Unassociated Document
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 September 30, 2010
OR
¨
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if
smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes ¨ No x
There
were 61,179,322 shares of the registrant’s common stock, $0.001 par value,
outstanding as of October 29, 2010.
KERYX
BIOPHARMACEUTICALS, INC.
FORM
10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2010
TABLE
OF CONTENTS
|
|
|
Page
|
|
|
|
|
SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
|
|
3
|
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
4
|
|
|
|
|
Item
1
|
Financial
Statements
|
|
4
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2010 (unaudited) and December 31,
2009
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Operations for the three and nine months ended September 30,
2010 and 2009 (unaudited)
|
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5
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders’ Equity for the nine months ended
September 30, 2010 (unaudited)
|
|
6
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2010 and
2009 (unaudited)
|
|
7
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
8
|
|
|
|
|
Item
2
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
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18
|
|
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
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29
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|
|
|
|
Item
4
|
Controls
and Procedures
|
|
29
|
|
|
|
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PART
II
|
OTHER
INFORMATION
|
|
29
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
|
29
|
|
|
|
|
Item
1A
|
Risk
Factors
|
|
30
|
|
|
|
|
Item
6
|
Exhibits
|
|
41
|
SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
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:
|
·
|
expectations
for increases or decreases in
expenses;
|
|
·
|
expectations
for the clinical and pre-clinical development, manufacturing, regulatory
approval, and commercialization of KRX-0401 (perifosine) and ZerenexTM
(ferric citrate) or any other products we may acquire or
in-license;
|
|
·
|
expectations
for incurring capital expenditures to expand our research and development
and manufacturing capabilities;
|
|
·
|
expectations
for generating revenue or becoming profitable on a sustained
basis;
|
|
·
|
expectations
or ability to enter into marketing and other partnership
agreements;
|
|
·
|
expectations
or ability to enter into product acquisition and in-licensing
transactions;
|
|
·
|
expectations
or ability to build our own commercial infrastructure to manufacture,
market and sell our drug
candidates;
|
|
·
|
estimates
of the sufficiency of our existing cash and cash equivalents and
investments to finance our business strategy, including expectations
regarding the value and liquidity of our
investments;
|
|
·
|
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.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
Keryx
Biopharmaceuticals, Inc.
Consolidated
Balance Sheets as of September 30, 2010 and December 31, 2009
(in
thousands, except share and per share amounts)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
25,239 |
|
|
$ |
16,386 |
|
Short-term
investment securities
|
|
|
9,122 |
|
|
|
17,548 |
|
Interest
receivable
|
|
|
31 |
|
|
|
66 |
|
Other
current assets
|
|
|
344 |
|
|
|
1,521 |
|
Total
current assets
|
|
|
34,736 |
|
|
|
35,521 |
|
Long-term
investment securities
|
|
|
— |
|
|
|
1,914 |
|
Property,
plant and equipment, net
|
|
|
64 |
|
|
|
94 |
|
Goodwill
|
|
|
3,208 |
|
|
|
3,208 |
|
Other
assets, net
|
|
|
74 |
|
|
|
81 |
|
Total
assets
|
|
$ |
38,082 |
|
|
$ |
40,818 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
7,028 |
|
|
$ |
5,001 |
|
Accrued
compensation and related liabilities
|
|
|
433 |
|
|
|
755 |
|
Deferred
revenue
|
|
|
156 |
|
|
|
156 |
|
Liabilities
of discontinued operations
|
|
|
120 |
|
|
|
120 |
|
Total
current liabilities
|
|
|
7,737 |
|
|
|
6,032 |
|
Contingent
equity rights
|
|
|
2,639 |
|
|
|
2,639 |
|
Other
liabilities
|
|
|
— |
|
|
|
50 |
|
Total
liabilities
|
|
|
10,376 |
|
|
|
8,721 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value per share (5,000,000 shares authorized, no shares
issued and outstanding)
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.001 par value per share (95,000,000 shares authorized,
61,259,270 and 56,560,478 shares issued, 61,179,322 and 56,480,530 shares
outstanding at September 30, 2010 and December 31, 2009,
respectively)
|
|
|
61 |
|
|
|
57 |
|
Additional
paid-in capital
|
|
|
364,452 |
|
|
|
353,650 |
|
Treasury
stock, at cost, 79,948 shares at September 30, 2010 and December 31, 2009,
respectively
|
|
|
(357 |
) |
|
|
(357 |
) |
Accumulated
other comprehensive income
|
|
|
— |
|
|
|
180 |
|
Accumulated
deficit
|
|
|
(336,450 |
) |
|
|
(321,433 |
) |
Total
stockholders’ equity
|
|
|
27,706 |
|
|
|
32,097 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
38,082 |
|
|
$ |
40,818 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Keryx
Biopharmaceuticals, Inc.
Consolidated
Statements of Operations
for the
three months and nine months ended September 30, 2010 and 2009
(Unaudited)
(in
thousands, except share and per share amounts)
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
revenue
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,616 |
|
Service
revenue
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Other
revenue
|
|
|
— |
|
|
|
3,500 |
|
|
|
— |
|
|
|
3,575 |
|
Total
revenue
|
|
|
— |
|
|
|
3,500 |
|
|
|
— |
|
|
|
25,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
322 |
|
|
|
388 |
|
|
|
998 |
|
|
|
950 |
|
Other
research and development
|
|
|
3,901 |
|
|
|
1,527 |
|
|
|
9,584 |
|
|
|
4,357 |
|
Total
research and development
|
|
|
4,223 |
|
|
|
1,915 |
|
|
|
10,582 |
|
|
|
5,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
291 |
|
|
|
250 |
|
|
|
959 |
|
|
|
1,648 |
|
Other
general and administrative
|
|
|
1,419 |
|
|
|
904 |
|
|
|
3,673 |
|
|
|
3,473 |
|
Total
general and administrative
|
|
|
1,710 |
|
|
|
1,154 |
|
|
|
4,632 |
|
|
|
5,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,933 |
|
|
|
3,069 |
|
|
|
15,214 |
|
|
|
10,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(5,933 |
) |
|
|
431 |
|
|
|
(15,214 |
) |
|
|
14,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
85 |
|
|
|
129 |
|
|
|
197 |
|
|
|
377 |
|
(Loss)
income before income taxes
|
|
|
(5,848 |
) |
|
|
560 |
|
|
|
(15,017 |
) |
|
|
15,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
(loss) income
|
|
$ |
(5,848 |
) |
|
$ |
560 |
|
|
$ |
(15,017 |
) |
|
$ |
15,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per common share
|
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
|
$ |
(0.26 |
) |
|
$ |
0.32 |
|
Diluted
net (loss) income per common share
|
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
|
$ |
(0.26 |
) |
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing basic net (loss) income per common
share
|
|
|
59,324,661 |
|
|
|
47,932,029 |
|
|
|
58,219,823 |
|
|
|
47,880,737 |
|
Weighted
average shares used in computing diluted net (loss) income per common
share
|
|
|
59,324,661 |
|
|
|
49,028,254 |
|
|
|
58,219,823 |
|
|
|
48,326,718 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Keryx
Biopharmaceuticals, Inc.
Consolidated
Statement of Changes in Stockholders’ Equity
for the
nine months ended September 30, 2010 (Unaudited)
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
Treasury
stock
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
income
|
|
|
deficit
|
|
|
Total
|
|
Balance
at December 31, 2009
|
|
|
56,560,478 |
|
|
$ |
57 |
|
|
$ |
353,650 |
|
|
|
79,948 |
|
|
$ |
(357 |
) |
|
$ |
180 |
|
|
$ |
(321,433 |
) |
|
$ |
32,097 |
|
Changes
during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
|
695,500 |
|
|
|
— |
* |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
* |
Forfeiture
of restricted stock
|
|
|
(7,635 |
) |
|
|
(— |
)* |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(— |
)* |
Issuance
of common stock in connection with the exercise of warrants from public
offering (net of offering costs of $452)
|
|
|
2,908,000 |
|
|
|
3 |
|
|
|
7,303 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,306 |
|
Issuance
of common stock in connection with the exercise of options
|
|
|
1,102,927 |
|
|
|
1 |
|
|
|
1,542 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,543 |
|
Compensation
in respect of options and restricted stock granted to employees, directors
and third-parties
|
|
|
— |
|
|
|
— |
|
|
|
1,957 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,957 |
|
Reduction
of unrealized gain on long-term investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
(180 |
) |
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,017 |
) |
|
|
(15,017 |
) |
Balance
at September 30, 2010
|
|
|
61,259,270 |
|
|
$ |
61 |
|
|
$ |
364,452 |
|
|
|
79,948 |
|
|
$ |
(357 |
) |
|
$ |
— |
|
|
$ |
(336,450 |
) |
|
$ |
27,706 |
|
* Amount
less than one thousand dollars.
The
accompanying notes are an integral part of the consolidated financial
statements.
Keryx
Biopharmaceuticals, Inc.
Consolidated
Statements of Cash Flows
for the
nine months ended September 30, 2010 and 2009 (Unaudited)
(in
thousands)
|
|
Nine
months ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(15,017 |
) |
|
$ |
15,143 |
|
Adjustments
to reconcile net (loss) income to cash flows used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
1,957 |
|
|
|
2,598 |
|
Depreciation
and amortization
|
|
|
48 |
|
|
|
72 |
|
Loss
(gain) on sale of available-for-sale securities
|
|
|
82 |
|
|
|
(16 |
) |
Impairment
of investment securities
|
|
|
32 |
|
|
|
68 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in other current assets
|
|
|
1,177 |
|
|
|
(527 |
) |
Decrease
in accrued interest receivable
|
|
|
35 |
|
|
|
20 |
|
Decrease
in other assets
|
|
|
7 |
|
|
|
3 |
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
2,027 |
|
|
|
(832 |
) |
(Decrease)
increase in accrued compensation and related liabilities
|
|
|
(322 |
) |
|
|
324 |
|
Decrease
in other liabilities
|
|
|
(50 |
) |
|
|
(51 |
) |
Decrease
in deferred revenue
|
|
|
— |
|
|
|
(18,616 |
) |
Net
cash used in operating activities
|
|
|
(10,024 |
) |
|
|
(1,814 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(18 |
) |
|
|
(4 |
) |
Investment
in held-to-maturity short-term securities
|
|
|
(18,366 |
) |
|
|
(1 |
) |
Proceeds
from maturity of held-to-maturity short-term securities
|
|
|
26,792 |
|
|
|
2,300 |
|
Proceeds
from sale of available-for-sale long-term securities
|
|
|
1,620 |
|
|
|
50 |
|
Net
cash provided by investing activities
|
|
|
10,028 |
|
|
|
2,345 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
proceeds from public offering
|
|
|
— |
|
|
|
20,000 |
|
Offering
costs paid
|
|
|
— |
|
|
|
(6 |
) |
Proceeds
from exercise of warrants from public offering, net
|
|
|
7,306 |
|
|
|
— |
|
Proceeds
from exercise of options
|
|
|
1,543 |
|
|
|
14 |
|
Net
cash provided by financing activities
|
|
|
8,849 |
|
|
|
20,008 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
8,853 |
|
|
|
20,539 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
16,386 |
|
|
|
13,143 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
25,239 |
|
|
$ |
33,682 |
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS
|
|
|
|
|
|
|
|
|
Accrued
offering costs
|
|
$ |
— |
|
|
$ |
1,551 |
|
Issuance
of warrants to placement agent in public offering
|
|
|
— |
|
|
|
100 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Keryx
Biopharmaceuticals, Inc.
Notes to
Consolidated Financial Statements (unaudited)
NOTE
1 - GENERAL
Basis
of Presentation
Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including cancer and renal disease. Most
of the Company's biopharmaceutical development and substantially all of its
administrative operations during the three and nine months ended September 30,
2010 and 2009 were conducted in the United States of America.
The
accompanying unaudited 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 may 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 consolidated
financial statements have been included. Nevertheless, these consolidated
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, 2009. The results of operations for the three
and nine months ended September 30, 2010, are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
Except
for in 2009, the Company has incurred substantial operating losses since its
inception, and expects to continue to incur operating losses for the foreseeable
future and may never become profitable. As of September 30, 2010, the Company
has an accumulated deficit of $336.5 million.
The
Company’s major sources of working capital have been proceeds from various
private placements of equity securities, option and warrant exercises, public
offerings of its common stock, interest income, and, beginning in 2007, from the
upfront and milestone payments from its Sublicense Agreement with Japan Tobacco
Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”) and miscellaneous
payments from its other prior licensing activities. The Company has not yet
commercialized any of its drug candidates and cannot be sure if it will ever be
able to do so. Even if the Company commercializes one or more of its drug
candidates, the Company may not become profitable. The Company’s ability to
achieve profitability depends on a number of factors, including its ability to
obtain regulatory approval for its drug candidates, successfully complete any
post-approval regulatory obligations and successfully commercialize its drug
candidates alone or in partnership. The Company may continue to incur
substantial operating losses even if it begins to generate revenues from its
drug candidates, if approved.
The
Company currently anticipates that its cash, cash equivalents and investment
securities as of September 30, 2010, exclusive of anticipated milestones to be
received and expected exercises of expiring options, are sufficient to meet the
Company’s anticipated working capital needs and fund its business plan for
approximately 16 to 18 months from September 30, 2010. Including anticipated
milestones to be received and the assumed proceeds from the exercise of expiring
options, the Company’s capital working capital resources are expected to be
sufficient to meet the Company’s anticipated working capital needs for
approximately 20 to 24 months from September 30, 2010. The actual amount of
working capital that the Company will need to operate is subject to many
factors, including, but not limited to, the timing, design and conduct of
clinical trials for the Company’s drug candidates. The Company is dependent upon
significant financing to provide the working capital necessary to execute its
business plan, including the commercialization of any of its drug
candidates.
The
Company’s common stock is listed on the NASDAQ Capital Market and trades
under the symbol “KERX.”
Recently
Issued Accounting Standards
In
October 2009, the Financial Accounting Standards Board (the “FASB”) issued
Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue
Arrangements. This ASU eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue
recognition based upon management’s estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The ASU also eliminates the use of the residual method
and instead requires an entity to allocate revenue using the relative selling
price method. Additionally, the guidance expands disclosure requirements with
respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company is currently
evaluating the potential impact of this standard on its consolidated financial
statements.
Effective
during the quarter ended March 31, 2010, the FASB issued ASU No. 2010-09,
Subsequent Events, amending Accounting Standards Codification 855, Subsequent
Events, to state that an entity that is a SEC filer is required to evaluate
subsequent events through the date that the financial statements are issued, but
is not required to disclose the date. The amendment was effective commencing
with the quarter ended March 31, 2010. The adoption of this standard did
not have a significant impact on the Company’s consolidated financial
statements.
Cash
and Cash Equivalents
The
Company treats liquid investments with original maturities of less than three
months when purchased as cash and cash equivalents.
Investment
Securities
The
Company records its investments as either held-to-maturity or
available-for-sale. Held-to-maturity investments are recorded at amortized cost.
Available-for-sale investment securities (which are comprised of auction rate
securities) are recorded at fair value. See Note 2 – Fair Value Measurements.
Other-than-temporary impairment charges are included in interest and other
income, net, and unrealized gains, if determined to be temporary, are included
in accumulated other comprehensive income in stockholders’ equity.
The
following table summarizes the Company’s investment securities at September 30,
2010, and December 31, 2009:
(in thousands)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Short-term
investment securities:
|
|
|
|
|
|
|
Obligations
of domestic governmental agencies (mature December 2010)
(held-to-maturity)
|
|
$ |
9,022 |
|
|
$ |
12,532 |
|
Bank
deposits (mature January 2011) (held-to-maturity)
|
|
|
100 |
|
|
|
5,016 |
|
Total
short-term investment securities
|
|
|
9,122 |
|
|
|
17,548 |
|
|
|
|
|
|
|
|
|
|
Long-term
investment securities:
|
|
|
|
|
|
|
|
|
Auction
rate security
|
|
$ |
— |
|
|
$ |
1,914 |
|
Revenue
Recognition
The
Company recognizes license revenue in accordance with the revenue recognition
guidance of the FASB Accounting Standards Codification, or Codification. The
Company analyzes each element of its licensing agreement to determine the
appropriate revenue recognition. The terms of the license agreement may include
payment to the Company of non-refundable up-front license fees, milestone
payments if specified objectives are achieved, and/or royalties on product
sales. The Company recognizes revenue from upfront payments over the period of
significant involvement under the related agreements unless the fee is in
exchange for products delivered or services rendered that represent the
culmination of a separate earnings process and no further performance obligation
exists under the contract. The Company recognizes milestone payments as revenue
upon the achievement of specified milestones only if (1) the milestone
payment is non-refundable, (2) substantive effort is involved in achieving
the milestone, (3) the amount of the milestone is reasonable in relation to
the effort expended or the risk associated with achievement of the milestone,
and (4) the milestone is at risk for both parties. If any of these
conditions are not met, the Company defers the milestone payment and recognizes
it as revenue over the estimated period of performance under the contract (see
Note 4).
Service
revenue consists of clinical trial management and site recruitment services.
Revenues generated from providing clinical trial management and site recruitment
services are recognized at the time such services are provided. Deferred revenue
is incurred when the Company receives a deposit or prepayment for services to be
performed at a later date.
Stock-Based
Compensation
The
Company recognizes all share-based payments to employees and to non-employee
directors as compensation for service on the Board of Directors as compensation
expense in the consolidated financial statements based on the fair values of
such payments. 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. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
For
share-based payments 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. The Company records
compensation expense based on the fair value of the award at the reporting date.
The awards to consultants and other third-parties are then revalued, or the
total compensation is recalculated based on the then current fair value, at each
subsequent reporting date.
Income
Taxes
As of
September 30, 2010, the Company has U.S. net operating loss carryforwards of
approximately $281.8 million which expire from 2019 through 2030. The Company
has established a 100% valuation allowance against its net deferred tax assets
due to the Company’s history of pre-tax losses and the resulting likelihood that
the deferred tax assets will not be realizable. Due to the Company’s historical
equity transactions, the utilization of certain tax loss carryforwards may be
subject to annual limitations imposed by Internal Revenue Code Section 382
relating to the change of control provisions.
The
Company has not recorded any income tax provision for the three and nine months
ended September 30, 2009, since the Company has estimated that its estimated
annual effective income tax rate will be zero.
The
Company is not aware of any unrecorded tax liabilities which would impact the
Company’s financial position or its results of operations.
Basic
and Diluted Net (Loss) Income per Common Share
Basic net
loss or income per share is based upon the weighted average number of common
shares outstanding during the period. Diluted net loss or income per share is
based upon the weighted average number of common shares outstanding during the
period, plus the effect of additional weighted average common equivalent shares
outstanding during the period when the effect of adding such shares is dilutive.
Common equivalent shares result from the assumed exercise of outstanding stock
options and warrants (the proceeds of which are then assumed to have been used
to repurchase outstanding stock using the treasury stock method). In addition,
the assumed proceeds under the treasury stock method include the average
unrecognized compensation expense of stock options that are in-the-money. This
results in the “assumed” buyback of additional shares, thereby reducing the
dilutive impact of stock options and warrants. Common equivalent shares have not
been included in the net loss per share calculations for three and nine months
ended September 30, 2010, because the effect of including them would have been
anti-dilutive.
Basic and
diluted net (loss) income per share were determined as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(in thousands, except share and per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(5,848 |
) |
|
$ |
560 |
|
|
$ |
(15,017 |
) |
|
$ |
15,143 |
|
Weighted
average shares outstanding
|
|
|
59,324,661 |
|
|
|
47,932,029 |
|
|
|
58,219,823 |
|
|
|
47,880,737 |
|
Basic
net (loss) income per common share
|
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
|
$ |
(0.26 |
) |
|
$ |
0.32 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(5,848 |
) |
|
$ |
560 |
|
|
$ |
(15,017 |
) |
|
$ |
15,143 |
|
Weighted
average shares outstanding
|
|
|
59,324,661 |
|
|
|
47,932,029 |
|
|
|
58,219,823 |
|
|
|
47,880,737 |
|
Effect
of dilutive options and warrants
|
|
|
— |
|
|
|
1,096,225 |
|
|
|
— |
|
|
|
445,981 |
|
Weighted
average shares outstanding assuming dilution
|
|
|
59,324,661 |
|
|
|
49,028,254 |
|
|
|
58,219,823 |
|
|
|
48,326,718 |
|
Diluted
net (loss) income per common share
|
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
|
$ |
(0.26 |
) |
|
$ |
0.31 |
|
The
Company did not include the following securities in the table below in the
computation of diluted net (loss)
income per common share because the securities were anti-dilutive during
the periods presented:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
7,888,616 |
|
|
|
4,816,050 |
|
|
|
7,888,616 |
|
|
|
8,431,050 |
|
Warrants
|
|
|
— |
|
|
|
2,908,000 |
|
|
|
— |
|
|
|
2,908,000 |
|
Total
|
|
|
7,888,616 |
|
|
|
7,724,050 |
|
|
|
7,888,616 |
|
|
|
11,339,050 |
|
Comprehensive
(Loss) Income
Comprehensive
(loss) income is composed of net (loss) income and other comprehensive (loss)
income. Other comprehensive (loss) income for the nine months ended September
30, 2010, is comprised of a reduction of unrealized gains on the Company’s
available-for-sale long-term investment securities that are excluded from net
(loss) income and reported separately in stockholders’ equity. Comprehensive
(loss) income and its components are as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income – as reported
|
|
$ |
(5,848 |
) |
|
$ |
560 |
|
|
$ |
(15,017 |
) |
|
$ |
15,143 |
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-for-sale long-term investment securities
|
|
|
— |
|
|
|
250 |
|
|
|
(180 |
) |
|
|
250 |
|
Comprehensive
(loss) income
|
|
$ |
(5,848 |
) |
|
$ |
810 |
|
|
$ |
(15,197 |
) |
|
$ |
15,393 |
|
Impairment
of Goodwill
Goodwill
is reviewed for impairment annually, or when events arise that could indicate
that an impairment exists. The Company tests for goodwill impairment using a
two-step process. The first step compares the fair value of the reporting unit
with the unit's carrying value, including goodwill. When the carrying value of
the reporting unit is greater than fair value, the unit’s goodwill may be
impaired, and the second step must be completed to measure the amount of the
goodwill impairment charge, if any. In the second step, the implied fair value
of the reporting unit’s goodwill is compared with the carrying amount of the
unit’s goodwill. If the carrying amount is greater than the implied fair value,
the carrying value of the goodwill must be written down to its implied fair
value.
Discontinued
Operations
In
September 2008, the Company terminated its license agreement related to its
Accumin product and ceased all operations related to its Diagnostic
segment.
The
liabilities of discontinued operations are stated separately as of September 30,
2010, and December 31, 2009, on the accompanying consolidated balance sheets.
The major liabilities are as follows:
(in thousands)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Liabilities
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
120 |
|
|
$ |
120 |
|
Liabilities
of discontinued operations
|
|
$ |
120 |
|
|
$ |
120 |
|
NOTE
2 – FAIR VALUE MEASUREMENTS
The
Company measures certain financial assets and liabilities at fair value on a
recurring basis in the financial statements. The hierarchy ranks the quality and
reliability of inputs, or assumptions, used in the determination of fair value
and requires financial assets and liabilities carried at fair value to be
classified and disclosed in one of the following three categories:
|
·
|
Level
1 – quoted prices in active markets for identical assets and
liabilities;
|
|
·
|
Level
2 – inputs other than Level 1 quoted prices that are directly or
indirectly observable; and
|
|
·
|
Level
3 – unobservable inputs that are not corroborated by market
data.
|
In May
2010, the Company sold its one remaining auction rate security investment for
$1.6 million, representing a loss of $82,000. Auction rate securities were
recorded at their fair value and were classified as long-term investments.
Quarterly, the Company had assessed the fair value of its auction rate
securities portfolio. As a result of this valuation process, as described below,
the Company reported an other comprehensive loss of $0 and $180,000 in the three
months and nine months ended September 30, 2010, respectively, for a reduction
of a temporary unrealized gain related to the estimated fair value of its
auction rate security, and reported other-than-temporary impairment charges and
net realized gains and losses in interest and other income, net, as per the
following table.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Impairment
of investment securities
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(32 |
) |
|
$ |
(68 |
) |
Net
realized loss
|
|
|
— |
|
|
|
— |
|
|
|
(82 |
) |
|
|
— |
|
Net
realized gain
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
(114 |
) |
|
$ |
(52 |
) |
The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of the Company’s auction rate securities. In addition,
the estimated fair value of the auction rates securities may differ from the
values that would have been used had a ready market existed, and the differences
could be material to the consolidated financial statements.
The
Company reviews investment securities for impairment and to determine the
classification of the impairment as temporary or other-than-temporary. Losses
are recognized in the Company’s consolidated statement of operations when a
decline in fair value is determined to be other-than-temporary. The Company
reviews its investments on an ongoing basis for indications of possible
impairment. Once identified, the determination of whether the impairment is
temporary or other-than-temporary requires significant judgment. The Company
believes that the impairment charges related to its auction rate securities
investments are other-than-temporary. The primary factors the Company
considers in classifying an impairment include the extent and time the fair
value of each investment has been below cost and the Company’s ability to hold
such investment to maturity.
The
following table provides the fair value measurements of applicable Company
financial assets as of September 30, 2010:
|
|
Financial assets at fair value
as of September 30, 2010
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds (1)
|
|
$ |
17,186 |
|
|
$ |
— |
|
|
$ |
— |
|
Obligations
of domestic governmental agencies (held-to-maturity) (2)
|
|
|
9,022 |
|
|
|
— |
|
|
|
— |
|
Bank
deposits (held-to-maturity)
|
|
|
100 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
26,308 |
|
|
$ |
— |
|
|
$ |
— |
|
(1)
|
Included
in cash and cash equivalents on the Company’s consolidated balance sheet.
The carrying amount of money market funds is a reasonable estimate of fair
value.
|
(2)
|
Amortized
cost approximates fair value.
|
The
following table summarizes the change in carrying value associated with Level 3
financial assets for the nine months ended September 30, 2010:
(in thousands)
|
|
Available-for-sale
long-term
investments
|
|
|
|
|
|
Balance
at January 1, 2010
|
|
$ |
1,914 |
|
Total
impairment charges included in net (loss) income
|
|
|
(32 |
) |
Other
comprehensive loss (reduction of temporary unrealized
gain)
|
|
|
(180 |
) |
Sale
of security
|
|
|
(1,620 |
) |
Realized
loss on sale of security
|
|
|
(82 |
) |
Balance
at September 30, 2010
|
|
$ |
— |
|
NOTE
3 – STOCKHOLDERS' EQUITY
Common
Stock
On
September 30, 2009, the Company completed a registered direct offering to
certain investors of 8,000,000 shares of its common stock and warrants to
purchase up to a total of 2,800,000 shares of its common stock for gross
proceeds of approximately $20 million. The common stock and warrants were sold
in units, with each unit consisting of one share of common stock and a warrant
to purchase 0.35 of a share of common stock. The purchase price per unit was
$2.50. Subject to certain ownership limitations, the warrants were exercisable
at any time on or prior to October 1, 2010, at an exercise price of $2.65 per
warrant share. In addition, the placement agent received a warrant to purchase
up to 108,000 shares of common stock at an exercise price of $3.125 per warrant
share, exercisable at any time on or prior to October 1, 2010. Total proceeds to
the Company from this public offering were approximately $18.4 million, net of
offering costs of approximately $1.6 million. As of September 30, 2010, all the
warrants have been exercised, which provided additional proceeds to the Company
of approximately $7.3 million, net of offering costs of approximately $0.5
million.
The
shares and warrants were sold under a shelf registration statement on Form S-3
(File No. 333-161607) filed with the SEC on August 28, 2009, and declared
effective by the SEC on September 23, 2009. The registration statement provides
for the offering of up to $40 million of the Company's common stock and
warrants. Subsequent to this registered direct offering, there remains
approximately $12.2 million of the Company's common stock and warrants available
for sale under the shelf registration statement. 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.
Equity
Incentive Plans
Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 1,802,181 shares at
September 30, 2010.
Stock
Options
The
following table summarizes stock option activity for the nine months ended
September 30, 2010:
|
|
Number
of shares
|
|
|
Weighted-
average
exercise price
|
|
|
Weighted-
average
contractual
term
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
(in
years)
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
9,353,572 |
|
|
$ |
6.63 |
|
|
|
3.3 |
|
|
$ |
6,513,185 |
|
Granted
|
|
|
405,840 |
|
|
|
3.66 |
|
|
|
4.0 |
|
|
|
|
|
Exercised
|
|
|
(1,102,927 |
) |
|
|
1.40 |
|
|
|
|
|
|
$ |
3,908,505 |
|
Forfeited
|
|
|
(2,120 |
) |
|
|
9.80 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(765,749 |
) |
|
|
10.20 |
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2010
|
|
|
7,888,616 |
|
|
$ |
6.86 |
|
|
|
3.4 |
|
|
$ |
14,251,589 |
|
Vested
and expected to vest at September 30, 2010
|
|
|
7,852,448 |
|
|
$ |
6.87 |
|
|
|
3.3 |
|
|
$ |
14,164,290 |
|
Exercisable
at September 30, 2010
|
|
|
6,746,016 |
|
|
$ |
7.29 |
|
|
|
2.5 |
|
|
$ |
11,645,658 |
|
Upon the
exercise of stock options, the Company issues new shares of its common stock. As
of September 30, 2010, 125,000 options issued to employees and 50,000 options
issued to consultants are unvested, milestone-based options.
Restricted
Stock
Certain
employees, directors and consultants have been awarded restricted stock under
the 2004 Long-Term Incentive Plan and 2007 Incentive Plan. Generally, the
restricted stock vests over a period of two to four years. The following table
summarizes restricted share activity for the nine months ended September 30,
2010:
|
|
Number of
shares
|
|
|
Weighted
average
grant date
fair value
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
1,492,136 |
|
|
$ |
0.59 |
|
|
$ |
3,730,340 |
|
Granted
|
|
|
695,500 |
|
|
|
2.78 |
|
|
|
|
|
Vested
|
|
|
(764,496 |
) |
|
|
0.68 |
|
|
$ |
3,304,317 |
|
Forfeited
|
|
|
(7,634 |
) |
|
|
1.41 |
|
|
|
|
|
Outstanding
at September 30, 2010
|
|
|
1,415,506 |
|
|
$ |
1.61 |
|
|
$ |
6,808,584 |
|
On
September 14, 2009, the Company entered in an employment agreement with Ron
Bentsur, its Chief Executive Officer. The agreement terminates on May 20, 2012,
provided, however, that Mr. Bentsur’s opportunity to earn the milestone awards
described below will be effective until May 20, 2014, subject to certain early
termination events. As of September 30, 2010, Mr. Bentsur has been granted
a total of 350,000 shares of restricted stock based on the achievement of
certain milestone awards described in his employment agreement. In addition, as
of September 30, 2010, Mr. Bentsur has the opportunity to earn certain milestone
awards as follows:
(1)
400,000 shares of restricted stock will be granted to Mr. Bentsur upon the
first to occur of (a) the Company’s filing of an accepted new drug application,
or NDA, with the U.S. Food and Drug Administration for Zerenex or Perifosine, or
(b) the Company’s outlicensing of Zerenex or Perifosine in the U.S. to a third
party. Such restricted stock will vest in equal installments over each of
the first three anniversaries of the date of grant provided that Mr. Bentsur
remains an employee of the Company during such vesting period. This
milestone #1 may be achieved with respect to NDAs or qualifying outlicenses for
multiple indications of the same product, but not for subsequent outlicenses of
the product relating to an indication for which the milestone is met. Upon
achievement of milestone #2 below with respect to a product, the restricted
stock granted for one indication of the product under milestone #1 above will
vest in full.
(2) 500,000
shares of restricted stock will be granted to Mr. Bentsur, upon the first
to occur of (a) the Company’s first commercial sale of Zerenex or Perifosine in
the U.S. off an approved NDA, (b) the Company’s receipt of the first royalty
upon the commercial sale of Zerenex or Perifosine in the U.S. by a partner to
whom the Company has sold exclusive or non-exclusive commercial rights, or (c)
the Company’s complete outlicensing of the entire product rights of Zerenex or
Perifosine in the U.S. Such restricted stock will vest on the first
anniversary of the date of grant provided that Mr. Bentsur remains an employee
of the Company during such vesting period.
(3) 100,000
shares of restricted stock will be granted to Mr. Bentsur upon each event
of the Company’s outlicensing Zerenex in a foreign market, other than Japan,
resulting in a greater than $10 million non-refundable cash payment to the
Company with a gross deal value to the Company of at least $50 million.
Such restricted stock will vest in equal installments over each of the first
three anniversaries of the date of grant provided that Mr. Bentsur remains an
employee of the Company during such vesting period.
Warrants
|
|
Warrants
|
|
|
Weighted-
average
exercise price
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
2,908,000 |
|
|
$ |
2.67 |
|
|
$ |
— |
|
Issued
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Exercised
|
|
|
(2,908,000 |
) |
|
|
2.67 |
|
|
$ |
5,550,820 |
|
Canceled
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Outstanding
at September 30, 2010
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
As
discussed above, as part of the registered direct offering completed on
September 30, 2009, the Company issued warrants to purchase up to 2,800,000
shares of the Company's common stock, all of which have been exercised as of
September 30, 2010. The warrants had an exercise price of $2.65 per warrant
share. The grant date fair value was $1.03 per warrant, for a total fair value
of $2,877,000, which is included in additional paid-in capital on the
consolidated balance sheet. In addition, the Company issued to the placement
agent in the transaction warrants to purchase up to 108,000 shares of its common
stock at an exercise price of $3.125 per warrant share, all of which have been
exercised as of September 30, 2010, with a grant date fair value of $0.93 per
warrant. The fair values of the warrants described above were estimated at the
date of grant using the Black-Scholes pricing model.
Stock-Based
Compensation
The
Company incurred $613,000 and $638,000 of non-cash compensation expense related
to equity incentive grants during the three months ended September 30, 2010 and
2009, respectively, and $1,957,000 and $2,598,000 during the nine months ended
September 30, 2010 and 2009, respectively. The fair value of stock options
granted is estimated at the date of grant using the Black-Scholes pricing 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. The risk-free interest rate is based
on the U.S. Treasury yield for a period consistent with the expected term of the
option in effect at the time of the grant. The Company has assumed no expected
dividend yield, as dividends have never been paid to stock or option holders and
will not be paid for the foreseeable future.
Black-Scholes
Option Valuation Assumptions
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Risk-free
interest rates
|
|
|
1.1 |
% |
|
|
2.0 |
% |
|
|
1.7 |
% |
|
|
2.0 |
% |
Dividend
yield
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Volatility
|
|
|
124.7 |
% |
|
|
125.8 |
% |
|
|
127.0 |
% |
|
|
123.4 |
% |
Weighted-average
expected term
|
|
4.0
years
|
|
|
4.0
years
|
|
|
4.0
years
|
|
|
4.8
years
|
|
The
weighted average grant date fair value of options granted for the three months
ended September 30, 2010 and 2009 was $3.42 and $1.71 per option, respectively,
and for the nine months ended September 30, 2010 and 2009 was $2.93 and $0.38
per option, respectively. The Company used historical information to
estimate forfeitures within the valuation model. As of September 30, 2010, there
was $1.5 million and $1.9 million of total unrecognized compensation cost
related to non-vested stock options and restricted stock, respectively, which is
expected to be recognized over weighted-average periods of 2.4 years and 2.2
years, respectively. These amounts do not include, as of September 30, 2010,
175,000 options outstanding which are milestone-based and vest upon certain
corporate milestones, such as FDA approval of the Company’s drug candidates,
market capitalization targets, and change in control. Stock-based compensation
will be measured and recorded if and when a milestone occurs.
On April
23, 2009, the Company’s Board of Directors voted to terminate the employment of
Michael S. Weiss as the Company’s Chairman and Chief Executive Officer. Under
the terms of Mr. Weiss’ employment agreement, 1,800,000 shares of restricted
stock vested and all of Mr. Weiss’ outstanding stock options vested and will
remain exercisable for two years following termination. In the second quarter of
2009, the Company recorded approximately $660,000 in non-cash compensation
expense (general and administrative) associated with the equity modifications of
Mr. Weiss’ outstanding stock options and shares of restricted
stock.
NOTE
4 - LICENSE AGREEMENTS
In
September 2007, the Company entered into a Sublicense Agreement with JT and
Torii, JT's pharmaceutical business subsidiary, under which JT and Torii
obtained the exclusive sublicense rights for the development and
commercialization of ferric citrate in Japan, which is being developed in the
United States under the trade name Zerenex. JT and Torii are responsible for the
future development and commercialization costs in Japan. Effective as of June 8,
2009, the Company entered into an Amended and Restated Sublicense Agreement (the
“Revised Agreement”) with JT and Torii, which, among other things, provided for
the elimination of all significant on-going obligations under the sublicense
agreement. Accordingly, in accordance with the Company’s revenue recognition
policies, all remaining deferred revenue pertaining to this sublicense has been
recognized in the nine months ended September 30, 2009.
Prior to
the Revised Agreement, an upfront payment of $12.0 million, which was received
in October 2007, was being recognized as license revenue on a straight-line
basis over the life of the agreement, which is through the expiration of the
last-to-expire patent covered by the agreement in 2023, and represented the
estimated period over which the Company had certain significant ongoing
responsibilities under the original sublicense agreement. An additional
milestone payment of $8.0 million, for the achievement of certain milestones
reached in March 2008, was received in April 2008, and was being recognized as
license revenue on a straight-line basis over the life of the original agreement
(as discussed above). As a result of the signing of the Revised Agreement, the
unamortized portion of the upfront payment of $12.0 million and the additional
milestone payment of $8.0 million were recognized in the nine months ended
September 30, 2009.
In March
2009, JT and Torii informed the Company that they had initiated a Phase 2
clinical study of Zerenex in Japan, which triggered a $3.0 million
non-refundable milestone payment, which was received by the Company in March
2009. As a result, the Company recorded license revenue of $3.0 million in
accordance with its revenue recognition policy, which is included in the nine
months ended September 30, 2009.
The
Company may receive up to an additional $77.0 million in payments upon the
achievement of pre-specified milestones. In addition, upon commercialization, JT
and Torii will make royalty payments to the Company on net sales of ferric
citrate in Japan.
In July
2009, the Company settled a dispute with Alfa Wassermann S.p.A. over issues
arising from the terminated license agreement for Sulonex (sulodexide). Under
the terms of the settlement agreement, Alfa Wassermann paid the Company
$3,500,000 (of which $2,750,000 was received in July 2009, and $750,000 was
received in July 2010), and the Company was required to deliver to Alfa
Wassermann all of its data, information and other intellectual property related
to Sulonex.
NOTE
5 – SEGMENT INFORMATION
The
Company has two reportable segments: Services and Products. The Services
business provides clinical trial management and site recruitment services to
other biotechnology and pharmaceutical companies. The Products business focuses
on the acquisition, development and commercialization of medically important
pharmaceutical products for the treatment of life-threatening diseases,
including cancer and renal disease, and also includes license revenue, other
revenue and associated costs.
Segment
information for the three and nine month periods were as follows:
|
|
|
|
|
|
Three months ended September
30,
|
|
|
Nine months ended September
30,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3 |
|
Products
|
|
|
— |
|
|
|
3,500 |
|
|
|
— |
|
|
|
25,191 |
|
Total
|
|
$ |
— |
|
|
$ |
3,500 |
|
|
$ |
— |
|
|
$ |
25,194 |
|
|
|
|
|
|
|
Three months ended September
30,
|
|
|
Nine months ended September
30,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3 |
|
Products
|
|
|
(5,933 |
) |
|
|
431 |
|
|
|
(15,214 |
) |
|
|
14,763 |
|
Total
|
|
$ |
(5,933 |
) |
|
$ |
431 |
|
|
$ |
(15,214 |
) |
|
$ |
14,766 |
|
A
reconciliation of the totals reported for the operating segments to the
consolidated (loss) income is as follows:
|
|
|
|
|
|
Three months ended September
30,
|
|
|
Nine months ended September
30,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income of reportable segments
|
|
$ |
(5,933 |
) |
|
$ |
431 |
|
|
$ |
(15,214 |
) |
|
$ |
14,766 |
|
Interest
and other income, net
|
|
|
85 |
|
|
|
129 |
|
|
|
197 |
|
|
|
377 |
|
Income
taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Consolidated
(loss) income
|
|
$ |
(5,848 |
) |
|
$ |
560 |
|
|
$ |
(15,017 |
) |
|
$ |
15,143 |
|
|
|
Assets (1)
|
|
(in thousands)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
— |
|
|
$ |
— |
|
Products
|
|
|
3,690 |
|
|
|
4,904 |
|
Total
assets of reportable segments
|
|
|
3,690 |
|
|
|
4,904 |
|
Cash,
cash equivalents, interest receivable and investment
securities
|
|
|
34,392 |
|
|
|
35,914 |
|
Consolidated
total assets
|
|
$ |
38,082 |
|
|
$ |
40,818 |
|
(1)
|
Assets
for the Company’s reportable segments include fixed assets, goodwill,
accounts receivable and prepaid
expenses.
|
The
carrying amount of goodwill by reportable segment as of September 30, 2010 and
December 31, 2009 was as follows:
|
|
|
|
(in thousands)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
— |
|
|
$ |
— |
|
Products
|
|
|
3,208 |
|
|
|
3,208 |
|
Total
|
|
$ |
3,208 |
|
|
$ |
3,208 |
|
NOTE
6 – SUBSEQUENT EVENT
In
November 2010, the Company was notified that it will receive a $488,958 grant
under The Patient Protection and Affordable Care Act of 2010 for its drug
candidates, KRX-0401 (perifosine) and Zerenex (ferric citrate). The Internal
Revenue Service issued the funding under the Qualifying Therapeutic Discovery
Project administered under section 48D of the Internal Revenue
Code.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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,
2009.
OVERVIEW
We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including cancer and renal disease. We
are developing KRX-0401 (perifosine), a novel, potentially first-in-class, oral
anti-cancer agent that inhibits Akt activation in the phosphoinositide 3-kinase
(PI3K) pathway, and also affects a number of other key signal transduction
pathways, including the JNK pathway, all of which are pathways associated with
programmed cell death, growth, differentiation and survival. KRX-0401 has
demonstrated both safety and clinical efficacy in several tumor types, both as a
single agent and in combination with novel therapies. KRX-0401 is currently in
Phase 3 clinical development for both refractory advanced colorectal cancer and
multiple myeloma, and in Phase 1 and 2 clinical development for several other
tumor types. Each of the KRX-0401 Phase 3 programs are being conducted under
Special Protocol Assessment (SPA) agreements with the FDA.
We are
also developing Zerenex™ (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex is
currently in Phase 3 clinical development, under an SPA, as a treatment for
hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal
disease, or ESRD. Zerenex has also completed Phase 2 development in Japan by our
Japanese partner, Japan Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd.
(“Torii”). The Phase 3 program in Japan is pending commencement.
We also
actively engage in business development activities that include seeking
strategic relationships for our product candidates, as well as evaluating
compounds and companies for in-licensing or acquisition. 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 product sales from our drug candidates. We
have generated, and expect to continue to generate, revenue from the licensing
of rights to Zerenex in Japan to our Japanese partner, JT and
Torii.
The table
below summarizes the status of our product pipeline.
Product candidate
|
|
Target indication
|
|
Development status
|
KRX-0401
(perifosine)
|
|
Colorectal
cancer
Multiple
myeloma
Multiple
other forms of cancer
|
|
Phase
3 trial ongoing, under SPA
Phase
3 trial ongoing, under SPA
Phase
1 & 2 trials ongoing
|
|
|
|
|
|
Zerenex™
(ferric citrate)
|
|
Hyperphosphatemia
in patients with end-stage renal disease
|
|
U.S.
Phase 3 program ongoing, under SPA Japan Phase 2 completed by sublicensee
(JT and Torii), Japan Phase 3 pending
commencement
|
KRX-0401
(perifosine)
Refractory Advanced
Colorectal Cancer
In June
2010, we announced final results from a randomized, multi-center, double-blind,
placebo-controlled, Phase 2 study of KRX-0401 (perifosine) in combination with
capecitabine (Xeloda(R)) versus capecitabine plus placebo in patients with
second- or third-line metastatic colorectal cancer. The data was presented at
the 46th Annual Meeting of the American Society of Clinical Oncology (ASCO) in
Chicago in a poster entitled, “Final results of a randomized phase II study of
perifosine in combination with capecitabine (P-CAP) versus capecitabine plus
placebo (CAP) in patients with second- or third-line metastatic colorectal
cancer (mCRC).”
In this
randomized, double-blind, placebo-controlled study conducted at 11 centers
across the United States, heavily pre-treated patients with second- or
third-line metastatic colorectal cancer were randomized to receive capecitabine
(a chemotherapy used in advanced metastatic colorectal cancer which is marketed
by Roche as Xeloda®) at 825 mg/m2 BID (total daily dose of 1650 mg/m2) on days 1
– 14 every 21 days plus either perifosine or placebo at 50 mg daily. The study
enrolled a total of 38 patients, 34 of which were third-line or greater. Median
age of patients was 65 (32-83); 61% of the patients were male. Of the 38
patients enrolled, 35 patients were evaluable for response (20 patients on the
perifosine + capecitabine arm and 15 patients on the placebo + capecitabine
arm). Three patients on the placebo + capecitabine arm were not evaluable for
response (2 patients were inevaluable due to toxicity (days 14, 46) and 1 was
inevaluable due to a new malignancy on day 6). All patients in the perifosine +
capecitabine arm were evaluable for response.
The
patients in the study were heavily pre-treated, with the arms well-balanced in
terms of prior treatment regimens. The prior treatment regimens for all 38
patients are shown in the table below. Notably, all of the patients (with the
exception of one CAP arm patient) had been treated with FOLFIRI and/or FOLFOX,
almost 80% treated with Avastin®, and half treated with an EGFR
antibody:
Prior RX
|
|
P-CAP (n=20)
|
|
CAP (n=18)
|
|
All Patients (n=38)
|
FOLFIRI
|
|
18
(90%)
|
|
16
(89%)
|
|
34
(89%)
|
FOLFOX
|
|
15
(75%)
|
|
13
(72%)
|
|
28
(74%)
|
FOLFIRI
& FOLFOX
|
|
13
(65%)
|
|
12
(67%)
|
|
25
(66%)
|
Avastin®
|
|
15
(75%)
|
|
15
(83%)
|
|
30
(79%)
|
EGFR
Antibody (1)
|
|
9
(45%)
|
|
10
(56%)
|
|
19
(50%)
|
5-FU
Refractory Status
|
|
14
(70%)
|
|
13
(72%)
|
|
27
(71%)
|
Third
Line or >
|
|
18
(90%)
|
|
16
(89%)
|
|
34
(89%)
|
(1) Prior
treatment with Erbitux® and/or Vectibix®
The
primary endpoint of this study was to measure Time to Progression (TTP).
Overall Response Rate (ORR), defined as Complete Response (CR) + Partial
Response (PR) by RECIST, and Overall Survival (OS) were measured as secondary
endpoints.
The P-CAP
arm demonstrated a statistically significant advantage for TTP and OS, as well
as for the percentage of patients achieving Stable Disease (SD) or better
lasting 12 or more weeks, as compared to the CAP arm. The P-CAP arm
demonstrated a greater than 60% improvement in OS, a more than doubling of
median TTP, and almost a doubling of the percentage of patients achieving SD or
better. In addition, the ORR was 20% (including one CR, and durable
responses) in the P-CAP arm versus 7% in the CAP arm. The final efficacy results
are as follows:
ALL
EVALUABLE PATIENTS (n=35):
Group
|
|
n
|
|
CR
n
(%)
|
|
PR
n
(%)
|
|
Duration
of Response
|
|
>
SD
(min
12 wks)
n
(%)
p=0.036
|
|
PD<
12 wks
n
(%)
|
|
Median
TTP
Wks
p=0.0012
|
|
Median
OS*
Months
p=0.0161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P-CAP
|
|
20
|
|
1
(5%)
|
|
3
(15%)
|
|
CR:
36 m
|
|
11
(55%)
|
|
5
(25%)
|
|
28
[95%
CI (12-48)]
|
|
17.7
[95%
CI (8.5-24.6)]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAP
|
|
15
|
|
0
|
|
1
(7%)
|
|
PR:
7 m
|
|
5
(33%)
|
|
9
(60%)
|
|
11
[95%
CI (9-15.9)]
|
|
10.9
[95%
CI
(5-16.9)]
|
*Survival
is calculated from date of randomization until the date of death from any cause,
whether or not additional therapies were received after removal from
treatment.
Of
notable interest were the patients who were previously refractory to a 5-FU
based regimen. The P-CAP arm again demonstrated a statistically
significant increase in both TTP and OS compared to the CAP arm. The final
data is illustrated below:
5-FU
REFRACTORY PATIENTS (n=25):
Group
|
|
n
(%)
|
|
PR
n
(%)
|
|
Duration
of Response
|
|
>
SD (min 12 wks)
n
(%)
p=0.066
|
|
PD
<12 wks
n
(%)
|
|
Median
TTP
Weeks
p=0.0004
|
|
Median
OS
Months
P=0.0112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P-CAP
|
|
14
(70%)
|
|
1
(7%)
|
|
19
m
|
|
8
(57%)
|
|
5
(36%)
|
|
18
[95%
CI (12-36)]
|
|
15.1
[95%
CI (7.3-22.3)]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAP
|
|
11
(73%)
|
|
0
|
|
-
|
|
3
(27%)
|
|
8
(73%)
|
|
10
[95%
CI (6.6-11)]
|
|
6.6
[95%
CI (4.7-11.7)]
|
All 38
patients were evaluable for safety. The P-CAP combination was well-tolerated
with Grade 3 and 4 adverse events of > 10% incidence for the P-CAP arm versus
CAP arm as follows: hand-foot syndrome (30% vs. 0%), anemia (15% vs. 0%),
fatigue (0% vs. 11%) and abdominal pain (5% vs. 11%). Of note, incidence of
Grade 1 and 2 hand-foot syndrome was similar in both the P-CAP and CAP arms (25%
vs. 22%, respectively). Hand-foot syndrome is a reported adverse event with
capecitabine monotherapy. Patients who remained on treatment longer in the Phase
2 study had a greater chance to develop hand-foot syndrome as illustrated by a
median time to onset of Grade 3 and 4 hand-foot syndrome in the P-CAP arm of 19
weeks.
Perifosine
is currently in Phase 3 clinical development for refractory advanced colorectal
cancer and multiple myeloma, both of these Phase 3 programs being conducted
under Special Protocol Assessment (SPA) agreements with the FDA with Fast Track
designations obtained for both indications.
Zerenex
(ferric citrate)
In April
2010, we reported updated long-term efficacy and safety data on Zerenex™ (ferric
citrate), our iron-based phosphate binder for the treatment of hyperphosphatemia
(elevated phosphate levels) from an open-label extension study in patients with
end-stage renal disease (ESRD) who are on dialysis. This data was presented at
the National Kidney Foundation (NKF) 2010 Spring Clinical Meeting in a poster
entitled “Long-Term Use of Ferric Citrate in End-Stage Renal Disease
Patients.”
After the
completion of a 28-day fixed dose Phase 2 clinical trial of ferric citrate in
ESRD patients, 29 patients who had participated in this trial at the site in
Taiwan were offered to continue onto an Open-Label Extension (OLE) trial for up
to one year. There was approximately a two month period between the completion
of the Phase 2 dose-ranging trial and enrollment into the OLE trial. During this
time interval, no patient was exposed to ferric citrate as a phosphate binder.
Patients were immediately switched back to ferric citrate from other phosphate
binders and there was no washout period prior to starting ferric citrate
treatment in the OLE trial. Of the 29 patients enrolled, 28 were exposed to
ferric citrate. The patients were started on doses of ferric citrate of 2 to 6
g/day. The maximum allowed dose was 6 g/day. The average dose per patient
throughout the study was approximately 4.5 g/day. The average duration of the
patient’s participation in the trial was 306 +/- 85 days. The primary objective
of this OLE trial of ferric citrate was to assess the long-term efficacy and
safety of ferric citrate as a phosphate binder in ESRD patients for up to one
year. The secondary objective of this OLE trial was to assess for the potential
for iron absorption.
The
therapeutic goal of the study was to achieve and maintain a serum phosphorus
level below 5.5 mg/dL. The mean levels of serum phosphorus (SP) and
phosphorus x calcium product (PxC) for the evaluable patients at each time point
over the treatment period were as follows:
|
|
SP
(mg/dL)
|
|
PxC
(mg/dL)2
|
Baseline
(sd)
|
|
5.63
(1.22)
|
|
50.79
(12.74)
|
3
months (sd)
|
|
5.48
(1.33)
|
|
51.84
(12.67)
|
6
months (sd)
|
|
5.16
(1.20)
|
|
48.40 (9.60)
|
9
months (sd)
|
|
5.24
(1.20)
|
|
48.72
(12.04)
|
12
months (sd)
|
|
5.21
(1.09)
|
|
50.05
(11.82)
|
Iron
parameters were measured at baseline and then quarterly through month 9. On
average, slight increases were observed over time, across all key parameters, as
follows:
|
|
Baseline
(sd)
|
|
9
Months (sd)
|
Ferritin
(ng/mL)
|
|
520 (328)
|
|
781 (364)
|
TSAT
(%)
|
|
39.2
(19.7)
|
|
45.5
(21.1)
|
Iron
(mcg/dL)
|
|
87.8
(37.9)
|
|
88.3
(37.2)
|
HCT
(%)
|
|
30.8 (6.9)
|
|
32.9 (9.7)
|
If a
patient had a ferritin greater than 600 ng/mL and a TSAT greater than 50%, the
use of IV iron was withheld until the patient’s ferritin and TSAT were below the
above levels during the treatment period. If a patient had a hematocrit
(HCT) greater than 36%, the use of EPO was withheld until the HCT was greater
than 36% during the treatment period.
There
were 8 patients that had IV iron supplements withheld for approximately 3 to 6
months and there were 8 patients that had EPO withheld for approximately 1 to 10
months during the OLE trial. Out of the 16 patients in the two groups, three
patients had both IV iron and EPO withheld.
Ferric
citrate was well-tolerated throughout the OLE study. There were no patient
deaths during the OLE and no serious adverse events reported related to ferric
citrate.
The
investigators concluded that in this OLE trial of ferric citrate with doses as
high as 6 g/day, ferric citrate demonstrated the potential to be used long-term
as a phosphate binder in ESRD patients. Ferric citrate appeared to be
efficacious in controlling serum phosphorus and well-tolerated and safe for up
to one year. Additionally, it is the investigators’ opinion that this OLE trial,
along with data from both animal studies and the Phase 2 high dose trial,
supports the notion that some iron absorption may be occurring with the use of
ferric citrate as a phosphate binder in ESRD patients and that if a reduction in
the use of IV-iron supplements and/or EPO are documented in future long-term
clinical trials, the cost-benefit and cost-effectiveness of ferric citrate as a
phosphate binder, as compared to currently marketed phosphate binders, would be
significant.
In
September 2010, we announced the initiation of the long-term Phase 3 study of
Zerenex (ferric citrate) in patients with end-stage renal disease on
dialysis. The initiation of this study marked the commencement of the
final component of our Phase 3 registration program for Zerenex, which is being
conducted in accordance with a Special Protocol Assessment (SPA) agreement with
the FDA. Pursuant to the SPA agreement, the Zerenex Phase 3 registration program
consists of a short-term efficacy study, which was initiated in May 2010, and
the 58-week long-term safety and efficacy study.
The
short-term efficacy study initiated in May 2010 is a multicenter, randomized,
open-label clinical trial with an enrollment of approximately 150 patients on
hemodialysis. In October 2010, we announced the completion of patient enrollment
into the study. All patients underwent a 2-week washout period, following which
the patients were randomized 1:1:1 to receive a fixed dose of Zerenex (1 gram, 6
grams or 8 grams per day) for a treatment period of 28 days. The primary
endpoint of the study is to demonstrate a dose response in the change of serum
phosphorous from baseline (end of washout period) to end of the treatment period
(day 28). Fourteen sites in the U.S. are participating in the short-term
study.
The
long-term study initiated in September 2010 is a multicenter, randomized,
open-label, safety and efficacy clinical trial with a planned enrollment of
approximately 300 ESRD patients on hemodialysis or peritoneal dialysis.
The study consists of a 2-week washout period followed by a 52-week safety
assessment in which patients are randomized 2:1 to receive either Zerenex or an
active control. The 52-week safety assessment period will be followed by a
4-week efficacy assessment in which only patients randomized to treatment with
Zerenex during the safety assessment period will be randomized in a 1:1 ratio to
either continue treatment with Zerenex or switch to placebo for a 4-week
efficacy assessment period. Approximately 45 sites in the U.S. and select
ex-U.S. sites will participate in the study.
General
Corporate
We have
devoted substantially all of our efforts to the identification, in-licensing,
development and partnering 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, partnership and licensing activities.
Our
license revenues currently consist of license fees and milestone payments
arising from our agreement with JT and Torii. We recognize upfront license fee
revenues ratably over the estimated period in which we will have certain
significant ongoing responsibilities under the sublicense agreement, with
unamortized amounts recorded as deferred revenue. We recognize milestone
payments as revenue upon the achievement of specified milestones only if
(1) the milestone payment is non-refundable, (2) substantive effort is
involved in achieving the milestone, (3) the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with
achievement of the milestone, and (4) the milestone is at risk for both
parties. If any of these conditions are not met, we defer the milestone payment
and recognize it as revenue over the estimated period of performance under the
contract as we complete our performance obligations.
Our
service 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
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, manufacture, testing, and enhancement of
our drug 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, 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 restricted stock. Compensation expense for awards of
options and restricted stock granted to employees and directors represents the
fair value of the award recorded over the respective vesting periods of the
individual awards. The expense is included in the respective categories of
expense in the consolidated statements of operations. We expect to continue to
incur significant non-cash compensation expenses.
For
awards of options and restricted stock 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.
The awards to consultants and other third-parties 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 equity award grant, and additional expense or a
reversal of 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.
In
addition, certain options and restricted stock issued to employees, consultants
and other third-parties vest upon the achievement of certain milestones,
therefore the total expense is uncertain until the milestone is
met.
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 drug
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 may 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 September 30, 2010 and September 30, 2009
License Revenue. There was no
license revenue in the three months ended September 30, 2010 and 2009,
respectively. We expect to recognize additional license revenue from our
sublicense agreement upon JT’s initiation of a Phase 3 clinical trial for
Zerenex in Japan, which is pending commencement.
Service Revenue. There was no
service revenue in the three months ended September 30, 2010 and 2009,
respectively. We do not expect our service revenue to have a material impact on
our financial results in the fourth quarter of 2010.
Other Revenue. There was no
other revenue for the three months ended September 30, 2010. Other revenue for
the three months ended September 30, 2009 was $3,500,000 and was due to the
settlement of our dispute with Alfa Wassermann S.p.A., in July 2009, over issues
arising from the terminated license agreement for Sulonex (sulodexide). We do
not expect our other revenue to have a material impact on our financial results
in the fourth quarter of 2010.
Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants decreased by $66,000 to $322,000
for the three months ended September 30, 2010, as compared to $388,000 for the
three months ended September 30, 2009. The decrease in non-cash compensation
expense in the three months ended September 30, 2010, as compared to September
30, 2009, was primarily related to grants of equity awards to research and
development personnel and the recording of the related fair value of the awards
over the respective vesting periods of the individual awards.
Other Research and Development
Expenses. Other research and development expenses increased by $2,374,000
to $3,901,000 for the three months ended September 30, 2010, as compared to
$1,527,000 for the three months ended September 30, 2009. The increase in other
research and development expenses was due primarily to a $1,242,000 increase in
research and development expenses related to KRX-0401, primarily due to the two
ongoing Phase 3 clinical trials, as well to a $913,000 increase in research and
development expenses related to the ongoing Phase 3 clinical trials for Zerenex,
including the long-term Phase 3 study initiated in September 2010. We expect our
other research and development costs to increase in the fourth quarter of 2010
due to increased patient recruitment into our Phase 3 clinical programs for
KRX-0401 and Zerenex.
Non-Cash Compensation Expense
(General and Administrative). Non-cash compensation expense (general and
administrative) related to equity incentive grants increased by $41,000 to
$291,000 for the three months ended September 30, 2010, as compared to $250,000
for the three months ended September 30, 2009. The increase in non-cash
compensation expense in the three months ended September 30, 2010, as compared
to September 30, 2009, was primarily related to grants of equity awards to
general and administrative personnel and the recording of the related fair value
of the awards over the respective vesting periods of the individual
awards.
Other General and Administrative
Expenses. Other general and administrative expenses increased by $515,000
to $1,419,000 for the three months ended September 30, 2010, as compared to an
expense of $904,000 for the three months ended September 30, 2009. The increase
was due primarily to increased expenses related to general and administrative
and investor outreach initiatives. We expect our other general and
administrative expenses to remain at a comparable level in the fourth quarter of
2010.
Interest and Other Income,
Net. Interest and other income, net, decreased by $44,000 to $85,000 for
the three months ended September 30, 2010, as compared to $129,000 for the three
months ended September 30, 2009. The decrease was due primarily to a lower
effective interest earned on our investment portfolio.
Nine
months ended September 30, 2010 and September 30, 2009
License Revenue. License
revenue decreased by $21,616,000 to $0 for the nine months ended September 30,
2010, as compared to $21,616,000 for the nine months ended September 30, 2009.
The decrease in license revenue was due primarily to the recognition of all
remaining deferred revenue related to the JT and Torii sublicense agreement
originally signed in September 2007, and amended and restated in June 2009, and
due to the recognition in the nine months ended September 30, 2009, of a $3.0
million milestone payment received from JT and Torii due to their initiation of
a Phase 2 clinical study of Zerenex in Japan. We expect to recognize additional
license revenue from our sublicense agreement upon JT’s initiation of a Phase 3
clinical trial for Zerenex in Japan, which is pending commencement.
Service Revenue. There was no
service revenue in the nine months ended September 30, 2010, as compared to
service revenue of $3,000 for the nine months ended September 30, 2009. We do
not expect our service revenue to have a material impact on our financial
results in the fourth quarter of 2010.
Other Revenue. There was no
other revenue for the nine months ended September 30, 2010. Other revenue for
the nine months ended September 30, 2009 was $3,575,000 and was due to the
$3,500,000 settlement of our dispute with Alfa Wassermann S.p.A., in July 2009,
over issues arising from the terminated license agreement for Sulonex
(sulodexide) and was also related to a $75,000 payment earned in June 2009 from
a December 2008 license termination agreement for KRX-0501. Payments associated
with this license termination agreement are recognized as earned since we have
no on-going responsibilities under the terminated license agreement or the
termination agreement. We do not expect our other revenue to have a material
impact on our financial results in the fourth quarter of 2010.
Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $48,000 to $998,000
for the nine months ended September 30, 2010, as compared to $950,000 for the
nine months ended September 30, 2009. The increase in non-cash compensation
expense in the nine months ended September 30, 2010, as compared to September
30, 2009, was primarily related to grants of equity awards to research and
development personnel and the recording of the related fair value of the awards
over the respective vesting periods of the individual awards.
Other Research and Development
Expenses. Other research and development expenses increased by $5,227,000
to $9,584,000 for the nine months ended September 30, 2010, as compared to
$4,357,000 for the nine months ended September 30, 2009. The increase in other
research and development expenses was due primarily to a $2,841,000 increase in
research and development expenses related to KRX-0401, primarily due to the two
ongoing Phase 3 clinical trials, as well to a $1,767,000 increase in research
and development expenses related to the Zerenex Phase 3 clinical program. We
expect our other research and development costs to increase in the fourth
quarter of 2010, due to increased patient recruitment into our Phase 3 clinical
programs for KRX-0401 and Zerenex.
Non-Cash Compensation Expense
(General and Administrative). Non-cash compensation expense (general and
administrative) related to equity incentive grants decreased by $689,000 to
$959,000 for the nine months ended September 30, 2010, as compared to an expense
of $1,648,000 for the nine months ended September 30, 2009. The decrease in
non-cash compensation expense in the nine months ended September 30, 2010, as
compared to September 30, 2009, was primarily related to an expense in the
second quarter of 2009 of approximately $660,000 associated with the equity
modifications of outstanding stock options and shares of restricted stock of our
former chief executive officer, whose employment was terminated in April
2009.
Other General and Administrative
Expenses. Other general and administrative expenses increased by $200,000
to $3,673,000 for the nine months ended September 30, 2010, as compared to an
expense of $3,473,000 for the nine months ended September 30, 2009. The increase
was due primarily to increased expenses related to general and administrative
and investor outreach initiatives partially offset by an expense in the nine
months ended September 30, 2009, of approximately $551,000 for severance and
notice pay related to the termination of our former chief executive officer in
April 2009. We expect our other general and administrative expenses to remain at
a comparable level in the fourth quarter of 2010.
Interest and Other Income,
Net. Interest and other income, net, decreased by $180,000 to $197,000
for the nine months ended September 30, 2010, as compared to $377,000 for the
nine months ended September 30, 2009. The decrease was due primarily to a lower
effective interest earned on our investment portfolio as well as a realized loss
of $82,000 related to the sale in May 2010 of our last auction rate security
investment.
LIQUIDITY
AND CAPITAL RESOURCES
Our major
sources of working capital have been proceeds from various private placements of
equity securities, option and warrant exercises, public offerings of our common
stock, interest income, and, beginning in 2007, from the upfront and milestone
payments from our Sublicense Agreement with JT and Torii and miscellaneous
payments from our other prior licensing activities. We have not yet
commercialized any of our drug candidates and cannot be sure if we will ever be
able to do so. Even if we commercialize one or more of our drug candidates, we
may not become profitable. Our ability to achieve profitability depends on a
number of factors, including our ability to obtain regulatory approval for our
drug candidates, successfully complete any post-approval regulatory obligations
and successfully commercialize our drug candidates alone or in partnership. We
may continue to incur substantial operating losses even if we begin to generate
revenues from our drug candidates, if approved.
As of
September 30, 2010, we had $34.4 million in cash, cash equivalents, interest
receivable, and investment securities, a decrease of $1.5 million from December
31, 2009. We currently anticipate that our cash, cash equivalents and investment
securities as of September 30, 2010, exclusive of our anticipated milestones to
be received and expected exercises of expiring options, are sufficient to meet
our anticipated working capital needs and fund our business plan for
approximately 16 to 18 months from September 30, 2010. Including anticipated
milestones to be received and the proceeds from the exercise of expiring
options, our working capital resources are expected to be sufficient to meet our
anticipated working capital needs for approximately 20 to 24 months from
September 30, 2010. The actual amount of working capital that we will need to
operate is subject to many factors, including, but not limited to, the timing,
design and conduct of clinical trials for our drug candidates. We are dependent
upon significant financing to provide the working capital necessary to execute
our business plan, including the commercialization of any of our drug
candidates.
In
November 2010, we were notified that we will receive a $488,958 grant under The
Patient Protection and Affordable Care Act of 2010 for our drug candidates,
KRX-0401 (perifosine) and Zerenex (ferric citrate). The Internal Revenue Service
issued the funding under the Qualifying Therapeutic Discovery Project
administered under section 48D of the Internal Revenue Code.
On
September 30, 2009, we completed a registered direct offering to certain
investors of 8,000,000 shares of our common stock and warrants to purchase up to
a total of 2,800,000 shares of our common stock for gross proceeds of
approximately $20 million. The common stock and warrants were sold in units,
with each unit consisting of one share of common stock and a warrant to purchase
0.35 of a share of common stock. The purchase price per unit was $2.50. Subject
to certain ownership limitations, the warrants were exercisable at any time on
or prior to October 1, 2010, at an exercise price of $2.65 per warrant share. In
addition, the placement agent received a warrant to purchase up to 108,000
shares of our common stock at an exercise price of $3.125 per warrant share,
exercisable at any time on or prior to October 1, 2010. As of September 30,
2010, all of the warrants related to the September 30, 2009 registered direct
offering were exercised. Total proceeds to us from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million, and $7.3 million from the exercise of the warrants, net of offering
costs of approximately $0.5 million. The shares and warrants were sold under a
shelf registration statement on Form S-3 (File No. 333-161607) filed with the
SEC on August 28, 2009, and declared effective by the SEC on September 23, 2009.
The registration statement provides for the offering of up to $40 million of our
common stock and warrants. Subsequent to this registered direct offering, there
remains approximately $12.2 million of our common stock and warrants available
for sale under the shelf registration statement. We may offer the remaining
securities under our shelf registration from time to time in response to market
conditions or other circumstances if we believe such a plan of financing is in
our best interests and the best interests of our stockholders. We believe that
the shelf registration provides us with the flexibility to raise additional
capital to finance our operations as needed.
Cash used
in operating activities for the nine months ended September 30, 2010 was $10.0
million, as compared to $1.8 million for the nine months ended September 30,
2009. This increase in cash used in operating activities was due primarily to
increased expenditures in the nine months ended September 30, 2010, associated
with our Phase 3 clinical programs for KRX-0401 and Zerenex, as well as a $3.0
million non-refundable milestone payment received from JT and Torii in the nine
months ended September 30, 2009, associated with their initiation of a Phase 2
trial for Zerenex in Japan.
For the
nine months ended September 30, 2010, net cash provided by investing activities
of $10.0 million was primarily the result of the maturity of held-to-maturity
short-term securities, partially offset by investments in held-to-maturity
short-term securities. For the nine months ended September 30, 2010, net cash
provided by financing activities of $8.8 million was related to net proceeds
received from the exercise of options and warrants.
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.
OBLIGATIONS
AND COMMITMENTS
In August
2010, we signed an amendment to the lease on our corporate and executive office
located in New York City extending its term through September 30, 2013. We also
executed an amendment to our office sharing agreement with a third party for a
portion of our leased space through September 30, 2013. We may terminate the
lease and office sharing agreements as of September 30, 2011, provided we give
two months notice of such terminations.
As of
September 30, 2010, we have the following operating lease
obligations.
|
|
Payment due by period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Operating
leases
|
|
$ |
1,577,000 |
|
|
$ |
526,000 |
|
|
$ |
1,051,000 |
|
|
$ |
— |
|
|
$ |
— |
|
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 stock options and restricted stock to employees, directors and
consultants, as well as warrants to other third parties. For employee and
director grants, 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, these estimates are 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 equity awards 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 addition, because some of the options and
warrants issued to employees, consultants and other third-parties vest upon the
achievement of certain milestones, the total expense is
uncertain.
Total
compensation expense for options and restricted stock issued to consultants is
determined at the “measurement date.” The expense is recognized over the vesting
period for the options and restricted stock. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. We record
stock-based compensation expense based on the fair value of the equity awards at
the reporting date. These equity awards 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 equity award grant, and additional expense or a
reversal of 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 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 and expense in any accounting period. In
addition, administrative costs related to external CROs are recognized on a
straight-line basis over the estimated contractual period. With respect to
clinical site costs, the financial terms of these agreements are subject to
negotiation and vary from contract to contract. Payments under these contracts
may be uneven, and depend on factors such as the achievement of certain events,
the successful recruitment of patients, the completion of portions of the
clinical trial or similar conditions. The objective of our policy is to match
the recording of expenses in our financial statements to the actual services
received and efforts expended. As such, expense accruals related to clinical
site costs are recognized based on our estimate of the degree of completion of
the event or events specified in the specific clinical study or trial
contract.
Revenue Recognition. We
recognize license revenue in accordance with the revenue recognition guidance of
the Codification. We analyze each element of our licensing agreement to
determine the appropriate revenue recognition. The terms of the license
agreement may include payment to us of non-refundable up-front license fees,
milestone payments if specified objectives are achieved, and/or royalties on
product sales. We recognize revenue from upfront payments over the period of
significant involvement under the related agreements unless the fee is in
exchange for products delivered or services rendered that represent the
culmination of a separate earnings process and no further performance obligation
exists under the contract. We recognize milestone payments as revenue upon the
achievement of specified milestones only if (1) the milestone payment is
non-refundable, (2) substantive effort is involved in achieving the
milestone, (3) the amount of the milestone is reasonable in relation to the
effort expended or the risk associated with achievement of the milestone, and
(4) the milestone is at risk for both parties. If any of these conditions
are not met, we defer the milestone payment and recognize it as revenue over the
estimated period of performance under the contract.
We
recognize service revenues 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
recognize other revenues at the time such fees and payments are
earned.
Accounting Related to
Goodwill. As of September 30, 2010, there was approximately $3.2 million
of goodwill on our consolidated balance sheet. Goodwill is reviewed for
impairment annually, or when events arise that could indicate that an impairment
exists. We test for goodwill impairment using a two-step process. The first step
compares the fair value of the reporting unit with the unit's carrying value,
including goodwill. When the carrying value of the reporting unit is greater
than fair value, the unit’s goodwill may be impaired, and the second step must
be completed to measure the amount of the goodwill impairment charge, if any. In
the second step, the implied fair value of the reporting unit’s goodwill is
compared with the carrying amount of the unit’s goodwill. If the carrying amount
is greater than the implied fair value, the carrying value of the goodwill must
be written down to its implied fair value.
We are
required to perform impairment tests annually, at December 31, and whenever
events or changes in circumstances suggest that the carrying value of an asset
may not be recoverable. For all of our acquisitions, various analyses,
assumptions and estimates were made at the time of each acquisition that were
used to determine the valuation of goodwill and intangibles. In future years,
the possibility exists that changes in forecasts and estimates from those used
at the acquisition date could result in impairment indicators.
Impairment of Long-Lived
Assets. We recognize an impairment loss when circumstances indicate
that the carrying value of long-lived tangible and intangible assets with finite
lives may not be recoverable. Management’s policy in determining whether an
impairment indicator exists, a triggering event, comprises measurable operating
performance criteria as well as qualitative measures. If an analysis is
necessitated by the occurrence of a triggering event, we make certain
assumptions in determining the impairment amount. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future cash flows expected to be generated by the asset or used in its disposal.
If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the excess of the carrying value of the
asset above its fair value.
Impairment of Investment
Securities. In May 2010, we sold our one remaining auction rate security
investment for $1.6 million, representing a loss of $82,000, which is included
in interest and other income, net, in the nine months ended September 30,
2010.
Auction
rate securities were recorded at their fair value and were classified as
long-term investments. Quarterly, we have assessed the fair value of our prior
auction rate securities portfolio. As a result of this valuation process, as
described below, we reported an other comprehensive loss of $180,000 in the nine
months ended September 30, 2010, for a reduction of a temporary unrealized gain
related to the estimated fair value of our last auction rate security, and
recorded impairment charges of $32,000 and $68,000 in the nine months ended
September 30, 2010 and 2009, respectively, for other-than-temporary declines in
the value of our auction rate securities, all of which were included in interest
and other income, net.
The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of our auction rate securities. In addition, the
estimated fair value of the auction rates securities may differ from the values
that would have been used had a ready market existed, and the differences could
be material to the consolidated financial statements.
We review
investment securities for impairment and to determine the classification of the
impairment as temporary or other-than-temporary. Losses are recognized in our
consolidated statement of operations when a decline in fair value is determined
to be other-than-temporary. We review our investments on an ongoing basis for
indications of possible impairment. Once identified, the determination of
whether the impairment is temporary or other-than-temporary requires significant
judgment. The primary factors we consider in classifying an impairment include
the extent and time the fair value of each investment has been below cost and
our ability to hold such investment to maturity.
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 consolidated 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 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 maintaining the valuation
allowance.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements. This ASU eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue
recognition based upon management’s estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The ASU also eliminates the use of the residual method
and instead requires an entity to allocate revenue using the relative selling
price method. Additionally, the guidance expands disclosure requirements with
respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. We are currently evaluating
the potential impact of this standard on our consolidated financial
statements.
Effective
during the quarter ended March 31, 2010, the FASB issued ASU No. 2010-09,
Subsequent Events, amending Accounting Standards Codification 855, Subsequent
Events, to state that an entity that is a SEC filer is required to evaluate
subsequent events through the date that the financial statements are issued, but
is not required to disclose the date. The amendment was effective commencing
with the quarter ended March 31, 2010. The adoption of this standard did
not have a significant impact on our financial statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 in accordance with our
investment policy. Some of the securities in which we invest have market risk.
This means that a change in prevailing interest rates, and/or credit risk, may
cause the fair value 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 fair value of our investment
will probably decline. As of September 30, 2010, our portfolio of financial
instruments consists of cash equivalents and short-term interest bearing
securities, including money market funds and government debt. Due to the
short-term nature of our investments, we believe we have no material exposure to
interest rate risk, and/or credit risk, arising from our
investments.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2010, management carried out, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Our disclosure controls and procedures are designed to provide
reasonable assurance that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable rules and forms.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of September 30, 2010, our disclosure controls and
procedures were effective.
Internal
Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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
October 2009, we filed a statement of claim with the Financial Institution
Regulatory Authority (“FINRA”) to commence an arbitration proceeding against an
SEC registered broker-dealer. In this arbitration proceeding, we seek
damages arising from that broker-dealer’s recommendations and purchases of
auction rate securities for our cash management account. The claim will be
determined by a panel of three FINRA arbitrators. In January 2010, the
broker-dealer filed an answer to the statement of claim and denied liability.
The arbitration panel has been selected and the parties are in the process of
exchanging documents relevant to the claims. A hearing is scheduled for February
2011 concerning our claims against the broker-dealer.
ITEM
1A. 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 substantial operating losses since our inception and
expect to continue to incur operating losses for the foreseeable future and may
never become profitable. As of September 30, 2010, we had an accumulated deficit
of approximately $336.5 million. As we continue 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.
We have
not yet commercialized any of our drug candidates and cannot be sure that we
will ever be able to do so. Even if we commercialize one or more of our drug
candidates, 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.
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, and the rate we collect, clean, lock and analyze
the clinical trial database. 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 currently
conducting or planning clinical trials that seek to enroll patients with the
same diseases that we are studying. Certain clinical trials are designed to
continue until a pre-determined number of events have occurred in the patients
enrolled. Trials such as this are subject to delays stemming from patient
withdrawal and from lower than expected event rates. They may also incur
additional 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 in a cost-effective or timely manner. In addition,
conducting multi-national studies adds another level of complexity and
risk. We are subject to events affecting countries outside the United
States. Negative or inconclusive results from the clinical trials we
conduct or unanticipated adverse medical events could cause us to have to repeat
or terminate the clinical trials. We may also opt to change the delivery method,
formulation or dosage which could affect efficacy results for the drug
candidate. For example, we have limited clinical experience with our new one
gram caplet formulation for Zerenex, and therefore, there is no assurance that
this new formulation will be safe and efficacious when assessed in a large
and/or long-term clinical trial setting. We are currently using this one gram
caplet formulation in our ongoing Phase 3 clinical program for Zerenex.
Accordingly, we may not be able to complete the clinical trials within an
acceptable time frame, if at all.
In
December 2009, we initiated a Phase 3 clinical trial for KRX-0401 (perifosine)
in relapsed / refractory multiple myeloma patients pursuant to a SPA with the
FDA. In April 2010, we initiated a Phase 3 clinical trial for KRX-0401
(perifosine) in patients with refractory advanced colorectal cancer pursuant to
a SPA with the FDA. In May 2010 and in September 2010, we initiated two Phase 3
clinical trials for Zerenex (ferric citrate) as a treatment of hyperphosphatemia
in patients with end-stage renal disease pursuant to a SPA with the FDA. Many
companies which have been granted SPAs and/or the right to utilize fast track or
accelerated approvals have ultimately failed to obtain final approval to market
their drugs. Since we are seeking approvals under SPAs, based on protocol
designs negotiated with the FDA, we may be subject to enhanced scrutiny.
Additionally, even if the primary endpoint in a Phase 3 clinical trial is
achieved, a SPA does not guarantee approval. The FDA may raise issues of safety,
study conduct, bias, deviation from the protocol, statistical power, patient
completion rates, changes in scientific or medical parameters or internal
inconsistencies in the data prior to making its final decision. The FDA may also
seek the guidance of an outside advisory committee prior to making its final
decision.
Additionally,
we have never filed a NDA, or similar application for approval in the United
States, or in any country, which may result in a delay in, or the rejection of,
our filing of an NDA or similar application. During the drug development
process, regulatory agencies will typically ask questions of drug sponsors.
While we endeavor to answer all such questions in a timely fashion, or in the
NDA filing, some questions may remain unanswered by the time we file our NDA.
Unless the FDA opts not to pursue these questions, submission of a NDA may be
delayed or rejected.
Pre-clinical
testing and clinical development are long, expensive and uncertain processes. 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. It 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. The
FDA may pose additional questions or request further clinical substantiation. 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.
Safety
signals detected during clinical studies and pre-clinical animal studies, such
as the gastrointestinal bleeding and liver toxicities that have been seen in
some high-dose, ferric citrate canine studies, may require us to perform
additional safety studies or analyses, which could delay the development of the
drug or lead to a decision to discontinue development of the drug. We have
submitted to the FDA data from our short-term and long-term rat and canine
pre-clinical studies for Zerenex. While the FDA has reviewed data from these
studies and has permitted us to continue with our Phase 3 clinical program, we
can provide no assurance that the FDA will not raise any safety concerns in the
future from these studies. Drug candidates in the later stages of clinical
development may fail to show the desired traits of safety and efficacy despite
positive results in initial clinical testing. Results from earlier studies may
not be indicative of results from future clinical trials. The risk remains that
a pivotal program may generate efficacy data that will be insufficiently
persuasive for the approval of the drug, or may raise safety concerns that may
prevent approval of the drug. The risk also remains that a clinical program
conducted by one of our partners may raise efficacy or safety concerns that may
prevent approval of the drug. Interpretation of the prior pre-clinical and
clinical safety and efficacy data of our drug candidates may be flawed. There
can be no assurance that safety and/or efficacy concerns from the prior data
were not overlooked or misinterpreted, which in subsequent, larger studies might
appear and prevent approval of such drug candidates. We may not be able to
replicate in our Phase 3 clinical program for Zerenex, the efficacy and safety
results for Zerenex observed in the previous Phase 2 clinical trials and the
Open Label Extension (OLE) clinical trial. The positive effects of Zerenex on IV
iron and EPO use observed in the OLE clinical trial may not be reproducible.
Further, any negative effects of the potential absorption and/or accumulation of
ferric (iron) or citrate would significantly limit the likelihood of obtaining
regulatory approval for Zerenex. In addition, we may not be able to replicate in
the Phase 3 trials for KRX-0401, the efficacy and safety results for KRX-0401
observed in previous clinical trials. In addition, we will need to re-input our
safety information on KRX-0401 into a database compliant with Good Clinical
Practice. We can provide no assurance that safety concerns will not
subsequently arise.
Clinical
trials 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 what appeared to be 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. Accordingly, we may encounter
unforeseen problems and delays in the approval process. Although we may engage a
clinical research organization with experience in conducting regulatory trials,
errors in the conduct, monitoring and/or auditing could potentially invalidate
the results.
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 rights, patent or
otherwise, to our drugs candidates from third parties. These license agreements
require us to meet development 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.
From time to time, in the ordinary course of business, we may have disagreements
with our licensors or collaborators regarding the terms of our agreements or
ownership of proprietary rights, which could lead to delays in the research,
development and commercialization of our drug candidates or could require or
result in litigation or arbitration, which would be time-consuming and
expensive.
We
rely on third parties to manufacture and analytically test our products. If
these third parties do not successfully manufacture and test our products, our
business will be harmed.
We have
limited experience in manufacturing products for clinical or commercial
purposes. We intend to continue, in whole or in part, to use third parties to
manufacture and analytically test our products for use in clinical trials and
for future sales. We may not be able to enter into future contract agreements
with these third-parties on terms acceptable to us, if at all.
Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving raw material supplies, production yields, scaled-up product
characteristics, 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. These risks become
more acute as we scale up for commercial quantities, where a reliable source of
raw material supplies becomes critical to commercial success. For example,
given the large quantity of materials required for ferric citrate production, as
we approach commercialization for Zerenex we will need to ensure an adequate
supply of starting materials that meet quality, quantity and cost
standards. Failure to achieve this level of supply can jeopardize the
successful commercialization of the product. Moreover, issues that may arise in
our current transition to a commercial batch manufacturer for Zerenex can lead
to delays in our planned clinical trials and development timelines, and could
affect our ability to complete our clinical trials on a cost-effective or timely
basis, if at all.
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 and unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with
current Good Manufacturing Practices, as well as other governmental regulations
and corresponding foreign standards. The same issues apply to contract
analytical services which we use for testing of our products. We will not have
control over, other than by contract and periodic oversight, third-party
manufacturers' compliance with these regulations and standards. We are currently
developing analytical tools for ferric citrate active pharmaceutical ingredient
and drug product testing. Failure to develop effective analytical tools could
result in regulatory or technical delay or could jeopardize our ability to
complete Phase 3 clinical trials and/or obtain FDA approval. Switching or
engaging multiple third-party contractors to produce our products may be
difficult because the number of potential manufacturers may be limited and 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. For Zerenex, we currently rely on a sole source of ferric citrate
active pharmaceutical ingredient. The loss of this sole source of supply would
result in significant additional costs and delays in our development program.
Moreover, if we need to change manufacturers after commercialization, 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
we do not establish or maintain manufacturing, drug development and marketing
arrangements with third parties, we may be unable to commercialize our
products.
We 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:
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manufacture
our product candidates;
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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. Additionally, if
these third parties fail to perform their obligations under our agreements with
them or fail to perform their work in a satisfactory manner, in spite of our
efforts to monitor and ensure the quality of such work, we may face delays in
achieving the regulatory milestones required for commercialization of one or
more drug candidates.
If, in
the future, the market conditions for raising capital deteriorate, we may be
forced to rely predominantly or entirely on our ability to contract with third
parties for our manufacturing, drug development and marketing. If we are unable
to contract with such third parties, we may be forced to limit or suspend or
terminate the development of some or all of our product candidates.
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
such CROs 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. 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 that one or more of our drug candidates are approved by the FDA, we
currently plan to conduct our own sales and marketing effort to support the
drugs. We currently have limited 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 want or 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.
Notwithstanding
our current plans to commercialize our drug candidates, from time to time we may
consider offers or hold discussions with companies for partnerships or the
acquisition of our company or any of our products. Any accepted offer may
preclude us from the execution of our current business plan.
Even
if we obtain FDA approval to market our drug products, if they fail to achieve
market acceptance, we may 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, including, but not limited
to, the perception of the long-term effects of the potential absorption
and/or accumulation of ferric (iron) or citrate resulting from the use of
Zerenex;
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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.
For example, KRX-0401 (perifosine), if approved in the United States would
compete with other anti-cancer agents, such as mTOR inhibitors. Pfizer Inc.,
Novartis AG and Ariad Pharmaceuticals are developing mTOR inhibitors for use in
cancer and Pfizer’s mTOR inhibitor, temsirolimus, and Novartis’ mTOR inhibitor,
everolimus, have been approved to treat patients with advanced kidney disease.
Biotechnology companies such as Amgen Inc., Biogen-Idec, Inc., ImClone Systems,
Inc. (a wholly-owned subsidiary of Eli Lilly and Company), Merck & Co.,
Inc., Millennium Pharmaceuticals, Inc. (a wholly-owned subsidiary of Takeda
Pharmaceutical Company), Novartis AG, Onyx Pharmaceuticals, Inc. and OSI
Pharmaceuticals, Inc. are developing and, in some cases, marketing drugs to
treat various diseases, including cancer, by inhibiting cell-signaling pathways.
In addition, we are aware of a number of small and large companies developing
competitive products that target Akt and the phosphoinositide 3-kinase (PI3K)
pathway. Zerenex, if approved in the United States, would compete with other FDA
approved phosphate binders such as Renagel® (sevelamer hydrochloride) and
Renvela® (sevelamer carbonate), both marketed by Genzyme Corporation, PhosLo®
(calcium acetate), marketed by Fresenius Medical Care, and Fosrenol® (lanthanum
carbonate), marketed by Shire Pharmaceuticals Group plc, as well as
over-the-counter calcium carbonate products such as TUMS® and metal-based
options such as aluminum and magnesium. A generic formulation of PhosLo®
manufactured by Roxane Laboratories, Inc. was launched in the United States in
October 2008. In addition, upon the expiration of their core patents (expected
in 2014), generic formulations of Renagel® and Renvela® may be launched, which
could have a material effect on the pricing of phosphate binders.
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
October 29, 2010, we had 19 full and part-time employees. To successfully
develop our drug candidates, we must be able to attract and retain highly
skilled personnel. Our limited resources may hinder our efforts to attract and
retain highly skilled personnel. In addition, if we lose the services of our
current personnel, in particular, Ron Bentsur, our Chief Executive Officer, our
ability to continue to execute on our business plan could be materially
impaired. Although we have an employment agreement with Mr. Bentsur, such
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 pricing of healthcare products and
services in the United States or internationally, the reimportation of drugs
into the U.S. from other countries (where they are then sold at a lower price),
and the amount of reimbursement available from governmental agencies or other
third party payors. In the United States, health care reform legislation titled
the Patient Protection and Affordable Care Act and the Reconciliation Act was
signed into law on March 23, 2010. This comprehensive legislation will affect
the terms of public and private health insurance and have a substantial impact
on the pharmaceutical industry. For example, the new law will impose an annual
fee on manufacturers of branded prescription pharmaceuticals that will impact
our products. Regulations to implement this and other provisions related to the
research, marketing and sale of prescription pharmaceutical products could
result in a decrease in our stock price or limit our ability to raise capital or
to obtain strategic partnerships or licenses. Government-financed
comparative efficacy research could also result in new practice guidelines,
labeling or reimbursement policies that discourages use of our
products.
For
example, in July 2010, the Centers for Medicare & Medicaid Services, or CMS,
released its final rule to implement a bundled prospective payment system for
end-stage renal disease facilities as required by the Medicare Improvements for
Patients and Providers Act, or MIPPA. The final rule did not include oral
medications without IV equivalents, such as phosphate binders, in the bundle
until January 1, 2014. If phosphate binders are bundled into the composite rate
beginning in 2014, separate Medicare reimbursement will no longer be available
for phosphate binders. While it is too early to project the impact bundling may
have on the phosphate binder industry, the impact could potentially cause
dramatic price reductions for phosphate binders.
On
September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was
enacted, giving the FDA enhanced post-market authority, including the authority
to require post-marketing studies and clinical trials, labeling changes based on
new safety information, and compliance with risk evaluations and mitigation
strategies approved by the FDA. The FDA's exercise of this authority may result
in delays or increased costs during the period of product development, clinical
trials and regulatory review and approval, which may also increase costs related
to complying with new post-approval regulatory requirements, and increase
potential FDA restrictions on the sale or distribution of approved
products.
We
face product liability risks and may not be able to obtain adequate
insurance.
The use
of our drug candidates in clinical trials, the future sale of any approved drug
candidates and new technologies, and our sale of Accumin prior to its
discontinuation, 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 and the sale of Accumin prior to its discontinuation. 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 also 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 in 2004, provides clinical trial
management and site recruitment services to us as well as other biotechnology
and pharmaceutical companies. OCOG has not entered into a new third-party
service contracts since 2005 and does not plan to enter into any further service
contracts. 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 19
full and part-time employees as of October 29, 2010. We also have significantly
fewer employees than many other companies that have a product candidate in
clinical development, and we rely heavily on third parties to conduct many
important functions. While we believe that our corporate compliance program is
sufficient to ensure compliance with applicable regulations, 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 length of time that we have
estimated.
We
currently anticipate that our cash, cash equivalents and investment securities
as of September 30, 2010, exclusive of our anticipated milestones to be received
and expected exercises of expiring options, are sufficient to meet our
anticipated working capital needs and fund our business plan for approximately
16 to 18 months from September 30, 2010. Including anticipated milestones to be
received and the proceeds from the exercise of expiring options, our capital
resources are expected to be sufficient to meet our anticipated working capital
needs for approximately 20 to 24 months from September 30, 2010. Our forecast of
the period of time through which our cash, cash equivalents 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, but are not limited to, the
following:
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the
timing, design and conduct of, and results from, clinical trials for our
drug candidates;
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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 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, if at
all.
Risks Related to Our
Intellectual Property and Third-Party Contracts
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.
The
intellectual property that we own or have licensed relating to our product
candidates are limited, which could adversely affect our ability to compete in
the market and adversely affect the value of our product
candidates.
The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:
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Our
composition of matter patent covering KRX-0401 (perifosine) expires in
2013 and we cannot assure you that we can obtain an extension to 2018 (the
maximum term of extension under the patent term restoration program). Our
composition of matter patent covering Zerenex expires in 2017 and we
cannot assure you that we can obtain an extension to 2022 (the maximum
term of extension under the patent term restoration program). Composition
of matter patents can provide protection for pharmaceutical products to
the extent that the specifically covered compositions are important. Upon
expiration of our composition of matter patents for KRX-0401 and Zerenex,
competitors who obtain the requisite regulatory approval can offer
products with the same composition as our products so long as the
competitors do not infringe any other patents that we may hold, such as
method of use patents.
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Our
method of use patents only protect the products when used or sold for the
specified method. However, this type of patent does not limit a competitor
from making and marketing a product that is identical to our product that
is labeled for an indication that is outside of the patented method, or
for which there is a substantial use in commerce outside the patented
method.
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Proof of
direct infringement by a competitor for method of use patents can also prove
difficult because the competitors making and marketing a product typically do
not engage in the patented use. Additionally, proof that a competitor
contributes to or induces infringement of a patented method of use by another
can also prove difficult because an off-label use of a product could prohibit a
finding of contributory infringement and inducement of infringement requires
proof of intent by the competitor.
Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may directly infringe or contribute to or induce infringement of
method of use patents, such infringement is difficult to prevent or
prosecute.
In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.
In
addition to patent protection, we may utilize orphan drug regulations or other
provisions of the Food, Drug and Cosmetic Act to provide market exclusivity for
certain of our drug candidates. Orphan drug regulations provide incentives to
pharmaceutical and biotechnology companies to develop and manufacture drugs for
the treatment of rare diseases, currently defined as diseases that exist in
fewer than 200,000 individuals in the United States, or, diseases that affect
more than 200,000 individuals in the United States but that the sponsor does not
realistically anticipate will generate a net profit. Under these provisions, a
manufacturer of a designated orphan drug can seek tax benefits, and the holder
of the first FDA approval of a designated orphan product will be granted a
seven-year period of marketing exclusivity for such FDA-approved orphan product.
In September 2009, we announced that KRX-0401 (perifosine) has received
Orphan-Drug designation from the FDA for the treatment of multiple myeloma, and
in July 2010, we announced that KRX-0401 has received Orphan-Drug designation
from the FDA for the treatment of neuroblastoma. We believe that KRX-0401 may be
eligible for additional orphan drug designations; however, we cannot assure that
KRX-0401, or any other drug candidates we may acquire or in-license, will obtain
such orphan drug designations. Additionally, upon FDA approval, we believe that
perifosine would qualify as a New Chemical Entity (NCE), which provides for five
years of exclusivity following approval.
Litigation
or third-party claims could require us to spend substantial time and money
defending such claims and adversely affect our ability to develop and
commercialize our products.
We may be
forced to initiate litigation to enforce our contractual and intellectual
property rights, or we may be sued by third parties asserting claims based on
contract, tort or intellectual property infringement. In addition, third parties
may have or may obtain patents in the future and claim that our drug products or
technologies infringe their patents. If we are required to defend against suits
brought by third parties, or if we sue third parties to protect our 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 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 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
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 August
28, 2009, we filed with the SEC a shelf registration statement on Form S-3 (File
No. 333-161607)), that was declared effective by the SEC on September 23, 2009,
providing for the offering of up to $40 million of our common stock and warrants
to purchase our common stock. Subsequent to the registered direct offering that
was completed on September 30, 2009, there remains approximately $12.2 million
of our common stock and warrants 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, our stockholders’ holdings may be significantly
diluted. 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.
In
addition, we may be required to issue up to 2,872,422 shares of our common stock
to former stockholders of ACCESS Oncology upon the achievement of certain
development and sales milestones.
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 and
liquidity;
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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 the approval of our
stockholders. 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.
ITEM 6. EXHIBITS
The
exhibits listed on the Exhibit Index are included with this
report.
3.1
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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 September 30, 2004, filed on August 12, 2004, and
incorporated herein by reference.
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3.2
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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, and incorporated herein by
reference.
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3.3
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Amendment
to Amended and Restated Certificate of Incorporation of Keryx
Biopharmaceuticals, Inc., dated July 24, 2007, filed as Exhibit 3.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2007, filed on August 9, 2007 and incorporated herein by
reference.
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31.1
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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
November 5, 2010.
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31.2
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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
November 5, 2010.
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32.1
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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 November 5,
2010.
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32.2
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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 November 5,
2010.
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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:
November 5,
2010
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By:
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/s/ James F. Oliviero
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Chief
Financial Officer
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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:
31.1
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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
November 5, 2010.
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31.2
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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
November 5, 2010.
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32.1
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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 November 5,
2010.
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32.2
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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 November 5,
2010.
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