, or other holders of significant amounts of shares of our stock, could
adversely impact the price of our common stock.
None.
None.
None.
None.
See
the
Index to Exhibits included in this quarterly report.
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.
|
TARGETED
GENETICS
CORPORATION
|
|
|
Date: November
5, 2008
|
By:
|
|
|
|
H.
Stewart Parker,
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
Date:
November 5, 2008
|
By:
|
/s/
DAVID
J. POSTON
|
|
|
David
J. Poston,
Vice
President, Finance and Chief Financial Officer
(Principal
Financial and Accounting
Officer)
|
INDEX
TO EXHIBITS
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
of
First
Filing
|
|
Exhibit
Number
|
|
Filed
Herewith
|
3.1
|
|
Restated
Articles of Incorporation
|
|
8-K
|
|
1/30/08
|
|
3.1
|
|
|
3.2
|
|
Amended
and Restated Bylaws.
|
|
8-K
|
|
12/28/07
|
|
3.1
|
|
|
4.1
|
|
Registration
Rights Agreement among Targeted Genetics Corporation and certain
investors
dated as of January 8, 2007.
|
|
8-K
|
|
1/8/07
|
|
10.2
|
|
|
4.2
|
|
Registration
Rights Agreement among Targeted Genetics Corporation and certain
purchasers dated as of June 22, 2007.
|
|
8-K
|
|
6/25/07
|
|
10.2
|
|
|
10.2
|
|
Amended
and Restated Senior Management Employment Agreement, dated as of
March 11,
2008, between Targeted Genetics Corporation and Barrie J.
Carter
|
|
8-K
|
|
3/12/08
|
|
10.2
|
|
|
10.3
|
|
Amended
and Restated Senior Management Employment Agreement, dated as of
March 11,
2008, between Targeted Genetics Corporation and David J.
Poston
|
|
8-K
|
|
3/12/08
|
|
10.3
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e)
under
the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e)
under
the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
|
X
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
X
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
X
|