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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the fiscal year ended December 31, 2006 or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
Commission File Number 0-27718
NEOSE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3549286 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 102 Rock Road | ||
| Horsham, Pennsylvania | 19044 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (215) 315-9000
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, par value $0.01 per share | The NASDAQ Stock Market LLC | |
| (Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in the definitive proxy statement or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
As of June 30, 2006, the aggregate market value of the registrant’s Common Stock held by
non-affiliates of the registrant was approximately $76,818,298 based on the last sale price of
the Common Stock on such date as reported by The NASDAQ Stock Market LLC. This calculation
excludes 13,861,139 shares held on June 30, 2006 by directors, executive officers, and two
holders of more than 10% of the registrant’s Common Stock.
As of March 15, 2007, there were 54,387,843 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant’s definitive proxy statement to be filed in connection with solicitation of
proxies for its Annual Meeting of Stockholders to be held on May 4, 2007, is incorporated by
reference into Part III of this Annual Report on Form 10-K.
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NEOSE, GlycoAdvance, GlycoPEGylation and GlycoConjugation are trademarks of Neose Technologies,
Inc. This Annual Report on Form 10-K also includes trademarks and trade names of other companies.
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PART I
ITEM 1. BUSINESS.
Overview
We are a clinical–stage biopharmaceutical company focused on the development of
next-generation therapeutic proteins, which we believe will be competitive with best-in-class
protein drugs currently on the market. Our lead therapeutic protein candidates are GlycoPEG-EPO
(NE-180) and GlycoPEG-GCSF. In 2005, the EPO and G-CSF drug categories had aggregate worldwide
sales of approximately $11.2 billion and $4.0 billion, respectively.
NE-180 is a long-acting version of erythropoietin (EPO) produced in insect cells. EPO is
prescribed to stimulate production of red blood cells, and is approved for sale in major markets
around the world for treatment of chemotherapy-induced anemia and anemia associated with chronic
renal failure. NE-180 is being developed for the treatment of anemia in adult cancer patients with
non-myeloid malignancies receiving chemotherapy and for the treatment of anemia associated with
chronic kidney disease, including patients on dialysis and patients not on dialysis. During 2006,
we completed a Phase I clinical trial for NE-180 in Switzerland. In January 2007, we received
approval from Swissmedic, the Swiss Agency for Therapeutic Products, for the initiation of a Phase
II human trial to evaluate the safety, tolerability and dose response of NE-180 in cancer patients
receiving platinum-based chemotherapy. In March 2007, we received approval from the U.S. Food and
Drug Administration (FDA) to initiate clinical trials in the U.S. in response to our amended
Investigational New Drug application (IND).
Our second proprietary protein, GlycoPEG-GCSF, is a long-acting version of granulocyte colony
stimulating factor (G-CSF) that we are co-developing with BioGeneriX AG, a company of the
ratiopharm Group. G-CSF is prescribed to stimulate production of neutrophils (a type of white blood
cell) and is approved for sale in major markets around the world for treatment of neutropenia
associated with myelosuppressive chemotherapy. In November 2006, BioGeneriX initiated the first of
two planned Phase I clinical trials for GlycoPEG-GCSF. We expect BioGeneriX to initiate and
complete the second Phase I trial during 2007.
We believe that our enzymatic pegylation technology, GlycoPEGylation™, can improve the drug
properties of therapeutic proteins by building out, and attaching polyethylene glycol (PEG) to,
carbohydrate structures on the proteins. We are using our technology to develop proprietary
versions of protein drugs with proven safety and efficacy and to improve the therapeutic profiles
of proteins being developed by our partners. We expect these modified proteins, such as NE-180 and
GlycoPEG-GCSF, to offer significant advantages, including less frequent dosing and possibly
improved efficacy, over the original versions of the drugs now on the market, as well as to meet or
exceed the pharmacokinetic profile of next-generation versions of the drugs now on the market. We
believe this strategy of targeting drugs with proven safety and efficacy allows us to lower the
risk profile of our proprietary development portfolio as compared to de novo protein drug
development. We intend to continue to focus our research and development resources on therapeutic
proteins that we believe have the highest probability of clinically meaningful therapeutic profile
improvements from our technology and are in commercially attractive categories.
Opportunities in the Therapeutic Protein Market
Worldwide sales of protein drugs in 2006 have been reported at over $47 billion, and by some
estimates are expected to grow to over $55 billion by 2011. We believe that many of the proteins
now on the market will lose the protection of certain patent claims over the next 15 years. In
addition, many marketed proteins are facing increased competition from next-generation versions or
from other drugs approved for the same disease indications. Although not every protein drug is a
candidate for the use of our technologies, we believe our technologies can be applied to many of
these marketed drugs to create products with improved clinical profiles. We are pursuing
opportunities in this field through our own proprietary drug development portfolio, our exploratory
research program and our partnering and licensing program. We will continue our efforts to build a
portfolio of commercially attractive partnerships in a blend of co-developments and licenses. Where
possible, we will seek partnerships that allow us to participate significantly in the commercial
success of each of the compounds.
Our Technology
Our GlycoPEGylation technology involves the use of enzymes to attach PEG to carbohydrate
structures that we have introduced or modified on proteins. We have developed a special expertise
and an extensive intellectual property position in this area. Our technologies may permit the
development of therapeutic proteins with improved clinical profiles. In
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some cases, these improvements to therapeutic proteins may also allow us to create new
intellectual property relating to our core technologies, as well as new compositions of matter. In
addition, our technology can be applied to proteins produced in a variety of cell expression
systems, including Chinese hamster ovary (CHO) cells, E. coli, and insect cells. We continue to
make significant investments in research and development and legal services to protect and expand
our intellectual property position. We believe our core technologies have broad application to
protein drug development and can be extended to provide an opportunity for sustainable growth. We
are using our GlycoPEGylation technology in our drug development portfolio, in our partnering and
licensing program, and in our exploratory research.
Improved Clinical Profiles. Common protein drug delivery problems include poor solubility and
stability, proteolysis (rapid degradation), rapid clearance, and immunogenicity. For some proteins,
one approach to these problems has been conventional chemical pegylation — the attachment of the
large, water-soluble polymer, PEG, directly to the amino acid backbone of the protein. Pegylation
may improve the solubility, stability, half-life and immunogenicity profile of a protein drug.
Pegylation has been used in marketed drugs, such as PEG-INTRON®, PEGASYS® and Neulasta®.
For some protein drugs, it has been difficult to achieve the benefits of pegylation by the
conventional approach of attaching PEG directly to the protein backbone. A possible explanation is
that the sites for the attachment of PEG occur at positions where the bulky PEG molecules block
access to the active site on the protein or alter the conformation of the protein. This may
diminish or eliminate drug activity.
By employing GlycoPEGylation, we are able to attach PEG efficiently and selectively to the
carbohydrate structures on proteins, rather than attaching PEG directly to the protein backbone. By
linking PEG to carbohydrate structures that are remote from the protein’s active site,
GlycoPEGylation may preserve the bioactivity of the drug and extend its half-life. We believe that
significant clinical benefits may be achieved through the application of our GlycoPEGylation
technology to proteins. By using our GlycoPEGylation technology, we have been able to demonstrate
with several drug candidates a prolonged drug effect in animals, including drug candidates that
have not shown biological activity following chemical pegylation.
Enabling Multiple Expression Systems. In addition to attaching PEG to carbohydrate
structures, our enzymes also modify or introduce carbohydrate structures on proteins. We refer to
this as our GlycoAdvance® technology. Currently, recombinant glycoprotein drugs are often produced
in mammalian cell culture expression systems, primarily Chinese hamster ovary (CHO) cells.
Generally, carbohydrates are added to proteins during the process of expression. CHO cells, and
many other expression systems used for commercial manufacturing of proteins, tend to produce
protein molecules with incomplete or inconsistent carbohydrate structures. In the human body, these
incompletely glycosylated proteins may be cleared too rapidly, thus compromising the half-life and
effectiveness of these proteins.
Our technology addresses these problems by employing enzymes to modify the carbohydrate
structures on proteins that have inadequate carbohydrate structures and to introduce carbohydrate
structures on proteins that have none. Proteins may have inadequate carbohydrate structures as a
result of the cell expression systems used, or may have no carbohydrate structures in their native
state. Our ability to modify or introduce carbohydrate structures allows our GlycoPEGylation
technology to be applied to proteins produced in a variety of cell expression systems, including
CHO cells, E. coli, and insect cells.
GlycoPEGylated Products in Development
There are currently three next-generation therapeutic protein candidates in development using
our GlycoPEGylation technology: NE-180, GlycoPEG-GCSF, and a long-acting version of Factor VIIa
(GlycoPEG-FVIIa).
NE-180. We are developing NE-180, a long-acting version of EPO that is produced in insect
cells. NE-180 is being developed for the treatment of anemia in adult cancer patients with
non-myeloid malignancies receiving chemotherapy and for the treatment of anemia associated with
chronic kidney disease, including patients on dialysis and patients not on dialysis. During 2006,
we completed a Phase I clinical trial for NE-180 in Switzerland. We concluded from that trial that
single doses of NE-180, up to 1.5 µg/kg, were generally well-tolerated with no serious adverse
events and demonstrated potent, dose-dependent erythropoietic activity. The results from the Phase
I study support a Phase II program in patients with anemia associated with chronic kidney disease,
dosed every four weeks, and in cancer patients receiving chemotherapy, dosed every three weeks.
In January 2007, we received approval from Swissmedic, the Swiss Agency for Therapeutic
Products, for the initiation of a Phase II human trial. The Phase II trial is designed as an open
label, sequential, ascending dose study to evaluate the safety, tolerability and dose response of
NE-180 in cancer patients receiving platinum-based chemotherapy. In
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March 2007, we received clearance from the U.S. Food and Drug Administration (FDA) to initiate
clinical trials in the U.S. in response to our amended Investigational New Drug application (IND).
EPO is prescribed to stimulate production of red blood cells, and is approved for sale in
major markets around the world for the treatment of chemotherapy-induced anemia and anemia
associated with chronic renal failure. EPO accounts for more sales worldwide than any other
glycoprotein drug. Worldwide sales in the EPO category in 2005 were approximately $11.2 billion. Of
these sales, approximately $6.8 billion were in the U.S. and approximately $4.4 billion were
outside the U.S.
We believe that the expiration of key patents covering EPO will provide commercial
opportunities in time frames consistent with our development timeline. While we expect to pursue
early entry opportunities in the U.S., we expect to pursue regulatory and marketing approval first
in Europe, where the key patents, along with those in Japan, have expired.
In the U.S., we believe that the key patents surrounding EPO expressed in non-vertebrate
systems will expire by the end of 2013, and that the remaining key patents will expire by the end
of 2015. Accordingly, we believe that our use of an insect cell expression system will allow NE-180
to enter the U.S. market sooner than EPO products expressed in vertebrate or mammalian cells. In
addition, we believe that the use of an insect cell expression system may allow us to enter the
U.S. market before even the non-vertebrate patents expire. Some of the issues relevant to the
analysis of our freedom to operate in the U.S. are the subject of ongoing litigation between other
parties. We continue to monitor these matters, as well as evaluate whether the applicable patent
claims would block our entry into the U.S. market prior to expiration. In the meantime, we expect
to continue development in the U.S. of NE-180 under the protection of a statutory safe harbor.
GlycoPEG-GCSF. We are developing GlycoPEG-GCSF, a long-acting version of G-CSF, in
collaboration with our partner BioGeneriX. In November 2006, BioGeneriX initiated in a Western
European jurisdiction the first of two planned Phase I clinical trials for GlycoPEG-GCSF. We expect
BioGeneriX to initiate and complete the second Phase I trial during 2007. G-CSF is prescribed to
stimulate production of neutrophils (a type of white blood cell), and is approved for sale in major
markets around the world for treatment of neutropenia associated with myelosuppressive
chemotherapy. Worldwide sales in the G-CSF category in 2005 were approximately $4.0 billion. Of
these sales, approximately $2.7 billion were in the U.S. and approximately $1.3 billion were
outside the U.S.
We believe that the expiration of key patents covering G-CSF will provide commercial
opportunities in a time frame consistent with our development timeline. We expect that regulatory
approval for GlycoPEG-GCSF will be sought both in and outside the U.S. We believe that key patents
covering G-CSF have expired in Europe, and will expire in the U.S. in late 2013 and in other
jurisdictions between these times. We expect BioGeneriX to pursue regulatory and marketing approval
for GlycoPEG-GCSF first in Europe.
GlycoPEG-FVIIa (Long-acting rFVIIa). A long-acting form of recombinant Factor VIIa is being
developed by our partner, Novo Nordisk, utilizing our GlycoPEGylation technology. In 2006, we
successfully completed technical transfer of the process to Novo Nordisk, who performed preclinical
pharmacokinetic and pharmacodynamic studies, and conducted other preclinical activities. Novo
Nordisk has announced that they plan to initiate Phase I clinical studies in 2007. Factor VIIa is
used in the treatment of bleeding episodes and for the prevention of bleeding during surgery or
invasive procedures in patients with congenital hemophilia with inhibitors to coagulation factors
VIII or IX. The worldwide market for recombinant Factor VIIa was approximately $1 billion in 2006,
with all of the sales being generated by Novo Nordisk. Novo Nordisk is also investigating other
applications for Factor VIIa, including its use in hemophilia prophylaxis, intracerebral
hemorrhage, trauma, traumatic brain injury, and spinal and cardiac surgery.
Partnering And Licensing Program
Currently we have the following collaborations:
BioGeneriX. In 2004, we entered into an agreement with BioGeneriX to use our proprietary
GlycoAdvance and GlycoPEGylation technologies to develop a long-acting version of G-CSF. In October
2006, we entered into an amendment of this agreement. Under the agreement, as amended, we and
BioGeneriX shared the expenses of preclinical development. BioGeneriX is responsible for supplying
the protein and funding the clinical development program and we are responsible for supplying
enzyme reagents and sugar nucleotides. As of January 1, 2007, BioGeneriX is responsible for the
cost of reagent supply. If we and BioGeneriX proceed to commercialization, we will have commercial
rights in the U.S., Canada, Mexico and Japan, and BioGeneriX will have commercial rights in Europe
and the rest of the world. Each company has the ability to search for its own marketing partner for
its territories and will receive significant royalties on product sales in the other company’s
territory. Each party has the right, in various circumstances, to terminate the agreement by giving
the required
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notice to the other party, subject to the other party’s right to continue working on the
development and commercialization of a long-acting version of G-CSF, as provided in the agreement.
In addition, we have immediate termination rights, in which case we will have all rights to the
product candidate, including supply of protein from BioGeneriX or its contract manufacturer, in the
event BioGeneriX does not meet certain Phase I and Phase II diligence requirements. In November
2006, BioGeneriX initiated a Phase I clinical trial for GlycoPEG-CGSF in a Western European
jurisdiction, and we expect BioGeneriX to conduct a second Phase I trial during 2007.
In 2005, we entered into a research, co-development and commercialization agreement with
BioGeneriX for a GlycoPEGylated erythropoietin made in CHO cells (GlycoPEG-CHO-EPO). We received a
non-refundable payment in connection with the execution of this agreement. The agreement provided
for us to conduct research on behalf of BioGeneriX for up to 12 months and grant BioGeneriX the
right to obtain an exclusive, worldwide license to use our enzymatic technologies to develop and
commercialize a long-acting version of the target protein. Under an amendment to the agreement
entered into in October 2006, BioGeneriX had until December 31, 2006 to exercise the option.
BioGeneriX did not exercise the option and all rights to Neose’s GlycoPEGylation technology as it
applies to GlycoPEG-CHO-EPO reverted to Neose.
Novo Nordisk. In 2003, we entered into two agreements with Novo Nordisk A/S to use our
GlycoPEGylation technology to develop and commercialize next-generation versions of Factors VIIa,
VIII and IX, one of which, Factor VIIa, is currently marketed by Novo Nordisk. Under these
agreements, we received a $4.3 million upfront fee, and Novo Nordisk funds our research and
development activities for these three proteins. We may also receive up to $52 million in
development milestones under these agreements, as amended, as well as significant royalties on
sales of the licensed products.
In October 2006, we entered into an amended and restated agreement with Novo Nordisk, which
supersedes one of the original agreements entered into in November 2003. The amended and restated
agreement incorporates the prior amendments to the original agreement and further amends the
original agreement to clarify certain terms and conditions related to intellectual property.
Under these agreements, as amended, Novo Nordisk’s license with respect to each protein continues
until the expiration of the last Neose patent covering a licensed product, or until the earlier
termination of the applicable agreement. Novo Nordisk has the right to terminate each of the
agreements without cause. We have the right to terminate the agreement with respect to Factors VIII
and IX if there are no commercial sales of licensed products within a specified period, subject to
Novo Nordisk’s ability to extend by paying minimum royalties.
Exploratory Research Program
We conduct exploratory research, both independently and with collaborators, on therapeutic
candidates, primarily proteins, using our enzymatic technologies. Successful therapeutic candidates
may be advanced for development through our own drug development program, our partnering and
licensing program, or a combination of the two.
Intellectual Property
Our success depends on our ability to protect and use our intellectual property rights in the
continued development and application of our technologies, to operate without infringing the
proprietary rights of others, and to prevent others from infringing on our proprietary rights. In
connection with our proprietary protein drug program, we have devoted significant resources to
investigating the patent protection for currently marketed proteins. We also devote significant
resources to obtaining and maintaining patents, and we expect to aggressively enforce our rights if
necessary, although we recognize that the scope and validity of patents is never certain.
Our patent strategy has two main components, the pursuit of a patent portfolio protecting our
technologies and their anticipated applications, and the evaluation of patent protection for
proteins we may target for development.
Patents and Proprietary Rights. We have continued to file patent applications covering new
developments in our technologies, including compositions and methods for enzymatically introducing
and modifying sugar chains on a multitude of proteins to form stable linkages between a sugar
attached to a polypeptide and a water soluble polymer, therapeutic compound, targeting agent, or
other biologically active molecule.
In addition to developing our own intellectual property, we have obtained and continue to seek
complementary intellectual property from others. We have entered into license agreements with
various institutions and individuals for certain patent rights, as well as sponsored research and
option agreements for the creation and possible license to us of additional intellectual property
rights. We are obligated to pay royalties at varying rates based upon, among other things, levels
of revenues from the sale of licensed products under our existing license agreements, and we expect
to pay royalties
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under new license agreements for intellectual property. Generally, these agreements continue
for a specified number of years or as long as any licensed patents remain in force, unless the
agreements are terminated earlier.
We own 28 issued U.S. patents, and have licensed 78 issued U.S. patents from various
institutions. In addition, we own or have licensed over 124 patent applications pending in the U.S.
There are also 522 foreign patent applications pending or granted related to our owned and licensed
patents. Additionally, we have assigned four issued U.S. patents and seven granted or pending
foreign counterparts to Magnolia Nutritionals, our joint venture with McNeil Nutritionals (a
subsidiary of Johnson & Johnson).
We recently received five U.S. patents and five Notices of Allowance from the U.S. Patent and
Trademark Office from and for our patent applications related to our GlycoConjugation and
GlycoPEGylation technologies. The granted U.S. claims broadly cover glycosyl-linked polyethylene
glycol conjugates of therapeutic peptides, methods of GlycoConjugating a Factor VIII polypeptide,
and GlycoConjugates comprising more than one peptide. These recently granted U.S. patents and U.S.
allowances belong to a series of pending patent applications directed toward our broad
GlycoConjugation technology platform and proprietary proteins.
Proprietary Protein Drugs. To pursue our strategy of developing proprietary protein drugs, we
must ascertain the nature, scope and expiration of existing patent claims covering the proteins we
may target for development, and our methods of improving them, such as adding PEG. The patent
coverage on these proteins and methods of making them is complex. These patents must be analyzed on
a claim-by-claim basis, and we must make decisions based on our analysis of these varied claims.
The patents and their expiration dates often vary from the U.S. to Europe to Japan. It is possible
that we are unaware of issued patents or pending patent applications that are relevant to our
product candidates, either because our search did not find them or because they are not yet
publicly available.
In order to market proprietary versions of currently marketed proteins, it is necessary to
determine the expiration dates of existing patent claims that could cover a product candidate by
analyzing numerous, complex patent claims and, in some cases, judicial opinions. The analysis of
patents is subject to different interpretations. Our analysis of the patent coverage surrounding
EPO in the U.S. has encouraged us that there may be opportunities to enter the U.S. market with
NE-180 sooner than our competitors whose products would have different characteristics or
manufacturing processes. If we pursue a strategy of early entry in the U.S., litigation could
result, and would be costly regardless of whether we were successful. Litigation could also result
in delays in the launch of a product, even if we ultimately were to prevail in the litigation.
Nature of Protection. The nature of patent protection in the pharmaceutical and biotechnology
industry is complex, uncertain and unpredictable, and expensive. The patents we seek may not issue,
or may issue with a narrower scope than originally sought, and may not be valid or effectively
enforceable. Even if our patents are enforceable, enforcement of our patents could be time
consuming and expensive. If the claims in our pending patent applications are narrowed prior to
issuance, others will have greater opportunity to circumvent or design around our patent
protection.
We also have proprietary trade secrets and know-how that are not patentable or that we have
chosen to maintain as secret rather than filing for patent protection. We seek to protect our
secret information by entering into confidentiality agreements with employees, consultants,
licensees, and potential collaboration partners. These agreements generally provide that all
confidential information developed by us, or made known by us to the other party, during the
relationship shall be kept confidential and may not be disclosed to third parties, except in
specific circumstances. Our agreements with employees also provide that inventions made by the
employee during the period of employment will be solely owned by us if they are the result of tasks
assigned by us or the use of property (including intellectual property) owned or used by us. Our
agreements with consultants generally provide that inventions conceived by the consultant while
rendering consulting services to us will be our exclusive property.
We are aware of numerous pending and issued U.S. and foreign patent rights and other
proprietary rights owned by third parties in fields related to our technologies. We will continue
to expend resources to protect our own technology and seek to avoid infringing the technology of
others. Patent protection obtained by others may interfere with our ability to obtain patents, or
our ability to effectively employ our technologies.
Others may claim that our technology infringes on their patents. Even if successful, the
process of defending against such claims could result in substantial costs and delay our ability to
commercialize our product candidates that utilize the challenged technology.
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Government Regulation
Our research and development activities, the future manufacture of reagents and products
incorporating our technologies, and the marketing of these products are subject to regulation for
safety and efficacy by numerous governmental authorities in the U.S. and other countries.
Regulation of Pharmaceutical Product Candidates. The research and development, clinical
testing, manufacture and marketing of products using our technologies are subject to regulation by
the FDA and by comparable regulatory agencies in other countries. Product development and approval
within this regulatory framework take a number of years and involve the expenditure of substantial
resources. We anticipate that the development of our next-generation proprietary proteins will
involve a traditional development program, including clinical trials.
After laboratory analysis and preclinical testing in animals, a regulatory filing is required
to be submitted to the appropriate authorities before human testing may begin. In the U.S., an IND
filing is made to the FDA. In Europe, a Clinical Trial Application, including an Investigational
Medicinal Product Dossier (IMPD) in a country requiring adherence to guidance of the European
Agency for the Evaluation of Medicinal Products (EMEA), or other country-specific filing, such as
is the case in Switzerland, is submitted to the national health authority (Competent Authority) in
each country in which a clinical trial is planned. Typically, a sequential three-phase human
clinical testing program is then undertaken, but the phases may overlap or be combined. Certain
phases may not be necessary for a particular product. Each clinical study is conducted according to
an approved protocol after written approval is obtained from an independent Institutional Review
Board (IRB) in the U.S, or Independent Ethics Committee (IEC) in Europe. During Phase I, small
clinical trials are conducted to determine the safety of the product in healthy volunteers. During
Phase II, clinical trials are expanded in size and are conducted to assess safety, establish an
acceptable dose, and gain preliminary evidence of the efficacy of the product in a subset of the
target population. During Phase III, clinical trials are further expanded in size and conducted to
obtain sufficient data to establish statistically significant proof of safety and efficacy in the
target population. The time and expense required to perform this clinical testing vary and can be
substantial. The results of the non-clinical and clinical testing of a biological pharmaceutical
product are then submitted to the appropriate authority in the form of a Biologics License
Application (BLA), or New Drug Application (NDA) in the U.S., or a Marketing Authorization
Application (MAA) or equivalent in Europe. If the application contains all pertinent information
and data, the appropriate regulatory authority will formally accept the file for review. In
responding to this filing, the regulatory authority may grant marketing approval, request
additional information, or deny the application.
No action may be taken to market any new drug or biologic product in either the U.S. or Europe
until an appropriate marketing application has been approved by the responsible regulatory
authority. Even after initial regulatory approval is obtained, further clinical trials may be
required to provide additional data on safety and effectiveness or to gain clearance for the use of
a product as a treatment for indications other than those initially approved. Side effects or
adverse events that are reported during clinical trials may delay, impede, or prevent marketing
approval. Similarly, adverse events that are reported after obtaining marketing approval may result
in additional limitations being placed on the use of a product and, potentially, withdrawal of the
product from the market.
The regulatory requirements and approval processes of countries in Europe (including
Switzerland, where we conducted the Phase I clinical trial for NE-180) are similar to, but not the
same as, those in the U.S. The European clinical trials are being performed in a manner consistent
with FDA requirements, which would potentially allow the data generated from the European trials to
be used to support an IND or NDA in the United States.
In addition to regulating and auditing human clinical trials, the FDA regulates and inspects
equipment, facilities, and processes used in the manufacture and control of products prior to
providing approval to market a product. Among other conditions for marketing approval in the U.S.,
the prospective manufacturer’s quality control and manufacturing procedures must conform on an
ongoing basis with current Good Manufacturing Practices (cGMP). Before granting marketing approval,
the FDA will perform a pre-licensing inspection of the facility to determine its compliance with
cGMP and other rules and regulations. In complying with cGMP, manufacturers must continue to expend
time, money and effort in the area of production, training and quality control to ensure full
compliance. After approval of a BLA or NDA, manufacturers are subject to periodic inspections by
the FDA. If, as a result of FDA inspections relating to our products or reagents, the FDA
determines that equipment, facilities, or processes do not comply with applicable FDA regulations
or conditions of product approval, the FDA may seek civil, criminal, or administrative sanctions
and remedies against us, such as the suspension of manufacturing operations, the seizure of
products, and the suspension of sales of our products.
Products manufactured in the U.S. for distribution abroad are subject to FDA regulations
regarding export, as well as to the requirements of the country to which they are shipped. Products
distributed to European countries that are members
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of the EU are also subject to EU regulations. The requirements of the EU and foreign countries
generally cover the conduct of clinical trials, the submission, review and approval of marketing
applications, and all aspects of product manufacture and marketing. These requirements may vary
significantly from country to country.
We expect to enter into agreements with third parties for the manufacture of enzymes, sugar
nucleotides and other reagents that are used in the production of next-generation GlycoPEGylated
protein therapeutics using our technology. Any third parties we contract with will be subject to
substantially the same regulatory requirements as we are with regard to the items they manufacture
for us.
Other Regulations Affecting our Business. We are subject to various other laws and
regulations, such as those relating to safe working conditions, employee relations, employee
benefits, the environment (including the use and disposal of hazardous or potentially hazardous
substances), antitrust and international trade, securities law and taxation. We endeavor to comply
with applicable laws and regulations. However, we recognize that this is a complex and expensive
process, and that we cannot predict when changes will occur or whether they would have a material
adverse effect on our operations.
We contract with third parties for supplies and services that are critical to our business.
These third parties are also subject to government regulation. The failure of any of these third
parties to comply with applicable laws and regulations could cause substantial delays to our drug
development timelines and have a material adverse effect on our operations.
Third-Party Reimbursement. Our ability and the ability of each of our collaborators to
successfully commercialize drug products may depend in part on the extent to which coverage and
reimbursement for the cost of such products will be available from government health administration
authorities, private health insurers, and other organizations. Uncertainty continues within the
pharmaceutical and biotechnology industries as to the reimbursement status of new therapeutic
products, and we cannot be sure that third-party reimbursement would be available for any
therapeutic products that we or our collaborators may develop. Healthcare reform, especially as it
relates to prescription drugs, is an area of increasing attention and a priority of many
governmental officials.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly evolving
technology and significant competition. Our competitors include pharmaceutical and biotechnology
companies. In addition, many specialized biotechnology companies have formed collaborations with
large, established companies to support research, development and commercialization of products
that may be competitive with our current and future product candidates and technologies. Academic
institutions, governmental agencies and other public and private research organizations are also
conducting research activities and seeking patent protection and may commercialize competitive
products or technologies on their own or through collaborations with pharmaceutical and
biotechnology companies.
First-Generation EPO and G-CSF Products. In the U.S., first-generation EPO products are
marketed by Amgen as Epogen`® for kidney disease and Ortho Biotech as
Procrit® for cancer-related anemia. In Europe, Ortho Biotech’s Eprex® and
Roche’s NeoRecormon® are marketed for both kidney and cancer indications. In Japan,
Amgen’s and Roche’s products are sold respectively by Kirin Brewery (ESPO®) and Chugai
(Epogin®) for kidney disease. 2005 worldwide sales of these first generation EPO
products were approximately $8.0 billion. Shire’s Dynepo™ was approved for marketing in the
European Union, and has been launched in Germany.
First-generation G-CSF products are marketed in the U.S. and Europe by Amgen as
Neupogen®, in Europe by Sanofi Aventis as Granocyte®, and in Japan by Kirin
Brewery (GRAN®), Chugai (Neutrogin®) and Kyowa Hakko Kogyo
(Neu-up®®). 2005 worldwide sales of these first generation G-CSF products were
approximately $1.7 billion.
Competitive Next-Generation EPO and G-CSF Products. Other companies have programs focused on
developing next-generation or improved versions of EPO and G-CSF, and some are already marketing
improved versions of these products.
Amgen currently markets Aranesp®, its improved version of EPO, which has a longer
circulating half-life than Amgen’s first-generation EPO product, Epogen. Amgen launched Aranesp in
the last quarter of 2001 and has reported that global sales of Aranesp were approximately $4.1
billion during 2006. Roche is developing an improved EPO known as Mircera. In April 2006, Roche
filed a BLA with the FDA and EMEA for certain renal indications for Mircera. Roche has indicated
that it plans to seek regulatory approval for cancer-related anemia indications in 2009. In late
2005, Amgen filed a lawsuit against Roche alleging that Mircera infringes on Amgen’s patents.
Besides Amgen, Ortho Biotech and Roche, other companies are applying their technologies to develop
improved EPO compounds. Syntonix (which announced in January
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2007 that it has signed a definitive agreement to be acquired by Biogen Idec) has tested its
EPO-Fc fusion protein in a Phase I proof-of-principle study and has announced it is developing a
different candidate. Fibrogen is developing FG-2216 and FG-4592, its small molecule promoter of
endogenous EPO, which are in Phase II and Phase I respectively. Affymax is developing Hematide, its
synthetic EPO-like peptide, which is currently in Phase II.
Amgen currently markets Neulasta®, which is a modified version of its original
G-CSF product, Neupogen®. Neulasta is a chemically pegylated compound, with a longer
circulating half-life than Neupogen. Amgen launched Neulasta in the first quarter of 2002 and has
reported that global sales of Neulasta were approximately $2.3 billion during 2005. Other companies
are also applying their technologies to develop long-acting competitors to G-CSF.
Next-Generation Protein Development. We are aware that other companies are working on the
development of other next-generation protein therapeutics to which we are also applying our
technology. Our product candidates will face competition from products already established in the
marketplace and new therapies that may be developed by our competitors or may result from advances
in biotechnology or other fields.
Follow-on Biologics (Biogenerics). Several companies are pursuing the opportunity to develop
and commercialize follow-on versions of currently marketed biologic products, including EPO, G-CSF
and others. These companies include Novartis (Sandoz), BioGeneriX, Stada (Bioceuticals),
BioPartners, Teva Sicor USA and Pliva (which has been acquired by Barr Pharmaceuticals). In the
U.S. and Japan, a clear development and regulatory path does not currently exist for biologic
products that are, or soon will be, off-patent, although a bill was recently introduced in the U.S.
Senate to authorize the FDA to approve generic versions of biologics. In Europe, the first
guidelines regarding the quality, preclinical and clinical development of follow-on biologics was
adopted in September 2005.
Research and Development Services. Although we are focused on the development of proprietary
protein drugs, we also use our GlycoPEGylation technology to provide collaborative research
services and product improvement opportunities to other pharmaceutical and biotechnology companies.
These services may compete with efforts within these companies to improve therapeutic protein
profiles and expression, and with services provided by other companies to improve proteins, such as
chemical pegylation technology.
Manufacturing
We used our former Witmer Road pilot manufacturing facility (Witmer Road Facility), which we
sold in September 2006, to develop manufacturing processes for NE-180, enzyme reagents and key
sugar nucleotides (including our sugar-PEG nucleotides). We manufactured NE-180 in sufficient
quantities to meet the needs of our expected preclinical development and early clinical trials. In
2006, we began to engage third-party contract manufacturing organizations (CMOs) to supply NE-180,
enzyme reagents and sugar nucleotides for late Phase II and Phase III clinical development.
Our partners currently manufacture or otherwise provide the native proteins that are
subsequently remodeled using GlycoPEGylation and will incorporate the remodeling processes at their
facilities. Our supply chain obligations, outside of NE-180, are therefore confined to the supply
of enzyme reagents and sugar nucleotides. We use CMOs for the supply of our enzyme reagents and
sugar nucleotides, except those that are available commercially.
Marketing, Distribution, and Sales
We intend to capitalize on the significant experience and resources of our collaborative
partners to commercialize proprietary products made using our technologies. These partners
generally would be responsible for much of the development, regulatory approval, sales, marketing,
and distribution activities for products incorporating our technologies. However, we intend to
retain some commercial rights to some proteins in select territories, as we did in our
collaboration with BioGeneriX. If we commercialize any products on our own, we will have to
establish or contract for regulatory, sales, marketing, and distribution capabilities, and we may
have to supplement our development capabilities. The marketing, advertising, and promotion of any
product manufactured using our technology would be subject to regulation by the FDA or other
governmental agencies.
Employees
As of December 31, 2006, we employed 78 individuals, consisting of 59 employees engaged in
research and development activities, and 19 employees devoted to corporate and administrative
activities. None of our employees is covered by collective bargaining agreements. We believe we
have good relations with our employees.
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Restructurings and Employee Severance Costs
In March 2007, we initiated a restructuring of operations designed to allow for significantly
higher clinical development costs for NE-180, while keeping anticipated 2007 net cash spending
consistent with 2006 levels. The restructuring, which will be implemented over the next few
months, will result in a workforce reduction of approximately 40%. We estimate that we will incur
cash restructuring costs of approximately $1.0 million, most of which will be reflected in our
operating results during the first half of 2007. We have not yet determined if we will incur any
contract termination or non-cash impairment charges in connection with the restructuring.
In September 2006, we implemented a restructuring of operations in connection with the sale of
the Witmer Road Facility. The employee severance costs incurred for this restructuring were
payable pursuant to an employee severance plan established in August 2005. Therefore, these costs
did not meet the definition for classification as a restructuring charge on our Statements of
Operations. Our net loss for the year ended December 31, 2006 included $0.7 million of employee
severance costs related to this restructuring, of which $0.6 million was included in research and
development expenses and $0.1 million was included in general and administrative expenses.
In August 2005, we implemented a restructuring of operations to enable an enhanced focus on
next-generation proteins, to allow for the transfer of production of proteins and reagents to our
collaborative partners and CMOs, and to reduce cash burn. Our net loss for 2005 included $14.2
million of charges related to this restructuring, including $13.2 million of non-cash property and
equipment impairment charges, most of which related to the Witmer Road Facility and related
equipment, and $1.0 million of payments for employee severance and costs to close our leased
facility in San Diego, California.
Internet Address and Securities Exchange Act Filings
Our internet address is www.neose.com. We make available free of charge through our website
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended. We make these reports and amendments available on our website as
soon as practicable after filing them electronically with, or furnishing them to, the Securities
and Exchange Commission (SEC).
ITEM 1A. RISK FACTORS.
Financial Risks
We require additional capital to fund our operations. Any additional financing could result in
equity dilution.
To date, we have funded our operations primarily through proceeds from the public and private
placements of equity securities. We have also funded our operations to a lesser extent from
proceeds from the sale of the Witmer Road Facility, property and equipment financing, interest
earned on investments, corporate collaborations, and the sale of investments. In March 2007, we
sold 21.4 million shares of our common stock and warrants to purchase 9.6 million shares of common
stock through a private placement at a price of $2.02 per unit, generating net proceeds of
approximately $40.5 million. The warrants have a five-year term and an exercise price of $1.96 per
share. We believe that our existing cash and cash equivalents (including the net proceeds from our
March 2007 financing), expected proceeds from collaborations and license arrangements, and interest
income should be sufficient to meet our operating and capital requirements at least through the
second quarter of 2008, although changes in our collaborative relationships or our business,
whether or not initiated by us, may affect the rate at which we deplete our cash and cash
equivalents. Our present and future capital requirements depend on many factors, including:
| • | level of research and development investment required to develop our therapeutic proteins, and maintain and improve our technology position; | ||
| • | the costs of process development and scale-up of proteins and reagents for research, development and at commercial scale; | ||
| • | the results of non-clinical and clinical testing, which can be unpredictable in drug development; | ||
| • | the time and costs involved in obtaining regulatory approvals; |
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| • | changes in product candidate development plans needed to address any difficulties that may arise in process development, scale-up, manufacturing, non-clinical activities, clinical studies or commercialization; | ||
| • | our ability to enter into new agreements with collaborators and to extend or maintain our existing collaborations, and the terms of these agreements; | ||
| • | the timing of milestone and royalty payments from our collaborators; | ||
| • | the costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights, and the costs of investigating patents that might block us from developing potential drug candidates; | ||
| • | the costs of recruiting and retaining qualified personnel; | ||
| • | the timing, willingness, and ability of our collaborators to commercialize products incorporating our technologies; | ||
| • | our need or decision to acquire or license complementary technologies or new drug targets; and | ||
| • | the evolution of the competitive landscape. |
We will require significant amounts of additional capital in the future, and we do not have
any assurance that funding will be available when we need it on terms that we find favorable, if at
all. We may seek to raise these funds through public or private equity offerings, debt financings,
credit facilities, or corporate collaborations and licensing arrangements. In addition, the
investors in our March 2007 financing have the right to participate in future capital raising
transactions by us until June 2008. The existence of this participation right may reduce or
diminish our ability to establish terms with respect to, or enter into, any capital raising
transaction with parties other than those investors until this participation right expires in June
2008.
If we raise additional capital by issuing equity securities, our existing stockholders’
percentage ownership will be reduced and they may experience substantial dilution. We may also
issue equity securities that provide for rights, preference and privileges senior to those of our
common stock. If we raise additional funds by issuing debt securities, these debt securities would
have rights, preferences, and privileges senior to those of our common stock, and the terms of the
debt securities issued could impose significant restrictions on our operations. If we raise
additional funds through collaborations and licensing arrangements, we may be required to
relinquish some rights to our technologies or drug candidates, or to grant licenses on terms that
are not favorable to us. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, take advantage of opportunities, develop products and
technologies, and otherwise respond to competitive pressures could be significantly delayed or
limited, and we may need to downsize or halt our operations.
We have a history of losses, and we may incur continued losses for some time.
We have incurred losses each year of our existence, including net losses of $27.1 million for
the year ended December 31, 2006, $51.8 million for the year ended December 31, 2005, and $41.6
million for the year ended December 31, 2004. Given our planned level of operating expenses, we
expect to continue incurring losses for some time. As of December 31, 2006, we had an accumulated
deficit of $266.3 million. To date, we have derived substantially all of our revenue from corporate
collaborations, license agreements, and investments. We expect that substantially all of our
revenue for the foreseeable future will result from these sources and from the licensing of our
technologies. We also expect to spend significant amounts to expand research and development on our
proprietary drug candidates and technologies, maintain and expand our intellectual property
position, and expand our business development and commercialization efforts. Our level of operating
expenditures will vary depending upon the stage of development of our proprietary proteins and the
number and nature of our collaborations. We may continue to incur substantial losses even if our
revenues increase.
We have not yet commercialized any products or technologies, and we may never become
profitable.
We have not yet commercialized any products or technologies, and we may never be able to do
so. Since we began operations in 1990, we have not generated any revenues, except from corporate
collaborations, license agreements, and investments. We do not know when or if we will complete any
of our product development efforts, obtain regulatory approval for any product candidates
incorporating our technologies, or successfully commercialize any approved products. Even if we are
successful in developing products that are approved for marketing, we will not be successful unless
these products gain market acceptance. The degree of market acceptance of these products will
depend on a number of factors, including:
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| • | the timing of regulatory approvals in the countries, and for the uses, we seek; | ||
| • | the competitive environment; | ||
| • | the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products; | ||
| • | the adequacy and success of distribution, sales and marketing efforts; and | ||
| • | the pricing and reimbursement policies of government and third-party payors, such as insurance companies, health maintenance organizations and other plan administrators. |
Physicians, patients, payors or the medical community in general may be unwilling to accept,
utilize or recommend any of our products or products incorporating our technologies. As a result,
we are unable to predict the extent of future losses or the time required to achieve profitability,
if at all. Even if we or our collaborators successfully develop one or more products that
incorporate our technologies, we may not become profitable.
If the estimates we make and the assumptions on which we rely in preparing our financial
statements prove inaccurate, our actual results may vary significantly.
Our financial statements have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and
expenses, the amounts of charges taken by us and related disclosure. Such estimates and judgments
include the carrying value of our property, equipment and intangible assets, revenue recognition
and the value of certain liabilities. We base our estimates and judgments on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances. However,
these estimates and judgments, or the assumptions underlying them, may change over time, which
could require us to restate some of our previously reported financial information. A restatement
of previously reported financial information could cause our stock price to decline and could
subject us to securities litigation. For a further discussion of the estimates and judgments that
we make and the critical accounting policies that affect these estimates and judgments, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Policies and Estimates” elsewhere in this annual report on Form 10-K.
Risks Related to Development of Products and Technologies
We may be unable to develop next-generation therapeutic proteins.
We are seeking to use our enzymatic technologies to develop proprietary next-generation
proteins, generally in collaboration with a partner. The development of protein drugs involves a
range of special challenges at various stages of the process.
In the preclinical phase of product development, we and our partners will face several
potential problems, including producing or obtaining supplies of the protein on commercially
reasonable terms, successfully modifying the protein using our enzymatic technologies, and
achieving adequate yields of the next-generation protein. Even if a protein development program
appears to be proceeding well in the early phases, a product candidate may fail in clinical trials
for several reasons, such as results indicating that the product candidate is less effective than
desired (e.g., the trial failed to meet its primary objectives) or that it has harmful or
problematic side effects. If clinical trials are successful, it is possible that problems may arise
later during commercialization. For example, we are aware that certain marketed EPO products were
associated with pure red cell aplasia that arose after marketing authorization. This highlights the
fact that even after a product is approved for marketing, problems may arise that can negatively
affect sales and increase costs.
Our failure to solve any of these problems could delay or prevent the commercialization of
products incorporating our technologies and could negatively impact our business.
Non-clinical and clinical trial results for our products may not be favorable.
In order to obtain regulatory approval for the commercial sale of any of our product
candidates, we must conduct both non-clinical studies and human clinical trials that demonstrate
the product is safe and effective for the use for which we are seeking approval. We may suffer
significant setbacks in clinical trials, even after promising results in earlier trials. For
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example, Phase II activity may not replicate Phase I results or Phase III efficacy data may
not replicate Phase II data. Adverse results from studies, including clinical trials, could have a
negative effect on our ability to obtain the approval of the FDA or other regulatory agencies.
We and our collaboration partners also may not be permitted to undertake or continue clinical
trials for any of our product candidates in the future or may otherwise be unable to do so because
acceptable candidates to participate in such trials are unavailable. Even if we or our
collaboration partners are able to conduct such trials, we or our collaboration partners may not be
able to demonstrate satisfactorily that the products are safe and effective and thus qualify for
the regulatory approvals necessary to commercialize them.
Safety and efficacy results from non-clinical studies involving animals and other models and
from early clinical trials are often not accurate indicators of results of later-stage clinical
trials that involve larger human populations, and, moreover, may not always be representative of
results obtained while marketing an approved drug, particularly with regard to safety.
Unfavorable results of clinical trials conducted by our competitors or other biotechnology
companies may also adversely affect our ability to gain regulatory approval of our product
candidates by increasing government scrutiny of our clinical trials and reducing the number of
treatments receiving approval from the FDA. Government and public concerns over safety issues
associated with pharmaceutical and biological products could potentially result in termination of
clinical trials on entire classes of drug candidates, lengthen the trial process and increase costs
relating to certain drug categories, and/or expand the safety labeling for approved products. For
example, we are aware that the FDA has scheduled a meeting of the Oncologic Drugs Advisory
Committee (ODAC) for May 2007 to review the safety of erythropoiesis-stimulating agents (ESAs)
based on the results of recent clinical studies. Invitees to the meeting include Amgen Inc. and
Ortho Biotech Products, L.P., who market Aranesp® and Procrit®, respectively. On March 9, 2007,
the FDA announced revised product labeling for ESAs, including updated warnings, a new boxed
warning and modifications to dosing instructions. The changes in product labeling and the outcome
of the ODAC meeting, which could include further revisions to labeling, could adversely affect the
conduct of the clinical trials or commercialization opportunities for our drug candidates, although
we cannot speculate at this time on the impact to us or the ESA drug category in general.
We depend on third parties to conduct our clinical trials.
We are highly dependent on third parties to conduct our clinical trials. We contract with
these third parties, generally referred to as clinical research organizations or CROs, to oversee
the operations of such clinical trials and to perform data collection and analysis, including
finding investigators to conduct the clinical study; encouraging patient enrollment in the study;
collecting the data and entering the data into computer systems; cleaning, outputting and analyzing
the data from the study; and writing the Clinical Study Report(s). We are subject to the risk that
these third parties could fail to perform their obligations properly, in a timely fashion, and/or
in compliance with applicable FDA and other governmental regulations. The failure of any of these
third parties to perform all of their obligations to us could substantially delay our development
efforts, and delay or prevent regulatory approval of our product candidates.
Our clinical trials may be delayed.
One potential cause of a delay in product development is a delay in clinical trials. Many
factors could delay clinical trials, including, without limitation:
| • | the failure to obtain or maintain regulatory clearance to conduct clinical trials; | ||
| • | insufficient supplies of clinical trial materials; | ||
| • | slow rate of patient enrollment and early discontinuation of patient participation; | ||
| • | adverse events occurring during clinical trials; | ||
| • | adverse results from non-clinical studies; and | ||
| • | changes in regulatory requirements. |
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Proteins are uniquely susceptible to neutralizing antibodies that could result in diminished
efficacy of our products.
Proteins that are foreign to a living body often provoke an immune response. Protein drugs
produced by recombinant technology, even though they have the same primary amino acid sequence as a
native human protein, sometimes provoke formation of antibodies that bind to the protein drug. Some
such antibodies bind so as to prevent the protein drug from engaging its receptor, and thus
neutralize the drug activity of the protein. Furthermore, neutralizing antibodies provoked by
administration of a protein drug may react with endogenous proteins whose natural activity the drug
was intended to supplement, thereby inducing a total lack of both therapeutic and natural
activities in the patient. Such a condition can prove fatal. We will not know if the proteins we
develop as product candidates will provoke neutralizing antibody responses in humans until they are
evaluated in clinical trials. It is possible that our product candidates may be rendered
ineffective for the therapeutic purpose for which they are intended or could induce harm to
patients because of the neutralizing effect of antibodies to endogenous proteins in humans in
response to our proteins.
Additionally, all protein drugs expressed by recombinant technology retain some trace of
contaminating proteins from the host cells used to express the protein drug. These host cell
proteins may increase the chances of an immunogenic response that could diminish the therapeutic
efficacy of the protein. Our GlycoAdvance technology enables the use of protein drugs produced in
insect cells, an expression system which has certain technical advantages in enabling the
application of our technology to this protein, but for which no product to date has received
marketing authorization in the U.S. or Europe. It is possible that NE-180 may be rendered
ineffective for the therapeutic purpose for which it is intended because of the neutralizing
effects of antibodies provoked by the presence of trace amounts of insect cell proteins in our drug
preparations.
We have no commercial manufacturing capability and rely on third parties to manufacture our
product candidates and the materials used to make them.
Completion of our clinical trials and commercialization of our product candidates require
access to, or the development of, facilities to manufacture a sufficient supply of our proteins,
enzymes, sugar nucleotides and other reagents needed to produce and commercialize our technologies.
Since we currently have no manufacturing capability of our own, we are highly dependent on contract
manufacturers to produce these materials for us for non-clinical, clinical and/or commercial
purposes. Our success depends on our ability to have these compounds manufactured on a commercial
scale or to obtain commercial quantities, in either case, at reasonable cost. We may not be able to
procure sufficient quantities of the products we develop to meet our needs for non-clinical or
clinical development or commercialization. We may compete with other parties for access to
manufacturing facilities and suitable alternatives may be unavailable to us. As a result, our
products candidates may suffer delays in manufacture if our CMOs give other products greater
priority than our product candidates. It is time-consuming and expensive to change contract
manufacturers for pharmaceutical products, particularly when the products are under regulatory
review in a New Drug Application (NDA) process. If we fail to maintain essential manufacturing and
service relationships, we may not be able to replace an important CMO or to develop our own
manufacturing capabilities, either of which could impede our ability to obtain regulatory approval
for our products candidates and delay or prevent our product development and commercialization. If
we do find replacement CMOs, we may not be able to enter into agreements with them on terms and
conditions favorable to us and, there could be a considerable delay before a new facility could be
qualified and registered with the appropriate authorities. If we encounter delays or difficulties
in connection with manufacturing, commercialization of our products and technologies could be
delayed, we could breach our obligations under our collaborative agreements and we could have
difficulty obtaining necessary financing.
The manufacture of our product candidates is_a complex and highly-regulated
process. If any of our CMOs encounters problems manufacturing materials for us, our business could
suffer.
The FDA and foreign regulators require manufacturers to register manufacturing facilities. The
FDA and foreign regulators also inspect these facilities to confirm compliance with current Good
Manufacturing Practices (cGMP) or similar requirements that the FDA or foreign regulators
establish. The manufacture of products and key reagents at any facility will be subject to strict
quality control, testing, and record keeping requirements, and continuing obligations regarding the
submission of safety reports and other post-market information. Ultimately, we, our CMOs, or other
suppliers may not meet these requirements. Our CMOs may face manufacturing or quality control
problems causing product production and shipment delays or a situation where we or they may not be
able to maintain compliance with the FDA’s cGMP requirements, or those of foreign regulators,
necessary to continue manufacturing our product candidates and materials. Any failure to comply
with cGMP requirements or other FDA or foreign regulatory requirements could adversely affect our
clinical research activities and our ability to market and develop our products candidates.
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We face challenges unique to proteins.
We and the third parties with whom we contract to manufacture our proteins face the
significant, normal scale-up risks associated with protein manufacturing: proteins are difficult to
produce; it is difficult to scale up protein manufacturing processes; and it is expensive to
produce proteins. We also face special risks in connection with our first product, NE-180, an EPO
protein. Our success with this program will depend on our ability to have this protein
manufactured, at commercial scale, in the insect cell expression system (the production source of
NE-180), by a collaborator or supplier. We do not know if we will be able to locate a CMO outside
of the U.S. that will be able to manufacture this protein at commercial scale and on economically
feasible terms. To our knowledge, no therapeutic protein produced in this expression system has yet
received marketing authorization in the U.S. or Europe, which means that we may face previously
unidentified problems resulting from the use of this expression system and related regulatory
challenges.
Our long-term success depends upon our ability to develop, receive regulatory approval for and
commercialize drug product candidates.
All of our product candidates are in the development stage and have not received regulatory
approval, an important requirement to the commercialization of any product candidate. If we or our
collaboration partners fail to complete the development, receive regulatory approvals for and/or
commercialize our product candidates, we will not be able to generate revenues from the sale of
products resulting from our product candidates. As we or our collaboration partners continue our
product development, there is a high risk that testing will demonstrate that our product candidates
are not suitable for commercialization, either because they are unsafe, inefficient, or too costly
to manufacture, or because third party competitors market a more clinically effective, safer, or
more cost-effective product
Moreover, even if we believe that the clinical data demonstrates the safety and efficacy of a
product candidate, regulators may disagree with us, and we could be delayed, limited or prevented
from obtaining the required regulatory approval of such product candidate. In addition, regulatory
approval may take longer than we expected. Although we have received approval from Swissmedic for
the initiation of a Phase II human trial for NE-180, the FDA or foreign regulators could at any
point forbid us to initiate or continue testing of our product candidates in human clinical trials.
There is also the risk that one of our product candidates is later discovered to cause adverse
effects that prevent widespread use, require withdrawal from the market, or serve as the basis for
product liability claims.
If we or our collaboration partners are unable to successfully develop and commercialize our
product candidates, we will not have a sufficient source of revenue. Moreover, the failure of one
or more of our product candidates in clinical development could harm our ability to raise
additional capital.
Our ability to enter into new collaborations and to achieve success under existing
collaborations is uncertain.
A material component of our business strategy is to establish and maintain collaborative
arrangements with third parties to co-develop our products and to commercialize products made using
our technologies. We also intend to establish collaborative relationships to obtain domestic or
international sales, marketing and distribution capabilities for product candidates receiving
regulatory approval. In fact, it is very likely that we will require a partner to develop our first
product, NE-180, beyond the Phase II clinical trial stage given the scale and cost associated with
late-stage clinical development. We currently have collaborative agreements with Novo Nordisk,
BioGeneriX and MacroGenics, Inc. We anticipate that substantially all of our revenues during the
next several years will continue to be generated from collaboration or license agreements.
The process of establishing collaborative relationships is difficult, time-consuming and
involves significant uncertainty. Our partnering strategy entails many risks, including:
| • | we may be unsuccessful in entering into or maintaining collaborative agreements for the co-development of our products or the commercialization of products incorporating our technologies; | ||
| • | we may not be successful in applying our technologies to the needs of our collaborative partners; | ||
| • | our collaborators may not be successful in, or may not remain committed to, co-developing our products or commercializing products incorporating our technologies; | ||
| • | our collaborators may seek to develop other proprietary alternatives to our products or technologies; |
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| • | our collaborators may not commit sufficient resources to incorporating our technologies into their products; | ||
| • | our collaborators are not obligated to market or commercialize our products or products incorporating our technologies, and they are not required to achieve any specific commercialization schedule; | ||
| • | our collaborative agreements may be terminated by our partners on short notice; and | ||
| • | continued consolidation in our target markets may limit our ability to enter into collaboration agreements, or may result in terminations of existing collaborations. |
Furthermore, even if we do establish collaborative relationships, it may be difficult for us
to maintain or perform under such collaboration arrangements, as our funding resources may be
limited or our collaborators may seek to renegotiate or terminate their relationships with us due
to unsatisfactory clinical results, a change in business strategy, or other reasons. If we or any
collaborator fails to fulfill any responsibilities in a timely manner, or at all, our research,
clinical development or commercialization efforts related to that collaboration could be delayed or
terminated. It may also become necessary for us to assume responsibility for activities that would
otherwise have been the responsibility of our collaborator. Further, if we are unable to establish
and maintain collaborative relationships on acceptable terms, we may have to delay or discontinue
further development of one or more of our product candidates, undertake development and
commercialization activities at our own expense or find alternative sources of funding.
We may be exposed to product liability and related risks.
The use in humans of compounds developed by us or incorporating our technologies may result in
product liability claims. Product liability claims can be expensive to defend, and may result in
large settlements of claims or judgments against us. Even if a product liability claim is not
successful, the adverse publicity, time, and expense involved in defending such a claim may
interfere with our business. We may not be able to obtain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses.
Risks Related to Intellectual Property
Blocking patents or claims of infringement may stop or delay the development of our
proprietary products.
Our commercial success depends in part on avoiding claims of infringement of the patents or
proprietary rights of third parties. We have devoted significant resources to investigating the
patent protection surrounding the proteins that are the subject of our development programs. The
numerous patents, each with multiple claims, may be difficult to uncover and interpret, leading to
uncertainty about our freedom to operate. It is possible that we will not be aware of issued
patents or pending patent applications that are relevant to our product candidates because our
searches do not find them, or pending patent applications because they are not yet publicly
available. Our interpretation of patents could be challenged, leading to litigation, and we could
face claims of infringement of rights of which we are unaware.
There have been significant litigation and interference proceedings regarding patent rights,
and the patent situation regarding particular products is often complex and uncertain. For example,
with respect to EPO, the target of our first development program, the status of issued patents is
currently being litigated by others and these patents could delay our ability to market a
long-acting EPO in the U.S. As we proceed with this program and other targets, we may face
uncertainty and litigation could result, which could lead to liability for damages, prevent our
development and commercialization efforts, and divert resources from our business strategy.
The cost of any litigation challenging our right to pursue our target proteins or technologies
could be substantial. Others seeking to develop next-generation versions of proteins, or the
holders of patents on our target proteins, may have greater financial resources, making them better
able to bear the cost of litigation. In particular, one company that produces products that will
likely be in direct competition with our current product candidates has aggressively defended the
patents related to its products and this could increase the likelihood of litigation or the cost of
litigation. Uncertainties resulting from the initiation and continuation of patent litigation or
other proceedings could have a material adverse effect on our ability to develop, manufacture, and
market products, form strategic alliances, and compete in the marketplace.
Third parties from time to time may assert that we are infringing their patents, trade secrets
or know-how. In addition, patents may issue in the future to third parties that our technology may
infringe. We could incur substantial costs in defending ourselves and our partners against any such
claims. Furthermore, parties making such claims may be able to obtain injunctive or other equitable
relief, which could effectively block our ability or our partners’ ability to further develop or
commercialize some or all of our products or technologies in the U.S. and abroad, and could result
in the award of substantial
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damages. If we are found to infringe, we may be required to obtain one or more licenses from
third parties or be unable to proceed. There can be no assurance that we will be able to obtain
such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such
required license could have a material adverse effect on us.
The failure to obtain, maintain or protect patents and other intellectual property could
impact our ability to compete effectively.
To compete effectively, we need to develop and maintain a proprietary position with regard to
our own technologies, products and business. We are seeking to develop patent protection for
therapeutic proteins that include numerous claims for composition of matter, methods of use, and
methods of making. Legal standards relating to the validity and scope of claims in our technology
field are still evolving. Therefore, the degree of future protection in the U.S. and other
countries for our proprietary rights in our core technologies and products made using these
technologies is also uncertain. The risks and uncertainties that we face with respect to our
patents and other proprietary rights include the following:
| • | the pending patent applications we have filed, or to which we have exclusive rights, may not result in issued patents, or may take longer than we expect to result in issued patents; | ||
| • | we may be subject to interference proceedings; | ||
| • | we may be subject to opposition proceedings in foreign countries; | ||
| • | the claims of any patents that are issued may not provide meaningful protection; | ||
| • | we may not be able to develop additional proprietary technologies that are patentable; | ||
| • | the patents licensed or issued to us or our customers may not provide a competitive advantage; | ||
| • | other companies may challenge patents licensed or issued to us or our customers; | ||
| • | other companies may independently develop similar or alternative technologies, or duplicate our technologies; | ||
| • | other companies may design around technologies we have licensed or developed; and | ||
| • | enforcement of patents is complex, uncertain and expensive. |
We cannot be certain that patents will be issued as a result of any of our pending
applications, and we cannot be certain that any of our issued patents will give us adequate
protection from competing products. For example, issued patents may be circumvented or challenged,
declared invalid or unenforceable, or narrowed in scope. In addition, since publication of
discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot
be certain that we were the first to make our inventions or to file patent applications covering
those inventions. In the event that another party has also filed a patent application relating to
an invention claimed by us, we may be required to participate in an interference proceeding
declared by the U.S. Patent and Trademark Office to determine priority of invention, which could
result in substantial uncertainties and costs for us, even if the eventual outcome were favorable
to us. It is also possible that others may obtain issued patents that could prevent us from
commercializing our products or require us to obtain licenses requiring the payment of significant
fees or royalties in order to enable us to conduct our business. As to those patents that we have
licensed, our rights depend on maintaining our obligations to the licensor under the applicable
license agreement, and we may be unable to do so. Furthermore, patent protection available to us
may vary in different jurisdictions. In particular, the laws in some countries provide little
patent protection.
The cost to us of any patent litigation or other proceeding relating to our patents or
applications, even if resolved in our favor, could be substantial. Our ability to enforce our
patent protection could be limited by our financial resources, and may be subject to lengthy
delays. If we are unable to effectively enforce our proprietary rights, or if we are found to
infringe the rights of others, we may be in breach of our license agreements with our partners.
In addition to patents and patent applications, we depend upon trade secrets and proprietary
know-how to protect our proprietary technology. We require our employees, consultants, advisors,
and collaborators to enter into confidentiality agreements that prohibit the disclosure of
confidential information to any other parties. We require our employees and consultants to disclose
and assign to us their ideas, developments, discoveries, and inventions. These agreements may not,
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however, provide adequate protection for our trade secrets, know-how, or other proprietary
information in the event of any unauthorized use or disclosure.
We may have to develop or license alternative technologies if we are unable to maintain or
obtain key technology from third parties.
We have licensed patents and patent applications from a number of institutions. Some of our
proprietary rights have been licensed to us under agreements that have performance requirements or
other contingencies. The failure to comply with these provisions could lead to termination or
modifications of our rights to these licenses. Additionally, we may need to obtain additional
licenses to patents or other proprietary rights from other parties to facilitate development of our
proprietary technology base. The ownership of patents exclusively licensed to us may be subject to
challenge if inventorship was not adequately investigated and represented. If our existing licenses
are terminated or if we are unable to obtain such additional licenses on acceptable terms, our
ability to perform our own research and development and to comply with our obligations under our
collaborative agreements may be delayed while we seek to develop or license alternative
technologies.
Risks Related to Competition
Our competitors may develop better or more successful products.
Our business is characterized by extensive research efforts and rapid technological progress.
New developments in molecular biology, medicinal chemistry and other fields of biology and
chemistry are expected to continue at a rapid pace in both industry and academia. Our potential
competitors include both public and private pharmaceutical and biotechnology companies, as well as
academic institutions, governmental agencies and other public and private research organizations
that are also conducting research activities and seeking patent protection.
A number of these competitors are working on the development of next-generation protein
therapeutics. Some companies have programs focused on developing next-generation or improved
versions of EPO and G-CSF, and some are already marketing improved versions of these products.
These companies include Amgen, Ortho Biotech (Johnson & Johnson), Roche, Shire, Maxygen, Fibrogen,
Affymax, CoGenesys and Syntonix. Other companies are active in this area, and we expect that
competition will increase.
In addition, we may compete with companies commercializing first-generation protein
therapeutics, as a result of pricing practices or reimbursement limitations. Even if we succeed in
developing and marketing products that have significant advantages over first-generation products,
if first-generation products are available at a lower out-of-pocket cost to the consumer,
health-care providers and consumers may choose first-generation products instead of next-generation
versions.
Compared to us, many of our likely and potential competitors have more:
| • | financial, scientific and technical resources; | ||
| • | product development, manufacturing and marketing capabilities; | ||
| • | experience conducting non-clinical studies and clinical trials of new products; and | ||
| • | experience in obtaining regulatory approvals for products. |
Competitors may succeed in developing products and technologies that are more effective or
less costly than ours and that would render our products or technologies, or both, obsolete or
noncompetitive. We know that other companies with substantial resources are working on the
development of next-generation proteins, and they may achieve better results in enzymatically
modifying our target proteins or the target proteins of our potential collaborators.
Competitors also may prove to be more successful in designing, manufacturing and marketing
products. If we are successful in developing our own drug candidates or versions of drugs that are
no longer patented, we will compete with other drug manufacturers for market share. If we are
unable to compete successfully, our commercial opportunities will be diminished.
In addition, while there is no proven abbreviated regulatory pathway for follow-on biologics,
this possibility is under discussion in the U.S. and other jurisdictions and has been adopted in
part in Europe. A bill has recently been introduced in the U.S. Senate to authorize the FDA to
approve generic versions of biologics. If an abbreviated regulatory process is
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adopted for the approval of follow-on biologics in any major market, competition could
increase in related segments of the therapeutic protein market.
We may be unable to retain key employees or recruit additional qualified personnel.
Because of the specialized scientific nature of our business, we are highly dependent upon
qualified scientific, technical and managerial personnel, including our research and development
team. The advancement of our business is dependent upon our management team‘s ability to evaluate
collaboration opportunities and on their ability to focus our company’s efforts. Our anticipated
research and development efforts will require additional expertise and the addition of new
qualified personnel.
There is intense competition for qualified management and research and development personnel
in the pharmaceutical field. Therefore, we may not be able to attract and retain the qualified
personnel necessary for our business. The loss of the services of existing personnel, as well as
the failure to recruit additional key scientific, technical and managerial personnel in a timely
manner, could harm our research and development programs and our ability to manage day-to-day
operations, attract collaboration partners, attract and retain other employees, and generate
revenues. We do not maintain “key person” life insurance on any of our employees.
Risks Related to Government Regulation
We are subject to extensive government regulation, and we or our collaborators may not obtain
necessary regulatory approvals or may encounter long delays and large expenditures in obtaining
such approvals.
The research, development, manufacture and control, marketing, and sale of our reagents and
product candidates manufactured using our technologies are subject to significant, but varying,
degrees of regulation by a number of government authorities in the U.S. and other countries.
Pharmaceutical product candidates manufactured using our technologies must undergo an
extensive regulatory approval process before commercialization. This process is regulated by the
FDA and by comparable agencies in Europe and in other countries. The U.S. and foreign regulatory
agencies have substantial discretion to delay or withhold approval of the initiation of clinical
trials, terminate clinical trials, require additional testing, delay or withhold registration and
marketing approval, and mandate product withdrawals. In addition, the U.S. or other regulatory
agencies could, at any time in the regulatory approval process, place the regulatory submission for
a product candidate on “hold” pending the receipt, review and approval of additional information.
We and our collaborators intend to base our submissions for regulatory approval and the
information contained in such submissions on our understanding of the requirements of the FDA and
its foreign counterparts. If additional information is required in other jurisdictions, including
EMEA countries, or if the submitted information is deemed insufficient, we may face delays and
additional costs.
The specific risks of protein drugs may result in the application of more stringent regulatory
requirements prior to approval of our product candidates. We face special challenges in connection
with the development of proteins produced in the insect cell expression system. To our knowledge,
no therapeutic protein for human use produced in this expression system has been submitted for
marketing authorization in the U.S. or Europe, and we may encounter long delays and large
expenditures or other regulatory hurdles in connection with the approval process for a product
produced in this expression system.
Neither we nor our collaborators have submitted any product candidates incorporating our
technologies for marketing approval to the FDA or any other regulatory authority. If any product
candidate manufactured using our technology is submitted for regulatory approval, it may not
receive the approvals necessary for commercialization, the desired labeling claims, or adequate
levels of reimbursement. Any delay in receiving, or failure to receive, these approvals would
adversely affect our ability to generate product revenues or royalties, and we will have already
spent significant sums in pursuing approval.
We anticipate that the development of our next-generation proprietary proteins will involve a
traditional development program, including clinical trials. Any new governmental regulations may
delay or alter regulatory approval of any product candidate manufactured using our technology. If
an abbreviated regulatory process is adopted for the approval of follow-on biologics in any major
market, competition could increase in related segments of the therapeutic protein market. We cannot
predict the impact of adverse governmental action that might arise from future legislative and
administrative action.
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Even if we or our collaborators are successful in obtaining regulatory approvals for any of
our products, our or their manufacturing processes will be subject to continued review by the FDA
and other regulatory authorities. Any later discovery of unknown problems with our products,
products incorporating our technologies, or manufacturing processes could result in restrictions on
such products or manufacturing processes, including potential withdrawal of the products from the
market. In addition, if regulatory authorities determine that we or our collaborators have not
complied with regulations in the research and development of a product candidate or the manufacture
and control of our reagents, then we or our collaborators may not obtain necessary approvals to
market and sell the product candidate.
Third-party reimbursement for our collaborators’ or our future product candidates may not be
adequate.
Even if regulatory approval is obtained to sell any product candidates incorporating our
technologies, our future revenues, profitability, and access to capital will be determined in part
by the price at which we or our collaborators can sell such products. There are continuing efforts
by governmental and private third-party payors to contain or reduce the costs of health care
through various means. We expect a number of federal, state, and foreign proposals to control the
cost of drugs through governmental regulation. We are unsure of the form that any health care
reform legislation may take or what actions federal, state, foreign, and private payors may take in
response to the proposed reforms. Therefore, we cannot predict the effect of any implemented reform
on our business.
Our and our collaborators’ ability to commercialize our products successfully will depend, in
part, on the extent to which reimbursement for the cost of such products and related treatments
will be available from government health administration authorities, such as Medicare and Medicaid
in the U.S., private health insurers, and other organizations. Significant uncertainty exists as to
the reimbursement status of newly approved healthcare products. Adequate third-party coverage may
not be available to enable us to maintain price levels sufficient to realize an appropriate return
on investment in product research and development. Inadequate coverage and reimbursement levels
provided by government and third-party payors for use of our or our collaborators’ products may
cause these products to fail to achieve market acceptance and would cause us to lose anticipated
revenues and delay achievement of profitability. It is possible that reimbursement may be limited
to that which is available for first-generation versions of one or more of our or our
collaborator’s products, making it harder for us and our collaborators to realize an appropriate
return.
Risks Related to Facilities, Business Interruption, and the Environment
The use of hazardous materials in our operations may subject us to environmental claims or
liability.
Our research and development processes involve the controlled use of hazardous materials,
chemicals, and radioactive compounds. We conduct experiments that are quite common in the
biotechnology industry, in which we use small quantities of corrosive, toxic and flammable
chemicals, and trace amounts of radioactive materials. The risk of accidental injury or
contamination from these materials cannot be entirely eliminated. We do not maintain a separate
insurance policy for these types of risks. In the event of an accident or environmental discharge,
we may be held liable for any resulting damages, and any liability could exceed our resources. We
are subject to federal, state, and local laws and regulations governing the use, storage, handling,
and disposal of these materials and specified waste products. The cost of compliance with these
laws and regulations could be significant.
Destructive actions by activists or terrorists could damage our facilities, interfere with our
research activities, and cause ecological harm.
Activists and terrorists have shown a willingness to injure people and damage physical
facilities, equipment and biological materials to publicize or otherwise further their ideological
causes. Our or our collaborators’ operations and research activities, and services conducted for us
by third parties, could be adversely affected by such acts. Any such damage could delay our
research projects and decrease our ability to conduct future research and development. Damage
caused by activist or terrorist incidents could also cause the release of hazardous materials,
including chemicals, radioactive and biological materials.
Any significant interruption to our ability to conduct our business operations, research and
development activities, or manufacturing operations could reduce our revenue and increase our
expenses.
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Risk Related to Stock Market and Foreign Exchange Rates
Our stock price may continue to experience fluctuations.
The market prices of securities of thinly-traded biotechnology companies such as ours
generally are highly volatile. For example, since March 1, 2006, the price of our common stock
reached a high of $4.34 per share in July 2006 and a low of $1.56 per share in March 2007.
In this market environment, the sale of a substantial number of shares of our common stock in
the public market or the perception that such a sale might occur would likely have an adverse
effect on the market price of our common stock, at least for the short term. We have a number of
investors who hold relatively large positions in our securities. A decision by any of these
investors to sell all or a block of their holdings of our common stock could cause our stock price
to drop significantly.
The market also continues to experience significant price and volume fluctuations, some of
which are unrelated to the operating performance of particular companies. In recent years, the
price of our common stock has fluctuated significantly and may continue to do so in the future.
Many factors could have a significant effect on the market price for our common stock, including:
| • | non-clinical and clinical trial results; | ||
| • | product development delays; | ||
| • | regulatory delays; | ||
| • | an announcement or termination of a collaborative relationship by us or any of our partners or competitors; | ||
| • | developments relating to our patent position or other proprietary rights; | ||
| • | announcements of technological innovations or new therapeutic products; | ||
| • | government regulations; | ||
| • | public concern as to the safety of products developed by us or others; and | ||
| • | general market conditions. |
Any litigation brought against us as a result of this volatility could result in substantial
costs and a diversion of our management’s attention and resources, which could negatively impact
our financial condition, revenues, results of operations, and the price of our common stock.
If we raise additional capital by issuing equity securities in a fluctuating market, many or
all of our existing stockholders may experience substantial dilution, and if we need to raise
capital by issuing equity securities at a time when our stock price is down, we may have difficulty
raising sufficient capital to meet our requirements. If any of the risks described in these “RISK
FACTORS” occurred, of if any unforeseen risk affected our performance, it could have a dramatic and
adverse impact on the market price of our common stock.
Changes in foreign currency exchange rates could result in increased costs.
We have entered into some agreements denominated, wholly or partly, in Euros or other foreign
currencies, and, in the future, we may enter into additional, significant agreements denominated in
foreign currencies. If the values of these currencies increase against the dollar, our costs would
increase. To date, we have not entered into any contracts to reduce the risk of fluctuations in
currency exchange rates. In the future, depending upon the amounts payable under any such
agreements, we may enter into forward foreign exchange contracts to reduce the risk of
unpredictable changes in these costs. However, due to the variability of timing and amount of
payments under any such agreements, foreign exchange contracts may not mitigate the potential
adverse impact on our financial results.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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ITEM 2. PROPERTIES.
In September 2006, we sold our Witmer Road Facility for approximately $21.0 million. In
February 2007, we consolidated our operations into a 40,000 square foot facility that we currently
lease in Horsham, Pennsylvania (Rock Road Facility). We entered into the lease agreement for the
Rock Road Facility in February 2002. The initial term of the lease ends in July 2022, at which time
we have an option to extend the lease for an additional five years, followed by another option to
extend the lease for an additional four and one-half years. We also lease warehouse space nearby in
Horsham.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the fourth quarter of 2006.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is listed on the Global Market of The NASDAQ Stock Market LLC under the
symbol NTEC. We commenced trading on NASDAQ on February 15, 1996. The following table sets forth
the high and low sale prices of our common stock for the periods indicated.
| Common Stock Price | ||||||||
| High | Low | |||||||
Year Ended December 31, 2005 |
||||||||
First Quarter |
$ | 7.25 | $ | 2.49 | ||||
Second Quarter |
3.23 | 1.95 | ||||||
Third Quarter |
4.49 | 2.15 | ||||||
Fourth Quarter |
2.85 | 1.70 | ||||||
Year Ended December 31, 2006 |
||||||||
First Quarter |
3.95 | 1.85 | ||||||
Second Quarter |
4.18 | 2.18 | ||||||
Third Quarter |
4.34 | 1.90 | ||||||
Fourth Quarter |
2.89 | 1.78 | ||||||
As of March 15, 2007, there were approximately 200 record holders and 3,400 beneficial holders
of our common stock. We have not paid any cash dividends on our common stock and we do not
anticipate paying any in the foreseeable future.
Common Stock Performance Graph
The following Common Stock Performance Graph shall not be deemed incorporated by reference
into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent we specifically incorporate it by reference therein.
The following graph assumes that $100 was invested on December 31, 2001 in our common stock.
The graph compares the cumulative return, which includes the reinvestment of dividends, of this
investment with an equivalent investment on that date in the NASDAQ Stock Market – U.S. Index (the
“NASDAQ Composite”) and the NASDAQ Stock Market Biotech Index (the “NASDAQ Biotech Index”)
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ITEM 6. SELECTED FINANCIAL DATA.
The following Statements of Operations and Balance Sheet Data for each of the years in the
five-year period ended December 31, 2006 are derived from our audited financial statements. The
financial data set forth below should be read in conjunction with the sections of this Annual
Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and the financial statements and notes included elsewhere in this Annual
Report on Form 10-K.
| Year Ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
Statements of Operations Data: |
||||||||||||||||||||
Revenue from collaborative agreements |
$ | 6,184 | $ | 6,137 | $ | 5,070 | $ | 1,435 | $ | 4,813 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
29,013 | 33,136 | 34,672 | 26,821 | 21,481 | |||||||||||||||
General and administrative |
11,551 | 10,878 | 11,711 | 11,148 | 12,510 | |||||||||||||||
Restructuring charges |
— | 14,206 | — | — | — | |||||||||||||||
Total operating expenses |
40,564 | 58,220 | 46,383 | 37,969 | 33,991 | |||||||||||||||
Gain on sale of Witmer Road Facility |
7,333 | — | — | — | — | |||||||||||||||
Operating loss |
(27,047 | ) | (52,083 | ) | (41,313 | ) | (36,534 | ) | (29,178 | ) | ||||||||||
Other income |
— | 22 | — | — | 1,653 | |||||||||||||||
Impairment of equity securities |
— | — | — | (1,250 | ) | — | ||||||||||||||
Interest income (expense), net |
(60 | ) | 222 | (329 | ) | 103 | 1,108 | |||||||||||||
Net loss |
$ | (27,107 | ) | $ | (51,839 | ) | $ | (41,642 | ) | $ | (37,681 | ) | $ | (26,417 | ) | |||||
Basic and diluted net loss per share |
$ | (0.82 | ) | $ | (1.64 | ) | $ | (1.82 | ) | $ | (2.14 | ) | $ | (1.85 | ) | |||||
Weighted-average shares outstanding
used in computing basic and diluted net
loss per share |
32,857 | 31,590 | 22,898 | 17,611 | 14,259 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash, cash equivalents and marketable
securities |
$ | 16,388 | $ | 37,738 | $ | 45,048 | $ | 53,060 | $ | 41,040 | ||||||||||
Total assets |
31,243 | 65,363 | 90,731 | 94,845 | 83,092 | |||||||||||||||
Total debt and capital lease obligations |
1,831 | 14,454 | 18,345 | 10,601 | 7,411 | |||||||||||||||
Accumulated deficit |
(266,327 | ) | (239,220 | ) | (187,381 | ) | (145,739 | ) | (108,058 | ) | ||||||||||
Total stockholders’ equity |
15,559 | 40,117 | 60,854 | 72,213 | 70,685 | |||||||||||||||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are not historical facts and
include, but are not limited to, statements about our plans, objectives, representations and
contentions that typically may be identified by use of terms such as “anticipate,” “believe,”
“estimate,” “plan,” “may,” “expect,” “intend,” “could,” “potential,” and similar expressions,
although some forward-looking statements are expressed differently. These forward-looking
statements include, among others, the statements about our:
| • | estimate that our existing cash and cash equivalents (including the net proceeds from our March 2007 financing), expected proceeds from collaborations and license agreements, and interest income should be sufficient to meet our operating and capital requirements at least through the second quarter of 2008; | ||
| • | expected losses; | ||
| • | expectations for future capital requirements; | ||
| • | expectations for increases in operating expenses; | ||
| • | expectations for increases in research and development, and marketing, general and administrative expenses in order to develop products, procure commercial quantities of reagents and products, and commercialize our technology; | ||
| • | expectations regarding the scope and expiration of patents; | ||
| • | expectations regarding the timing of non-clinical activities, regulatory meetings and submissions, as well as the progression of clinical trials, for NE-180 and GlycoPEG-GCSF; | ||
| • | expectations for the development of long-acting versions of EPO and G-CSF, and subsequent proprietary drug candidates; | ||
| • | expectations regarding net cash utilization; | ||
| • | expectations for generating revenue; and | ||
| • | expectations regarding the timing and character of new or expanded collaborations and for the performance of our existing collaboration partners in connection with the development and commercialization of products incorporating our technologies. |
You should be aware that the forward-looking statements included in this report represent
management’s current judgment and expectations, but our actual results, events and performance
could differ materially from those in the forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:
| • | our ability to obtain the funds necessary for our operations; | ||
| • | our ability to meet forecasted timelines due to internal or external causes; | ||
| • | unfavorable non-clinical and clinical results for our products; | ||
| • | our ability to develop commercial-scale manufacturing processes for our products and reagents, either independently or in collaboration with others; | ||
| • | the performance of our CROs and CMOs; | ||
| • | our ability to enter into and maintain collaborative arrangements; | ||
| • | our ability to obtain adequate sources of proteins and reagents; |
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| • | our ability to develop and commercialize products without infringing the patent or intellectual property rights of others; | ||
| • | our ability to expand and protect our intellectual property and to operate without infringing the rights of others; | ||
| • | our ability and our collaborators’ ability to develop and commercialize therapeutic proteins and our ability to commercialize our technologies; | ||
| • | our ability to attract and retain key personnel; | ||
| • | our ability to compete successfully in an intensely competitive field; and | ||
| • | general economic conditions. |
These and other risks and uncertainties that could affect our actual results are discussed in
this report, particularly in Item 1A of Part I of this Annual Report on Form 10-K in the section
entitled “Risk Factors.”
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, events, levels of activity, performance, or
achievements. We do not assume responsibility for the accuracy and completeness of the
forward-looking statements other than as required by applicable law. We do not undertake any duty
to update any of the forward-looking statements after the date of this report to conform them to
actual results, except as required by the federal securities laws.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion should be read in conjunction with our financial statements and
related notes included in this Annual Report on Form 10-K.
Overview
We are a clinical-stage biopharmaceutical company focused on the development of
next-generation therapeutic proteins that we believe will be competitive with best-in-class protein
drugs currently on the market. Our lead therapeutic protein candidates are NE-180 and
GlycoPEG-GCSF. In 2005, the EPO and G-CSF drug categories had aggregate worldwide sales of
approximately $11.2 billion and $4.0 billion, respectively.
NE-180 is a long-acting version of EPO produced in insect cells. EPO is prescribed to
stimulate production of red blood cells, and is approved for sale in major markets around the world
for treatment of chemotherapy-induced anemia and anemia associated with chronic renal failure.
NE-180 is being developed for the treatment of anemia in adult cancer patients with non-myeloid
malignancies receiving chemotherapy and for the treatment of anemia associated with chronic kidney
disease, including patients on dialysis and patients not on dialysis. During 2006, we completed a
Phase I clinical trial for NE-180 in Switzerland. In January 2007, we received approval from
Swissmedic, the Swiss Agency for Therapeutic Products, for the initiation of a Phase II human trial
to evaluate the safety, tolerability and dose response of NE-180 in cancer patients receiving
platinum-based chemotherapy. In March 2007, we received clearance from the U.S. Food and Drug
Administration (FDA) to initiate clinical trials in the U.S. in response to our amended
Investigational New Drug application (IND).
Our second proprietary protein, GlycoPEG-GCSF, is a long-acting version of G-CSF that we are
co-developing with BioGeneriX AG, a company of the ratiopharm Group. G-CSF is prescribed to
stimulate production of neutrophils (a type of white blood cell) and is approved for sale in major
markets around the world for treatment of neutropenia associated with myelosuppressive
chemotherapy. In November 2006, BioGeneriX initiated the first of two planned Phase I clinical
trials for GlycoPEG-GCSF. We expect BioGeneriX to initiate and complete the second Phase I trial
during 2007.
We believe that our enzymatic pegylation technology, GlycoPEGylation™, can improve the drug
properties of therapeutic proteins by building out, and attaching PEG to, carbohydrate structures
on the proteins. We are using our technology to develop proprietary versions of protein drugs with
proven safety and efficacy and to improve the therapeutic profiles of proteins being developed by
our partners. We expect these modified proteins to offer significant advantages,
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including less frequent dosing and possibly improved efficacy, over the original versions of
the drugs now on the market, as well as to meet or exceed the pharmacokinetic profile of
next-generation versions of the drugs now on the market. We believe this strategy of targeting
drugs with proven safety and efficacy allows us to lower the risk profile of our proprietary
development portfolio as compared to de novo protein drug development. We intend to continue to
focus our research and development resources on therapeutic proteins that we believe have the
highest probability of clinically meaningful therapeutic profile improvements from our technology
and are in commercially attractive categories.
In March 2007, we sold 21.4 million shares of common stock and warrants to purchase 9.6
million shares of common stock through a private placement, including 5.0 million shares of common
stock and warrants to purchase 2.2 million shares of common stock to investment funds affiliated
with certain members of our board of directors, at a price of $2.02 per unit, generating net
proceeds of approximately $40.5 million. The warrants have a five-year term and an
exercise price of $1.96 per share.
In March 2007, we initiated a restructuring of operations designed to allow for significantly
higher clinical development costs for NE-180, while keeping anticipated 2007 net cash spending
consistent with 2006 levels. The restructuring, which will be implemented over the next few
months, will result in a workforce reduction of approximately 40%. We estimate that we will incur
cash restructuring costs of approximately $1.0 million, most of which will be reflected in our
operating results during the first half of 2007. We have not yet determined if we will incur any
contract termination or non-cash impairment charges in connection with the restructuring.
In September 2006, we sold our Witmer Road Facility for approximately $21.0 million. We owned
the Witmer Road Facility subject to mortgages supporting our term loan and industrial development
authority bond.. After payment of selling fees and expenses, we received net proceeds of
approximately $19.3 million. Concurrent with the closing, we repaid outstanding debt associated
with the facility and related equipment of approximately $9.6 million, which included accrued
interest and prepayment penalties. The remaining net proceeds from the sale of the Witmer Road
Facility of approximately $9.7 million will be used to further our research, preclinical
development, and clinical development objectives and to fund the capital expenditures described
below to the extent such expenditures are not financed through the issuance of new debt. In
conjunction with the sale of the Witmer Road Facility, we reduced the size of our workforce by
approximately 25 employees. We anticipate cash severance and retention costs of approximately $1.0
million, of which $0.6 million had been paid as of December 31, 2006.
In February 2007, we consolidated our operations into our Rock Road Facility, a 40,000 square
foot facility that we currently lease in Horsham, Pennsylvania. We anticipate total costs for
construction of additional laboratory and office space in the Rock Road Facility of approximately
$3.7 million, of which $2.1 million was included in construction-in-progress as of December 31,
2006.
We have incurred operating losses each year since our inception. As of December 31, 2006, we
had an accumulated deficit of $266.3 million. We expect additional losses over the next several
years as we continue product research and development efforts and expand our intellectual property
portfolio. We have financed our operations through private and public offerings of equity
securities, proceeds from debt financings, and revenues from our collaborative agreements.
We believe that our existing cash and cash equivalents (including the net proceeds from our
March 2007 financing), expected proceeds from collaborations and license arrangements, and interest
income should be sufficient to meet our operating and capital requirements at least through the
second quarter of 2008, although changes in our collaborative relationships or our business,
whether or not initiated by us, may cause us to deplete our cash and cash equivalents sooner than
the above estimate.
Liquidity and Capital Resources
Overview
We had $16.4 million in cash and cash equivalents as of December 31, 2006, compared to $37.7
million as of December 31, 2005. The decrease for 2006 was primarily attributable to the use of
cash to fund our operating activities, capital expenditures, and debt repayments, which were partly
offset by net proceeds received from the sale of the Witmer Road Facility. In March 2007, we sold
21.4 million shares of our common stock and warrants to purchase 9.6 million shares of our common
stock at $2.02 per unit, generating net proceeds of approximately $40.5 million. The warrants have
a five-year term and an exercise price of $1.96 per share.
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The development of next-generation proprietary protein therapeutics, which we are pursuing
both independently and in collaboration with selected partners, will require substantial
expenditures by us and our collaborators. We plan to continue financing our operations through
private and public offerings of equity securities, proceeds from debt financings, and proceeds from
existing and future collaborative agreements. Because our 2007 revenues could be substantially
affected by entering into new collaborations and on the financial terms of any new collaborations,
we cannot estimate our 2007 revenues. Other than proceeds from our collaborations with Novo Nordisk
and BioGeneriX, and any future collaborations with others, we do not expect to generate significant
revenues until such time as products using our technologies are commercialized, which is not
expected during the next several years. We expect an additional several years to elapse before we
can expect to generate sufficient cash flow from operations to fund our operating and investing
requirements. We believe that our existing cash and cash equivalents (including the net proceeds
from our March 2007 financing), expected revenue from collaborations and license arrangements, and
interest income should be sufficient to meet our operating and capital requirements at least
through the second quarter of 2008. Accordingly, we will need to raise substantial additional funds
to continue our business activities and fund our operations until we are generating sufficient cash
flow from operations. If we are unable to raise additional capital when required, we may need to
delay, scale back, or eliminate some or all of our research and development programs.
Operating Activities
Net cash used in operating activities during 2006 and 2005 was $26.8 million and $33.1
million, respectively. The decrease of $6.3 million in net cash used in operating activities during
2006 was substantially the result of a $4.1 million reduction in research and development costs
from 2005 to 2006. In addition, during 2006, $2.0 million of cash was provided by changes in
operating assets and liabilities compared to $0.6 million for 2005. Fluctuations in operating items
vary period-to-period due to, among other factors, the timing of research and development
activities, such as the initiation and progress of clinical trials and non-clinical studies.
Investing Activities
Net cash provided by investing activities during 2006 was $18.5 million, compared to net cash
used in investing activities during 2005 of $0.5 million. In September 2006, we sold our Witmer
Road Facility for approximately $21.0 million. After payment of selling fees and expenses, we
received net proceeds of approximately $19.3 million. Concurrent with the closing, we repaid
outstanding debt associated with the facility and related equipment of approximately $9.6 million,
which included accrued interest and prepayment penalties. The remaining net proceeds from the sale
of the Witmer Road Facility of approximately $9.7 million will be used to further our research,
preclinical development, and clinical development objectives and to fund the capital expenditures
described below to the extent such expenditures are not financed through the issuance of new debt.
In February 2007, we consolidated our operations into our Rock Road Facility. We anticipate total
costs for construction of additional laboratory and office space in our Rock Road Facility of
approximately $3.7 million, of which $2.1 million was included in construction-in-progress as of
December 31, 2006.
During 2006 and 2005, cash expenditures for property and equipment were $0.9 million and $0.8
million, respectively. The improvements to our Rock Road Facility contributed significantly to our
capital expenditures during 2006. In 2007, we expect our investment in capital expenditures to be
approximately $3.5 million to $4.0 million, which includes approximately $3.2 million to complete
the construction at our Rock Road Facility. We may finance some or all of these capital
expenditures through capital leases or the issuance of new debt or equity. The terms of any new
debt could require us to maintain a minimum cash and investments balance, or to transfer cash into
an escrow account to collateralize some portion of the debt, or both.
Financing Activities
Equity Financing Activities
In March 2007, we sold 21.4 million shares of common stock and warrants to purchase 9.6
million shares of common stock through a private placement, including 5.0 million shares of common
stock and warrants to purchase 2.2 million shares of common stock to investment funds affiliated
with certain members of our board of directors, at a price of $2.02 per unit, generating net
proceeds of approximately $40.5 million. The warrants have a five-year term and an exercise price
of $1.96 per share.
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In February 2005, we offered and sold 8.1 million shares of our common stock at a public
offering price of $4.00 per share, generating net proceeds of $30.0 million. In May 2004, we sold
4.7 million shares of common stock in a registered direct offering to a number of institutional and
individual investors, including 0.8 million shares sold to officers and an investment fund
affiliated with a director, at a price of $6.77 per share, generating net proceeds of $29.9
million.
Debt Financing Activities
Our total debt decreased by $12.6 million to $1.8 million at December 31, 2006, compared to
$14.4 million at December 31, 2005. This decrease primarily resulted from $9.3 million of early
repayments of principal in connection with the sale of our Witmer Road Facility in September 2006.
During 2006, we also made planned debt principal repayments of $3.8 million, which were partially
offset by $0.5 million in proceeds from the issuance of debt to finance insurance policy premiums.
Note Payable Secured by Insurance Policies
In March 2006, we borrowed $0.5 million to finance insurance policy premiums due on certain
insurance policies. We made the last payment in November 2006, and, therefore, there was no
outstanding principal balance under this agreement as of December 31, 2006. The interest was
calculated based on an annual percentage rate of 5.4%. To secure payment of the amounts financed,
we granted the lender a security interest in all of our right, title and interest to the insurance
policies.
Term Loan from Bank and Industrial Development Authority Bond
In September 2006, we repaid the outstanding balance of the term loan from a bank and the
Industrial Development Authority bond in connection with the sale of the Witmer Road Facility. In
connection with these repayments, we incurred $0.1 million of prepayment penalties and included
this amount in interest expense during 2006.
Term Loan from Landlord
In May 2004, we borrowed $1.5 million from the landlord of our Rock Road Facility in Horsham,
Pennsylvania. As of December 31, 2006, we owed the landlord $0.6 million. The terms of the
financing require us to pay monthly principal and interest payments over 48 months at an interest
rate of 13%. During 2007, we expect to make principal and interest payments totaling $0.5 million
under this agreement.
Notes Payable to Equipment Lender
As of December 31, 2006, we owed $1.1 million to an equipment lender that financed the
purchase of certain equipment and facility improvements, which collateralize the amounts borrowed.
We made $1.6 million of early principal repayments in September 2006 upon the closing of the sale
of the Witmer Road Facility. In connection with these early principal payments, we incurred $0.1
million of prepayment penalties and included this amount in interest expense during 2006. In
October 2006, we amended six promissory notes with our equipment lender in connection with the
early repayment of a portion of the outstanding debt as a result of the sale of the Witmer Road
Facility. Under the amended promissory notes, our last payment is scheduled for September 2008, and
interest rates applicable to the equipment loan range from 8.1% to 9.5%. During 2007, we expect to
make principal and interest payments totaling $0.8 million under these agreements.
Capital Lease Obligations
We did not enter into any agreements with capital lease obligations during 2006 and 2005. We
entered into agreements with capital lease obligations during 2004 for equipment with a value of
$0.2 million. The terms of existing leases require us to make monthly payments through August 2009.
As of December 31, 2006, the present value of aggregate minimum lease payments under these
agreements was $0.1 million. During 2007, we expect to make lease payments totaling $50,000 under
these agreements.
Operating Leases
We lease laboratory, office, warehouse facilities, and equipment under operating lease
agreements. In 2002, we entered into a lease agreement for our Rock Road Facility. The initial term
of this lease ends 2022, at which time we have an option to extend the lease for an additional five
years, followed by another option to extend the lease for an additional four and one-half years.
This lease contains escalation clauses, under which the base rent increases annually by 2%. We
lease
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approximately 5,000 square feet of office and warehouse space in Horsham, Pennsylvania under a
lease agreement that expires April 2007. In January 2007, we entered into a five-year lease
agreement for approximately 6,800 square feet of office and warehouse space in Horsham,
Pennsylvania to replace similar space subject to the expiration described above. Our rental expense
was $1.0 million for each of the years ended December 31, 2006, 2005, and 2004.
Summary of Contractual Obligations
The following table summarizes our obligations to make future payments under current contracts
as of December 31, 2006:
| Payments due by period | ||||||||||||||||||||
| Less than | ||||||||||||||||||||
| Total | 1 Year | 1 - 3 Years | 4 - 5 Years | After 5 Years | ||||||||||||||||
Long-term debt obligations1 |
||||||||||||||||||||
Debt maturities |
$ | 1,723,000 | $ | 1,201,000 | $ | 522,000 | $ | — | $ | — | ||||||||||
Contractual interest |
139,000 | 122,000 | 17,000 | — | — | |||||||||||||||
Capital lease obligations2 |
||||||||||||||||||||
Debt maturities |
108,000 | 50,000 | 58,000 | — | — | |||||||||||||||
Contractual interest |
11,000 | 8,000 | 3,000 | — | — | |||||||||||||||
Operating leases3 |
8,121,000 | 519,000 | 917,000 | 955,000 | 5,730,000 | |||||||||||||||
Purchase obligations4 |
800,000 | 796,000 | 4,000 | — | — | |||||||||||||||
Total contractual obligations |
$ | 10,902,000 | $ | 2,696,000 | $ | 1,521,000 | $ | 955,000 | $ | 5,730,000 | ||||||||||
| 1. | See “Financing Activities – Debt Financing Activities” in this Liquidity and Capital Resources section and Note 7 of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of the material features of our long-term debt. Contractual interest is the interest we contracted to pay on the long-term debt obligations. | |
| 2. | See “Financing Activities – Capital Lease Obligations” in this Liquidity and Capital Resources section and Note 13 of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of the material features of our capital lease obligations. At December 31, 2006, the present value of our capital lease obligations was $108,000 and the amount of imputed interest, calculated using an assumed incremental borrowing rate at the time we entered into the capital lease obligations, was $11,000. | |
| 3. | See Note 13 of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of our significant operating leases. | |
| 4. | See Note 13 of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of our commitments as of December 31, 2006 to purchase goods and services from various suppliers. |
Off-Balance Sheet Arrangements
We are not involved in any off-balance sheet arrangements that have or are reasonably likely
to have a material current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital
resources.
Critical Accounting Policies and Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) focuses on our liquidity, capital resources, and financial statements. The financial
statements have been prepared in accordance with U.S. generally accepted accounting principles. The
preparation of financial statements requires management to make estimates and assumptions that
affect the carrying amounts of assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. These estimates and assumptions are developed and adjusted
periodically by management based on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Actual results may differ from these estimates.
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Our summary of significant accounting policies is described in Note 2 of the Notes to
Financial Statements included in Item 8 of this Annual Report on Form 10-K. Management considers
the following policies and estimates to be the most critical in understanding the more complex
judgments that are involved in preparing our financial statements and the uncertainties that could
impact our results of operations, financial position, and cash flows. Management has discussed the
development and selection of these critical accounting policies and estimates with the audit
committee of our board of directors, and the audit committee has reviewed our disclosure relating
to it in this MD&A.
Revenue Recognition
We have entered into collaborative agreements with other companies for the development and
commercialization of our product candidates. The terms of the agreements typically include
non-refundable up-front license fees, funding of research and development, payments based upon
achievement of development milestones, and royalties on product sales.
License Fees and Multiple Element Arrangements
Non-refundable license fees are recognized as revenue when we have a contractual right to
receive such payment, the contract price is fixed or determinable, the collection of the resulting
receivable is reasonably assured, and we have no further performance obligations under the license
agreement.
Multiple element arrangements, such as license and development arrangements are analyzed to
determine whether the deliverables, which often include a license and performance obligations, such
as research and development services, can be separated or whether they must be accounted for as a
single unit of accounting in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. If the fair value of the
undelivered performance obligations can be determined, such obligations would then be accounted for
separately as performed. However, if the license is considered to either (i) not have stand-alone
value or (ii) have stand-alone value but the fair value of any of the undelivered performance
obligations cannot be determined, the arrangement would then be accounted for as a single unit of
accounting and the license payments and payments for performance obligations are recognized as
revenue over the estimated period of when the performance obligations are performed. In our
collaborative arrangements with Novo Nordisk and BioGeneriX, we have determined the license to each
does not have stand-alone value.
Whenever we determine that an arrangement should be accounted for as a single unit of
accounting, we must determine the period over which the performance obligations will be performed
and revenue will be recognized. Significant management judgment is required in determining the
period over which we are expected to complete our performance obligations under an arrangement.
Substantive Milestone Payments
Our collaboration agreements may also contain substantive milestone payments. Substantive
milestone payments are considered to be performance bonuses that are recognized upon achievement of
the milestone only if all of the following conditions are met:
| • | the milestone payments are non-refundable; | ||
| • | achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; | ||
| • | substantive effort is involved in achieving the milestone; | ||
| • | a reasonable amount of time passes between the up-front license payment and the first milestone payment as well as between each subsequent milestone payment; and | ||
| • | the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. |
Determination as to whether a payment meets the aforementioned conditions involves
management’s judgment. If any of these conditions are not met, the resulting payment would not be
considered a substantive milestone, and therefore the resulting payment would be considered part of
the consideration for the single unit of accounting and be recognized as revenue as such
performance obligations are performed.
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Reimbursement of Research and Development Costs
Reimbursement of research and development costs is recognized as revenue provided the
provisions of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent,
are met, the amounts are fixed and determinable, and collection of the related receivable is
reasonably assured. In our collaborative arrangements with Novo Nordisk and BioGeneriX, we
recognize revenue as such costs are incurred because we have evidence of fair value for these
delivered items.
Deferred Revenue
Amounts received prior to satisfying the above revenue recognition criteria are recorded as
deferred revenue in the accompanying balance sheets. Determination as to the classification of
deferred revenue as current or long-term on our balance sheets involves management’s judgment. For
example, in connection with our existing collaboration agreements, we have recorded on our balance
sheet current and long-term deferred revenue based on our best estimate of when such revenue will
be recognized. The current portion of deferred revenue consists of amounts that are expected to be
recognized as revenue during 2007. Amounts that we expect will not be recognized during 2007 are
classified as long-term deferred revenue. This estimate is based on our estimate of the periods of
our involvement in certain of our collaborations. In certain instances, the timing of satisfying
these obligations can be difficult to estimate. Accordingly, our estimates may change in the
future. Any change to the estimated performance period would be recognized on a prospective basis.
If these estimates and judgments change over the course of these agreements, it may affect the
timing and amount of revenue that we recognize and record in future periods.
Stock-based Employee Compensation
We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), effective January 1, 2006. SFAS No. 123R requires all
share-based payments to employees to be recognized in the financial statements based on their fair
values at the date of grant. Prior to January 1, 2006, we followed Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations in accounting for our stock-based compensation. We elected to use the modified
prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS
No. 123R apply to all awards granted or modified after the date of adoption and to that portion of
awards not fully vested as of the date of adoption. Accordingly, prior periods have not been
restated.
The fair value of stock options is determined using the Black-Scholes valuation model, which
is the same model we previously utilized for valuing stock options for footnote disclosures
required under SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123), as amended by
SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (SFAS No. 148).
The fair value of share-based awards is recognized as expense over the requisite service
period, net of estimated forfeitures. We rely primarily on historical experience to estimate
expected forfeitures for stock options. We have not assumed any expected forfeitures for restricted
stock units (RSUs) because those awards have been granted to a small number of individuals. For all
unvested share-based awards outstanding as of December 31, 2005, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant date, will be
recognized on an accelerated basis in our statement of operations over the remaining vesting
period, consistent with our recognition policy under SFAS No. 123. For share-based awards granted
subsequent to December 31, 2005, we have elected to recognize compensation expense in the statement
of operations on a straight-line basis from the date of grant. The following table contains the
assumptions used in the Black-Scholes option-pricing model in each year to value stock-based
compensation:
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Weighted average expected volatility |
75 | % | 75 | % | 80 | % | ||||||
Expected term (years) |
4.7 – 7.8 | 0.7 – 9.1 | 4.4 – 10.0 | |||||||||
Risk-free interest rate |
4.4% – 5.1 | % | 3.9% – 4.3 | % | 2.5% – 4.3 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
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Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment at least annually and whenever indicators of
impairment exist. Because our history of negative operating cash flows is an indicator of
impairment, we annually compare the market value of our equity and debt to the carrying value of
our net assets. During 2006 we recorded a non-cash impairment charge of $0.1 million for equipment
that was no longer in use. The market value of our equity and debt exceeded the carrying value of
our net assets as of December 31, 2006 and, therefore, we did not record any impairment of
long-lived assets other than the impairment of the equipment mentioned above.
Estimating Expenses from Contract Research and Development Service Providers
Some of our research and development is conducted by third parties, including contract
research and development service providers. At the end of each quarter, we compare the payments
made to each service provider to the estimated progress toward completion of the research or
development objectives. Such estimates are subject to change as additional information becomes
available. Depending on the timing of payments to the service providers and the estimated service
provided, we record net prepaid or accrued expense relating to these costs.
Results of Operations
Years Ended December 31, 2006 and 2005 and Outlook for 2007
Our net loss for the year ended December 31, 2006 was $27.1 million compared to $51.8 million
for the corresponding period in 2005. The following section explains the trends within each
component of net loss for 2006 compared to 2005 and provides our estimate of trends for 2007 for
each component.
Revenue from Collaborative Agreements. Our revenues from collaborative agreements have
historically been derived from a few major collaborators. Our collaborative agreements provide for
some or all of the following elements: license fees, research and development funding, milestone
revenues, and royalties on product sales. A summary of revenue recognized under our collaborative
agreements for the years ended December 31, 2006 and 2005 is presented in the following table (in
thousands).
| Year Ended December 31, | ||||||||
| 2006 | 2005 | |||||||
Novo Nordisk |
||||||||
Research and development funding |
$ | 3,577 | $ | 2,027 | ||||
Substantive milestones |
750 | — | ||||||
License fees |
457 | 769 | ||||||
| 4,784 | 2,796 | |||||||
BioGeneriX |
||||||||
Research and development funding |
1,191 | 2,939 | ||||||
License fees |
209 | 402 | ||||||
| 1,400 | 3,341 | |||||||
| $ | 6,184 | $ | 6,137 | |||||
Revenue from collaborative agreements increased slightly in 2006 from 2005. Increased research
and development funding and milestone revenue recognized during 2006 under our Novo Nordisk
agreements were largely offset by decreased research and development funding during 2006 from
BioGeneriX.
Because our 2007 revenues could be substantially affected by entering into new collaborations
and on the financial terms of any new collaborations, we cannot estimate our 2007 revenues.
Material cash inflows from proprietary drug
development projects are highly uncertain, and we cannot reasonably estimate the period in
which we will begin to receive, if
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ever, material net cash inflows from our major research and
development projects. Cash inflows from development-stage products are dependent on several
factors, including entering into collaborative agreements, the achievement of certain milestones,
and regulatory approvals. We may not receive milestone payments from any existing or future
collaborations if a development-stage product fails to meet technical or performance targets or
fails to obtain the required regulatory approvals. Further, our revenues from collaborations will
be affected by the levels of effort committed and made by our collaborative partners. Even if we
achieve technical success in developing drug candidates, our collaborative partners may discontinue
development, may not devote the resources necessary to complete development and commence marketing
of these products, or they may not successfully market potential products.
Research and Development Expense. Our lead therapeutic protein candidates are NE-180
and GlycoPEG-GCSF. NE-180 is a long-acting version of EPO produced in insect cells. EPO is
prescribed to stimulate production of red blood cells, and is approved for sale in major markets
around the world for treatment of chemotherapy-induced anemia and anemia associated with chronic
renal failure. NE-180 is being developed for the treatment of anemia in adult cancer patients with
non-myeloid malignancies receiving chemotherapy and for the treatment of anemia associated with
chronic kidney disease, including patients on dialysis and patients not on dialysis. During 2006,
we completed a Phase I clinical trial for NE-180 in Switzerland. In January 2007, we received
approval from Swissmedic, the Swiss Agency for Therapeutic Products, for the initiation of a Phase
II human trial to evaluate the safety, tolerability and dose response of NE-180 in cancer patients
receiving platinum-based chemotherapy. In March 2007, we received clearance from the U.S. Food
and Drug Administration (FDA) to initiate clinical trials in the U.S. in response to our amended
Investigational New Drug application (IND).
Our second proprietary protein, GlycoPEG-GCSF, is a long-acting version of G-CSF that we are
co-developing with BioGeneriX AG, a company of the ratiopharm Group. G-CSF is prescribed to
stimulate production of neutrophils (a type of white blood cell) and is approved for sale in major
markets around the world for treatment of neutropenia associated with myelosuppressive
chemotherapy. In November 2006, BioGeneriX initiated the first of two planned Phase I clinical
trials for GlycoPEG-GCSF. We expect BioGeneriX to initiate and complete the second Phase I trial
during 2007.
We conduct exploratory research, both independently and with collaborators, on therapeutic
candidates, primarily proteins, for development using our enzymatic technologies. Successful
candidates may be advanced for development through our own proprietary drug program or through our
partnering and licensing program, or a combination of the two. Although our primary focus is the
development of long-acting proteins, we are also conducting research to assess opportunities to use
our enzymatic technologies in other areas, such as glycopeptides and glycolipids. We expect to
continue this research during 2007.
Our current research and development projects are divided between two categories: (i)
GlycoPEGylation and (ii) Other Glycotechnology Programs, which includes projects investigating
opportunities to use our enzymatic technologies in other areas, such as glycolipids. The following
chart sets forth our projects in each of these categories and the stage to which each has been
developed:
| Development Stage | Status | |||
GlycoPEGylation: |
||||
NE-180
|
Clinical (Phase II) | Active | ||
GlycoPEG-GCSF
|
Clinical (Phase I) | Active | ||
Other protein projects
|
Research | Active | ||
Other Glycotechnology Programs: |
||||
Non-protein therapeutic applications
|
Research | Active | ||
Nutritional applications
|
N/A | Evaluating | ||
| outlicensing | ||||
| opportunities |
The process of bringing drugs from the preclinical research and development stage through
Phase I, Phase II, and Phase III clinical trials to FDA or other regulatory approval is time
consuming and expensive. Because our announced product candidates are currently in the early
clinical and preclinical stages, and there are a variety of potential intermediate clinical and
non-clinical outcomes that are inherent in drug development, we cannot reasonably estimate either
the timing or costs we will incur to complete these research and development projects. In addition,
the timing and costs to complete our
research and development projects will be affected by the timing and nature of any
collaboration agreements we may enter into with a third party, neither of which we can currently
estimate.
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For each of our research and development projects, we incur both direct and indirect expenses.
Direct expenses include salaries and other costs of personnel, raw materials, and supplies for each
project. We may also incur third-party costs related to these projects, such as contract research,
consulting and non-clinical development costs. Indirect expenses include depreciation expense and
the costs of operating and maintaining our facilities, property, and equipment, to the extent used
for our research and development projects, as well as the costs of general management of our
research and development projects.
Our research and development expenses decreased to $29.0 million in 2006 from $33.1 million in
2005. During 2007, we expect our research and development expenses to be significantly higher than
they were in 2006 as a result of anticipated clinical trial, non-clinical study, and process
development costs associated with NE-180. The following table illustrates research and development
expenses incurred during 2006 and 2005 in each period for our significant groups of research and
development projects (in thousands):
| Year ended December 31, | 2006 | 2005 | ||||||
GlycoPEGylation |
$ | 18,846 | $ | 18,170 | ||||
Other Glycotechnology Programs |
435 | 978 | ||||||
Indirect expenses |
9,732 | 13,988 | ||||||
| $ | 29,013 | $ | 33,136 | |||||
GlycoPEGylation
Our GlycoPEGylation research and development expenses increased during 2006, compared to 2005,
primarily due to increased non-clinical study costs associated with NE-180 and GlycoPEG-GCSF, as
well as increased clinical trial costs associated with NE-180. These increases were partially
offset by lower payroll and related personnel costs due to reduced headcount in 2006. Increased
purchases of laboratory services and research supplies also contributed to the overall increase.
Other Glycotechnology Programs
Research and development expenses related to our other glycotechnology programs decreased
during 2006, compared to 2005, primarily due to reduced research efforts during 2006 for early
stage research.
Indirect expenses
Our indirect research and development expenses decreased during 2006, compared to 2005,
primarily due to decreased depreciation resulting from the August 2005 impairment of our Witmer
Road Facility and the closure of our leased facility in San Diego. Further contributing to the
decrease during 2006 were lower amounts spent for indirect outside laboratory services and
consulting, and was partially offset by $0.8 million of non-cash compensation costs for share-based
payment arrangements accounted for under SFAS No. 123R.
General and Administrative Expense. General and administrative expenses for the year ended
December 31, 2006 were $11.6 million, compared to $10.9 million for the corresponding period in
2005. The increase in 2006 was primarily attributable to $1.6 million of non-cash compensation
costs for share-based payment arrangements accounted for under SFAS No. 123R, and was partially
offset by lower consulting costs, lower patent legal expenses and reduced depreciation resulting
from the August 2005 impairment of our Witmer Road Facility and the closure of our leased facility
in San Diego. During 2007, we expect our general and administrative expenses to remain relatively
consistent with the 2006 expense amounts.
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Gain on Sale of Witmer Road Facility. During 2006, we recognized a gain from the sale
of the Witmer Road Facility of $7.3 million. In September 2006, we sold the Witmer Road Facility
for approximately $21.0 million. After payment of selling fees and expenses, we received net
proceeds of approximately $19.3 million. The carrying value of the property and equipment sold was
$12.4 million. We continued to occupy a portion of the facility on a rent-free basis for six months
after the closing. We estimated the rental fair value for the space we continued to occupy to be
$0.4 million, which was included in the calculation of the $7.3 million gain on the sale of the
Witmer Road Facility and is being amortized as rent expense to our Statements of Operations over
the expected period of our occupancy.
Restructuring Charges. Restructuring charges for the year ended December 31, 2005 were
$14.2 million, which included $13.2 million of non-cash property and equipment impairment charges
and $1.0 million of payments for employee severance and facility closure costs. We did not incur
any restructuring charges during 2006.
Interest Income. Interest income for the year ended December 31, 2006 was $1.2
million, compared to $1.5 million for the corresponding period in 2005. The decrease was due to
lower available cash balances during 2006. Our interest income during 2007 is difficult to project,
and will depend largely on whether we enter into any new collaborative agreements, complete any
equity or debt financings, and prevailing interest rates during 2007.
Interest Expense. Interest expense for each of the years ended December 31, 2006 and
2005 was $1.3 million. Our interest expense during 2007 is difficult to project and will depend
largely on whether we complete any new debt financings and prevailing interest rates during 2007.
See “Financing Activities – Debt Financing Activities” in the Liquidity and Capital Resources
section of this Annual Report on Form 10-K for a description of the material features of our debt
financings.
Years Ended December 31, 2005 and 2004
Our net loss for the year ended December 31, 2005 was $51.8 million compared to $41.6 million
for the corresponding period in 2004. The following section explains the trends within each
component of net loss for 2005 compared to 2004.
Revenue from Collaborative Agreements. A summary of revenue recognized under our
collaborative agreements for the years ended December 31, 2005 and 2004 is presented in the
following table (in thousands).
| Year ended December 31, | ||||||||
| 2005 | 2004 | |||||||
Novo Nordisk |
||||||||
Research and development funding |
$ | 2,027 | $ | 2,490 | ||||
Substantive milestones |
— | — | ||||||
License fees |
769 | 842 | ||||||
| 2,796 | 3,332 | |||||||
BioGeneriX |
||||||||
Research and development funding |
2,939 | 1,699 | ||||||
License fees |
402 | 39 | ||||||
| 3,341 | 1,738 | |||||||
| $ | 6,137 | $ | 5,070 | |||||
Revenue from collaborative agreements increased to $6.1 million in 2005 from $5.1 million in
2005 primarily due to increased research and development funding and license fee revenue from
BioGeneriX.
Research and Development Expense. Our research and development expenses decreased to
$33.1 million in 2005 from $34.7 million in 2004. The following table illustrates research and
development expenses incurred during 2005 and 2004 in each period for our significant groups of
research and development projects (in thousands).
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| Year ended December 31, | 2005 | 2004 | ||||||
GlycoPEGylation |
$ | 18,170 | $ | 16,650 | ||||
Other Glycotechnology Programs |
978 | 196 | ||||||
Indirect expenses |
13,988 | 17,826 | ||||||
| $ | 33,136 | $ | 34,672 | |||||
GlycoPEGylation
Our GlycoPEGylation research and development expenses increased during 2005, compared to 2004,
primarily due to increased non-clinical development costs associated with NE-180 and GlycoPEG-GCSF,
and increased purchases of laboratory services and research supplies.
Other Glycotechnology Programs
Research and development expenses related to our Other Glycotechnology Programs increased
during 2005, compared to 2004, primarily due to increased research during 2005 to assess
opportunities to use our enzymatic technologies in glycolipids.
Indirect expenses
Our indirect research and development expenses decreased during 2005, compared to 2004,
primarily due to decreased depreciation resulting from the August 2005 impairment of the Witmer
Road Facility and the closure of our leased facility in San Diego. Further contributing to the
decrease during 2005 were lower amounts spent for indirect outside laboratory services and
consulting.
General and Administrative Expense. General and administrative expenses for the year
ended December 31, 2005 were $10.9 million, compared to $11.7 million for the corresponding period
in 2004. The decrease in 2005 was attributable to lower salaries and personnel-related expenses,
lower consulting costs, and reduced depreciation, which resulted from the August 2005 impairment of
the Witmer Road Facility and the closure of our leased facility in San Diego. Partially offsetting
these decreases were an increase in patent legal expenses as well as higher non-cash compensation
expenses due to the issuance of restricted stock units.
Restructuring Charges. Restructuring charges for the year ended December 31, 2005
were $14.2 million, which included $13.2 million of non-cash property and equipment impairment
charges and $1.0 million of expected payments for employee severance and facility closure costs. We
did not incur any restructuring charges during 2004.
Interest Income. Interest income for the year ended December 31, 2005 was $1.5
million, compared to $0.7 million for the corresponding period in 2004. The increase was due to
higher interest rates during 2005.
Interest Expense. Interest expense for the year ended December 31, 2005 was $1.3
million, compared to $1.0 million for the corresponding period in 2004, primarily due to higher
interest rates during 2005. The increase was also partially attributable to the fact that we did
not capitalize any interest expense during 2005. During 2004, we capitalized $0.1 million of
interest expense associated with leasehold improvements that we placed in service in April 2004.
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Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS No. 157), which is applicable for fiscal years beginning after November
15, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Although SFAS No. 157 does not require any
new fair value measurements, its application may, for some entities, change current practices
related to the definition of fair value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. We are currently evaluating the impact of the adoption
of SFAS No.157 on our financial statements and related disclosures.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Topic 1N,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB No. 108). SAB No. 108 requires the evaluation of prior-year misstatements
using both the balance sheet approach and the income statement approach. In the initial year of
adoption, should either approach result in quantifying an error that is material in light of
quantitative and qualitative factors, SAB No. 108 guidance allows for a one-time cumulative-effect
adjustment to beginning-of-year retained earnings. In years subsequent to adoption, previously
undetected misstatements deemed material shall result in the restatement of previously issued
financial statements in accordance with SFAS No. 154, Accounting Changes and Error Corrections
(SFAS No. 154). SAB No. 108 is effective for material errors in existence at the beginning of the
first fiscal year ended after November 15, 2006, with earlier adoption encouraged. The adoption of
SAB No. 108 did not have any impact on our financial statements and related disclosure.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which is applicable for fiscal years beginning after December 15, 2006. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position reported or expected to be reported on a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. We do not believe the adoption of FIN 48 will have any impact
on our financial statements and we are evaluating the impact it may have on the related
disclosures.
In May 2005, the FASB issued SFAS No. 154, which replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting principles. SFAS
No. 154 applies to all voluntary changes in accounting principle, and also applies to changes
required by an accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. SFAS No. 154 became effective for accounting changes and
corrections of errors made by us after January 1, 2006. SFAS No. 154 does not change the transition
provisions of any existing accounting pronouncements, including those that are in a transition
phase as of the effective date of SFAS No. 154. The adoption of SFAS No. 154 did not have any
impact on our financial statements and related disclosure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. We are currently not engaged in
hedging activities and we do not use derivative financial instruments for speculation or trading
purposes. We do not believe that our exposure to interest rate risk is material to our results of
operations. The analysis below presents the sensitivity of our interest income and expense to
selected changes in market interest rates.
The primary objective of our investment activities is to preserve our capital to fund
operations and maximize income from our investments without assuming significant risk. We seek the
safety of principal and market liquidity by investing in high credit quality institutional money
market funds and fixed income securities. Our market risk exposure consists principally of exposure
to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. Because our investments are short-term in duration, we believe our exposure to
interest rate risk is not significant. We held no marketable securities as of December 31, 2006.
The approximate principal amount of our investment portfolio as of December 31, 2006 was $16.4
million, and the weighted-average annualized interest rate and interest income earned on the
portfolio during the year ended December 31, 2006 were 4.9% and $1.2 million, respectively. The
sensitivity analysis as it
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relates to our investment activities assumes an instantaneous 100 basis point move in interest
rates from their weighted-average levels during the year ended December 31, 2006. A 100 basis point
move up or down in market interest rates would have caused a corresponding change of $0.2 million
in interest income during the year ended December 31, 2006.
As of December 31, 2006, the principal components of our debt portfolio were (1) a term loan
from our landlord of $0.6 million that accrues interest at a fixed annual rate of 13.0%; (2)
aggregate equipment financing of $1.1 million that accrues interest at fixed annual rates ranging
from 8.1% to 9.5%; and (3) capital lease obligations with a present value of $0.1 million, for
which we imputed interest at fixed annual rates ranging from 8.7% to 11.5%. Our aggregate interest
expense for the year ended December 31, 2006 was $1.3 million. By modifying the interest expense
associated with variable rate debt while it was outstanding during the year ended December 31,
2006, as well as for fixed rate debt entered into during the year ended December 31, 2006, a 100
basis point move up or down in market interest rates would have caused a corresponding change of
$0.1 million in interest expense during the year ended December 31, 2006.
Foreign Exchange Risk
We have entered into some agreements denominated, wholly or partly, in Euros or other foreign
currencies, and, in the future, we may enter into additional, significant agreements denominated in
foreign currencies. If the values of these currencies increase against the dollar, our costs would
increase. To date, we have not entered into any contracts to reduce the risk of fluctuations in
currency exchange rates. In the future, depending upon the amounts payable under any such
agreements, we may enter into forward foreign exchange contracts to reduce the risk of
unpredictable changes in these costs. However, due to the variability of timing and amount of
payments under any such agreements, foreign exchange contracts may not mitigate the potential
adverse impact on our financial results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item are attached to this
Annual Report on Form 10-K beginning on page F-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(Exchange Act), as of December 31, 2006. Based on that evaluation, our principal executive officer
and principal financial officer concluded that these controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported as specified in SEC rules and forms.
There were no changes in these controls or procedures identified in connection with the evaluation
of such controls or procedures that occurred during our last fiscal quarter, or in other factors
that have materially affected, or are reasonably likely to materially affect, these controls or
procedures.
Our disclosure controls and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the rules and forms of the
SEC. These disclosure controls and procedures include, among other things, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we file
under the Exchange Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our
principal executive and principal financial and accounting officers and effected
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by our board of directors and management to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | ||
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and board of directors; and | ||
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risks that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2006. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment, our management believes that, as of December
31, 2006, our internal control over financial reporting is effective. In addition, no changes in
our internal control over financial reporting have occurred during the three months ended December
31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. The following is the audit report on our assessment of our
internal control over financial reporting issued by our independent registered public accounting
firm.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Neose Technologies, Inc.:
Neose Technologies, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Neose Technologies, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Neose Technologies, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of Neose Technologies, Inc.’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Neose Technologies, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal Control—Integrated Framework issued by
the COSO. Also, in our opinion, Neose Technologies, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Neose Technologies, Inc. as of December 31,
2006 and 2005, and the related statements of operations, stockholders’ equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended December 31, 2006, and
our report dated March 16, 2007 expressed an unqualified opinion on those financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 16, 2007
March 16, 2007
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors and executive officers, appearing under the caption
“Governance of the Company” in our Proxy Statement (the Proxy Statement) to be filed with the SEC
in connection with our Annual Meeting of Stockholders to be held on May 4, 2007; the information
concerning executive officers, appearing under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement; the information concerning stockholder nominations
for director candidates, appearing under the captions “Governance of the Company – Committees of
our Board of Directors – Corporate Governance Committee” and “Requirements for Advance Notification
of Nominations and Stockholder Proposals” in the Proxy Statement; and the information concerning
the Audit Committee of our Board of Directors and the audit committee financial expert thereon,
appearing under the caption “Governance of the Company – Committees of our Board of Directors –
Audit Committee” in the Proxy Statement are incorporated herein by reference in response to this
Item 10.
Code of Conduct
We have a Code of Business Conduct and Ethics, which can be viewed on our website at
www.neose.com (under “About Neose”). We require all employees to adhere to the Code in addressing
the legal and ethical issues encountered in conducting their work. The Code of Business Conduct and
Ethics requires that our employees avoid conflicts of interest, comply with all laws and other
legal requirements, conduct business in an honest and ethical manner, and otherwise act with
integrity and in our best interest. All of our employees were required to certify that they
reviewed and understood the Code when they received it during 2003 or upon their later hire date,
and are required to renew this certification annually thereafter and when the Code is changed. The
Code of Business Conduct and Ethics is intended to comply with Item 406 of the SEC’s Regulation S-K
and the rules of NASDAQ.
The Code of Business Conduct and Ethics includes procedures for reporting violations of the
Code, which are applicable to all employees. The Sarbanes-Oxley Act of 2002 requires companies to
have procedures to receive, retain and treat complaints received regarding accounting, internal
accounting controls or auditing matters and to allow for the confidential and anonymous submission
by employees of concerns regarding questionable accounting or auditing matters. The Code of
Business Conduct and Ethics also includes these required procedures.
Any waiver or amendment of the Code of Business Conduct and Ethics for designated senior
officers, including our chief executive officer and chief financial officer, will be disclosed
promptly on our Internet website.
Copies of the Code of Business Conduct and Ethics, which appears on our website, are also
available upon request by any stockholder addressed to our Corporate Secretary, 102 Rock Road,
Horsham, PA 19044.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the sections titled “Executive Compensation” and “Governance of
the Company — Compensation of Directors” in the Proxy Statement is incorporated herein by reference
in response to this Item 11.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee of our Board of Directors are Douglas J.
MacMaster, Jr., Patrick L. Gage and H. Stewart Parker. None of these individuals has ever been an
officer or employee of ours. In addition, none of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or the Compensation Committee of our Board of
Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the section titled “Stock Ownership of our Directors, Executive
Officers and 5% Beneficial Owners” in the Proxy Statement is incorporated herein by reference in
response to this Item 12.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the section titled “Certain Relationships and Related
Transactions” in the Proxy Statement, and the information concerning director independence under
the captions “Governance of the Company – Independence of Directors and – Committees of our Board
of Directors” in the Proxy Statement is incorporated herein by reference in response to this Item
13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information contained in the section titled “Relationship with Independent Registered
Public Accounting Firm” in the Proxy Statement is incorporated herein by reference in response to
this Item 14.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements.
The Financial Statements filed as part of this Annual Report on Form 10-K are listed on the
Index to Financial Statements on page F-1.
2. Financial Statement Schedules.
All financial statement schedules have been omitted here because they are not applicable, not
required, or the information is shown in the Financial Statements or Notes thereto.
3. Exhibits.
The following is a list of exhibits filed as part of this Annual Report on Form 10-K. We are
incorporating by reference to our previous SEC filings each exhibit that contains a footnote. For
exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated
in parentheses.
| Exhibit | ||
| Number | Description | |
2.1
|
Purchase and Sale Agreement and Joint Escrow Instructions by and between ARE-PA Region No.6, LLC and Neose Technologies, Inc. dated September 1, 2006. (Exhibit 2.1)(25) | |
3.1
|
Fourth Amended and Restated Certificate of Incorporation. (Exhibit B)(21) | |
3.2
|
Second Amended and Restated By-Laws. (Exhibit 3.2)(4) | |
4.1
|
See Exhibits 3.1 and 3.2 for instruments defining rights of holders of common stock. | |
4.2
|
Amended and Restated Rights Agreement, dated as of December 3, 1998, between American Stock Transfer & Trust Company, as Rights Agent, and Neose Technologies, Inc. (Exhibit 4.2)(13) | |
4.3
|
Amendment No. 1, dated November 14, 2000, to the Amended and Restated Rights Agreement, dated as of December 3, 1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit 4.1)(1) | |
4.4
|
Amendment No. 2, dated June 13, 2002, to the Amended and Restated Rights Agreement, dated as of December 3, 1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit 4.1)(3) | |
4.5
|
Amendment No. 3, dated October 30, 2002, to the Amended and Restated Rights Agreement, dated as of December 3, 1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit 4.1)(5) | |
10.1††
|
1995 Amended and Restated Stock Option/Stock Issuance Plan, as amended. (Appendix B)(7) | |
10.2††
|
Non-Qualified Stock Option Agreement, dated March 29, 2002, between C. Boyd Clarke and Neose Technologies, Inc. (Exhibit 10.2)(2) | |
10.3††
|
Form of Change of Control Agreement between Neose Technologies, Inc. and Certain Officers. (Exhibit 10.1)(4) | |
10.4††
|
Tuition Reimbursement Agreement between A. Brian Davis and Neose Technologies, Inc., dated May 24, 2001. (Exhibit 10.44)(1) | |
10.5††
|
Change of Control Agreement, dated October 7, 2002, between Debra J. Poul and Neose Technologies, Inc. (Exhibit 10.2)(4) | |
10.6
|
Agreement of Lease, dated as of February 15, 2002, between Liberty Property Leased Partnership and Neose Technologies, Inc. (Exhibit 10.40)(1) | |
10.7
|
Master Security Agreement between General Electric Capital Corporation and Neose Technologies, Inc., dated as of December 19, 2002. (Exhibit 10.33)(6) | |
10.8
|
Amendment to Master Security Agreement between General Electric Capital Corporation and Neose Technologies, Inc., dated as of December 19, 2002. (Exhibit 10.34)(6) | |
10.9
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated September 17, 2003. (Exhibit 10.1)(8) |
-45-
Table of Contents
| Exhibit | ||
| Number | Description | |
10.10†
|
Research, Development and License Agreement between Neose Technologies, Inc. and Novo Nordisk A/S dated as of November 17, 2003. (Exhibit 10.39)(9) | |
10.11†
|
Amendment to Research, Development and License Agreement between Neose Technologies, Inc. and Novo Nordisk A/S dated December 18, 2003. (Exhibit 10.41)(9) | |
10.12
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated December 18, 2003. (Exhibit 10.43)(9) | |
10.13
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated March 30, 2004. (Exhibit 10.1)(10) | |
10.14†
|
Research, Co-Development and Commercialization Agreement between BioGeneriX AG and Neose Technologies, Inc., dated April 20, 2004. (Exhibit 10.5)(11) | |
10.15
|
First Amendment to Lease between Liberty Property Limited Partnership and Neose Technologies, Inc., dated May 18, 2004. (Exhibit 10.7)(11) | |
10.16
|
Promissory Note of Neose Technologies, Inc. to Liberty Property Limited Partnership, dated May 7, 2004. (Exhibit 10.8)(11) | |
10.17††
|
Neose Technologies, Inc. 2004 Equity Incentive Plan. (Exhibit 99.1)(17) | |
10.18
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation dated August 20, 2004. (Exhibit 10.11)(12) | |
10.19††
|
Form of Incentive Stock Option Award Agreement under the Neose Technologies, Inc. 2004 Equity Incentive Plan. (Exhibit 10.12)(12) | |
10.20††
|
Form of Non-Qualified Stock Option Award Agreement under the Neose Technologies, Inc. 2004 Equity Incentive Plan. (Exhibit 10.13)(12) | |
10.21††
|
Form of Annual Director Grant Agreement under the Neose Technologies, Inc. 2004 Equity Incentive Plan. (Exhibit 10.14)(12) | |
10.22††
|
Form of Director Fee Option Grant Agreement under the Neose Technologies, Inc. 2004 Equity Incentive Plan. (Exhibit 10.15)(12) | |
10.23†
|
Letter dated October 12, 2004 (effective November 9, 2004) amending Research, Development and License Agreement Between Neose Technologies, Inc. and Novo Nordisk A/S dated as of November 17, 2003, as amended. (Exhibit 10.46)(13) | |
10.24
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated December 16, 2004. (Exhibit 10.47)(13) | |
10.25
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated December 16, 2004. (Exhibit 10.48)(13) | |
10.26††
|
Form of Restricted Stock Unit Agreement (cliff vesting) between Neose Technologies, Inc. and Certain Employees, Officers and Directors. (Exhibit 10.1)(14) | |
10.27††
|
Form of Restricted Stock Unit Agreement (quarterly vesting) between Neose Technologies, Inc. and Certain Employees, Officers and Directors. (Exhibit 10.2)(14) | |
10.28††
|
Letter Agreement dated March 3, 2005 by and between Neose Technologies, Inc and C. Boyd Clarke. (Exhibit 10.3)(14) | |
10.29†
|
Letter dated February 16, 2005 amending the Research, Development and License Agreement by and between Neose Technologies, Inc. and Novo Nordisk A/S dated as of November 17, 2003, as amended. (Exhibit 10.2)(15) | |
10.30†
|
Research, License and Option Agreement by and between BioGeneriX AG and Neose Technologies, Inc. dated April 28, 2005. (Exhibit 10.1)(16) | |
10.31
|
Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation dated July 12, 2005. (Exhibit 10.1)(18) | |
10.32
|
Separation Agreement between Neose Technologies, Inc. and Joseph J. Villafranca, dated October 31, 2005. (Exhibit 10.51)(19) | |
10.33
|
Separation Agreement between Neose Technologies, Inc. and Marjorie A. Hurley, dated October 31, 2005. (Exhibit 10.52)(19) | |
10.34
|
Amendment No. 2 to the Credit Agreement by and between Neose Technologies, Inc. and Brown Brothers Harriman & Co. dated March 1, 2006. (Exhibit 10.1)(20) |
-46-
Table of Contents
| Exhibit | ||
| Number | Description | |
10.35
|
Premium Finance Agreement, Disclosure Statement and Security Agreement by and between Neose Technologies, Inc. and AICCO, Inc. dated March 9, 2006. (Exhibit 10.2)(22) | |
10.36
|
Omnibus Amendment No. 1 to Loan Documents by and between Neose Technologies, Inc. and Brown Brothers Harriman & Co. dated March 10, 2006. (Exhibit 10.3)(22) | |
10.37††
|
Employment Agreement by and between Neose Technologies, Inc. and George J. Vergis, Ph.D. dated May 4, 2006. (Exhibit 10.1)(23) | |
10.38
|
Post-Closing Property Access Agreement by and between Auxilium Pharmaceuticals, Inc. and Neose Technologies, Inc. dated September 1, 2006. (Exhibit 10.1)(25) | |
10.39
|
Consent to Property Access Agreement by and among ARE-PA Region No.6, LLC, Auxilium Pharmaceuticals, Inc. and Neose Technologies, Inc. dated September 1, 2006. (Exhibit 10.2)(25) | |
10.40
|
Modification Agreement by and between Neose Technologies, Inc. and General Electric Capital Corporation dated October 31, 2006. (Exhibit 10.1)(26) | |
10.41* #
|
Amendment Number 1 to Research, Co-Development and Commercialization Agreement and Research License and Option Agreement between Neose Technologies, Inc. and BioGeneriX AG dated October 20, 2006. | |
10.42* #
|
Amended and Restated Research, Development and License Agreement among Neose Technologies, Inc. and Novo Nordisk A/S and Novo Nordisk Health Care AG dated October 31, 2006. | |
10.43* #
|
Bioprocessing Services Agreement by and between Neose Technologies, Inc. and Diosynth RTP Inc. dated December 7, 2006. | |
10.44*
|
Commercial Premium Finance Agreement and Promissory Note from Neose Technologies, Inc. to AFCO Credit Corporation dated March 6, 2007. | |
10.45
|
Securities Purchase Agreement by and among Neose Technologies, Inc. and the purchasers appearing on the signature pages thereto dated March 8, 2007. (Exhibit 10.1)(27) | |
10.46
|
Registration Rights Agreement by and among Neose Technologies, Inc. and the purchasers appearing on the signature pages thereto dated March 8, 2007. (Exhibit 10.2)(27) | |
10.47
|
Form of Common Stock Purchase Warrant (U.S.), dated March 8, 2007. (Exhibit 10.3)(27) | |
10.48
|
Form of Common Stock Purchase Warrant (Non-U.S.), dated March 8, 2007. (Exhibit 10.4)(27) | |
23.1*
|
Consent of KPMG LLP. | |
24*
|
Powers of Attorney (included as part of signature page hereof). | |
31.1*
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification by Chief Financial Officer pursuant to Rule 13-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2*
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Filed herewith. | |
| † | Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to an order of the SEC granting our application for confidential treatment filed pursuant to Rule 24b-2 under the Exchange Act. | |
| †† | Compensation plans and arrangements for executives and others. | |
| # | Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been filed with the SEC. | |
| (1) | Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-27718). | |
| (2) | Filed as an Exhibit to our Current Report on Form 8-K/A filed with the SEC on April 30, 2002. | |
| (3) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on June 13, 2002. | |
| (4) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002. | |
| (5) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on November 1, 2002. | |
| (6) | Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2002. | |
| (7) | Filed as an Exhibit to our Proxy Statement filed with the SEC on April 7, 2003. | |
| (8) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003. | |
| (9) | Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003. | |
| (10) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. |
-47-
Table of Contents
| (11) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004. | |
| (12) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004. | |
| (13) | Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2004. | |
| (14) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on March 4, 2005. | |
| (15) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005. | |
| (16) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005. | |
| (17) | Filed as an Exhibit to our Post-Effective Amendment No. 1 to Form S-8 filed with the SEC on August, 19, 2005. | |
| (18) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005. | |
| (19) | Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005. | |
| (20) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on March 3, 2006. | |
| (21) | Filed as an Exhibit to our Proxy Statement filed with the SEC on March 30, 2006. | |
| (22) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006. | |
| (23) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on May 8, 2006. | |
| (24) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on September 6, 2006. | |
| (25) | Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006. | |
| (26) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on November 2, 2006. | |
| (27) | Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on March 13, 2007. |
-48-
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly
authorized.
| NEOSE TECHNOLOGIES, INC. | ||||
Date: March 16, 2007
|
By: /s/ George J. Vergis | |||
| George J. Vergis | ||||
| Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Neose and in the capacities and on the dates
indicated.
Each person, in so signing also makes, constitutes, and appoints George J. Vergis and A. Brian
Davis, and each of them acting alone, as his or her true and lawful attorneys-in-fact, with full
power of substitution, in his name, place, and stead, to execute and cause to be filed with the
Securities and Exchange Commission any or all amendments to this report.
| Name | Capacity | Date | ||
/s/ George J. Vergis
|
Chief Executive Officer (Principal Executive Officer) | March 16, 2007 | ||
/s/ A. Brian Davis
|
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | March 16, 2007 | ||
/s/ C. Boyd Clarke
|
Director | March 16, 2007 | ||
/s/ Brian H. Dovey
|
Director | March 16, 2007 | ||
/s/ L. Patrick Gage
|
Chairman | March 16, 2007 | ||
/s/ William F. Hamilton
|
Director | March 16, 2007 | ||
/s/ Douglas J. MacMaster, Jr.
|
Director | March 16, 2007 | ||
/s/ H. Stewart Parker
|
Director | March 16, 2007 | ||
/s/ Mark H. Rachesky
|
Director | March 16, 2007 | ||
/s/ Lowell E. Sears
|
Director | March 16, 2007 | ||
/s/ Elizabeth H.S. Wyatt
|
Director | March 16, 2007 |
-49-
Table of Contents
Index to Financial Statements
| F-2 | ||
| F-3 | ||
| F-4 | ||
| F-5 | ||
| F-6 | ||
| F-7 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Neose Technologies, Inc.:
Neose Technologies, Inc.:
We have audited the accompanying balance sheets of Neose Technologies, Inc. as of December 31, 2006
and 2005, and the related statements of operations, stockholders’ equity and comprehensive loss,
and cash flows for each of the years in the three-year period ended December 31, 2006. These
financial statements are the responsibility of the management of Neose Technologies, Inc. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Neose Technologies, Inc. as of December 31, 2006 and 2005, and
the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation as required by Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Neose Technologies, Inc.’s internal control over
financial reporting as of December 31, 2006, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 16, 2007 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG
LLP
Philadelphia, Pennsylvania
March 16, 2007
Philadelphia, Pennsylvania
March 16, 2007
F-2
Table of Contents
Neose Technologies, Inc.
Balance Sheets
(in thousands, except per share amounts)
| December 31, | ||||||||
| 2006 | 2005 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 16,388 | $ | 37,738 | ||||
Accounts receivable |
286 | 1,076 | ||||||
Prepaid expenses and other current assets |
1,284 | 892 | ||||||
Total current assets |
17,958 | 39,706 | ||||||
Property and equipment, net |
13,104 | 24,708 | ||||||
Intangible and other assets, net |
181 | 949 | ||||||
Total assets |
$ | 31,243 | $ | 65,363 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt and capital lease obligations |
$ | 1,251 | $ | 4,031 | ||||
Accounts payable |
1,848 | 722 | ||||||
Accrued compensation |
1,772 | 1,618 | ||||||
Accrued expenses |
4,749 | 2,697 | ||||||
Deferred revenue |
645 | 1,527 | ||||||
Total current liabilities |
10,265 | 10,595 | ||||||
Long-term debt and capital lease obligations, net of current portion |
580 | 10,423 | ||||||
Deferred revenue, net of current portion |
4,329 | 3,765 | ||||||
Other liabilities |
510 | 463 | ||||||
Total liabilities |
15,684 | 25,246 | ||||||
Commitments and contingencies (See Note 13) |
||||||||
Stockholders’ equity: |
||||||||
Preferred stock, par value $.01 per share, 5,000 shares authorized, none issued |
— | — | ||||||
Common stock, par value $.01 per share, 75,000 and 50,000 shares authorized;
32,972 and 32,782 shares issued and outstanding |
330 | 328 | ||||||
Additional paid-in capital |
281,556 | 279,015 | ||||||
Deferred compensation |
— | (6 | ) | |||||
Accumulated deficit |
(266,327 | ) | (239,220 | ) | ||||
Total stockholders’ equity |
15,559 | 40,117 | ||||||
Total liabilities and stockholders’ equity |
$ | 31,243 | $ | 65,363 | ||||
The accompanying notes are an integral part of these financial statements.
F-3
Table of Contents
Neose Technologies, Inc.
Statements of Operations
(in thousands, except per share amounts)
| Year ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Revenue from collaborative agreements |
$ | 6,184 | $ | 6,137 | $ | 5,070 | ||||||
Operating expenses: |
||||||||||||
Research and development |
29,013 | 33,136 | 34,672 | |||||||||
General and administrative |
11,551 | 10,878 | 11,711 | |||||||||
Restructuring charges |
— | 14,206 | — | |||||||||
Total operating expenses |
40,564 | 58,220 | 46,383 | |||||||||
Gain on sale of Witmer Road Facility (see Note 5) |
7,333 | — | — | |||||||||
Operating loss |
(27,047 | ) | (52,083 | ) | (41,313 | ) | ||||||
Other income |
— | 22 | — | |||||||||
Interest income |
1,211 | 1,536 | 652 | |||||||||
Interest expense |
(1,271 | ) | (1,314 | ) | (981 | ) | ||||||
Net loss |
$ | (27,107 | ) | $ | (51,839 | ) | $ | (41,642 | ) | |||
Basic and diluted net loss per share |
$ | (0.82 | ) | $ | (1.64 | ) | $ | (1.82 | ) | |||
Weighted-average shares outstanding used in computing basic and diluted net loss per share |
32,857 | 31,590 | 22,898 | |||||||||
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
Neose Technologies, Inc.
Statements of Stockholders’ Equity and Comprehensive Loss
(in thousands)
| Additional | Total | |||||||||||||||||||||||
| Common stock | paid-in | Deferred | Accumulated | stockholders’ | ||||||||||||||||||||
| Shares | Amount | capital | compensation | deficit | equity | |||||||||||||||||||
Balance, January 1, 2004 |
19,935 | $ | 199 | $ | 217,849 | $ | (96 | ) | $ | (145,739 | ) | $ | 72,213 | |||||||||||
Net and total comprehensive loss |
— | — | — | — | (41,642 | ) | (41,642 | ) | ||||||||||||||||
Sale of common stock in a registered offering |
4,733 | 47 | 29,881 | — | — | 29,928 | ||||||||||||||||||
Exercise of stock options |
25 | 1 | 73 | — | — | 74 | ||||||||||||||||||
Shares issued pursuant to employee stock purchase plan |
24 | — | 175 | — | — | 175 | ||||||||||||||||||
Deferred compensation related to grants of employee stock options |
— | — | 56 | (56 | ) | — | — | |||||||||||||||||
Deferred compensation related to non-employee stock options |
— | — | (8 | ) | 8 | — | — | |||||||||||||||||
Stock-based compensation related to modification of options |
— | — | 1 | — | — | 1 | ||||||||||||||||||
Amortization of deferred compensation related to: |
||||||||||||||||||||||||
Employee stock options |
— | — | — | 101 | — | 101 | ||||||||||||||||||
Non-employee stock options |
— | — | — | 4 | — | 4 | ||||||||||||||||||
Balance, December 31, 2004 |
24,717 | 247 | 248,027 | (39 | ) | (187,381 | ) | 60,854 | ||||||||||||||||
Net and total comprehensive loss |
— | — | — | — | (51,839 | ) | (51,839 | ) | ||||||||||||||||
Sale of common stock in a registered offering |
8,050 | 81 | 29,925 | — | — | 30,006 | ||||||||||||||||||
Shares issued pursuant to employee stock purchase plan |
15 | — | 86 | — | — | 86 | ||||||||||||||||||
Restricted stock units: |
||||||||||||||||||||||||
Conversion of liability-classified awards to equity-classified awards |
— | — | 382 | — | — | 382 | ||||||||||||||||||
Compensation cost recognized in the statement of operations |
— | — | 609 | — | — | 609 | ||||||||||||||||||
Deferred compensation related to non-employee stock options |
— | — | (14 | ) | 14 | — | — | |||||||||||||||||
Amortization of deferred compensation related to: |
||||||||||||||||||||||||
Employee stock options |
— | — | — | 28 | — | 28 | ||||||||||||||||||
Non-employee stock options |
— | — | — | (9 | ) | — | (9 | ) | ||||||||||||||||
Balance, December 31, 2005 |
32,782 | 328 | 279,015 | (6 | ) | (239,220 | ) | 40,117 | ||||||||||||||||
Net and total comprehensive loss |
— | — | — | — | (27,107 | ) | (27,107 | ) | ||||||||||||||||
Reclassification of deferred compensation upon the adoption of SFAS No. 123R |
(6 | ) | 6 | — | ||||||||||||||||||||
Exercise of stock options |
5 | — | 14 | — | — | 14 | ||||||||||||||||||
Restricted stock units: |
||||||||||||||||||||||||
Restricted stock units issued at vesting date for compensation costs recognized in the Statement of Operations |
185 | 2 | (2 | ) | — | — | — | |||||||||||||||||
Payment of withholding taxes related to restricted stock units |
— | — | (175 | ) | — | — | (175 | ) | ||||||||||||||||
Conversion of liability-classified awards to equity-classified awards |
— | — | 129 | — | — | 129 | ||||||||||||||||||
Compensation costs recognized in the Statement of Operations: |
||||||||||||||||||||||||
Employee stock options |
— | — | 2,438 | — | — | 2,438 | ||||||||||||||||||
Non-employee stock options |
— | — | 14 | — | — | 14 | ||||||||||||||||||
Restricted stock units |
— | — | 129 | — | — | 129 | ||||||||||||||||||
Balance, December 31, 2006 |
32,972 | $ | 330 | $ | 281,556 | $ | — | $ | (266,327 | ) | $ | 15,559 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
Neose Technologies, Inc.
Statements of Cash Flows
(in thousands)
| Year ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (27,107 | ) | $ | (51,839 | ) | $ | (41,642 | ) | |||
Adjustments to reconcile net loss to cash used in operating activities: |
||||||||||||
Impairment of property and equipment and assets held for sale |
121 | 13,187 | 104 | |||||||||
Depreciation and amortization expense |
2,209 | 4,322 | 6,063 | |||||||||
Non-cash compensation expense |
2,581 | 628 | 106 | |||||||||
Non-cash rent expense |
260 | — | — | |||||||||
Loss (gain) on disposition of equipment and assets held for sale, net |
(7,272 | ) | (4 | ) | 95 | |||||||
Premiums paid on early repayment of debt |
215 | — | — | |||||||||
Accelerated amortization of debt issuance costs on early repayment of debt |
133 | — | — | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
790 | 1,809 | (1,438 | ) | ||||||||
Prepaid expenses and other current assets |
(75 | ) | (150 | ) | 330 | |||||||
Intangible and other assets |
— | — | 47 | |||||||||
Accounts payable |
481 | (1,043 | ) | (559 | ) | |||||||
Accrued compensation |
283 | 84 | (594 | ) | ||||||||
Accrued expenses |
818 | 698 | 411 | |||||||||
Deferred revenue |
(318 | ) | (691 | ) | 213 | |||||||
Other liabilities |
47 | (70 | ) | 120 | ||||||||
Net cash used in operating activities |
(26,834 | ) | (33,069 | ) | (36,744 | ) | ||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(898 | ) | (792 | ) | (9,844 | ) | ||||||
Proceeds from sale of property and equipment and assets held for sale |
19,373 | 110 | — | |||||||||
Proceeds from settlement of property and equipment dispute |
— | 75 | — | |||||||||
Purchases of marketable securities |
— | (9,845 | ) | — | ||||||||
Proceeds from maturities of marketable securities |
— | 10,000 | 5,000 | |||||||||
Net cash provided by (used in) investing activities |
18,475 | (452 | ) | (4,844 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of debt |
539 | 1,484 | 14,112 | |||||||||
Repayments of debt |
(13,154 | ) | (5,365 | ) | (6,552 | ) | ||||||
Premiums paid on early repayment of debt |
(215 | ) | — | — | ||||||||
Debt issuance costs |
— | — | (103 | ) | ||||||||
Restricted funds related to debt |
— | — | 901 | |||||||||
Proceeds from issuance of common stock, net |
14 | 30,092 | 30,177 | |||||||||
Payment of withholding taxes related to restricted stock units |
(175 | ) | — | — | ||||||||
Net cash provided by (used in) financing activities |
(12,991 | ) | 26,211 | 38,535 | ||||||||
Net decrease in cash and cash equivalents |
(21,350 | ) | (7,310 | ) | (3,053 | ) | ||||||
Cash and cash equivalents, beginning of year |
37,738 | 45,048 | 48,101 | |||||||||
Cash and cash equivalents, end of year |
$ | 16,388 | $ | 37,738 | $ | 45,048 | ||||||
The accompanying notes are an integral part of these financial statements.
F-6
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
Note
1. Background
We are a clinical-stage biopharmaceutical company focused on the development of
next-generation therapeutic proteins that are competitive with best-in-class protein drugs
currently on the market. Our lead therapeutic protein candidates are GlycoPEG-EPO (NE-180) and
GlycoPEG-GCSF.
NE-180 is a long-acting version of erythropoietin (EPO) produced in insect cells. EPO is
prescribed to stimulate production of red blood cells, and is approved for sale in major markets
around the world for treatment of chemotherapy-induced anemia and anemia associated with chronic
renal failure. NE-180 is being developed for the treatment of anemia in adult cancer patients with
non-myeloid malignancies receiving chemotherapy and for the treatment of anemia associated with
chronic kidney disease, including patients on dialysis and patients not on dialysis. During 2006,
we completed a Phase I clinical trial for NE-180 in Switzerland. In January 2007, we received
approval from Swissmedic, the Swiss Agency for Therapeutic Products, for the initiation of a Phase
II human trial to evaluate the safety, tolerability and dose response of NE-180 in cancer patients
receiving platinum-based chemotherapy. In March 2007, we received approval from the U.S. Food and
Drug Administration (FDA) to initiate clinical trials in the U.S. in response to our amended
Investigational New Drug application (IND).
Our second proprietary protein, GlycoPEG-GCSF, is a long-acting version of granulocyte colony
stimulating factor (G-CSF) that we are co-developing with BioGeneriX AG, a company of the
ratiopharm Group. G-CSF is prescribed to stimulate production of neutrophils (a type of white blood
cell) and is approved for sale in major markets around the world for treatment of neutropenia
associated with myelosuppressive chemotherapy. In November 2006, BioGeneriX initiated the first of
two planned Phase I clinical trials for GlycoPEG-GCSF. We expect BioGeneriX to initiate and
complete the second Phase I trial during 2007.
We believe that our enzymatic pegylation technology, GlycoPEGylation™, can improve the drug
properties of therapeutic proteins by building out, and attaching polyethylene glycol (PEG) to,
carbohydrate structures on the proteins. We are using our technology to develop proprietary
versions of protein drugs with proven safety and efficacy and to improve the therapeutic profiles
of proteins being developed by our partners. We expect these modified proteins, such as NE-180 and
GlycoPEG-GCSF, to offer significant advantages, including less frequent dosing and possibly
improved efficacy, over the original versions of the drugs now on the market, as well as to meet or
exceed the pharmacokinetic profile of next-generation versions of the drugs now on the market. We
believe this strategy of targeting drugs with proven safety and efficacy allows us to lower the
risk profile of our proprietary development portfolio as compared to de novo protein drug
development. We intend to continue to focus our research and development resources on therapeutic
proteins that we believe have the highest probability of clinically meaningful therapeutic profile
improvements from our technology and are in commercially attractive categories.
We have incurred losses each year since inception. As of December 31, 2006, we had an
accumulated deficit of $266,327. We expect to spend significant amounts to expand our research and
development on our proprietary drug candidates and technologies, maintain and expand our
intellectual property position, and expand our business development and commercialization efforts.
Given our planned level of operating expenses, we expect to continue incurring losses for some
time. In March 2007, we sold 21,415 shares of our common stock and warrants to purchase 9,637
shares of common stock through a private placement at a price of $2.02 per unit, generating net
proceeds of approximately $40,459. The warrants have a five-year term and an exercise price of
$1.96 per share. In March 2007, we initiated a restructuring of operations designed to allow for
significantly higher clinical development costs for NE-180, while keeping anticipated 2007 net cash
spending consistent with 2006 levels. The restructuring, which will be implemented over the next
few months, will result in a workforce reduction of approximately 40%. We have not yet determined
if we will incur any contract termination or non-cash impairment charges in connection with the
restructuring.
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
We believe that our existing cash and cash equivalents (including the net proceeds from our
March 2007 financing), expected proceeds from collaborations and license arrangements, and interest
income should be sufficient to meet our operating and capital requirements at least through the
second quarter of 2008, although changes in our collaborative relationships or our business,
whether or not initiated by us, may cause us to deplete our cash and cash equivalents sooner than
the above estimate. We will require significant amounts of additional capital in the future to fund
our operations, and we do not have any assurance that funding will be available when we need it on
terms that we find favorable, if at all. If we are unable to raise additional capital when
required, we may need to delay, scale back, or eliminate some or all of our research and
development programs.
We have not yet developed any products or commercialized any products or technologies, and we
may never be able to do so. Even if we are successful in developing products that are approved for
marketing, we will not be successful unless our products, and products incorporating our
technologies, gain market acceptance. Our operations are subject to risks and uncertainties other
than mentioned above including, among others, the uncertainty of product development, including our
dependence upon third parties to conduct our clinical trials and to manufacture our product
candidates and the materials used to make them; our limited product development and manufacturing
experience; our dependence upon collaborative partners to develop and commercialize products
incorporating our technologies and the success of collaborative relationships; the uncertainty of
intellectual property rights; technological uncertainty and the risk of technological obsolescence;
the risk of development and commercialization of competitive products by others that are more
effective, less costly, or otherwise gain greater market acceptance; and the uncertainty of
achieving regulatory approvals for our products, or products incorporating our technologies.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires us to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the repor
ted amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less on the date of purchase to be cash equivalents. As of December 31, 2006 and 2005, cash equivalents consisted of money market investments. Our cash balances have been kept on deposit primarily at one bank and in amounts greater than $100, which is the limit of insurance provided by the Federal Deposit Insu
rance Corporation.
Marketable Securities
Marketable securities consist of investments that have a maturity of more than three months on
the date of purchase. To help maintain the safety and liquidity of our marketable securities, we
have established guidelines for the concentration, maturities, and credit ratings of our
investments. We determine the appropriate classification of our debt securities at the time of
purchase and re-evaluate such designation as of each balance sheet date. Marketable securities that
we have the positive intent and ability to hold to maturity are classified as held-to-maturity
securities and recorded at amortized cost.
As of December 31, 2006 and 2005, we held no marketable securities. We held no securities that
matured during the year ended December 31, 2006. Securities maturing during the years ended
December 31, 2005 and 2004 earned interest of $155 and $55, respectively.
F-8
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Property and Equipment
Property and equipment are stated at cost. Property and equipment capitalized under capital
leases are recorded at the present value of the minimum lease payments due over the lease term.
Expenditures for additions and improvements are capitalized, while maintenance and repairs are
charged to expense as incurred. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the assets. Laboratory and office equipment
are depreciated over three to seven years. For assets acquired under capital leases and for
leasehold improvements, depreciation and amortization are calculated on the straight-line method
over the estimated useful lives of the assets or the lease term, whichever is shorter. Upon the
disposition of assets, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included on our Statements of Operations.
Impairment of Long-lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment at least
annually and whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of
the carrying amount of an asset to future net undiscounted cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. As described in Note 5, we recognized during the third quarter of 2005 non-cash
impairment charges on our property and equipment as a result of the restructuring we announced in
August 2005 (see Note 12). During the year ended December 31, 2006, we recognized additional
non-cash impairment charges on our property and equipment. Because our history of negative
operating cash flows is an indicator of impairment, we annually compare the market value of our
equity and debt to the carrying value of our net assets. The market value of our equity and debt
exceeded the carrying value of our net assets as of December 31, 2006 and, therefore, we did not
recognize any impairment of long-lived assets other than the impairment of property and equipment
mentioned above.
Financing Costs Related to Long-term Debt
Costs associated with obtaining long-term debt are deferred and amortized to interest expense
over the term of the related debt. During the year ended December 31, 2006, the remaining amount of
deferred financing costs was amortized to interest expense in our Statements of Operations due to
the repayment in full of the related debt (see Note 6).
Deferred Rent and Landlord Incentive
We have entered into various operating lease arrangements for laboratory, office and warehouse
space which contain escalation clauses, under which the base rent increases annually (see Note
13).We record monthly rent expense equal to the total of the payments due over the lease term,
divided by the number of months of the lease term. The difference between rent expense recorded and
the amount paid is credited or charged to deferred rent, which is included in other liabilities on
our Balance Sheets. In addition we received an incentive from the landlord for partial
reimbursement for improvements we made to the facility. This incentive is also included in other
liabilities on our Balance Sheets and is being amortized ratably as a reduction to rent expense
over the lease term.
Revenue Recognition
We have entered into collaborative agreements with other companies for the development and
commercialization of our product candidates. The terms of the agreements typically include
non-refundable up-front license fees, funding of research and development, payments based upon
achievement of development milestones,
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
and royalties on product sales.
License Fees and Multiple Element Arrangements
Non-refundable license fees are recognized as revenue when we have a contractual right to
receive such payment, the contract price is fixed or determinable, the collection of the resulting
receivable is reasonably assured, and we have no further performance obligations under the license
agreement.
Multiple element arrangements, such as license and development arrangements are analyzed to
determine whether the deliverables, which often include a license and performance obligations, such
as research and development services, can be separated or whether they must be accounted for as a
single unit of accounting in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. If the fair value of the
undelivered performance obligations can be determined, such obligations would then be accounted for
separately as performed. However, if the license is considered to either (i) not have stand-alone
value or (ii) have standalone value but the fair value of any of the undelivered performance
obligations cannot be determined, the arrangement would then be accounted for as a single unit of
accounting and the license payments and payments for performance obligations are recognized as
revenue over the estimated period of when the performance obligations are performed. In our
collaborative arrangements with Novo Nordisk and BioGeneriX, we have determined the license to each
does not have stand-alone value.
Whenever we determine that an arrangement should be accounted for as a single unit of
accounting, we must determine the period over which the performance obligations will be performed
and revenue will be recognized. Significant management judgment is required in determining the
period over which we are expected to complete our performance obligations under an arrangement.
Substantive Milestone Payments
Our collaboration agreements may also contain substantive milestone payments. Substantive
milestone payments are considered to be performance bonuses that are recognized upon achievement of
the milestone only if all of the following conditions are met:
| • | the milestone payments are non-refundable; | ||
| • | achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; | ||
| • | substantive effort is involved in achieving the milestone; | ||
| • | a reasonable amount of time passes between the up-front license payment and the first milestone payment as well as between each subsequent milestone payment; and | ||
| • | the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. |
Determination as to whether a payment meets the aforementioned conditions involves
management’s judgment. If any of these conditions are not met, the resulting payment would not be
considered a substantive milestone, and therefore the resulting payment would be considered part of
the consideration for the single unit of accounting and be recognized as revenue as such
performance obligations are performed.
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Reimbursement of Research and Development Costs
Reimbursement of research and development costs is recognized as revenue provided the
provisions of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent,
are met, the amounts are fixed and determinable, and collection of the related receivable is
reasonably assured. In our collaborative arrangements with Novo Nordisk and BioGeneriX, we
recognize revenue as such costs are incurred because we have evidence of fair value for these
delivered items.
Deferred Revenue
Amounts received prior to satisfying the above revenue recognition criteria are recorded as
Deferred Revenue in the accompanying balance sheets. Determination as to the classification of
deferred revenue as current or long-term on our Balance Sheets involves management’s judgment. For
example, in connection with our existing collaboration agreements, we have recorded on our balance
sheet current and long-term deferred revenue based on our best estimate of when such revenue will
be recognized. The current portion of deferred revenue consists of amounts that are expected to be
recognized as revenue during 2007. Amounts that we expect will not be recognized during 2007 are
classified as long-term deferred revenue. This estimate is based on our estimate of the periods of
our involvement in certain of our collaborations. In certain instances, the timing of satisfying
these obligations can be difficult to estimate. Accordingly, our estimates may change in the
future. Any change to the estimated performance period would be recognized on a prospective basis.
If these estimates and judgments change over the course of these agreements, it may affect the
timing and amount of revenue that we recognize and record in future periods.
Research and Development
Research and development costs are charged to expense as incurred. For each of our research
and development projects, we incur both direct and indirect expenses. Direct expenses include
salaries and other costs of personnel, raw materials, and supplies for each project. We may also
incur third-party costs related to these projects, such as consulting and contract research,
development, and manufacturing costs. Indirect expenses include depreciation expense and the costs
of operating and maintaining our facilities, property, and equipment, to the extent used for our
research and development projects, as well as the costs of general management of our research and
development projects.
Some of our research and development is conducted by third parties, including contract
research and development service providers. At the end of each quarter, we compare the payments
made to each service provider to the estimated progress toward completion of the research or
development objectives. Such estimates are subject to change as additional information becomes
available. Depending on the timing of payments to the service providers and the estimated service
provided, we may record net prepaid or accrued expense relating to these costs.
Accounting for Restructuring Costs
In September 2006 and August 2005, we implemented a restructuring of operations (see Note 12).
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146), addresses financial accounting and reporting for costs
associated with exit or disposal activities. SFAS No. 146 requires a liability for a cost
associated with an exit or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS No. 146 does not apply to costs associated with a
disposal activity covered by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144).
The employee severance costs incurred for the 2006 Restructuring were payable pursuant to an
employee severance plan established in August 2005. Therefore, these costs did not meet the
definition for classification as a restructuring charge on our Statements of Operations. The
restructuring charges recorded by us during 2005 were
F-11
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
comprised primarily of costs to reduce property and equipment to fair value and to reduce our
workforce.
Under SFAS No. 144, any impairment of property and equipment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets. To
determine the fair value of assets that are not likely to be used over their remaining useful
economic life, we use a probability-weighted approach of estimated cash flows to be received upon a
range of possible disposition outcomes. In August 2005, we announced we would evaluate alternatives
relative to our headquarters and pilot manufacturing facility (Witmer Road Facility), which we
owned subject to a mortgage, including the potential disposition of the facility and further
consolidation of our research, development and administrative operations into a currently leased
facility also located in Horsham, Pennsylvania. As a result of the announcement, we concluded that
identifiable cash flows could be assigned to the Witmer Road Facility and related equipment. We
based our estimates of potential cash flows related to possible disposition outcomes on
conversations with commercial real estate firms that have both knowledge of recent history of sales
and expertise in marketing and selling similar facilities.
Under SFAS No. 146, employee severance costs are determined based on the estimated severance
and fringe benefit charge for identified employees. In calculating the cost to exit our leased
facility in San Diego, California, we estimated the future lease and operating costs to be paid
until the lease is terminated, the amount, of any sublease receipts, and real estate broker fees.
SFAS No. 146 also required us to estimate the timing and the amount of operating costs and the
timing and rate at which we might be able to sublease the facility. To form our estimates for these
costs, we performed an assessment of the affected facility and considered the current market
conditions.
Interest Expense
During the years ended December 31, 2006 and 2004, we incurred significant capital
expenditures related to improving our owned and leased facilities. See Note 5 for a description of
our property and equipment. Accordingly, we capitalized a portion of interest incurred during each
reporting period in accordance with SFAS No. 34, Capitalization of Interest Cost, as amended. We
did not capitalize any interest incurred during the year ended December 31, 2005.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. We provide a valuation allowance for the full amount of our net deferred tax assets
because there is no assurance they will be realized.
Stock-based Employee Compensation
We adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), effective January
1, 2006. SFAS No. 123R requires all share-based payments to employees to be recognized in the
financial statements based on their fair values at the date of grant. Prior to January 1, 2006, we
followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees
(APB No. 25), and related interpretations in accounting for our stock-based compensation. We
elected to use the modified prospective transition method for adopting SFAS No. 123R. Under this
method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of
adoption and to that portion of awards not fully vested as of the date of adoption. Accordingly,
prior periods have not been restated.
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The fair value of stock options is determined using the Black-Scholes valuation model, which
is the same model we previously utilized for valuing stock options for footnote disclosures
required under SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123), as amended by
SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (SFAS No. 148).
The fair value of share-based awards is recognized as expense over the requisite service
period, net of estimated forfeitures. We rely primarily on historical experience to estimate
expected forfeitures for stock options. We have not assumed any expected forfeitures for restricted
stock units (RSUs) because those awards have been granted to a small number of individuals. For all
unvested share-based awards outstanding as of December 31, 2005, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant date, will be
recognized on an accelerated basis in our statement of operations over the remaining vesting
period, consistent with our recognition policy under SFAS No. 123. For share-based awards granted
subsequent to December 31, 2005, we have elected to recognize compensation expense in the statement
of operations on a straight-line basis from the date of grant. Our deferred stock compensation
balance of $6 as of December 31, 2005 was reclassified into additional paid-in capital upon the
adoption of SFAS No. 123R.
SFAS No. 123R requires us to present pro forma information for comparative periods prior to
the adoption as if we had accounted for all our stock-based employee compensation under the fair
value method of SFAS No. 123. The following table illustrates the effect on our net loss and basic
and diluted net loss per share if we had recorded compensation expense for the estimated fair value
of our stock-based employee compensation, consistent with SFAS No. 123:
| Year ended December 31, | ||||||||
| 2005 | 2004 | |||||||
Net loss – as reported |
$ | (51,839 | ) | $ | (41,642 | ) | ||
Add: Stock-based employee compensation expense included in reported net loss |
788 | 101 | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards |
(4,607 | ) | (9,869 | ) | ||||
Net loss – pro forma |
$ | (55,658 | ) | $ | (51,410 | ) | ||
Basic and diluted net loss per share – as reported |
$ | (1.64 | ) | $ | (1.82 | ) | ||
Basic and diluted net loss per share – pro forma |
$ | (1.76 | ) | $ | (2.25 | ) | ||
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
common shares outstanding for the period. Diluted net loss per share is computed by dividing net
loss by the sum of weighted-average number of common shares outstanding for the period and the
number of additional shares that would have been outstanding if dilutive potential common shares
had been issued. Potential common shares are excluded from the calculation of diluted net loss per
share if the effect on net loss per share is antidilutive. Our diluted net loss per share is equal
to basic net loss per share for all reporting periods presented because giving effect in the
computation of diluted net loss per share to the exercise of outstanding options or granting of
restricted stock
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Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
units would have been antidilutive. See Note 10 for a summary of outstanding options and a
description of our restricted stock units.
Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of comprehensive income
(loss) in the financial statements. Comprehensive income (loss) is comprised of net income (loss)
and other comprehensive income (loss). Other comprehensive income (loss) includes changes to equity
that are not included in net income (loss). Our comprehensive loss for the years ended December 31,
2006, 2005, and 2004 was comprised only of our net loss and is reported on our Statements of
Stockholders’ Equity and Comprehensive Loss.
Fair Value of Financial Instruments
The fair value of our financial instruments is the amount for which the instrument could be
exchanged in a current transaction between willing parties. As of December 31, 2006, the carrying
values of cash and cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, accrued expenses, and accrued compensation equaled or approximated their
respective fair values because of the short duration of these instruments. The fair value of our
long-term debt was estimated by discounting the future cash flows of each instrument at rates
recently offered to us for similar debt instruments offered by our lenders. As of December 31,
2006, the fair and carrying values of our long-term debt and capital lease obligations were $1,838
and $1,831, respectively.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS No. 157), which is applicable for fiscal years beginning after November
15, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Although SFAS No. 157 does not require any
new fair value measurements, its application may, for some entities, change current practices
related to the definition of fair value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. We are currently evaluating the impact of the adoption
of SFAS No.157 on our financial statements and related disclosures.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 108, Topic 1N, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 requires
the evaluation of prior-year misstatements using both the balance sheet approach and the income
statement approach. In the initial year of adoption should either approach result in quantifying an
error that is material in light of quantitative and qualitative factors. SAB No. 108 guidance
allows for a one-time cumulative-effect adjustment to beginning-of-year retained earnings. In years
subsequent to adoption, previously undetected misstatements deemed material shall result in the
restatement of previously issued financial statements in accordance with SFAS No. 154, Accounting
Changes and Error Corrections (SFAS No. 154). SAB No. 108 is effective for material errors in
existence at the beginning of the first fiscal year ended after November 15, 2006, with earlier
adoption encouraged. The adoption of SAB No. 108 did not have any impact on our financial
statements and related disclosures.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which is applicable for fiscal years beginning after December 15, 2006. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
statement recognition and measurement of a tax position reported or expected to be reported on
a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. We do not believe the
adoption of FIN 48 will have any impact on our financial statements and we are evaluating the
impact it may have on the related disclosures.
In May 2005, the FASB issued SFAS No. 154, which replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting principles. SFAS
No. 154 applies to all voluntary changes in accounting principle, and also applies to changes
required by an accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. SFAS No. 154 became effective for accounting changes and
corrections of errors made by us after January 1, 2006. SFAS No. 154 does not change the transition
provisions of any existing accounting pronouncements, including those that are in a transition
phase as of the effective date of SFAS No. 154. The adoption of SFAS No. 154 did not have any
impact on our financial statements and related disclosures.
Reclassification
Certain prior year amounts have been reclassified to conform to our current year presentation.
F-15
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Note 3. Supplemental Disclosure of Cash Flow Information
The following table contains additional cash flow information for the periods reported.
| Year ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest, net of amounts capitalized (see Note 5) |
$ | 1,164 | $ | 1,302 | $ | 958 | ||||||
Non-cash operating activities: |
||||||||||||
Non-cash rent included in gain on sale of Witmer Road Facility (see Note 5) |
$ | 390 | $ | — | $ | — | ||||||
Increase in prepaid expenses and other current assets included in accounts payable |
$ | 228 | $ | — | $ | — | ||||||
Non-cash investing activities: |
||||||||||||
Increase (decrease) in property and equipment included in accounts payable and accrued expenses |
$ | 1,651 | $ | 45 | $ | (792 | ) | |||||
Assets acquired under capital leases |
$ | — | $ | — | $ | 184 | ||||||
Decrease in acquisition value of property and equipment related to cancellation of a vendor invoice as partial settlement of dispute (see Note 5) |
$ | — | $ | 116 | $ | — | ||||||
Decrease in acquisition value of property and equipment due to decrease in amount of remaining minimum lease payments under capital lease |
$ | — | $ | 10 | $ | — | ||||||
Non-cash financing activities: |
||||||||||||
Conversion of accrued compensation from liability to equity classified award upon grant of restricted stock units (see Note 10) |
$ | 129 | $ | 382 | $ | — | ||||||
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Note 4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| December 31, | 2006 | 2005 | ||||||
Prepaid contract research and development services |
$ | 228 | $ | — | ||||
Prepaid rent |
195 | 61 | ||||||
Prepaid maintenance agreements |
162 | 276 | ||||||
Prepaid clinical trials and non-clinical studies |
124 | 141 | ||||||
Prepaid insurance |
86 | 96 | ||||||
Other prepaid expenses |
262 | 144 | ||||||
Other current assets |
227 | 174 | ||||||
| $ | 1,284 | $ | 892 | |||||
Receivable from Related Party
In 2001, we entered into a tuition reimbursement agreement with an employee who subsequently
became an executive officer. Under the agreement, we agreed to lend the amounts necessary to pay
for the employee’s tuition payments and related costs and fees. Interest accrues on the loan at
4.71% per year, and has been payable annually since May 2002. We agreed to forgive repayment of the
principal amount outstanding, in four equal, annual installments, commencing in May 2004, if the
employee remains employed by us on each forgiveness date. We also agreed to forgive the accrued
interest on each annual due date and, if the employee is terminated without cause, we also agreed
to forgive all outstanding principal and interest. We forgave principal and accrued interest of
$31, $33 and $34 during the years ended December 31, 2006, 2005, and 2004, respectively. As of
December 31, 2006 and 2005, the amounts outstanding under the agreement, including accrued
interest, were $29 and $59, respectively. Of these amounts, $29 and $30 were included in prepaid
expenses and other current assets on our Balance Sheets as of December 31, 2006 and 2005,
respectively.
Note 5. Property and Equipment
Property and equipment consisted of the following:
| December 31, | 2006 | 2005 | ||||||
Leasehold improvements |
$ | 9,817 | $ | 9,964 | ||||
Laboratory, manufacturing, and office equipment |
5,874 | 9,606 | ||||||
Building, facility improvements, and land |
— | 9,522 | ||||||
Construction-in-progress |
2,142 | — | ||||||
| 17,833 | 29,092 | |||||||
Less accumulated depreciation and amortization |
(4,729 | ) | (4,384 | ) | ||||
| $ | 13,104 | $ | 24,708 | |||||
In September 2006, we sold the Witmer Road Facility for $21,043. After payment of selling fees
and expenses, we received net proceeds of approximately $19,322. The carrying value of the property
and equipment
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
sold was $12,379. We owned the Witmer Road Facility subject to mortgages supporting our term
loan and industrial development authority bond (see Note 7). We were permitted to occupy a portion
of the facility on a rent-free basis for up to six months after closing. We have estimated the
rental fair value for the space we occupied to be $390, which was included in the calculation of
the $7,333 gain on the sale of the Witmer Road Facility and will be amortized as rent expense to
our Statements of Operations over the expected period of our occupancy. As of December 31, 2006,
the unamortized balance of the estimated rental fair value was $130 and was included in prepaid
expenses and other current assets on our Balance Sheets (see Note 4).
Concurrent with the closing, we repaid outstanding debt associated with the Witmer Road
Facility and related equipment of $9,647, which included accrued interest and prepayment penalties.
The remaining net proceeds of $9,675 will be used to further our research, non-clinical
development, and clinical development objectives and to fund the capital expenditures described
below to the extent such expenditures are not financed through the issuance of new debt.
In February 2007, we consolidated our operations into a 40,000 square foot facility that we
currently lease in Horsham, Pennsylvania (Rock Road Facility). We anticipate total costs for
construction of additional laboratory and office space in the Rock Road Facility of approximately
$3,650, of which $2,111 was included in construction-in-progress as of December 31, 2006.
Approximately $3,100 of the estimated total construction costs relate to leasehold improvements
that will be amortized over the remaining lease term of approximately 15 years. The remaining
estimated construction costs relate to laboratory and office equipment that will be amortized over
three to seven years.
Laboratory, manufacturing, and office equipment as of December 31, 2006 and 2005 included $122
and $530 respectively, of assets acquired under capital leases. Accumulated depreciation and
amortization as of December 31, 2006 and 2005 includes $47 and $293, respectively, related to
assets acquired under capital leases. During the years ended December 31, 2006 and 2004, we
capitalized $8 and $139, respectively, of interest expense in connection with our facility
improvement projects. We did not capitalize any interest incurred during the year ended December
31, 2005.
Depreciation expense, which includes amortization of assets acquired under capital leases, was
$1,606, $3,751, and $5,047 for the years ended December 31, 2006, 2005, and 2004, respectively.
During the years ended December 31, 2006 and 2005, we disposed of fully depreciated assets that had
original acquisition values of $99 and $129, respectively. We did not dispose of any fully
depreciated assets during the year ended December 31, 2004. During the year ended December 31,
2006, we recorded a gain on the sale of Witmer Road Facility of $7,333. During the years ended
December 31, 2006, 2005 and 2004, we recorded losses on disposition of property and equipment of
$13, $17, and $95, respectively. In addition, during the years ended December 31, 2006 and 2005, we
recorded a loss of $48 and a gain of $21, respectively, on the disposition of assets held for sale.
The aggregate proceeds from the disposition of property and equipment and assets held for sale,
excluding the Witmer Road Facility, was $51 and $110, respectively, for the years ended December
31, 2006 and 2005. We did not receive any proceeds from the disposition of property and equipment
and assets held for sale during the year ended December 31, 2004.
During 2006, we evaluated cash flows that could be assigned to equipment that was no longer in
use. We based our estimates of potential cash flows on possible disposition outcomes if the
equipment was sold at auction. Based on those estimates, we recorded a non-cash impairment charge
of $121, which was included in research and development expenses in our Statements of Operations.
The aggregate acquisition value of the impaired assets was reduced by $586 and the related
accumulated depreciation was reduced by $465.
2005 Activity
As part of the restructuring announced in August 2005 (see Note 12), we centralized research
activities in Horsham, Pennsylvania by ending operations in our leased facility in San Diego,
California. We recorded a non-cash
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
impairment charge of $187 related to property and equipment located in the San Diego facility.
The aggregate acquisition value of the impaired assets was reduced by $745 and the related
accumulated depreciation and amortization was reduced by $558. This impairment charge was included
in restructuring charges on our Statements of Operations.
We also announced that we would evaluate alternatives relative to our Witmer Road Facility,
including the potential disposition of the facility and further consolidation of our research,
development and administrative operations into Rock Road Facility. As a result of the announcement,
we concluded that identifiable cash flows could be assigned to the Witmer Road Facility and related
equipment. To determine the appropriate carrying value of these assets, we used a
probability-weighted approach of estimated cash flows to be received upon a range of possible
disposition outcomes. We based our estimates of potential cash flows related to possible
disposition outcomes on conversations with commercial real estate firms that had both knowledge of
recent history of sales and expertise in marketing and selling similar facilities. Based on those
estimates, we recorded during the third quarter of 2005 a non-cash impairment charge of $13,000,
which was included in restructuring charges on our Statements of Operations, on our Witmer Road
Facility and related equipment. The aggregate acquisition value of the impaired assets was reduced
by $29,007 and the related accumulated depreciation and amortization was reduced by $16,007.
During 2005, we settled a dispute with a vendor from which we had purchased property and
equipment. Pursuant to the settlement agreement, the vendor canceled an outstanding invoice of
$116, which we had previously included in accounts payable, and paid us $75. Therefore, we reduced
the acquisition cost of the property and equipment by $191.
Note 6. Intangible and Other Assets
Intangible and other assets consisted of the following:
| December 31, | 2006 | 2005 | ||||||
Acquired intellectual property, net of accumulated amortization of $4,427 and $3,836 as of December 31, 2006 and 2005, respectively |
$ | 123 | $ | 714 | ||||
Deferred financing costs, net of accumulated amortization of $181 and $36 as of December 31, 2006 and 2005, respectively |
— | 145 | ||||||
Receivable from related party (see Note 4) |
— | 29 | ||||||
Deposits |
58 | 61 | ||||||
| $ | 181 | $ | 949 | |||||
Acquired Intellectual Property
In 1999, we acquired the carbohydrate-manufacturing patents, licenses, and other intellectual
property of Cytel Corporation for aggregate consideration of $4,750, of which $200 was charged to
research and development expense on our Statements of Operations in 1998. The acquired intellectual
property consists of core technology with alternative future uses. The acquired intellectual
property balance is being amortized using the straight-line method to research and development
expense on our statement of operations over eight years, which is the estimated useful life of the
technology. Amortization expense relating to the acquired intellectual property was $591, $598, and
$598 for the years ended December 31, 2006, 2005, and 2004, respectively. The remaining carrying
value of $123 as of December 31, 2006 will be amortized during the year ending December 31, 2007.
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Deferred Financing Costs
During 2004, we entered into agreements with a bank. In connection with entering into these
agreements, we incurred $181 of legal and other costs. We recorded this amount as an asset, and
began amortizing the asset to interest expense in our Statements of Operations over the ten-year
repayment term to the bank. Upon the repayment of the term loan from a bank and the Industrial
Development Authority bond in September 2006 (see Note 7), we accelerated the amortization of the
remaining carrying value of $133 of deferred financing costs to interest expense. Amortization
expense, including the acceleration of amortization in 2006, relating to the deferred financing
costs was $145, $18, and $18 for the years ended December 31, 2006, 2005, and 2004, respectively.
Note 7. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consisted of the following:
| December 31, | 2006 | 2005 | ||||||
Term loan from bank |
$ | — | $ | 7,111 | ||||
Industrial development authority bond |
— | 1,000 | ||||||
Notes payable to equipment lender |
1,101 | 5,075 | ||||||
Term loan from landlord |
622 | 997 | ||||||
Subtotal |
1,723 | 14,183 | ||||||
Capital lease obligations (see Note 13) |
108 | 271 | ||||||
Total debt |
1,831 | 14,454 | ||||||
Less current portion |
(1,251 | ) | (4,031 | ) | ||||
Total debt, net of current portion |
$ | 580 | $ | 10,423 | ||||
Minimum principal repayments of long-term debt and capital lease obligations as of December
31, 2006 were as follows: 2007¾$1,251; 2008¾$573; and 2009¾$7. Interest expense
during the years ended December 31, 2006, 2005, and 2004 was $1,271, $1,314, and $981,
respectively. See Note 5 for the amounts of interest capitalized during each of the three years
ended December 31, 2006.
Term Loan from Bank and Industrial Development Authority Bond
In September 2006, we repaid the outstanding balance of the term loan from a bank and the
Industrial Development Authority bond in connection with the sale of the Witmer Road Facility (see
Note 5). In connection with the early repayment of this debt, we paid $153 of premiums to the bank,
which premiums were included in interest expense for the year ended December 31, 2006.
Notes Payable to Equipment Lender
As of December 31, 2006, we owed an equipment lender $1,101 under various borrowings. The
amounts owed were secured by equipment and facility improvements that had a carrying value of
$1,654 as of December 31, 2006. In September 2006, we repaid $1,626 of the outstanding debt as a
result of the sale of the Witmer Road Facility (see Note 5), and in October 2006, we amended six
promissory notes with our equipment lender. Under the amended promissory notes, our last payment is
scheduled for September 2008, and interest rates applicable to the
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
equipment loans range from 8.1% to 9.5%. In connection with the early repayment of this debt, we
paid $62 of premiums to the equipment lender, which premiums were included in interest expense
during the year ended December 31, 2006.
Term Loan from Landlord
In May 2004, we borrowed $1.5 million of unsecured debt from the landlord of our Rock Road
Facility. As of December 31, 2006, we owed the landlord $622. The terms of the financing require
us to pay monthly principal and interest payments over 48 months at an interest rate of 13%. The
final payment is due June 2008.
Note Payable Secured by Insurance Policies
In March 2006, we borrowed $539 to finance insurance policy premiums due on certain insurance
policies. In November 2006, we paid in full the outstanding balance of the borrowing. The insurance
policy premiums, net of amortization, were included in prepaid expenses and other current assets on
our Balance Sheets at December 31, 2006 (see Note 4). The interest was calculated based on an
annual percentage rate of 5.4%. To secure payment of the amounts financed, we granted the lender a
security interest in all of our right, title and interest to the insurance policies. Upon a default
by us, the lender could have demanded, and would have had the right to receive from us, immediate
payment of the total unpaid balance of the loan. In the event of default and the demand for
immediate payment by the lender, interest would have accrued on any unpaid amounts at the highest
rate allowed by applicable law.
Note 8. Accrued Expenses
Accrued expenses consisted of the following:
| December 31, | 2006 | 2005 | ||||||
Professional fees |
$ | 1,469 | $ | 1,346 | ||||
Contract research and development services |
1,283 | 650 | ||||||
Property and equipment |
1,244 | 10 | ||||||
Clinical trials and non-clinical studies |
625 | 183 | ||||||
Other expenses |
128 | 508 | ||||||
| $ | 4,749 | $ | 2,697 | |||||
Note 9. Stockholders’ Equity
Common Stock
In March 2007, we sold 21,415 shares of our common stock and warrants to purchase 9,637 shares
of common stock through a private placement, including 4,950 shares of common stock and warrants to
purchase 2,228 shares of our common stock to investment funds affiliated with certain members of
our board of directors, at a price of $2.02 per unit, generating net proceeds of approximately
$40,459. The warrants have a five-year term and an exercise price of $1.96 per share.
In February 2005, we offered and sold 8,050 shares of our common stock at a public offering
price of $4.00 per share, generating net proceeds of $30,006.
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
In May 2004, we sold 4,733 shares of common stock in a registered offering to a number of
institutional and individual investors, including 812 shares sold to officers and an investment
fund affiliated with a director, at a price of $6.77 per share, generating net proceeds of $29,928.
Shareholder Rights Plan
In September 1997, we adopted a Shareholder Rights Plan. Under this Shareholders Rights Plan,
which was amended in December 1998, holders of common stock are entitled to receive one right for
each share of common stock held. Separate rights certificates would be issued and become
exercisable if any acquiring party either accumulates or announces an offer to acquire at least 15%
of our common stock. Each right will entitle any holder who owns less than 15% of our common stock
to buy one one-hundredth share of the Series A Junior Participating Preferred Stock at an exercise
price of $150. Each one one-hundredth share of the Series A Junior Participating Preferred Stock is
essentially equivalent to one share of our common stock. If an acquiring party accumulates at least
15% of our common stock, each right entitles any holder who owns less than 15% of our common stock
to purchase for $150 either $300 worth of our common stock or $300 worth of the 15% acquirer’s
common stock. In November 2000, the Shareholders Rights Plan was amended to increase the threshold
from 15% to 20% for Kopp Investment Advisors, Inc. and related parties. In June 2002 and October
2002, the Shareholders Rights Plan was amended to increase the threshold to 20% and 25%,
respectively, for Eastbourne Capital Management, LLC and related parties. The rights expire in
September 2007 and may be redeemed by us at a price of $.01 per right at any time up to ten days
after they become exercisable.
Note 10. Compensation Plans
Equity Incentive Plans
We have two equity incentive plans, under which a total of 7,374 shares of common stock have
been authorized. In addition, we granted nonqualified stock options in 2002 outside of these plans
to purchase 488 shares. The 2004 Equity Incentive Plan (Plan) incorporates a predecessor plan. The
following types of awards are available under the Plan: incentive stock options, non-qualified
stock options, stock appreciation rights, restricted shares and restricted stock units (RSUs). All
employees, non-employee directors, and consultants are eligible to receive awards under the Plan.
The Plan allows us to grant restricted shares and RSUs with complete discretion as to: when
grants are made; the consideration, if any, to be paid for restricted shares; and when the
restrictions applicable to each restricted share and RSU will lapse. The Plan also allows us to
grant stock options and stock appreciation rights to eligible individuals, with complete discretion
as to: when grants are made; the number of shares subject to vesting and the vesting schedule; the
designation as either an incentive or a non-qualified stock option; the maximum term to remain
outstanding, which term, for an incentive stock option, may not exceed ten years (and for an
incentive stock option granted to a person who owns more than 10% of our voting power may not
exceed five years); and the exercise price, which for a non-qualified stock option may not be less
than 85% of the fair market value of the stock on the date of grant and for an incentive stock
option must be at least 100% of the fair market value on the date of grant (unless the recipient
owns more than 10% of our voting power, in which case the exercise price must be at least 110% of
the fair market value on the date of grant). During the years ended December 31, 2006, 2005, and
2004, we granted no options at an exercise price in excess of the market price on the date of
grant. We normally issue new shares to satisfy stock option exercises and the delivery of shares
pursuant to RSUs. There were no modifications to stocks options during the year ended December 31,
2006.
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The following table summarizes the status of stock options as of December 31, 2006 and changes
during the year then ended:
| Weighted- | ||||||||||||||||
| Weighted- | average | |||||||||||||||
| average | Aggregate | remaining | ||||||||||||||
| exercise | intrinsic | contractual life | ||||||||||||||
| Shares | price | value | (years) | |||||||||||||
Outstanding at January 1, 2006 |
4,995 | $ | 14.01 | |||||||||||||
Granted |
1,420 | 2.60 | ||||||||||||||
Exercised |
(5 | ) | 2.58 | |||||||||||||
Forfeited |
(306 | ) | 4.25 | |||||||||||||
Expired |
(823 | ) | 13.41 | |||||||||||||
Outstanding at December 31, 2006 |
5,281 | $ | 11.61 | $ | 2 | 6.7 | ||||||||||
Vested at December 31, 2006 and expected to vest |
4,993 | $ | 12.07 | $ | 2 | 6.6 | ||||||||||
Exercisable at December 31, 2006 |
3,280 | $ | 16.09 | $ | 2 | 5.5 | ||||||||||
Fair Value Disclosures
We adopted SFAS No. 123R effective January 1, 2006. Prior to January 1, 2006, we applied the
intrinsic value method of accounting for all stock-based employee compensation in accordance with
APB No. 25 and related interpretations. We elected to use the modified prospective transition
method for adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all
awards granted or modified after the date of adoption and to awards not fully vested as of the date
of adoption. Accordingly, prior periods have not been restated. For the year ended December 31,
2006, we recorded $2,602 of compensation cost for share-based payment arrangements in our
Statements of Operations, of which $21 related to liability-classified awards. The effect of the
adoption of SFAS No. 123R was to increase our 2006 operating and net loss by $2,438 and our basic
and diluted loss per share by $0.07. The adoption of SFAS No. 123R had no effect on our cash flows
from operations or cash flows from financing activities. No tax benefit was recorded as of December
31, 2006 in connection with compensation cost due to the uncertainty regarding ultimate realization
of our net operating loss carryforwards (see Note 14). The weighted-average fair value per share of
stock options granted during the years ended December 31, 2006, 2005, and 2004 was $1.83, $2.49,
and $7.91, respectively. The weighted-average fair value per share of employee purchase rights
granted under our employee stock purchase plan (see below) in 2004 was $7.52. There were no
employee purchase rights granted in 2006 or 2005. The total intrinsic value of stock options
exercised during the years ended December 31, 2006 and 2004 was $5 and $31, respectively. There
were no stock options exercised during the year ended December 31, 2005.
The fair value of stock options is determined using the Black-Scholes valuation model, which
is the same model we previously utilized for valuing stock options for footnote disclosures
required under SFAS No. 123 as amended by SFAS No. 148 for the years ended December 31, 2005 and
2004. During the years ended December 31, 2006, 2005, and 2004 the fair value of each stock option
award was determined as of the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
| Year ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Weighted average expected volatility |
75 | % | 75 | % | 80 | % | ||||||
Expected term (years) |
||||||||||||
Stock options |
4.7 ¾ 7.8 | 0.7 ¾ 9.1 | 4.4 ¾ 10.0 | |||||||||
Employee stock purchase plan |
N/A | N/A | 1.3 | |||||||||
Risk-free interest rate |
||||||||||||
Stock options |
4.4% ¾ 5.1 | % | 3.9% ¾ 4.3 | % | 2.5% ¾ 4.3 | % | ||||||
Employee stock purchase plan |
N/A | N/A | 1.6 | % | ||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Expected volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the stock options. We rely solely on historical
volatility because our traded options do not have sufficient trading activity to allow us to
incorporate the mean historical implied volatility from traded options into our estimate of future
volatility. The expected term calculation for stock options granted to directors and officers is
based on the observed and expected time to post-vesting exercise and forfeitures of stock options
by those individuals. The expected term calculation for stock options granted to all other
individuals is based on the “simplified” method described in SAB No. 107, Share-Based Payment. The
risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for an
instrument with a maturity that is commensurate with the expected term of the stock options. The
dividend yield of zero is based on the fact that we have never paid cash dividends on our common
stock, and we have no present intention to pay cash dividends.
The fair value of share-based awards is recognized as expense over the requisite service
period, net of estimated forfeitures. Based on our historical experience of option pre-vesting
cancellations, we have assumed an annualized forfeiture rate of 13% for our stock options granted
to individuals not terminated as a result of a restructuring of our operations in connection with
the sale of the Witmer Road Facility (2006 Restructuring) (see Note 12). For employees terminated
as a result of the 2006 Restructuring, we have assumed an annualized forfeiture rate of 100%. We
have not assumed any expected forfeitures for RSUs because those awards have been granted to a
small number of individuals. Under the provisions of SFAS No. 123R, we will record additional
expense if the actual forfeiture rate is lower than we estimated, and will record a recovery of
prior expense if the actual forfeiture is higher than we estimated. We rely primarily on historical
experience to estimate expected forfeitures.
For all unvested awards outstanding as of December 31, 2005, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant date, is being
recognized on an accelerated basis in our Statements of Operations over the remaining vesting
period, consistent with our recognition policy under SFAS No. 123. For share-based awards granted
subsequent to December 31, 2005, we have elected to recognize compensation expense in our
Statements of Operations on a straight-line basis from the date of grant. Our deferred stock
compensation balance of $6 as of December 31, 2005 was reclassified into additional paid-in capital
upon the adoption of SFAS No. 123R.
As of December 31, 2006, there was $1,938 of total unrecognized compensation cost, which
includes the impact of expected forfeitures, related to unvested share-based compensation
arrangements. That cost is expected to be recognized over a weighted-average period of 1.2 years.
Non-employee Stock Options
During the years ended December 31, 2006, 2005, and 2004 we recognized $14, $(9), and $4,
respectively, of compensation expense (gain), in connection with the vesting of stock options
granted to non-employees. The compensation expense or gain was based on each option’s estimated
fair value, which was calculated using the
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Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Black-Scholes option-pricing model. Because we re-value each option over the related vesting
term in accordance with Emerging Issues Task Force 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services,
increases in our stock price result in increased expense while decreases in our stock price result
in a gain.
Restricted Stock Units
In May 2005, RSUs were granted to members of our board of directors in lieu of cash payment
for services. Because these RSUs vested immediately, we charged the fair value of $107 relating to
these RSUs to operating expenses on the date of grant.
In March 2005, the Compensation Committee of our board of directors (Compensation Committee)
modified our 2004 bonus program for officers, adjusted salaries for officers to reduce cash
payments, granted RSUs to officers, and decided to pay any 2005 bonuses for officers by the award
of RSUs instead of cash. In March 2005, the aggregate value of liability-classified awards of $382
related to the payment of a portion of 2004 officer bonuses in RSUs instead of cash was
reclassified to additional paid-in capital. In January 2006, the aggregate value of
liability-classified awards of $129 related to the payment of 2005 officer bonuses in RSUs instead
of cash was reclassified to additional paid-in capital. During the years ended December 31, 2006
and 2005, we recorded $150 and $653, respectively, of expense for RSUs, of which $21 and $151,
respectively, were recorded while the RSUs were liability-classified. A summary of the status of
RSUs as of December 31, 2006, and changes during the year then ended, is presented in the following
table:
| Weighted- | ||||||||||||||||
| Weighted- | average | |||||||||||||||
| average | Aggregate | remaining | ||||||||||||||
| grant-date | intrinsic | contractual | ||||||||||||||
| Shares | fair value | value | life (years) | |||||||||||||
Outstanding at January 1, 2006 |
290 | $ | 3.68 | |||||||||||||
Awarded |
84 | 2.29 | ||||||||||||||
Settled |
(246 | ) | 3.90 | |||||||||||||
Forfeited |
¾ | ¾ | ||||||||||||||
Outstanding at December 31, 2006 |
128 | $ | 2.34 | $ | 285 | 0.1 | ||||||||||
Vested at December 31, 2006 and expected to vest |
128 | $ | 2.34 | $ | 285 | 0.1 | ||||||||||
The number of shares and aggregate intrinsic value of the vested portion of RSUs outstanding
at December 31, 2006 were 108 and $241, respectively. The number of shares and aggregate fair value
of RSUs that vested during the year ended December 31, 2006 were 199 and $674, respectively. In
connection with the settlement of RSUs in shares during 2006, 47 shares, with an aggregate fair
value of $175 were withheld to satisfy the award holders’ minimum tax withholding obligations. In
accordance with the terms of the RSUs, vested awards will be settled in shares upon the earlier to
occur of 18 months after the grant date or six months after the grantee’s separation from service,
subject to certain conditions.
Employee Stock Purchase Plan
Effective January 31, 2005, we terminated our employee stock purchase plan, or ESPP, under
which 183 shares had been reserved for issuance. The ESPP allowed any eligible employee the
opportunity to purchase shares of our common stock through payroll deductions. The ESPP provided
for successive, two-year offering periods,
F-25
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
each of which contained four semiannual purchase periods. The purchase price at the end of
each purchase period was 85% of the lower of the market price per share on the employee’s entry
date into the offering period or the market price per share on the purchase date. Any employee who
owned less than 5% of our common stock could have purchased up to the lesser of:
| • | 10% of his or her eligible compensation; | ||
| • | 1 share per purchase; or | ||
| • | the number of shares per year that does not exceed the quotient of $25 divided by the market price per share on the employee’s entry date into the offering period. |
A total of 4 shares of common stock remained available for issuance under the ESPP immediately
prior to the termination of the plan. The total purchases of common stock under the ESPP during the
years ended December 31, 2005 and 2004 were 15 shares at a total purchase price of $86 and 24
shares at a total purchase price of $175, respectively. We have not recorded any compensation
expense for the ESPP.
401(k) Savings Plan
We maintain a 401(k) Savings Plan (Savings Plan) for our employees. Employee contributions are
voluntary, determined on an individual basis, and limited to the maximum amount allowable under
federal income tax regulations. We match employee contributions up to specified limits. We
contributed $189, $266, and $181 to the Savings Plan for the years ended December 31, 2006, 2005,
and 2004, respectively. In addition, during 2006, 2005 and 2004, we allocated $23, $15 and $79,
respectively, of prior year Savings Plan forfeitures to match employee contributions.
Note 11. Collaborative Agreements and Significant Customer Concentration
A summary of revenue recognized under our collaborative agreements for the years ended
December 31, 2006, 2005, and 2004 is presented in the following table.
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Novo Nordisk |
||||||||||||
Research and development funding |
$ | 3,577 | $ | 2,027 | $ | 2,490 | ||||||
Substantive milestones |
750 | — | — | |||||||||
License fees |
457 | 769 | 842 | |||||||||
| 4,784 | 2,796 | 3,332 | ||||||||||
BioGeneriX |
||||||||||||
Research and development funding |
1,191 | 2,939 | 1,699 | |||||||||
License fees |
209 | 402 | 39 | |||||||||
| 1,400 | 3,341 | 1,738 | ||||||||||
| $ | 6,184 | $ | 6,137 | $ | 5,070 | |||||||
F-26
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Novo Nordisk A/S Agreements
In November 2003, we entered into two agreements with Novo Nordisk A/S to use GlycoPEGylation
technology to develop and commercialize next-generation versions of Factors VIIa, VIII and IX, one
of which, Factor VIIa, is currently marketed by Novo Nordisk. Under these agreements, we received a
non-refundable, upfront fee of $4,300, which is being amortized to revenue over the expected
performance period. Novo Nordisk is responsible for funding our research and development activities
under the agreements, and we may receive up to $52,200 in milestone payments based on the progress
of the programs. In addition, we could receive additional milestones and royalties on new
indications for next-generation versions of Factors VIII and IX. We will receive royalties on sales
of any products commercialized under the agreements.
In November 2004, we amended our agreements with Novo Nordisk to provide an amended work plan
for one of the proteins, a method of applying some of the project-related funds to tasks that are
mutually agreed upon by the parties, a change in the timing of one milestone payment, and the
addition of a new milestone payment. We also received from Novo Nordisk a payment, which is being
amortized to revenue over the expected remaining performance period. In December 2005, we further
amended our agreements with Novo Nordisk to provide for an additional project related to one
protein and two additional milestone payments to be made to us upon the occurrence of certain
events related to the additional project. In 2006, we received two payments upon the occurrence of
substantive events related to the additional project. In October 2006, we entered into an Amended
and Restated Research, Development and License Agreement with Novo Nordisk, which supersedes one of
the original agreements entered into in November 2003. The Amended and Restated Research,
Development and License Agreement incorporates the prior amendments to the original agreement and
further amends the original agreement to clarify certain terms and conditions related to
intellectual property.
Under these agreements, as amended, Novo Nordisk’s license with respect to each protein
continues until the expiration of the last Neose patent covering a licensed product, or until the
earlier termination of the applicable agreement. Novo Nordisk has the right to terminate each of
the agreements without cause. We have the right to terminate the agreement with respect to Factors
VIII and IX if there are no commercial sales of licensed products within a specified period,
subject to Novo Nordisk’s ability to extend by paying minimum royalties. After entering into the
amendment in December 2005, we changed our estimate of the expected performance period from six
years to ten years.
BioGeneriX A/G Agreements
In April 2004, we entered into an agreement with BioGeneriX to use our proprietary
GlycoAdvance and GlycoPEGylation technologies to develop a long-acting version of granulocyte
colony stimulating factor (G-CSF). In connection with the agreement, we received from BioGeneriX a
non-refundable, upfront fee, which is being recognized to revenue over the expected performance
period of eighteen years. In October 2006, we entered into an amendment of this agreement. Under
the agreement, as amended, we and BioGeneriX shared the expenses of preclinical development.
BioGeneriX is responsible for supplying the protein and funding the clinical development program
and we are responsible for supplying enzyme reagents and sugar nucleotides. As of January 1, 2007,
BioGeneriX is responsible for the cost of reagent supply.
If we and BioGeneriX proceed to commercialization, we will have commercial rights in the U.S.,
Canada, Mexico and Japan, and BioGeneriX will have commercial rights in Europe and the rest of the
world. Each company has the ability to search for its own marketing partner for its territories and
will receive significant royalties on product sales in the other company’s territory. Each party
has the right, in various circumstances, to terminate the agreement by giving the required notice
to the other party, subject to the other party’s right to continue working on the development and
commercialization of a long-acting version of G-CSF, as provided in the agreement. In addition, we
have immediate termination rights, in which case we will have all rights to the product candidate,
F-27
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
including supply of protein from BioGeneriX or its contract manufacturer, in the event
BioGeneriX does not meet certain Phase I and Phase II diligence requirements.
In April 2005, we entered into a research, co-development and commercialization agreement with
BioGeneriX for a GlycoPEGylated erythropoietin made in CHO cells (GlycoPEG-CHO-EPO). We received a
non-refundable payment in connection with the execution of this agreement. The agreement provided
for us to conduct research on behalf of BioGeneriX for up to 12 months and grant BioGeneriX the
right to obtain an exclusive, worldwide license to use our enzymatic technologies to develop and
commercialize a long-acting version of the target protein. Under an amendment to the agreement
entered into in October 2006, BioGeneriX had until December 31, 2006 to exercise the option.
BioGeneriX did not exercise the option and all rights to Neose’s GlycoPEGylation technology as it
applies to GlycoPEG-CHO-EPO reverted to Neose.
Note 12. Restructurings and Employee Severance Costs
2006 Restructuring
In September 2006, we implemented a restructuring of operations in connection with the sale of
the Witmer Road Facility (2006 Restructuring). The employee severance costs incurred for the 2006
Restructuring were payable pursuant to an employee severance plan established in August 2005.
Therefore, these costs did not meet the definition for classification as a restructuring charge on
our Statements of Operations. Our net loss for the year ended December 31, 2006 included $710 of
employee severance costs related to the 2006 Restructuring, of which $575 is included in research
and development expenses and $135 is included in general and administrative expenses. Of these
amounts, $67 remained unpaid and was included in accrued compensation on our Balance Sheets as of
December 31, 2006. We expect to pay the remaining obligations under the 2006 Restructuring by the
end of the first quarter of 2007.
In connection with the 2006 Restructuring we committed to pay future cash retention bonuses to
certain employees who were not given notice of termination in September 2006, contingent on their
not voluntarily terminating their employment prior to the payment date. In connection with this
commitment, we expect to pay $280 of retention bonuses in the first half of 2007, of which $160 was
included in accrued compensation on our Balance Sheets as of December 31, 2006. We also granted
stock options to certain employees as part of an employee retention program. These options will
vest in full on July 1, 2007 for all holders who have not terminated their employment prior to the
vesting date. The aggregate fair market value of the options was $605, which is being recognized
ratably as compensation expense over the vesting period.
2005 Restructuring
In August 2005, we implemented a restructuring of operations to enable an enhanced focus on
next-generation proteins, to allow for the transfer of production of proteins and reagents to our
collaborative partners and contract manufacturers, and to reduce cash burn (2005 Restructuring).
Upon completion of the 2005 Restructuring, we reduced the size of our workforce by approximately
25% compared to the end of the first quarter of 2005. Our net loss for 2005 included $14,206 of
charges related to the 2005 Restructuring, including $13,187 of non-cash property and equipment
impairment charges (see Note 5), $867 of payments for employee severance costs, and $152 of
payments for facility closure costs.
As part of the 2005 Restructuring we centralized research activities in Horsham, Pennsylvania
by ending operations in our leased facility in San Diego, California. During 2005, we recorded a
charge of $152 in our Statements of Operations for the operating lease related to the San Diego
facility. The charge was based on an estimate of the present value of the loss we would incur over
the remaining term of the lease. Because the remaining
F-28
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
lease term extended for only five months beyond our cease-use date of the facility, we assumed
no sublease income in our calculation.
Of the $1,019 accrued during 2005 for employee severance and facility closure costs for the
2005 Restructuring, we paid $932 during 2005 and the remaining $87 was included in accrued expenses
as of December 31, 2005. As of December 31, 2006, all of our obligations related to the 2005
Restructuring have been satisfied.
Note 13. Commitments and Contingencies
Leases
Our future minimum lease payments as of December 31, 2006 under capital leases and under
non-cancelable operating leases, with initial or remaining lease terms in excess of one year, were
as follows:
| Capital | Operating | |||||||
| leases | leases | |||||||
2007 |
$ | 58 | $ | 519 | ||||
2008 |
54 | 454 | ||||||
2009 |
7 | 463 | ||||||
2010 |
— | 473 | ||||||
2011 |
— | 482 | ||||||
Thereafter |
— | 5,730 | ||||||
Total minimum lease payments |
119 | $ | 8,121 | |||||
Less amounts representing imputed interest |
(11 | ) | ||||||
Present value of minimum lease payments |
108 | |||||||
Less current portion of capital lease obligations |
(50 | ) | ||||||
Capital lease obligations, excluding current portion |
$ | 58 | ||||||
Capital Lease Obligations
In February 2004, we entered into a capital lease obligation for equipment with a book value
of $184, which was calculated using an assumed incremental annual borrowing rate of 8.7%. The terms
of the lease require us to make monthly payments through February 2009. This equipment had an
aggregate net book value of $54 as of December 31, 2006.
In September 2003, we entered into a capital lease obligation for software with a book value
of $60, which was calculated using an assumed incremental annual borrowing rate of 11.5%. The terms
of the lease require us to make monthly payments through September 2008. As of December 31, 2006,
this software had a net book value of $21.
Operating Leases
We lease laboratory, office, warehouse facilities, and equipment under operating lease
agreements. In February 2002, we entered into a lease agreement for our Rock Road Facility, which
consists of approximately
F-29
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
40,000 square feet of laboratory and office space. The initial term of
the lease ends in July 2022, at which time we
have an option to extend the lease for an additional five years, followed by another option to
extend the lease for an additional four and one-half years. Pursuant to the lease, we received $250
from the landlord in September 2004 as a partial reimbursement for improvements we made to the
facility. This landlord incentive, which is included in other liabilities on our balance sheet, is
being amortized ratably as a reduction to rental expense over the lease term. In April 2001, we
entered into a lease agreement for approximately 10,000 square feet of laboratory and office space
in San Diego, California. As part of the 2005 Restructuring, we centralized research activities in
Horsham, Pennsylvania by ending operations in our leased facility in San Diego. As of October 31,
2005, we ceased operations at our San Diego facility. The initial term of the San Diego lease ended
in March 2006, at which time we terminated the lease. We lease approximately 5,000 square feet of
office and warehouse space in Horsham, Pennsylvania under a lease agreement that expires April
2007. In January 2007, we entered into a five-year lease agreement for approximately 6,800 square
feet of office and warehouse space in Horsham, Pennsylvania to replace similar space subject to the
expiration described above. Our laboratory, office, and warehouse facility leases contain
escalation clauses, under which the base rent increases annually by 2%. Our rental expense for the
years ended December 31, 2006, 2005, and 2004 was $967, $951, and $981, respectively.
Purchase Obligations and Employment Agreements
As of December 31, 2006, we had non-cancelable purchase obligations for 2007 in the amount of
$796, which all relate to goods or services. As of December 31, 2006, our non-cancelable purchase
obligations for 2008 were $4, and we had no non-cancelable purchase obligations for 2009 and
thereafter.
In May 2006, we entered into an employment agreement with our chief executive officer, George
J. Vergis, Ph.D. Under the terms of the agreement we are required to pay Dr. Vergis an annual base
salary of at least $350 for continuing his employment with us. In addition, if Dr. Vergis remains
employed by us through the earlier of (i) the date of payment by us of fiscal 2006 annual bonuses
to senior executives or (ii) March 15, 2007, Dr. Vergis’ annual bonus for the 2006 calendar year
will not be less than $105.
F-30
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Note 14. Income Taxes
We had no income taxes payable as of December 31, 2006 and 2005. As of December 31, 2006, we
had $115,475 of federal and $60,777 of state net operating loss (NOL) carryforwards potentially
available to offset future taxable income. As of December 31, 2006, our federal NOL carryforward
included $8,999 related to equity-based compensation, which will be recorded as additional paid-in
capital upon recognition of the tax benefit associated with these deductions. As of December 31,
2006, we had federal and state research and development tax credit carryforwards of $7,716 and
$1,172, respectively, potentially available to offset future taxable income.
The Tax Reform Act of 1986 (Tax Reform Act) provided for a limitation on the annual use of NOL
and research and development tax credit carryforwards following certain ownership changes. Because
we may have experienced various ownership changes, as defined by the Tax Reform Act, as a result of
past equity financings, our ability to utilize federal NOL and credit carryforwards in any given
year may be limited. In addition, federal tax law limits the time during which carryforwards may be
applied against future taxes, and Pennsylvania tax law limits the utilization of state NOL
carryforwards to $3,000 annually. Therefore, we may not be able to take full advantage of these
carryforwards to offset future taxable income. The federal and state NOL and tax credit
carryforwards will expire as follows:
| Net operating loss | Research and development | |||||||||||||||
| carryforwards | tax credit carryforwards | |||||||||||||||
| Federal | State | Federal | State | |||||||||||||
2007 |
$ | 2,147 | $ | 777 | $ | 41 | $ | ¾ | ||||||||
2008 |
638 | ¾ | 146 | ¾ | ||||||||||||
2009 |
385 | ¾ | 207 | ¾ | ||||||||||||
2010 |
110 | ¾ | 83 | ¾ | ||||||||||||
2011 |
150 | ¾ | 104 | ¾ | ||||||||||||
Thereafter |
112,045 | 60,000 | 7,135 | 1,172 | ||||||||||||
| $ | 115,475 | $ | 60,777 | $ | 7,716 | $ | 1,172 | |||||||||
F-31
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
We have incurred a loss in each period since our inception. Due to the uncertainty surrounding
the realization of the tax benefit associated with our federal and state carryforwards, we have
provided a full valuation allowance against these tax benefits. The approximate income tax effect
of each type of carryforward and temporary difference is as follows:
| Current | Noncurrent | Total | ||||||||||
December 31, 2006 |
||||||||||||
Net operating loss carryforwards |
$ | ¾ | $ | 43,269 | $ | 43,269 | ||||||
Research and development tax credit carryforwards |
¾ | 8,888 | 8,888 | |||||||||
Capitalized research and development expenses |
¾ | 51,862 | 51,862 | |||||||||
Property and equipment |
¾ | 1,448 | 1,448 | |||||||||
Capitalized start-up costs |
3,404 | ¾ | 3,404 | |||||||||
Deferred revenue |
262 | 1,757 | 2,019 | |||||||||
Deferred compensation |
¾ | 1,461 | 1,461 | |||||||||
Impairment of equity securities |
¾ | 647 | 647 | |||||||||
Accrued expenses not currently deductible |
538 | 219 | 757 | |||||||||
Total deferred tax assets |
4,204 | 109,551 | 113,755 | |||||||||
Less valuation allowance |
(4,204 | ) | (109,551 | ) | (113,755 | ) | ||||||
Net deferred tax assets |
$ | ¾ | $ | ¾ | $ | ¾ | ||||||
December 31, 2005 |
||||||||||||
Net operating loss carryforwards |
$ | ¾ | $ | 36,145 | $ | 36,145 | ||||||
Research and development tax credit carryforwards |
¾ | 7,491 | 7,491 | |||||||||
Capitalized research and development expenses |
¾ | 42,058 | 42,058 | |||||||||
Capitalized start-up costs |
¾ | 6,808 | 6,808 | |||||||||
Property and equipment |
¾ | 8,587 | 8,587 | |||||||||
Deferred revenue |
254 | 1,528 | 1,782 | |||||||||
Deferred compensation |
¾ | 1,283 | 1,283 | |||||||||
Impairment of equity securities |
¾ | 647 | 647 | |||||||||
Accrued expenses not currently deductible |
401 | 198 | 599 | |||||||||
Total deferred tax assets |
655 | 104,745 | 105,400 | |||||||||
Less valuation allowance |
(655 | ) | (104,745 | ) | (105,400 | ) | ||||||
Net deferred tax assets |
$ | ¾ | $ | ¾ | $ | ¾ | ||||||
F-32
Table of Contents
Neose Technologies, Inc.
Notes to Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Note 15. Quarterly Data (unaudited)
The following tables summarize our quarterly results of operations for each of the quarters in
2006 and 2005. Our operating expenses and net loss for the third quarter of 2005 included $14,002
of restructuring charges (see Note 12), including $13,187 of non-cash property and equipment
impairment charges (see Note 5) and $815 of payments for employee severance costs. These quarterly
results are unaudited, but in the opinion of management have been prepared on the same basis as our
audited financial information and include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of our results of operations.
| 2006 Results | ||||||||||||||||||||
| First | Second | Third | Fourth | Full | ||||||||||||||||
| quarter | quarter | quarter | quarter | year | ||||||||||||||||
Revenue from collaborative agreements |
$ | 2,396 | $ | 1,715 | $ | 1,477 | $ | 596 | $ | 6,184 | ||||||||||
Operating expenses |
10,239 | 10,145 | 9,839 | 10,341 | 40,564 | |||||||||||||||
Gain on sale of Witmer Road Facility |
¾ | ¾ | 7,335 | (2 | ) | 7,333 | ||||||||||||||
Operating loss |
(7,843 | ) | (8,430 | ) | (1,027 | ) | (9,747 | ) | (27,047 | ) | ||||||||||
Interest income (expense), net |
58 | (17 | ) | (323 | ) | 222 | (60 | ) | ||||||||||||
Net loss |
$ | (7,785 | ) | $ | (8,447 | ) | $ | (1,350 | ) | $ | (9,525 | ) | $ | (27,107 | ) | |||||
Basic and diluted net loss per share |
$ | (0.24 | ) | $ | (0.26 | ) | $ | (0.04 | ) | $ | (0.29 | ) | $ | (0.82 | )* | |||||
Weighted-average shares outstanding used in computing basic and diluted net loss per share |
32,783 | 32,804 | 32,866 | 32,972 | 32,857 | |||||||||||||||
| 2005 Results | ||||||||||||||||||||
| First | Second | Third | Fourth | Full | ||||||||||||||||
| quarter | quarter | quarter | quarter | year | ||||||||||||||||
Revenue from collaborative agreements |
$ | 1,348 | $ | 1,420 | $ | 1,503 | $ | 1,866 | $ | 6,137 | ||||||||||
Operating expenses |
12,603 | 11,793 | 24,208 | 9,616 | 58,220 | |||||||||||||||
Operating loss |
(11,255 | ) | (10,373 | ) | (22,705 | ) | (7,750 | ) | (52,083 | ) | ||||||||||
Other income |
22 | ¾ | ¾ | ¾ | 22 | |||||||||||||||
Interest income (expense), net |
(34 | ) | 88 | 84 | 84 | 222 | ||||||||||||||
Net loss |
$ | (11,267 | ) | $ | (10,285 | ) | $ | (22,621 | ) | $ | (7,666 | ) | $ | (51,839 | ) | |||||
Basic and diluted net loss per share |
$ | (0.40 | ) | $ | (0.31 | ) | $ | (0.69 | ) | $ | (0.23 | ) | $ | (1.64 | )* | |||||
Weighted-average shares outstanding used in computing basic and diluted net loss per share |
27,947 | 32,782 | 32,782 | 32,782 | 31,590 | |||||||||||||||
| * | The net loss per share in each quarter is computed using the weighted-average number of shares outstanding during the quarter. The net loss per share for the full year, however, is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the quarterly net loss per share amounts does not equal the full-year net loss per share. |
F-33
Table of Contents
Exhibit Index
| Exhibit | Description | |
10.41 #
|
Amendment Number 1 to Research, Co-Development and Commercialization Agreement and Research License and Option Agreement between Neose Technologies, Inc. and BioGeneriX AG dated October 20, 2006. | |
10.42 #
|
Amended and Restated Research, Development and License Agreement among Neose Technologies, Inc. and Novo Nordisk A/S and Novo Nordisk Health Care AG dated October 31, 2006. | |
10.43 #
|
Bioprocessing Services Agreement by and between Neose Technologies, Inc. and Diosynth RTP Inc. dated December 7, 2006. | |
10.44
|
Commercial Premium Finance Agreement and Promissory Note from Neose Technologies, Inc. to AFCO Credit Corporation dated March 6, 2007. | |
23.1
|
Consent of KPMG LLP. | |
24
|
Powers of Attorney (included as part of signature page hereof). | |
31.1
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification by Chief Financial Officer pursuant to Rule 13-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| # | Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been filed with the SEC. |