UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________________
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended March 31, 2006
|
|
OR
|
|
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
|
SECURITIES
EXCHANGE ACT OF 1934
|
|
For
the transition period from ______________ to
______________.
|
Commission
File Number 000-30929
___________________
KERYX
BIOPHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
|
13-4087132
(I.R.S.
Employer Identification No.)
|
|
750
Lexington Avenue
New
York, New York 10022
(Address
including zip code of principal executive offices)
(212)
531-5965
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
one):
Large
accelerated filer £ Accelerated
filer x Non-accelerated
filer £
There
were 43,112,221 shares of the registrant’s common stock, $0.001 par value,
outstanding as of May 4, 2006.
KERYX
BIOPHARMACEUTICALS, INC.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2006
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27
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28
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Certain
matters discussed in this report, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by such
forward-looking statements. The words "anticipate," "believe," "estimate,"
"may," "expect" and similar expressions are generally intended to identify
forward-looking statements. Our actual results may differ materially from the
results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation, those discussed under the captions
“Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report, as well as other
factors
which may be identified from time to time in our other filings with the
Securities and Exchange Commission, or the SEC, or in the documents where such
forward-looking statements appear. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by
these
cautionary statements. Such forward-looking statements include, but are not
limited to, statements about our:
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·
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expectations
for increases or decreases in expenses;
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·
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expectations
for the development, manufacturing, and approval of SulonexTM,
ZerenexTM,
KRX-0401, and our additional product candidates or any other products
we
may acquire or in-license;
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·
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expectations
for incurring additional capital expenditures to expand our research
and
development and manufacturing capabilities;
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·
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expectations
for generating revenue or becoming profitable on a sustained basis;
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·
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expectations
or ability to enter into marketing and other partnership agreements;
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·
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expectations
or ability to enter into product acquisition and in-licensing
transactions;
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·
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expectations
or ability to build our own commercial infrastructure to manufacture,
market and sell our drug
candidates;
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·
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estimates
of the sufficiency of our existing cash and cash equivalents and
investments to finance our business strategy;
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·
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expectations
for future capital requirements.
|
The
forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by
law, we assume no responsibility for updating any forward-looking statements.
We
qualify all of our forward-looking statements by these cautionary statements.
In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)
Consolidated
Balance Sheets as of March 31, 2006, and December 31, 2005
|
|
March
31, 2006
|
|
December
31, 2005*
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
139,026
|
|
$
|
68,175
|
|
Short-term
investment securities
|
|
|
22,578
|
|
|
18,272
|
|
Accrued
interest receivable
|
|
|
196
|
|
|
336
|
|
Other
receivables and prepaid expenses
|
|
|
4,497
|
|
|
3,200
|
|
Total
current assets
|
|
|
166,297
|
|
|
89,983
|
|
Long-term
investment securities
|
|
|
9,491
|
|
|
13,950
|
|
Property,
plant and equipment, net
|
|
|
1,499
|
|
|
1,004
|
|
Other
assets
|
|
|
352
|
|
|
160
|
|
Total
assets
|
|
$
|
177,639
|
|
$
|
105,097
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
6,354
|
|
$
|
5,054
|
|
Accrued
compensation and related liabilities
|
|
|
2,212
|
|
|
936
|
|
Deferred
revenue
|
|
|
198
|
|
|
103
|
|
Total
current liabilities
|
|
|
8,764
|
|
|
6,093
|
|
Contingent
equity rights
|
|
|
4,004
|
|
|
4,004
|
|
Other
liabilities
|
|
|
305
|
|
|
322
|
|
Total
liabilities
|
|
|
13,073
|
|
|
10,419
|
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Stockholders’
equity
|
|
|
|
|
|
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Common
stock, $0.001 par value per share (60,000,000 and 60,000,000 shares
authorized, 42,828,321 and 37,831,896 shares issued, 42,772,221 and
37,775,796 shares outstanding at March 31, 2006, and December 31,
2005,
respectively)
|
|
|
43
|
|
|
38
|
|
Additional
paid-in capital
|
|
|
298,656
|
|
|
209,177
|
|
Treasury
stock, at cost, 56,100 shares at March 31, 2006, and December 31,
2005,
respectively
|
|
|
(89
|
)
|
|
(89
|
)
|
Deficit
accumulated during the development stage
|
|
|
(134,044
|
)
|
|
(114,448
|
)
|
Total
stockholders’ equity
|
|
|
164,566
|
|
|
94,678
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
177,639
|
|
$
|
105,097
|
|
The
accompanying notes are an integral part of the consolidated financial
statements
*
Condensed from audited financial statements.
Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)
Three
Months Ended March 31, 2006 and 2005
(in
thousands, except share and per share amounts)
|
|
Three
months ended
March
31,
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Amounts
accumulated during the development
|
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2006
|
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2005
|
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stage
|
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Revenue:
|
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Service
revenue
|
|
$
|
112
|
|
$
|
157
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|
$
|
1,495
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Management
fees from related party
|
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|
—
|
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|
|
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300
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|
Total
revenue
|
|
|
112
|
|
|
157
|
|
|
1,795
|
|
|
|
|
|
|
|
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|
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Operating
expenses:
|
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|
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Cost
of services
|
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171
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|
|
181
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|
1,825
|
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|
|
|
|
|
|
|
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Research
and development:
|
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Non-cash
compensation
|
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2,724
|
|
|
176
|
|
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10,458
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Non-cash
acquired in-process research and development
|
|
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|
|
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18,800
|
|
Other
research and development
|
|
|
12,333
|
|
|
4,042
|
|
|
76,227
|
|
Total
research and development expenses
|
|
|
15,057
|
|
|
4,218
|
|
|
105,485
|
|
|
|
|
|
|
|
|
|
|
|
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General
and administrative:
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
2,817
|
|
|
185
|
|
|
8,258
|
|
Other
general and administrative
|
|
|
2,645
|
|
|
645
|
|
|
27,731
|
|
Total
general and administrative expenses
|
|
|
5,462
|
|
|
830
|
|
|
35,989
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
20,690
|
|
|
5,229
|
|
|
143,299
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(20,578
|
)
|
|
(5,072
|
)
|
|
(141,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
982
|
|
|
240
|
|
|
7,951
|
|
Net
loss before income taxes
|
|
|
(19,596
|
)
|
|
(4,832
|
)
|
|
(133,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
491
|
|
Net
loss
|
|
$
|
(19,596
|
)
|
$
|
(4,832
|
)
|
$
|
(134,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.51
|
)
|
$
|
(0.15
|
)
|
$
|
(7.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing basic and diluted net loss
per common share
|
|
|
38,071,609
|
|
|
31,477,797
|
|
|
18,588,909
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Interim
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
March
31, 2006 and 2005
(in
thousands)
|
|
Three
months ended
March
31,
|
|
Amounts
accumulated
during
the
development
stage
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(19,596
|
)
|
$
|
(4,832
|
)
|
$
|
(134,044
|
)
|
Adjustments
to reconcile cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Acquired
in-process research and development
|
|
|
|
|
|
|
|
|
18,800
|
|
Stock
compensation expense
|
|
|
5,541
|
|
|
361
|
|
|
18,716
|
|
Issuance
of common stock to technology licensor
|
|
|
|
|
|
|
|
|
359
|
|
Interest
on convertible notes settled through issuance of preferred
shares
|
|
|
|
|
|
|
|
|
253
|
|
Depreciation
and amortization
|
|
|
52
|
|
|
40
|
|
|
2,663
|
|
Loss
on disposal of property, plant and equipment
|
|
|
|
|
|
|
|
|
172
|
|
Impairment
charges
|
|
|
|
|
|
|
|
|
2,482
|
|
Exchange
rate differences
|
|
|
|
|
|
|
|
|
94
|
|
Changes
in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
in other receivables and prepaid expenses
|
|
|
(1,297
|
)
|
|
(475
|
)
|
|
(4,126
|
)
|
Decrease
(increase) in accrued interest receivable
|
|
|
140
|
|
|
86
|
|
|
(196
|
)
|
(Increase)
in security deposits
|
|
|
(241
|
)
|
|
|
|
|
(249
|
)
|
Increase
in accounts payable and accrued expenses
|
|
|
1,300
|
|
|
321
|
|
|
5,041
|
|
Increase
(decrease) in accrued compensation and related liabilities
|
|
|
1,276
|
|
|
(557
|
)
|
|
1,640
|
|
(Decrease)
increase in other liabilities
|
|
|
(17
|
)
|
|
(17
|
)
|
|
150
|
|
Increase
(decrease) in deferred revenue
|
|
|
95
|
|
|
(5
|
)
|
|
(258
|
)
|
Net
cash used in operating activities
|
|
|
(12,747
|
)
|
|
(5,078
|
)
|
|
(88,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(526
|
)
|
|
(141
|
)
|
|
(5,917
|
)
|
Proceeds
from disposals of property, plant and equipment
|
|
|
|
|
|
|
|
|
425
|
|
(Increase)
in note and accrued interest receivable from related party
|
|
|
|
|
|
|
|
|
(356
|
)
|
Decrease
(increase) in other assets
|
|
|
27
|
|
|
|
|
|
(1,192
|
)
|
(Investment
in) held-to-maturity short-term securities
|
|
|
(26
|
)
|
|
(10
|
)
|
|
(44,859
|
)
|
Proceeds
from maturity of held-to-maturity short-term securities
|
|
|
305
|
|
|
4,914
|
|
|
44,051
|
|
(Investment
in) available-for-sale short-term securities
|
|
|
(125
|
)
|
|
(25
|
)
|
|
(19,850
|
)
|
Proceeds
from sale of available-for-sale short-term securities
|
|
|
|
|
|
|
|
|
9,675
|
|
(Investment
in) held-to-maturity long-term securities
|
|
|
(3
|
)
|
|
(6,605
|
)
|
|
(21,273
|
)
|
Proceeds
from maturity of held-to-maturity long-term securities
|
|
|
2
|
|
|
96
|
|
|
(187
|
)
|
Net
cash used in investing activities
|
|
|
(346
|
)
|
|
(1,771
|
)
|
|
(39,109
|
)
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)
Interim
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
March
31, 2006 and 2005
(in
thousands)
|
|
Three
months ended
March
31,
|
|
Amounts
accumulated
during
the
development
stage
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from short-term loans
|
|
$
|
|
|
$
|
|
|
$
|
500
|
|
Proceeds
from long-term loans
|
|
|
|
|
|
|
|
|
3,251
|
|
Payment
of assumed notes payable and accrued interest in connection with
the
ACCESS Oncology acquisition
|
|
|
|
|
|
|
|
|
(6,322
|
)
|
Issuance
of convertible note, net
|
|
|
|
|
|
|
|
|
2,150
|
|
Issuance
of preferred shares, net
|
|
|
|
|
|
|
|
|
8,453
|
|
Receipts
on account of shares previously issued
|
|
|
|
|
|
|
|
|
7
|
|
Proceeds
from initial public offering, net
|
|
|
|
|
|
|
|
|
46,298
|
|
Proceeds
from secondary public offering, net
|
|
|
|
|
|
|
|
|
75,843
|
|
Proceeds
from private placements, net
|
|
|
82,741
|
|
|
|
|
|
128,536
|
|
Proceeds
from exercise of options and warrants
|
|
|
1,203
|
|
|
243
|
|
|
8,064
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
83,944
|
|
|
243
|
|
|
266,638
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
acquired in acquisition
|
|
|
|
|
|
|
|
|
94
|
|
Effect
of exchange rate on cash
|
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
70,851
|
|
|
(6,606
|
)
|
|
139,026
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
68,175
|
|
|
29,699
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
139,026
|
|
$
|
23,093
|
|
$
|
139,026
|
|
|
|
|
|
|
|
|
|
|
|
|
NON
- CASH TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with acquisition
|
|
$
|
|
|
$
|
|
|
$
|
6,325
|
|
Issuance
of contingent equity rights in connection with acquisition
|
|
|
|
|
|
|
|
|
4,004
|
|
Assumption
of liabilities in connection with acquisition
|
|
|
|
|
|
|
|
|
8,723
|
|
Conversion
of short-term loans into contributed capital
|
|
|
|
|
|
|
|
|
500
|
|
Conversion
of long-term loans into contributed capital
|
|
|
|
|
|
|
|
|
2,681
|
|
Conversion
of long-term loans into convertible notes of Partec
|
|
|
|
|
|
|
|
|
570
|
|
Conversion
of convertible notes of Partec and accrued interest into stock in
Keryx
|
|
|
|
|
|
|
|
|
2,973
|
|
Issuance
of warrants to related party as finder’s fee in private
placement
|
|
|
|
|
|
|
|
|
114
|
|
Declaration
of stock dividend
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
|
|
$
|
|
|
$
|
1,166
|
|
Cash
paid for income taxes
|
|
$
|
|
|
$
|
|
|
$
|
432
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Notes
to
Interim Consolidated Financial Statements as of March 31, 2006 (unaudited)
NOTE
1 - GENERAL
BASIS
OF
PRESENTATION
Keryx
Biopharmaceuticals, Inc. (“Keryx” or the “Company”) is a biopharmaceutical
company focused on the acquisition, development and commercialization of novel
pharmaceutical products for the treatment of life-threatening diseases,
including diabetes and cancer. The Company was incorporated in Delaware in
October 1998 (under the name Paramount Pharmaceuticals, Inc., which was later
changed to Lakaro Biopharmaceuticals, Inc. in November 1999, and finally to
Keryx Biopharmaceuticals, Inc. in January 2000). The Company commenced
activities in November 1999, and since then has operated in one segment of
operations, namely the development and commercialization of clinical compounds
and core technologies for the life sciences.
Until
November 1999, most of the Company’s activities were carried out by Partec
Limited, an Israeli corporation formed in December 1996, and its subsidiaries
-
SignalSite Inc. (85% owned), SignalSite Israel Ltd. (wholly-owned), Vectagen
Inc. (87.25% owned) and Vectagen Israel Ltd. (wholly-owned) (hereinafter
collectively referred to as “Partec”). In November 1999, the Company acquired
substantially all of the assets and liabilities of Partec and, as of that date,
the activities formerly carried out by Partec were performed by the Company.
On
the date of the acquisition, Keryx and Partec were entities under common control
(the controlling interest owned approximately 79.7% of Keryx and approximately
76% of Partec) and accordingly, the assets and liabilities were recorded at
their historical cost basis by means of “as if” pooling, with Partec being
presented as a predecessor company. Consequently, these financial statements
include the activities performed in previous periods by Partec by aggregating
the relevant historical financial information with the financial statements
of
the Company as if they had formed a discrete operation under common management
for the entire development stage.
The
Company owns a 100% interest in each of ACCESS Oncology, Inc. (“ACCESS
Oncology”), Neryx Biopharmaceuticals, Inc., and Accumin Diagnostics, Inc., all
U.S. corporations incorporated in the State of Delaware, and Keryx (Israel)
Ltd.
and Keryx Biomedical Technologies Ltd., each organized in Israel. In 2003,
the
Company’s subsidiaries in Israel ceased operations and are currently in the
process of being closed down. Substantially all of the Company’s
biopharmaceutical development and administrative activities during the three
months ended March 31, 2006, and 2005, were conducted in the United States
of
America.
On
February 5, 2004, the Company completed the acquisition of ACCESS Oncology
and
its subsidiaries (“ACCESS Oncology”). The transaction was structured as a merger
of AXO Acquisition Corp., a Delaware corporation and the Company’s wholly-owned
subsidiary, with and into ACCESS Oncology, with ACCESS Oncology remaining as
the
surviving corporation and a wholly-owned subsidiary of the Company. The
transaction was accounted for under the purchase method of accounting. The
assets and liabilities of ACCESS Oncology that the Company acquired and assumed
pursuant to the acquisition have been included in the Company’s consolidated
financial statements as of February 5, 2004.
The
accompanying unaudited interim consolidated financial statements were prepared
in accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. All adjustments that are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the interim
consolidated financial statements have been included. Nevertheless, these
financial statements should be read in conjunction with the Company's audited
consolidated financial statements contained in its Annual Report on Form 10-K
for the year ended December 31, 2005. The results of operations for the three
months ended March 31, 2006, are not necessarily indicative of the results
that
may be expected for the entire fiscal year or any other interim
period.
The
Company has not generated any revenues from its planned principal operations
and
is dependent upon significant financing to provide the working capital necessary
to execute its business plan. If the Company determines that it is necessary
to
seek additional funding, there can be no assurance that the Company will be
able
to obtain any such funding on terms that are acceptable to it, if at
all.
STOCK
-
BASED COMPENSATION
In
December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS 123R”). SFAS 123R requires all share-based payments
to employees, or to non-employee directors as compensation for service on the
Board of Directors, to be recognized as compensation expense in the consolidated
financial statements based on the fair values of such payments.
The
Company adopted SFAS 123R using the modified prospective transition method.
Under this method, compensation cost recognized in the quarter ended
March 31, 2006 includes: a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions
of
Statement of Financial Accounting Standards No. 123 “Accounting for
Stock-Based Compensation,” (“SFAS 123”), and b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
The results for prior periods have not been restated.
Stock-based
compensation expense recognized each period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the
period. SFAS 123R requires forfeitures to be estimated at the time of grant
and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. In the Company's pro forma disclosures required under
SFAS 123 for periods prior to 2006, the Company accounted for
forfeitures as they occurred. Upon adoption of SFAS 123R, the
Company elected to use the Black-Scholes model to value share-based
payments granted to employees subsequent to January 1, 2006 and elected to
attribute the value of stock-based compensation to expense using the
straight-line single option method. These methods were previously used
for the Company's pro forma information required under SFAS 123. For
additional information, see Note 2 - Stockholders' Equity.
The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by the
provisions of Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services” (“EITF 96-18”).
NET
LOSS
PER SHARE
Basic
net
loss per share is computed by dividing the losses allocable to common
stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted net loss per share does not reflect the
effect of shares of common stock to be issued upon the exercise of stock options
and warrants, as their inclusion would be anti-dilutive. The options and
warrants exercisable as of March 31, 2006, and 2005, which are not included
in
the computation of net loss per share amounts, were 6,418,953 and 4,400,886,
respectively.
NOTE
2 - STOCKHOLDERS' EQUITY
Common
Stock
On
March
29, 2006, the Company completed a registered direct offering of 4,500,000 shares
of its common stock to two institutional investors at $18.40 per share.
Total proceeds to the Company from this public offering were approximately
$82.7
million, net of offering expenses of approximately $0.1 million. The shares
were
sold under a shelf registration statement on Form S-3 (File No. 333-130809)
filed with the Securities and Exchange Commission, or SEC, on December 30,
2005,
and declared effective by the SEC on January 13, 2006, covering shares of the
Company’s Common Stock having a value not to exceed $150 million.
The
Company may offer the remaining securities under its shelf registration from
time to time in response to market conditions or other circumstances if it
believes such a plan of financing is in the best interest of the Company and
its
stockholders. The Company believes that the shelf registration provides it
with
the flexibility to raise additional capital to finance its operations as
needed.
Stock
Option Plans
The
Company has in effect the following stock option plans. Options granted
typically vest over a three to four year period.
a.
The
1999 Stock Option Plan was adopted in November 1999. Under the 1999 Stock Option
Plan, the Company’s board of directors could grant stock-based awards to
directors, consultants and employees. The plan authorizes grants to purchase
up
to 4,230,000 shares of authorized but unissued common stock. The plan limits
the
term of each option, to no more than 25 years from the date of the grant, unless
otherwise authorized by the board. The plan permits the board of directors
or a
committee appointed by the board to administer the plan. The administrator
has
the authority, in its discretion, to determine the terms and conditions of
any
option granted to a Company service provider, including the vesting schedule.
No
additional shares of our common stock may be issued under the 1999 Stock Option
Plan.
b.
The
2000 Stock Option Plan was adopted in June 2000. Under the 2000 Stock Option
Plan the compensation committee of the Company’s board of directors could grant
stock-based awards to directors, consultants and employees. The 2000 plan
authorizes grants to purchase up to 4,455,000 shares of authorized but unissued
common stock. The plan limits the term of each option, to no more than 10 years
from the date of the grant, unless authorized by the board. As of March 31,
2006, up to 52,318 additional shares may be issued under the 2000 Stock Option
Plan.
c.
The
Non-Plan was adopted in February 2000. Under the Non-Plan, the Company’s board
of directors granted options, which are not part of any plan, to non-employee
directors of the Company to purchase up to 240,000 shares of authorized but
unissued common stock. The options issued by the board of directors pursuant
to
the Non-Plan have a life of 10 years from the date of their grant. No additional
shares of our common stock may be issued under the Non-Plan.
d.
The
2002 CEO Incentive Stock Option Plan was adopted in December 2002. Under the
2002 CEO Incentive Stock Option Plan the Company’s board of directors granted an
option to the newly-appointed Chief Executive Officer of the Company to purchase
up to 2,002,657 shares of authorized but unissued common stock. The option
has a
term of 10 years from the date of the grant. The option granted to the newly
appointed Chief Executive Officer was part of a total grant of options issued
pursuant to the 1999 Stock Option Plan, the 2000 Stock Option Plan and the
2002
CEO Incentive Stock Option Plan, to purchase a total of 4,050,000 shares of
the
Company’s common stock. As of March 31, 2006, all of the options granted under
the 2002 CEO Incentive Stock Option Plan have vested. In the event of a merger,
acquisition or other change of control or in the event that the Company
terminates the Chief Executive Officer’s employment, either without cause or as
a result of his death or disability, or he terminates his employment for good
reason, the time period during which he shall be allowed to exercise such
options shall be extended to the shorter of two years from the date of the
termination of his employment or December 24, 2012. No additional shares of
our
common stock may be issued under the 2002 CEO Incentive Stock Option
Plan.
e.
The
2004 President Incentive Stock Option Plan was adopted in February 2004. Under
the 2004 President Incentive Stock Option Plan the Company’s board of directors
granted an option to the newly-appointed President of the Company to purchase
up
to 1,000,000 shares of authorized but unissued common stock. The option has
a
term of 10 years from the date of the grant. The option granted to the newly
appointed President was made pursuant to an employment agreement following
the
acquisition of ACCESS Oncology, Inc. in February 2004. Of these options, 166,667
vest over a three-year period and 833,333 vest upon the earlier of the
achievement of certain performance-based milestones or January 2, 2014. As
of
March 31, 2006, 444,444 options have vested under this plan. In addition, in
the
event of a merger, acquisition or other change of control or in the event that
the Company terminates the President’s employment, either without cause or as a
result of his death or disability, or he terminates his employment for good
reason, the exercisability of any of the options described in this paragraph
that are unexercisable at the time of such event or termination shall accelerate
and the time period during which he shall be allowed to exercise such options
shall be extended to the shorter of two years from the date of the termination
of his employment or January 2, 2014. Additionally, the Company’s board of
directors shall have the discretion to accelerate all or a portion of these
options at any time. No additional shares of our common stock may be issued
under the 2004 President Incentive Stock Option Plan.
f.
The
2004 Long-Term Incentive Plan was adopted in June 2004 by our stockholders.
Under the 2004 Long-Term Incentive Plan, the compensation committee of the
Company’s board of directors could grant stock-based awards to directors,
consultants and employees. The 2004 plan authorizes grants to purchase up to
4,000,000 shares of authorized but unissued common stock. The plan limits the
term of each option, to no more than 10 years from the date of their grant.
As
of March 31, 2006, up to an additional 759,790 shares may be issued under the
2004 Long-Term Incentive Plan.
g.
The
2006 CFO Incentive Plan was adopted in February 2006. Under the 2006 CFO
Incentive Plan the Company’s board of directors granted an option to the
newly-appointed Chief Financial Officer of the Company to purchase up to 500,000
shares of authorized but unissued common stock. The option has a term of 10
years from the date of the grant. The option granted to the newly appointed
Chief Financial Officer was made pursuant to an employment agreement. Of these
options, 55,556 vest on the one-year anniversary of employment and 13,889 vest
every three months following the one-year anniversary of employment until the
36th
month of
employment; and the balance after seven years, provided that the newly appointed
Chief Financial Officer remains employed by the Company on such date. As of
March 31, 2006, 111,111 options have vested under this plan. No additional
shares of our common stock may be issued under the 2006 CFO Incentive
Plan.
The
following table summarizes activity for the Company’s stock option plans during
the three months ended March 31, 2006:
|
|
Number
of
options
|
|
Weighted-average
exercise
price
|
|
Weighted-average
remaining
contractual
term
(years)
|
|
Aggregate
intrinsic
value
|
|
Outstanding
at January 1, 2006
|
|
|
8,024,652
|
|
$
|
3.69
|
|
|
7.2
|
|
$
|
123,757,000
|
|
Granted
|
|
|
3,112,460
|
|
$
|
14.29
|
|
|
|
|
|
|
|
Exercised
|
|
|
(396,425
|
)
|
$
|
3.03
|
|
|
|
|
$
|
6,373,000
|
|
Forfeited
and expired
|
|
|
(97,746
|
)
|
$
|
2.39
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
10,642,941
|
|
$
|
6.82
|
|
|
8.1
|
|
$
|
130,763,000
|
|
Exercisable
at March 31, 2006
|
|
|
6,096,977
|
|
$
|
2.98
|
|
|
7.0
|
|
$
|
98,364,000
|
|
The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing common stock price of $19.11
on March 31, 2006 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had
all option holders exercised their options as of that date. Upon
the exercise of outstanding options, the Company intends to issue new
shares.
As
of
March 31, 2006, there were 100,000 shares of restricted stock outstanding.
All 100,000 shares were granted to the Company’s newly-appointed Chief Financial
Officer on February 14, 2006, at a grant-date fair value of $15.30 per share.
50,000 of the restricted shares will vest in three equal installments on the
first, second and third anniversary of the grant date. For the remaining 50,000
restricted shares, vesting is contingent upon meeting a certain performance
goal.
Stock-based
Compensation
The
application of SFAS 123R had the following effect on reported amounts, for
the
three months ended March 31, 2006, relative to amounts that would have been
reported using the intrinsic value method under previous
accounting:
|
|
Three
months ended
|
|
(in
thousands, except per share amounts)
|
|
March
31, 2006
|
|
|
|
|
|
Net
loss, using previous accounting method
|
|
$
|
(14,485
|
)
|
Basic
and diluted loss per ordinary share, using previous method
|
|
|
(0.38
|
)
|
|
|
|
|
|
Impact
of the adoption of SFAS No. 123R
|
|
|
(5,111
|
)
|
Net
loss, as reported
|
|
|
(19,596
|
)
|
Basic
and diluted loss per ordinary share, as reported
|
|
$
|
(0.51
|
)
|
The
value
of these options has been estimated using the Black-Scholes model. The expected
term of options granted is derived from historical data and the expected vesting
period. Expected volatility is based on the historical volatility of the
Company's common stock and the Company's assessment of its future volatility.
The risk-free interest rate is based on the U.S. Treasury vield for a period
consistent with the expected term of the option in effect at the time of the
grant. The Company has assumed no expected dividend yeld, as dividends have
never been paid to stock or option holders and will not be for the foreseeable
future.
The
weighted average fair market value of options granted during the three months
ended March 31, 2006, as of the date of the grant, was $8.10. The
assumptions used in the calculation of the fair value of options granted during
the three months ended March 31, 2006 were a weighted average expected term
of
3.0 years, a weighted average expected volatility rate of 79.25% and a weighted
average risk-free interest rate of 4.75%. The Company used historical
information to estimate forfeitures within the valuation model. As of
March 31, 2006, there was $31.8 million of total unrecognized compensation
cost, related to nonvested stock options and restricted stock, which is expected
to be recognized over a weighted-average period of 3.2 years.
Prior
to
January 1, 2006, the Company applied the intrinsic value-based method of
accounting prescribed by the Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”), and related
interpretations, including Financial Accounting Standards Board (“FASB”)
Interpretation 44, “Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25,” to account for its
fixed-plan stock options for employees and non-employee directors. Under this
method, compensation expense was recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. Prior
to January 1, 2006, the Company provided pro forma disclosure amounts in
accordance with SFAS 123, as amended by Statement of Financial Accounting
Standards No. 148 “Accounting for Stock-Based Compensation — Transition and
Disclosure,” (“SFAS 148”). As compensation expense was disclosed but not
recognized in periods prior to January 1, 2006, no cumulative adjustment
for forfeitures was recorded in 2006. The following is a pro forma unaudited
presentation illustrating the effect on net loss and net loss per share if
the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation in the prior three-month period ended
March 31, 2005:
|
|
Three
months ended
|
|
(in
thousands, except per share amounts)
|
|
March
31, 2005
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(4,832
|
)
|
Add:
Stock-based compensation expense to employees and directors determined
under the intrinsic value-based method, as included in reported net
loss
|
|
|
111
|
|
Deduct:
Stock-based compensation expense to employees and directors determined
under fair value based method
|
|
|
(873
|
)
|
Pro
forma net loss
|
|
$
|
(5,594
|
)
|
|
|
|
|
|
Basic
and diluted loss per common share:
|
|
|
|
|
As
reported
|
|
$
|
(0.15
|
)
|
Pro
forma
|
|
$
|
(0.18
|
)
|
The
value
of these options had been estimated using the Black-Scholes model. The weighted
average fair market value of options granted during the three months ended
March
31, 2005, as of the date of the grant, was $7.74. The assumptions used in
the calculation of the fair value of options granted during the three months
ended March 31, 2005 were a weighted average expected term of 5.0 years, a
weighted average expected volatility rate of 85.21% and a weighted average
risk-free interest rate of 3.70%.
NOTE 3
- BONUS TO OFFICER
Pursuant
to his employment agreement, the Chief
Executive Officer of the
Company
is entitled to receive a one-time $2 million cash bonus due to the achievement
of a corporate milestone that occurred,
and was
expensed, in
the
first quarter of 2006. Of this amount, $1,000,000 was included in other research
and development expenses and $1,000,000 was included in other general and
administrative expenses for the three months ended March 31, 2006, and has
been
included in accrued compensation and related liabilities in the accompanying
balance sheet as of March 31, 2006.
NOTE
4 - SUBSEQUENT EVENT
On
April
6, 2006, Accumin Diagnostics, Inc. (“ADI”), a wholly-owned subsidiary of the
Company, completed the acquisition of AccuminTM,
a
novel, patent protected, diagnostic for the direct measurement of total,
intact urinary albumin, from AusAm Biotechnologies, Inc. (“AusAm”). ADI also
assumed a limited amount of liabilities of AusAm. ADI acquired Accumin in
exchange for up to 300,000 shares of Keryx common stock, a royalty arrangement
under which ADI may be required to pay up to a maximum of $16.1 million, and
the
payment of AusAm liabilities by ADI under license agreements in the amount
of
$247,000 over the next 36 months. Keryx has filed a registration statement
on
Form S-3 with the SEC with respect to the shares issued to AusAm. At closing,
300,000 shares were issued to AusAm by Keryx, but are being held in escrow
until
such time as the SEC declares the registration statement effective (the
“Effective Date”). On the Effective Date, the number of shares released from
escrow to AusAm will be equal to the lower of (1) 300,000 shares, or (2) a
number of shares equal to $3,570,000 divided by the average price of a share
of
Keryx common stock on the Nasdaq Stock Market for a period of 20 trading days
before the Effective Date. Any shares not released to AusAm on the Effective
Date will be canceled.
Unless
the context requires otherwise, references in this report to “Keryx,” the
“Company,” “we,” “us” and “our” refer to Keryx Biopharmaceuticals, Inc., its
predecessor company and our respective subsidiaries.
The
following discussion and analysis contains forward-looking statements about
our
plans and expectations of what may happen in the future. Forward-looking
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and our results
could
differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to,
those factors discussed in “Risk Factors.” See also the “Special Cautionary
Notice Regarding Forward-Looking Statements” set forth at the beginning of this
report.
You
should read the following discussion and analysis in conjunction with the
unaudited, consolidated financial statements, and the related footnotes thereto,
appearing elsewhere in this report, and in conjunction with management’s
discussion and analysis and the audited, consolidated financial statements
included in our annual report on Form 10-K for the year ended December 31,
2005.
OVERVIEW
We
are a
biopharmaceutical company focused on the acquisition, development and
commercialization of novel pharmaceutical products for the treatment of
life-threatening diseases, including diabetes and cancer. Our lead compound
under development is Sulonex™ (sulodexide), which we previously referred to as
KRX-101, a first-in-class, oral heparinoid compound for the treatment of
diabetic nephropathy, a life-threatening kidney disease caused by diabetes.
Sulonex is in a pivotal Phase III and Phase IV clinical program under a Special
Protocol Assessment, or SPA, with the Food & Drug Administration, or FDA.
Additionally, we are developing Zerenex™, an oral, inorganic, iron-based
compound that has the capacity to bind to phosphorous and form non-absorbable
complexes. Zerenex is currently in Phase II clinical development for the
treatment of hyperphosphatemia (elevated phosphate levels) in patients with
end-stage renal disease, or ESRD. We are also developing clinical-stage oncology
compounds, including KRX-0401, a novel, first-in-class, oral anti-cancer agent
that modulates Akt, a protein in the body associated with tumor survival and
growth, and a number of other key signal transduction pathways, including the
JNK and MAPK pathways, which are pathways associated with programmed cell death,
cell growth, cell differentiation and cell survival. KRX-0401 is currently
in
Phase II clinical development for multiple tumor types. We also have an active
in-licensing and acquisition program designed to identify and acquire additional
drug candidates. To date, we have not received approval for the sale of any
of
our drug candidates in any market and, therefore, have not generated any
revenues from our drug candidates.
The
table
below summarizes the status of our product pipeline.
Product
candidate
|
|
Target
indication
|
|
Development
status
|
Endocrine/Renal
|
|
|
|
|
Sulonex™
|
|
Diabetic
nephropathy
|
|
Phase
III & Phase IV
|
Zerenex™
|
|
Hyperphosphatemia
in patients with end-stage
renal disease
|
|
Phase
II
|
Oncology
|
|
|
|
|
KRX-0401
|
|
Multiple
forms of cancer
|
|
Phase
II
|
KRX-0402
|
|
Brain
cancer
|
|
Phase
II
|
KRX-0404
|
|
Multiple
forms of cancer
|
|
Pre-clinical
|
Neurology
|
|
|
|
|
KRX-0501
|
|
Neurological
disorders
|
|
Pre-clinical
|
We
were
incorporated in Delaware in October 1998. We commenced operations in November
1999, following our acquisition of substantially all of the assets and certain
of the liabilities of Partec Ltd., our predecessor company that began operations
in January 1997. Since commencing operations, our activities have been primarily
devoted to developing our technologies and drug candidates, acquiring
clinical-stage compounds, raising capital, purchasing assets for our facilities,
and recruiting personnel.
We
are a
development stage company and have no product sales to date. Our major sources
of working capital have been proceeds from various private placements of equity
securities, option and warrant exercises, and from public offerings of our
common stock. We have devoted substantially all of our efforts to the discovery,
in-licensing and development of drug candidates. We have incurred negative
cash
flow from operations each year since our inception. We anticipate incurring
negative cash flows from operating activities for the foreseeable future. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy, including our product development
efforts, our clinical trials and in-licensing and acquisition activities.
Our
revenues consist entirely of clinical trial management and site recruitment
services. Revenues from providing these services are recognized as the services
are provided. Deferred revenue is recorded when we receive a deposit or
prepayment for services to be performed at a later date. We have not earned
any
revenues from the commercial sale of any of our drug candidates.
Our
cost
of services consist of all costs specifically associated with our clinical
trial
management and site recruitment client programs such as salaries, benefits
paid
to personnel, payments to third-party vendors and systems and other support
facilities associated with delivering services to our clients. Cost of services
are recognized as services are performed.
Our
research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and laboratory development, facilities-related and other expenses
relating to the design, development, testing, and enhancement of our product
candidates and technologies, as well as expenses related to in-licensing of
new
product candidates. We expense our research and development costs as they are
incurred.
Our
general and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including investor
relations, general legal activities and facilities related expenses.
Our
results of operations include non-cash compensation expense as a result of
the
grants of stock options and warrants. Compensation expense for awards of options
granted to employees and directors represents the fair value of the award
recorded over the respective vesting periods of the individual stock options.
The expense is included in the respective categories of expense in the statement
of operations. For awards of options and warrants to consultants and other
third-parties, compensation expense is determined at the “measurement date.” The
expense is recognized over the vesting period of the award. Until the
measurement date is reached, the total amount of compensation expense remains
uncertain. We record compensation expense based on the fair value of the award
at the reporting date. These awards are then revalued, or the total compensation
is recalculated based on the then current fair value, at each subsequent
reporting date. We expect to incur significant non-cash compensation as a result
of adopting SFAS No. 123R, which we adopted on January 1, 2006. In addition,
because some of the options and warrants issued to employees, consultants and
other third-parties either do not vest immediately or vest upon the achievement
of certain milestones, the total expense is uncertain.
For
periods presented prior to our adoption of SFAS 123R, compensation expense
for
fixed award options and warrants granted to employees and directors represents
the intrinsic value (the difference between the stock price of the common stock
and the exercise price of the options or warrants) of the options and warrants
at the date of grant. For variable awards, we considered the difference between
the stock price at reporting date and the exercise price, in the case where
a
measurement date has not been reached. The compensation cost was recorded over
the respective vesting periods of the individual stock options and warrants.
The
expense was included in the respective categories of expense in the statement
of
operations.
Our
ongoing clinical trials will be lengthy and expensive. Even if these trials
show
that our drug candidates are effective in treating certain indications, there
is
no guarantee that we will be able to record commercial sales of any of our
product candidates in the near future. In addition, we expect losses to continue
as we continue to fund in-licensing and development of new drug candidates.
As
we continue our development efforts, we may enter into additional third-party
collaborative agreements and may incur additional expenses, such as licensing
fees and milestone payments. In addition, we will need to establish the
commercial infrastructure required to manufacture, market and sell our drug
candidates following approval, if any, by the FDA, which would result in us
incurring additional expenses. As a result, our quarterly results may fluctuate
and a quarter-by-quarter comparison of our operating results may not be a
meaningful indication of our future performance.
RESULTS
OF OPERATIONS
Three
months ended March 31, 2006 and March 31, 2005
Revenue.
Service
revenue decreased by $45,000 to $112,000 for the three months ended March 31,
2006, as compared to revenue of $157,000 for the three months ended March 31,
2005. The decrease in service revenue was primarily due to a reduction in
service contracts in the current period. We do not expect our service revenues
to have a material impact on our financial results during the remainder of
2006.
Cost
of Services Expense.
Cost of
services expense decreased by $10,000 to $171,000 for the three months ended
March 31, 2006, as compared to an expense of $181,000 for the three months
ended
March 31, 2005. The decrease in cost of services was primarily due to a
reduction in service contracts in the current period. We do not expect our
cost
of service expense to have a material impact on our financial results during
the
remainder of 2006.
Non-Cash
Compensation Expense (Research and Development).
Non-cash
compensation expense related to stock option grants and warrant issuances was
$2,724,000 for the three months ended March 31, 2006, as compared to an expense
of $176,000 for the three months ended March 31, 2005. The increase in non-cash
compensation expenses was due primarily to the adoption of SFAS 123R on January
1, 2006. In addition, expenses during the three months ended March 31, 2006,
and
March 31, 2005, of $250,000 and $135,000, respectively were due to the
adjustment to fair market value of previously-issued options to consultants.
Other
Research and Development Expenses.
Other
research and development expenses increased by $8,291,000 to $12,333,000 for
the
three months ended March 31, 2006, as compared to an expense of $4,042,000
for
the three months ended March 31, 2005. The increase in other research and
development expenses was due primarily to a $7,534,000 increase in expenses
related to our Sulonex pivotal
Phase III and Phase IV clinical program,
and
includes one-half, or $1,000,000, of a one-time bonus to our Chief Executive
Officer pursuant to his employment agreement for the achievement of a corporate
milestone.
We
expect
our other research and development costs to increase during the remainder of
2006 as a result of the pivotal Phase III and Phase IV clinical program for
Sulonex and the expansion of the clinical program for KRX-0401, including the
planned commencement of additional single agent and combination trials, as
well
as possible development programs for our other drug candidates.
Non-Cash
Compensation Expense (General and Administrative).
Non-cash
compensation expense related to stock option grants and warrant issuances was
$2,817,000 for the three months ended March 31, 2006, as compared to an expense
of $185,000 for the three months ended March 31, 2005. The increase in
non-compensation expenses was associated with the adoption of SFAS 123R on
January 1, 2006. In addition, expenses during the three months ended March
31,
2006, and March 31, 2005, of $37,000 and $68,000, respectively were due to
the
adjustment to fair market value of previously-issued options to consultants.
Additionally, the continued vesting of options granted to certain directors
resulted in expenses of $111,000 in each period.
Other
General and Administrative Expenses.
Other
general and administrative expenses increased by $2,000,000 to $2,645,000 for
the three months ended March 31, 2006, as compared to an expense of $645,000
for
the three months ended March 31, 2005. The increase in general and
administrative expenses was due primarily to one-half, or $1,000,000, of a
one-time bonus to our Chief Executive Officer for the achievement of a corporate
milestone pursuant to his employment agreement. The compensation of our Chief
Executive Officer is allocated equally between other research and development
expenses and other general and administrative expenses to reflect the allocation
of his responsibilities and activities for Keryx. The increase was also due
to
$470,000 of expenses incurred related to the acquisition of AccuminTM,
which
closed on April 6, 2006.
We
expect
our other general and administrative costs to increase modestly over the
remainder of 2006 primarily as a result of our clinical development
programs.
Interest
and Other Income, Net.
Interest and other income, net, increased by $742,000 to $982,000 for the three
months ended March 31, 2006, as compared to income of $240,000 for the three
months ended March 31, 2005. The increase resulted from a higher level of
invested funds due to the completion of a public offering that closed in July
2005, as well as due to the general increase in short-term market interest
rates
when compared to the comparable period last year.
LIQUIDITY
AND CAPITAL RESOURCES
We
have
financed our operations from inception primarily through public offerings of
our
common stock, various private placement transactions, and option and warrant
exercises. This includes net proceeds of $82.7 million from our March 2006
registered direct offering, $75.8 million from our July 2005 public offering,
and net proceeds of approximately $31.7 million from the private placement
of
our common stock in fiscal 2004.
As
of
March 31, 2006, we had $171.3 million in cash, cash equivalents, interest
receivable, and short-term and long-term securities, an increase of $70.6
million from December 31, 2005. Cash used in operating activities for the three
months ended March 31, 2006 was $12.7 million, as compared to $5.1 million
for
the three months ended March 31, 2005. This increase in cash used in operating
activities was due primarily to increased expenditures associated with the
execution of our business plan, including costs associated with our pivotal
Phase III and Phase IV clinical program for Sulonex, and the expansion of the
KRX-0401 clinical program. For the three months ended March 31, 2006, net cash
used in investing activities of $0.3 million was primarily the result of the
purchase of manufacturing equipment related to the planned commercial production
of Sulonex. For the three months ended March 31, 2006, net cash provided by
financing activities of $83.9 million was the result of our $82.7 million
registered direct offering of our common stock completed in March 2006, and
$1.2
million of proceeds from the exercise of options and warrants.
In
March
2006, we completed a registered direct offering of 4,500,000 shares of our
common stock to two institutional investors at $18.40 per share. We received
approximately $82.7 million in proceeds, net of offering expenses of
approximately $0.1 million.
We
believe that our $171.3 million in cash, cash equivalents, interest receivable
and investment securities as of March 31, 2006 will be sufficient to enable
us
to meet our planned operating needs and capital expenditures for at least the
next 24 months. Additionally, we also believe that our cash position provides
us
with added flexibility in our in-licensing and product acquisition program
to
potentially strengthen our portfolio with additional clinical-stage drug
candidates.
Our
cash
and cash equivalents and investment securities as of March 31, 2006 are invested
in highly liquid investments such as cash, money market accounts and short-term
and long-term U.S. corporate and government debt and auction note securities.
As
of March 31, 2006, we are unaware of any known trends or any known demands,
commitments, events, or uncertainties that will, or that are reasonably likely
to, result in a material increase or decrease in our required liquidity. We
expect that our liquidity needs throughout 2006 will continue to be funded
from
existing cash, cash equivalents, and short-term marketable securities.
On
December 30, 2005, we filed a shelf registration statement on Form S-3 with
the
SEC, that was declared effective by the SEC on January 13, 2006. The
registration statement provides for the offering of up to $150 million of our
common stock. Subsequent to the registered direct offering that was completed
in
March 2006, there remains $67.2 million of our common stock available for sale
on this shelf registration statement. We may offer these securities from time
to
time in response to market conditions or other circumstances if we believe
such
a plan of financing is in the best interest of the company and our stockholders.
We believe that the availability to conduct such offerings enhances our ability
to raise additional capital to finance our operations.
OFF-BALANCE
SHEET ARRANGEMENTS
We
have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments
or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest
in an
unconsolidated entity that provides us with financing, liquidity, market risk
or
credit risk support.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements, which have been prepared
in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities and related disclosure
of
contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the applicable period.
Actual results may differ from these estimates under different assumptions
or
conditions.
We
define
critical accounting policies as those that are reflective of significant
judgments and uncertainties and which may potentially result in materially
different results under different assumptions and conditions. In applying these
critical accounting policies, our management uses its judgment to determine
the
appropriate assumptions to be used in making certain estimates. These estimates
are subject to an inherent degree of uncertainty. Our critical accounting
policies include the following:
Stock
Compensation.
We have
granted options to employees, directors and consultants, as well as warrants
to
other third parties. In December 2004, the FASB issued SFAS 123R. This SFAS
123R is a revision of SFAS 123 “Accounting for Stock-Based Compensation” and
amends SFAS No. 95 “Statement of Cash Flows.” SFAS 123R supersedes APB
Opinion No. 25 “Accounting for Stock Issued to Employees,” and its related
implementation guidance. SFAS 123R covers a wide range of share-based
compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. The new standard is effective as of the beginning of the first interim
or
annual reporting period that begins after December 15, 2005. We adopted
SFAS 123R effective January 1, 2006. See Note 1 - “Stock Based
Compensation.”
In
applying SFAS 123R, the value of each option award is estimated on the date
of
grant using the Black-Scholes option-pricing model. The Black-Scholes model
takes into account volatility in the price of our stock, the risk-free interest
rate, the estimated life of the option, the closing market price of our stock
and the exercise price. We base our estimates of our stock price volatility
on
the historical volatility of our common stock and our assessment of future
volatility; however, this estimate is neither predictive nor indicative of
the
future performance of our stock. For purposes of the calculation, we assumed
that no dividends would be paid during the life of the options and warrants.
The
estimates utilized in the Black-Scholes calculation involve inherent
uncertainties and the application of management judgment. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense
for
those options expected to vest. As a result, if other assumptions had been
used,
our recorded stock-based compensation expense could have been materially
different from that reported.
In
accordance with EITF 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,” total compensation expense for options issued to consultants is
determined at the “measurement date.” The expense is recognized over the vesting
period for the options. Until the measurement date is reached, the total amount
of compensation expense remains uncertain. We record option compensation based
on the fair value of the options at the reporting date. These options are then
revalued, or the total compensation is recalculated based on the then current
fair value, at each subsequent reporting date. This results in a change to
the
amount previously recorded in respect of the option grant, and additional
expense or a negative expense may be recorded in subsequent periods based on
changes in the assumptions used to calculate fair value, such as changes in
market price, until the measurement date is reached and the compensation expense
is finalized.
Accruals
for Clinical Research Organization and Clinical Site Costs. We
make
estimates of costs incurred to date in relation to external clinical research
organizations, or CROs, and clinical site costs. We analyze the progress of
clinical trials, including levels of patient enrollment, invoices received
and
contracted costs when evaluating the adequacy of the amount expensed and the
related prepaid asset and accrued liability. Significant judgments and estimates
must be made and used in determining the accrued balance in any accounting
period. In addition, administrative costs related to external CROs are
recognized on a straight-line basis over the estimated contractual
period.
Accounting
For Income Taxes.
In
preparing our consolidated financial statements, we are required to estimate
our
income taxes in each of the jurisdictions in which we operate. This process
involves management estimation of our actual current tax exposure and assessment
of temporary differences resulting from differing treatment of items for tax
and
accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe
that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period,
we
must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have fully offset
our
U.S. deferred tax assets with a valuation allowance. Our lack of earnings
history and the uncertainty surrounding our ability to generate taxable income
prior to the reversal or expiration of such deferred tax assets were the primary
factors considered by management in establishing the valuation allowance. In
prior periods, our wholly-owned Israeli subsidiaries had generated taxable
income in respect of services provided within the group, and therefore we
believed in the past that our deferred tax assets relating to the Israeli
subsidiaries would be realized. With the cessation of operating activities
in
Israel during 2003 and the resulting absence of taxable income from the Israeli
subsidiaries, the deferred tax asset was written off in 2003.
RISK
FACTORS
You
should carefully consider the following risks and uncertainties. If any of
the
following occurs, our business, financial condition or operating results could
be materially harmed. These factors could cause the trading price of our common
stock to decline, and you could lose all or part of your investment.
Risks
Related to Our Business
We
have a limited operating history and have incurred substantial operating losses
since our inception. We expect to continue to incur losses in the future and
may
never become profitable.
We
have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred operating losses since our inception and expect
to
continue to incur operating losses for the foreseeable future and may never
become profitable. As of March 31, 2006, we had an accumulated deficit of
approximately $134.0 million. As we expand our research and development efforts,
we will incur increasing losses. We may continue to incur substantial operating
losses even if we begin to generate revenues from our drug candidates or
technologies.
We
have
not yet commercialized any products or technologies and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates or technologies, we may not become profitable. Our ability to achieve
profitability depends on a number of factors, including our ability to complete
our development efforts, obtain regulatory approval for our drug candidates,
successfully complete any post-approval regulatory obligations and successfully
commercialize our drug candidates and technologies.
Risks
Associated with Our Product Development Efforts
If
we are unable to successfully complete our clinical trial programs, or if such
clinical trials take longer to complete than we project, our ability to execute
our current business strategy will be adversely
affected.
Whether
or not and how quickly we complete clinical trials is dependent in part upon
the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients. Patient enrollment is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials, and whether existing or new drugs are approved
for
the indication we are studying. We are aware that other companies are planning
clinical trials that will seek to enroll patients with the same diseases as
we
are studying. In addition, one of our current trials for Sulonex is designed
to
continue until a pre-determined number of events have occurred to the patients
enrolled. Trials such as this are subject to delays stemming from patient
withdrawal and from lower than expected event rates and may also incur increased
costs if enrollment is increased in order to achieve the desired number of
events. If we experience delays in identifying and contracting with sites and/or
in patient enrollment in our clinical trial programs, we may incur additional
costs and delays in our development programs, and may not be able to complete
our clinical trials on a cost-effective or timely basis.
Additionally,
we have finalized an SPA agreement with the FDA for the Phase III and Phase
IV
clinical trials of Sulonex. The clinical plan to support a New Drug
Application, or NDA, approval for Sulonex under subpart H, as agreed upon
with the FDA under an SPA, consists of: (i) a single Phase III trial in patients
with microalbuminuria based on the surrogate marker of regression of
microalbuminuria as the primary endpoint; (ii) supportive data from previously
conducted clinical studies; and (iii) substantial recruitment into our Phase
IV
confirmatory study that will measure clinical outcomes in patients with overt
nephropathy, or macroalbuminuria. The subpart H process is complex and requires
careful execution. No assurance can be given that we will be able to meet the
requirements set forth in the SPA. Even if we meet those requirements, the
FDA
is not obligated to grant approval of our NDA for Sulonex. If the FDA approves
Sulonex for marketing on the basis of our Phase III trial, our Phase IV clinical
trial may yield insufficient efficacy data or give rise to safety concerns,
which could result in withdrawal of such approval or could cause us to withdraw
the product from the market. Many companies who have been granted the right
to
utilize an accelerated approval approach have failed to obtain approval.
Moreover, negative or inconclusive results from the clinical trials we hope
to
conduct or adverse medical events could cause us to have to repeat or terminate
the clinical trials. Accordingly, we may not be able to complete the clinical
trials within an acceptable time frame, if at all.
If
our drug candidates do not receive the necessary regulatory approvals, we will
be unable to commercialize our drug candidates.
We
have
not received, and may never receive, regulatory approval for the commercial
sale
of any of our drug candidates. We will need to conduct significant additional
research and human testing before we can apply for product approval with the
FDA
or with regulatory authorities of other countries. Pre-clinical testing and
clinical development are long, expensive and uncertain processes. Satisfaction
of regulatory requirements typically depends on the nature, complexity and
novelty of the product and requires the expenditure of substantial resources.
Data obtained from pre-clinical and clinical tests can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. It
may
take us many years to complete the testing of our drug candidates and failure
can occur at any stage of this process. Negative or inconclusive results or
medical events during a clinical trial could cause us to delay or terminate
our
development efforts.
Furthermore,
interim results of preclinical or clinical studies do not necessarily predict
their final results, and acceptable results in early studies might not be
obtained in later studies. Drug candidates in the later stages of clinical
development may fail to show the desired safety and efficacy traits despite
positive results in initial clinical testing. There can be no assurance that
the
results from the Phase III study will track the data from the Phase II study,
or
that the results from the Phase IV study will yield sufficient efficacy data.
With respect to Sulonex, the recommendation to move into our pivotal program,
as
well as the announced Phase II data, may not be indicative of results from
future clinical trials and the risk remains that the pivotal program for Sulonex
may generate efficacy data that will be insufficient for the approval of the
drug, or may raise safety concerns that may prevent approval of the
drug.
Clinical
trials also have a high risk of failure. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after achieving promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process.
Because
all of our proprietary technologies are licensed to us by third parties,
termination of these license agreements would prevent us from developing our
drug candidates.
We
do not
own any of our drug candidates. We have licensed the patent rights to these
drugs candidates from others. These license agreements require us to meet
development or financing milestones and impose development and commercialization
due diligence requirements on us. In addition, under these agreements, we must
pay royalties on sales of products resulting from licensed technologies and
pay
the patent filing, prosecution and maintenance costs related to the licenses.
If
we do not meet our obligations in a timely manner or if we otherwise breach
the
terms of our license agreements, our licensors could terminate the agreements,
and we would lose the rights to our drug candidates.
We
rely on third parties to manufacture our products. If these third parties do
not
successfully manufacture our products, our business will be
harmed.
We
have
no experience in manufacturing products for clinical or commercial purposes
and
do not have any manufacturing facilities. We intend to continue, in whole or
in
part, to use third parties to manufacture our products for use in clinical
trials and for future sales. We may not be able to enter into future third-party
contract manufacturing agreements on acceptable terms to us, if at
all.
Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving production yields, quality control and assurance, shortage
of
qualified personnel, compliance with FDA and foreign regulations, production
costs and development of advanced manufacturing techniques and process controls.
Our third-party manufacturers may not perform as agreed or may not remain in
the
contract manufacturing business for the time required by us to successfully
produce and market our drug candidates. In addition, our contract manufacturers
will be subject to ongoing periodic, unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with,
among other things, current good manufacturing practices, in addition to other
governmental regulations and corresponding foreign standards. We will not have
control over, other than by contract, third-party manufacturers' compliance
with
these regulations and standards. Switching or engaging multiple manufacturers
may be difficult because the number of potential manufacturers is limited and,
particularly in the case of Sulonex, the process by which multiple manufacturers
make the drug substance must be identical at each manufacturing facility. It
may
be difficult for us to find and engage replacement or multiple manufacturers
quickly and on terms acceptable to us, if at all. Moreover, if we need to change
manufacturers, the FDA and corresponding foreign regulatory agencies must
approve these manufacturers in advance, which will involve testing and
additional inspections to ensure compliance with FDA and foreign regulations
and
standards.
If
third-party manufacturers fail to deliver the required quantities of our drug
candidates on a timely basis and at commercially reasonable prices, we will
not
be able to commercialize our products as planned.
We
have
entered into a relationship with a U.S.-based contract manufacturer for Sulonex
which we believe will be adequate to satisfy our current clinical supply needs;
however, as we scale-up for commercial manufacturing, we will need to ensure
that we accurately reproduce the established process on a larger scale. As
with
all heparin-like compounds, the end product is highly sensitive to the
manufacturing process utilized. Accordingly, as we scale-up, reproducibility
will be required for the successful commercialization of Sulonex. There can
be
no assurance that we will be successful in this endeavor. Additionally, as
we
scale-up, we will incur capital expenditures to enable larger scale
production.
If
we
are not able to obtain the raw materials required for the manufacture of our
lead product candidate, Sulonex,
our
ability to develop and market this product candidate will be substantially
harmed.
Source
materials for Sulonex, our lead product candidate, are derived from porcine
mucosa. Long-term supplies for Sulonex could be affected by limitations in
the
supply of porcine mucosa and the demand for other heparin products, over which
we will have no control. Additionally, diseases affecting the world supply
of
pigs could have an actual or perceived negative impact on our ability, or the
ability of our contract manufacturers, to source, make and/or sell Sulonex.
Such
negative impact could materially affect the commercial success of
Sulonex.
If
we do not establish or maintain manufacturing, drug development and marketing
arrangements with third parties, we may be unable to commercialize our
products.
We
are an
emerging company and do not possess all of the capabilities to fully
commercialize our products on our own. From time to time, we may need to
contract with third parties to:
|
● |
manufacture
our product candidates;
|
|
● |
assist
us in developing, testing and obtaining regulatory approval for and
commercializing some of our compounds and technologies;
and
|
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market
and distribute our drug products.
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We
can
provide no assurance that we will be able to successfully enter into agreements
with such third parties on terms that are acceptable to us, if at all. If we
are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of
our
drug development programs or seek to develop or commercialize our products
independently, which could result in delays. Furthermore, such failure could
result in the termination of license rights to one or more of our products.
If
these manufacturing, development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of
our
products. Accordingly, to the extent that we rely on third parties to research,
develop or commercialize our products, we are unable to control whether such
products will be scientifically or commercially successful.
Our
reliance on third parties, such as clinical research organizations, or CROs,
may
result in delays in completing, or a failure to complete, clinical trials if
they fail to perform under our agreements with them.
In
the
course of product development, we engage CROs to conduct and manage clinical
studies and to assist us in guiding our products through the FDA review and
approval process. Because we have engaged and intend to continue to engage
CROs
to help us obtain market approval for our drug candidates, many important
aspects of this process have been and will be out of our direct control. If
the
CROs fail to perform their obligations under our agreements with them or fail
to
perform clinical trials in a satisfactory manner, we may face delays in
completing our clinical trials, as well as commercialization of one or more
drug
candidates. Furthermore, any loss or delay in obtaining contracts with such
entities may also delay the completion of our clinical trials and the market
approval of drug candidates.
Other
Risks Related to Our Business
If
we are unable to develop adequate sales, marketing or distribution capabilities
or enter into agreements with third parties to perform some of these functions,
we will not be able to commercialize our products
effectively.
In
the
event Sulonex is approved by the FDA, we currently plan to conduct our own
sales
and marketing effort to support the drug, and we may adopt this strategy with
respect to future drug products. We currently have no experience in sales,
marketing or distribution. To directly market and distribute any products,
we
must build a sales and marketing organization with appropriate technical
expertise and distribution capabilities. We may attempt to build such a sales
and marketing organization on our own or with the assistance of a contract
sales
organization. For some market opportunities, we may need to enter into
co-promotion or other licensing arrangements with larger pharmaceutical or
biotechnology firms in order to increase the commercial success of our products.
We may not be able to establish sales, marketing and distribution capabilities
of our own or enter into such arrangements with third parties in a timely manner
or on acceptable terms. To the extent that we enter into co-promotion or other
licensing arrangements, our product revenues are likely to be lower than if
we
directly marketed and sold our products, and some or all of the revenues we
receive will depend upon the efforts of third parties, and these efforts may
not
be successful. Additionally, building marketing and distribution capabilities
may be more expensive than we anticipate, requiring us to divert capital from
other intended purposes or preventing us from building our marketing and
distribution capabilities to the desired levels.
Even
if we obtain FDA approval to market our drug products, if they fail to achieve
market acceptance, we will never record meaningful
revenues.
Even
if
our products are approved for sale, they may not be commercially successful
in
the marketplace. Market acceptance of our drug products will depend on a number
of factors, including:
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perceptions
by members of the health care community, including physicians, of
the
safety and efficacy of our product
candidates;
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the
rates of adoption of our products by medical practitioners and the
target
populations for our products;
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the
potential advantages that our products offer over existing treatment
methods;
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the
cost-effectiveness of our products relative to competing
products;
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the
availability of government or third-party payor reimbursement for
our
products;
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the
side effects or unfavorable publicity concerning our products or
similar
products; and
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the
effectiveness of our sales, marketing and distribution efforts.
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Because
we expect sales of our products, if approved, to generate substantially all
of
our revenues in the long-term, the failure of our drugs to find market
acceptance would harm our business and could require us to seek additional
financing or other sources of revenue.
If
our competitors develop and market products that are less expensive, more
effective or safer than our drug products, our commercial opportunities may
be
reduced or eliminated.
The
pharmaceutical industry is highly competitive. Our competitors include
pharmaceutical companies and biotechnology companies, as well as universities
and public and private research institutions. In addition, companies that are
active in different but related fields represent substantial competition for
us.
Many of our competitors have significantly greater capital resources, larger
research and development staffs and facilities and greater experience in drug
development, regulation, manufacturing and marketing than we do. These
organizations also compete with us to recruit qualified personnel, attract
partners for joint ventures or other collaborations, and license technologies
that are competitive with ours. As a result, our competitors may be able to
more
easily develop technologies and products that could render our drug products
obsolete or noncompetitive. To compete successfully in this industry we must
identify novel and unique drugs or methods of treatment and then complete the
development of those drugs as treatments in advance of our
competitors.
The
drugs
that we are attempting to develop will have to compete with existing therapies.
In addition, our commercial opportunities may be reduced or eliminated if our
competitors develop and market products that are less expensive, more effective
or safer than our drug products. Other companies have drug candidates in various
stages of pre-clinical or clinical development to treat diseases for which
we
are also seeking to discover and develop drug products. Some of these potential
competing drugs are further advanced in development than our drug candidates
and
may be commercialized earlier. Even if we are successful in developing effective
drugs, our products may not compete successfully with products produced by
our
competitors.
If
we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted and our business could be
harmed.
As
of May
5, 2006, we had 36 full and part-time employees. To successfully develop our
drug candidates, we must be able to attract and retain highly skilled personnel.
In addition, if we lose the services of our current personnel, in particular,
Michael S. Weiss, our Chairman and Chief Executive Officer, our ability to
continue to execute on our business plan could be materially impaired. In
addition, although we have an employment agreement with Mr. Weiss, this
agreement does not prevent him from terminating his employment with
us.
Any
acquisitions we make may require a significant amount of our available cash
and
may not be scientifically or commercially successful.
As
part
of our business strategy, we may effect acquisitions to obtain additional
businesses, products, technologies, capabilities and personnel. If we make
one
or more significant acquisitions in which the consideration includes cash,
we
may be required to use a substantial portion of our available cash.
Acquisitions
involve a number of operational risks, including:
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difficulty
and expense of assimilating the operations, technology and personnel
of
the acquired business;
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our
inability to retain the management, key personnel and other employees
of
the acquired business;
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our
inability to maintain the acquired company's relationship with key
third
parties, such as alliance partners;
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exposure
to legal claims for activities of the acquired business prior to
the
acquisition;
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the
diversion of our management's attention from our core business;
and
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the
potential impairment of goodwill and write-off of in-process research
and
development costs, adversely affecting our reported results of
operations.
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The
status of reimbursement from third-party payors for newly approved health care
drugs is uncertain and failure to obtain adequate reimbursement could limit
our
ability to generate revenue.
Our
ability to commercialize pharmaceutical products may depend, in part, on the
extent to which reimbursement for the products will be available
from:
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government
and health administration authorities;
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private
health insurers;
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managed
care programs; and
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other
third-party payors.
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Significant
uncertainty exists as to the reimbursement status of newly approved health
care
products. Third-party payors, including Medicare, are challenging the prices
charged for medical products and services. Government and other third-party
payors increasingly are attempting to contain health care costs by limiting
both
coverage and the level of reimbursement for new drugs and by refusing, in some
cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted labeling approval. Third-party insurance
coverage may not be available to patients for our products. If government and
other third-party payors do not provide adequate coverage and reimbursement
levels for our products, their market acceptance may be reduced.
Health
care reform measures could adversely affect our
business.
The
business and financial condition of pharmaceutical and biotechnology companies
are affected by the efforts of governmental and third-party payors to contain
or
reduce the costs of health care. In the United States and in foreign
jurisdictions there have been, and we expect that there will continue to be,
a
number of legislative and regulatory proposals aimed at changing the health
care
system, such as proposals relating to the reimportation of drugs into the
U.S. from other countries (where they are then sold at a lower price) and
government control of prescription drug pricing. The pendency or approval of
such proposals could result in a decrease in our stock price or limit our
ability to raise capital or to obtain strategic partnerships or
licenses.
We
face product liability risks and may not be able to obtain adequate
insurance.
The
use
of our drug candidates in clinical trials, and the future sale of any approved
products, exposes us to liability claims. Although we are not aware of any
historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates or limit commercialization of any approved products.
We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials. We intend to expand our insurance coverage to include
the commercial sale of any approved products if marketing approval is obtained;
however, insurance coverage is becoming increasingly expensive. We may not
be
able to maintain insurance coverage at a reasonable cost. We may not be able
to
obtain additional insurance coverage that will be adequate to cover product
liability risks that may arise. Regardless of merit or eventual outcome, product
liability claims may result in:
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decreased
demand for a product;
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injury
to our reputation;
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our
inability to continue to develop a drug candidate;
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withdrawal
of clinical trial volunteers; and
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Consequently,
a product liability claim or product recall may result in losses that could
be
material.
In
connection with providing our clinical trial management and site recruitment
services, we may be exposed to liability that could have a material adverse
effect on our financial condition and results of
operations.
The
Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary we acquired
through our acquisition of ACCESS Oncology, provides clinical trial management
and site recruitment services to us as well as other biotechnology and
pharmaceutical companies. In conducting the activities of OCOG, any failure
on
our part to comply with applicable governmental regulations or contractual
obligations could expose us to liability to our clients and could have a
material adverse effect on us. We also could be held liable for errors or
omissions in connection with the services we perform. In addition, the wrongful
or erroneous delivery of health care information or services may expose us
to
liability. If we were required to pay damages or bear the costs of defending
any
such claims, the losses could be material.
Our
corporate compliance efforts cannot guarantee that we are in compliance with
all
potentially applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company
with 36 employees. We also have significantly fewer employees than many
other companies that have a product candidate in late-stage clinical
development, and we rely heavily on third parties to conduct many important
functions. While we have developed and instituted a corporate compliance program
based on what we believe are the current best practices, we cannot assure you
that we are or will be in compliance with all potentially applicable
regulations. If we fail to comply with any of these regulations we could be
subject to a range of regulatory actions, including suspension or termination
of
clinical trials, the failure to approve a product candidate, restrictions on
our
products or manufacturing processes, withdrawal of products from the market,
significant fines, or other sanctions or litigation.
Risks
Related to Our Financial Condition
Our
current cash, cash equivalents and investment securities may not be adequate
to
support our operations for the next 24 months as we have
estimated.
We
believe that our $171.3 million in cash, cash equivalents, interest receivable
and investment securities as of March 31, 2006 will be sufficient to enable
us
to meet our planned operating needs and capital expenditures for at least the
next 24 months. Our forecast of the period of time through which our cash,
cash
equivalents, interest receivable and investment securities will be adequate
to
support our operations is a forward-looking statement that involves risks and
uncertainties. The actual amount of funds we will need to operate is subject
to
many factors, some of which are beyond our control. These factors include the
following:
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the
timing of expenses associated with manufacturing and product development
of the proprietary drug candidates within our portfolio and those
that may
be in-licensed, partnered or
acquired;
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the
timing of the in-licensing, partnering and acquisition of new product
opportunities;
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the
progress of the development efforts of parties with whom we have
entered,
or may enter, into research and development
agreements;
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our
ability to achieve our milestones under our licensing arrangements;
and
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the
costs involved in prosecuting and enforcing patent claims and other
intellectual property rights.
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If
we are unable to obtain additional funds on terms favorable to us, or at all,
our business would be harmed.
We
expect
to use, rather than generate, funds from operations for the foreseeable future.
Based on our current plans, we believe our existing cash, cash equivalents,
interest receivable and investment securities will be sufficient to fund our
operating expenses and capital requirements for at least the next 24 months;
however, the actual amount of funds that we will need prior to or after that
date will be determined by many factors, some of which are beyond our control.
As a result, we may need funds sooner or in different amounts than we currently
anticipate, depending upon:
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the
progress of our development activities;
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the
progress of our research activities;
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the
number and scope of our development programs;
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the
costs associated with commercialization activities, including
manufacturing, marketing and sales;
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our
ability to establish and maintain current and new licensing or acquisition
arrangements;
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our
ability to achieve our milestones under our licensing
arrangements;
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the
costs involved in enforcing patent claims and other intellectual
property
rights; and
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the
costs and timing of regulatory approvals.
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If
our
capital resources are insufficient to meet future capital requirements, we
will
have to raise additional funds. If we are unable to obtain additional funds
on
terms favorable to us or at all, we may be required to cease or reduce our
operating activities or sell or license to third parties some or all of our
intellectual property. If we raise additional funds by selling additional shares
of our capital stock, the ownership interests of our stockholders will be
diluted. If we need to raise additional funds through the sale or license of
our
intellectual property, we may be unable to do so on terms favorable to
us.
Our
prior restructurings may result in additional Israeli-related
liabilities.
In
July
2003, our Israeli subsidiary vacated its Jerusalem facility, after giving
advance notice to the landlord. On May 1, 2005, the landlord of the Jerusalem
facility filed suit in Israel claiming that we were liable as a result of the
alleged breach of the lease agreement by our subsidiary. The amount demanded
by
the landlord totals 4,345,313 New Israeli Shekels or approximately $931,000,
and
includes rent for the entire remaining term of the lease, as well as property
taxes and other costs allegedly incurred by the landlord. In August 2003, the
landlord claimed a bank deposit, in the amount of $222,000, which was previously
provided as security in connection with the lease agreement. We intend to
vigorously defend the suit. In July 2005, Keryx (Israel) Ltd. and Keryx
Biomedical Technologies Ltd. filed an answer to the landlord’s complaint. In
October 2005, Keryx Biopharmaceuticals, Inc. filed an answer to the landlord’s
complaint. Generally, each answer challenges the merits of the landlord’s cause
of action as to each defendant. All defendants, except Keryx (Israel) Ltd.,
have
also filed a motion to dismiss the complaint. The plaintiff has filed a response
to each answer and a hearing date has been set by the Circuit Court of
Jerusalem. To date, we have not yet recorded a charge to reflect any potential
liability associated with this lawsuit as it is too early to accurately estimate
the amount of the charge, if any.
In
September 2001, one of our Israeli subsidiaries received the status of an
"Approved Enterprise," a status which grants certain tax benefits in Israel
in
accordance with the "Law for the Encouragement of Capital Investments, 1959."
Through December 31, 2003, our Israeli subsidiary, which ceased operations
in
2003, has received tax benefits in the form of exemptions of approximately
$744,000 as a result of our subsidiary's status as an "Approved Enterprise."
As
part of the restructuring implemented during 2003, we closed down our Jerusalem
laboratory facility. In October 2003, the subsidiary received a letter from
the
Israeli Ministry of Industry and Trade that its Approved Enterprise status
was
cancelled as of July 2003 and that past benefits would not need to be repaid.
The Israeli tax authorities have yet to confirm this position; however, we
believe that, based on the letter received from the Ministry of Industry and
Trade, it is unlikely that past benefits will need to be repaid, and therefore,
we have not recorded any charge with respect to this potential liability. There
can be no assurances that the Israeli tax authorities will confirm this
position. As a result, we may be liable to repay some or all of the tax benefits
received to date, which could adversely affect our cash flow and results of
operations.
Risks
Related to Our Intellectual Property
If
we are unable to adequately protect our intellectual property, third parties
may
be able to use our intellectual property, which could adversely affect our
ability to compete in the market.
Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents against third-party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, the patents we use may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative drug products or technologies or design around our
patented drug products and technologies. The patents we use may be challenged
or
invalidated or may fail to provide us with any competitive
advantage.
We
rely
on trade secrets to protect our intellectual property where we believe patent
protection is not appropriate or obtainable. Trade secrets are difficult to
protect. While we require our employees, collaborators and consultants to enter
into confidentiality agreements, this may not be sufficient to adequately
protect our trade secrets or other proprietary information. In addition, we
share ownership and publication rights to data relating to some of our drug
products and technologies with our research collaborators and scientific
advisors. If we cannot maintain the confidentiality of this information, our
ability to receive patent protection or protect our trade secrets or other
proprietary information will be at risk.
Litigation
or third-party claims of intellectual property infringement could require us
to
spend substantial time and money defending such claims and adversely affect
our
ability to develop and commercialize our products.
Third
parties may assert that we are using their proprietary intellectual property
without authorization. In addition, third parties may have or obtain patents
in
the future and claim that our drug products or technologies infringe their
patents. If we are required to defend against patent suits brought by third
parties, or if we sue third parties to protect our patent rights, we may be
required to pay substantial litigation costs, and our management's attention
may
be diverted from operating our business. In addition, any legal action against
our licensors or us that seeks damages or an injunction of our commercial
activities relating to the affected our drug products or technologies could
subject us to monetary liability and require our licensors or us to obtain
a
license to continue to use the affected our drug products or technologies.
We
cannot predict whether our licensors or we would prevail in any of these types
of actions or that any required license would be made available on commercially
acceptable terms, if at all.
Risks
Related to Our Common Stock
Concentration
of ownership of our common stock among our existing executive officers and
directors may prevent new investors from influencing significant corporate
decisions.
As
of
March 31, 2006, our executive officers and directors (including their
affiliates) beneficially owned, in the aggregate, approximately 18.83% of our
outstanding common stock, including, for this purpose, currently exercisable
options and warrants held by our executive officers and directors. As a result,
these persons, acting together, may have the ability to significantly influence
the outcome of all matters submitted to our stockholders for approval, including
the election and removal of directors and any merger, consolidation or sale
of
all or substantially all of our assets. In addition, such persons, acting
together, may have the ability to effectively control our management and
affairs. Accordingly, this concentration of ownership may depress the market
price of our common stock.
Future
sales or other issuances of our common stock could depress the market for our
common stock.
Sales
of
a substantial number of shares of our common stock, or the perception by the
market that those sales could occur, could cause the market price of our common
stock to decline or could make it more difficult for us to raise funds through
the sale of equity in the future. On December 30, 2005, we filed with the SEC
a
shelf registration statement on Form S-3, that was declared effective by the
SEC
on January 13, 2006, providing for the offering of up to $150 million of our
common stock. Following our registered direct offering of common stock
to two institutional investors that was completed in March 2006, there remains
$67.2 million available for sale on this shelf registration statement. Future
sales pursuant to this registration statement could depress the market for
our
common stock.
If
we
make one or more significant acquisitions in which the consideration includes
stock or other securities, your equity in us may be significantly diluted.
We
may be required to issue up to 3,372,422 shares of our common stock to former
stockholders of ACCESS Oncology upon the achievement of certain milestones.
In
addition, we may enter into arrangements with third parties permitting us to
issue shares of common stock in lieu of certain cash payments upon the
achievement of milestones.
As
of
March 31, 2006, our executive officers and directors, beneficially own, in
the
aggregate, approximately 18.83% of our common stock, including currently
exercisable warrants and options held by them. If some or all of them should
decide to sell a substantial number of their holdings, it could have a material
adverse effect on the market for our common stock.
Our
stock price can be volatile, which increases the risk of litigation, and may
result in a significant decline in the value of your
investment.
The
trading price of our common stock is likely to be highly volatile and subject
to
wide fluctuations in price in response to various factors, many of which are
beyond our control. These factors include:
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developments
concerning our drug candidates;
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announcements
of technological innovations by us or our competitors;
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introductions
or announcements of new products by us or our
competitors;
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announcements
by us of significant acquisitions, strategic partnerships, joint
ventures
or capital commitments;
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changes
in financial estimates by securities analysts;
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actual
or anticipated variations in quarterly operating results;
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expiration
or termination of licenses, research contracts or other collaboration
agreements;
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conditions
or trends in the regulatory climate and the biotechnology and
pharmaceutical industries;
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changes
in the market valuations of similar companies; and
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additions
or departures of key personnel.
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In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management's attention and resources, which
could seriously harm our business.
Certain
anti-takeover provisions in our charter documents and Delaware law could make
a
third-party acquisition of us difficult. This could limit the price investors
might be willing to pay in the future for our common
stock.
Provisions
in our amended and restated certificate of incorporation and bylaws could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, or control us. These
factors could limit the price that certain investors might be willing to pay
in
the future for shares of our common stock. Our amended and restated certificate
of incorporation allows us to issue preferred stock with rights senior to those
of the common stock. The issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of such holders. In certain circumstances, such issuance could have the effect
of decreasing the market price of our common stock. Our amended and restated
bylaws eliminate the right of stockholders to call a special meeting of
stockholders, which could make it more difficult for stockholders to effect
certain corporate actions. Any of these provisions could also have the effect
of
delaying or preventing a change in control.
The
primary objective of our investment activities is to preserve principal while
maximizing our income from investments and minimizing our market risk. We invest
in government and investment-grade corporate debt and auction note securities
in
accordance with our investment policy. Some of the securities in which we invest
may have market risk. This means that a change in prevailing interest rates
may
cause the principal amount of the investment to fluctuate. For example, if
we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. As of March 31, 2006, our
portfolio of financial instruments consists of cash equivalents and short-term
and long-term interest bearing securities, including corporate debt, money
market funds, government debt and auction note securities. The average duration
of all of our held-to-maturity investments held as of March 31, 2006, was less
than 12 months. Additionally, the re-pricing of our auction notes within thirty
days allows these securities to function as short-term investments. Due to
the
short-term nature of our investments, we believe we have no material exposure
to
interest rate risk arising from our investments.
Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in our periodic filings with the SEC is (1) recorded,
processed, summarized and reported properly, within the time periods specified
in the SEC’s rules and forms and (2) accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
on a timely basis so that proper disclosure can be made. Our Chief Executive
Officer and Chief Financial Officer conducted an evaluation of our disclosure
controls and procedures as of March 31, 2006, and concluded that our disclosure
controls and procedures were effective.
There
were no changes in our internal control over financial reporting during the
three months ended March 31, 2006, that have materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected.
We,
and
our subsidiaries, are not a party to, and our property is not the subject of,
any material pending legal proceedings, other than as noted below.
In
July
2003, Keryx (Israel) Ltd., one of our Israeli subsidiaries, vacated its
Jerusalem facility, after giving advance notice to RMPA Properties Ltd., the
landlord. On May 1, 2005, the landlord filed suit in the Circuit Court of
Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
parties, was liable as a result of the alleged breach of the lease
agreement. In addition to Keryx (Israel) Ltd., the landlord brought suit
against Keryx Biomedical Technologies Ltd., another of our Israeli subsidiaries,
Keryx Biopharmaceuticals, Inc., Michael S. Weiss, our Chairman and Chief
Executive Officer, and Robert Trachtenberg, a former employee of Keryx.
The amount demanded by the landlord totals 4,345,313 New Israeli Shekels or
approximately $931,000 and includes rent for the entire remaining term of the
lease, as well as property taxes and other costs allegedly incurred by the
landlord. In August 2003, the landlord claimed a bank deposit, in the amount
of
$222,000, which was previously provided as security in connection with the
lease
agreement. We intend to vigorously defend the suit. In July 2005, Keryx
(Israel) Ltd. and Keryx Biomedical Technologies Ltd. filed an answer to the
landlord’s complaint. In October 2005, Keryx Biopharmaceuticals, Inc.
filed an answer to the landlord’s complaint. Generally, each answer
challenges the merits of the landlord’s cause of action as to each
defendant. All defendants, except Keryx (Israel) Ltd., have filed a motion
to dismiss the complaint. The plaintiff has filed a response to each answer
and
a hearing date has been set by the Circuit Court of Jerusalem. To date, we
have
not yet recorded a charge to reflect any potential liability associated with
this lawsuit, as it is too early to accurately estimate the amount of the
charge, if any.
The
exhibits listed on the Exhibit Index are included with this report.
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Asset
Purchase Agreement dated February 6, 2006, by and among AusAm
Biotechnologies, Inc., Keryx Biopharmaceuticals, Inc. and Accumin
Diagnostics, Inc., filed as Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K, dated March 31, 2006, filed on April 6, 2006,
and
incorporated herein by reference.
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Amendment
No. 1 to the Asset Purchase Agreement dated February 6, 2006, by
and among
AusAm Biotechnologies, Inc., Keryx Biopharmaceuticals, Inc. and Accumin
Diagnostics, Inc., filed as Exhibit 2.2 to the Registrant’s Current Report
on Form 8-K, dated March 31, 2006, filed on April 6, 2006, and
incorporated herein by reference.
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Amended
and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
Inc., filed as Exhibit 3.1 to the Registrant's Annual Report on Form
10-Q
for the quarter ended June 30, 2004, filed on August 12, 2004, and
incorporated herein by reference.
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Amended
and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2001, filed on March 26, 2002 (File No. 000-30929),
and
incorporated herein by reference.
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Employment
Agreement between Keryx Biopharmaceuticals, Inc. and Ronald C. Renaud,
Jr., dated as of February 14, 2006, filed as Exhibit 10.20 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2005, filed on March 8, 2006, and incorporated herein by
reference.
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Amendment
to the Keryx Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan
dated
April 11, 2006.
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated
May 10, 2006.
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated
May 10, 2006.
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Certification
of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
May 10,
2006.
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
May 10,
2006.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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KERYX
BIOPHARMACEUTICALS, INC.
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Date:
May 10, 2006
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By:
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/s/
Ronald C. Renaud, Jr
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Senior
Vice President, Chief Financial Officer, Secretary and
Treasurer
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(Principal
Financial and Accounting Officer)
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EXHIBIT
INDEX
The
following exhibits are included as part of this Quarterly Report on Form
10-Q:
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Amendment
to the Keryx Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan
dated
April 11, 2006.
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated
May 10, 2006.
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|
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated
May 10, 2006.
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|
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Certification
of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
May 10,
2006.
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
May 10,
2006.
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