As filed with the Securities and Exchange Commission on March 25, 2013
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1997
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HYSEQ,
ARCA BIOPHARMA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(Exact name of registrant as specified in its charter)
| Delaware | 2835 | 41-2193603 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
8001 Arista Place, Suite 430
Broomfield, CO 80021
720-940-2200
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Michael R. Bristow
President and Chief Executive Officer
8001 Arista Place, Suite 430
Broomfield, CO 80021
720-940-2200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Brent D. Fassett Cooley LLP 380 Interlocken Crescent, Suite 900 Broomfield, Colorado 80021 (720) 566-4000 | Robert Charron Ellenoff Grossman & 150 East 42nd Street New York, New York 10017 (212) 370-1300 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration
Statement.
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registration statement.
If any of the securities being registered on this Formform are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_]
x
If this Formform is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
¨
If this Formform is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
¨
If delivery of the prospectusthis form is expected to be madea post-effective amendment filed pursuant to Rule 434,
please462(d) under the Securities Act, check the following box. [_]
box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1) | Amount of Registration Fee (2) | ||
Common Stock, $0.001 par value | ||||
Warrants to purchase shares of common stock | ||||
Shares of common stock issuable upon exercise of the Warrants | ||||
Total: | $20,000,000 | $2,728 | ||
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| (1) | Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. |
| (2) | Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457 solely for the purposesspecifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of computing the
registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
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SUBJECT TO COMPLETION, DATED JUNE 12, 1997
PROSPECTUS
2,750,000 SHARES
[LOGO OF HYSEQ INC. APPEARS HERE]
COMMON STOCK
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All of the 2,750,000 shares of Common Stock offered hereby are being sold by
Hyseq, Inc. ("Hyseq" or the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
inclusion of the Common Stock for quotation on the Nasdaq National Market under
the symbol "HYSQ."
Concurrent with this offering, Chiron Corporation ("Chiron") and The Perkin-
Elmer Corporation ("Perkin-Elmer") have agreed to purchase shares of Common
Stock directly from the Company at a price per share equal to the price to
public less one-half of the underwriting discounts and commissions applicable
to the shares of Common Stock being offered to the public hereby, for an
aggregate purchase price of approximately $2.5 million and $5.0 million,
respectively, pursuant to an existing agreement with the Company (the "Private
Placement"). See "Business--Collaborative and Other Arrangements."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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Per Share.................................. $ $ $
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Total(3)................................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expensesamended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not a soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 25, 2013
PRELIMINARY PROSPECTUS
Shares of $750,000 payable byCommon Stock
Warrants for Purchase up to Shares of Common Stock
Shares of Common Stock Underlying the Company.
(3) The Company has granted the Underwriters a 30-day optionWarrants
Common Stock
We are offering up to shares of our common stock and warrants to purchase up to 412,500 additional shares of Common Stockour common stock. Each warrant will have an exercise price of $ per share, will be immediately exercisable and will expire on the same terms and conditions
set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full,year anniversary of the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
------------date of issuance. The shares of Common Stockcommon stock and warrants are immediately separable and will be issued separately, but will be purchased together in this offering. Our common stock is listed on The NASDAQ Capital Market under the symbol “ABIO.” On March 20, 2013, the last reported sale price of our common stock on The NASDAQ Capital Market was $2.80 per share. There is no established trading market for the warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the warrants on any national securities exchange. The warrants will be issued in registered form pursuant to a warrant agency agreement between us and Computershare Trust Company, N.A., as warrant agent.
Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| PER SHARE | TOTAL | |||||||
Public Offering Price | $ | $ | ||||||
Placement Agent’s Fees (1) | $ | $ | ||||||
Proceeds to ARCA biopharma before expenses | $ | $ | ||||||
| (1) | In addition we have agreed to issue to the placement agent warrants to purchase up to an aggregate of 5.0% of the aggregate number of shares of common stock sold in this offering, to pay to the placement agent a non-accountable expense allowance equal to 2.0% of the aggregate gross proceeds raised in the offering and to reimburse legal expense of the placement agent in an amount up to $75,000. |
Dawson James Securities, Inc. has agreed to act as our lead placement agent in connection with this offering. Dawson may engage one or more sub-placement agents or selected dealers. The placement agent is not purchasing or selling the securities offered by this Prospectus are being offered byus, and is not required to sell any specific number or dollar amount of securities, but will use its reasonable best efforts to arrange for the Underwriters subject to prior sale to withdrawal, cancellation or
modification of the offersecurities offered. We have agreed to pay the placement agent a placement fee equal to 6.0% of the aggregate gross proceeds to us from the sale of the securities in the offering and to issue the placement agent warrants to purchase 5.0% of the common stock sold in this offering with an exercise price equal to $ . We estimate total expenses of this offering, excluding the placement agent fees, will be approximately $ . Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount, placement agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above. See “Plan of Distribution” beginning on page 49 of this prospectus for more information on this offering and the placement agent arrangements.
This offering will terminate on , 2013, unless the offering is fully subscribed before that date or we decide to terminate the offering prior to that date. In either event, the offering may be closed without further notice to deliveryyou.
Investing in our common stock involves a high degree of risk. Before making any investment in our common stock, you should read and carefully consider the risks described in this prospectus under “Risk Factors” beginning on page 5 of this prospectus.
You should rely only on the information contained in this prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with different information.
Neither the Securities and acceptanceExchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Dawson James Securities, Inc.
Prospectus dated , 2013
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |||
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Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders | 46 | |||
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We have not, and the placement agent has not, authorized anyone to provide you with information different than that contained or incorporated by reference in this prospectus and any free writing prospectus that we have authorized for use in connection with this offering. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the Underwritersplacement agent is not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus, the documents incorporated by reference in this prospectus, and to certain further conditions. Itin any free writing prospectus that we have authorized for use in connection with this offering, is expected that delivery of
certificates representing the shares of Common Stock will be made at the
offices of Lehman Brothers Inc., New York, New York, on or about , 1997.
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LEHMAN BROTHERS
SMITH BARNEY INC.
FAHNESTOCK & CO. INC.
, 1997
[GRAPHICS APPEARS HERE]
This Prospectus contains certain forward-looking statements (within the
meaningaccurate only as of the Private Securities Litigation Reform Actdate of 1995) that involve
substantial risksthose respective documents. Our business, financial condition, results of operations and uncertainties. When usedprospects may have changed since those dates. You should read this prospectus, the documents incorporated by reference in this Prospectus,prospectus, and any free writing prospectus that we have authorized for use in connection with this offering, in their entirety before making an investment decision. You should also read and consider the words
"anticipate," "believe," "estimate,"information in the documents to which we have referred you in the sections of this prospectus entitled “Where You Can Find Additional Information” and "expect"“Incorporation of Certain Information by Reference.”
Unless the context indicates otherwise, the terms “ARCA,” “ARCA biopharma,” “we,” “us” and similar expressions as
they relate“our” refer to ARCA biopharma, Inc.
ARCA, the Company or its managementARCA logo, and associated logo are intended to identify such
forward-looking statements. The Company's actual results and performance could
differ materially from the results expressed in or implied by these forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON
STOCK FOLLOWING THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR MAINTAIN THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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Hyseq(R) is a registered trade and service marktrademarks of the Company; HyChip(TM),
HyGenomics(TM), HyGnostics(TM) and HyX(SM) are trade and service marks of the
Company. All otherARCA biopharma, Inc.
Other trademarks service marks and trade names referred to in
this Prospectusthat are the property of their respective owners.
2
[GRAPHICS APPEAR HERE]
A color schematic diagram entitled "Hyseq HyX Platform Technology". Five
photographsowners are arrangedalso contained in a circle, connected by arrows in a counterclockwise
direction, beginning from the photograph in the top left corner. Moving
counterclockwise, the photograph in the top left corner is of a Hyseq pipetting
robot and the caption reads "Pipetting Robot - Sample Preparation". The next
photograph is of a Hyseq spotting robot and the caption reads "Spotting Robot -
DNA Array Manufacture". The next photograph is of a Hyseq hybridization robot
and the caption reads "Hybridization Robot - Hybridization Probing". The next
photograph is of a sample Hyseq HyGnostics Array and the caption reads "Computer
Image of HyGnostics Array - Imaging of Results". The next photograph is of a
sample Hyseq sequence image and the caption reads "Computer Image of Sequence -
Analysis of Results".
i
PROSPECTUS SUMMARY
The following
This summary is qualified in its entiretyhighlights selected information contained elsewhere or incorporated by reference to,in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read and should be read in conjunction with,consider carefully the more detailed information in this prospectus, including the factors described under the heading “Risk Factors” in this prospectus beginning on page 5 and the Consolidated Financial Statementsfinancial and related Notes thereto appearing elsewhereother information included and incorporated by reference in this Prospectus. Unless indicated otherwise,prospectus, as well as the information containedincluded in any free writing prospectus that we have authorized for use in connection with this Prospectus: (i) assumesoffering, before making an investment decision.
The terms “ARCA,” “the Company,” “we,” “us,” “our” and similar terms refer to ARCA biopharma, Inc.
Overview
We are a biopharmaceutical company whose principal focus is developing genetically-targeted therapies for cardiovascular diseases. Our lead product candidate is Gencaro™ (bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator that we plan to evaluate in a new clinical trial for the treatment of atrial fibrillation, or AF, in patients with heart failure and left ventricular dysfunction, or HFREF. We have identified common genetic variations in receptors in the cardiovascular system that we believe interact with Gencaro’s pharmacology and may predict patient response to the drug.
We plan to test this hypothesis in a Phase 2b/3 clinical trial of Gencaro, known as GENETIC-AF. We plan to pursue this indication for Gencaro because data from the previously conducted Phase 3 heart failure (HF) trial of Gencaro in 2,708 HF patients, or the BEST trial, suggest that Gencaro may be successful in reducing or preventing AF.
AF is a disorder in which the normally regular and coordinated contraction pattern of the heart’s two small upper chambers (the atria) becomes irregular and uncoordinated. The irregular contraction pattern associated with AF causes blood to pool in the atria, predisposing the formation of clots potentially resulting in stroke. AF is considered an epidemic cardiovascular disease with an estimated prevalence of at least 2.7 million Americans in 2010. The approved therapies for the treatment or prevention AF have certain disadvantages in HFREF patients, such as toxic or cardiovascular adverse effects, and most of the approved drugs for AF are contra indicated or have warnings in their prescribing information for such patients. We believe there is an unmet medical need for new AF treatments that have fewer side effects than currently available therapies and are more effective, particularly in HFREF patients.
GENETIC-AF is planned as a multi-center, randomized, double-blind clinical trial designed to compare the safety and efficacy of Gencaro to an active comparator in beta-1 389 arginine homozygous genotype HFREF patients recently diagnosed with persistent AF. The primary endpoint will be measured over a twenty-four week period after the patient’s AF has been electrically cardioverted through the administration of a direct current shock to restore normal heart rhythm.
We have created an adaptive design for GENETIC-AF, which we plan to initiate with a Phase 2b study in approximately 200 HFREF patients with recent onset, persistent AF who also have a genetic variant of the beta-1 adrenergic receptor which we believe responds most favorably to Gencaro. The secondary endpoint of the proposed Phase 2b portion of the trial will be AF burden, defined as a patient’s actual percentage of time in AF, regardless of symptoms. Under the proposed design, all 200 patients in the Phase 2b portion of the trial will have AF burden measured by continuous monitoring, either by previously implanted cardiac resynchronization or defibrillation devices, or newly or previously inserted loop recorders. At the end of enrollment of the first 200 patients, the primary endpoint of the combination of recurrent symptomatic AF or all-cause mortality, and the secondary endpoint of AF burden will be evaluated by the trial’s Data and Safety Monitoring Board for evidence of an efficacy signal. If a sufficient efficacy signal is detected and acceptable safety is observed, the trial could then proceed to the Phase 3 portion. We estimate that GENETIC-AF could begin approximately 6 months after we obtain sufficient funding. We believe the Phase 2b study would take approximately two years to complete.
The trial is designed to compare Gencaro to the beta-blocker metoprolol CR/XL in patients with the beta-1 389 arginine homozygous genotype, which we believe responds most favorably to Gencaro. We believe data from the BEST trial indicate that Gencaro may have a genetically regulated effect in reducing or preventing AF, whereas we believe the therapeutic benefit of metoprolol CR/XL does not appear to be enhanced in patients with this genotype. A retrospective analysis of data from the BEST trial shows that the Underwriters' over-allotment optionentire cohort of patients in the BEST trial treated with Gencaro had a 41% reduction in the risk of new onset AF (time-to-event) compared to placebo (p = 0.0004). In the BEST DNA substudy, patients with the beta-1 389 arginine homozygous genotype experienced a 74% (p = 0.0003) reduction in risk of AF when receiving Gencaro, based on the same analysis. The beta-1 389 arginine homozygous genotype was present in about 47% of the patients in the BEST pharmacogenetic substudy, and we estimate it is not exercised; (ii) assumespresent in about 50% of the US general population.
Medtronic, Inc., a leader in medical technologies to improve the treatment of chronic diseases including cardiac rhythm disorders, has signed a non-binding Letter of Intent, or LOI, with us to collaborate on the Phase 2b portion of the proposed trial to support GENETIC-AF. The proposed collaboration involves a substudy of the Phase 2b portion of GENETIC-AF that will measure the AF burden data by means of their continuous monitoring devices. Under the proposed collaboration, Medtronic would provide support for the AF burden substudy and for collection and analysis of the substudy data.
We have been granted patents in the U.S., Europe, and other jurisdictions for methods of treating AF and HF patients with Gencaro based on genetic testing, which we believe will provide market exclusivity for these uses of Gencaro into at least 2026 in the U.S. and into 2025 in Europe. In addition, we believe that if Gencaro is approved, a Gencaro patent will be eligible for patent term extension based on our current clinical trial plans which, if granted , may provide market exclusivity for Gencaro into 2029 or 2030 in the U.S. and Europe.
To support the continued development of Gencaro, including the planned GENETIC-AF clinical trial and our ongoing operations, we plan to pursue an underwritten public offering to fund the Phase 2b portion of the GENETIC-AF trial and our general and administrative costs through the projected completion of the proposed salePhase 2b portion. We may seek additional interim funding that could allow us to operate while we continue to pursue financing options, a strategic combination, partnering and licensing opportunities. If we are delayed in obtaining funding or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or discontinue our operations. We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 2013. We are unable to assert that our current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond September 2013. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate.
Risks Associated with Our Business
Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary, beginning on page 5. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, our risks include:
Our management and our independent registered public accountant have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.
We will need to raise substantial additional funds through the public or private debt and equity securities, from government funding or complete one or more strategic transactions, to continue development of Gencaro. If we are unable to raise such financing or complete such a transaction, we may not be able to continue operations.
If we are not able to successfully develop, obtain FDA approval for and provide for the commercialization of Gencaro in a timely manner, we may not be able to continue our business operations.
Our clinical trials for our product candidates may not yield results that will enable us to further develop our products and obtain the regulatory approvals necessary to sell them.
We expect to rely on contract research organizations to conduct clinical trials, and as a result, will be unable to directly control the timing, conduct and expense of clinical trials.
If we encounter difficulties enrolling patients in our clinical trials, our trials could be delayed or otherwise adversely affected.
We do not have a binding agreement with Medtronic for their participation in the GENETIC-AF trial and we may never complete a binding agreement with Medtronic.
We must enter into another a separate agreement with Lab Corp or other provider to support the genetic test and we may never complete a binding agreement with Lab Corp or another provider.
We may not achieve our projected development goals in the time frames we announce and expect.
Our intellectual property rights may not preclude competitors from developing competing products and our business may suffer.
Corporate Information
On January 27, 2009, we completed a business combination (the Merger) with ARCA Colorado in accordance with the terms of that Agreement and Plan of Merger and Reorganization, dated September 24, 2008, and amended on October 28, 2008 in which a wholly-owned subsidiary of Nuvelo, Inc. merged with and into ARCA Colorado, with ARCA Colorado continuing after the Merger as the surviving corporation and a wholly-owned subsidiary of Nuvelo, Inc. Immediately following the Merger, we changed our name from Nuvelo, Inc. to ARCA biopharma, Inc. Nuvelo was originally incorporated as Hyseq, Inc. in Illinois in 1992 and reincorporated in Nevada in 1993. On January 31, 2003, Nuvelo merged with Variagenics, Inc., a publicly traded Delaware corporation based in Massachusetts, and, in connection with the merger, changed its name to Nuvelo, Inc. On March 25, 2004, Nuvelo was reincorporated from Nevada to Delaware. On January 27, 2009, in connection with the Merger with ARCA Colorado described above, Nuvelo changed its name to ARCA biopharma, Inc. On March 4, 2013, we executed a one for six reverse split of our common stock. Our principal offices are located in Broomfield, Colorado, and our telephone number is (720) 940-2200. Our website address iswww.arcabiopharma.com. The information in or that can be accessed through our website is not part of this prospectus.
THE OFFERING
| Securities offered by us in this offering | shares of common stock Warrants to purchase up to shares of common stock shares of common stock issuable upon exercise of the warrants | |
| Common Stock outstanding prior to offering | shares of common stock | |
| Common stock outstanding after the offering | shares of common stock | |
Warrants Exercisability Exercise Price Exercise Term | Each warrant is exercisable for share(s) of common stock. $ per share. years. | |
| Securities Purchase Agreement | We may enter into one or more securities purchase agreements directly with certain institutional investors in connection with this offering, which will set forth the terms of the offering, as described in this prospectus. | |
| Use of proceeds | We expect to use the proceeds received from the offering to fund the Phase 2b portion of the GENETIC-AF trial and working capital and general corporate purposes. See “use of Proceeds” for more information. | |
| NASDAQ Capital Market listing | Our common stock is listed on The NASDAQ Capital Market under the symbol “ABIO.” There is no established trading market for the warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the warrants on any national securities exchange. | |
| Risk factors | Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 5 of this prospectus. | |
Outstanding Shares
The number of shares of Series
B Preferred Stockcommon stock outstanding immediately after this offering is based on or about June 20, 1997, subject to approval by The Perkin-
Elmer Corporation board of directors; (iii) gives retroactive effect to the
conversion of the Company's Series A Preferred Stock and Series B Preferred
Stock to Common Stock, par value $.001 per share (the "Common Stock"),
immediately prior to the completion of this offering; and (iv) gives
retroactive effect to a subsequent 1.92-for-1 split of the Company's2,660,315 shares of Common Stock, to be effected before the completioncommon stock outstanding as of this offering. Unless
otherwise indicated, all references to the "Company" or "Hyseq" include Hyseq,
Inc. and its subsidiary.
THE COMPANY
Hyseq, Inc. ("Hyseq" or the "Company") applies the proprietary DNA array
technology of its integrated HyX genomics platform (the "HyX Platform") to
develop gene-based therapeutic product candidates and diagnostic products and
tests. The Company believes that its HyX Platform, which utilizes the Company's
proprietary sequencing by hybridization ("SBH") technology as its foundation,
generates higher gene sequence throughput with greater analytical flexibility
and accuracy and lower cost than prevailing technologies. The HyX Platform's
Gene Discovery Module presently is analyzing human DNA samples at a rate of
approximately 400,000 partial sequences per month, representing approximately
50% of a module's current capacity. Based in part on this rate of analysis and
on published industry information, the Company believes that its HyGenomics
Database of partial gene sequences is one of the largest proprietary human gene
databases in the world. The Company has collaborative agreements with Chiron
Corporation ("Chiron") in gene discovery and The Perkin-Elmer Corporation
("Perkin-Elmer") regarding commercialization of its HyChip products, and
initial agreements with SmithKline Beecham Clinical Laboratories, Inc.
("SmithKline Beecham") and Quest Diagnostics Incorporated ("Quest") regarding
evaluation of its HyGnostics Module for commercial-scale diagnostic testing.
In 1996, sales of human gene-based products (e.g., therapeutic proteins),
including erythropoietin, human insulin, granulocyte colony stimulating factor
and tissue plasminogen activator, totaled over $6 billion. The large market
potential for gene-based products has led to a worldwide effort to discover and
sequence the estimated 150,000 genes in the human genome. Industry experts
believe that after genes are discovered and sequenced, many additional years of
research will be required to determine their functions and roles in disease. To
date, genomics companies have relied primarily on gel-sequencing technology and
expressed sequence tags ("ESTs") to identify genes and obtain sequence
information.
The Company believes that the ability of its HyX Platform to process millions
of samples per year and sequence billions of bases per year represents a
fundamental advance in performing genomic experimentation, gene discovery, gene
function analyses and diagnostic testing in commercial-scale volumes. The HyX
Platform includes (i) a comprehensive set of labeled DNA probes; (ii) DNA
arrays of samples and probes; (iii) three software-driven modules (Gene
Discovery, HyGnostics and HyChip Modules), which enable user-driven DNA probe
selection to customize the level and type of analysis; (iv) industrial robotics
systems for screening DNA probes against DNA samples; and (v) bioinformatics to
manage and analyze genetic information. These combined technologies enable
Hyseq to conduct a range of genomic applications, including gene
identification, expression level determination, gene interaction studies,
polymorphism screening, diagnostic testing and genetic mapping on one
integrated platform.
3
The HyX Platform's software-driven modules include:
. Gene Discovery Module. Designed to screen or sequence large numbers of
human DNA samples (typically, 30,000 to 50,000 samples per batch) for
gene discovery, gene function analysis and genomic experimentation. Hyseq
uses the Gene Discovery Module internally to identify proprietary gene-
based therapeutic candidates in the central nervous system,
cardiovascular and infectious disease areas and therapeutic product
candidates which impact cell receptors. The Company has an exclusive
collaboration with Chiron to develop therapeutics, diagnostic molecules
and vaccines relating to a specified disease area.
. HyGnostics Module. Designed to screen or sequence small to medium numbers
of DNA samples (typically, 10 to 1,000 samples per batch) for diagnostic
applications, including DNA testing of genetic and infectious disease and
cancer. The Company is currently marketing its HyGnostics Module to major
clinical reference laboratories. The Company has entered into initial
agreements with SmithKline Beecham and Quest, two of the three largest
clinical reference laboratories in the United States, relating to
evaluation of the HyGnostics Module for commercial-scale diagnostic
testing.
. HyChip Module. Designed to screen or sequence DNA samples in a single
reaction with a capacity ranging in size from the detection of single
base mutations to the sequencing of entire viral genomes. Hyseq is
presently using the HyChip Module internally for research applications.
The Company has an exclusive collaboration with Perkin-Elmer to co-
develop and commercialize gene-sequencing systems targeted at specific
DNA research and diagnostic applications utilizing HyChip products and
Perkin-Elmer's life science system capabilities.
Hyseq's strategy is to engage in large-scale gene discovery and to establish
collaborations to facilitate development and commercialization activities.
Hyseq believes that this research- and partner-driven approach may create
significant operational and financial advantages for the Company and accelerate
commercial development of new therapeutic and diagnostic products. In
therapeutics, Hyseq's strategy is to (i) discover candidates and then
collaborate to develop gene-based pharmaceuticals, including therapeutic
proteins, small molecules, gene therapy, antisense and other products, which
can be used to impact cell receptor targets and treat central nervous system,
cardiovascular and infectious diseases; (ii) develop disease-related programs,
such as the Company's program with Chiron, in conjunction with collaboration
partners; and (iii) perform genomic experimentation in commercial-scale volumes
by screening large numbers of DNA samples for expression levels under various
conditions and by large-scale partial sequencing of samples to find disease-
related polymorphisms. In diagnostics, Hyseq's strategy is to (i) expand its
HyGnostics Module licensing program to leading clinical reference laboratories
for multiple DNA analyses, including sequencing diagnostics, point mutation,
detection, population screening and confirmatory assays; (ii) market the
HyGnostics Module to pharmaceutical and biotechnology companies and clinical
research organizations as a resource for potentially accelerating clinical
trials; and (iii) commercialize HyChip products through its collaboration with
Perkin-Elmer.
Hyseq intends to patent commercially relevant genes and gene-based products
obtained through application of its HyX Platform. The Company believes that
information about the biological function of genes is critical to obtaining
such patents. Further, the Company believes that the HyX Platform's ability to
perform complete sequencing rapidly and cost effectively may accelerate the
characterization of gene function and enhance the discovery and development of
new therapeutic product candidates and diagnostic products and tests. The
Company has three issued U.S. patents and several pending patent applications
covering SBH technology and the use of its proprietary DNA array technology.
Several other pending patent applications cover apparatus and applications of
its technology and aDecember 31, 2012. This number of partial gene sequences identified in its gene
discovery program.
4
THE OFFERING
Common Stock offered by the 2,750,000 shares
Company........................
Common Stock to be outstanding
after the offering............. 12,127,418 shares(1)
Use of Proceeds................. Development of potential therapeutic product
candidates and diagnostic tests, expansion of
the HyGenomics Database, further development
of the HyChip Module, investments in capital
equipment and leasing of additional space to
increase capacity and general corporate
purposes, including working capital. See "Use
of Proceeds."
Proposed Nasdaq National Market HYSQ
symbol.........................
- --------
(1) Includes an aggregate of 597,849excludes:
930,725 shares of Common Stock (based on an
assumed initial public offering price of $13.00 per share in this offering)
to be issued to Chiron and Perkin-Elmer in the Private Placement. Excludes:
(i) 645,619 shares of Common Stockcommon stock issuable upon the exercise of vested optionswarrants outstanding as of December 31, 2012, at a weighted average exercise price of $2.27$9.10 per share; (ii)
692,847
144,019 shares of Common Stockcommon stock issuable upon the exercise of warrantsoptions outstanding as of December 31, 2012, at a weighted average exercise price of $3.81; (iii) 747,848$18.28 per share;
80,255 additional shares of Common Stock issuable upon exercisecommon stock reserved for future issuance under our Amended and Restated 2004 Equity Incentive Plan; and
521,066 shares of options outstandingcommon stock issued in connection with stock offerings completed subsequent to December 31, 2012
Except as otherwise indicated, all information in this prospectus assumes a 1-for-6 reverse stock split of our capital stock that became effective on March 4, 2013.
An investment in ARCA’s securities involves certain risks, including those set forth below and elsewhere in this report. In addition to the risks set forth below and elsewhere in this report, other risks and uncertainties not known to ARCA, that are beyond its control or that ARCA deems to be immaterial may also materially adversely affect ARCA’s business operations. You should carefully consider the risks described below as well as other information and data included in this report.
Risks Related to Our Business and Financial Condition
Our management and our independent registered public accountant, in their report on our financial statements as of and for the year ended December 31, 2012, have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.
Our audited financial statements for the fiscal year ended December 31, 2012 were prepared assuming that we will continue as a going concern. The going concern basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our management and our independent registered public accountants have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern. We may be forced to reduce our operating expenses and raise additional funds to meet our working capital needs, principally through the additional sales of our securities or debt financings. However, we cannot guarantee that will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us. If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund our operations, develop Gencaro or our other product candidates, or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.
We will need to raise substantial additional funds through public or private equity transactions complete one or more strategic transactions, to continue development of Gencaro. If we are unable to raise such financing or complete such a transaction, we may not be able to continue operations.
In light of the expected development timeline to potentially obtain FDA approval for Gencaro, if at all, the substantial additional costs associated with the development of Gencaro, including the costs associated with the planned GENETIC-AF clinical trial, the substantial cost of commercializing Gencaro, if it is approved, we will need to raise substantial additional funding through public or private r equity transactions or a strategic combination or partnership. If we are delayed in obtaining funding or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or discontinue our operations. Even if we are able to fund continued development and Gencaro is approved, we expect that we will need to complete a strategic transaction or raise substantial additional funding through public or private debt or equity securities to successfully commercialize Gencaro.
We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 30, 2013. As a result of the significant additional development effort required for Gencaro, including the additional clinical trials, we may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of Gencaro or to continue operation and may not be able to execute any strategic transaction. We are unable to assert that our current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond September 30, 2013. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate.
Our liquidity, and our ability to raise additional capital or complete any strategic transaction, depends on a number of factors, including, but not vested;limited to, the following:
the costs and (iv) 501,765 shares reservedtiming for issuance upon exerciseadditional clinical trials in order to gain possible FDA approval for Gencaro;
the market price of optionsour stock and the availability and cost of additional equity capital from existing and potential new investors;
our ability to retain the listing of our common stock on the Nasdaq Capital Market;
general economic and industry conditions affecting the availability and cost of capital;
our ability to control costs associated with our operations;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
the terms and conditions of our existing collaborative and licensing agreements.
The sale of additional equity or convertible debt securities would likely result in substantial dilution to our stockholders. If we raise additional funds through the incurrence of indebtedness, the obligations related to such indebtedness would be senior to rights of holders of our capital stock and could contain covenants that would restrict our operations. We also cannot predict what consideration might be available, if any, to us or our stockholders, in connection with any strategic transaction. Should strategic alternatives or additional capital not be available to us in the near term, or not be available on acceptable terms, we may be grantedunable to realize value from our assets and discharge our liabilities in the future undernormal course of business which may, among other alternatives, cause us to further delay, substantially reduce or discontinue operational activities to conserve our cash resources.
If we are not able to maintain the Company's Stock Option
Planrequirements for listing on the Nasdaq Capital Market, we could be delisted, which could have a materially adverse effect on our ability to raise additional funds as well as the price and Non-Employee Director Stock Option Plan. See "Management and
Scientific Advisory Board--Stock Option Plans and Agreements," "Descriptionliquidity of our common stock.
Our common stock is currently listed on the Nasdaq Capital Stock" and Note 7Market. To maintain the listing of Notesour common stock on the Nasdaq Capital Market we are required to Consolidated Financial Statements.
SUMMARY CONSOLIDATED FINANCIAL DATA
During 2012 our stock price fell below the Nasdaq Capital Market’s minimum bid price requirements and we became subject to delisting from the exchange. On March 4, 2013 we executed a 1 for 6 reverse split of our common stock and have subsequently regained compliance with the minimum bid price requirements. In future periods, if we do not meet the minimum stockholders’ equity or minimum closing bid price requirements, we would be subject to delisting from the Nasdaq Capital Market.
As of March 18, 2013, the closing price of our common stock was $2.72 per share, and the receipttotal market value of our publicly held shares of our common stock (excluding shares held by our executive officers, directors and 10% or more stockholders) was approximately $6.8 million and the total market value of our listed securities was approximately $8.7 million. As of December 31, 2012, we had stockholders’ equity of $2.9 million.
Our failure to raise substantial additional funding or enter into a strategic transaction may materially and adversely affect our business.
Unless we are able to raise substantial additional funding through other means, we will need to complete a strategic transaction to continue the development of Gencaro or our other operations. The strategic transactions that we may consider include a potential combination or partnership. Our board of directors and management team has and will continue to devote substantial time and resources to obtaining additional capital or the consideration and implementation of any such strategic transaction. In addition, conditions in the financial markets may lead to an increased number of biotechnology companies that are also seeking to enter into strategic transactions, which may limit our ability to negotiate favorable terms for any such transaction. Further, our current employees do not have experience in the strategic transaction process, and our previous efforts to enter into a strategic transaction have not been successful. As a result of these and other factors, there is substantial risk that we may not be able to complete a strategic transaction on favorable terms, or at all. The failure to complete a strategic transaction may materially and adversely affect our business.
We may be limited in our ability to access sufficient funding through a private equity or convertible debt offering.
Nasdaq rules impose restrictions on our ability to raise funds through a private offering of our common stock, convertible debt or similar instruments without obtaining stockholder approval. Under Nasdaq rules, an offering of more than 20% of our total shares outstanding for less than the greater of book or market value requires stockholder approval unless the offering qualifies as a “public offering” for purposes of the estimated net proceeds
therefromNasdaq rules. As of March 18, 2013, we had 3,185,562 shares of common stock outstanding, 20% of which is 637,112 shares. To the extent we seek to raise funds through a private offering of stock, convertible debt or similar instruments, we are limited in how much funding we could raise privately without requiring a stockholder vote.
In addition, we are currently subject to certain contractual rights of investors arising from our public and (ii)private equity financing transactions that limit the nature and price of future public and private financing transactions that we may effect. For example, in January 2013, we entered into separate subscription agreements with certain institutional investors in connection with a private investment in public equity, pursuant to which we sold shares of our common stock and warrants to purchase shares of our common stock to the investors. In connection with this transaction, we agreed that, subject to certain exceptions, we would not, while the warrants are outstanding, effect or enter into an agreement to effect any issuance of common stock or securities convertible into, exercisable for or exchangeable for common stock in a “variable rate transaction,” which means a transaction in which we issue or sell any convertible securities either (A) at a conversion price, exercise price or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares of common stock at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the convertible securities or upon the occurrence of the specified or contingent events directly or indirectly related to our business or the market for our common stock. In addition, we agreed that, subject to certain exceptions, if we issue securities within one year following the closing of the offering, each investor would have the right to purchase its pro rata share of a specified portion of the securities in the future offering on the same terms, conditions and price provided for in the proposed issuance of securities.
The restrictions imposed by the terms of these offerings, and that could be imposed in future offerings, may limit our access to capital on agreeable terms and delay or make impossible certain otherwise available equity financing opportunities and could severely restrict our access to the capital necessary to conduct our business.
If we are not able to successfully develop, obtain FDA approval for and provide for the commercialization of Gencaro in a timely manner, we may not be able to continue our business operations.
We currently have no products that have received regulatory approval for commercial sale. The process to develop, obtain regulatory approval for and commercialize potential product candidates is long, complex and costly. We plan to conduct a Phase 2b/Phase 3 clinical study of Gencaro in approximately 200-620 HFREF patients with AF. Clinical trials are typically lengthy, complex and expensive and we do not currently have the resources to fund such a trial.
Failure to demonstrate that a product candidate, particularly Gencaro, is safe and effective, or significant delays in demonstrating such safety and efficacy, would adversely affect our business. Failure to obtain marketing approval of Gencaro from appropriate regulatory authorities, or significant delays in obtaining such approval, would also adversely affect our business and could, among other things, preclude us from completing a strategic transaction or obtaining additional financing necessary to continue as a going concern.
Even if approved for sale, a product candidate must be successfully commercialized to generate value. We do not currently have the capital resources or management expertise to commercialize Gencaro and, as a result, will need to complete a strategic transaction, or, alternatively, raise substantial additional funds to enable commercialization of Gencaro, if it is approved. Failure to successfully provide for the commercialization of Gencaro, if it is approved, would damage our business.
Our clinical trials for our product candidates may not yield results that will enable us to further develop our products and obtain the regulatory approvals necessary to sell them.
We will only receive regulatory approval for our product candidates if we can demonstrate in carefully designed and conducted clinical trials that the product candidate is safe and effective. We do not know whether any future clinical trials, including the planned GENETIC-AF clinical trial for Gencaro, will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or will result in marketable products. For example, GENETIC-AF is designed to be an adaptive trial. If we do not see sufficient efficacy and safety in the Phase 2b portion of the trial, we will not complete the Phase 3 portion of the trial. Clinical trials are lengthy, complex and expensive processes with uncertain results. We have spent, and expect to continue to spend, significant amounts of time and money in the clinical development of our product candidates. We have never conducted a Phase 2 or Phase 3 clinical trial and do not currently have sufficient staff with the requisite experience to do so, and we therefore expect that we will have to rely on contract research organizations to conduct certain of our clinical trials. While certain of our employees have experience in designing and administering clinical trials, these employees have no such experience since being with us.
The results we obtain in preclinical testing and early clinical trials may not be predictive of results that are obtained in later studies. We may suffer significant setbacks in advanced clinical trials, even after seeing promising results in earlier studies. Based on results at any stage of clinical trials, we may decide to repeat or redesign a trial or discontinue development of one or more of our product candidates. If we fail to adequately demonstrate the safety and efficacy of our products under development, we will not be able to obtain the required regulatory approvals to commercialize our product candidates, and our business, results of operations and financial condition would be materially adversely affected.
Administering our product candidates to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications.
If clinical trials for a product candidate are unsuccessful, we will be unable to commercialize the product candidate. If one or more of our clinical trials are delayed, we will be unable to meet our anticipated development timelines. Either circumstance could cause the market price of our common stock to decline.
We expect to rely on contract research organizations to conduct clinical trials, and as a result, will be unable to directly control the timing, conduct and expense of clinical trials.
We expect that we, or any strategic partners, will rely primarily on third parties to conduct clinical trials, including the AF clinical trial that we plan to conduct. As a result, we will have less control over the conduct of the clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us or any strategic partner to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay ongoing trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can conduct clinical trials in an acceptable manner and at an acceptable cost.
Even if we do use a contract research organization to conduct clinical trials, we will have to devote substantial resources and rely on the expertise of our employees to manage the work being done by the contract research organization. We have never conducted a clinical trial and do not currently have sufficient staff with the requisite experience to do so. The inability of our current staff to adequately manage any contract research organization that we hire may exacerbate the risks associated with relying on a contract research organization.
If we encounter difficulties enrolling patients in our clinical trials, our trials could be delayed or otherwise adversely affected.
Clinical trials for our product candidates require that we identify and enroll a large number of patients with the disorder or condition under investigation. We may not be able to enroll a sufficient number of patients to complete our clinical trials in a timely manner.
Patient enrollment is affected by factors including:
design of the protocol;
the size of the patient population;
eligibility criteria for the study in question;
perceived risks and benefits of the drug under study;
availability of competing therapies, including the off-label use of therapies approved for related indications;
efforts to facilitate timely enrollment in clinical trials;
the success of our personnel in making the arrangements with potential clinical trial sites necessary for those sites to begin enrolling patients;
patient referral practices of physicians;
availability of clinical trial sites; and
other clinical trials seeking to enroll subjects with similar profiles.
If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have a negative effect on our business. Delays in enrolling patients in our clinical trials would also adversely affect our ability to generate any product, milestone and royalty revenues under collaboration agreements, if any, and could impose significant additional costs on us or on any future collaborators.
We do not have a binding agreement with Medtronic for their participation in the GENETIC-AF trial and we may never complete a binding agreement with Medtronic.
We anticipate that Medtronic’s participation in our planned GENETIC-AF trial will expand the data collection and monitoring of subjects in the Phase 2b portion of the trial. We do not currently have a binding agreement with Medtronic for their participation in the Phase 2b portion of the trial, and we may never enter into a binding agreement with Medtronic. If we do enter into a binding agreement with Medtronic, we cannot predict the terms of such an agreement or that the terms will be favorable to us. The final terms of any final agreement may differ significantly from the terms in the current letter of intent. If we are not successful in completing a definitive agreement with Medtronic or the terms of the agreement are different than we currently contemplate, we may be unable to complete, or we may be delayed in initiating, the Phase 2b portion of GENETIC-AF or we may be forced to alter the proposed design of the trial. If any of these events occur, our business and prospects will be materially and adversely affected and we may be unable to meet our expected timelines and milestones.
Our planned GENETIC-AF clinical trial will require the use of a third-party diagnostic services provider to administer the genetic test needed to identify the patient receptor genotypes of clinical trial participants. We do not currently have a third-party diagnostic services provider identified to perform this work for our planned clinical trial. If we have difficulty getting an arrangement for administering the Gencaro Test, the launch of our clinical trial could be delayed.
The planned GENETIC-AF clinical trial we intend to conduct with Gencaro requires a companion test that identifies the patient’s receptor genotype, or Gencaro Test, and the trial will only enroll those patients with the receptor that has the potential for enhanced efficacy, the beta-1 389 Arg receptor as detected by a beta-1 389 Arg/Arg genotype. Accordingly, the GENETIC-AF trial will require use of a third-party diagnostic service to perform the Gencaro Test. Previously we entered into a collaboration arrangement with LabCorp to develop and commercialize the Gencaro Test for the treatment of patients with HF. Under the terms of that collaboration, we licensed to LabCorp certain rights to commercialize a receptor genotype diagnostic for the beta-1 and alpha-2C polymorphisms. We currently intend to pursue a separate arrangement with LabCorp or another third party to provide the diagnostic services of the Gencaro Test needed to support our GENETIC-AF trial. Obtaining an arrangement with a third party for developing or administering the Gencaro Test for the clinical trial could delay the launch and/or affect the cost and complexity of our planned study.
Unless we are able to generate sufficient product revenue, we will continue to incur losses from operations and may not achieve or maintain profitability. We are years away from commercializing a product and generating product revenue.
Our historical losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital, among other things. We are years away from commercializing a product and generating any product revenue. As a result, we expect to continue to incur significant operating losses for the foreseeable future. Even if we ultimately receive regulatory approval for Gencaro or our other product candidates, sales of such products may not generate sufficient revenue for it to achieve or maintain profitability. Because of the numerous risks and uncertainties associated with developing therapeutic drugs, we may experience larger than expected future losses and may never reach profitability.
We may not achieve our projected development goals in the time frames we announce and expect.
We set goals for, and make public statements regarding, the timing of certain accomplishments, such as, the commencement and completion of clinical trials, particularly GENETIC-AF, the disclosure of trial results, the obtainment of regulatory approval and the sale of 597,849 sharesdrug product, which we sometimes refer to as milestones. These milestones may not be achieved, and the actual timing of Common Stock (based on an
assumed initial public offering pricethese events can vary dramatically due to a number of $13.00 per sharefactors such as delays or failures in this offering)
to be issued to Chiron and Perkin-Elmerour clinical trials, disagreements with current or future collaborative partners, the uncertainties inherent in the Private Placementregulatory approval process and manufacturing scale-up and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. FDA approval of Gencaro, if it occurs, is expected to require years of additional clinical development, including the receipt of the net proceeds therefrom.
5
RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
evaluating the Company and its business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained herein.
Unproven Ability to Commercialize Gene-Based Products. The Company's
strategy of using its Gene Discovery Module to rapidly identify and
characterize the functioncompletion of a substantial numbernew multi-year clinical study of genes and then selecting
from those genes promising candidates to be used to develop therapeutic
products and diagnostic products and tests is unproven. While other companies
have adopted a similar strategy, the application of this strategy isGencaro in too
early a stage to determine whether it can be successfully implemented. The
Company's development effortsapproximately 200-620 HF patients with respect to therapeutic product candidates
and diagnostic tests are still in an early stage. Collaborations with the
Company's current and future collaboration partners will require significant
further research, development, testing and regulatory approvals by the Company
and any such collaboration partners prior to market release of any therapeutic
products or diagnostic tests developed. Even if the Company completely
sequences a substantial number of genes, its success in marketing potential
gene-based therapeutic product candidates and diagnostic tests will depend
upon its ability to determine which of those genes have potential value and to
select an appropriate commercialization strategy for each potential product it
chooses to pursue. To select those genes that are suitable for further
research and development, the Company will need to expend significant time and
resources isolating and sequencing the genes and analyzing them to determine
their function.AF. There can be no assurance that our clinical trials will be completed, or that we will make regulatory submissions or receive regulatory approvals as planned. If we fail to achieve one or more of these milestones as planned, our business will be materially adversely affected.
Our product candidates are subject to extensive regulation, which can be costly and time-consuming, and unsuccessful or delayed regulatory approvals could increase our future development costs or impair our future revenue.
The preclinical and clinical development, testing, manufacture, safety, efficacy, labeling, storage, recordkeeping, and subsequent advertising, promotion, sale, marketing, and distribution, if approved, of our product candidates are subject to extensive regulation by the CompanyFDA and other regulatory authorities in the United States and elsewhere. These regulations also vary in important, meaningful ways from country to country. We are not permitted to market a potential drug in the United States until we receive approval of an NDA from the FDA. We have not received an NDA approval from the FDA for Gencaro or any of our other product candidates. There can be no guarantees with respect to our product candidates that clinical studies will adequately support an NDA, that the products will receive necessary regulatory approvals, or that they will prove to be commercially successful.
To receive regulatory approval for the commercial sale of any product candidates, we must demonstrate safety and efficacy in humans to the satisfaction of regulatory authorities through preclinical studies and adequate and well-controlled clinical trials of the product candidates. This process is expensive and can take many years, and failure can occur at any stage of the testing. Our failure to adequately demonstrate the safety and efficacy of our product candidates will prevent regulatory approval and commercialization of such products. In 2008, we submitted and the FDA accepted our NDA filing for Gencaro for the treatment of chronic HF. In 2009, the FDA issued a CRL in which the FDA stated that it could not approve the Gencaro NDA in its current form, and specified actions required for approval of the NDA, including conducting an additional Phase 3 clinical trial of Gencaro in patients with HF. We plan to conduct a clinical study of Gencaro in AF patients HREF to assess its efficacy in reducing or preventing AF. We anticipate that GENETIC-AF could begin approximately six months after we obtain sufficient funding. This trial is planned to begin as a Phase 2b study in approximately 200 patients and, depending on the outcome of the Phase 2b portion, may be expanded to a Phase 3 study with up to an estimated additional 420 patients. We believe the Phase 2b study would take approximately two years to complete. This product candidate will require years of clinical development. Even if we conduct additional studies in accordance with further FDA guidance and submit or file a new or amended NDA, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval.
In the event that we or our collaborators conduct preclinical studies that do not comply with Good Laboratory Practices or GLP or incorrectly design or carry out human clinical trials in accordance with Good Clinical Practices or GCP or those clinical trials fail to demonstrate clinical significance, it is unlikely that we will be able to obtain FDA approval for product development candidates. Our inability to successfully develop therapeuticand effectively complete clinical trials for any product candidates thatcandidate on schedule, or at all, will severely harm our business. Significant delays in clinical development could materially increase product development costs or allow our competitors to bring products to market before we do, impairing our ability to effectively commercialize any future product candidate. We do not know whether planned clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of commercial
interestreasons, including:
delays or failures in obtaining regulatory authorization to current or future collaboration partners, nor can there be any
assurance that therapeuticcommence a trial because of safety concerns of regulators relating to our product candidates or diagnostic tests identifiedsimilar product candidates of our competitors or failure to follow regulatory guidelines;
delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidates for use in trials;
delays or failures in reaching agreement on acceptable terms with prospective study sites;
delays or failures in obtaining approval of our clinical trial protocol from an institutional review board, or IRB, to conduct a clinical trial at a prospective study site;
delays in recruiting patients to participate in a clinical trial, which may be due to the size of the patient population, eligibility criteria, protocol design, perceived risks and benefits of the drug, availability of other approved and standard of care therapies, availability of clinical trial sites;
other clinical trials seeking to enroll subjects with similar profile;
failure of our clinical trials and clinical investigators to be in compliance with the FDA’s Good Clinical Practices;
unforeseen safety issues, including negative results from ongoing preclinical studies;
inability to monitor patients adequately during or after treatment;
difficulty monitoring multiple study sites; and
failure of our third-party contract research organizations, clinical site organizations and other clinical trial managers, to satisfy their contractual duties, comply with regulations or meet expected deadlines.
In addition, any such collaboration partners would resultapprovals we may obtain may not cover all of the clinical indications for which we seek approval or permit us to make claims of superiority over currently marketed competitive products. Also, an approval might contain significant limitations in the developmentform of commercially viable products.
To date, onlynarrow indications, warnings, precautions or contraindications with respect to conditions of use. If the FDA determines that a limited numberrisk evaluation and mitigation strategy, or REMS, is necessary to ensure that the benefits of gene-based products have been developed
and commercialized, and none have been developed or commercialized by the Company. Even ifdrug outweigh the Company identifiesrisks, we may be required to include as part of the NDA a gene and determines its function,
the Companyproposed REMS that may include a package insert directed to patients, a plan for communication with healthcare providers, restrictions on a drug’s distribution, or a collaboration partnerMedication Guide, to provide better information to consumers about the drug’s risks and benefits. Finally, an approval could be conditioned on our commitment to conduct further clinical trials, which we may not be ablehave the resources to developconduct or which may negatively impact our financial situation.
The manufacture and tableting of Gencaro is done by third party suppliers, who must also meet current Good Manufacturing Practices, or cGMP, requirements and pass a commercially feasible product based on the gene. The developmentpre-approval inspection of therapeutictheir facilities before we can obtain marketing approval.
All of our product candidates and diagnostic tests will be subjectare prone to the risks of failure inherent in drug development. The results from preclinical animal testing and early human clinical trials may not be predictive of results obtained in later human clinical trials. Further, although a new product may show promising results in preclinical or early human clinical trials, it may subsequently prove unfeasible or impossible to generate sufficient safety and efficacy data to obtain necessary regulatory approvals. The data obtained from preclinical and clinical studies are susceptible to varying interpretations that may delay, limit or prevent regulatory approval, and the FDA and other regulatory authorities in the United States and elsewhere exercise substantial discretion in the drug approval process. The numbers, size and design of preclinical studies and clinical trials that will be required for FDA or other regulatory approval will vary depending on the product candidate, the disease or condition for which the product candidate is intended to be used and the regulations and guidance documents applicable to any particular product candidate. The FDA or other regulators can delay, limit or deny approval of any product candidate for many reasons, including, but not limited to:
Side effects;
Safety and efficacy;
Defects in the design of clinical trials;
The fact that the FDA or other regulatory officials may not approve our or our third party manufacturer’s processes or facilities; or
The fact that new regulations may be enacted by the FDA or other regulators may change their approval policies or adopt new regulations requiring new or different evidence of safety and efficacy for the intended use of a product candidate.
In light of widely publicized events concerning the safety of certain drug products, regulatory authorities, members of Congress, the Government Accountability Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of certain drug products, revisions to certain drug labeling that further limit use of the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials and approval. Data from clinical trials may receive greater scrutiny with respect to safety and the product’s risk/benefit profile, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense, and a delay or failure in obtaining approval or approval for a more limited indication than originally sought. Aside from issues concerning the quality and sufficiency of submitted preclinical and clinical data, the FDA may be constrained by limited resources from reviewing and determining the approvability of the Gencaro NDA in a timely manner.
In pursuing clinical development of products based onGencaro for an AF indication, we would likely be required to amend the Gencaro HF NDA or prepare a new technologies,NDA. The FDA could approve Gencaro, but without including some or all of the possibilitiesprescribing information that therapeuticwe have requested. For instance, the FDA could approve Gencaro for AF in a more limited patient population or included additional warnings in the drug’s label. This, in turn, could substantially and detrimentally impact our ability to successfully commercialize Gencaro and effectively protect our intellectual property rights in Gencaro.
If our product candidates willreceive regulatory approval, we would be found
toxic, defective, unreliablesubject to ongoing regulatory obligations and restrictions, which may result in significant expenses and limit our ability to develop and commercialize other potential products.
If a product candidate of ours is approved by the FDA or otherwise failby another regulatory authority, we would be held to receive necessaryextensive regulatory clearance; such products willrequirements over product manufacturing, testing, distribution, labeling, packaging, adverse event reporting and other reporting to regulatory authorities, storage, advertising, marketing, promotion, distribution, and record keeping. Regulatory approvals may also be difficultsubject to manufacturesignificant limitations on a large scalethe indicated uses or
uneconomical to market; proprietary rights of others will preclude marketing of the Company's products;product candidates. Potentially costly follow-up or post-marketing clinical studies may be required as a condition of approval to further substantiate safety or efficacy, or to investigate specific issues of interest to the regulatory authority. Previously unknown problems with the product candidate, including adverse events of unanticipated severity or frequency, may result in additional regulatory controls or restrictions on the marketing or use of the product or the need for post marketing studies, and could include suspension or withdrawal of the products from the market.
Furthermore, our third-party manufacturers and the manufacturing facilities that they use to make our product candidates are regulated by the FDA. Quality control and manufacturing procedures must continue to conform to cGMP after approval. Drug manufacturers and their subcontractors are required to register their facilities and products manufactured annually with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA, state and/or other foreign authorities. Any subsequent discovery of third partiesproblems with a product, or a manufacturing or laboratory facility used by us or our collaborators, may result in restrictions on the product, or on the manufacturing or laboratory facility, including a withdrawal of the drug from the market or suspension of manufacturing. Any changes to an approved product, including the way it is manufactured or promoted, often require FDA approval before the product, as modified, can be marketed. We and our third-party manufacturers will also be subject to ongoing FDA requirements for submission of safety and other post-market information.
The marketing and advertising of our drug products by our collaborators or us will be superior.
Certain areas of gene-based discovery that may be pursuedregulated by the Company under
current and future collaborative arrangements, including gene therapy, involve
new technologies, and existing data on the safety and efficacyFDA, certain state agencies or foreign regulatory authorities. Violations of these technologies is very limited. At present, nolaws and regulations, including promotion of our products for unapproved uses or failing to disclose risk information, are punishable by criminal and civil sanctions and may result in the issuance of enforcement letters or other enforcement action by the FDA, U.S. Department of Justice, state agencies, or foreign regulatory authorities that could jeopardize our ability to market the product.
In addition to the FDA, state or foreign regulations, the marketing of our drug products by us or our collaborators will be regulated by federal, state or foreign laws pertaining to health care “fraud and abuse,” such as the federal anti-kickback law prohibiting bribes, kickbacks or other remuneration for the order or recommendation of items or services reimbursed by federal health care programs. Many states have similar laws applicable to items or services reimbursed by commercial products have been
developed from these technologies. Several significant scientific challenges
must be addressed before the therapeutic potentialinsurers. Violations of these technologies can
be realized. Even iflaws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including the CompanyMedicare, Medicaid and its collaboration partners are successful
in developing a therapeutic product, it would be a number of years before such
products could reach the market. The failure to successfully commercialize
products based on Company-discovered genes would have a material adverse
effect on the Company's business, financial condition and operating results.
See "Business--Competition."
Dependence upon Collaborative Arrangements. The Company presently plans to
develop therapeutic product candidates and diagnostic products and tests only
through collaborative arrangements with collaboration partners who would be
responsible for obtaining regulatory approval or clearance. As a result, the
Company's strategy for commercialization of such products relies substantially
upon arrangements with current and future collaboration partners and
licensees. There can be no assurance that the Company will be able to maintain
existing collaborations or obtain additional collaboration partners, or that
they will be on terms favorable to the Company. The Company will have only a
limited internal sales and marketing organization, and, with the exceptionVeterans Affairs healthcare programs. Because of the HyGnostics Module, which the Company markets directly, Hyseq will rely
primarily on collaboration partners or licensees or on arrangements with
others to market its products domestically and internationally. To the extent
the Company can establish additional collaborations, the Company will be
partially
6
dependent upon the subsequent successfar-reaching nature of these collaboration partners in
performing their responsibilities. There can be no assurance that any current
or future collaborations will ultimately succeed in obtaining commercially
viable products. There can be no assurance that these efforts or any products,
if approved, will gain market acceptance. Significant timelaws, we may be required to secure additional collaboration partners becausediscontinue one or more of the needour practices to effectively
sell the benefits of the Company's technologybe in compliance with these laws. Health care fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to a variety of constituencies
within future collaboration partners, including research and development
personnel and top management. In addition, each collaborative arrangement will
involve the negotiation of terms that may be unique to each collaboration
partner. The Company may expend substantial funds and management effort with
no assuranceclaims that a collaboration will result. Finally, there can be no
assurance that the Company's collaboration partners will not adopt alternative
technologiesstatute or develop alternative products either on their own or in
collaboration with others including the Company's competitors. The failure to
enter into and successfully maintain collaborative arrangements would have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Collaborative and Other Arrangements."
Uncertainties Related to Certain Technological Approaches. The Company's
HyGnostics Module, which is used for DNA testing of genetic and infectious
diseases and cancer,prohibition has been marketed for only a short period of time. There
can be no assurance that additional improvements or modifications will not be
necessary before the HyGnostics Module gains market acceptance, if at all. In
addition, the Company's HyChip Module, which is being used internally for
research applications in genomics and DNA testing, is under development for
commercial applications. As the HyChip Module undergoes further development,
there can be no assurance that previously unknown problems will not emerge or
that, if they do emerge, they can be solved. There also can be no assurance
that improvements in the HyChip Module or related products necessary for
successful commercialization will be achieved by the Company or by its
collaboration partner, Perkin-Elmer, which is developing the overall system
with the Company. Further, the HyChip Module and related products and the
Company's Gene Discovery and HyGnostics Modules will need to compete against
well-established technologies and enhancements to such technologies for
analyzing genes and performing diagnostics. The impactviolated. Any violations of these uncertainties
is difficult to predict andlaws, or any action against us for violations of these laws, even if we successfully defend against it, could have a material adverse effect on the
Company'sour business, financial condition and operating results.
Limited Historyresults of Operations, History of Lossesoperations.
We could also become subject to false claims litigation under federal statutes, which can lead to civil money penalties, restitution, criminal fines and Uncertainty of Future
Profitability. The Company commenced operationsimprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state health care programs. These false claims statutes include the fourth quarter of 1994.
AsFalse Claims Act, which allows any person to bring a development-stage company, there is limited historical information
available upon which an investor can base an evaluation of an investment in
the Company. For the three months ended March 31, 1997 and for the years ended
December 31, 1996, 1995 and 1994, the Company had net losses of $1.9 million,
$4.8 million, $601,000 and $2.3 million, respectively, and as of March 31,
1997, the Company had an accumulated deficit of $10.1 million. Expansionsuit on behalf of the Company's HyGenomics Database and marketing activities with respectfederal government alleging submission of false or fraudulent claims, or causing to its
HyGnostics Module, together with the development of therapeutic product
candidates and diagnostic products and tests and developmentpresent such false or fraudulent claims, under federal programs or contracts claims or other violations of the HyChip
Modulestatute and related products, will require substantial increasesto share in expenditures over the next several years. As a result, the Company currently
expects to incur operating losses at least through 1999, and the Company may
never achieve significant revenues or profitable operations. The likelihood of
success of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays, many of which are beyond the Company's
control, frequently encountered in connection with the formation of a new
business, development and commercialization of new products, and the
utilization of new technology.
Competition. There is a finite number of genes (estimatedany amounts paid by the Companyentity to be approximately 150,000 genes)the government in the human genome. A significant numberfines or settlement. These suits against pharmaceutical companies have increased significantly in volume and breadth in recent years. Some of such genesthese suits have been identified bybrought on the Company and others conducting genomic
research, andbasis of certain sales practices promoting drug products for unapproved uses. This new growth in litigation has increased the Company believesrisk that virtually all genesa pharmaceutical company will have to defend a false claim action, pay fines or restitution, or be identified
withinexcluded from the next several years. To date, relatively few gene-based products
with significant commercial potential have been announced. While the Company's
goal has been to identify, establish the utility of and ultimately patent as
many genes as it can as rapidly as possible, the Company continues to face
substantial competition in these efforts from entities using gel sequencersMedicare, Medicaid, Veterans Affairs and other methods to discover genes. The Company believes that its primary
competitors in genomics are Human Genome Sciences, Inc.federal and Incyte
Pharmaceuticals, Inc., which are
7
using gel sequencers as part of their gene sequencing efforts. Research to
identify genes is also being conducted by various institutes and by United
States and foreign government-financedstate healthcare programs which in some cases may be
competitive with the Company. A number of other companies also have announced
plans to engage in gene discovery using gel sequencers and may develop other
procedures for automated sequencing of genes. In addition, certain of the
Company's collaboration partners could, in the future, become competitors. As
a result, any one or more of these companies or other entities may discover
and establish, before the Company, a patent position in one or more genes that
the Company has identified. Any potential therapeutic products or diagnostic
products or tests based on genes identified by the Company may face
competition both from companies developing gene-based products and from
companies developing other forms of treatment for diseases that may be caused
by, or related to, genes identified by the Company. There can be no assurance
that the Company will compete successfully with its existing competitors or
with any new competitors.
The market for diagnostic products such as the HyGnostics Module and
diagnostic tests derived from the Company's gene discovery efforts is
currently limited and is expected to be highly competitive. In the area of
diagnostics, the Company competes primarily with Affymetrix, Inc.
("Affymetrix"). Additionally, the Applied Biosystems division of Perkin-Elmer
presently markets gel sequencers that are used by third parties to compete
with the Company in gene discovery and diagnostics. Many companies are
developing and marketing DNA probe tests for genetic and other diseases. Other
companies are conducting research on new technologies for diagnostic tests
based on advances in genetic information. Established diagnostic companies
have advantages over Hyseq, including greater financial and other resources to
invest in new technologies, substantial intellectual property portfolios,
substantial experience in new product development, regulatory expertise,
manufacturing capabilities and the distribution channels to deliver products
to customers. Potential customers for the HyGnostics Module, including
clinical reference laboratories, may have an existing base of instruments in
several markets and therefore be unwilling to adopt the HyGnostics Module in
lieu of existing instruments. Similarly, potential customers for HyChip
products, when introduced commercially, may already have existing instruments
and therefore be unwilling to adopt HyChip products. In addition, some of
these companies have formed alliances with genomics companies which provide
them access to genetic information that may be incorporated into their
diagnostic tests.
Several of the Company's existing and potential competitors have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than the Company. These
competitors may succeed in identifying genes or developing products earlier
than the Company or its collaboration partners, obtaining approvals from the
United States Food and Drug Administration (the "FDA") or other regulatory
agencies for such products more rapidly than the Company or its collaboration
partners, or developing products that are more effective than those proposed
to be developed by the Company or its collaboration partners. Certain of these
competitors may be further advanced than the Company in developing potential
products that may compete with potential products of the Company. There can be
no assurance that research and development by others will not render obsolete
or non-competitive the products that the Company or its collaboration partners
may seek to develop. In addition, loss of the Company's patent rights to SBH
technology as a result of an investigation arising out of such action. We may become subject to such litigation and, if we are not successful legal challenges could remove a legal
obstacle to competitors in designing platforms with similar competitive
advantages. The Company expects that competition in this field will intensify.
A failure of the Company to adequately compete in its markets woulddefending against such actions, those actions may have a material adverse effect on the Company'sour business, financial condition and operating results. See "Business--Competition"results of operations. We could also become subject to false claims litigation and "--Litigation."
Fluctuationsconsumer protection claims under state statutes, which also could lead to civil monetary penalties, restitution, criminal fines and imprisonment, and exclusion from participation in Operating Results. state health care programs.
Of note, over the past few years there has been an increased focus on the sales and marketing practices of the pharmaceutical industry at both the federal and state level. Additionally, the law or regulatory policies governing pharmaceuticals may change. New statutory requirements may be enacted or additional regulations may be adopted that could prevent or delay regulatory approval of our product candidates or limit our ability to commercialize our products. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or elsewhere.
If we, our collaborators or our third-party manufacturers fail to comply with applicable continuing regulatory requirements, our business could be seriously harmed because a regulatory agency may:
issue untitled or warning letters;
suspend or withdraw our regulatory approval for approved products;
seize or detain products or recommend a product recall of a drug or medical device, or issue a mandatory recall of a medical device;
refuse to approve pending applications or supplements to approved applications filed by us;
suspend our ongoing clinical trials;
restrict our operations, including costly new manufacturing requirements, or restrict the sale, marketing and/or distribution of our products;
seek an injunction;
pursue criminal prosecutions;
close the facilities of our contract manufacturers; or
impose civil or criminal penalties.
We will need to establish a collaborative arrangement with a third-party diagnostics services provider to obtain marketing clearance or approval of the companion Gencaro Test. There is no guarantee that the FDA will grant timely clearance or approval of the Gencaro Test, if at all, and failure to obtain such timely clearance or approval would adversely affect our ability to market Gencaro.
The Company's operatingdrug label we intend to seek for Gencaro would identify the patient receptor genotype for which the drug is approved. Accordingly, we believe developing a Gencaro Test that is simple to administer and widely available will be critical to the successful commercialization of Gencaro and also to the ability to conduct our planned GENETIC-AF clinical trial. The Gencaro Test will be subject to regulation by the FDA and by comparable agencies in various foreign countries. The process of complying with the requirements of the FDA and comparable agencies is costly, time consuming and burdensome.
Despite the time and expense expended, regulatory clearance or approval is never guaranteed. If regulatory clearance or approval is delayed, or if a third-party diagnostic services provider is unable to obtain FDA approval of the Gencaro Test at all or in parallel with the approval of Gencaro, or is unable to commercialize the test successfully and in a manner that effectively supports the commercial efforts for Gencaro, or if the information concerning the differential response to Gencaro resulting from certain genetic variation is not included in the approval label for Gencaro, the commercial launch of Gencaro may be significantly and adversely affected.
Reliance on third parties to commercialize Gencaro could negatively impact our business. If we are required to establish a direct sales force in the U.S. and are unable to do so, our business may be harmed.
Commercialization of Gencaro, particularly the establishment of a sales organization, will require substantial additional capital resources. We currently intend to pursue a strategic partnership alternative for the commercialization of Gencaro, if it is approved, and we have suspended our efforts to build internal sales, marketing and distribution capabilities. If we elect to rely on third parties to sell Gencaro and any other products, then we may receive less revenue than if we sold such products directly. In addition, we may have little or no control over the sales efforts of those third parties.
If we are unable to complete a strategic transaction, we would be unable to commercialize Gencaro or any other product candidate without substantial additional capital. Even if such capital were secured, we would be required to build internal sales, marketing and distribution capabilities to market Gencaro in the U.S. None of our current employees have experience in establishing and managing a sales force.
In the event we are unable to sell Gencaro and other selected product candidates, either directly or through third parties via a strategic transaction, the commercialization of Gencaro, if it is approved, may be delayed indefinitely.
Future sales of Gencaro may suffer if its marketplace acceptance is negatively affected by the Gencaro Test.
The Gencaro Test is an important component of the commercial strategy for Gencaro in addition to being required to proceed with our planned AF trial. We believe that the Gencaro Test helps predict patient response to Gencaro, and that this aspect of the drug is important to its ability to compete effectively with current therapies. The Gencaro Test adds an additional step in the prescribing process, an additional cost for the patient and payors, the risk that the test results may fluctuate significantlynot be rapidly available and the possibility that it may not be available at all to hospitals and medical centers. Although we anticipate that Gencaro, if approved in a timely manner, would be the first genetically-targeted cardiovascular drug, Gencaro will be one of a number of successful drugs in the futurebeta-blocker class currently on the market. Prescribers may be more familiar with these other beta-blockers, and may be resistant to prescribing Gencaro as an AF or HF therapy. Any one of these factors could affect prescriber behavior, which in turn may substantially impede market acceptance of the Gencaro Test, which could cause significant harm to Gencaro’s ability to compete, and in turn harm our business.
We are dependent on our key personnel.
The success of our business is highly dependent on the principal members of our board of directors and executive management, including our President and Chief Executive Officer, Michael R. Bristow. The loss of the services of any such individual might seriously harm our product development, partnering and financing efforts. Recruiting and training personnel with the requisite skills is challenging and we compete for talent with companies that are larger and have more financial resources.
We have no manufacturing capacity which puts us at risk of lengthy and costly delays of bringing our products to market.
We do not currently operate manufacturing facilities for clinical or commercial production of our product candidates, including their active pharmaceutical ingredients, or API. We have no experience in drug formulation or manufacturing, and we lack the resources and the capabilities to manufacture any of our product candidates on a resultclinical or commercial scale. We do not intend to develop facilities for the manufacture of a variety of factors,
including, but not limited to, changesproduct candidates for clinical trials or commercial purposes in the demandforeseeable future. We have contracted with Groupe Novasep to manufacture commercial quantities of the API for Gencaro. For drug production, we have contracted with Patheon, Inc. to manufacture the Gencaro tablets. These contract manufacturers may not perform as agreed
or may not remain in the contract manufacturing business for the Company's
products; the nature, sizetime required to successfully produce, store and timing of collaborative arrangements and
products provided to or developed with the Company's current and future
collaboration partners; changes in the research and development budgets of the
Company's current and future collaboration partners; capital expenditures and
other costs related to the expansion of the Company's operations; litigation
and other costs associated with defending its proprietary rights; changes in
government regulations; and the introduction of competitive technologies.
Changes in the number of collaboration partners coulddistribute our products. In addition, these manufacturers may have a significant
effect on the Company's revenues and results of
8
operations. If revenues in a particular period do not meet expectations, the
Companystaffing difficulties, may not be able to adjust significantlymanufacture our products on a timely basis or may become financially distressed. In the event of errors in forecasting production quantities required to meet demand, natural disaster, equipment malfunctions or failures, technology malfunctions, strikes, lock-outs or work stoppages, regional power outages, product tampering, war or terrorist activities, actions of regulatory authorities, business failure, strike or other difficulty, we may be unable to find an alternative third-party manufacturer in a timely manner and the production of our product candidates would be interrupted, resulting in delays and additional costs, which could impact our ability to commercialize and sell our product candidates. We or our contract manufacturers may also fail to achieve and maintain required manufacturing standards, which could result in patient injury or death, product recalls or withdrawals, an order by governmental authorities to halt production, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business. Contract manufacturers also often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. In addition, our contract manufacturers are subject to ongoing inspections and regulation by the FDA, the U.S. Drug Enforcement Agency and corresponding foreign and state agencies and they may fail to meet these agencies’ acceptable standards of compliance. If our contract manufacturers fail to comply with applicable governmental regulations, such as quality control, quality assurance and the maintenance of records and documentation, we may not be able to continue production of the API or finished product. If the safety of any API or product supplied is compromised due to failure to adhere to applicable laws or for other reasons, this may jeopardize our regulatory approval for Gencaro and other product candidates, and we may be held liable for any injuries sustained as a result. Upon the occurrence of one of the aforementioned events, the ability to switch manufacturers may be difficult for a number of reasons, including:
the number of potential manufacturers is limited and we may not be able to negotiate agreements with alternative manufacturers on commercially reasonable terms, if at all;
long lead times are often needed to manufacture drugs;
the manufacturing process is complex and may require a significant learning curve; and
the FDA must approve any replacement prior to manufacturing, which requires new testing and compliance inspections.
If a third-party diagnostics provider responsible for the Gencaro Test or certain of its level of expenditures in
such period, which would have an adverse effect onthird-party suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if there are unanticipated problems with the Company's operating
results. The timing of revenues is difficult to forecast because the Company's
revenue generation cycleGencaro Test, these products could be relatively longsubject to restrictions or withdrawal from use in trial or from the market.
Any medical device for which a third-party diagnostics provider obtains clearance or approval, and may depend on factorsthe manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. With respect to the Gencaro Test, to the extent applicable, any third-party diagnostics provider and certain of its suppliers will be required to comply with the FDA’s Quality System Regulation, or QSR, and International Standards Organization, or ISO, requirements which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which clearance or approval is obtained. Regulatory bodies, such as the sizeFDA, enforce the QSR and scopeother regulations through periodic inspections. The failure by a third-party diagnostics provider, or certain of assignmentsits third-party manufacturers or suppliers, as the case may be, to comply with applicable statutes and general economic conditions. The
need for continued investment in development ofregulations administered by the Company's productsFDA and for
extensive ongoing support capabilities results in a high percentage ofother regulatory bodies, or the Company's expenses being fixed. Accordingly, fluctuations in revenuesfailure to timely and expenses dueadequately respond to a variation in the nature, number and timing of collaborative
arrangements, particularly atany adverse inspectional observations or near the end of a quarter, can cause
significant variations in operating results from quarter to quarter andproduct safety issues, could result in, continued lossesamong other things, enforcement actions. If any of these actions were to occur, it could harm our reputation and cause product sales and profitability of Gencaro to suffer and may prevent us from generating revenue or utilizing the Company. Although the Company can adjust
overhead expendituresGencaro Test further in any clinical trial. Even if regulatory clearance or approval is granted, such clearance or approval may be subject to correspond to the number of active projects, it must
maintain a certain level of overhead expenditures to continue operations.
Quarterly comparisons of the Company's financial results may not necessarily
be meaningful and should not be relied upon as an indication of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence upon Proprietary Rights; Risks of Infringement. The Company owns
certain proprietary information and expects to acquire additional proprietary
information in the course of its research and development activities. There
can be no assurance as to the breadth or the degree of protection that such
proprietary information or patents or pending patent applications, if issued,
will afford the Company. There also can be no assurance that issued patents
and any future issued patents will ultimately be found valid and enforceable.
There can be no assurance that any issued patents will provide protection
against any competitors or will provide the Company with competitive
advantages, nor can there be assurance that such patents will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products or, if patents are issued to the
Company, will not design around such patents.
Although the Company has sought or intends to timely seek international
coverage for all patent applications filed since its inception in August 1992,
the Company's rights in and to its three currently issued patents covering SBH
technology extend only to the United States. Therefore, the Company is not
currently able to prevent others from practicing the SBH process disclosed in
the currently issued SBH patents outside of the United States. Although the
Company intends to defend its patent rights to SBH technology, there can be no
assurance that it will be successful in such endeavor. Two of the patents
covering the Company's SBH technology are currently the subject of a
counterclaim by Affymetrix seeking declaratory relief that such patents are
invalid or that Affymetrix does not infringe them. See "--Certain Litigation"
and "Business--Litigation." Loss of its patent rights to SBH technology could
remove a legal obstacle to competitors in designing platforms with similar
competitive advantages. There can be no assurance that others will not develop
substantially equivalent know-how or otherwise obtain access to Company know-
how, or that others will not infringe the Company's patents, causing the
Company to incur substantial costs and expend substantial personnel time in
asserting the Company's patent rights.
The Company's long-term commercial success may depend in partlimitations on the ability
ofintended uses for which the Company or its collaboration partners to obtain patent protection on
genes that the Company discovers. The Company intends to seek patent
protection on genes that it completely sequences as well as patent protection
of selected partial gene sequences. The patent positions of biotechnology
companies generally are highly uncertain and involve complex legal and factual
questions. There is a substantial backlog of biotechnology patent applications
at the United States Patent and Trademark Office (the "Patent Office"). No
consistent legislative or other policy has yet emerged regarding the breadth
of claims covered in biotechnology patents, and there also have been proposals
for review of the appropriateness of patents on genes and partial gene
sequences.
The Company's ability to obtain patent protection based on genes or partial
gene sequences will depend, in part, upon identification of a function for the
gene or gene sequences sufficient to meet the statutory requirement that an
invention have utility, which is a question of fact. Clinical dataproduct may be required for issuance of patents for human therapeutics, which, if required,
could delay, add substantial costsmarketed and reduce our potential to or affectsuccessfully commercialize the abilityproduct and generate revenue from the product.
A third-party diagnostics provider may need to obtain patent
protection. There can be no assurance that the Company's disclosures in itsconduct clinical trials to support current or future patent applicationsversions of the Gencaro Test. Delays or failures in any such clinical trials may prevent a third-party diagnostics provider from commercializing any modified or new versions of the Gencaro Test and will adversely affect our business, operating results and prospects.
Based on discussions with the FDA, we do not believe that additional clinical data are needed for the Gencaro Test submission. However, the FDA may require clinical data for the Gencaro Test submission and/or future products. Initiating and completing clinical trials necessary to support 510(k)s or PMAs, if required, for current or future products will be sufficient to meet these
requirements. Even if patents are issued, there may be current or
9
future uncertainty as totime consuming and expensive and the scope of the coverage or protection provided by
any such patents. The Company cannot predict what issues may arise in
connection with the Company's patent applications or the timing of the grant,
if any, of patents with respect to genes or partial gene sequences covered by
such patent applications.
The Company also relies on trade secret protection for its confidential and
proprietary information. Although the Company's policy is to enforce security
measures to protect its assets, trade secrets are difficult to protect. While
the Company requires all employees to enter into confidentiality agreements,
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or
that the Company can meaningfully protect its trade secrets.
The Company may be required to obtain licenses to patents or other
proprietary rights of others. There can be no assurance that any licenses
required under any such patents or proprietary rights would be made available
on terms acceptable to the Company or at all. If the Company does not obtain
such licenses, it could encounter delays in product market introductions and
incur substantial costs while it attempts to design around such patents, or
could find that the development, manufacture or sale of products requiring
such licenses could be foreclosed.outcome uncertain. Moreover, the Company could incur
substantial costsresults of early clinical trials are not necessarily predictive of future results, and expend substantial personnel timeany product we or our third party suppliers advance into clinical trials may not have favorable results in defending itself in
any suits brought againstlater clinical trials.
Conducting successful clinical studies may require the Company claiming infringementenrollment of the patent
rightslarge numbers of others or in asserting the Company's patent rights in a suit against
another party. Any of these factors could have a material adverse effect on
the Company's business, financial conditionpatients, and operating results. See
"Business--Patents and Proprietary Technology" and "--Litigation."
Unproven Market for Genetic Testing. The Company's success in diagnostics
will depend in large part upon its ability to obtain customers and the ability
of these customers to properly market genetic tests performed with the
Company's technology. Genetic tests, including those performed using the
HyGnostics Module,suitable patients may be difficult to interpretidentify and may lead to
misinformation or misdiagnosis. Even when a genetic test identifiesrecruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including: the existence of a mutation in an individual, the interpretationsize of the result is
often limited to the identification of a statistical probability that the
tested individual will develop the disease or condition for which the test is
performed. The prospect of broadly available genetic predisposition testing
has raised societal and governmental concerns regarding the appropriate
utilization and the confidentiality of information provided by such testing.
Government authorities could, for social or other purposes, limit the use of
genetic testing or prohibit testing for genetic predisposition to certain
conditions that could adversely effect the use of the Company's products.
There can be no assurance that ethical concerns about genetic testing will not
materially adversely effect market acceptance of the Company's technology for
diagnostic applications, which could materially and adversely effect the
Company's business, financial condition and operating results. See "Business--
Government Regulation."
Certain Litigation. On March 3, 1997, the Company brought suit against
Affymetrix in the U.S. District Court for the Northern District of California,
San Jose Division, alleging infringement by Affymetrix of the Company's U.S.
Patents Nos. 5,202,231 and 5,525,464 (Hyseq, Inc. v. Affymetrix, Inc., Case
No. C 97-20188 RMW ENE, U.S. District Court). The suit alleges that Affymetrix
willfully infringed, and continues to infringe, upon these patents covering
SBH technology. Through the lawsuit, the Company seeks both to enjoin
Affymetrix from infringing upon the patents covering SBH technology and an
award of monetary damages for Affymetrix's past infringement. On April 23,
1997, Affymetrix filed a motion to dismiss or, in the alternative, for a more
definite statement. On May 19, 1997, Affymetrix filed an Answer and
Affirmative Defenses to the First Amended Complaint and Counterclaim. The
counterclaim seeks a declaratory judgment of invalidity and non-infringement
with respect to these patents covering SBH technology. On June 9, 1997, the
Company filed a reply to the counterclaim in which it denied the allegation of
invalidity and non-infringement. By order of the court, an initial case
management conference is scheduled for August 1, 1997. While the Company
believes that it has a meritorious defense to the counterclaim, this
litigation is at an early stage and there can be no assurance that the Company
will prevail in the claim. The Company may incur substantial costs and expend
substantial personnel time in asserting the Company's patent rights against
Affymetrix or others and there can be no assurance that the Company will be
successful in asserting its patent rights. Failure to successfully enforce its
patent rights or the loss of these patent rights covering SBH technology also
could remove a legal obstacle to competitors in designing platforms with
similar competitive advantages, which could have a material adverse effect on
the Company's business, financial condition and operating results.
10
Management of Growth. The Company has recently experienced, and expects to
continue to experience, significant growth inpatient population; the number of its employeespatients to be enrolled; the nature of the trial protocol; the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects; the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites; and the scope of its operations. Continued growth may place a significant strain
on the Company's management and operations. In order to significantly increase
capacity to remain competitive or satisfy the needs of current and future
collaboration partners, the Company will be required to acquire additional
equipment and supplies, upgrade software and adapt robotics and bioinformatics
resourcespatients’ ability to meet increased sequencing rates. The Company's ability to manage
such growth effectively will depend upon its ability to broaden its management
teamthe eligibility and to attract, hire and retain skilled employees. The Company's success
also will depend on the ability of its officers and key employees to continue
to implement and improve its operational, management information and financial
control systems and to expand, train and manage its employee base. Inability
to manage growth effectively could have a material adverse effect on the
Company's business, financial condition and operating results.
Dependence on Key Personnel. Recruiting and retaining qualified scientific
and other management personnel to perform research and development work is
critical to Hyseq's success, and there can be no assurance that the Company
will be able to attract and retain such qualified personnel. The Company
employs and expects to rely heavily,exclusion criteria for the foreseeable future, upon Dr.
Radoje T. Drmanac and Dr. Radomir B. Crkvenjakov for their SBH technology
expertise. Loss of the services of either Dr. Drmanac or Dr. Crkvenjakov would
impede the achievement of its business and scientific objectives and could
have a material adverse effect on the Company's business, financial condition
and operating results. The Company's projected growth and expansion into
activities requiring additional expertise, production and marketing also are
expected to place increased demands upon the Company's resources and
organization. These demands are expected to require the addition of new
management and scientific personnelparticipation in the near term as well as over time.
There canclinical trial and patient compliance. For example, patients may be no assurance thatdiscouraged from enrolling in clinical trials if the Company will be abletrial protocol requires them to attractundergo extensive post-treatment procedures or follow-up to assess the safety and retain
such qualified personnel. See "Management and Scientific Advisory Board."
Uncertaintyeffectiveness of Third-Party Reimbursement. The Company's ability to receive
significant royalties from itsour products may depend on the ability of its
collaboration partners or customers to obtain adequate levels of third-party
reimbursement. Currently, availability of third-party reimbursement is limited
and uncertain for genetic predisposition tests. In the United States, the cost
of medical care is funded by government insurance programs, such as Medicare
and Medicaid, and private and corporate health insurance plans. Third-party
payors may deny reimbursement if they determine that a prescribedthe treatments received under the trial protocol are not attractive or involve unacceptable risks or discomforts. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required, and we or the third-party diagnostics provider may not adequately develop such protocols to support clearance and approval. The trials will require the submission and approval of an investigational device exemption, or diagnostic test has not received appropriate clearancesIDE, from the FDA. There is no guarantee that the FDA will approve the third-party diagnostics provider’s or our future IDE submissions. Further, the FDA may require them or us to submit data on a greater number of patients than originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of future products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in such clinical trials, the FDA may not consider the data to be adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our or our third party suppliers’ business, operating results and prospects.
Transitioning from a developmental stage company will require successful completion of a number of steps, many of which are outside of our control and, consequently, we can provide no assurance of our successful and timely transition from a developmental stage company.
We are a development stage biopharmaceutical company with a limited operating history. To date we have not generated any product revenue and have historically funded our operations through investment capital. Our future growth depends on our ability to emerge from the developmental stage and successfully commercialize or provide for the commercialization of Gencaro and our other product candidates, which in turn, will depend, among other things, on our ability to:
conduct an additional clinical trial and develop and obtain regulatory approval for Gencaro or other government regulators, is not usedproduct candidates;
successfully partner a companion genetic test with the commercial launch of Gencaro;
enter into a strategic transaction enabling the continued development and commercialization of Gencaro, or alternatively, raise significant additional capital to enable these activities;
pursue additional indications for Gencaro and develop other product candidates, including other cardiovascular therapies; and
obtain commercial quantities of Gencaro or other product candidates at acceptable cost levels.
Any one of these factors or other factors discussed in accordance with cost-effective treatment
methods as determinedthis report could affect our ability to successfully commercialize Gencaro and other product candidates, which could impact our ability to earn sufficient revenues to transition from a developmental stage company and continue our business.
If approved by the payor,FDA, Gencaro will be entering a competitive marketplace and may not succeed.
Gencaro is a new type of beta-blocker and vasodilator being developed for AF. While we anticipate that this drug, if approved, would be the first genetically-targeted cardiovascular drug, and potentially the only beta-blocker approved for AF. Gencaro will be one of a number of successful drugs in the beta-blocker class currently on the market. For example, currently, there are three branded beta-blockers indicated for chronic HF in New York Health Association, or is experimental, unnecessaryNYHA, class II-IV patients: Toprol-XL (once-a-day formulation), Coreg and Coreg CR (once-a-day). Toprol-XL and Coreg have generic equivalents commercially available in the U.S. (metoprolol succinate and carvedilol, respectively). The price of the generic forms of these drugs will be less than the anticipated price of Gencaro, if approved. As a result, Gencaro may not be successful in competing against these existing drugs.
Our commercial opportunity may be reduced or inappropriate.eliminated if competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than Gencaro. If products with any of these properties are developed, or any of the existing products are better marketed, then prescriptions of Gencaro by physicians and patient use of Gencaro could be significantly reduced or rendered obsolete and noncompetitive. Further, public announcements regarding the development of any such competing drugs could adversely affect the market price of our common stock and the value of our assets.
Future sales of our products may suffer if they are not accepted in the marketplace by physicians, patients and the medical community.
Gencaro or our other product candidates may not gain market acceptance among physicians, patients and the medical community. The Company'sdegree of market acceptance of Gencaro or our other product candidates will depend on a number of factors, such as its effectiveness and tolerability, as compared with competitive drugs. Also, prevalence and severity of side-effects could negatively affect market acceptance of Gencaro or our other product candidates. Failure to achieve market acceptance of Gencaro would significantly harm our business.
If we are unable to obtain acceptable prices or adequate reimbursement from third-party payors for Gencaro, or any other product candidates that we may seek to commercialize, then our revenues and prospects for profitability will suffer.
Our or any strategic partner’s ability to commercialize certain of its products
successfullyGencaro, or any other product candidates that we may dependseek to commercialize, is highly dependent on the extent to which appropriatecoverage and reimbursement levels are obtained from authorities, for these product candidates will be available from:
governmental payors, such as Medicare and Medicaid;
private health insurers, including managed-care organizations; and
other third-party payors.
Many patients will not be capable of paying for our potential products themselves and otherwill rely on third-party payors to pay for their medical needs. A primary current trend in the U.S. health care industry is toward cost containment. Large private payors, managed-care organizations, such as health maintenancegroup purchasing organizations ("HMOs"). Third-partyand similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are increasingly challenging the prices charged for medical products and services. The trend towards managedservices, and many third-party payors limit reimbursement for newly approved health care products.
Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues lower than anticipated. If the prices for our product candidates decrease, or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, then our revenue and prospects for profitability will suffer.
Health care reform measures could materially and adversely affect our business.
The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payors to contain or reduce the costs of health care. The U.S. Congress has enacted legislation to reform the health care system. While we anticipate that this legislation may, over time, increase the number of patients who have insurance coverage for pharmaceutical products, it also imposes cost containment measures that may adversely affect the amount of reimbursement for pharmaceutical products. These measures include increasing the minimum rebates for products covered by Medicaid programs and extending such rebates to drugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed care organizations as well as expansion of the 340(B) Public Health Services drug discount program. In addition, such legislation contains a number of provisions designed to generate the revenues necessary to fund the coverage expansion, including new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, each medical device manufacturer will have to pay an excise tax (or sales tax) in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices. Such excise taxes may impact any potential sales of the Gencaro Test if it is approved for marketing. In foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health care system. For example, in some countries other than the United States, pricing of prescription drugs is subject to government control and we expect to see continued efforts to reduce healthcare costs in international markets.
Some states are also considering legislation that would control the prices of drugs, and state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring prior authorization by the state program for use of any drug for which supplemental rebates are not being paid. Managed care organizations continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs. This may result in managed care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on prices and reimbursement for drugs. It is likely that federal and state legislatures and health agencies will continue to focus on additional health care reform in the future although we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. We or any strategic partner’s ability to commercialize Gencaro, or any other product candidates that we may seek to commercialize, is highly dependent on the extent to which coverage and reimbursement for these product candidates will be available from government payors, such as Medicare and Medicaid, private health insurers, including managed care organizations, and other third-party payors, and any change in reimbursement levels could materially and adversely affect our business. Further, the pendency or approval of future proposals or reforms could result in a decrease in our stock price or limit our ability to raise capital or to obtain strategic partnerships or licenses.
Our competitors may be better positioned in the marketplace and thereby may be more successful than us at developing, manufacturing and marketing approved products.
Many of our competitors currently have significantly greater financial resources and expertise in conducting clinical trials, obtaining regulatory approvals, managing manufacturing and marketing approved products than us. Other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring therapies and therapy licenses complementary to our programs or advantageous to our business. We expect that our ability to compete effectively will depend upon our ability to:
successfully and rapidly complete clinical trials for any product candidates and obtain all requisite regulatory approvals in a cost-effective manner;
build an adequate sales and marketing infrastructure, raise additional funding, or enter into strategic transactions enabling the commercialization of our products;
develop competitive formulations of our product candidates;
attract and retain key personnel; and
identify and obtain other product candidates on commercially reasonable terms.
If we fail to identify and license or acquire other products or product candidates, then we may be unable to expand our business, and the acquisition or licensing of other products or product candidates may put a strain on our operations and will likely require us to seek additional financing.
One of our strategies is to license or acquire clinical-stage products or product candidates and further develop them for commercialization. The market for licensing and acquiring products and product candidates is intensely competitive and many of our competitors may have greater resources than us. If we undertake any additional acquisitions, whether of product candidates or other biopharmaceutical companies, the process of integrating an acquired product candidate or complementary company into our business may put a strain on our operations, divert personnel, financial resources and management’s attention. In 2013, we expect our research and development activities will be dedicated to Gencaro. If we are not able to substantially expand our research and development efforts, or identify, or license or acquire other products or product candidates or complete future acquisitions, then we will likely be unable expand our pipeline of product candidates. In addition, any future acquisition would give rise to additional operating costs and will likely require us to seek additional financing. Future acquisitions could result in additional issuances of equity securities that would dilute the ownership of existing stockholders. Future acquisitions could also result in the incurrence of debt, contingent liabilities or the amortization of expenses related to other intangible assets, any of which could adversely affect our operating results.
We would be subject to applicable regulatory approval requirements of the foreign countries in which we market our products, which are costly and may prevent or delay us from marketing our products in those countries.
In addition to regulatory requirements in the United States, we would be subject to the regulatory approval requirements in each foreign country where we market our products. In addition, we might be required to identify one or more collaborators in these foreign countries to develop, seek approval for and manufacture our products and any companion genetic test for Gencaro. If we decide to pursue regulatory approvals and commercialization of our product candidates internationally, we may not be able to obtain the concurrent growth of organizations such as HMOs,required foreign regulatory approvals on a timely basis, if at all, and any failure to do so may cause us to incur additional costs or prevent us from marketing our products in foreign countries, which could control or
significantly influence purchases of health care services and products, as
well as legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices for certain of the
Company's diagnostics products. The cost containment measures that health care
providers are instituting and the results of any health care reform may have a material adverse effect on the Company'sour business, financial condition and operating results.
No Assuranceresults of FDA Regulatory Approval; Government Regulation. The Company
initially plansoperations.
If our internal control over financial reporting is not considered effective, our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to collaborateevaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our annual report on manufactureForm 10-K for that fiscal year. Our management, including our chief executive officer and sell products through
collaborative arrangementschief financial officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. During the first quarter of 2011 there was a reduction in our workforce which included personnel involved in financial reporting and our internal control processes. Since that time we have continued to operate with third parties whoa reduced staff for financial reporting. Though the process and design of our internal controls over financial reporting have not been altered, the reduced number of staff may limit our ability to properly segregate internal control procedures which could result in deficiencies or material weaknesses in our internal controls in the future. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be responsible for
obtaining regulatory approvalmet. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud involving a company have been, or clearance. However, the Company may
ultimately determine to pursue directly the development of certain therapeutic
or diagnostic products requiring regulatory approval or clearance. Products
such as those proposed to be developed by the Company or with collaboration
partners typically will be, subject to an extensive regulatory process bydetected. The design of any system of controls is based in part on certain assumptions about the FDAlikelihood of future events, and comparable agencieswe cannot assure you that any design will succeed in other countries. In order to obtain regulatory
approvalachieving its stated goals under all potential future conditions. Over time, controls may become ineffective because of a drug product,changes in conditions or deterioration in the Companydegree of compliance with policies or its collaboration partners must
demonstrate to the satisfactionprocedures. Because of the applicable regulatory agency, among
other things,inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that suchwe or our independent registered public accounting firm will not identify a material weakness in our internal control over financial reporting in the future. A material weakness in our internal control over financial reporting would require management to consider our internal control over financial reporting as ineffective. If our internal control over financial reporting is not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.
Risks Related to Intellectual Property and Other Legal Matters
If product is safeliability lawsuits are successfully brought against us, then we will incur substantial liabilities and effective for its intended uses
and that the manufacturing facilities are in compliance with current Good
Manufacturing Practice ("cGMP") requirements. Although the Company does not
need to comply with
11
cGMP with respect to the HyGnostics Module under current law, it may need to
comply with cGMP if currently proposed legislative changes are adopted, and it
will need to comply with cGMP with respect to its HyChip Module once HyChip
products are available for commercial sale, if sold for clinical diagnostics.
The Company or its collaboration partners also must demonstrate the
approvability of a Biological License Application or a Product License
Application and an Establishment License Application for any biological
products. In order to market its HyGnostics Module and other diagnostic
products, which may be considered to be medical devices, the Company or its
collaboration partners will be required to receive 510(k) marketing clearancelimit commercialization of Gencaro or Premarket Approval ("PMA") from the FDA for such products among other regulatory requirements. To obtain 510(k) marketing clearance, the Company
must show that the diagnostic product is substantially equivalent to a legally
marketedcandidates.
We face product not requiring FDA approval. In addition, the Company must
demonstrate that it is capable of manufacturing the productliability exposure related to the relevant
standards. To obtain a PMA, the Company or its collaboration partners must
submit extensive data, including pre-clinicaltesting of our product candidates in human clinical trials, and clinical trial datamay face exposure to prove
the safety and efficacy of the device. Clinical trials are normally done in
three phases over two to five years, but may take longer to complete as a
result of many factors, including slower than anticipated patient enrollment,
difficulty in finding a sufficientclaims by an even greater number of patients fitting the appropriate
trial profile, difficulty in the acquisitionpersons once we begin marketing and distributing our products commercially. If we cannot successfully defend against product liability claims, then we will incur substantial liabilities.
Regardless of sufficient supplymerit or eventual outcome, liability claims may result in:
decreased demand for our products and product candidates;
injury to our reputation;
withdrawal of clinical trial participants;
costs of related litigation;
substantial monetary awards to patients and others;
loss of revenues; and
the inability to commercialize our products and product candidates.
We have obtained limited product liability insurance coverage. Such coverage, however, may not be adequate or may not continue to be available to us in sufficient amounts or at an acceptable cost, or at all. We may not be able to obtain commercially reasonable product liability insurance for any product candidate.
Defending against claims relating to improper handling, storage or disposal of hazardous chemicals, radioactive or biological materials could be time consuming and expensive.
Our research and development of product candidates may involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. We cannot eliminate the risk of accidental contamination or adverse events occurring duringdischarge and any resultant injury from the trials. Inmaterials. Various laws and regulations govern the event
the Companyuse, manufacture, storage, handling and disposal of hazardous materials. We may be sued or its collaborators develop products classified as drugs, the
Company and its collaborators will be required to obtainpay fines for any injury or contamination that results from our use or the use by third parties of these materials. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.
The loss of any rights to market key products would significantly impair our operating results.
We have licensed from CPEC, who has licensed rights in Gencaro from Bristol Meyers Squibb (BMS), the exclusive rights to Gencaro for all therapeutic and diagnostic uses in any country until the later of (i) 10 years from the first commercial sale of Gencaro in such country, or (ii) the termination of our commercial exclusivity in such country. This license includes a sublicense to us from BMS. We are obligated to use commercially reasonable efforts to develop and commercialize Gencaro, including obtaining regulatory approvals. Our ability to develop and commercialize Gencaro is dependent on numerous factors, including some factors that are outside of our control. CPEC has the right to terminate our license if we materially breach our obligations under the license agreement and fail to cure any such breach within the terms of the license.
If our license agreement with CPEC is terminated for reasons related to non-payment of fees, or for any other breach, then we would have no further rights to develop and commercialize Gencaro for any indication. The termination of this license, or of any other agreement which enables us to market a key product or product candidate, could significantly and adversely affect our business.
Certain intellectual property licensed by us is the subject of additional approvals.
Moreover, several areas inlicensing arrangements to which the Companyparty that has licensed rights to us is subject. If such parties were to breach the terms of such licenses or its collaboration partners
may develop therapeutic products involve relatively newsuch licenses were otherwise to terminate, our and our partners’ rights to use such technology and develop and commercialize their products such as the Gencaro Test may terminate and our business would be materially harmed.
Third parties may own or control patents or patent applications that we may be required to license to commercialize our product candidates or that could result in litigation that would be costly and time consuming.
Our or any strategic partner’s ability to commercialize Gencaro and other product candidates depends upon our ability to develop, manufacture, market and sell these drugs without infringing the proprietary rights of third parties. A number of pharmaceutical and biotechnology companies, universities and research institutions have or may be granted patents that cover technologies similar to the technologies owned by or licensed to us. We may choose to seek, or be required to seek, licenses under third party patents, which would likely require the payment of license fees or royalties or both. We may also be unaware of existing patents that may be infringed by Gencaro, the genetic testing we intend to use in connection with Gencaro or our other product candidates. Because patent applications can take many years to issue, there may be other currently pending applications that may later result in issued patents that are infringed by Gencaro or our other product candidates. Moreover, a license may not been subjectbe available to extensiveus on commercially reasonable terms, or at all.
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we are infringing on its technology, then our business and results of operations could be harmed by a number of factors, including:
infringement and other intellectual property claims, even if without merit, are expensive and time-consuming to litigate and can divert management’s attention from our core business;
monetary damage awards for past infringement can be substantial;
a court may prohibit us from selling or licensing product testing in patients. Accordingly,candidates unless the regulatory requirements governingpatent holder chooses to license the patent to us; and
if a license is available from a patent holder, we may have to pay substantial royalties.
We may also be forced to bring an infringement action if we believe that a competitor is infringing our protected intellectual property. Any such litigation will be costly, time-consuming and divert management’s attention, and the outcome of any such litigation may not be favorable to us.
Our intellectual property rights may not preclude competitors from developing competing products and related clinical
procedures are uncertain and such productsour business may be subject to substantial
additional review by various governmental regulatory authorities, which could
prevent or delay regulatory approval. Regulatory requirements ultimately
imposedsuffer.
Our competitive success will depend, in these areas could adversely affect the Company'spart, on our ability to clinically test, manufacture or market products. No assurance canobtain and maintain patent protection for our inventions, technologies and discoveries, including intellectual property that we license. The patent positions of biotechnology companies involve complex legal and factual questions, and we cannot be givencertain that our patents and licenses will successfully preclude others from using our technology. Consequently, we cannot be certain that any applicable regulationsof our patents will provide significant market protection or will not be amended,circumvented or thatchallenged and found to be unenforceable or invalid. In some cases, patent applications in the Company willU.S. and certain other jurisdictions are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be ablecertain of the priority of inventions covered by pending patent applications. Moreover, we may have to comply withparticipate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention or in opposition proceedings in a foreign patent office, any new or modified regulations.
The process of obtaining FDA and other required regulatory approvals and
clearanceswhich could result in substantial cost to us, even if the eventual outcome is lengthy and will require the expenditure of substantial capital
and resources.favorable. There can be no assurance that a court of competent jurisdiction would hold any claims in any issued patent to be valid. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology. Regardless of merit, the Companylisting of patents in the FDA Orange Book for Gencaro may be challenged as being improperly listed. We may have to defend against such claims and possible associated antitrust issues. We could also incur substantial costs in seeking to enforce our proprietary rights against infringement.
While the composition of matter patents on the compound that comprises Gencaro have expired, we hold the intellectual property concerning the interaction of Gencaro with the polymorphisms of the ß1 and 2C receptors. We have obtained patents that claim methods involving Gencaro after a patient’s receptor genotype has been determined. Our NDA requested a label that will include a claim that efficacy varies based on receptor genotype and a recommendation in the prescribing information that prospective patients be tested for their receptor genotype. We believe that under applicable law, a generic bucindolol label would likely be required to include this recommendation as it pertains directly to the safe or efficacious use of the drug. Such a label may be considered as inducing infringement, carrying the same liability as direct infringement. If the label with the genotype information for Gencaro is not approved, or if generic labels are not required to copy the approved label, competitors could have an easier path to introduce competing products and our business may suffer. The approved label may not contain language covered by the patents, or we may be unsuccessful in enforcing them.
We may not be able to obtaineffectively protect our intellectual property rights in some foreign countries, as our patents are limited by jurisdiction and many countries do not offer the necessary approvalssame level of legal protection for intellectual property as the U.S.
We require our employees, consultants, business partners and clearances. Moreover, ifmembers of our scientific advisory board to execute confidentiality agreements upon the commencement of employment, consulting or business relationships with us. These agreements provide that all confidential information developed or made known during the course of the relationship with us be kept confidential and when such
approvalnot disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for us, utilizing the property or clearances are obtained, the marketing, distributionrelating to our business and manufacture of such products would remain subject to extensive regulatory
requirements administeredconceived or completed by the FDAindividual during employment shall be our exclusive property to the extent permitted by applicable law.
Third parties may breach these and other regulatory bodies. Failureagreements with us regarding our intellectual property and we may not have adequate remedies for the breach. Third parties could also fail to complytake necessary steps to protect our licensed intellectual property, which could seriously harm our intellectual property position.
If we are not able to protect our proprietary technology, trade secrets and know-how, then our competitors may develop competing products. Any issued patent may not be sufficient to prevent others from competing with applicable regulatory requirements canus. Further, we have trade secrets relating to Gencaro, and such trade secrets may become known or independently discovered. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, opposed, invalidated or circumvented, which could allow competitors to market similar products or limit the patent protection term of our product candidates. All of these factors may affect our competitive position.
If the manufacture, use or sale of our products infringe on the intellectual property rights of others, we could face costly litigation, which could cause us to pay substantial damages or licensing fees and limit our ability to sell some or all of our products.
Extensive litigation regarding patents and other intellectual property rights has been common in the biopharmaceutical industry. Litigation may be necessary to assert infringement claims, enforce patent rights, protect trade secrets or know-how and determine the enforceability, scope and validity of certain proprietary rights. Litigation may even be necessary to defend disputes of inventorship or ownership of proprietary rights. The defense and prosecution of intellectual property lawsuits, U.S. Patent and Trademark Office interference proceedings, and related legal and administrative proceedings (e.g., a reexamination) in the U.S. and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue, and their outcome is uncertain.
Regardless of merit or outcome, our involvement in amongany litigation, interference or other things, warning letters, fines, injunctions, civil penalties, recalladministrative proceedings could cause us to incur substantial expense and could significantly divert the efforts of our technical and management personnel. Any public announcements related to litigation or seizure of products, totalinterference proceedings initiated or partial suspension of production, refusalthreatened against us could cause our stock price to decline. Adverse outcomes in patent litigation may potentially subject us to antitrust litigation which, regardless of the government to grant approvals, premarket clearance or premarket approval,
withdrawal of approvals and criminal prosecution. If marketed outside the
United States, the Company's therapeutic and diagnostic products will be
subject to foreign regulatory requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement, which vary from country
to country and are becoming more restrictive throughout the European Union.
The process of obtaining foreign regulatory approvals can be lengthy and
require the expenditure of substantial capital and resources, and there can be
no assurance that the Company or its collaboration partners will be successful
in obtaining the necessary approvals. Any delay or failure by the Company or
its collaboration partners to obtain regulatory approvals for its productsoutcome, would adversely affect our business. An adverse determination may subject us to the Company's abilityloss of our proprietary position or to generate productsignificant liabilities, or require us to seek licenses that may include substantial cost and royalty
revenues, whichongoing royalties. Licenses may not be available from third parties, or may not be obtainable on satisfactory terms. An adverse determination or a failure to obtain necessary licenses may restrict or prevent us from manufacturing and selling our products, if any. These outcomes could have a material adverse effect on the Company'smaterially harm our business, financial condition and operating results. See "Business--Government
Regulation."
Need for Future Capital; Uncertaintyresults of Additional Funding. Whileoperations.
Risks Related to Stock Price Volatility
Ownership of our common stock is highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.
Our executive officers, directors and their affiliates beneficially owned approximately 29% of our outstanding common stock as of February 28, 2013. Accordingly, these executive officers, directors and their affiliates, acting individually or as a group, have substantial influence over the Company believesoutcome of a corporate action of ours requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also delay or prevent a change in control of us, even if such change in control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the value of our common stock due to investors’ perception that estimated net proceeds from this offering and the
Private Placement, together with existing capital resources, will be
sufficient to support the Company's operations through 1999, depending upon
the abilityconflicts of the Company to develop additional collaborative arrangements,
meet its budgeted expenditures for expansion of operations and market its
HyGnostics Module, additional fundsinterest may be necessary sooner. There can be no
assurance that additional funds will be available when neededexist or on terms
acceptable to the Company. If adequate additional funds are not available, the
Company may have to reduce substantially or eliminate expenditures for the
12
development, production and marketing of certain of its proposed products, or
obtain funds through arrangements with collaboration partners that require the
Company to relinquish rights to certain of its technologies or products, which
could have a material adverse effect on the Company's business, financial
condition and operating results. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. The initial
public offeringarise.
Our stock price per share of the Common Stock will be determined by
negotiations between management of the Company and the representatives of the
Underwriters (the "Representatives"). See "Underwriting" for factorsis expected to be considered in determining the initial public offering price per share.
Application has been madevolatile.
Our common stock could be subject to significant fluctuations. Market prices for the Common Stock to be quoted on the Nasdaq
National Market; however, there can be no assurance that an active trading
market will develop and be sustained subsequent to this offering. The market
pricesecurities of the Common Stock may fluctuate substantially because of a variety of
factors, including quarterly fluctuations in results of operations, adverse
circumstances affecting the introduction or market acceptance of new products
offered by the Company, announcements by competitors, developments in the
Company's litigation proceedings, changes in earnings estimates by analysts,
changes in accounting principles, sales of Common Stock by existing holders,
loss of key personnel and other factors. In addition, the stock market in
general, and the market forearly-stage pharmaceutical, biotechnology and other life science stocks in
particular, hassciences companies have historically been subjectparticularly volatile. Some of the factors that may cause the market price of our common stock to extreme pricefluctuate include:
the regulatory status of Gencaro and volume
fluctuations. This volatility has hadthe Gencaro Test, and whether and when they are approved for sale, if at all, and the labeling or other conditions of use imposed by the FDA;
our ability to secure substantial additional funding or complete a significant effectstrategic transaction or to complete development of and commercialize Gencaro;
potential receipt of government or third party funding to further develop Gencaro;
the results of our future clinical trials and any future NDAs of our current and future product candidates;
the entry into, or termination of, key agreements, including key strategic alliance agreements;
the results and timing of regulatory reviews relating to our product candidates;
failure of any of our product candidates, if approved, to achieve commercial success;
general and industry-specific economic conditions that may affect our research and development expenditures;
the results of clinical trials conducted by others on drugs that would compete with our product candidates;
issues in manufacturing our product candidates or any approved products;
the initiation of or material developments in or the conclusion of litigation to enforce or defend any of our intellectual property rights;
the loss of key employees;
the introduction of technological innovations or new commercial products by our competitors;
changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
future sales of our common stock;
changes in the structure of health care payment systems;
period-to-period fluctuations in our financial results; and
our ability to retain the listing of our common stock on the market
prices of securities issued by many companies for reasonsNasdaq Capital Market.
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of theseindividual companies. These broad market fluctuations may also adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company'scompany’s securities, stockholders have often instituted class action securities litigation has often beenagainst those companies. Such litigation, if instituted, against such a company. Any
such litigation instigated against the Company could result in substantial costs and a diversion of management'smanagement attention and resources, which could have a material adverse effect onsignificantly harm our profitability and reputation.
Future sales or the Company's business, financial condition
and operating results.
Use and Disposalpossibility of Hazardous Materials. The Company's operations requirefuture sales of our common stock may depress the controlled usemarket price of hazardous and radioactive materials. Althoughour common stock.
Sales in the Company believes that its safety procedures for handling such materials comply
with the standards prescribed by federal, state and local regulations, the
riskpublic market of accidental contamination or injury from these materials cannot be
completely eliminated. In the eventsubstantial amounts of such an accident, the Companyour common stock could be
held liable for any damages that result, which could have a material adverse
effect on the Company's business, financial condition and operating results.
Riskdepress prevailing market prices of Natural Disaster. The Company's sole facility is located in
Sunnyvale, California. In the event that a fire or other natural disaster
(such as an earthquake) prevents the Company from operating its production
line, the Company's business, financial condition and operating results would
be materially, adversely affected. The Company maintains earthquake coverage
for its facility, but does not maintain such coverage for personal property or
resulting business interruption.
Immediate and Substantial Dilution. The initial public offering price per
shareour common stock. As of Common Stock is substantially higher than the net tangible book value
per share of the Common Stock. Purchasers ofMarch 18, 2013, 3,185,562 shares of Common Stock in this
offering will experience immediate and substantial dilutioncommon stock were outstanding. All of $8.46 in the
pro forma net tangible book value per share of Common Stock. To the extent
outstanding options and warrants to purchase Common Stock are exercised, there
will be further dilution. See "Dilution."
Shares Eligible for Future Sale. Immediately after completion of this
offering and the Private Placement, the Company will have 12,127,418 shares of
Common Stock outstanding (assuming no exercise of outstanding options or
warrants). Of these shares the 2,750,000 shares sold pursuant to this
offering will beare freely tradabletransferable without restriction or further registration under the Securities Act, except for shares held by our directors, officers and other affiliates and unregistered shares held by non-affiliates. The sale of 1933, as amended (the "Securities Act"), except
thosethese additional shares, acquired by affiliatesor the perception that such sales may occur, could depress the market price of the Company. The remaining 9,377,418
shares (including the 597,849our common stock.
As of March 18, 2013 approximately 1.3 million shares of Common Stock, basedour common stock were issuable upon the exercise of outstanding warrants. Once a warrant is exercised, if the shares of our common stock issued upon the exercise of any such warrant are not available for sale in the open market without further registration under the Securities Act, then the holder can arrange for the resale of shares either by invoking any applicable registration rights, causing the shares to be registered under the Securities Act and thus freely transferable, or by relying on an assumed
initial public offering price of $13.00 per share in this offering, soldexemption to the Securities Act. If these registration rights, or similar registration rights that may apply to securities we may issue in the Private Placement)future, are exercised, it could result in additional sales of our common stock in the market, which may have an adverse effect on our stock price.
As of March 18, 2013, there were approximately 138,000 shares of our common stock which may be issued upon exercise of outstanding stock options. If and when these options are exercised, such shares will be restricted securities withinavailable for sale in the meaning of
Rule 144open market without further registration under the Securities Act. The Company intendsexistence of these outstanding options may negatively affect our ability to registercomplete future equity financings at acceptable prices and on acceptable terms. The exercise of those options, and the shares
sold in the Private Placement following the expirationprompt resale of the 180 day lock-up
agreements covering these shares, as described below. Chiron and Perkin-Elmer
have no present intentions to dispose of any shares of Common Stock which will
be owned by them atour common stock received, may also result in downward pressure on the completion of
13
1 this offering. However, there can be no assurance that such intentions will
not change in the future. The Company, executive officers and directors and
certain stockholders (including Chiron and Perkin-Elmer) have agreed not to
(1) offer, pledge, sell, contract to sell, engage in any short sale, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or similar agreement that transfers, in whole or in part, the
economic risk of ownership of the Common Stock, until 180 days after the
effective date of this Prospectus (the "Lock-Up Period"), without the prior
consent of Lehman Brothers Inc. However, Lehman Brothers Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements.
Of the 9,377,418 Restricted Shares, 1,612,339 shares will be freely
transferable pursuant to Rule 144 at the end of the Lock-Up Period and
2,262,778 shares will be held by affiliates and transferable pursuant to Rules
144 and 701, subject to the volume limitations of Rule 144, at the end of the
Lock-Up Period. Additional Restricted Shares, which will be transferable at
the end of the Lock-Up Period subject to the volume limitations of Rule 144,
will become freely transferable pursuant to Rule 144(k) as follows: 66,960
shares at various times during February and March 1998; 2,585,280 at various
times during April and May 1998; and 81,600 at various times during December
1998 and January 1999. An additional 1,462,132 Restricted Shares will not be
transferable pursuant to Rule 144 until the expiration of their one-year
holding periods, beginning at various times following the end of the Lock-Up
Period. An additional 708,480 shares are held in a blocked account and
therefore may not be voted or transferred pursuant to restrictions imposed by
the U.S. Department of Treasury. The 597,849 shares of Common Stock (based on
an assumed initial public offering price of $13.00 per share in this offering)
sold inour common stock.
In the Private Placement will be freely transferable following the
effectivenessabsence of a registration statement whichsignificant strategic transaction, we will need to raise significant additional capital to finance our capital requirements, including the Company intends to file at
the endresearch, development and commercialization of the Lock-Up Period. There can be no assurance as to how long such
restrictions will remain in effect. The Company has granted to certainour drug products. If future securities holders demandofferings occur, they would dilute our current stockholders’ equity interests and piggyback registration rights covering an
aggregate of 3,892,140 shares of Common Stock upon conversion of Series A and
Series B Preferred Stock and 216,422 shares of Common Stock issuable upon the
exercise of warrants (registration rights covering 227,760 of such shares will
expire prior to the end of the Lock-Up Period and registration rights covering
an additional 2,729,040 of such shares will expire at various times between
the end of the Lock-Up Period and January 1999). Sales of substantial amounts
of such shares in the public market or the availability of such shares for
future sale could adversely affectreduce the market price of these sharesour common stock.
We do not expect to pay cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of Common
Stockthe price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.
We have implemented anti-takeover provisions that could discourage, prevent or delay a takeover, even if the acquisition would be beneficial to our stockholders.
Provisions of our certificate of incorporation and the Company's ability to raise additional capital at a price
favorable to the Company. Within approximately 180 days after the date of this
Prospectus, the Company expects to file a Registration Statement on Form S-8
registering 1,895,232 shares of Common Stock reserved for issuance under the
Company's stock option agreements, Stock Option Plan and Non-Employee Director
Stock Option Plan. See "Shares Eligible for Future Sale" and "Underwriting."
Anti-Takeover Provisions. Certainbylaws, as well as provisions of the Company's Amended and
Restated Articles of Incorporation, as amended ("Articles"), and By-Laws ("By-
Laws") and the Nevada General Corporation Law (the "NGCL") will effectivelyDelaware law, could make it more difficult for a third party to acquire control of the Company by
means ofus, even if doing so would benefit our stockholders. These provisions:
establish a tender offer through a proxy contest for the electionclassified board of directors or otherwise. The Articles contain provisions which: (i) classifyso that not all members of our board may be elected at one time;
authorize the Boardissuance of Directors into three classes, with one class being elected each year; (ii)
requireup to 5 million additional shares of preferred stock that stockholder actioncould be taken only atissued by our board of directors to increase the number of outstanding shares and hinder a duly called meeting and not
by written consent; (iii) permit the Company's stockholders totakeover attempt;
limit who may call a special meeting of the stockholders only upon request of stockholders owning at least
50% of the Company's capital stock; and (iv) do not provide for cumulative
voting. The Company may issue shares of Preferred Stock withoutstockholders;
prohibit stockholder approval and upon such terms as the Board of Directors may determine. The
rights of the holders of the Common Stock willaction by written consent, thereby requiring all stockholder actions to be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. These provisions may have the effect of
lengthening the time required for a person to acquire control of the Company
through a proxy contest for the election of a majority of the Board of
Directors, may discourage bids for the Common Stocktaken at a premium over market
pricemeeting of our stockholders; and may deter efforts
establish advance notice requirements for nominations for election to obtain control of the Company. See "Description
of Capital Stock--Preferred Stock" and "--Anti-Takeover Effects of Provisions
of the Articles and By-Laws and Nevada Law."
14
THE COMPANY
Hyseq, Inc. was incorporated in August 1992 as an Illinois corporation and
was merged into a newly formed Nevada corporation in November 1993, with the
Nevada corporation being the survivor. References in this Prospectus to
"Hyseq" and the "Company" include the Nevada corporation, its predecessors and
its subsidiary, Hyseq Diagnostics, Inc., a Nevada corporation, unless
otherwise stated or indicated by the context. The Company maintains its
principal executive offices at 670 Almanor Avenue, Sunnyvale, California
94086. Its telephone number is (408) 524-8100.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $13.00 per share, and after deducting underwriting discounts
and commissions and other estimated offering expenses, are estimated to be
approximately $32,497,500 ($37,484,625 if the Underwriters' over-allotment
option is exercised in full). Concurrent with this offering, Chiron and
Perkin-Elmer have agreed to purchase shares of Common Stock directly from the
Company at a price per share equal to the price to public less one-half of the
underwriting discounts and commissions applicable to the shares of Common
Stock being offered to the public hereby, for an aggregate purchase price of
approximately $2.5 million and $5.0 million, respectively. Total net proceeds
from this offering and the Private Placement are estimated to be approximately
$39,997,500 ($44,984,625 if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use the net proceeds from this offering and the
Private Placement primarily to develop potential therapeutic product
candidates and diagnostic tests while continuing to expand its HyGenomics
Database. The Company also expects to use a portion of the proceeds to further
develop its HyChip Module and related products, to fund expanded research into
new applications of its technologies, to expand marketing capabilities with
respect to its HyGnostics Module and collaborations, and to invest in capital
equipment and lease additional space to increase sequencing capacity. The
Company intends to use the balance of the net proceeds for working capital and
other general capital purposes. Pending such uses, the Company intends to
invest the net proceeds of this offering in short-term, investment-grade,
interest-bearing securities. The amounts actually expended for each purpose
and the timing of such expenditures will depend upon numerous factors,
including but not limited to payments received under current and possible
future collaborative arrangements; the progress of the Company's collaborative
and independent research and development projects; the prosecution, defense
and enforcement of patent claims and other intellectual property rights; and
the expansion of marketing capabilities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that any future earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions, if any, and such other factors as the Board of Directors may
deem relevant.
15
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997; (ii) on a pro forma basis to reflect the exercise of a warrant
and options to purchase an aggregate of 243,894 shares of Common Stock in June
1997, the automatic conversion of all outstanding Series A Preferred Stock
into Common Stock on a 1-for-1 basis concurrently with the closing of this
offering and the issuance of an aggregate of 854,700 shares of Common Stock
upon conversion of shares of Series B Preferred Stock sold to Chiron and
Perkin-Elmer in May and June, 1997; and (iii) pro forma as adjusted to reflect
the sale of 2,750,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $13.00 per share and the receipt
of estimated net proceeds therefrom and the Private Placement and the receipt
of the net proceeds therefrom. The following table should be read in
conjunction with "Business," and the Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus.
AS OF MARCH 31, 1997
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------------ ------------ --------------
Cash and cash equivalents........... $ 4,743,260 $ 14,743,260 $ 54,740,760
============ ============ ============
Current maturities of capital lease
and loan obligations............... $ 274,893 $ 274,893 $ 274,893
============ ============ ============
Non-current portion of capital lease
and loan obligations (1)........... $ 718,973 $ 718,973 $ 718,973
Stockholders' equity:
Preferred stock, $.001 par value;
8,000,000 shares authorized,
2,170,460 shares issued and
outstanding, actual; no shares
issued and outstanding, pro
forma; no shares issued and
outstanding, pro forma as
adjusted......................... 14,780,013 -- --
Common stock, $.001 par value;
20,000,000 shares authorized;
2,329,540 shares issued and
outstanding, actual; 50,000,000
shares authorized, 8,779,569
shares issued and outstanding,
pro forma; 12,127,418 shares
issued and outstanding, pro forma
as adjusted (4).................. 5,396,571 30,176,584 70,174,084
Notes receivable (5).............. (3,905,705) (3,905,705) (3,905,705)
Deferred compensation............. (568,064) (568,064) (568,064)
Deficit accumulated during the
development stage................ (10,127,991) (10,127,991) (10,127,991)
------------ ------------ ------------
Total stockholders' equity...... 5,574,824 15,574,824 55,572,324
------------ ------------ ------------
Total capitalization.......... $ 6,293,797 $ 16,293,797 $ 56,291,297
============ ============ ============
- --------
(1) See Notes 4 and 5 of Notes to Consolidated Financial Statements for a
description of the Company's obligations.
(2) Gives effect to: (i) the exercise of a warrant and options to purchase an
aggregate of 243,894 shares of Common Stock in June 1997; (ii) the
automatic conversion of all outstanding Series A Preferred Stock into
Common Stock on a 1-for-1 basis concurrently with the closing of this
offering; and (iii) the issuance of an aggregate of 854,700 shares of
Common Stock upon conversion of shares of Series B Preferred Stock sold to
Chiron and Perkin-Elmer in May and June, 1997.
(3) Reflects the sale of 2,750,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $13.00 per
share and the receipt of estimated net proceeds therefrom and the sale of
597,849 shares of Common Stock (based on an assumed initial public
offering price of $13.00 per share in this offering) sold in the Private
Placement and the receipt of the net proceeds therefrom.
(4) Excludes: (i) 645,619 shares of Common Stock issuable upon exercise of
vested options outstanding at a weighted average exercise price of $2.27
per share; (ii) 692,847 shares of Common Stock issuable upon exercise of
warrants outstanding at a weighted average exercise price of $3.81; (iii)
747,848 shares of Common Stock issuable upon exercise of options
outstanding but not vested and (iv) 501,765 shares reserved for issuance
upon exercise of options that may be granted in the future under the
Company's Stock Option Plan and Non-Employee Director Stock Option Plan.
See "Management and Scientific Advisory Board--Stock Option Plans and
Agreements," "Description of Capital Stock" and Note 7 of Notes to
Consolidated Financial Statements.
(5) Notes receivable includes loans with outstanding principal balances at
March 31, 1997 of $1,662,000, $1,842,000 and $4,120 to three officers in
connection with their purchases of Common Stock. Also includes a loan with
an outstanding principal balance at March 31, 1997 of $397,585 to Sachnoff
& Weaver, Ltd. in connection with its purchase of Common Stock. See
"Certain Transactions."
16
DILUTION
As of March 31, 1997, the pro forma net tangible book value of the Company
was $15,101,120 or $1.72 per share. "Pro forma net tangible book value per
share" represents the amount of tangible net assets of the Company, less total
liabilities, divided by the pro forma number of shares of Common Stock
outstanding as of March 31, 1997. After giving effect to the sale by the
Company of 2,750,000 shares of its Common Stock offered hereby at an assumed
initial public offering price of $13.00 per share and the receipt of the net
proceeds therefrom and the sale of 597,849 shares of Common Stock (based on an
assumed initial public offering price of $13.00 per share in this offering) by
the Company in the Private Placement and the receipt of the net proceeds
therefrom, the pro forma net tangible adjusted book value of the Company at
March 31, 1997 would have been $55,098,620 or $4.54 per share. This amount
represents an immediate increase in pro forma net tangible book value of $2.82
per share to existing owners of the Company and an immediate dilution in net
tangible book value per share of $8.46 per share to purchasers of Common Stock
in this offering. The following table illustrates this per share dilution,
without giving effect to any exercise of the Underwriters' over-allotment
options:
Assumed initial public offering price per share.................. $13.00
Pro forma net tangible book value per share at March 31, 1997.. $ 1.72
Increase attributable to new investors (1)..................... 2.82
------
Pro forma net tangible book value per share after this offering
and the Private Placement....................................... 4.54
------
Dilution per share to new investors.............................. $ 8.46
======
- --------
(1) Includes increase attributable to the Private Placement and the sale of
shares in this offering.
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences in the number of shares of capital stock purchased from the
Company, the total cash consideration paid and the average price paid per
share by existing stockholders and by new investors before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company at the assumed initial public offering price of $13.00 per
share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------ ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
Existing stockholders (1). 8,779,569 72.4% $30,788,289 41.6% $ 3.51
New investors (1)(2)...... 3,347,849 27.6 43,250,000 58.4 12.92
---------- ----- ----------- -----
Total................... 12,127,418 100.0% $74,038,289 100.0%
========== ===== =========== =====
- --------
(1) If exercised, the Underwriters' over-allotment option to purchase 412,500
additional shares will further reduce the percentage held by existing
stockholders to 69.6% and increase the percentage held by new investors to
30.4%.
(2) Includes shares sold in the Private Placement and this offering.
The foregoing tables (i) include the issuance of an aggregate of 845,700
shares of Common Stock upon the conversion of shares of Series B Preferred
Stock issued in May and June, 1997 and the exercise of warrants and options to
purchase an aggregate of 243,894 shares of Common Stock in June 1997; and (ii)
assume no exercise of outstanding options or warrants. As of June 30, 1997,
there were options and warrants outstanding to purchase a total of 2,086,314
shares of Common Stock at a weighted average exercise price of $3.72 per
share. Assuming that all of these options and warrants were exercised and
proceeds were received therefrom, net tangible book value dilution per share
to new investors would be $8.46. See "Management and Scientific Advisory
Board--Stock Option Plans and Agreements" and Note 7 of Notes to Consolidated
Financial Statements.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 have
been derived from the Company's consolidated financial statements, which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere herein. The selected consolidated financial data as set forth below
as of December 31, 1993 and 1994 and for the period from August 14, 1992
(inception) to December 31, 1993 have been derived from the Company's audited
consolidated financial statements not included herein. The selected
consolidated financial data as set forth below as of March 31, 1997--actual,
and for the three months ended March 31, 1996 and 1997 and the period from
August 14, 1992 (inception) to March 31, 1997, have been derived from the
Company's unaudited financial statements which are included elsewhere herein.
The unaudited financial statements have been prepared by the Company on a
basis consistent with the Company's audited financial statements and, in the
opinion of management, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
results of operations and financial condition for such periods. Operating
results for the three months ended March 31, 1997 are not necessarily
indicative of results that may be expected for the entire year ending December
31, 1997. The selected consolidated financial data set forth below should be
read in conjunction with the Consolidated Financial Statements and related
Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PERIOD FROM THREE MONTHS PERIOD FROM
AUGUST 14, 1992 ENDED AUGUST 14, 1992
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION) TO
DECEMBER 31, ----------------------------------- ------------------------ MARCH 31,
1993 1994 1995 1996 1996 1997 1997
--------------- ----------- --------- ----------- ----------- ----------- ---------------
STATEMENT OF OPERATIONS
DATA:
Contract revenues....... $ -- $ 50,000 $2,127,00 $ 426,099 $ 78,327 $ 272,373 $ 2,875,472
Operating expenses:
Research and
development........... -- 850,707 1,811,212 3,735,925 946,324 1,306,233 7,704,077
General and
administrative........ 511,755 1,477,664 937,656 1,749,086 400,670 931,298 5,607,459
---------- ----------- --------- ----------- ----------- ----------- ------------
Total operating
expenses.............. 511,755 2,328,371 2,748,868 5,485,011 1,346,994 2,237,531 13,311,536
---------- ----------- --------- ----------- ----------- ----------- ------------
Loss from operations.... (511,755) (2,278,371) (621,868) (5,058,912) (1,268,667) (1,965,158) (10,436,064)
Interest income
(expense), net......... 2,473 15,926 20,604 219,977 (5,840) 49,093 308,073
---------- ----------- --------- ----------- ----------- ----------- ------------
Net loss................ $(509,282) $(2,262,445) $(601,264) $(4,838,935) $(1,274,507) $(1,916,065) $(10,127,991)
========== =========== ========= =========== =========== =========== ============
Pro forma net loss per
share(1)............... $(0.52) $(0.21)
=========== ===========
Shares used in computing
pro forma net loss per
share(1)............... 9,403,000 9,067,000
=========== ===========
DECEMBER 31, MARCH 31, 1997
----------------------------------------------- --------------------------------------
PRO FORMA
AS
1993 1994 1995 1996 ACTUAL PRO FORMA(2) ADJUSTED(3)
---------- ----------- ---------- ---------- ----------- ------------ -----------
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $1,009,563 $ 1,196,044 $ 750,291 $6,707,288 $ 4,743,260 $ 14,743,260 $54,740,760
Working capital......... 886,272 429,995 331,251 5,954,671 4,051,350 14,051,350 54,048,850
Total assets............ 1,539,393 2,455,508 2,739,679 9,365,814 7,549,233 17,549,233 57,546,733
Noncurrent portion of
capital lease and loan
obligations............ -- -- 32,360 791,405 718,973 718,973 718,973
Deficit accumulated
during the development
stage.................. (509,282) (2,771,727) (3,372,991) (8,211,926) (10,127,991) (10,127,991) (10,127,991)
Total stockholders'
equity................. $1,416,102 $ 1,625,203 $1,976,557 $7,363,537 $ 5,574,824 $ 15,574,824 $55,572,324
- -------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(2) Pro forma to give effect to: (i) the exercise of warrants and options to
purchase an aggregate of 243,894 shares of Common Stock in June 1997 and
(ii) the issuance of an aggregate of $10.0 million of Series B Preferred
Stock to Chiron and Perkin-Elmer in May and June, 1997.
(3) Adjusted to give effect to: (i) the sale of 2,750,000 shares of Common
Stock by the Company offered hereby and (ii) the receipt of the net
proceeds therefrom and the sale of 597,849 shares of Common Stock (based
on an assumed initial public offering price of $13.00 per share in this
offering) to Chiron and Perkin-Elmer in the Private Placement and the
receipt of the net proceeds therefrom.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements contained herein, including statements concerning
potential collaboration arrangements, royalties and other payments under
potential collaboration arrangements, and product development and sales and
other statements, are forward-looking statements, which statements involve
risks and uncertainties. Actual results and performance could differ
materially from those projected in the forward-looking statements as a result
of many factors, including but not limited to, the following: the scientific
progress of the Company's programs; the ability of the Company to establish
additional collaborative and licensing arrangements; the extent to which the
Company engages in development of products without collaboration partners; the
time and cost involved in obtaining regulatory approvals for its diagnostics
products; the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims; competing technological and market developments;
and whether conditions to milestone payments are met and the timing of such
payment or payments. Prospective investors are also directed to the other
risks discussed under "Risk Factors."
OVERVIEW
The Company applies the proprietary DNA array technology of its HyX Platform
to develop gene-based therapeutic product candidates and diagnostic products
and tests. The Company believes that its HyGenomics Database of partial gene
sequences is one of the largest proprietary human gene databases in the world.
The Company presently is collaborating with Chiron to develop therapeutics,
diagnostic molecules and vaccines relating to a specified disease area and
with Perkin-Elmer to commercialize HyChip products for commercial
applications. The Company intends to form additional collaborations in
targeted disease categories. The Company is marketing its HyGnostics Module
for DNA testing of genetic and infectious disease and cancer to clinical
reference laboratories. The Company has initial agreements with SmithKline
Beecham and Quest relating to evaluation of the HyGnostics Module for
commercial-scale diagnostic testing.
Subsequent to March 31, 1997, Chiron and Perkin-Elmer invested $5.0 million
each in connection with collaboration agreements with the Company. The
majority of revenues received by the Company through March 31, 1997 related to
agreements with pharmaceutical companies and a clinical reference laboratory
entered into in 1995 and to a three-year, $2 million grant awarded in November
1994 from the National Institute of Standards and Technology ("NIST"), the
proceeds of which are being applied to development of the Company's super chip
technology. The Company expects to receive the remainder of the NIST grant and
to begin earning revenues under its collaboration with Chiron in 1997. The
Company has incurred operating losses since inception and expects to incur
operating losses at least through 1999 and possibly longer. The Company may
never achieve significant revenues or profitable operations. There can be no
assurance that the Company will be able to obtain licensees of its HyGnostics
Module, customers for HyChip products, additional collaboration partners on
acceptable terms or that its collaborative arrangements or products will
produce revenues adequate to fund the Company's operations.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, including, but not limited to, changes in
the demand for the Company's products; the nature, size and timing of
collaborative arrangements and products provided to or developed with the
Company's current and future collaboration partners; changes in the research
and development budgets of the Company's current and future collaboration
partners; capital expenditures and other costs related to the expansion of the
Company's operations; litigation and other costs associated with defending its
proprietary rights; changes in government regulations; and the introduction of
competitive technologies.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Contract Revenues. Contract revenues were $272,000 and $78,000 for the
quarters ended March 31, 1997 and 1996, respectively. Contract revenues earned
in both periods related to the Company's NIST grant. The Company recognizes
revenues under the grant as research is performed. The Company expects to
receive the
19
remaining balance of the NIST grant in 1997. The recognition of revenues will
vary from quarter to quarter and may result in significant fluctuations in
operating results from year to year. There can be no assurance that the
Company will be able to maintain existing collaborations and obtain additional
collaboration partners. The failure to maintain existing collaboration
partners or the inability to enter into additional collaborative arrangements
could have a material effect on the Company's revenues and operating results.
Operating Expenses. Total operating expenses, consisting of research and
development expenses and general and administrative expenses, were $2.2
million in the quarter ended March 31, 1997 compared to $1.3 million in the
same period of 1996. As the Company expands its commercialization efforts,
operating expenses are expected to increase as a result of several factors
including: (i) the planned expansion of sequencing operations, software
development and enhancements and increased work on gene discovery in
connection with development of potential therapeutic product candidates and
diagnostic tests; (ii) the continued expansion of its HyGenomics Database;
(iii) expanded research into new applications of its technologies; (iv) the
expansion of marketing capabilities with respect to its HyGnostics Module and
collaborations; and (v) new technology development expenses relating to the
HyChip Module and related products.
The magnitude of the increases in the Company's operating expenses will be
significantly affected by the Company's ability to secure new collaboration
partners. At times, the Company may choose to increase sequencing production
and analysis capabilities in order to support its efforts to recruit new
collaboration partners. However, if the Company does not obtain additional
collaboration partners in a timely manner, it may not be able to adjust
significantly its level of expenditures in any such period, which could have
an adverse effect on the Company's operating results.
Research and development expenses increased to $1.3 million in the quarter
ended March 31, 1997 from $946,000 in the same period of 1996. This increase
resulted primarily from expanded sequencing production, software and database
development, the addition of scientific personnel and costs associated with
prosecuting and defending the Company's intellectual property. The Company
expects research and development spending to increase in the future as the
Company further expands research and product development efforts in support of
its gene sequencing and database development programs. The Company is also
obligated to commit an aggregate of $5.0 million over the next two years for
the development of the chip component of the HyChip system.
General and administrative expenses were $931,000 in the quarter ended March
31, 1997 compared to $401,000 in the same period of 1996. This increase
resulted primarily from increased marketing and business development expenses,
and the addition of management personnel and administrative staff to support
the continued expansion of the Company's sequencing production and data
analysis capabilities. In addition, during the period ended March 31, 1997,
the Company incurred legal expenses associated with its suit filed against
Affymetrix in March 1997. As the Company expands operations, general and
administrative expenses in support of such expansion are expected to increase.
Interest Income (Expense), Net. Net interest income increased to $49,000 in
the quarter ended March 31, 1997 from an expense of $6,000 in the same period
of 1996. The increase in interest income for the first quarter of 1997 as
compared to the first quarter of 1996 results from larger cash and investment
balances held by the Company primarily due to the realization of $9.9 million
in net proceeds from its private placement of Series A Preferred Stock in the
second quarter of 1996.
Net Loss. The Company incurred a net loss for the three months ended March
31, 1997 of $1.9 million compared to $1.3 million in the same period of 1996.
Since inception, the Company has incurred operating losses, and as of March
31, 1997, had an accumulated deficit of $10.1 million. As of December 31,
1996, the Company had a net operating loss carryover for federal income tax
purposes of approximately $7.4 million, the majority of which expires, if
unused, in the year 2011. Utilization of the net operating loss carryover is
expected to be subject to a substantial annual limitation because of the
"change in ownership" provisions of the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
losses before utilization. See Note 8 of Notes to Consolidated Financial
Statements.
20
Years Ended December 31, 1996, 1995 and 1994
Contract Revenues. Contract revenues were $426,000 and $2.1 million in 1996
and 1995, respectively. The Company did not lease and begin build-out of a
facility until May 1994, and did not commence operations until the fourth
quarter of 1994. As a result, the Company did not recognize any significant
revenues in 1994. Contract revenues recognized in 1996 related to the
Company's NIST grant, and in 1995 related to the NIST grant and agreements
with a pharmaceutical company and with SmithKline Beecham. The Company
recognized revenues under those agreements as milestones were achieved.
Operating Expenses. Total operating expenses, consisting of research and
development expenses and general and administrative expenses, were $5.5
million in 1996 compared to $2.7 million in 1995 and $2.3 million in 1994.
Research and development expenses increased to $3.7 million in 1996 from
$1.8 million in 1995 and $851,000 in 1994. Increases in expenses from 1995 to
1996 resulted primarily from expanded sequencing production, software and
database development, addition of scientific personnel and intellectual
property protection. Increases from 1994 to 1995 were the result of the
addition of scientific personnel, growth of research activities and increased
legal costs associated with prosecuting the Company's patent portfolio, all
primarily related to the expansion and improvements in sequencing production.
General and administrative expense were $1.7 million in 1996 compared to
$938,000 in 1995 and $1.5 million in 1994. The increase from 1995 to 1996 was
due primarily to increased marketing and business development expenses and the
addition of management personnel and administrative staff to support the
continued expansion of the Company's sequencing production and data analysis
capabilities. The decrease from 1994 to 1995 was primarily the result of the
reduction in non-recurring start-up expenses.
Interest Income (Expense), Net. Net interest income increased to $220,000 in
1996 from $21,000 in 1995 and $16,000 in 1994. The increase in interest income
for 1996 resulted from larger cash and investment balances held by the Company
primarily due to the realization of approximately $9.9 million in net proceeds
from its private placement of Series A Preferred Stock in 1996. The increase
from 1994 to 1995 is primarily due to the interest income on higher average
investment balances resulting from approximately $1.0 million of net proceeds
received in 1995 from its private placement of Series A Preferred Stock.
Net Loss. Since inception the Company has incurred operating losses, and as
of December 31, 1996 had an accumulated deficit of $8.2 million. The Company
incurred a net loss for the year ended December 31, 1996 of $4.8 million
compared to a loss of $601,000 and $2.3 million in 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had $4.7 million in cash, cash equivalents
and marketable securities, compared to $6.7 million as of December 31, 1996.
This decrease reflects net cash used in operations of $1.7 million and for
capital expenditures of $208,000 during the three months ended March 31, 1997,
partially offset by payments received under the Company's NIST grant.
Subsequent to March 31, 1997, Chiron and Perkin-Elmer invested $5.0 million
each in connection with collaboration agreements with the Company. The Company
has classified all of its investments as short-term at March 31, 1997, as the
Company may hold its investments until maturity in order to take advantage of
favorable market conditions. Cash and investments are held currently in U.S.
Treasury and government agency obligations, investment-grade commercial paper
and interest-bearing securities and are invested in accordance with the
Company's investment policy with primary objectives of liquidity, safety of
principal and diversity of investments.
Cash used in operating activities increased from $510,000 in 1995 to $4.3
million in 1996 due to costs associated with the expansion of the Company's
sequencing production and data analysis capabilities. The
21
increases in cash used in operating activities for the year ended December 31,
1996 as compared to 1995 were offset in part by payments received in those
periods pursuant to collaborative arrangements and receipt of revenues from
the Company's NIST grant.
The Company's investing activities, other than purchase and sales of cash
equivalent investments, have consisted of capital expenditures, which totaled
$943,000, $679,000 and $415,000 for the years ended December 31, 1996, 1995
and 1994, respectively. Capital expenditures increased in 1996 and 1995
primarily due to leasehold improvements in the Company's facilities and the
purchase of new equipment and workstations required in conjunction with the
Company's expanded sequencing production and software development activities.
Capital expenditures increased in 1994 related primarily to leasehold
improvements and as a result of purchases of new equipment to commence
operations.
Net cash provided by financing activities increased to $11.2 million for the
year ended December 31, 1996 from $1.0 million in 1995. Net cash provided by
financing activities in 1996 reflects primarily the $9.9 million in net
proceeds from the private offering as well as a $750,000 equipment loan. Net
cash provided by financing activities of $1.0 million in 1995 reflects
primarily the $949,000 in net proceeds from the sale of Series A Preferred
Stock to investors, partially offset by principal payments on capital lease
obligations.
The Company expects its cash requirements to increase significantly in
future periods because of the planned expansion of sequencing operations and
software development and improvement efforts and increased work on gene
discovery and new technology development expenses relating to the HyChip
Module and related products. In addition, the Company expects to expend
additional cash in 1998 and beyond for capital improvements to acquire a
larger facility and the associated lease expenses related thereto. The Company
expects to continue to fund future operations with revenues from existing
collaborations in addition to using its current cash, cash equivalents and
investments when necessary. The Company intends to fund development of HyChip
products with funds received under its NIST grant and the proceeds of its
$5.0 million private placement of Series B Preferred Stock with Perkin-Elmer,
which will be completed on or about June 20, 1997, subject to approval by the
Perkin-Elmerour board of directors.
The Company expects that the estimated net proceeds from this offering and
the Private Placement, together with existing capital resources, will be
sufficient to support the Company's operations through 1999. The Company's
estimate of the time perioddirectors or for which cash funds will be adequate to fund its
operations is a forward-looking estimate subject to risks and uncertainty, and
actual results may differ materially. The Company's future capital
requirements and the adequacy of its available funds will depend on many
factors, including, but not limited to, scientific progress in its research
and development programs and the magnitude of those programs, the ability of
the Company to establish collaborative and licensing arrangements and the
financial commitments involved in such arrangements.
There can be no assurance that the Company will be able to establish
additional collaborations or that such collaborations will produce revenues,
which together with the Company's cash, cash equivalents and marketable
securities, will be adequate to fund the Company's operations. The Company's
cash requirements depend on numerous factors, including the ability of the
Company to attract collaboration partners; the Company's research and
development activities; competing technological and market developments; the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; and the purchase of additional capital
equipment, including capital equipment necessary to insure that the Company's
sequencing operation remains competitive. There can be no assurance that
additional funding, if necessary, will be available on favorable terms, if at
all. See "Risk Factors--Need for Future Capital; Uncertainty of Additional
Funding."
22
BUSINESS
OVERVIEW
Hyseq, Inc. ("Hyseq" or the "Company") applies the proprietary DNA array
technology of its integrated HyX genomic platform (the "HyX Platform") to
develop gene-based therapeutic product candidates and diagnostic products and
tests. The Company believes that its HyX Platform, which utilizes the
Company's proprietary sequencing by hybridization ("SBH") technology as its
foundation, generates higher gene sequence throughput with greater analytical
flexibility and accuracy and lower cost than prevailing technologies. The HyX
Platform's Gene Discovery Module presently is analyzing human DNA samples at a
rate of approximately 400,000 partial sequences per month, representing
approximately 50% of the Module's current capacity. Based in part on this rate
of analysis and on published industry information, the Company believes that
its HyGenomics Database of partial gene sequences is one of the largest
proprietary human gene databases in the world.
The Company believes the ability of its HyX Platform to process millions of
samples per year and sequence billions of bases per year represents a
fundamental advance in performing genomic experimentation, gene discovery,
gene function analyses and diagnostic testing in commercial-scale volumes. The
HyX Platform includes (i) a comprehensive set of labeled DNA probes; (ii) DNA
arrays of samples and probes; (iii) three software-driven modules (Gene
Discovery, HyGnostics and HyChip Modules), which provide flexible DNA probe
selection to customize the level and type of analysis; (iv) industrial
robotics systems for screening DNA probes against DNA samples; and (v)
bioinformatics to manage and analyze genetic information. These combined
technologies enable the Company to conduct a range of genomic applications,
including gene identification, expression level determination, gene
interaction studies, polymorphism screening, diagnostic testing and genetic
mapping, on one integrated platform.
Hyseq's strategy is to engage in large-scale gene discovery and to establish
collaborations to facilitate development and commercialization activities.
Hyseq believes that this research- and partner-driven approach creates
significant operational and financial advantages for the Company and may
accelerate commercial development of new therapeutic and diagnostic products.
The Company has an exclusive collaboration with Chiron Corporation ("Chiron")
to develop therapeutics, diagnostic molecules and vaccines relating to a
specified disease area. The Company has entered into initial agreements with
SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline Beecham") and
Quest Diagnostics Incorporated ("Quest"), two of the three largest clinical
reference laboratories in the United States, relating to evaluation of the
HyGnostics Module for commercial-scale diagnostic testing. The Company is
collaborating with The Perkin-Elmer Corporation ("Perkin-Elmer") to
commercialize HyChip products.
Hyseq intends to patent commercially relevant genes and gene-based products
obtained through application of its HyX Platform. The Company believes that
information about the biological function of genes is critical to obtaining
such patents. Further, the Company believes that the HyX Platform's ability to
perform complete sequencing rapidly and cost effectively may accelerate the
characterization of gene function and enhance the discovery and development of
new therapeutic product candidates and diagnostic products and tests. The
Company has three issued U.S. patents and several pending patent applications
covering SBH technology and the use of its proprietary DNA array technology.
Several other pending patent applications cover apparatus and applications of
its technology and a number of partial gene sequences identified in its gene
discovery program.
BACKGROUND
Genes are the hereditary units that control the structure, health and
function of all organisms. The study of genes and their functions has led to
the development of products and services for diverse markets ranging from
health care to agriculture. In 1996, sales of human gene-based products,
including erythropoietin, human insulin, granulocyte colony stimulating factor
and tissue plasminogen activator, totaled over $6 billion. Genomics, the study
of all genetic information of organisms, is a growing field that is expected
to lead to the development of additional gene-based therapeutics like
erythropoietin ("EPO"), small molecules and other drugs and diagnostic tests
for detection of genetic conditions.
23
The Genetic Code
The entire genetic content of each organism, known as its genome, is encoded
in deoxyribonucleic acid ("DNA"). DNA, which is found in cells, is a molecule
comprising two single strands entwined in the form of a double helix. Various
combinations of four chemical building blocks or "bases" of DNA, adenine
("A"), thymine ("T"), cytosine ("C") and guanine ("G"), are linked together in
series to form each DNA strand. The bases of one DNA strand bind to the bases
of the other strand in a specific fashion to form "base pairs": A pairs with T
and G pairs with C. In humans, there are approximately six billion base pairs
organized into 23 pairs of DNA structures called "chromosomes."
A gene comprises a series of groupings of three bases on a DNA strand that
encodes specific amino acids which, in turn, combine to form proteins. Gene
"sequencing" is the process of determining the order in which these bases are
linked together to form a gene. Scientists believe that approximately 10% of
human DNA comprises genes, with most of the remaining 90% being of unknown
function. The human genome has been estimated to contain approximately 150,000
genes which encode proteins. Proteins are essential to cellular structure,
growth and function and, thus, are the principal determinants of an organism's
characteristics.
Scientists believe that each gene has two basic regions, a structural region
and a regulatory region. The structural region of a gene encodes a specific
protein. The process by which the structural region of a gene directs the
production of a protein is known as gene expression. In that process, the
sequence of bases in a gene is copied into a related molecule called messenger
ribonucleic acid ("mRNA"). The mRNA instructs the cell to combine amino acids
together in a particular order to form a protein. The regulatory region of a
gene is responsible for the rate of gene expression and the resultant amount
of a given protein produced in specific cells of the body.
THE HUMAN GENOME
[GRAPHICS APPEARS HERE]
Figure 1 is a black and white schematic diagram entitled "The Human Genome"
which illustrates protein formation. At the top left corner of the diagram are
pictures of five human cells. An arrow points from the cells to a karyotype of
chromosomes. An arrow points from this picture to an enlarged figure of double
stranded DNA. An arrow points from the DNA picture to a figure representing
messenger RNA ("mRNA"). Lastly, an arrow points from the mRNA to a molecule
representing protein.
24
The Relationship Between Genes and Disease
Because genes encode proteins, which govern substantially all functions of
the human body, the sequences of genes and their levels of expression
determine when, where and how well essential functions are performed. The
addition, deletion or substitution of one or more bases in a gene, known as a
"mutation," can alter a protein or a gene's level of expression and result in
a disease condition. For example, whether a cell is cancerous or normal may
depend upon the presence or absence of a mutation in the "p53" human cancer
suppressor gene. Similarly, scientists believe that whether an individual
develops acquired immune deficiency syndrome ("AIDS") upon infection with the
human immunodeficiency virus ("HIV") is, in part, a function of at least one
human gene sequence. Moreover, the susceptibility of a particular strain of
HIV to drug treatment may depend upon the sequence of the viral strain's
genome. Most diseases are believed to be polygenic, in that multiple genes
interact to cause or affect a disease condition. In developing a drug for a
polygenic disease like diabetes, the most effective target may be best
selected when all genes which interact to cause or affect the disease are
known.
Applications of Genomics to Understanding Disease
Detailed knowledge of gene sequences that encode missing, defective or
abnormally expressed proteins and an understanding of gene interactions in
disease conditions offer the potential to develop novel therapeutic products
and diagnostic tests. Genomics provides the basis for developing drugs
designed to replace missing or defective proteins or to deactivate or limit
the effect of proteins that are present at excessive levels. Drugs also may be
designed to supplement proteins produced by normal genes. For example, anemia
can be treated by injecting a patient with EPO, a protein that stimulates the
production of red blood cells. Drugs also may be designed to remedy the
effects of defective genes by affecting their expression. In addition,
diagnostic tests for diseases can be developed by determining gene sequences
that predispose individuals to gene-related diseases.
Several genomic applications, including (i) polymorphism screening, (ii)
gene expression level studies, (iii) motif searches, and (iv) gene
identification, can provide critical insight into understanding disease and
developing therapeutic products and diagnostic tests. Polymorphism screening
involves sequencing the same gene in each member of a population of healthy
and diseased individuals to find naturally occurring variations or
"polymorphisms" in the gene sequence and correlating those polymorphisms with
the disease condition. Expression level studies compare the levels at which
genes are expressed in healthy and diseased individuals to correlate
differences with the disease condition. Motif searches, the screening of DNA
samples for short DNA segments that are associated with a specific function,
can be used to identify families of genes having similar functions as
potential therapeutic product candidates. Gene identification can be used to
find genes expressed at low levels. Such genes are said to be "rarely"
expressed because their corresponding mRNA is rarely found in tissue samples.
Because proteins expressed by rarely expressed genes, such as EPO, are more
effective in small quantities than proteins expressed by highly expressed
genes, they represent attractive candidates for potential therapeutic
products.
Limitations of Prevailing Technologies
Many biotechnology companies historically have been involved in the search
for genes that encode proteins with functions known to have commercial value.
Information from traditional genetics and molecular biology provides clues
about where to look for these genes, but the rate at which these genes can be
identified from this information is limited. The large market potential for
gene products led to the initiation of the Human Genome Project by the United
States government and to the formation of genomic companies. Given the volume
of sequence information in the human genome, genomics companies have focused
on partially sequencing human DNA that contains genes that encode proteins
(approximately 10% of all human DNA).
To date, genomics companies have relied primarily on gel-sequencing
technology to identify genes and obtain sequence information. Gel sequencing
involves the production of multiple DNA copies, each of which is successively
shorter by one base. The last base of each copy is labeled with a fluorescent
tag to identify it as an
25
A, T, C or G. The copies are then introduced into a gel sequencer that uses an
electrical field to move the labeled copies through a gel. The copies move
through the gel at different rates, with shorter copies moving faster than
longer copies. The gel must be run for several hours to separate the copies
sufficiently to be read by a detector which identifies the end base as an A,
T, C or G as the copies move through the detector. The sequence of the
successive readouts represents the sequence of the DNA sample. Because the
readouts generated by this process may yield ambiguous information, the gel
may be run several times to ensure complete accuracy. If a technician cannot
resolve an ambiguity, the process is repeated and may require additional
treatment of the DNA sample.
Genomics companies use gel sequencing primarily to generate short sequences,
known as expressed sequence tags ("ESTs"), which assist in gene
identification. In producing ESTs, portions of mRNA sequences from tissue
samples are first copied into a form of DNA called complementary DNA ("cDNA").
An EST is then obtained by sequencing an end of the cDNA, thereby "tagging"
the cDNA. As a result, the EST is only a partial sequence of one end of a
partial copy of an mRNA. To identify new genes, genomics companies produce
large numbers of ESTs and collect them into databases. The ESTs are then
compared to sequences of known genes to determine whether a new gene may have
been identified. While gel sequencing and ESTs have generated higher volumes
of gene sequence information than other prevailing technologies. These
technologies are relatively labor intensive and time consuming, creating
limitations in throughput, flexibility of applications, accuracy and cost.
THE HYSEQ DNA ARRAY SOLUTION
The Company believes that the ability of its HyX Platform to process
millions of samples per year and sequence billions of bases per year
represents a fundamental advance in performing genomic experimentation, gene
discovery, gene function analyses and diagnostic testing in commercial-scale
volumes. The Company believes that its HyX Platform, which utilizes the
Company's proprietary SBH technology as its foundation, generates higher gene
sequence throughput with greater analytical flexibility and accuracy and lower
cost than prevailing technologies. The HyX Platform includes (i) a
comprehensive set of labeled DNA probes; (ii) DNA arrays of samples and
probes; (iii) three software-driven modules, which enable user-driven DNA
probe selection to customize the level and type of analysis; (iv) industrial
robotics systems for screening DNA probes against DNA samples; and (v)
bioinformatics to manage and analyze genetic information. The HyX Platform's
software-driven modules include:
Gene Discovery Module: The Company's Gene Discovery Module is designed to
screen or sequence large numbers of human DNA samples (typically, 30,000 to
50,000 samples per batch) for correlation and comparison of such sequences
in gene discovery and genomic experimentation. The information generated by
the Gene Discovery Module is stored in the Company's HyGenomics Database,
which the Company believes is one of the largest human gene databases in
the world. This module is being used internally to identify proprietary
gene-based therapeutic candidates in the central nervous system,
cardiovascular and infectious disease areas and therapeutic product
candidates that impact cell receptors. The Company has an exclusive
collaboration with Chiron to develop therapeutics, diagnostic molecules and
vaccines relating to a specified disease area.
HyGnostics Module: The Company's HyGnostics Module is designed to
sequence small to medium numbers of DNA samples (typically, 10 to 1,000
samples per batch) for diagnostic applications, including DNA testing of
genetic and infectious disease and cancer. The Company is currently
marketing its HyGnostics Module to major clinical reference laboratories,
and has entered into initial agreements with SmithKline Beecham and Quest
relating to evaluation of the HyGnostics Module for commercial-scale
diagnostic testing. In a recent blind test conducted by SmithKline Beecham,
the HyGnostics Module was 100% accurate and met or exceeded all
requirements for sensitivity, cost, speed, correct heterozygote sequencing,
reproducibility and temperature range.
HyChip Module: The Company's HyChip Module is designed to sequence, in a
single reaction, DNA samples ranging in size from the detection of single
base mutations to the sequencing of entire viral genomes. The HyChip Module
is being used internally for research applications. The Company has an
26
exclusive collaboration with Perkin-Elmer to co-develop and commercialize
gene-sequencing systems targeted at specific DNA research and diagnostic
applications utilizing HyChip products and Perkin-Elmer's life science
system capabilities. The Company has conducted tests on its HyChip Module
in which a set of probes capable of complete sequencing of all mutations
was applied to samples of the HIV genome, which the Company believes is the
first time such capacity has been demonstrated. The HyChip Module also has
the capacity to sequence 64,000 bases in one reaction, which the Company
believes is the greatest amount of DNA sequencing capacity demonstrated to
date.
The Company believes that its HyX Platform represents a significant advance
in analyses such as gene identification, expression level determination, gene
interaction studies, polymorphism screening, diagnostic testing and genetic
mapping. As indicated in the chart below, the analyses performed on the
modules of the HyX Platform generate information for the HyGenomics Database,
which the Company intends to utilize independently and with collaboration
partners to develop potential therapeutic product candidates and diagnostics
tests.
HYX PLATFORM APPLICATIONS IN GENOMICS
[GRAPHIC APPEARS HERE]
Figure 2 is a black and white schematic diagram entitled "HyX Platform
Applications in Genomics". From top to bottom, the diagram reads across five
tiers of boxes. At the top of the diagram is a small box labeled "Tissue
Samples". An arrow extends from this box and points to a large box labeled
"Hyseq's Fully Integrated, Industrial Scale Genomics Platform" with three
subheadings listed as follows: "Gene Discovery Module, "HyGnostics Module" and
HyChip Module". Six arrows extend from this box and each point to one of six
boxes, all located on the same tier. The six boxes are labeled as follows:
"Motif Searching", "Gene Identification", "Expression Level Determination",
"Gene Interaction Studies", "Polymorphism Analysis' Diagnostics" and Genetic
Mapping". Each of these six boxes has a doubled headed arrow which points to one
box situated at the next tier below the six boxes and this box is labeled
"HyGenomics Database". Two arrows point down from the "HyGenomics Database" box
to one of two boxes situated on the last tier; one box is labeled "Therapeutic
Target and Product Opportunities" and the other box is labeled "Diagnostic Test
Opportunities".
ADVANTAGES OF THE HYX PLATFORM
Higher Throughput
Ability to Obtain More Gene Targets for Monogenic and Polygenic
Diseases. Researchers have focused primarily on identifying single genes that
may be involved in a disease due to throughput limitations of prevailing
technologies. While this may be an effective approach to understanding
monogenic disorders in which one gene is the predominant cause of a disease,
most diseases are believed to be polygenic. The Company believes that the
Hyseq gene sequencing approach provides researchers with the first industrial-
scale tool for comprehensively analyzing gene identities and expression levels
in a cell or tissue. Similarly, effective gene interaction studies that
identify genes involved in polygenic disease under various conditions require
the ability to process millions
27
of cDNAs. The HyX Platform's Gene Discovery Module presently is analyzing
human tissue samples at a rate of approximately 400,000 partial gene sequences
per month, representing approximately 50% of a module's current capacity. The
Company believes that this high capacity gives it an advantage in performing
effective gene identification and gene interaction studies, which are required
to obtain gene targets on an industrial scale. The Company believes that these
capabilities enhance the ability of researchers to focus on multiple genes
involved in a disease.
Ability to Effectively Conduct Polymorphism Screening. Genes correlated with
disease may be sequenced to identify polymorphisms in an attempt to understand
what significance, if any, mutations may have. Polymorphism screening for such
polygenic diseases typically involves sequencing many genes, some or all of
which may be thousands of bases in length, from thousands of healthy and
diseased individuals. An understanding of polygenic disease also requires
analysis of gene interactions that cause or affect the disease. The Company
believes that effective polymorphism screening, which is an element of genomic
experimentation and diagnostic testing, requires the ability to sequence
billions of bases per year. The Hyseq Gene Discovery Module presently can
analyze batches of approximately 30,000 to 50,000 DNA samplesproposing matters that can be 1,000 bases in length each (up to approximately 50,000,000 total bases per
batch). By comparison, gel sequencers presently can analyze batches of
approximately 75 DNA samples that each can be up to 500 bases in length (up to
approximately 37,500 total bases per batch).
Identification of Rarely Expressed Genes. Scientists believe that rarely
expressed genes encode regulatory proteins of all kinds, including receptors
and hormones. Because rarely expressed genes are represented by far fewer
copies of mRNA in a given tissue sample than highly expressed genes, large
numbers of cDNAs may have to be analyzed before the cDNA of a rarely expressed
gene is found. The Company believes that its high throughput significantly
enhances its ability to analyze the large number of cDNAs necessary to find
rarely expressed genes. Out of the hundreds of thousands of mRNAs present in a
typical tissue sample, only a few copies of mRNA for rarely expressed genes
are present. The Hyseq Gene Discovery Module is capable of identifying a copy
of mRNA that appears only once per cell in such a tissue sample.
Diagnostics. A gene involved in a disease like cystic fibrosis may be
thousands of bases long and can contain disease-causing mutations at any one
or more of hundreds of locations. Accurately diagnosing such a disease can
often dependacted upon complete sequencing of the gene. Moreover, accurately
diagnosing polygenic diseases such as diabetes may require sequencing of
several genes. The Company's HyGnostics Module can completely sequence genes
such that all mutations are identified. The high throughput of the HyGnostics
Module also allows many genes from the same sample to be sequenced in a single
batch, thereby facilitating diagnosis of polygenic disorders. The Company
believes that these features make the HyGnostics Module particularly useful in
commercial-scale diagnostic applications.
Greater Flexibility
Functional Analyses. The Company believes that determining a gene's function
is a critical step in patenting and commercializing a gene or gene product.
The Company believes that the flexibility of the Hyseq Gene Discovery Module,
which allows researchers to obtain the appropriate level of functional
information from motifs, gene expression studies and complete sequences, is
expected to accelerate the characterization of function. Unlike prevailing
technologies, the HyX Platform's ability to sequence genes at multiple levels
of completeness makes it appropriate for a large number of therapeutic and
diagnostic applications. Using software commands, the level of completeness
can be adjusted from intermittent sequencing for gene identification and
expression level determination to partial sequencing for motif searches to
complete sequencing for diagnostics. For example, in scanning sequences
associated with a growth factor function, the Company can screen millions of
DNA samples for the presence of a growth factor motif without completely
sequencing the samples.
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Expansion of Diagnostics Applications. The flexibility of the HyGnostics
Module is derived from simple software commands that allow the user to rapidly
add new DNA tests or new mutations to existing tests on one platform with one
set of supplies, rather than using systems supplied by multiple vendors. This
one-platform approach enables the user to screen for mutations and sequence
the identified mutation on a single platform and enables the user to introduce
new tests in response to market demand. Unlike biochip approaches which are
test-specific and require development of a new biochip for each modification
or for each new test, the HyGnostics Module's software allows the user to
perform multiple tests for multiple targets (e.g., both the CF gene and HIV)
in one batch without any hardware or biochip modifications.
High Degree of Accuracy
The Company believes that SBH is highly accurate because SBH technology
compiles multiple overlapping sequences of bases for each DNA sample, thereby
providing multiple verifications of each base in a sequence in one run as
opposed to the three to eight runs typically required for comparable accuracy
in gel sequencing. Accuracy is critical in patenting genes because a patent
claim containing inaccurate sequence information can nullify the protection
intended by the patent. In diagnostics, accuracy is critical to avoiding
misdiagnoses and possible injury to patients. Based in part upon a blind test
conducted by SmithKline Beecham, the Company believes that its Gene Discovery
and HyGnostics Modules produce complete sequences with significantly better
accuracy per run than gel sequencing. Additionally, the Company's HyGnostics
and HyChip Modules can accurately sequence mutations in the form of insertions
or deletions of bases. See "--Technology."
Greater Cost Effectiveness
Based on the Company's cost and cost information for gel sequencing reported
in commercial and scientific publications, the Company believes that it can
identify genes and produce complete DNA sequences at a lower cost than gel
sequencing. Overall, the Hyseq modules require less labor than gel sequencing,
in part becausestockholder meeting.
Specifically, our certificate of the elimination of multiple steps involved in sample
preparation and interpretation. Hyseq can analyze approximately twice the
amount of DNA bases per sample in batches containing, on average, over 1,000
times the total number of bases per batch as gel sequencing. Moreover, the
Company's modules can sequence DNA samples significantly faster per batch than
current gel sequencers.
STRATEGY
Hyseq's strategy is to engage in large-scale gene discovery and to establish
collaborations to facilitate development and commercialization activities.
Hyseq believes that this research- and partner-driven approach may create
significant operational and financial advantages for the Company and
accelerate commercial development of new therapeutic and diagnostic products.
The following are key elements of the Company's strategy.
Therapeutics
Discover Gene-Based Pharmaceutical Candidates and Commercialize Them Through
Collaboration Partners. Hyseq presently is concentrating on generating
proprietary product candidates in areas where a gene sequence can be directly
used in manufacturing pharmaceuticals. Products may include therapeutic
proteins and gene therapy and diagnostic product candidates that the Company
intends to transfer to collaboration partners for bioassays, protein
expression, regulatory review, manufacturing and marketing. The Company is
focusing initially on candidates that affect cell receptors and certain
central nervous system, cardiovascular and infectious diseases.
29
Establish Collaborations for Disease-Specific Programs. The Company is
pursuing selected collaborations with pharmaceutical and biotechnology
companies to discover, develop and commercialize new product candidates in
narrowly defined disease categories. The Company seeks collaboration partners
with expertise in expression, bioassays, preclinical and clinical regulatory
review and marketing. To enhance profitability in the near term, the Company
intends to seek revenues in the form of up-front and milestone payments and
database access fees. To enhance revenues in the long term, the Company
intends to seek royalties on sales of products resulting from the
collaborations. The Company has an exclusive collaboration with Chiron to
develop therapeutics, diagnostic molecules and vaccines relating to a
specified disease area.
Implement Commercial-Scale Genomic Experimentation. The Company believes
that the ability of its HyX Platform to process millions of samples per year
and sequence billions of bases per year represents a fundamental advance in
DNA sequencing analysis that enables genomic experimentation in commercial-
scale volumes. Hyseq's strategy is to leverage this genomic experimentation
capacity by screening large numbers of samples for expression levels from
cells under various conditions in order to correlate disease conditions with
genetic changes and by large-scale partial sequencing of samples to find
disease-related polymorphisms. The Company believes that the resultant rapid
expansion of its HyGenomics Database will provide the Company and its
collaboration partners a competitive advantage in patenting and
commercializing gene-based pharmaceutical products.
Diagnostics
Expand Marketing of the HyGnostics Module for Diagnostic Testing. The
Company seeks to become a leader in the field of DNA sequence diagnostics by
expanding its HyGnostics Module licensing program for clinical reference
laboratories. The HyGnostics Module permits multiple DNA analyses, including
sequencing diagnostics, point mutation detection, population screening, gene
sequencing and confirmatory assays on an integrated platform, which the
Company believes can replace proprietary technologies from multiple vendors.
The Company believes that licensing of the HyGnostics Module and diagnostic
tests may offer near-term and intermediate sources of product revenues. The
independent clinical reference laboratory market is highly concentrated in
three companies, LabCorps, Quest and SmithKline Beecham, which account for
approximately 42% of that market. The Company believes that in the near and
intermediate term such genetic tests will be predominately performed by large
clinical reference laboratories which have the resources to introduce, market
and support such tests. The Company presently has initial agreements with
SmithKline Beecham and Quest relating to evaluation of its HyGnostics Module
for commercial-scale diagnostic testing.
Market HyGnostics Module for Accelerating Clinical Trials. As part of its
HyGnostics licensing program, the Company intends to design and market
diagnostic tests for use by companies in qualifying participants for clinical
trials. In the pharmaceutical industry, the availability of diagnostic tests
which allow patients to be genetically profiled for response to a therapeutic
product and to proactively profile patients at risk for major diseases offers
the potential to dramatically reduce the cost and time of the pharmaceutical
development cycle. Such diagnostic tests also can be effective in diagnosing
and monitoring patients once the drugs are approved. The Company believes that
tests for accelerating clinical trials may provide near-term and intermediate-
term sources of revenue.
Commercialize HyChip Products Through Collaborations. Hyseq presently is
using the HyChip Module internally for a variety of research applications. The
Company has identified numerous diagnostic and research applications that
require sequencing large amounts of DNA per sample, including sequencing of
entire viral genomes. The Company is collaborating with Perkin-Elmer to
commercialize HyChip products targeted at specific DNA research and diagnostic
applications. The Company believes Perkin-Elmer's expertise in the design,
manufacture and marketing of scientific instruments for research and
diagnostics will allow the Company to significantly accelerate HyChip product
development. The Company and Perkin-Elmer intend to market HyChip products so
as to receive revenues from sales of HyChip systems and from royalties on
products discovered using HyChip products. See "--Collaborative and Other
Arrangements."
30
TECHNOLOGY
The HyX Platform
The HyX Platform combines the Company's DNA array technology with software-
driven flexibility for therapeutic candidate discovery and diagnostic testing.
The HyX Platform, which utilizes the Company's proprietary SBH technology as
its foundation,incorporation provides a range of genomic applications on one integrated
platform, including gene identification, expression level determination, gene
interaction studies, polymorphism screening, diagnostic testing and genetic
mapping. The HyX Platform includes (i) a comprehensive set of labeled DNA
probes; (ii) DNA arrays of samples and probes; (iii) three software-driven
modules, which enable user-driven probe selection to customize the level and
type of analysis; (iv) industrial robotics systems for screening DNA probes
against DNA samples; and (v) bioinformatics to manage and analyze genetic
information. The Company's Gene Discovery Module is designed for discovery and
functional analysis of potential therapeutic product candidates. The Company's
HyGnostics Module is designed for use by clinical reference laboratories for
diagnostic testing of genetic and infectious diseases and cancer. The
Company's HyChip Module is being used internally for research applications and
is being developed for commercial applications targeted at specific DNA
research and diagnostic applications.
SBH Technology
In the versions of SBH technology presently used by the Company, DNA
sequences are determined by "hybridizing" or binding labeled DNA probes (short
fragments of chemically tagged DNA which have known sequences) to DNA samples.
Using Hyseq's proprietary software, labeled DNA probes are selected from the
Company's comprehensive set of DNA probes and screened against DNA samples.
The labeled probes used on a given DNA array are selected and applied in a
highly automated and proprietary software-controlled process, giving users
flexibility in directing the type and level of analysis to be performed. Each
labeled probe binds to segments of a DNA sample that have matching or
"complementary" sequences. Upon completion of the hybridization process, the
sequences of the labeled probes that bind to the sample are overlapped to form
columns of identical bases. Reading the base in each column, Hyseq's
proprietary bioinformatics then assembles a DNA sample's sequence. The
redundancy created by overlapping multiple DNA probes generates highly
accurate DNA sequence information. The DNA sequence information from the
sample enables the Company to track a gene's role and activity in disease
conditions and, hence, to evaluate the gene as a potential therapeutic or
diagnostic product candidate.
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THE HYBRIDIZATION AND SEQUENCE ASSEMBLY PROCESS
[GRAPHIC APPEARS HERE]
Figure 3 is a black and white schematic diagram entitled "The Hybridization and
Sequence Assembly Process". From left to right, the diagram reads across four
stations. The first station, on the leftmost side of the diagram, has three
vertical, parallel lines, two of which represent a sample of DNA as two single
strands, and a third line, which is placed between the two strands of DNA, which
represents a probe hybridized to one of the DNA strands. A sunburst figure is
placed at the base of the third line to represent a label attached to the probe.
An arrow from this station points to a second station which is a box with a list
of probe DNA sequences which hybridize to the DNA sample. An arrow from the
second station points to the next station which is a box with a list of the
probes' DNA sequences maximally overlapped. An arrow from this station points
down to the fourth station which is a box with a unique assembled DNA sequence
obtained by reading down each column in the third station.
DNA Arrays
The HyX Platform uses industrial robots to print DNA arrays onto substrates
such as glass, plastic or paper. The HyX Platform's Gene Discovery Module
presently uses two types of DNA arrays: (i) DNA sample arrays with unknown
sequences in its Gene Discovery and HyGnostics Modules; and (ii) DNA probe
arrays with known sequences in its HyChip Module, to which a sample and one or
more labeled probes are applied. Tissue samples, such as blood or biopsy
tissues, are prepared by using standard biochemical methods for use with any
of the Company's DNA arrays.
Gene Discovery Arrays. The Gene Discovery array is designed to identify, map
and sequence large numbers of DNA samples within genomes and to correlate and
compare such sequences in gene discovery. The Gene Discovery Module
robotically prints an array of 30,000 to 50,000 DNA samples and then applies a
labeled probe or a set of probes of known sequence to each array. After
washing the array to remove unbound probes and determining which known probes
have hybridized to the DNA sample, an SBH process assembles the sequence of
that sample. The Company is using this type of array in generating proprietary
product candidates that affect cell receptors or that are candidates in
disease categories including certain cancer, central nervous system,
cardiovascular and infectious diseases.
HyGnostics Arrays. The HyGnostics array is designed to perform complete
sequencing of small to medium numbers of DNA samples. The HyGnostics Module
robotically prints duplicate arrays of 10 to 1,000 DNA samples, with each
array being printed inside a square of a grid that prevents fluid leakage from
one square to another, and then applies a labeled probe or set of probes to
each array. After washing the arrays, the known sequence of any labeled probe
that binds to a sample in the array is used in an SBH process to assemble the
sequence of that sample. The Company is marketing the HyGnostics Module to
clinical reference laboratories for the testing of genetic and infectious
disease and cancer.
HyChip Arrays. The HyChip array is designed for gene discovery and
diagnostic applications that require analysis of DNA samples in a range of
lengths, from detecting single base mutation to the sequencing of entire viral
genomes. The HyChip Module robotically prints duplicate arrays of different
unlabeled DNA probes on a substrate (the "chip" component of the HyChip
Module). The sequence of each unlabeled probe is known for
32
each point in the array. A DNA sample, a labeled probe or set of probes and a
chemical linking agent are applied to each array. The sample then hybridizes
to a substrate-bound unlabeled probe and a free-floating labeled probe. The
two probes hybridize to the sample end-to-end and are bound together by the
chemical agent. After washing the arrays, the combined known sequences of the
labeled probe and the unlabeled probe to which it is linked are used in an SBH
process to assemble the sequence of the sample. The HyChip Module currently is
being used internally for research applications, while being developed for
commercial applications.
Hyseq's Integrated Platform
[GRAPHIC APPEARS HERE]
Figure 4 is a black and white schematic diagram entitled "The HyX Platform". The
diagram is arranged as three boxes, two of which are juxtaposed to each other
and a third box is placed below and centered between the two upper boxes. A line
with a sunburst image placed at one end of the line is situated between the
two upper boxes and is labeled "Labeled Probe Set". Three arrows point from the
Labeled Probe Set to one of the three boxes. The upper left box is an image of
laboratory results and is labeled "Gene Discovery Module". The upper right box
is an image of laboratory results and is labeled "HyGnostics Module". The lower
center box is an image of laboratory results and is labeled "HyChip Module".
THE HYX PLATFORM--The comprehensive set of labeled probes is a common
element among the types of DNA arrays currently being used by Hyseq.
Probe Selection
Hyseq's proprietary probe selection software gives users the flexibility to
select any combination of probes tailored for a given sample or genomic
application. For example, a technician can select the Gene Discovery Module
motif-searching application or the HyGnostics Module for complete sequencing.
The technician's selection is transmitted to an industrial robot that locates
appropriate probes from Hyseq's comprehensive collection of labeled probes and
then pipettes selected probes into multi-well plastic plates. By comparison,
other biochip approaches require hardware changes, in some cases including
design and retooling to manufacture new hardware, in order to switch among
applications.
Instrumentation
The multi-well plastic plate with the selected probes and one of the
Company's sample-containing DNA arrays are introduced into a proprietary
robotic hybridization station. The hybridization station applies the labeled
probes to the DNA array, incubates them for a programmed period of time and
then washes the unbound probes away. The DNA array with bound labeled probes
is transferred to a reader that detects the labeled probes' locations in the
array and transmits the data through a local area workstation network for
sequence assembly. The Company uses robots and readers with proprietary
modifications for integration into the Company's platform.
33
Bioinformatics
The HyX Platform's sophisticated proprietary image analysis software can
extract as much as 50,000 sequence information bits in less than three
minutes. Data is stored in the HyGenomics Database, which the Company believes
is one of the largest human gene databases in the world. The Company believes
that the Database's design facilitates commercial-scale genomic
experimentation by providing capabilities for rapidly processing, storing,
retrieving and analyzing biological information and for manipulating that
information. The Company's bioinformatics software allows it to analyze and
compare SBH and other data in the HyGenomics Database, both internally and
against publicly available gene sequences. The Company's software also
performs similarity analyses for identifying identical or related gene
samples, sequence motif identification, differential gene expression analysis
and sequence assembly. The Company uses the BioMerge software of Molecular
Informatics Inc. for searching complete sequence and EST data.
APPLICATIONS OF THE HYX PLATFORM
Therapeutics
Gene Discovery. To identify the best potential therapeutic and diagnostic
product candidates, the Company is analyzing selected human tissues to
discover disease-related human genes and their functions. In addition to
screening for highly expressed genes, the Company is focusing on screening for
rarely expressed genes in these tissues. By obtaining information about the
degree to which a small number of probes hybridize to a cDNA, the HyX Platform
generates a unique intermittent partial sequence called a "signature" for that
cDNA. The Company uses signatures for identifying genes and for characterizing
their functions. Because the signatures are spread throughout the cDNA, and
not just at its end as is the case with ESTs, the Company believes that the
signature process is more accurate than the EST process in determining the
identity of a cDNA and, as a result, whether it represents a known or new
gene. By comparing such signatures, the number of identical, similar and
different cDNAs can be determined and inventoried. The Company presently is
analyzing human DNA samples at a rate of approximately 400,000 partial gene
sequences per month, representing 50% of the Gene Discovery Module's present
capacity.
Expression Monitoring. The relative gene expression levels corresponding to
cDNAs can be determined by comparing the number of copies of each signature
found in collections of cDNA samples such as those obtained from diseased and
normal tissues or before and after drug administration. Hyseq's signature
analysis differs from other technologies in that it can provide both identity
and expression level information in one analysis on a single platform.
Furthermore, unlike other approaches, expression levels of all expressed genes
can be determined. The Company believes that its high-throughput screening of
large DNA sample libraries may enable it to determine a gene's function by
examining the gene's pattern of expression. For example, a gene expressed in
the human prostate during the early stages of cancer, but not expressed in
other tissues or at other times, may be a marker for the cancer and may
provide insights into the biological mechanism of the cancer. The Company
currently is analyzing hundreds of thousands of DNA samples from a number of
tissue types to determine relative gene expression levels.
HyGenomics Database. The Company compiles DNA sequence information generated
by its Modules in its HyGenomics Database where the information is compared
against other sequences in the Database and sequences of known genes and
proteins in public databases. The Company believes that information generated
by these comparative analyses may facilitate the development of potential
therapeutic products and diagnostic tests. The Company intends to collaborate
with collaboration partners to develop products based on genetic information
in its HyGenomics Database. The Company believes that its HyGenomics Database
of partial gene sequences is one of the largest proprietary human gene
databases in the world.
Polymorphism Screening. By correlating a polymorphism with a specific
condition, polymorphism screening can be used to determine the significance of
gene regions to the function of the gene as a whole. This correlation assists
in targeting pharmaceuticals to appropriate regions of gene products (e.g., to
a binding site of a receptor). In a polymorphism study, the more types of
sequences that are screened, the more information
34
regarding variability is obtained. Hyseq's high-throughput Gene Discovery
Module is designed to sequence tens of thousands of samples simultaneously.
The Company believes that conducting a successful polymorphism study requires
the ability to sequence billions of bases per year, which the HyX Platform can
provide more cost-effectively than other technologies.
Genetic Mapping. Genetic mapping is a method for linking diseases to
particular genes by correlating the presence or absence on chromosomes of
predetermined DNA sequences, known as markers, with a genetic trait.
Researchers attempt to locate genes by using markers in conditions such as
diabetes, asthma and cardiovascular disease. Tissue samples and histories from
families with members who have the disease are analyzed by comparing the
patterns of markers between healthy and diseased family members. A correlation
of a marker with a disease indicates that a gene or genes involved in the
disease is located near the marker. The more markers that are available, the
more likely it will be that a disease will be correlated with at least one of
these markers. The usual marker linkage process is labor intensive and
requires significant computational capabilities. The Company believes that its
ability to sequence and analyze billions of bases per year will generate
substantial numbers of markers, including markers consisting of entire gene
sequences, thus facilitating linkage of genes with disease.
Diagnostics
The Company believes that the ability of its DNA array technology to detect
gene mutations with a high level of accuracy broadens the scope of diagnostic
applications of its HyGnostics Module and can provide diagnostic tests on a
commercial scale more quickly and at a lower cost than other technologies.
Hyseq currently is marketing its HyGnostics Module for diagnostics testing of
genetic and infectious disease and cancer primarily to clinical reference
laboratories. In October 1995, the Company's wholly owned subsidiary, Hyseq
Diagnostics, Inc., entered into an initial agreement with SmithKline Beecham,
one of the nation's leading clinical reference laboratories. The agreement,
among other things, provides for the granting of a non-exclusive license to
use the HyGnostics Module in the United States for testing human genetic
disease and cancer. In May 1997, the Company entered into an initial agreement
with Quest relating to evaluation of the HyGnostics Module for commercial-
scale diagnostic testing. See "Collaborative and Other Arrangements."
Cancer. An estimated 1.35 million new cases of cancer will be diagnosed in
1997 in the United States and approximately 530,000 people will die from
cancer in 1997. Colorectal, breast, prostate and lung cancer account for about
half of all cancer diagnoses. The normal protein product of the p53 gene
controls cell replication, but a mutation in the gene may contribute to the
aggressive growth of some cancers, including colorectal, breast and bladder
cancers. Mutations have been observed at more than 400 distinct sites in the
p53 gene. Currently available antibody-based diagnostic tests detect
accumulation of p53 gene products, but not gene mutations, and gel-sequencing
methods are impractical because mutations occur over a large area requiring
many gels to be processed. Other biochip approaches are reported to be under
development for research purposes, but these approaches reportedly are unable
to sequence certain types of mutations and therefore may be less reliable than
gel sequencing. As a result, these methods have thus far been unable to
provide a practical prediction of susceptibility to cancer or the rate of
cancer progression, which would be valuable for determining an appropriate
cancer therapy.
The Company is currently developing cancer DNA sequencing tests for future
commercialization. The HyGnostics Module can apply any combination of its DNA
sequence probes to determine the gene sequences of patient samples. In a
recent blind test administered by SmithKline Beecham and designed to sequence
p53 samples, the HyGnostics Module was 100% accurate and met or exceeded all
requirements of the test for sensitivity, cost, speed, correct heterozygote
sequencing, reproducibility and temperature range. The results were
reproducible within and between runs. All types of mutations (substitutions,
insertions and deletions) were correctly sequenced, generating no false
positives or false negatives.
Infectious Diseases. The Company believes that its proprietary DNA array
technology has the potential to significantly improve the understanding of
infectious diseases and thereby advance their diagnosis and treatment. Hyseq
currently is using a version of the HyChip Module internally for research
applications and is developing HyChip products for commercial applications
with Perkin-Elmer. The Company is currently developing an HIV
35
test for commercial use. Over 3.1 million individuals worldwide were estimated
to be infected with HIV in 1996. Approximately 75,000 individuals in the
United States were diagnosed with AIDS in 1996. Mutations in the HIV genome
have been correlated with the success of various therapies, and rapid mutation
in the HIV genome is an indicator of progression of the disease. Using the
HyChip Module, the Company has conducted tests in which it has scored all one
million possible probes 10 bases in length on HIV sequence samples. The
Company believes this is the first time that a set of probes capable of
complete sequencing of all mutations has been reported to be applied to HIV
sequence samples.
COLLABORATIVE AND OTHER ARRANGEMENTS
Chiron Corporation. In May 1997, the Company entered into an exclusive
collaboration with Chiron. Pursuant to the terms of the collaboration
agreement, the Company and Chiron are collaborating to develop therapeutics,
diagnostic molecules and vaccines relating to a specified disease area (the
"Disease Area"). The collaboration has an initial term of three years and can
be extended at Chiron's option for two additional two-year periods. Chiron has
guaranteed payment of a minimum of $8.5 million in the first year and $5.5
million in each of the two years thereafter in connection with the Company's
research on Chiron tissue sample libraries. The agreement requires the Company
to generate data at a specified level per year which, if not met could result
in the Company's breach of the agreement. Chiron has the exclusive right to
commercialize any Disease Area products resulting from the collaboration. The
Company will receive royalties on any such products. Pursuant to the terms of
a stock purchase agreement, Chiron concurrently acquired 427,350 shares of
Common Stock issuable upon the conversion of shares of Series B Preferred
Stock at $11.70 per share for a total investment of $5.0 million. The Series B
Preferred Stock will convert automatically into Common Stock on a 1.27-for-1
basis immediately upon the closing of this offering, which Common Stock will
split on a 1.92-for-1 basis. Concurrent with this offering, Chiron has agreed
to purchase 199,283 shares of Common Stock (based on an assumed initial public
offering price of $13.00 per share in this offering) directly from the Company
in the Private Placement at a price per share equal to the price to public,
less one-half of the underwriting discounts and commissions applicable to the
shares of Common Stock being offered to the public hereby, for an aggregate
purchase price of $2.5 million.
The Perkin-Elmer Corporation. In May 1997, the Company entered into an
agreement with Perkin-Elmer to combine the Company's super chip technology and
Perkin-Elmer's life science system capabilities to commercialize HyChip
products (collectively, the "HyChip System"). Pursuant to the terms of the
agreement, the Company is obligated to commit $5.0 million to further
development of the Company's "chip" component of the HyChip System over the
next two years, and Perkin-Elmer must commit certain funds to develop the
overall system. The collaboration has an initial term of five years and will
be extended automatically thereafter unless the parties mutually agree to
termination. The agreement contemplates that the design, development and
manufacture of the HyChip "chip" will be under the direction of the Company,
while design, development and manufacture of the system will be under the
direction of Perkin-Elmer. HyChip products will be distributed through Perkin-
Elmer's Applied Biosystems Division. Perkin-Elmer also has agreed to acquire
427,350 shares of Common Stock issuable upon the conversion of shares of
Series B Preferred Stock at $11.70 per share for a total investment of $5.0
million. The Series B Preferred Stock will convert automatically into Common
Stock on a 1.27-for-1 basis immediately upon the closing of this offering,
which Common Stock will split on a 1.92-for-1 basis. Concurrent with this
offering, Perkin-Elmer has agreed to purchase 398,566 shares of Common Stock
(based on an assumed initial public offering price of $13.00 per share in this
offering) directly from the Company in the Private Placement at a price per
share equal to the price to public, less one-half of the underwriting
discounts and commissions applicable to the shares of Common Stock being
offered to the public hereby, for an aggregate purchase price of $5.0 million.
See "--Government Regulation."
SmithKline Beecham Clinical Laboratories, Inc. In September 1995, the
Company entered into an initial agreement with SmithKline Beecham. The
agreement, among other things, required an up-front payment to the Company and
grants SmithKline Beecham a non-exclusive license to use the HyGnostics Module
in the United States for testing human genetic disease and cancer upon
satisfaction of certain conditions by the Company and payment of a license fee
by SmithKline Beecham. Under the conditions, which were satisfied in February
1997,
36
SmithKline Beecham administered a blind test designed to sequence p53 samples.
The HyGnostics Module was 100% accurate and met or exceeded all requirements
of the test for sensitivity, cost, speed, correct heterozygote sequencing,
reproducibility and temperature range. All types of mutations (substitutions,
insertions and deletions) were correctly sequenced, generating no false
positives or false negatives. The agreement expires in October 1997 unless
SmithKline Beecham pays the license fee. The Company and SmithKline Beecham
are discussing possible modifications to, and expansion of, their relationship
under the agreement. As of June 30, 1997, the Company had received a total of
$200,000 from SmithKline Beecham.
Quest Diagnostics Incorporated. In May 1997, the Company entered into an
initial agreement with Quest pursuant to which the Company is performing an
evaluation project for Quest. The Company received a total of $75,000 from
Quest under the initial agreement. Depending upon the results of the
evaluation, Quest will continue negotiation of a non-exclusive license from
the Company.
The National Institute of Standards and Technology. In November 1994, the
Company was awarded a three-year, $2.0 million grant from The National
Institute of Standards and Technology ("NIST"). Funds received from NIST are
being applied to develop the Company's super chip technology, which is being
used in the HyChip Module. As of May 31, 1997, the Company had received a
total of approximately $1.4 million from NIST. The Company expects to receive
and apply the balance of the NIST grant in 1997. See "--Licensed Technology."
Conservation International, Inc. In February 1997, the Company entered into
an agreement with Conservation International, Inc. ("CII"), an environmental
conservation organization, to search for genetic products with commercial
potential. Pursuant to the terms of the agreement, the Company will focus on
initial areas of interest for further development with potential corporate
partners, with the initial focus being on rain forest species. CII will
provide research and other assistance in identifying potential products for
consideration and has received an initial $30,000 payment from the Company for
research relating to a specified product. The Company and potential corporate
partners will be responsible for all costs of development. The Company
believes that rain forest genetic information may be an important source of
genetic variety for developing new drugs and agricultural products.
COMPETITION
The Company believes that virtually all genes in the human genome will be
identified within several years. However, the Company believes that
determination of function, rather than identification, will be the primary
driver of competition in genomics since function is a critical element in
obtaining patent protection with respect to gene discovery and
commercialization. The Company believes that its primary competitors in
genomics are Human Genome Sciences, Inc. and Incyte Pharmaceuticals, Inc.,
which are using gel sequencers as part of their gene sequencing efforts. A
number of other companies engage in, or have announced plans to engage in,
gene discovery and have acquired, or could acquire, gel sequencers or other
technologies, or may develop alternative procedures for gene sequencing. Such
competitors may include major pharmaceutical and biotechnology firms and other
companies, not-for-profit entities and United States and foreign government-
financed programs, many of which have substantially greater research and
product development capabilities and financial, scientific, marketing and
human resources than the Company. These competitors may succeed in identifying
genes and determining their functions or developing products earlier than the
Company or its current or future collaboration partners, obtaining patents and
regulatory approvals for such products more rapidly than the Company or its
current or future collaboration partners, or developing products that are more
effective than those proposed to be developed by the Company or its
collaboration partners.
The Company believes that its ability to compete in genomics is dependent,
in part, upon its ability to continue to improve the HyX Platform to permit
more rapid identification of genes while improving its bioinformatics capacity
for analyzing gene sequences and identifying the possible function of the
genes sequenced. While the Company believes that its HyX Platform provides a
significant competitive advantage, any one of the Company's competitors may
discover and establish a patent position in one or more genes which the
Company has identified and designated as a product candidate. Loss of its SBH
patent rights also could remove
37
a legal obstacle to competitors in designing platforms with similar
competitive advantages. Further, any potential products based on genes
identified by the Company ultimately will face competition both from companies
developing gene-based products and from companies developing other forms of
treatment for diseases which may be caused by, or related to, genes identified
by the Company. There can be no assurance that research and development by
others will not render the products which the Company or its collaboration
partners may develop, obsolete or uneconomical or result in treatments, cures
or diagnostics superior to any therapy or diagnostic developed by the Company
or its collaboration partners, or that any therapy developed by the Company or
its collaboration partners will be preferred to any existing or newly
developed technologies. Competition in this field is expected to intensify.
In the area of diagnostics, the Company competes primarily with Affymetrix,
Inc. ("Affymetrix"). See "--Litigation," regarding the Company's litigation
against Affymetrix. Additionally, although the Company is collaborating with
Perkin-Elmer to develop HyChip products for commercial applications, the
Applied Biosystems division of Perkin-Elmer presently markets gel sequencers
that are used by third parties to compete with the Company in gene discovery
and diagnostics. The Company believes that its ability to compete in
diagnostics will depend primarily upon its continued ability to demonstrate
that the HyGnostics Module can provide higher levels of accuracy and a lower
cost per test for clinical reference laboratories than other prevailing
technologies. Additionally, although the Company believes that the ability of
the HyGnostics Module to accommodate new tests through software modifications
will be attractive to clinical reference laboratories, biochips such as those
being marketed by Affymetrix may be competitive for certain applications. In
addition, other commercial diagnostic products from competitors or other
companies could adversely impact the Company's ability to market the
HyGnostics Module or HyChip products. See "Risk Factors--Competition."
PATENTS AND PROPRIETARY TECHNOLOGY
Patents Rights Relating to Technology
Hyseq holds three United States patents with claims covering the method of
SBH. Hyseq also has pending several patent applications covering SBH
technology and its applications in diagnostics. If granted, these pending
applications would provide supplementary protection in related areas of
potential interest.
Patent Rights Relating to Genes
Hyseq intends to patent commercially relevant genes and ESTs obtained by SBH
technology and has filed for patent protection on a limited number of these
targets. The patenting of genes is a well recognized commercial practice in
the United States. For example, hundreds of gene targets (not including many
times that number of constructions containing genes) have been patented,
including valuable human genes such as those encoding EPO (patent owned by
Amgen, Inc.), granulocyte colony stimulating factor (patent owned by Amgen,
Inc.), tissue plasminogen activator (patent owned by Genentech, Inc.), immune
interferon (patent owned by Genentech, Inc.), interleukin-2 muteins (patent
owned by Chiron) and leukocyte interferon (patent owned by Biogen, Inc.). Many
more are claimed in patent applications, including patent applications filed
by competitors such as Human Genome Sciences, Inc.
There are certain court decisions indicating that disclosure of a partial
sequence may not be sufficient to support the patentability of a full-length
sequence. In view of these court decisions, as well as the position of the
United States Patent and Trademark Office (the "Patent Office") referred to
below, the Company believes that there is significant risk that patents will
not issue based on patent disclosures limited to partial gene sequences. Even
if patents issue on the basis of partial gene sequences, there is uncertainty
as to the scope of the coverage, enforceability or commercial protection
provided by any such patents. The Patent Office rejected patent claims
contained in a patent application filed by the National Institutes of Health
("NIH") relating to partial gene sequence ESTs produced by conventional gel
sequencing. The NIH elected not to appeal the decision. The application
generated substantial controversy in the scientific community regarding the
patentability of gene fragments and the full-length gene based on only partial
sequencing of genes, particularly in cases where the biological function of
the full-length gene is not identified. In practice, the way in which ESTs are
generated by
38
gel sequencing does not identify complete gene sequences nor are the ESTs
readily correlated with the function of the product of the gene. The Company
believes that SBH technology enables complete sequencing of genes more rapidly
and cost effectively than other existing technologies. The Company also
believes that SBH technology will facilitate correlation between gene
sequences and gene functions. The Company therefore believes that it will take
entities using gel sequencing significantly longer to obtain information about
gene function for patenting gene sequences. Information about the function of
the gene products provides the critical information for obtaining patents that
Hyseq's competitors may lack. Hyseq believes that this information would be
useful for satisfying the current requirements for obtaining patents on genes
in the manner followed by the biotechnology companies over the past 10 years.
See "Risk Factors--Dependence upon Proprietary Rights; Risks of Infringement."
LICENSED TECHNOLOGY
In 1994, the Company acquired an exclusive license from Arch Development
Corporation, a not-for-profit corporation affiliated with the University of
Chicago that manages The Argonne National Laboratories ("Argonne"), to further
develop and use certain SBH super chip improvements developed by one of the
Company's chief scientists while he was at Argonne. The Company must commit a
total of $2.5 million, directly or indirectly, through grants and other
sources of funding, to the development of super chip improvements through June
30, 1998. In addition, the Company must pay royalties commencing in July 1997.
The Company is applying the proceeds of a three-year, $2.0 million NIST grant
to development of super chip technology. The Company's HyChip Module, which is
being developed for commercial applications with Perkin-Elmer, utilizes the
Company's super chip technology.
GOVERNMENT REGULATION
The FDA regulates drugs, biologics and medical devices under the Federal
Food, Drug and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. These laws and implementing
regulations govern, among other things, the development, testing,
manufacturing, record keeping, storage, labeling, advertising, promotion and
premarket clearance or approval of products subject to regulation. The Company
presently plans to develop drugs or biologicals only through collaborations
with third parties who would be responsible for obtaining regulatory approval
or clearance. Although the Company believes that its HyGnostics Module, as
presently marketed, is not subject to regulation as a medical device, the FDA
recently proposed regulations that may subject it to such regulation. The
Company believes that HyChip products sold as diagnostic products will be
subject to regulation as medical devices when commercial sales for clinical
use commence. The Company may ultimately determine to pursue directly the
development of therapeutic and other diagnostic products requiring regulatory
approval or clearance.
The Company believes that any pharmaceutical products that may be developed
by or with a collaboration partner will be regulated by the FDA as drugs or
biologicals. Additionally, any diagnostic products developed are likely to be
regulated as medical devices or biologicals. The following is a discussion of
the government regulation to which the Company or collaboration partners may
become subject.
FDA Regulation
Approval of Therapeutic Products. Generally, in order to gain FDA pre-market
approval, a company first must conduct pre-clinical studies in the laboratory
and in animal model systems to identify safety problems and to gain
preliminary information on an agent's efficacy. The results of these studies
are submitted as a part of an Investigational New Drug Application ("IND"),
which the FDA must review before human clinical trials of an investigational
drug can start. In order to commercialize any products, the collaboration
partner or the Company will be required to sponsor and file an IND and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety, efficacy and potency that are necessary to obtain FDA approval of
any such products. Clinical trials are normally done in three phases, which
may overlap, and generally take two to five years, but may take longer to
complete as a result of many factors, including slower than anticipated
patient enrollment, difficulty in finding a sufficient number of patients
fitting the appropriate trial profile or in the
39
acquisition of sufficient supplies of clinical trial materials or adverse
events occurring during the clinical trials. After completion of clinical
trials of a new product, FDA marketing approval must be obtained. If the
product is classified as a new drug, the collaboration partner or the Company
will be required to file a New Drug Application ("NDA") and receive approval
before commercial marketing of the drug. The testing and approval processes
require substantial time and effort and there can be no assurance that any
approval will be granted on a timely basis, if at all. NDAs submitted to the
FDA take, on average, two to five years to receive approval. If questions
arise during the FDA review process, approval can take more than five years.
The Company or its collaboration partners also must demonstrate the
approvability of a Biological License Application or a Product License
Application as well as an Establishment License Application for biological
products. Even if FDA regulatory clearances are obtained, a marketed product
is subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market as well as possible civil or criminal sanctions. For
marketing outside the United States, the collaboration partner or the Company
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country and are becoming more
restrictive throughout the European Union.
Regulatory approval or clearance could include significant limitations on
the indicated uses for which a product could be marketed. The approval process
is affected by a number of factors, including the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. After
FDA approval for the initial indications, further clinical trials may be
necessary to gain approval for the use of the product for additional
indications. The FDA may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense or result in
restrictions on the product, including withdrawal of the product from the
market. In addition, the policies of the FDA may change, and additional
regulations may be promulgated which could prevent or delay regulatory
approval. There can be no assurance that any approval or clearance will be
granted on a timely basis, if at all. In the event that a collaboration
partner fails to receive FDA clearance for a therapeutic product, the Company
may not receive revenues from the collaboration until some type of FDA
approval is received, if at all.
Approval of Diagnostic Products. In the United States, the FDA regulates, as
medical devices, most diagnostic tests and in vitro reagents that are marketed
as finished test kits or equipment. Some clinical laboratories, however,
purchase individual reagents intended for specific analyses, and, using those
reagents, develop and prepare their own finished diagnostic tests. Although
the FDA has not generally exercised regulatory authority over these individual
reagents or the finished tests prepared from them by the clinical
laboratories, the FDA has recently proposed a rule that, if adopted, would
regulate reagents sold to clinical laboratories as medical devices. The
proposed rule would also restrict sales of these reagents to clinical
laboratories certified under the Clinical Laboratory Improvement Amendments
("CLIA") as high-complexity laboratories. The Company intends to market its
HyGnostics Module and tests which may be run on the module as well as
diagnostic products primarily to clinical laboratories. The Company may market
some diagnostic products such as its HyChip products, as finished tests or
equipment and others as individual reagents; consequently, some or all of
these products may be regulated as medical devices.
The Food, Drug and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance (known as a "510(k)") or premarket
approval ("PMA"). Some of the Company's diagnostic products may be deemed to
be medical devices and require a PMA or a 510(k). With respect to devices
reviewed through the 510(k) process, a Company may not market a device until
an order is issued by the FDA finding the product to be substantially
equivalent to a legally marketed device known as a "predicate device." A
510(k) submission may involve the presentation of a substantial volume of
data, including clinical data, and may require a substantial review. The FDA
may agree that the product is substantially equivalent to a predicate device
and allow the product to be marketed in the United States. The FDA, however,
may (i) determine that the device is not substantially equivalent and require
a PMA; or (ii) require further information, such as additional test data,
including data from clinical studies, before
40
it is able to make a determination regarding substantial equivalence. By
requesting additional information, the FDA can further delay market
introduction of a company's products. If the FDA indicates that a PMA is
required for any of the Company's diagnostic products, the application will
require extensive clinical studies, manufacturing information and likely
review by a panel of experts outside the FDA. Clinical studies to support
either a 510(k) submission or a PMA application would need to be conducted in
accordance with FDA requirements. FDA review of PMA applications routinely
takes significantly longer than that of 510(k) applications.
If the Company's diagnostics products are subject to FDA regulation, there
can be no assurance that the Company will be able to meet the FDA's
requirements or that any necessary approval will be received. Once granted, a
510(k) clearance or PMA may place substantial restrictions on how the device
is marketed or to whom it may be sold. Even where a device is exempted from
510(k) clearance or PMA, the FDA may impose restrictions on its marketing. In
addition to requiring clearance or approval for new products, the FDA may
require clearance or approval prior to marketing products that are significant
modifications of existing products. There can be no assurance that any
necessary 510(k) clearance or PMA will be granted on a timely basis or at all.
FDA imposed restrictions could limit the number of customers to whom
particular products could be marketed or what may be communicated about
particular products. Delays in receipt of or failure to receive any necessary
510(k) clearance or PMA could have a material adverse effect on the Company.
Customers using the Company's diagnostic devices for clinical use in the
United States may be regulated under the CLIA. CLIA is intended to ensure
quality and reliability of clinical laboratories in the United States by
mandating specific standards in the areas of personnel, qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations
promulgated under CLIA establish three levels of diagnostic tests ("waived,"
"moderately complex" and "highly complex"), and the standards applicable to a
clinical laboratory depend on the level of the tests it performs. CLIA
requirements may prevent some clinical laboratories from using certain of the
Company's diagnostic products. Therefore, there can be no assurances that the
CLIA regulations and future administrative interpretations of CLIA will not
have a material adverse impact on the Company by limiting the potential market
for diagnostic products.
Post-Approval Requirements. Even if regulatory approvals for the Company's
product candidates are obtained, the products and the facilities manufacturing
the products are subject to continued review and periodic inspection. Each
drug and device manufacturing establishment in the United States must be
registered with the FDA. Domestic manufacturing establishments are subject to
biannual inspections by the FDA and must comply with the FDA's current Good
Manufacturing Practice ("cGMP") regulations. The Company also may be required
to comply with standards prescribed by various other federal, state and local
regulatory agencies in the United States as well regulatory agencies in other
countries. In complying with cGMP regulations, manufacturers must expend
funds, time and effort to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. The Company and
its collaboration partners will need to comply with cGMP regulations to
manufacture HyChip diagnostic products for sale to third parties.
The FDA's cGMP regulations require that drugs and medical devices be
manufactured and records be maintained in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company would be
required to comply with the FDA requirements for labeling and promotion of its
medical devices. For example, the FDA prohibits cleared or approved drugs and
devices from being marketed for uncleared or unapproved uses. In addition,
drugs and medical device reporting regulations would require that the Company
provide information to the FDA whenever there is evidence to reasonably
suggest that one of its drugs or devices may have caused or contributed to a
death or serious injury, or a medical device malfunction that has occurred
would be likely to cause or contribute to a death or serious injury if the
malfunction were to recur.
Failure to comply with applicable regulatory requirements can result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant approvals, premarket clearance or premarket
approval, withdrawal of approvals and criminal prosecution of the Company and
employees.
41
Environmental Regulation
The Company is subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of hazardous materials and
certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any liability could exceed the resources of
the Company.
FACILITIES AND EMPLOYEES
The Company leases a 12,000 square foot facility at 670 Almanor Avenue,
Sunnyvale, California, which serves as its executive offices and research and
production facility. The facility lease expires in November 1999 and requires
base payments on average of approximately $12,300 per month, subject to
standard pass-throughs and escalations. The Company expects to require
additional space by the end of 1997. As of the date of this Prospectus, the
Company had 54 full-time employees, including 35 scientists. Fourteen
employees hold Ph.D.s or are M.D.s. No employees are represented by unions.
The Company believes that relations with its employees are good.
LITIGATION
On March 3, 1997, the Company brought suit against Affymetrix in the U.S.
District Court for the Northern District of California, San Jose Division,
alleging infringement by Affymetrix of the Company's U.S. Patents Nos.
5,202,231 and 5,525,464 (Hyseq, Inc. v. Affymetrix, Inc., Case No. C 97-20188
RMW ENE, U.S. District Court). The suit alleges that Affymetrix willfully
infringed, and continues to infringe, upon these patents covering SBH
technology. Through the lawsuit, the Company seeks both to enjoin Affymetrix
from infringing upon the patents covering SBH technology and an award of
monetary damages for Affymetrix's past infringement. On April 23, 1997,
Affymetrix filed a motion to dismiss or, in the alternative, for a more
definite statement. On May 19, 1997, Affymetrix filed an Answer and
Affirmative Defenses to the First Amended Complaint and Counterclaim. The
counterclaim seeks a declaratory judgment of invalidity and non-infringement
with respect to these patents covering SBH technology. On June 9, 1997, the
Company filed a reply to the counterclaim in which it denied the allegation of
invalidity and non-infringement. By order of the court, an initial case
management conference is scheduled for August 1, 1997. While the Company
believes it has meritorious defenses to the counterclaim, this litigation is
at an early stage and there can be no assurance that the Company will prevail
in the claim. The Company may incur substantial costs and expend substantial
personnel time in asserting the Company's patent rights against Affymetrix or
others and there can be no assurance that the Company will be successful in
asserting its patent rights. Failure to successfully enforce its patent rights
or the loss of these patent rights covering SBH technology also could remove a
legal obstacle to competitors in designing platforms with similar competitive
advantages.
On May 10, 1996, Sands Brothers & Co., Ltd. ("Sands") filed a suit against
the Company in the U.S. District Court for the Southern District of New York
alleging certain claims against the Company arising out of the Company's prior
engagement of Sands to act as a placement agent in a private placement. The
complaint seeks, among other things, damages in the aggregate amount of at
least $12 million. The Company filed a motion to dismiss the complaint with
the District Court on July 25, 1996. The court has not yet ruled on the
Company's motion. The Company believes that the suit has no merit and that it
has valid defenses to the claims. There can be no assurance, however, that the
Company will prevail in its defense of the claims asserted by Sands. Any such
failure to prevail could have a material adverse effect on the Company's
business, financial condition and operating results.
The Company is not a party to any other litigation that is expected to have
a material effect on the Company or its business.
42
MANAGEMENT AND SCIENTIFIC ADVISORY BOARD
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, ages and positions of the executive
officers and directors of the Company as of June 30, 1997:
NAME AGE POSITION
---- --- --------
Robert D. Weist (1)(2)........... 57 Chairman of the Board of Directors
Chief Executive Officer, President and
Lewis S. Gruber.................. 46 Director
Executive Vice President and Chief
Christopher R. Wolf.............. 43 Financial Officer
Co-Senior Vice President for Research
Radoje T. Drmanac, Ph.D.......... 39 and Director
Co-Senior Vice President for Research
Radomir B. Crkvenjakov, Ph.D..... 50 and Director
Vice President of Corporate
Douglas C. Lane.................. 47 Development
Vice President of Administration and
James N. Fletcher................ 44 Secretary
Raymond F. Baddour, Ph.D. (1)(3). 72 Director
Greta E. Marshall (2)............ 59 Director
Thomas N. McCarter III (3)....... 67 Director
Kenneth D. Noonan, Ph.D. (3)..... 49 Director
- --------
(1) Member of the Compensation Committee.
(2) Member of the Nominating Committee.
(3) Member of the Audit Committee.
Robert D. Weist has served as Chairman of the Board of Directors of the
Company since March 1994, and served as the President and a director of the
Company from May 1993 until March 1994. Mr. Weist has also been President of
Weist Associates, a management consulting firm, since April 1992. Mr. Weist
was a consultant to and Senior Vice President, Administration, General Counsel
and Secretary of Amgen Inc., a biotechnology company ("Amgen"), from January
1986 through April 1992, and served as its Vice President, General Counsel and
Secretary from May 1982 to January 1986. Mr. Weist also serves as a director
of BioSource International Inc., a biological products supplier. Mr. Weist
holds a B.S. in chemical engineering from Purdue University, a J.D. from New
York University and an M.B.A. from the University of Chicago.
Lewis S. Gruber, a founder of the Company, has been the Chief Executive
Officer, President and a director since joining the Company in June 1994. From
January 1989 until June 1994, Mr. Gruber was a partner with the law firm of
Marshall, O'Toole, Gerstein, Murray & Borun, which has represented the Company
as one of its patent counsel since May 1992. Mr. Gruber holds a B.S. in
sociology and M.S. in cell biology and genetics from the University of Arizona
and a J.D. from Arizona State University.
Christopher R. Wolf joined the Company as Executive Vice President and Chief
Financial Officer in December 1996. From May 1996 to December 1996, Mr. Wolf
was Senior Vice President, Investment Banking and Group Head of Healthcare for
Fahnestock & Co. Inc., an investment banking firm, and from February 1991
until May 1996, was a partner of the Georgica Group, Inc., a financial
consulting company. From 1989 until February 1991, Mr. Wolf was a partner of
Oppenheimer & Co., Inc., an investment banking firm, and from 1983 until 1988,
was with Kidder Peabody & Co. Incorporated, an investment banking firm. Mr.
Wolf holds a B.A. in political science from Ohio Wesleyan University and an
M.P.P.M. from Yale University School of Management.
Radoje T. Drmanac, Ph.D. joined the Company in August 1994 and serves as Co-
Senior Vice President for Research and a director. Dr. Drmanac co-invented SBH
technology while at the Institute of Molecular Genetics and Genetics
Engineering in Belgrade, Yugoslavia ("IMGGE"), where he conducted research
from May 1986 until February 1991. Dr. Drmanac served as a Molecular Biologist
and Group Leader at Argonne National Laboratory ("Argonne") from February 1991
until August 1994. Dr. Drmanac was a member of the Editorial Board of the
International Journal of Genome Research from 1992 to 1994, and has been a
member of the Human Genome Organization ("HUGO") since 1992. Dr. Drmanac
received his Ph.D. from Belgrade University and conducted post-doctoral
studies at the Imperial Cancer Fund Research Laboratories in London.
43
Radomir B. Crkvenjakov, Ph.D. joined the Company in August 1994 and serves
as Co-Senior Vice President for Research and a director. Dr. Crkvenjakov was
appointed to the Editorial Board of Mutation Research Genomics in January
1997. Dr. Crkvenjakov served as Senior Molecular Biologist and Group Leader at
Argonne from February 1991 until August 1994. Prior to joining Argonne, Dr.
Crkvenjakov was with IMGGE from May 1986 until February 1991, where he co-
invented SBH technology. Dr. Crkvenjakov has performed research projects for
the U.S. National Institutes of Health ("NIH") and has been a member of HUGO
since 1992. Dr. Crkvenjakov received his Ph.D. in biochemistry and molecular
biology from Harvard University and conducted post-doctoral studies at the
University of Heidelberg.
Douglas C. Lane joined the Company as Vice President of Corporate
Development in July 1996. From June 1995 until June 1996, Mr. Lane was a
principal of Interhealth Development Consulting, a technology development
consulting firm. From June 1994 to May 1995, Mr. Lane managed business
development for the Advance Technologies in Genetics Group of SmithKline
Beecham Pharmaceutical, a pharmaceutical company. From October 1988 until May
1994, Mr. Lane was the Director of Business Development of SmithKline Beecham,
a diagnostic laboratory company. Mr. Lane holds a B.A. in psychology from the
University of Southern California, a B.S. in microbiology and biochemistry
from California State University, Chico and an M.B.A. from Golden Gate
University.
James N. Fletcher has served as the Company's Vice President of
Administration since September 1994 and as its Secretary since April 1996. Mr.
Fletcher was an independent consultant to the Company from April 1994 until
September 1994. Mr. Fletcher served as general counsel and a consultant to
National Business Funding, a development-stage financial services company,
from July 1993 until May 1994 and as assistant general counsel of ComputerLand
Corporation, a computer reseller, from November 1990 until December 1992 and
served as a consultant from December 1992 until May 1993. Mr. Fletcher holds a
B.S. in political science from Arizona State University and a J.D. from the
University of Arizona.
Raymond F. Baddour, Ph.D. has served as a director of the Company since
December 1993. Since July 1989, Dr. Baddour has served as the Lammot du Pont
Professor of Chemical Engineering, Emeritus, at the Massachusetts Institute of
Technology where he formerly served as the Lammot du Pont Professor of
Chemical Engineering from 1973 to 1989. Dr. Baddour also serves as a director
of Amgen, Ascent Pediatrics, Inc., a pharmaceutical company, and MatTet
Corporation, a bio-materials company. Dr. Baddour holds a B.S. in chemical
engineering from Notre Dame University and a M.S. and Sc.D. from the
Massachusetts Institute of Technology.
Greta E. Marshall has served as a director of the Company since July 1994.
Ms. Marshall is a principal of The Marshall Plan, an investment management
company, which she founded in 1989. From 1985 until 1989, Ms. Marshall was
Investment Manager of the California Public Employee's Retirement System, a
public pension organization. Ms. Marshall is also a director of EG&G Inc., a
technology and scientific instrument company. Ms. Marshall holds a B.A. in
English and an M.B.A. from the University of Louisville.
Thomas N. McCarter III has served as a director of the Company since October
1996. Mr. McCarter currently serves as Chairman of the Ramapo Land Company, a
real estate company, and is a general partner of Miles Timber Properties, a
land company which positions he has held for more than the past five years.
Mr. McCarter is a director and was past Chairman of Stillrock Management,
Inc., an investment company, serves as Chairman of Pendragon Technologies, a
diversified technology company, and is a director of Parock Group, a
diversified investment company, and a director of other closely held
companies. Mr. McCarter attended Princeton University from 1948 to 1951 and
has been a Certified Investment Counselor since 1972.
Kenneth D. Noonan, Ph.D. has served as a director of the Company since
October 1996. Dr. Noonan has been a Vice President at Booz-Allen & Hamilton,
Inc., a management consulting firm, since March 1996. From January 1992 until
February 1996, Dr. Noonan was the Managing Director of The Wilkerson Group,
Inc., a management consulting group specializing in medical products. Dr.
Noonan has also held senior positions in the diagnostics industry. Dr. Noonan
also serves as a director of Galenica Pharma. Dr. Noonan holds a Ph.D. in
biochemistry from Princeton University.
44
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. All directors hold office until the
next annual meeting of stockholders or until their successors are duly elected
and qualified. The Board of Directors is divided into three classes, each of
whose members serve for a staggered three-year term. The Board comprises two
Class I Directors (Messrs. Weist and Gruber), two Class II Directors (Dr.
Baddour and Ms. Marshall) and four Class III Directors (Drs. Drmanac,
Crkvenjakov and Noonan and Mr. McCarter). At each annual meeting of
stockholders, the appropriate number of directors will be elected for a three-
year term to succeed the directors of the same class whose terms are then
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors expire upon the due election and qualification of successor
directors at the annual meetings of stockholders held in calendar years 2000,
1998 and 1999, respectively. See "Description of Capital Stock--Anti-Takeover
Effects of Provisions of the Articles and By-Laws and Nevada Law."
There are no family relationships among the directors and executive officers
of the Company. See "Certain Transactions."
SCIENTIFIC ADVISORY BOARD
Hyseq has established a Scientific Advisory Board ("SAB") of internationally
recognized scientists and may add additional members over time, as
appropriate. In addition to Drs. Drmanac and Crkvenjakov, who serve as Co-
Chairmen of the SAB, the following individuals serve on the SAB:
Paul Doty, Ph.D. is a member of the U.S. National Academy of Sciences
("NAS") and was a technical advisor to the Strategic Arms Limitation Treaty
negotiations. His career has included participation in the Manhattan Project
and membership in the President's Science Advisors Committee under Presidents
John F. Kennedy and Lyndon B. Johnson. Nucleic acid hybridization technology
was invented in the laboratory of Dr. Doty at Harvard University. Dr. Doty
presently serves as Director Emeritus of the Center for Science and
International Affairs at Harvard University.
Vladimir Glisin, Ph.D. is a Director of the IMGGE. Dr. Glisin is a recipient
of the U.S. National Science Foundation Senior Foreign Scientist Award. Dr.
Glisin serves as a consultant and science advisor to the United Nations and
has organized a United Nations Industrial Development Organization Genome
Sequencing Conference. Dr. Glisin conducted his post-graduate research with
Dr. Doty at Harvard University and has served as a visiting professor at
Harvard University and the University of New Hampshire. Dr. Glisin has also
served as invited professor of Biochemistry and Molecular Biology at the
Kuwait Medical School and is currently on the Faculty of Sciences of the
University of Belgrade.
Anthony Carrano, Ph.D. is the Associate Director, Biology and Biotechnology
Research Program of Lawrence Livermore National Laboratory, and a Professor of
Molecular Genetics and Human Genetics at the University of California at
Davis. Dr. Carrano is a fellow of the American Association for the Advancement
of Science ("AAAS"). Dr. Carrano is a recipient of the Environmental Mutagen
Society Recognition Award. Dr. Carrano has also served as special fellow to
the U.S. Atomic Energy Commission. Dr. Carrano is a member of the editorial
boards of numerous scientific journals, has been a member of HUGO since 1989,
the NIH/Department of Energy Joint Human Genome Advisory Committee since 1989
and the U.S. Department of Energy Human Genome Project Coordinating Committee
since 1988.
Michael Waterman, Ph.D. is a Professor of Mathematics and Biological
Sciences at the University of Southern California ("USC"). Dr. Waterman is a
co-developer of the Smith-Waterman algorithm used worldwide in gene sequence
analysis. Dr. Waterman serves on the editorial boards of numerous scientific
journals. Dr. Waterman is a fellow of the Institute of Mathematical Statistics
and the AAAS and a member of HUGO and numerous other professional societies.
Dr. Waterman received the USC Associates Award for Creativity in Research and
Scholarship and holds a USC Associates Endowed Professorship in Mathematics
and Biology.
45
Douglas Brutlag, Ph.D. is a Professor of Biochemistry at the Stanford
University School of Medicine. Dr. Brutlag was a co-founder of IntelliCorp,
Inc., a financial software development company, and IntelliGenetics Inc., a
biotech software supplier, and is the recipient of numerous professional
honors and memberships. Dr. Brutlag is a fellow of the AAAS and a member of
the American Association of Artificial Intelligence.
BOARD COMMITTEES
Compensation Committee; Compensation Committee Interlocks and Insider
Participation
In April 1994, the Board of Directors established a Compensation Committee.
The Compensation Committee recommends to the Board of Directors compensation
for certain of the Company's personnel and administers the Stock Option Plan.
The Compensation Committee comprises Dr. Baddour as the chairperson and Mr.
Weist. Mr. Weist served as Acting President of the Company from May 1993 until
March 1994. The Company entered into a consulting agreement with Mr. Weist in
May 1993 pursuant to which he received $125,000 in 1993 for services rendered
in connection with the original structuring of the Company and other matters.
Mr. Weist purchased 489,763 shares of Common Stock in May 1993 for $20,000 in
cash and delivery of a promissory note in the original principal amount of
$180,000. The promissory note accrued interest at 3.72% per annum and matured
in May 1994. Such promissory note had an outstanding balance of approximately
$55,000 (plus approximately $3,900 of accrued interest) at May 1, 1994 when it
was repaid in connection with the Company's exercise of an outstanding option
to repurchase 205,056 of Mr. Weist's shares at his original purchase price of
$0.41 per share.
Audit Committee
In March 1997, the Board of Directors established an Audit Committee. The
Audit Committee reviews the Company's annual audit and will meet with the
Company's independent accountants to review the Company's internal controls
and financial management practices. The Audit Committee comprises Mr. McCarter
as the chairperson, Dr. Baddour and Dr. Noonan.
Nominating Committee
In March 1997, the Board of Directors also established a Nominating
Committee. The Nominating Committee considers and recommends individuals for
Board membership and senior management positions. The Nominating Committee
comprises Ms. Marshall as the chairperson and Mr. Weist.
DIRECTOR COMPENSATION
From the Company's inception in August 1992 until October 1996, no fees were
paid to non-employee directors. Commencing in October 1996, the Company
instituted a policy to pay all non-employee directors a fee of $2,500 for each
Board meeting attended in person or by telephone, subject to an overall cap of
$10,000 per year. Each non-employee director earned $7,500 in 1996, of which
$2,500 was paid to each in 1996 and the balance was paid in the first quarter
of 1997. Employees of the Company who are also directors do not receive any
director fees. All directors are reimbursed for reasonable expenses incurred
in attending meetings. Directors do not receive fees for attendance at
Committee meetings. See "--Stock Option Plans and Agreements."
STOCK OPTION PLANS AND AGREEMENTS
Stock Option Agreements
The Company has reserved 604,992 shares of Common Stock for issuance upon
exercise of options granted in 1994, to certain executive officers, an
employee, directors and members of the Company's SAB. See "Certain
Transactions."
46
1995 Stock Option Plan
At the Company's 1995 annual meeting, the stockholders approved an incentive
and non-qualified stock option plan (the "Stock Option Plan") for the purposes
of incentivizing employees and attracting and retaining executive officers and
other key employees. The Stock Option Plan permits grants of incentive and
non-qualified stock options (within the meaning of the Internal Revenue Code
of 1986, as amended) that are exercisable at a price equal to the fair market
value of the Common Stock on the date of grant as established by the Board. A
total of 576,000 shares of Common Stock initially were reserved for issuance
under the Stock Option Plan. At the Company's 1997 annual meeting,
stockholders approved an amendment to the Stock Option Plan which reserved an
additional 576,000 shares for issuance under the Stock Option Plan. At June
30, 1997, options granted under the Stock Option Plan to purchase 739,515
shares were issued and outstanding, including options to purchase 63,360
shares issued to directors and options to purchase 14,400 shares issued to SAB
members. See "Principal Stockholders."
1996 Director Stock Option Plan
At the Company's 1996 annual meeting, the stockholders approved a Non-
Employee Director Stock Option Plan (the "Directors' Plan") providing for
periodic stock option grants to Company directors who are not employees of the
Company. Management believes that the inherent value created by the granting
of options under the Directors' Plan will prove to be a successful means of
attracting, retaining and motivating highly qualified individuals for the
Company's Board. Under the Directors' Plan, each new, non-employee director
receives a one-time grant of options to purchase 23,040 shares of Common
Stock, of which options to purchase 11,520 shares vest immediately, with the
balance vesting in two equal allotments on the first and second anniversaries
of joining the Board. All non-employee directors automatically receive options
to purchase up to 5,760 shares each year (such that the amount received under
the Directors' Plan when added to all prior options granted to a director
which vest in that year total 5,760) on the date of the annual meeting of the
stockholders, commencing in 1997. Mr. Weist, Dr. Baddour and Ms. Marshall each
received options to purchase 960 shares immediately following the annual
meeting in 1997 under the Directors' Plan. A total of 138,240 shares of Common
Stock have been reserved and are available for purchase upon the exercise of
options granted under the Directors' Plan, of which options to purchase 48,960
shares were issued and outstanding at June 30, 1997.
47
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned for the fiscal year ended December 31, 1996 for the
Company's Chief Executive Officer and, based on actual or annualized salaries,
the four other most highly compensated executive officers (the "Named
Executive Officers"). No other executive officer's compensation exceeded
$100,000 for the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
1996
ANNUAL LONG-TERM
COMPENSATION COMPENSATION ON AWARD'S
---------------- ---------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL STOCK UNDERLYING ALL OTHER
POSITIONS SALARY BONUS AWARD($) OPTIONS COMPENSATION
- ------------------ -------- ------- ----------- ------------- ------------
Lewis S. Gruber......... $200,000 $ -- -- 42,240 $ --
President and Chief Ex-
ecutive Officer
Christopher R. Wolf (1). 10,416 -- 0(1) 144,000 30,000(1)
Executive Vice Presi-
dent and Chief Finan-
cial Officer
Radoje T. Drmanac (2)... 146,000 13,680 -- 35,476 46,200(2)
Co-Senior Vice Presi-
dent for Research
Radomir B. Crkvenjakov
(2).................... 146,000 13,680 -- 35,476 46,200(2)
Co-Senior Vice Presi-
dent for Research
Douglas C. Lane (3)..... 55,000 -- -- 48,000 11,824(3)
Vice President of Cor-
porate Development
- --------
(1) Mr. Wolf joined the Company in December 1996 and received compensation
based on an annual salary of $125,000. In addition, Mr. Wolf received a
one-time reimbursement for relocation expenses of $30,000. In December
1996, Mr. Wolf purchased 161,280 shares of Common Stock at $4.17 per
share. The shares vest over a period of two years, in equal allotments of
6,720 shares per month for so long as Mr. Wolf is employed by the Company.
As of December 31, 1996, the value of Mr. Wolf's aggregate restricted
stock holdings was $0.
(2) Pursuant to the terms of employment agreements dated as of August 1, 1994,
each of Drs. Drmanac and Crkvenjakov are entitled to annual bonuses of
$13,680 and were entitled to a one-time special bonus of $91,200 when the
Company reached $8.5 million of funding. Although the funding level was
reached in 1995, the special bonuses were not paid until January 1996. As
a condition of payment, Drs. Drmanac and Crkvenjakov forfeited options to
purchase 57,600 shares and 48,000 shares respectively, at an exercise
price of $1.56 per share and their two-year employment agreements were
automatically extended to terms of four years. The amounts paid were
offset against loans made in August 1994 by the Company to each of
Drs. Drmanac and Crkvenjakov in the amount of $45,000, such that each of
Drs. Drmanac and Crkvenjakov received a net payment of $46,200 in January
1996.
(3) Mr. Lane joined the Company in July 1996 and received compensation based
on an annual salary of $120,000. In addition, Mr. Lane received a one-time
reimbursement for relocation expenses of $11,824.
48
The following table sets forth certain information with respect to the grant
of options to purchase Common Stock by the Company during 1996 to the Named
Executive Officers.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
-------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR (PER SHARE) DATE
---- ---------- --------------- ----------- ----------
Lewis S. Gruber............... 42,240 10.6% $4.17 5/31/06
Christopher R. Wolf........... 144,000 36.1 4.17 12/08/06
Radoje T. Drmanac............. 35,476 8.9 4.17 5/31/06
Radomir B. Crkvenjakov........ 35,476 8.9 4.17 5/31/06
Douglas C. Lane .............. 48,000 12.0 4.17 7/14/06
- --------
(1) All options were granted pursuant to the Stock Option Plan and, with the
exception of options granted to Mr. Wolf, vest in four equal annual
installments commencing one year after the date of grant. Mr. Wolf's
options were granted in connection with commencement of his employment in
December 1996 and vest in four equal annual installments commencing on the
date of grant.
The following table sets forth for each of the Named Executive Officers
certain information with respect to the exercise of options to purchase Common
Stock during the year ended December 31, 1996 and the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1996.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS OF THE MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996 (2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------ ----------- ------------- ----------- -------------
Lewis S. Gruber......... 67,200 $175,000 195,581 139,382 $2,335,616 $1,456,247
Christopher R. Wolf..... -- -- 36,000 108,000 317,880 953,640
Radoje T. Drmanac....... -- -- 76,800 73,876 878,592 752,549
Radomir B. Crkvenjakov.. -- -- 72,000 69,076 823,680 697,992
Douglas C. Lane......... -- -- -- 48,000 -- 423,840
- --------
(1) Based on the fair market value at the date of exercise, as determined by
the Board of Directors, minus the exercise price.
(2) Based on the assumed initial public offering price of $13.00 per share
minus the exercise price.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Dr. Drmanac and Dr. Crkvenjakov,
pursuant to which they became employees on August 1, 1994. These agreements
have terms of four years and expire on July 31, 1998. See "--Executive
Compensation" and "Principal Stockholders" regarding stock options granted in
connection with their employment. Pursuant to the terms of their employment
agreements, each of Drs. Drmanac and Crkvenjakov are entitled to annual
bonuses of $13,680 and were entitled to a one-time special bonus of $91,200
when the Company reached an aggregate of $8.5 million of funding. Although the
funding level was reached in 1995, the special bonuses were not paid until
January 1996. As a condition of payment, Drs. Drmanac and Crkvenjakov
surrendered options to purchase 57,600 shares and 48,000 shares respectively,
at an exercise price of $1.56 per share. The amounts paid were offset against
loans made in August 1994 by the Company to each of Drs. Drmanac and
Crkvenjakov in the amount of $45,000, such that each of Drs. Drmanac and
Crkvenjakov received a net payment in January 1996 of $46,200.
49
CERTAIN TRANSACTIONS
Robert D. Weist is a director and serves as chairperson of the Compensation
Committee. For a description of certain transactions relating to Mr. Weist, see
"Management and Scientific Advisory Board--Board Committees."
In December 1993, Lewis S. Gruber, a director and executive officer of the
Company, received a warrant to purchase 144,000 shares of Common Stock at $2.90
per share in exchange for the assignment of all right, title and interest in
and to certain patent rights relating to diagnostic applications owned by him.
In connection with Mr. Gruber's employment by the Company in June 1994, Mr.
Gruber was granted a 10-year option to purchase 345,600 shares of Common Stock
at an exercise price of $1.56 per share. In September 1996, Mr. Gruber
exercised options to purchase 19,200 shares of Common Stock at an exercise
price of $1.56 per share. In December 1996, Mr. Gruber used the proceeds of a
loan from the Company to exercise the warrant to purchase 144,000 shares of
Common Stock at $2.90 per share and to exercise options to purchase 48,000
shares of Common Stock at an exercise price of $1.56 per share. The loan, in
the principal amount of $492,000, is evidenced by a promissory note dated
December 9, 1996, that bears interest at 3% per annum and is due on December 8,
2001. The loan is secured by, and with recourse only to, 118,080 shares of Mr.
Gruber's Common Stock. In March and June 1997, Mr. Gruber exercised options to
purchase an additional 7,680 and 2,880 shares, respectively, of Common Stock at
an exercise price of $1.56 per share. Also in March 1997, Mr. Gruber purchased
179,712 shares at $6.51 per share using the proceeds of an additional
$1,170,000 loan, as evidenced by a promissory note dated March 12, 1997 on the
same terms as his prior loan. As of June 30, 1997, the amounts outstanding
under such loans were $492,000 and $1,170,000, respectively. The 179,712 shares
are subject to a right of repurchase by the Company over a period of two years.
This repurchase option lapses in equal allotments of 7,488 shares per month for
so long as Mr. Gruber is employed by the Company. As a condition of the
purchase in March 1997, Mr. Gruber did not and will not receive any options
under the Stock Option Plan during 1997.
Until joining the Company, Mr. Gruber was a member of Marshall, O'Toole,
Gerstein, Murray & Borun, which firm has served as one of the Company's patent
counsel since its inception in 1992. He also is the spouse of Misty S. Gruber,
who was a director of the Company from inception to June 1994 and is a member
of Sachnoff & Weaver, Ltd., which law firm has served as general corporate
counsel to Hyseq since June 1996. Ms. Gruber formerly was a member of Shefsky
Froelich & Devine Ltd, which law firm served as general corporate counsel to
the Company from inception to June 1996. Sachnoff & Weaver, Ltd. and one member
in addition to Ms. Gruber and certain partners and related persons of Marshall,
O'Toole, Gerstein, Murray & Borun are stockholders of the Company. Mr. and Ms.
Gruber, individually and through a corporation that they control, beneficially
own a total of 559,941 shares of Common Stock, including 179,712 shares of
Common Stock purchased in March 1997 at $6.51 per share, 144,000 shares of
Common Stock issued upon the exercise of a warrant to purchase shares in
December 1996 at $2.90 per share, 158,469 shares of Common Stock purchased in
August 1992 and May 1993 at purchase prices of $0.35 and $0.41 respectively,
and 77,760 shares of Common Stock at $1.56 per share issued upon the exercise
of options in September 1996, December 1996, March 1997 and June 1997 (which
shares include the 297,792 shares pledged as security for the loans referenced
above). Mr. and Ms. Gruber also jointly purchased 6,716 shares of Series A
Preferred Stock at $2.90 per share in November 1993 and 7,317 shares of Series
A Preferred Stock at $3.46 per share in November 1994. See also "Principal
Stockholders."
In May 1996, the Company issued to Fahnestock & Co. Inc. a warrant to
purchase 206,822 shares of Common Stock at an exercise price of $4.58 per
share, a portion of which warrant was subsequently transferred to certain
principals of this firm, including a warrant to purchase 1,920 shares to
Christopher R. Wolf who was then a principal of the investment bank and is now
Executive Vice President and Chief Financial Officer of the Company. Fahnestock
& Co. Inc. is one of the Representatives. See "Underwriting." In December 1996,
Mr. Wolf borrowed $672,000 from the Company, as evidenced by a promissory note
dated December 9, 1996, which bears interest at 3% per annum and is due on
December 8, 2001. Mr. Wolf used the proceeds of the loan to purchase 161,280
shares of Common Stock at $4.17 per share in December 1996. The shares vest
over a period of two years, in equal allotments of 6,720 shares per month for
so long as Mr. Wolf is employed by the
50
Company. In March 1997, Mr. Wolf purchased 179,712 shares at $6.51 per share
using the proceeds of a $1,170,000 Company loan on the same terms as the loan
to Mr. Gruber in March 1997. As of June 30, 1997, the amounts outstanding
under such loans were $672,000 and $1,170,000, respectively. As a condition of
the purchase, Mr. Wolf did not and will not receive any options under the
Stock Option Plan during 1997. The loans are secured by, and with recourse
only to, all 340,992 shares purchased by Mr. Wolf using proceeds of Company
loans. Mr. Wolf also is a partner in Blue Hill Partners, a partnership
controlled by Thomas N. McCarter III, a director of the Company. Blue Hill
Partners purchased 76,800 shares of Common Stock at $4.17 per share in
September 1996.
In order to maintain certain agreed upon ratios of ownership in the Company,
the Company issued 5,446,502 shares of Common Stock at par ($0.001 per share)
to the Hyseq One Trust, an Illinois business trust (the "Trust"). The Trust
held 42,862 shares as of June 30, 1997. The Company has the right, among other
things, to repurchase shares from the Trust for $0.0016 per share (the
"Repurchase Price") as the Company issues Common Stock or Preferred Stock. The
Trust will terminate when all Trust shares have been repurchased. The Company
cancels all shares that are repurchased from the Trust. Pending repurchase,
all shares of Common Stock held by the Trust are voted by its trustee, who is
an independent third party with no relationship to the Company, or its
stockholders other than as trustee of the Trust. Concurrently with completion
of this offering, the Company will repurchase all remaining shares held by the
Trust for nominal consideration and the Trust will terminate. See "Principal
Stockholders."
In January 1997, Sachnoff & Weaver, Ltd. purchased 76,800 shares of Common
Stock at $6.51 per share. Sachnoff & Weaver, Ltd., a member of which is the
spouse of the Company's President and Chief Executive Officer, paid $102,415
and delivered a promissory note to the Company for the balance in the amount
of $397,585 secured by 61,069 shares of Common Stock. The note bears interest
at 8.25% per annum and is due on March 18, 2001. As of May 16, 1997, the note
had an outstanding balance of $374,887.
51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of June 30, 1997, and as adjusted to reflect the
sale of the shares offered hereby and the Private Placement, by: (i) each
person known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock; (ii) each of the Company's
directors; (iii) each of the Named Executive Officers; and (iv) all directors
and executive officers of the Company as a group.
SHARES BENEFICIALLY OWNED (1)
-----------------------------------
PERCENTAGE PERCENTAGE
NUMBER OF PRIOR TO AFTER
NAME AND ADDRESS (2) SHARES OFFERING (3) OFFERING (4)
-------------------- --------- ------------ ------------
Robert D. Weist (5)........................ 223,075 2.5% 1.8%
Lewis S. Gruber (6)........................ 859,536 9.5 7.0
Christopher R. Wolf (7).................... 378,912 4.3 3.1
Radoje T. Drmanac (8) ..................... 866,314 9.7 7.1
Radomir B. Crkvenjakov (9)................. 806,148 9.1 6.6
Douglas C. Lane (10)....................... 12,000 * *
Raymond F. Baddour (11).................... 28,800 * *
Greta E. Marshall (12)..................... 32,640 * *
Thomas N. McCarter III (13)................ 88,320 1.0 *
Kenneth D. Noonan (14)..................... 11,520 * *
Institute of Molecular Genetics and Genetic
Engineering (15).......................... 708,480 8.1 5.9
Vojode Stepe 283
P.O. Box 794
11001 Belgrade Yugoslavia
Attn.: Dr. Vladimir Glisin
Lindner Dividend Fund (16)................. 600,000 6.8 5.0
7711 Carondolet Avenue
Suite 700
Clayton, MO 63105
Lindner Growth Fund (16)................... 600,000 6.8 5.0
7711 Carondolet Avenue
Suite 700
Clayton, MO 63105
Chiron Corporation (17).................... 427,350 4.9 5.2
4560 Horton St.
Emeryville, CA 94608
The Perkin-Elmer Corporation (18).......... 427,350 4.9 6.8
761 Main Ave.
Norwalk, CT 06859
All directors and executive officers of the
Company, as a group (11 persons) (19)..... 3,316,919 33.5 25.0
- --------
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission"), based on factors
including voting and investment power with respect to shares. Shares of
Common Stock issuable pursuant to stock options currently exercisable, or
exercisable within 60 days after June 30, 1997, are deemed outstanding
for purposes of computing the percentage owned by the person holding such
options, but are not deemed outstanding for computing the percentage of
any other person.
52
(2) Unless otherwise indicated, the persons named in the table above have the
sole voting and investment power with respect to all shares beneficially
owned by them, subject to applicable community property laws. Unless
otherwise indicated, the address of each beneficial owner is: c/o Hyseq,
Inc., 670 Almanor Avenue, Sunnyvale, California 94086.
(3) Applicable percentage ownership is based on 8,779,569 shares of Common
Stock outstanding as of June 30, 1997, which gives effect to the
conversion of Series A Preferred Stock to Common Stock on a 1-to-1 basis
and Series B Preferred Stock to Common Stock on a 1.27-to-1 basis and a
subsequent 1.92-for-one split of the Common Stock.
(4) Applicable percentage ownership after this offering and the Private
Placement is based upon 12,127,418 shares of Common Stock outstanding,
which gives effect to the conversion of Series A Preferred Stock on a 1-
for-1 basis and Series B Preferred Stock to Common Stock on a 1.27-for-1
basis and a subsequent 1.92-for-1 split of the Common Stock.
(5) Includes 14,400 shares issuable upon exercise of options.
(6) Mr. Gruber holds shares individually, jointly with his wife and through a
corporation that they control. Includes 285,562 shares issuable upon
exercise of options.
(7) Includes 1,920 shares issuable upon exercise of a warrant and 36,000
shares issuable upon exercise of options. Does not include 76,800 shares
owned by a partnership controlled by Mr. McCarter and of which Mr. Wolf
is a partner.
(8) Includes 104,868 shares issuable upon exercise of options held
individually by Dr. Radoje Drmanac. Also includes 52,965 shares issuable
upon exercise of options held individually by Dr. Radoje Drmanac's
spouse, Dr. Snezana Drmanac. Dr. Radoje Drmanac disclaims beneficial
ownership of any shares owned by, or issuable upon the exercise of
options held by, Dr. Snezana Drmanac.
(9) Includes 97,668 shares issuable upon exercise of options.
(10) Includes 12,000 shares issuable upon exercise of options.
(11) Includes 28,800 shares issuable upon exercise of options.
(12) Includes 28,800 shares issuable upon exercise of options.
(13) Mr. McCarter owns 76,800 shares through a partnership which he controls
and of which Mr. Wolf is a partner. Includes 11,520 shares issuable upon
exercise of options.
(14) Includes 11,520 shares issuable upon exercise of options.
(15) The 708,480 shares issued to the Institute of Molecular Genetics and
Genetic Engineering are being held by the First National Bank of Chicago
and cannot be voted or disposed of while held thereby until certain
restrictions imposed by the United States Department of the Treasury are
satisfied.
(16) An additional 120,000 shares of Series A Preferred Stock are held by the
Lindner Bulwark Fund.
(17) Applicable percentage ownership prior to the offering includes 854,700
shares of Common Stock issuable upon the conversion of shares of Series B
Preferred Stock sold by the Company to Chiron in May 1997. Applicable
percentage ownership after the offering includes an additional 199,283
shares of Common Stock to be purchased by Chiron in the Private Placement
concurrent with this offering.
(18) Applicable percentage ownership prior to the offering includes 854,700
shares of Common Stock issuable upon the conversion of shares of Series B
Preferred Stock sold to Perkin-Elmer on or about June 20, 1997.
Applicable percentage ownership after the offering includes an additional
398,566 shares of Common Stock to be purchased by Perkin-Elmer in the
Private Placement concurrent with this offering.
(19) Includes 1,135,233 shares issuable upon exercise of options.
53
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering and the Private Placement, the authorized
capital stock of the Company will consist of 50,000,000 shares of Common
Stock, par value $.001 per share, 12,127,418 shares of which will be
outstanding and 8,000,000 shares of Preferred Stock, par value $.001 per
share, none of which will be issued or outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for the election
of directors and all other matters submitted for stockholder vote, except
matters submitted to the vote of another class or series of shares. Holders of
Common Stock are not entitled to cumulative voting rights. The holders of
Common Stock are entitled to dividends in such amounts and at such times, if
any, as may be declared by the Board of Directors out of funds legally
available therefor. The Company has not paid any dividends on its Common Stock
and does not anticipate paying any cash dividends on such stock in the
foreseeable future. See "Dividend Policy." Upon liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payments to creditors and holders of senior securities. The Common Stock is
not redeemable and has no preemptive or conversion rights. The rights of the
holders of Common Stock are subject to the rights of the holders of any
Preferred Stock which may, in the future, be issued. All outstanding shares of
Common Stock are, and the shares of Common Stock to be sold by the Company in
this offering when issued will be, duly authorized, validly issued, fully paid
and non-assessable.
PREFERRED STOCK
The Board of Directors will have the authority to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the voting and other rights of the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no present plans to issue any series of
Preferred Stock.
WARRANTS
The warrants referenced in this paragraph were outstanding as of June 30,
1997. In connection with private placements of the Company's Series A
Preferred Stock, the Company issued a warrant to purchase 172,664 shares of
Common Stock issued in December 1993 at an exercise price of $2.90 per share,
which warrant is exercisable until December 1, 2000; a warrant to purchase
166,241 shares of Common Stock issued in November 1994 at an exercise price of
$3.42 per share, which warrant is exercisable until November 7, 2001; and a
warrant to purchase 137,520 shares of Common Stock issued in July 1995 at an
exercise price of $4.17 per share, which warrant is exercisable until July 15,
2002. The Company also issued a warrant to purchase 206,822 shares of Common
Stock at an exercise price of $4.58 per share to Fahnestock & Co. Inc., which
warrant is exercisable until May 16, 2001. A portion of the warrant was
subsequently transferred to certain principals of this firm, including a
warrant to purchase 1,920 shares to Christopher R. Wolf who was then a
principal of Fahnestock & Co. Inc. and is now Executive Vice President and
Chief Financial Officer of the Company. See "Certain Transactions." In
December 1996, the Company granted to a secured lender a warrant to purchase a
total of 9,600 shares of Common Stock at an exercise price of $5.21 per share,
which warrant is exercisable until December 23, 2001. The average exercise
price of all warrants outstanding as of the date of this Prospectus was $3.81.
54
REGISTRATION RIGHTS
Pursuant to certain registration rights agreements ("Rights Agreements")
among the Company and certain of its securities holders, 3,892,140 shares of
Common Stock (including 281,760 shares held by affiliates of Fahnestock & Co.
Inc.) and 216,422 shares issuable upon the exercise of warrants (including
178,022 shares issuable to Fahnestock & Co. Inc. and certain affiliates) (the
"Registrable Securities") will be entitled to certain rights with respect to
the registration of the Registrable Securities under the Securities Act.
Registration rights covering 227,760 shares will expire prior to the end of
the Lock-Up Period; registration rights covering an additional 2,652,240
shares will expire between the end of the Lock-Up Period and May 1998; and
registration rights covering 76,800 shares will expire in January 1999. Under
all of the Rights Agreements, if after completion of this offering the Company
proposes to register any of its securities under the Securities Act, either
for its own account or the account of other stockholders, the holders of
Registrable Securities are entitled to notice of such registration and are
entitled to include their Registrable Securities therein. In addition, if at
any time beginning six months following the date of this Prospectus, the
Company receives a request from certain initiating holders of Registrable
Securities, the Company is obligated to cause such shares to be registered
under the Securities Act. Holders of Registrable Securities have the right to
cause two such demand registrations. In addition to these two demand
registrations, holders of Registrable Securities may also require the Company
to register all or a portion of their Registrable Securities on Form S-2 or
Form S-3 under the Securities Act, when such forms become available for use by
the Company, and subject to certain other conditions and limitations. The
holders' rights with respect to all such registrations are subject to certain
conditions, including the right of the underwriters to limit the number of
shares included in any such registration. The Company has agreed to pay all
expenses related thereto, except for underwriting discounts and commissions,
to effect the sale of the Registrable Securities.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES AND BY-LAWS AND NEVADA LAW
Articles of Incorporation and By-Laws
The Company's By-Laws provide that members of the Board of Directors serve
staggered three-year terms. The Articles provide that all stockholder action must be effected at a duly called meeting and not by a consent in writing.written consent. The By-Lawsbylaws provide, however, that the Company'sour stockholders may call a special meeting of stockholders only upon a request of stockholders owning at least 50% of the
Company's capitalour outstanding common stock. These provisions of the Articlesour certificate of incorporation and By-Lawsbylaws could discourage potential acquisition proposals and could delay or prevent a change in control. We designed these provisions to reduce our vulnerability to unsolicited acquisition proposals and to discourage certain tactics that may be used in proxy fights. These provisions, however, could also have the effect of discouraging others from making tender offers for our shares. As a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management.
We are permitted to issue shares of our preferred stock without stockholder approval upon such terms as our board of directors determines. Therefore, the rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future. In addition, the issuance of preferred stock could have a dilutive effect on the holdings of our current stockholders.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware corporation from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s stock unless:
the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation’s stock;
after the transaction in which the stockholder acquired 15% or more of the corporation’s stock, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.
The provisions of our governing documents and current Delaware law may, collectively:
lengthen the time required for a person or entity to acquire control of us through a proxy contest for the election of a majority of our board of directors;
discourage bids for our common stock at a premium over market price; and
generally deter efforts to obtain control of us.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the information that we incorporate by reference, contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “continue” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” or the negative of these terms or other comparable terminology. These forward-looking statements may also use different phrases. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, including the information that we incorporate by reference, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:
the success, cost and timing of our product development activities and clinical trials;
our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;
our ability to obtain funding for our operations, including funding necessary for the planned clinical trials for Gencaro;
our plans to research, develop and commercialize our product candidates, particularly Gencaro;
our ability to attract collaborators with development, regulatory and commercialization expertise;
the size and growth potential of the markets for our product candidates, particularly Gencaro, and our ability to serve those markets;
our ability to successfully commercialize our product candidates, particularly Gencaro;
the rate and degree of market acceptance of our product candidates, particularly Gencaro;
our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;
regulatory developments in the United States and foreign countries;
the performance of our third party suppliers and manufacturers;
the success of competing therapies that are or become available;
the loss of key scientific or management personnel;
our use of the proceeds from this offering;
the accuracy of our estimates regarding expenses, clinical trial timelines, capital requirements and needs for additional financing; and
our ability to obtain and maintain intellectual property protection for our product candidates.
In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors, risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Given these other important factors, risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date such forward-looking statements are made. You should carefully read this prospectus, together with the information incorporated herein by reference as described under the section entitled “Incorporation of Certain Information by Reference,” completely and with the understanding that our actual future results may be materially different from what we expect. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our business, results of operations and financial condition.
You should rely only on information contained or incorporated by reference in this prospectus and the registration statement of which this prospectus is a part, including the exhibits that we have filed with the registration statement and, if required, any post-effective amendment to the registration statement of which this prospectus is a part. You should understand that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in the foregoing documents by these cautionary statements.
Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. You should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.
We estimate that the net proceeds from the sale of the shares of common stock that we are offering will be approximately $ million based on the assumed public offering price of $2.80 per share (which was the last reported sale price of our common stock as reported on The NASDAQ Capital Market on March 20, 2013) and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. Each $ increase (decrease) in the assumed public offering price of $2.80 per share would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming that the assumed public offering price remains the same, and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us.
We intend to use the net proceeds of the offering to fund the Phase 2b portion of the GENETIC-AF trial, working capital and general corporate purposes. If a warrant holder elects to exercise the warrants issued in this offering, we may also receive proceeds of up to $ . We cannot predict when or if the warrants will be exercised. It is possible that the warrants may expire and may never be exercised. The warrants contain a net exercise provision therefore the warrant holder may elect to utilize this feature and in this case we would not receive any proceeds from their exercise. Pending their use as described above, we intend to invest the net proceeds in high quality, short-term, interest-bearing securities.
Our common stock has been trading on The NASDAQ Capital Market under the symbol “ABIO”. The following table sets forth the high and low intraday sales prices of our common stock for the periods indicated as reported by The NASDAQ Capital Market:
| Price | ||||||||
| High | Low | |||||||
Year ended 2012 | ||||||||
First Quarter | $ | 6.90 | $ | 5.22 | ||||
Second Quarter | $ | 5.70 | $ | 2.22 | ||||
Third Quarter | $ | 3.66 | $ | 1.86 | ||||
Fourth Quarter | $ | 3.18 | $ | 1.44 | ||||
Year ended 2011 | ||||||||
First Quarter | $ | 20.04 | $ | 13.50 | ||||
Second Quarter | $ | 15.84 | $ | 8.46 | ||||
Third Quarter | $ | 10.08 | $ | 6.00 | ||||
Fourth Quarter | $ | 14.70 | $ | 5.70 | ||||
The reported last sale price of our common stock on The NASDAQ Capital Market on March 20, 2013 was $2.80 per share. As of March 20, 2013, there were 122 holders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock. Regardless of the restrictions in terms of any potential future indebtedness, we anticipate that we will retain all available funds and any future earnings to support our operations and finance the growth and development of our business and, therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of December 31, 2012:
on an actual basis;
on an as adjusted basis to give effect to the sale of the shares of our common stock that we are offering at an assumed public offering price of $2.80 per share (the last reported sale price of our common stock as reported on The NASDAQ Capital Market on March 20, 2013), after deducting the estimated placement agent’s fees and estimated offering expenses payable by us.
You should read this table with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated by reference in this prospectus.
| As of December 31, 2012 | ||||||||
| Actual | As Adjusted (1) | |||||||
| (in thousands, except share and per share data) (Unaudited) | ||||||||
Cash, cash equivalents and short-term investments | $ | 2,920 | $ | |||||
Stockholders’ equity (deficit): | ||||||||
Common stock, $0.001 par value: 100,000,000 shares authorized; 2,660,315 shares issued and outstanding | 3 | |||||||
Additional paid-in capital | 70,898 | |||||||
Deficit accumulated during the development stage | (67,994 | ) | ||||||
Accumulated other comprehensive income | — | |||||||
Total stockholders’ equity (deficit) | 2,907 | |||||||
Total capitalization | $ | 2,907 | $ | |||||
| (1) | Each $ increase (decrease) in the assumed public offering price of $2.80 per share would increase (decrease) each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase of shares in the number of shares offered by us would increase each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $ million, assuming that the assumed public offering price remains the same, and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. Similarly, each decrease of shares in the number of shares offered by us would decrease each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $ million, assuming that the assumed public offering price remains the same, and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. |
The number of shares of common stock shown above is based on 2,660,315 shares of common stock outstanding as of December 31, 2012. This number excludes:
930,725 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2012, at a weighted average exercise price of $9.10 per share;
144,019 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2012, at a weighted average exercise price of $18.28 per share;
80,255 additional shares of common stock reserved for future issuance under our Amended and Restated 2004 Equity Incentive Plan; and
521,066 shares of common stock issued in connection with stock offerings completed subsequent to December 31, 2012
If you invest in our common stock, you will experience immediate and substantial dilution to the extent of the difference between the public offering price of our common stock in this offering and the as adjusted net tangible book value per share of our common stock immediately after the offering.
Our historical net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the actual number of outstanding shares of our common stock. The historical net tangible book value of our common stock as of December 31, 2012 was $2,906,825 million, or $1.09 per share.
After giving effect to the sale of shares of our common stock offered by us at an assumed public offering price of $2.80 per share (the last reported sale price of our common stock on The NASDAQ Capital Market on March 20, 2013), after deducting the estimated placement agent’s fees and estimated offering expenses payable by us, our net tangible book value as of December 31, 2012 would have been approximately $ million, or $ per share of common stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of common stock in this offering at the assumed public offering price. The following table illustrates this dilution on a per share basis:
Assumed public offering price per share | $ | 2.80 | ||||
Net tangible book value per share as of December 31, 2012 | $ | 1.09 | ||||
Increase per share attributable to investors purchasing our common stock in this offering | ||||||
As adjusted net tangible book value per share after this offering | ||||||
Dilution per share to investors purchasing our common stock in this offering | $ |
Each $ increase (decrease) in the assumed public offering price of $2.80 per share would increase (decrease) our as adjusted net tangible book value after this offering by approximately $ million, or approximately $ per share, and the dilution per share to new investors by approximately $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of shares in the number of shares offered by us would increase our as adjusted net tangible book value after this offering by approximately $ million, or $ per share, and the dilution per share to new investors would be $ per share, assuming that the assumed public offering price remains the same, and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. Similarly, a decrease of shares in the number of shares offered by us would decrease our as adjusted net tangible book value after this offering by approximately $ million, or $ per share, and the dilution per share to new investors would be $ per share, assuming that the assumed public offering price remains the same, and after deducting the estimated placement agent’s fees and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.
The above discussion and table are based on 2,660,315 shares of common stock outstanding as of December 31, 2012 and exclude:
930,725 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2012, at a weighted average exercise price of $9.10 per share;
144,019 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2012, at a weighted average exercise price of $18.28 per share;
80,255 additional shares of common stock reserved for future issuance under our Amended and Restated 2004 Equity Incentive Plan; and
521,066 shares of common stock issued in connection with stock offerings completed subsequent to December 31, 2012
To the extent that options or warrants outstanding as of December 31, 2012 have been or are exercised, or other shares are issued, investors purchasing shares in this offering could experience further dilution.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We have included or incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this prospectus, and from time to time our management may make, statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may be identified by words including “anticipate,” “plan,” “believe,” “intend,” “estimate,” “expect,” “should,” “may,” “potential” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.
Overview
We are a biopharmaceutical company whose principal focus is developing genetically-targeted therapies for cardiovascular diseases. Our lead product candidate is Gencaro™ (bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator that we plan to study in a new clinical trial for the treatment of atrial fibrillation, or AF, in patients with heart failure and reduced left ventricular ejection fraction (“HFREF”). We have identified common genetic variations in receptors in the cardiac nervous system that we believe interact with Gencaro’s pharmacology and may enhance patient response.
We have been granted patents in the U.S., Europe, and other jurisdictions for methods of treating patients who have these genetic variations with Gencaro. We believe that if Gencaro is approved, the Gencaro patents may provide market exclusivity into 2029 or 2030 in the U.S. and in Europe.
We believe that Gencaro has potential efficacy in reducing or preventing AF, and this efficacy may be genetically regulated. We plan to test this hypothesis in a clinical trial of Gencaro, known as GENETIC-AF. GENETIC-AF is projected to be a Phase 2b/3 trial comparing Gencaro to metoprolol CR/XL for prevention of AF in patients with HFREF.
We have created an adaptive design for GENETIC-AF, under which the trial is intended to be initiated as a Phase 2b study in approximately 200 HFREF patients. Depending on the results of the Phase 2b portion, the trial may then be expanded to a Phase 3 study by enrolling an estimated additional 420 patients. We estimate that GENETIC-AF could begin approximately 6 months after we obtain sufficient funding, and we believe the Phase 2b study would take approximately two years to complete.
To support the continued development of Gencaro, including the planned GENETIC-AF clinical trial and our ongoing operations, we plan to pursue an underwritten public equity offering within the next quarter to fund, at least, the Phase 2b portion of the GENETIC-AF trial and our general and administrative costs through its projected completion. We may also seek additional funding that could allow us to operate while we continue to pursue financing options, a strategic combination, partnering, and licensing opportunities. If we are delayed in obtaining funding or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or discontinue our operations. We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 2013. We are unable to assert that our current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond September 2013. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate.
Results of Operations
Research and Development Expenses
Research and development, or R&D, expenses comprise research & development, regulatory, and manufacturing process development activities and costs. Our research and development expenses totaled $1.1 million for the year ended December 31, 2012 as compared to $2.3 million for 2011, a decrease of approximately $1.2 million. During 2012, our R&D efforts and costs were almost entirely for the development of Gencaro. The research and regulatory components of our R&D costs decreased approximately $883,000 due primarily to reduced personnel costs from staff furloughs implemented in the third quarter of 2012, and decreased consulting costs in association with our reduced clinical development activities compared to the prior year. Manufacturing process development costs decreased approximately $342,000 for the year. In 2011, we incurred milestone costs for ongoing, long-term drug stability studies of Gencaro and new costs for preliminary analysis and development of clinical trial materials for our planned GENETIC-AF clinical trial. During 2012 we did not have similar activities and the cost decrease reflects our lower utilization of outside support services in connection with our reduced level of operations.
Our R&D expenses are highly contingent upon our ability to raise substantial additional funding or complete a strategic transaction. Should we receive funds from one or a combination of these sources, R&D expense in 2013 will be substantially higher than 2012 if we initiate our GENETIC-AF clinical trial. Until substantial additional funding is obtained, R&D expenses in 2013 are expected to be comparable to 2012 levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, primarily consist of personnel costs, consulting and professional fees, insurance, facilities and depreciation expenses, and various other administrative costs.
SG&A expenses were $3.2 million for the year ended December 31, 2012, compared to $5.0 million for 2011, a decrease of approximately $1.8 million. Cost decreases of approximately $940,000 were comprised primarily of reduced personnel, consulting, board advisory, and legal expenses.
Approximately $772,000 of the total cost decrease was attributable to lower depreciation and occupancy expense, and the balance of the decrease is due to our reduced operations overall. During the fourth quarter of 2011 we relocated our corporate office to a smaller suite. The move necessitated additional depreciation of certain leasehold improvements, furniture and equipment that were not useable in the new office suite. The reductions in depreciation and occupancy related expenses in 2012 are the result of this office move.
SG&A expenses for 2013 are expected to be comparable to 2012 levels, but are contingent upon our ability to raise substantial additional funding or complete a strategic transaction. Should we receive funds from one or a combination of these sources, SG&A expense in 2013 could be substantially higher than 2012 as we increase activities to support initiating our GENETIC-AF clinical trial.
Gain on Assignment of Patent Rights
During the year ended December 31, 2011, we entered into an agreement in which we assigned certain patent rights to a large pharmaceutical company. In exchange for the patent rights we received a $2.0 million non-recourse payment during the second quarter of 2011. The gain was exclusive to 2011.
Interest and Other Income
Interest and other income was $2,000 for the year ended December 31, 2012, as compared to $2,000 for 2011, remaining essentially unchanged. Interest income was nominal in both years due to low investment yields and declining cash balances. We expect interest income to continue to be nominal in 2013.
Interest and Other Expense
Interest and other expense was $3,000 for the year ended December 31, 2012, as compared to $5,000 for 2011. The amounts and related change between years are nominal to our overall operations. Based on our current capital structure, interest expense for 2013 is expected to be comparable to 2012.
Liquidity and Capital Resources
Cash and Cash Equivalents
| December 31, 2012 | December 31, 2011 | |||||||
Cash and cash equivalents | $ | 2,920 | $ | 5,943 | ||||
Cash Flows from Operating, Investing and Financing Activities
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
Net cash (used in) provided by: | ||||||||
Operating activities | $ | (4,078 | ) | $ | (6,959 | ) | ||
Investing activities | — | 2,006 | ||||||
Financing activities | 1,055 | 3,871 | ||||||
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Net decrease in cash and cash equivalents | $ | (3,023 | ) | $ | (1,082 | ) | ||
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Net cash used in operating activities for the year ended December 31, 2012 decreased nearly $2.9 million compared with the 2011 period due to decreased R&D and SG&A expenses discussed above.
Net cash flows provided by investing activities for the year ended December 31, 2011 was primarily due to $2 million of cash received from the assignment of patent rights during 2011. There were no such transactions during 2012. Net cash provided by financing activities of approximately $1.1 million for the year ended December 31, 2012 is comprised of approximately $1.2 million of net proceeds from the sales of our common stock, less $134,000 in payments made on a vendor financing arrangement. For the year ended December 31, 2011, net cash provided by financing activities was $3.9 million of net proceeds from sales of our common stock, less $146,000 in payments made on a vendor financing arrangement.
Sources and Uses of Capital
Our primary sources of liquidity to date have been capital raised from issuances of shares of our common and preferred stock, issuance of convertible promissory notes, and funds provided by the Merger. The primary uses of our capital resources to date have been to fund operating activities, including research, clinical development and drug manufacturing expenses, license payments, and spending on capital items.
Considering the substantial additional time and costs associated with the development of Gencaro and our need to raise a significant amount of capital on acceptable terms to finance the planned GENETIC-AF clinical trial and our ongoing operations, we are evaluating strategic alternatives for funding our operations and development programs. We plan to pursue an underwritten public offering to fund, at least, the Phase 2b portion of the GENETIC-AF trial and our general and administrative costs through its projected completion. We may also seek additional funding that could allow us to operate while we continue to pursue financing alternatives, a strategic combination, or partnership to support the continued clinical development of Gencaro, including the planned GENETIC-AF clinical trial.
On August 2, 2012, we sold approximately $953,000 of ARCA’s common stock and warrants for common stock in a Registered Direct Offering under the Company’s registration statement on Form S-3 (File No.333-172686) (the “Registration Statement”) in which we issued 406,099 shares of common stock and warrants to purchase 304,575 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses payable by us, was approximately $741,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a purchase price of $2.35 per unit, which was a 15 percent discount to the consolidated price of the stock and warrants, based on the closing bid price of $2.76 as reported on the Nasdaq Capital Market on August 2, 2012. The warrants become exercisable six months after issuance, expire 6 years thereafter, and have an exercise price of $2.76 per share, equal to 100% of the closing bid price of ARCA’s common stock on the Nasdaq Capital Market on August 2, 1012. The Registered Direct Offering was effected as a takedown off the Registration Statement, which became effective on April 4, 2011, pursuant to a prospectus supplement filed with the Securities and Exchange Commission on August 3, 2012. The warrant agreements provide for settlement of the warrants in unregistered shares should an effective registration statement or current prospectus not be in place at the time a warrant is exercised.
On October 22, 2012, we sold approximately $325,000 of ARCA common stock and warrants for common stock in a private placement transaction. Certain Directors, Officers and Affiliates of ARCA were investors in the private placement. We issued to investors 137,530 shares of common stock together with warrants to purchase 103,148 shares of common stock. The net proceeds, after deducting offering expenses, were approximately $280,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of $2.36 per unit. The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of $1.80 per share, equal to 100% of the closing sales price of ARCA’s common stock on the Nasdaq Capital Market on October 22, 2012.
On December 18, 2012, we sold approximately $250,000 of our common stock and warrants for common stock in a private placement transaction with our Chief Executive Officer, Dr. Michael Bristow. We issued 86,186 shares of common stock together with warrants to purchase 64,640 shares of common stock. The net proceeds, after deducting offering expenses were approximately $230,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of $2.90 per unit. The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of $2.34 per share, equal to 100% of the closing sales price of ARCA’s common stock on the Nasdaq Capital Market on December 18, 2012.
On January 22, 2013, we sold approximately $1 million of our common stock and warrants for common stock in a private placement transaction with accredited investors and our Chief Executive Officer. We issued 356,430 shares of common stock together with warrants to purchase 249,501 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses, were approximately $850,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.70 shares of common stock, was sold at a purchase price of $2.81 per unit. The warrants were exercisable upon issuance, expire 7 years from the date of issuance, and have an exercise price of $2.28 per share, equal to 100% of the closing bid price of ARCA’s common stock on the Nasdaq Capital Market on January 22, 2013.
Pursuant to the terms of the Registration Rights Agreements (the Rights Agreements) entered into as part of each of these Private Placement transactions, we granted to the investors certain registration rights related to the shares underlying the units sold in these private placements. We filed a registration statement, in accordance with the terms of the Rights Agreements, for the resale of the shares underlying the units sold in these private placements. That registration statement was declared effective by the Securities and Exchange Commission on February 14, 2013.
On January 31, 2013, we sold approximately $730,000 of ARCA’s common stock and warrants for common stock in a Registered Direct Offering under the Company’s registration statement on Form S-3 (File No.333-172686) (the “Registration Statement”) in which we issued 164,636 shares of common stock and warrants to purchase 65,855 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses payable by us, was approximately $630,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.40 shares of common stock, was sold at a purchase price of $4.43 per unit. The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of $4.13 per share, equal to 100% of the closing bid price of ARCA’s common stock on the Nasdaq Capital Market on January 30, 2013. The Registered Direct Offering was effected as a takedown off the Registration Statement, which became effective on April 4, 2011, pursuant to a prospectus supplement filed with the Securities and Exchange Commission on February 1, 2013. The warrant agreements provide for settlement of the warrants in unregistered shares should an effective registration statement or current prospectus not be in place at the time a warrant is exercised.
We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 30, 2013. However, we are unable to assert that these funds are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond September 30, 2013. The consolidated financial statements contained in this report have been prepared with the assumption that we will continue as a going concern and will be able to realize our assets and discharge our liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. We may not be able to raise sufficient capital on acceptable terms or at all to continue development of Gencaro or to continue operations and may not be able to execute any strategic transaction.
Our liquidity, and ability to raise additional capital or complete any strategic transaction, depends on a number of factors, including, but not limited to, the following:
the costs and timing for an additional clinical trial in order to gain possible FDA approval for Gencaro;
the market price of our stock and the availability and cost of additional equity capital from existing and potential new investors;
our ability to retain the listing of our common stock on the Nasdaq Capital Market;
general economic and industry conditions affecting the availability and cost of capital;
our ability to control costs associated with our operations;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
the terms and conditions of our existing collaborative and licensing agreements.
The sale of additional equity or convertible debt securities would likely result in substantial additional dilution to our stockholders. If we raise additional funds through the incurrence of indebtedness, the obligations related to such indebtedness would be senior to rights of holders of our capital stock and could contain covenants that would restrict our operations. We also cannot predict what consideration might be available, if any, to us or our stockholders, in connection with any strategic transaction. Should strategic alternatives or additional capital not be available to us in the near term, or not be available on acceptable terms, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business which may, among other alternatives, cause us to further delay, substantially reduce or discontinue operational activities to conserve its cash resources.
Critical Accounting Policies and Estimates
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in Note 1 of “Notes to Consolidated Financial Statements” included within Item 8 in this report, we believe the following critical accounting policy affected our most significant judgments, assumptions, and estimates used in the preparation of our consolidated financial statements and, therefore, is important in understanding our financial condition and results of operations.
Long-Lived Assets and Impairments
We review long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. As a development stage company, we have not generated positive cash flows from operations, and such cash flows may not materialize for a significant period in the future, if ever. Additionally, we may make changes to our business plan that would result in changes to expected cash flows from long-lived assets. It is reasonably possible that future evaluations of long-lived assets, including changes from our current expected use of long-lived assets, may result in impairments.
Accrued Expenses
As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date. Examples of estimated accrued expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to our drug product, and professional service fees, such as attorneys, consultants, and clinical research organizations. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.
Off-Balance Sheet Arrangements
We have not participated in any transactions with unconsolidated entities, such as special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify certain parties from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. We have entered into indemnity agreements with each of our directors, officers and certain employees. Such indemnity agreements contain provisions, which are in some respects broader than the specific indemnification provisions contained in Delaware law. We also maintain an insurance policy for our directors and executive officers insuring against certain liabilities arising in their capacities as such.
Some of the statements under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements include, but are not limited to, statements regarding the following: the timing and results of any clinical trials, including the planned Gencaro trial for the prevention of atrial fibrillation-our ability to obtain additional funding or enter into a strategic or other transaction, the extent to which our issued and pending patents may protect our products and technology, the potential of such product candidates to lead to the development of safe or effective therapies, our ability to enter into collaborations, our ability to maintain listing of our common stock on a national exchange, our future operating expenses, our future losses, our future expenditures, and the sufficiency of our cash resources to maintain operations. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain.
In addition, you should refer to the “Risk Factors” section of this Prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Annual Report on Form 10-K for the year ended December 31, 2012, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.
Overview
We are a biopharmaceutical company whose principal focus is developing genetically-targeted therapies for cardiovascular diseases. Our lead product candidate is Gencaro™ (bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator that we plan to evaluate in a new clinical trial for the treatment of atrial fibrillation, or AF, in patients with heart failure and left ventricular dysfunction, or HFREF. We have identified common genetic variations in receptors in the cardiovascular system that we believe interact with Gencaro’s pharmacology and may predict patient response to the drug.
We plan to test this hypothesis in a Phase 2b/3 clinical trial of Gencaro, known as GENETIC-AF. We plan to pursue this indication for Gencaro because data from the previously conducted Phase 3 HF trial of Gencaro in 2,708 HF patients, or the BEST trial, suggest that Gencaro may be successful in reducing or preventing AF.
AF is a disorder in which the normally regular and coordinated contraction pattern of the heart’s two small upper chambers (the atria) becomes irregular and uncoordinated. The irregular contraction pattern associated with AF causes blood to pool in the atria, predisposing the formation of clots potentially resulting in stroke. AF is considered an epidemic cardiovascular disease with an estimated prevalence of at least 2.7 million Americans in 2010. The approved therapies for the treatment or prevention AF have certain disadvantages in HFREF patients, such as toxic or cardiovascular adverse effects, and most of the approved drugs for AF are contra indicated or have warnings in their prescribing information for such patients. We believe there is an unmet medical need for new AF treatments that have fewer side effects than currently available therapies and are more effective, particularly in HFREF patients.
GENETIC-AF is planned as a multi-center, randomized, double-blind clinical trial designed to compare the safety and efficacy of Gencaro to an active comparator in beta-1 389 arginine homozygous genotype HFREF patients recently diagnosed with persistent AF. The primary endpoint will be measured over a twenty-four week period after the patient’s AF has been electrically cardioverted through the administration of a direct current shock to restore normal heart rhythm.
We have created an adaptive design for GENETIC-AF, which we plan to initiate with a Phase 2b study in approximately 200 HFREF patients with recent onset, persistent AF who also have a genetic variant of the beta-1 adrenergic receptor which we believe responds most favorably to Gencaro. The secondary endpoint of the proposed Phase 2b portion of the trial will be AF burden, defined as a patient’s actual percentage of time in AF, regardless of symptoms. Under the proposed design, all 200 patients in the Phase 2b portion of the trial will have AF burden measured by continuous monitoring, either by previously implanted cardiac resynchronization or defibrillation devices, or newly or previously inserted loop recorders. At the end of enrollment of the first 200 patients, the primary endpoint of the combination of recurrent symptomatic AF or all-cause mortality, and the secondary endpoint of AF burden will be evaluated by the trial’s Data and Safety Monitoring Board for evidence of an efficacy signal. If a sufficient efficacy signal is detected and acceptable safety is observed, the trial could then proceed to the Phase 3 portion. We estimate that GENETIC-AF could begin approximately 6 months after we obtain sufficient funding. We believe the Phase 2b study would take approximately two years to complete.
The trial is designed to compare Gencaro to the beta-blocker metoprolol CR/XL in patients with the beta-1 389 arginine homozygous genotype, which we believe responds most favorably to Gencaro. We believe data from the BEST trial indicate that Gencaro may have a genetically regulated effect in reducing or preventing AF, whereas we believe the therapeutic benefit of metoprolol CR/XL does not appear to be enhanced in patients with this genotype. A retrospective analysis of data from the BEST trial shows that the entire cohort of patients in the BEST trial treated with Gencaro had a 41% reduction in the risk of new onset AF (time-to-event) compared to placebo (p = 0.0004). In the BEST DNA substudy, patients with the beta-1 389 arginine homozygous genotype experienced a 74% (p = 0.0003) reduction in risk of AF when receiving Gencaro, based on the same analysis. The beta-1 389 arginine homozygous genotype was present in about 47% of the patients in the BEST pharmacogenetic substudy, and we estimate it is present in about 50% of the US general population.
Medtronic, Inc., a leader in medical technologies to improve the treatment of chronic diseases including cardiac rhythm disorders, has signed a non-binding Letter of Intent, or LOI, with us to collaborate on the Phase 2b portion of the proposed trial to support GENETIC-AF. The proposed collaboration involves a substudy of the Phase 2b portion of GENETIC-AF that will measure the AF burden data by means of their continuous monitoring devices. Under the proposed collaboration, Medtronic would provide support for the AF burden substudy and for collection and analysis of the substudy data.
We have been granted patents in the U.S., Europe, and other jurisdictions for methods of treating AF and HF patients with Gencaro based on genetic testing, which we believe will provide market exclusivity for these uses of Gencaro into at least 2026 in the U.S. and into 2025 in Europe. In addition, we believe that if Gencaro is approved, a Gencaro patent will be eligible for patent term extension based on our current clinical trial plans which, if granted , may provide market exclusivity for Gencaro into 2029 or 2030 in the U.S. and Europe.
To support the continued development of Gencaro, including the planned GENETIC-AF clinical trial and our ongoing operations, we plan to pursue an underwritten public offering to fund the Phase 2b portion of the GENETIC-AF trial and our general and administrative costs through the projected completion of the Phase 2b portion. We may seek additional interim funding that could allow us to operate while we continue to pursue financing options, a strategic combination, partnering and licensing opportunities. If we are delayed in obtaining funding or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or discontinue our operations. We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 2013. We are unable to assert that our current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond September 2013. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate.
On January 27, 2009, we completed a business combination (the “Merger”) with ARCA Colorado in accordance with the terms of that Agreement and Plan of Merger and Reorganization, dated September 24, 2008, and amended on October 28, 2008 (as amended, the “Merger Agreement”), in which a wholly-owned subsidiary of Nuvelo, Inc. merged with and into ARCA Colorado, with ARCA Colorado continuing after the Merger as the surviving corporation and a wholly-owned subsidiary of Nuvelo, Inc. Immediately following the Merger, we changed our name from Nuvelo, Inc. to ARCA biopharma, Inc., and our common stock began trading on the Nasdaq Global Market under the symbol “ABIO” on January 28, 2009. On March 7, 2011, the listing of our common stock was transferred from the Nasdaq Global Market to the Nasdaq Capital Market.
On February 25, 2013, we held a special meeting of our stockholders in order to approve a series of certificates of amendment to our Restated Certificate of Incorporation, as amended, to effect a reverse split of our outstanding common stock, pursuant to which any whole number of outstanding shares between, and including, three and twenty would be combined into one share of common stock and to authorize our board of directors to select and file one such certificate of amendment and abandon the other certificates of amendment, or to abandon all such certificates of amendment as permitted under Section 242(c) of the Delaware General Corporation Law, to be determined by the board of directors within one year of approval.
On March 4, 2013, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation, to implement a six-for-one reverse split of our common stock, as previously authorized and approved at our special meeting of stockholders on February 25, 2013. The reverse split was effective as of 5:01 p.m. (Eastern Time) on March 4, 2013, and our common stock continued trading on The NASDAQ Capital Market on a post-split basis on March 5, 2013.
As a result of the reverse split, every six shares of issued and outstanding common stock were combined into one share of issued and outstanding common stock. In addition, the reverse split effected a proportionate adjustment to the per share exercise price and the number of shares issuable upon the exercise or settlement of all outstanding options and warrants to purchase shares of our common stock, and the number of shares reserved for issuance pursuant to our existing stock option plans were reduced proportionately. No fractional shares were issued as a result of the reverse split, and stockholders who otherwise would have been entitled to a fractional share received in lieu thereof, a cash payment based on the closing sale price of our common stock as reported on The NASDAQ Capital Market on March 4, 2013. The reverse split did not alter the par value of our common stock or modify any voting rights or other terms of the common stock.
Our Strategy
Our mission is to become a leading biopharmaceutical company developing cardiovascular therapies with an emphasis on genetically-targeted therapies. To achieve this goal, we are pursuing the following strategies:
| • | Advance the development of Gencaro. We plan to focus our efforts on initiating and completing the GENETIC-AF Trial. |
| • | Raise substantial additional funding or complete a strategic transaction. To support the continued clinical development of Gencaro, including the planned GENETIC-AF clinical trial, we are seeking to raise substantial additional funding, through the sale of public or private equity securities or the completion of a strategic transaction. |
| • | Build a cardiovascular pipeline. Our management and employees, including our chief executive officer, have extensive experience in cardiovascular research, molecular genetics and clinical development of cardiovascular therapies. We are seeking to leverage this expertise to identify, acquire and develop other cardiovascular products or candidates, with an emphasis on pharmacogenetic applications. |
| • | Leverage our existing assets.We are pursuing opportunities to leverage certain of our development-stage product candidates. We are also pursuing licensing transactions for certain of our other compounds which are in early stages of development for various indications. For example, in 2011, we raised $2 million through the assignment of certain patent rights for one of these compounds to a large pharmaceutical company. |
Atrial Fibrillation Market Background and Opportunity
AF is a disorder in which the normally regular and coordinated contraction pattern of the heart’s two small upper chambers becomes irregular and uncoordinated. The irregular contraction pattern associated with AF causes blood to pool in the atria, predisposing to the formation of clots. These clots may travel from the heart and become lodged in the arteries leading to the brain and other organs, thereby blocking necessary blood flow and potentially resulting in stroke. In addition, we also believe that the development of AF in a HFREF patient can be associated with increased risk of death and other heart failure related adverse outcomes. AF is considered an epidemic cardiovascular disease with an estimated prevalence of at least 2.7 million Americans in 2010. Approximately 300,000-400,000 treated AF patients currently receive a form of beta-blocker as pharmaceutical intervention.
The goals of current medical therapy for AF are to maintain sinus rhythm or permanent AF control of the Company. ventricular rate response, avoid the risk of complications including stroke and to minimize patient symptoms. Current treatments include pharmaceutical intervention and device intervention. There are several antiarrhythmic drugs approved by the FDA for the treatment and/or prevention of recurrent AF. However, these drugs have safety and/or administration concerns and all but one have contraindications or label warnings regarding their prescription in patients with HFREF.
Current device interventions for the treatment of AF include:
Electrical cardioversion which is used to restore normal heart rhythm with administration of a direct current shock;
Radiofrequency ablation which can be effective in patients for whom medications are ineffective; and,
Atrial pacemakers which are implanted under the skin and then intravenously into the heart to regulate heart rhythm.
Gencaro
Gencaro (bucindolol hydrochloride) is a pharmacologically unique beta-blocker and mild vasodilator being developed for the treatment of AF. Gencaro is considered part of the beta-blocker class of compounds because of its property of blocking both beta-1 and beta-2, receptors in the heart. The blocking of these receptors prevents binding with other molecules, primarily the neurotransmitter norepinephrine (NE), which activate these receptors. We believe that Gencaro is well-tolerated in cardiovascular patients because of its mild vasodilator effects. Originally developed by Bristol-Myers Squibb, or BMS, the active pharmaceutical ingredient, or API, in Gencaro, bucindolol hydrochloride, has been tested clinically in approximately 4,500 patients. Gencaro was the subject of a Phase 3 HF mortality trial of over 2,700 patients, mostly in the U.S., known as the “BEST” trial. The BEST trial included a DNA bank of over 1,000 patients, which was used to evaluate the effect of genetic variation on patients’ response to Gencaro.
At the time of the BEST trial, our founding scientists, Dr. Michael Bristow and Dr. Stephen Liggett, hypothesized that the unique pharmacologic properties of Gencaro would interact with common genetic variations of beta-1, beta-2 and alpha-2C, adrenergic receptors, which are important receptors that regulate cardiac or adrenergic (sympathetic) nerve function. They tested this hypothesis prospectively in a substudy conducted using data from the BEST DNA bank. On the basis of this study, Drs. Bristow and Liggett have determined that patients with certain variations in these receptors had substantially improved outcomes on primary and certain secondary clinical endpoints in the trial, such as mortality, HF progression, hospitalization and prevention of arrhythmias, relative to the counterpart genotype groups and the general patient population of the BEST trial. We believe that these genetically determined receptor variations, which are detectable using standard DNA testing technology, can serve as diagnostic markers for predicting enhanced therapeutic response to Gencaro, and potentially avoiding adverse events, in individual patients. We have patented our methods for treating AF and HF patients with Gencaro in the U.S. and Europe based on genetic testing.
Pharmacology and Pharmacogenetics
Gencaro’s pharmacology appears to be different from other compounds in the beta-blocker class in two fundamental respects. First, the National Heart, Lung and Blood Institute of the National Institutes of Health (NHLBI) and the Cooperative Studies Program of the Department of Veterans Affairs sponsored studies conducted by Drs. Bristow and Liggett indicated that in human myocardial preparations, Gencaro leads to inactivation of constitutively active (i.e. functional in the absence of bound agonist) beta-1 receptors through a mechanism separate from beta-blockade, in addition to inhibiting the binding activity of the beta-1 receptor like a typical beta-blocker. Second, other studies, including BEST, indicated that Gencaro lowers the systemic levels of the neurotransmitter NE, released by cardiac and other adrenergic nerves. These two properties interact with common genetic variations in two cardiac receptors, the beta-1 and alpha-2C receptors, to produce the unique pharmacogenetic profile of Gencaro. We believe that these two properties, and their pharmacogenetic implications, are unique to Gencaro.
Gencaro has an important interaction with the beta-1 receptor found on muscle cells, or cardiac myocytes, of the heart. The general role of the beta-1 receptor and its downstream signaling cascades is to regulate the strength and rate of the heart’s contractions. NE serves as an activator of the beta-1 receptor, causing the receptor to initiate signaling to the cardiac myocyte. Although this signaling may be beneficial to the failing heart in the short term, in chronic HFREF patients the beta-1 receptor also initiates harmful, or cardiomyopathic, signaling which, over time, exacerbates the heart’s structural and functional decline. Beta-blockers counteract this destructive process by reducing beta-1 receptor signaling. They do this by binding to the receptor and blocking NE molecules from binding and activating the signaling activity and, in Gencaro’s case, by also inactivating certain beta-1 receptors that are constitutively active (active in the absence of NE stimulation) as well as by lowering NE levels.
There are two common genetic variations of the beta-1 receptor, each of which we estimate is present in approximately 50% of the U.S. population. One of these variations is known as the beta-1 389 arginine receptor variant, exclusively present in the beta-1 389 arginine homozygous or, genotype. Laboratory studies indicate that this variation results in a higher functioning beta-1 receptor, which has a greater ability to mediate the stimulatory effects of NE than the counterpart “beta-1 389 glycine or “beta-1 389 Gly” version of the beta-1 receptor. In addition, the beta-1 389 arginine variant is also more likely to be constitutively active and signal the cardiac myocyte to contract in the absence of NE. The beta-1 389 arginine receptor also has much higher affinity for NE as compared to the beta-1 389 glycine version, present in patients with either one or two copies of the beta-1 389 glycine gene allele (“Gly carriers”). Patients with the beta-1 389 glycine version, also present in approximately 50% of the U.S. population who are Gly carriers, results in a beta-1 receptor that is much lower functioning and, according to laboratory studies, has less probability of being in a constitutively active state and has lower NE affinity compared to the beta-1 389 arginine receptor.
We believe Gencaro has a powerful interaction with the higher-function beta-1 389 arginine variation of the beta-1 receptor. Laboratory studies show that constitutively active receptors will continue to signal in the presence of standard beta-blockade with neutral antagonists. Laboratory studies in isolated human heart preparations also show that Gencaro has the novel ability of being able to reduce the signaling of constitutively active receptors. We believe that this property contributes to the enhanced lowering of heart failure and arrhythmia event rates in HFREF patients who are beta-1 389 arginine homozygous genotype relative to individuals who are beta-1 389 Gly carriers or to the general population. In addition, we believe the unique NE lowering properties of Gencaro have a selectively beneficial effect in patients who have only beta-1 389 arginine receptors, because of the high affinity of these receptors for NE.
The efficacy of Gencaro also appears to be influenced by the alpha-2C receptor, located on the terminus of cardiac adrenergic nerves, at the neuromuscular junction with the cardiac myocyte. The role of this receptor is to modulate the release of NE at this junction, which in turn affects the activation of beta-1 receptors and the heart’s activity. There are two important genetic variations of this receptor that appear to affect the effects of Gencaro; the “alpha-2C -wild type”, which is the normal functioning version of the receptor (approximately 87-90% of the U.S. general population), and the “deletion variant”, a version of the receptor that functions poorly (present in at least one copy in approximately 10—13% of the U.S. general population). The DNA substudy of patients from the BEST trial, conducted by Drs. Bristow and Liggett, indicated that these two variations of the alpha-2C receptor appear to affect Gencaro’s heart failure and arrhythmia responses in HFREF patients only if the 389 Gly variant of the beta-1 receptor is also present; in patients with the beta-1 389 Gly variant, the wild type version of the alpha-2C receptor enhances clinical response, whereas the alpha-2C deletion variant reduces efficacy. When only the arginine version of the beta-1 receptor is present (beta-1 389 arginine homozygous genotype), the efficacy of Gencaro does not appear to depend on which version of the alpha-2C receptor is present.
The DNA substudy from the BEST HFREF trial indicated that the combinations of these receptor variations in individual patients appear to influence the response to Gencaro with respect to significant clinical endpoints. However, the beta-1 389 Arg/Arg variant appeared to have the most powerful beneficial effect on Gencaro heart failure and arrhythmia responses. While we believe that the beta-1 389 Gly carrier patients who also are alpha-2C wild type homozygotes may respond favorably to Gencaro, we believe that patients who possess only the beta-1 389 arginine variant (beta-1 389 arginine homozygous genotype) exhibit enhanced clinical responses to Gencaro, and should be the primary targeted population. The beta-1 389 arginine homozygous genotype constitutes an estimated 47-50% of the U.S. population.
The BEST trial
The NHLBI and Veterans Affairs Cooperative Studies funded BEST trial began in 1995. It was a double-blind, placebo-controlled, multi-center study of bucindolol’s effect on reduction of mortality and morbidity in an advanced chronic HFREF population. The primary endpoint of the BEST trial was all cause mortality (ACM) and the pre-specified main secondary endpoint was progression of heart failure (HF), defined as death from HF, cardiac transplant, HF hospitalization, or emergency room visit for the treatment of worsening HF not requiring hospitalization. The trial was planned to run four and one-half years, and enroll 2,800 patients. The trial enrolled a total of 2,708 chronic HF patients, who were mostly from the United States. Under the umbrella of the BEST trial substudies program, a DNA bank and substudy was created, and 1,040 of the BEST patients participated by providing blood for DNA analysis. The DNA bank provided data for the DNA substudy of BEST patients conducted by Drs. Bristow and Liggett.
In 1999, the BEST trial was terminated prior to the completion of follow-up, in response to a recommendation of the BEST trial Data and Safety Monitoring Board. The primary reason for termination was loss of investigator equipoise; in other words, the fact that the BEST investigators were no longer uncertain regarding the comparative therapeutic merits of giving a placebo versus giving a beta-blocker to a HFREF patient. Positive mortality results from two other HF trials involving other beta-blockers had been reported, and a substantial number of BEST trial investigators concluded that it was unethical to continue to give placebo to BEST trial participants. As a result, some investigators began to prescribe these other beta-blockers to patients in the trial, which threatened to destroy the trial’s integrity; therefore the trial was terminated early.
Clinical Results and the DNA Substudy
Following termination, the preliminary results of the study were analyzed and published. The preliminary determination and general perception were that the BEST trial had failed on the basis of not meeting its primary endpoint of ACM. The published values were a 10% risk reduction in mortality with a p-value of 0.10. Subsequently, we reanalyzed the results from BEST, in accordance with the FDA approved, pre-specified statistical analysis plans, which had not been performed by the sponsors of BEST when the trial was terminated. Our reanalysis appeared to show a 13% risk reduction on the primary endpoint of all-cause mortality in the BEST trial with a p-value of 0.053.
In 2003 and 2004, the results of the DNA substudy conducted by Drs. Bristow and Liggett began to be analyzed and released. The DNA substudy results indicated a significant enhancement of response on the major heart failure clinical endpoints from the BEST trial in patients with the beta-1 389 arginine homozygous genotype. The risk reduction on HF clinical efficacy endpoints such as mortality and hospitalization ranged from 34% to 48% in this genotype. In addition, in arrhythmia endpoints of atrial fibrillation or ventricular fibrillation/ventricular tachycardia, tracked by adverse events and surveillance ECGs, the risk reduction by bucindolol in the beta-1 389 arginine homozygous genotype appeared to be even greater, with hazard ratios of 74% for both endpoints.
Shown below are certain of the primary and secondary endpoint data from the BEST HF DNA substudy results, by genotype:
BEST Trial Clinical Responses by Genotype Groups
Endpoint | {beta-1 389 Arg/ Arg + any alpha-2C} “Very Favorable” Patient Type (47%) | {beta-1 389 Gly carrier+ alpha-2C Wt/Wt} “Favorable” Patient Type (40%) | {beta-1 389 Gly carrier + alpha-2C Del carrier} “Unfavorable” Patient Type (13%) | |||
All Cause Mortality (ACM), TTE | i38%* | i25% | h 4% | |||
Cardiovascular Mortality (CVM), TTE | i48%* | i40%* | h11% | |||
ACM + transplantation | i43%* | i24% | h 4% | |||
HF (HF) Progression | i34%** | i20% | i 1% | |||
HF Hosp days/patient | i48%** | i17% | h19% | |||
AF prevention (from AE and ECG db) | i74%** | i 6% | h33% | |||
VT/VF prevention (from AE db) | i74%** | i49%* | i24% |
| 1 | Covariate adjusted, transplant censored analysis with 1 – hazard ratio estimates presented |
| * | p<0.05; **p£ 0.007; TTE: Time To Event; CRF: Case Report Form; Adj.: Adjudicated |
Analysis of BEST trial for AF
Recently, the BEST study data were further analyzed focusing on AF prevention, rate control in patients with persistent AF, and on clinical outcomes of patients with AF. Although there was no pre-determined AF endpoint, including reduction in risk of AF, in the BEST trial, according to our analysis of adverse events and surveillance ECG’s during the trial, 7.9% of patients developed new onset AF, with a greater incidence observed in the placebo group (9.7%) compared to the bucindolol group (6.2%). This corresponded to a 36% reduction in the incidence of new onset AF (based on crude event rates) for patients receiving bucindolol (p = 0.002). In a time to event analysis, the risk of new onset AF was reduced by 41% (p = 0.0004) with bucindolol treatment. Patients in the BEST study with the beta-1 389 Arg/Arg genotype who received Gencaro had a 74% reduction in the risk of developing new onset AF (p = 0.0003).
Further published analyses of the data from BEST suggest that Gencaro may also have potential efficacy for other clinical endpoints and outcomes related to AF. A published analysis of the BEST data revealed that of the 303 patients in the BEST trial with established AF, 67% of those who received Gencaro achieved ventricular response rate control, defined as a resting heart rate of less than or equal to 80 beats per minute without symptomatic bradycardia (p < 0.005). In AF patients who achieved ventricular response rate control, Gencaro produced a 39% reduction (p = 0.025) in cardiovascular mortality/cardiovascular hospitalizations. In addition, Gencaro also improved cardiovascular clinical endpoints for those AF patients possessing the beta-1 389 arginine genotype that ARCA believes is most favorable for Gencaro response. In a substudy of 1,040 patients in BEST in which patient genotypes were analyzed, Gencaro was associated with a 72% decrease (p = 0.039) in cardiovascular mortality/cardiovascular hospitalizations in those 52 AF patients in the substudy with the beta-1 389 arginine homozygous genotype.
Analysis of the BEST Study data also shows that Gencaro has potential efficacy against the serious arrhythmias of VT/VF, which also appears to be genetically regulated. A published report demonstrated that patients in the BEST Trial who received Gencaro experienced a 58% reduction in the incidence of VT/VF (p = 0.00006), adjusted for the competing risk of mortality. In addition, the authors of this report determined that Gencaro reduced the incidence of VT/VF by 74% (p = 0.00005) in patients with the beta-1 389 arginine homozygous genotype.
As with the overall study cohort, most patients (89%) in the 1,040 patient DNA substudy were free of AF (91% sinus rhythm, 9% other non-AF rhythms) at baseline. The proportion of patients free of AF at baseline was also similar in the two treatment groups for the overall DNA substudy cohort, as well as in the ß 1 389 genotype subgroups. In the BEST DNA substudy, the proportion of patients who developed new onset AF was similar compared to the overall study cohort for both the placebo group (11% and 10%, respectively) and the Gencaro group in the DNA substudy population compared to the overall study cohort (7% and 6%, respectively). Also, there was a similar reduction in new onset AF observed in the bucindolol group compared to placebo (43% and 41%, respectively, by time to event analysis). Therefore, the overall results from the genetic substudy population are consistent with the results from the overall study population.
In patients with all genotypes, the AF risk reduction of 41-43% by Gencaro in BEST is based on an analysis of adverse events and surveillance ECG’s which was similar to AF risk reductions observed in a meta analysis of data regarding seven placebo-controlled beta-blocker trials in HFREF patients. In the meta-analysis, beta-blockers appeared to reduce the incidence of new onset AF in all but one trial, with an overall relative risk reduction of 27%. Despite what we believe to be potential evidence for the prevention of AF in HFREF trials, no beta-blocker has FDA approval for use in this indication. However, the evidence of modest efficacy by beta-blockers approved for other indications will require that any Phase 3 trials with Gencaro will have an active beta-blocker comparator instead of a comparison against placebo. The Phase 2b/3 trial GENETIC-AF trial will only enroll patients with the beta-1 389 arginine homozygous genotype. In the BEST trial, the post hoc analysis of patients with the beta-1 389 arginine homozygous genotype who received Gencaro had a 74% reduction in the risk of developing AF. In another trial, the active comparator we plan to use in GENETIC-AF, metoprolol CR/XL, reduced the risk of developing AF by 48% in all genotypes. Because these are not the same trials, the results should not be relied on as direct comparisons. However, we believe that these two data points indicate that Gencaro may have an advantage in preventing AF when compared to metoprolol in GENETIC-AF, in part due to our plan to only enroll beta-1 389 arginine homozygous genotype patients who appear to respond best to Gencaro.
Clinical and Regulatory Strategy
The regulatory strategy for Gencaro is to conduct our adaptive design Phase 2b/3 clinical trial, GENETIC-AF, to obtain an AF approval in a genotype specific HFREF population. We will seek to enroll certain patients with the beta-1 389 arginine homozygous genotype in our AF clinical trial because our analysis of the BEST DNA substudy indicated this group had a 74% reduction in risk for new AF events.
We have created an adaptive design for GENETIC-AF, under which we plan to initiate a Phase 2b study in approximately 200 HFREF patients. Depending on the results of the Phase 2b portion, the trial could then be expanded to a Phase 3 study by enrolling an estimated additional 420 patients. The secondary endpoint of the proposed Phase 2b portion of the trial will be AF burden, defined as a patient’s actual percentage of time in AF, regardless of symptoms. Under our proposed design, all 200 patients in the Phase 2b portion of the trial will have AF burden measured by continuous monitoring, either by previously implanted cardiac resynchronization or defibrillation devices, or newly or previously inserted implantable loop recorders. At the end of enrollment of the first 200 patients, the primary endpoint of recurrent symptomatic AF or all-cause mortality, and the secondary endpoint of AF burden will be evaluated by the trial’s Data and Safety Monitoring Board for evidence of an efficacy signal. If a sufficient efficacy signal is detected and acceptable safety is observed, the trial would then proceed to the Phase 3 portion and full enrollment.
We have previously received guidance from the FDA regarding a Phase 3 clinical study comparing Gencaro to metoprolol for the prevention of AF in approximately 620 patients, with a design similar to GENETIC-AF, but without an adaptive feature. Based on this FDA guidance, we believe that a successful Phase 3 clinical study similar to GENETIC-AF, with a p-value of less than 0.01, could be sufficient evidence of efficacy upon which to base a New Drug Application (“NDA”) for the approval of Gencaro for an AF indication in HFREF patients. We plan to obtain further guidance from the FDA on the new trial design, which may affect the trial’s design.
The Gencaro Test
If approved, we believe that Gencaro will be the first cardiovascular drug to be integrated with a companion diagnostic to predict enhanced efficacy. We believe the drug label being sought for Gencaro would identify the patient receptor genotypes that can expect enhanced efficacy, as well as those with a likelihood of a standard beta-blocker response and the small unfavorable subgroup with a low probability of benefit. The label being sought would recommend receptor genotype testing prior to initiation of therapy. Accordingly, we collaborated with LabCorp to develop a receptor genotype diagnostic, the Gencaro Test, and believe the test will be simple to administer and would be widely available. We currently intend to pursue a separate arrangement with LabCorp or another third party to provide the diagnostic services of the Gencaro Test needed to support our planned AF trial.
Through our existing agreement with LabCorp we have collaborated to develop and commercialize the Gencaro Test for the treatment of patients with HF. Under the terms of that collaboration, we licensed to LabCorp certain rights to commercialize a receptor genotype diagnostic for the beta-1 and alpha-2C polymorphisms. In return, LabCorp agreed to develop the Gencaro Test and obtain FDA clearance or approval of the Gencaro Test for HF.
Licensing and Royalty Obligations
We have licensed worldwide rights to Gencaro, including all preclinical and clinical data from Cardiovascular Pharmacology and Engineering Consultants, LLC, or CPEC, who has licensed rights in Gencaro from BMS. In addition, we have sublicensed CPEC’s rights from BMS. CPEC is a licensing entity which holds the rights of the biotechnology companies that were the commercial sponsors of the BEST trial. If the FDA grants marketing approval for Gencaro, the license agreements require that we make a milestone payment of $8.0 million, which is due within six months after FDA approval. Under the license agreements, we are required to make milestone payments of up to $5.0 million in the aggregate upon regulatory marketing approval in Europe and Japan. Our royalty obligation under the licenses ranges from 12.5% to 25% of revenue from the related product based on achievement of specified product sales levels including a 5% royalty that CPEC is obligated to pay under its original license agreement for Gencaro. We have the right to buy down the royalties to a range of 12.5% to 17% by making a payment within six months of regulatory approval. We also have licensed worldwide rights to intellectual property covering the pharmacogenetic response of Gencaro based on the cardiac receptor polymorphisms, which is owned by the University of Colorado. We have no material future financial obligations under this license. We also have an option to license exclusive, worldwide rights to develop and commercialize diagnostics for these receptor polymorphisms, for the purpose of prescribing Gencaro, from the licensee of these rights, the University of Cincinnati.
Development Pipeline
Our development activities are substantially focused on our lead product candidate, Gencaro, for the treatment of AF. We also believe, based upon data from the BEST trial, that Gencaro may have additional potential for the treatment of AF rate control, VT/VF and prevention of heart failure endpoints in HFREF patients. We do not expect to pursue development of Gencaro for disease indications beyond AF without entering into a strategic partnership or collaboration. We believe Gencaro has potential to address these additional indications, and that the clinical response of patients with these diseases may be genetically influenced, based on the same genetic markers we have identified for our proposed treatment of AF with Gencaro.
We also have exclusive pharmacogenetic and other patent rights to drug candidates that have potential indications in cardiovascular disease, oncology and other therapeutic areas, in both early and later stages of development. We may seek partners to assist us in the development of these candidates or who may license them.
Competition
Current treatments include pharmaceutical intervention and device intervention. There are several antiarrhythmic drugs approved by the FDA for the treatment and/or prevention of recurrent AF. However, these drugs have safety and/or administration concerns and all but one have contraindications or label warnings regarding their prescription in patients with heart failure.
Current device interventions for the treatment of AF include:
Electrical cardioversion which is used to restore normal heart rhythm with administration of a direct current shock;
Radiofrequency ablation which can be effective in patients for whom medications are ineffective; and,
Atrial pacemakers which are implanted under the skin and then intravenously into the heart to regulate heart rhythm.
Considering that most of the approved drugs and device interventions for the treatment or prevention AF have notable risks or adverse side effects, we believe there is an unmet medical need for new AF treatments that have fewer side effects than currently available therapies and are more effective, particularly in patients with HF where the approved drugs are contra-indicated or have warnings regarding their prescribing information. We believe that Gencaro’s prevention of AF in HF patients would provide this patient population a safer treatment option than other treatments currently approved by the FDA.
The pharmaceutical industry is highly competitive. We face significant competition from pharmaceutical companies and biotechnology companies that are researching and selling products designed to treat cardiovascular conditions. Most of these companies have significantly greater financial, product development, manufacturing, and commercial resources than we have.
In addition, our proposed prescribing information for Gencaro includes a recommendation for genetic testing, which will add additional cost and procedures to the process of prescribing Gencaro, and which could make it more difficult for us to compete against existing therapies.
Manufacturing and Product Supply
Gencaro is a small molecule drug with an established manufacturing history. Multiple manufacturers of both the API and drug product have successfully produced Gencaro for use in clinical trials over the course of its clinical development. We outsource all manufacturing and analytical testing of the Gencaro API and drug product. We have selected third party contract manufacturing organizations on the basis of their technical and regulatory expertise. Our approach with our contract manufacturing partners has been to replicate the manufacturing processes that were used to support the prior pivotal clinical trial with Gencaro, and to minimize any changes from these baseline processes, thereby reducing technical and regulatory risk. We contracted with Groupe Novasep to complete the drug substance registration batches required for the Gencaro NDA. These batches were successful, and the resulting drug substance was used to supply the drug product registration campaign. Remaining inventory was placed in current Good Manufacturing Practice, or cGMP, storage to provide a backup supply for the planned GENETIC-AF trial, and for use as an initial source of drug substance to support eventual product launch, if approved.
For drug product production, we have contracted with Patheon, Inc. to manufacture the Gencaro tablets. Gencaro is produced in a tablet form, utilizing standard solid oral dosage processing techniques. Six separate dosage strengths are manufactured, with the maximum recommended dose of 50mg twice daily for patient weighing 75kg or less and 100mg twice daily for patients weighing more than 75kg. Registration batches were successfully completed by Patheon, Inc. and tablets from these runs have been placed in cGMP storage to supply the planned GENETIC-AF trial.
If sufficient funding is obtained, our manufacturing focus for 2013 will be to prepare the blinded clinical trial supplies for Gencaro and the comparator compound, and to establish the appropriate packaging and clinical distribution channels necessary for the successful execution of the planned GENETIC-AF trial.
Research and Development Expenses
Our research and development expenses totaled $1.1 million for the year ended December 31, 2012 as compared to $2.3 million for 2011, a decrease of approximately $1.2 million. Our future R&D expenses are highly contingent upon our ability to raise substantial additional funding or complete a strategic transaction. Should we receive funds from one or a combination of these sources, R&D expense in 2013 could be substantially higher than 2012 as we initiate our planned GENETIC-AF clinical trial. Until substantial additional funding is obtained, R&D expenses in 2013 are expected to be comparable to 2012 levels.
Government Regulation
Governmental authorities in the U.S. at the federal, state, and local levels and foreign countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, marketing, distribution, sampling, and import and export of pharmaceutical and medical device products. In the U.S., the Food and Drug Administration (FDA) regulates these activities at the federal level pursuant to the Federal Food Drug and Cosmetic Act (FDCA) and the regulations promulgated thereunder.
Premarket Approval of Drugs
FDA approval is required before any new drug, dosage form, indication, or strength can be marketed in the U.S. We anticipate that all of our products will require regulatory approval by governmental agencies prior to commercialization. The process of obtaining approval and the subsequent process of maintaining compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. In addition, these statutes, rules, regulations and policies may change and our products may be subject to new legislation or regulations. There are numerous FDA and other federal and state sanctions for non-compliance.
The steps required before new human therapeutic drug products are marketed in the U.S. and foreign countries include rigorous preclinical and clinical testing and other approval requirements by regulatory agencies, such as the FDA and comparable agencies in foreign countries. There is no guarantee that products will be approved in a specific timeframe or at all.
Preclinical Phase. Preclinical studies are generally conducted in the laboratory to identify potential drug candidates and to evaluate their potential efficacy and safety. These studies include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate short and long-term toxicity in animals. Preclinical studies are governed by numerous regulations, including but not limited to FDA’s Good Laboratory Practices.
Clinical Phase. Before human clinical trials can commence, an Investigational New Drug, or IND, application, submitted to FDA must become effective. For an IND to become effective, the applicant must submit, among other things, information on design of the proposed investigation, reports necessary to assess the safety of the drug for use in clinical investigation, and information on the chemistry and manufacturing of the drug, controls available for the drug, and primary data tabulations from animal or human studies. The clinical phase of development involves the performance of human studies, including adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication. Typically, clinical evaluation involves three sequential phases, which may overlap. During Phase 1, clinical trials are conducted with a relatively small number of subjects or patients to determine the early safety profile of a product candidate, as well as dose tolerance, absorption, and the pattern of drug distribution and drug metabolism. Phase 2 trials are conducted with groups of patients afflicted by a specific target disease to determine preliminary efficacy, optimal dosages and dosage tolerance and to identify possible adverse effects and safety risks. In Phase 3, larger-scale, multi- center trials are conducted with patients afflicted with a specific target disease to provide data for the statistical proof of efficacy and safety as required by regulatory agencies. The conduct of clinical trials is subject to extensive regulation. FDA may delay or suspend clinical trials through clinical holds.
NDA Submission. In the U.S., the results of preclinical and clinical testing along with chemistry, manufacturing and controls information, are submitted to the FDA in the form of an NDA. Under the Prescription Drug User Fee Act, or PDUFA, after submission of an NDA and payment, or waiver, of the required fee, the FDA’s goal is to review most standard NDAs within 10 months from sponsor submission of the application by which time, the FDA must issue a “complete response,” or approve the NDA. While FDA’s goal is to issue a complete response within 10 months, the process may take longer than 10 months, particularly if multiple review cycles are required.
In responding to an NDA, the FDA may grant marketing approval or deny the application if the FDA determines that the application does not satisfy the statutory and regulatory approval criteria. A denial may include a request for additional information, including additional clinical data and/or an additional Phase 3 clinical trial. Data from clinical trials are not always conclusive and FDA may interpret data differently than we interpret data. Under the Food and Drug Modernization Act of 1997, the FDA is authorized to approve a drug based on a single adequate and well-controlled study if such study and other confirmatory data are sufficient to establish the drug’s effectiveness. However, it has long been the FDA’s general position that the standard of proof of a drug’s effectiveness generally requires at least two well-controlled and adequate Phase 3 clinical studies demonstrating statistically significant results as compared to a placebo or active control (with p-values of less than 0.05) with respect to the primary endpoint or endpoints of the trial.
In addition, in accordance with current FDA law and regulations, the FDA may refer a drug to an advisory committee for review prior to approval. Most new compounds are referred to an FDA advisory committee, which could add additional time to the review process. There is no guarantee that the advisory committee will recommend approval of a drug candidate. In some cases, FDA may require completion, within a specified time period, of additional clinical studies after approval, referred to as Phase 4 clinical studies, to monitor the effect of a new product and may prevent or limit future marketing of the product based on the results of these post-marketing programs. Furthermore, prior to granting approval, the FDA generally conducts an inspection of the facilities, including outsourced facilities that will be involved in the manufacture, production, packaging, testing and control of the drug substance and finished drug product for compliance with current Good Manufacturing Practice, or cGMP, requirements.
If the FDA approves the NDA, the sponsor is authorized to begin commercialization of the drug in accordance with the approval. Even if the FDA approves the NDA, the FDA may decide later to suspend or withdraw product approval if compliance with regulatory standards is not maintained or if safety problems are recognized after the product reaches the market. In addition, the FDA requires surveillance programs to monitor approved products that have been commercialized, and the agency has the power to require additional clinical studies, to require changes in labeling or to prevent further marketing of a product based on the results of these post-marketing programs. The FDA also has authority to request implementation of a risk evaluation and mitigation strategy, or REMS, that could restrict distribution of Gencaro or require us to provide additional risk information to prescribers. Whether or not FDA approval has been obtained, approval of a product candidate by comparable foreign regulatory authorities is necessary prior to the commencement of marketing of a product candidate in those countries. The approval procedures vary among countries and can involve additional testing. The time required to obtain approval may differ from that required for FDA approval.
Post-approval Compliance. If regulatory approval for a drug or medical device is obtained, the product and the facilities manufacturing the product are subject to periodic inspection and continued regulation by regulatory authorities, including compliance with cGMP, as well as labeling, advertising, promotion, recordkeeping, and reporting requirements, including the reporting of adverse events. In addition, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for labeling, promotion to health care professionals, direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Companies are responsible for compliance with such requirements and would be responsible to ensure that all contract manufacturing organizations who perform work for them also comply with such requirements. Similarly, if a drug manufacturer hires contract sales representatives or consultants to promote its products, such organizations or individuals must comply with all of the same requirements applicable to the drug manufacturer. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.
Drug Price Competition and Patent Term Restoration Act of 1984. Under the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, Congress created an abbreviated FDA review process for generic versions of pioneer (brand name) drug products. The Hatch-Waxman Act also provides for patent term restoration and the award, in certain circumstances, of non-patent marketing exclusivities.
Generic Drug Approval. The Hatch-Waxman Act established an abbreviated FDA review process for drugs that are shown to be equivalent to approved pioneer drugs. Approval for a generic drug is obtained by filing an abbreviated NDA, or ANDA. Generic drug applications are “abbreviated” because they generally do not include clinical data to demonstrate safety and effectiveness. Instead, an ANDA applicant must establish that its product is bioequivalent to an approved drug and that it is the same as the approved drug with respect to active ingredient(s), route of administration, dosage form, strength and recommended conditions of use (labeling). The FDA will approve the generic as suitable for an ANDA if it finds that the generic does not raise questions of safety and effectiveness as compared to the pioneer drug. A drug is not eligible for ANDA approval if the FDA determines that it is not equivalent to the pioneer drug or if it is intended for a different use. Any applicant who files an ANDA seeking approval of a generic version of an approved drug listed in FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book, before expiration of the patent(s) listed in the Orange Book for that approved drug, must certify to the FDA for each patent that (i) no patent information on the drug has been submitted to the FDA; (ii) that such patent has expired; (iii) the date on which such patent expires; or (iv) that such patent is invalid, unenforceable or will not be infringed by the manufacture, use or sale of the generic drug. If the ANDA applicant makes a certification pursuant to (iv) above, or a Paragraph IV certification, and the NDA holder files an infringement suit against the ANDA applicant within 45 days of receiving the Paragraph IV notification, the NDA owner is entitled to an automatic 30-month stay of FDA’s ability to approve the ANDA. This 30-month stay will end early upon any decision by a court that the patent is invalid, unenforceable or not infringed by the generic drug.
Patent Term Restoration. The Hatch-Waxman Act provides for the restoration of a portion of the patent term lost during product development and FDA review of an application. However, the maximum period of restoration cannot exceed five years, or restore the total remaining term of the patent to greater than 14 years from the date of FDA approval of the product.
Patent Term Extension. While the term of a U.S. patent is 20 years from the earliest priority date of a patent application (excluding a provisional patent application) , a U.S. patent that covers subject matter requiring regulatory approval to market is eligible for an extension of that patent term. Patent Term Extension, or PTE, extends the term of an issued patent for generally 1) the length of the FDA approval process and 2) half of the time spent in clinical trials. However, there are certain limitations to PTE, including the limitation that the term cannot be extended more than 14 years after approval has been obtained.
Under 35 U.S.C. § 156(a), a patent covering a method of using a product is eligible for PTE if the following conditions are met:
| (1) | the patent has not yet expired; |
| (2) | the patent was not previously extended; |
| (3) | the patent owner submits an application for PTE that includes all necessary supporting information within 60 days of FDA approval; |
| (4) | the product was subject to regulatory review before its commercial marketing or use; and |
| (5) | the drug application is for the first permitted commercial marketing of the product. |
We have obtained three U.S. patents (U.S. Patent Nos. 7,678,824; 8,080,578; 8,093,286), and have one pending U.S. patent application that generally concern methods for treating patients with Gencaro based on the presence of certain polymorphisms in the beta-1 and/or alpha-2C adrenergic receptors. We believe that, if approved by the FDA, one of the U.S. patents may be eligible for PTE, which could provide approximately 3 years or more of additional patent life based on our current clinical trial plans.
Patent Term Extension, known as a Supplementary Protection Certificate, or SPC, is a form of patent term extension that is available for pharmaceutical products approved for marketing in the European Union. We obtained a patent in Europe on methods for using Gencaro that is similar to the ‘824 patent (EP 1802775); this patent is in force in certain countries in Europe, including the United Kingdom, France, Germany, Italy and Spain. We believe that this patent may be eligible for an SPC, if Gencaro is approved for marketing in any European country in which the patent is in force, which could provide up to five years of additional patent life.
Non-Patent Marketing Exclusivities. Separate and apart from patent protection, the Hatch-Waxman Act entitles approved drugs to various periods of non-patent statutory protection, known as marketing exclusivity. The Hatch-Waxman Act provides five years of “new chemical entity” marketing exclusivity to the first applicant to gain approval of an NDA for a product that contains an active moiety not found in any other approved product. This exclusivity means that another manufacturer cannot submit an ANDA or 505(b)(2) NDA until the marketing exclusivity period ends. This exclusivity protects the entire new chemical entity franchise, including all products containing the active ingredient for any use and in any strength or dosage form, but will not prevent the submission or approval of stand-alone NDAs where the applicants have conducted their own clinical studies to demonstrate safety and effectiveness. There is an exception, however, for a competitor that seeks to challenge a patent with a Paragraph IV certification. Four years into the five-year exclusivity period, a manufacturer who alleges that one or more of the patents listed with the NDA is invalid, unenforceable or not infringed may submit an ANDA or 505(b)(2) NDA for a generic or modified version of the product.
The Hatch-Waxman Act also provides three years of “new use” marketing exclusivity for the approval of NDAs, and supplements, where those applications contain the results of new clinical investigations (other than bioavailability studies) essential to the FDA’s approval of the applications. Such applications may be submitted for new indications, dosage forms, strengths, or new conditions of use of approved products. So long as the studies are essential to the FDA’s approval or were conducted by or for the applicant, this three-year exclusivity prohibits the final approval of ANDAs or 505(b)(2) NDAs for products with the specific changes associated with those studies. It does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for other products containing the same active ingredient, without those changes.
FDA Premarket Review of Medical Devices
Unless an exemption applies, each medical device that a company wishes to market in the U.S. requires either approval of a premarket approval PMA application or clearance of a premarket notification, commonly known as a “510(k)” from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which may require the manufacturer to submit to the FDA a 510(k) requesting permission to commercially distribute the device. Clearance of a 510(k) usually requires between three months and one year from the time of submission of the 510(k), although the process may take longer. The FDA’s 510(k) clearance procedure is less rigorous than the PMA approval procedure, but is available only to companies who can establish that their device is substantially equivalent to a legally-marketed “predicate” device that was (i) on the market prior to the enactment of the Medical Device Amendments of 1976, (ii) reclassified from Class III to Class II, or (iii) has been cleared through the 510(k) procedure. 510(k)s must typically be supported by performance data, including preclinical data, bench testing, and in some cases, clinical data. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, or for which there is no predicate, are placed in class III, requiring approval of a PMA.
PMA Pathway. Generally, a PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information and will generally conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with FDA’s Quality System Regulations (QSR). By statute, the FDA has 180 days to review the “accepted application”, although, generally, review of the application can take between one and three years, and it may take significantly longer. The PMA application process can be expensive, and there is a substantial “user fee” that must be paid to FDA in connection with the submission of a PMA application. If the FDA’s evaluation of the PMA application or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years. After the PMA is approved, if significant changes are made to a device, its manufacturing or labeling, a PMA supplement containing additional information must be filed for prior FDA approval. PMA supplements often must be approved by FDA before the modification to the device, the labeling, or the manufacturing process may be implemented.
Clinical Trials. Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance.
In Vitro Diagnostic Companion Diagnostic Devices. FDA has described IVD companion diagnostic devices as in vitro diagnostic devices that provide information that is essential for the safe and effective use of a corresponding therapeutic product. The use of an IVD companion diagnostic device with a particular therapeutic product is stipulated in the instructions for use in the labeling of both the diagnostic device and the corresponding therapeutic product, as well as in the labeling of any generic equivalents of the therapeutic product. An IVD companion diagnostic device could be used to (i) identify patients who are most likely to benefit from a particular therapeutic product; (ii) identify patients likely to be at increased risk for serious adverse reactions as a result of treatment with a particular therapeutic product; or (iii) monitor response to treatment for the purpose of adjusting treatment (e.g., schedule, dose, discontinuation) to achieve improved safety or effectiveness. Although FDA’s regulation of IVD Companion Diagnostic Devices is evolving and implemented on a case-by-case basis, FDA’s stated policy is that a therapeutic product and its corresponding IVD companion diagnostic device would be developed contemporaneously, with the clinical performance and clinical significance of the IVD companion diagnostic device established using data from the clinical development program of the corresponding therapeutic product. FDA’s policy is that an IVD companion diagnostic device should be developed and approved or cleared contemporaneously to support the therapeutic product’s safe and effective use. With respect to the Gencaro Test, there is no assurance that we will be able to develop and obtain approval or clearance contemporaneously with Gencaro. Failure to develop the Gencaro Test or obtain clearance or approval could delay approval of Gencaro, if FDA regards the Gencaro Test as an IVD companion diagnostic test that is essential to the safe and effective use of Gencaro.
Continuing Regulation. After a device is placed on the market, numerous regulatory requirements apply to the manufacturer, or holder of a PMA approval. With respect to the Gencaro Test, we intend to seek a new or amended collaborative arrangement with a diagnostic company in which we could license them certain rights to perform the diagnostic test for patients with AF. As part of such arrangement, we will seek to have the diagnostic company take responsibility for compliance with the FDA’s device approval and on-going regulatory requirements.
International Marketing Approvals. International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country and are subject to change. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ.
Other Regulatory Requirements. We are also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our work. The extent and character of governmental regulation that might result from future legislation or administrative action cannot be accurately predicted.
Intellectual Property
The future success of our business will partly depend on our ability to maintain market exclusivity in the United States and important international markets for Gencaro, and for other products or product candidates that we may acquire or develop. We will rely on statutory protection, patent protection, trade secrets, know-how, and in-licensing of technology rights to maintain protection for our products.
We believe that both patent protection and data exclusivity statutes will give Gencaro market exclusivity in the U.S. and in major international markets. If approved by the FDA or international regulatory agencies, Gencaro will qualify as a New Chemical Entity, or NCE, as it has never received regulatory approval in any jurisdiction. As an NCE, Gencaro will enjoy market exclusivity in the United States and most international markets under data exclusivity statutes. These laws provide for an exclusivity period beginning from regulatory approval, during which any generic competitor is barred from submitting an application that relies on the data that has been submitted in connection with the approval of the NCE. In the U.S., the Hatch-Waxman Act provides for an initial period of four or five years from approval of the NCE, during which a generic application attempting to rely on the data submitted for the NCE cannot be filed with the FDA. This period can be extended under certain circumstances, and we believe that the maximum period of exclusivity under these provisions is seven and one-half years from FDA approval, as discussed below.
Many international markets have data exclusivity statutes that are analogous to Hatch-Waxman and often more protective. The analogous statute in the European Medicines Evaluation Agency will, in general, provide Gencaro with a minimum of ten years of protection before such a generic application may be approved. Protection under Hatch-Waxman and other data exclusivity statutes is sometimes considered superior to patent protection, as the generic cannot be marketed during the period of exclusivity, thus eliminating the need to initiate patent infringement litigation with its accompanying risks and costs.
In addition to protection under data exclusivity statutes, we believe that Gencaro’s patent portfolio provide alternative protection of market exclusivity. We have been granted patents in the United States and Europe that claim the use of Gencaro with the genetic polymorphisms of the beta-1 and alpha-2C receptors that predict Gencaro response. We believe that this patent strategy may effectively serve to exclude generic competition because of the threat of patent litigation. Consequently, if our patent strategy is successful, we believe that the possibility of generic competition with Gencaro will be significantly reduced or eliminated until at least the expiration of these patents, which would be no earlier than 2026 in the U.S and into 2025 in Europe. In addition, we believe that if Gencaro is approved, a Gencaro patent will be eligible for patent term extension based on our current clinical trial plans which, if granted may provide market exclusivity for Gencaro into 2029 or 2030 in the U.S. and Europe. We also believe that the initial period of statutory exclusivity for Gencaro in the U.S. may be extended to seven and one-half years from approval, under a special Hatch-Waxman provision that permits an automatic 30-month extension of the exclusivity period by pursuing litigation against any company attempting to enter the market with a generic for a drug that is covered by a composition of matter or method of use patent.
We also own or have rights in a number of patents and patent applications relating to a number of pre-clinical and clinical candidate molecules, including rNAPc2. We estimate that patents for rNAPc2 covering use as a treatment for hemorrhagic fever viruses will expire no earlier than 2023.
In some cases, certain of the U.S. patents may be entitled to an extension of their term and certain European patents may be entitled to supplemental protection in one or more countries in Europe. The length of any such extension, if an extension is granted, will vary by country. We cannot predict whether any such extensions will be granted.
Employees
As of December 31, 2012, we had 11 employees, of which 6 were full-time active employees. All of these employees operate out of the Broomfield, Colorado location. None of our employees are represented by any collective bargaining unit. We believe that we maintain good relations with our employees.
Corporate Information
On January 27, 2009, we completed a business combination (the Merger) with ARCA Colorado in accordance with the terms of that Agreement and Plan of Merger and Reorganization, dated September 24, 2008, and amended on October 28, 2008 in which a wholly-owned subsidiary of Nuvelo, Inc. merged with and into ARCA Colorado, with ARCA Colorado continuing after the Merger as the surviving corporation and a wholly-owned subsidiary of Nuvelo, Inc. Immediately following the Merger, we changed our name from Nuvelo, Inc. to ARCA biopharma, Inc. Nuvelo was originally incorporated as Hyseq, Inc. in Illinois in 1992 and reincorporated in Nevada in 1993. On January 31, 2003, Nuvelo merged with Variagenics, Inc., a publicly traded Delaware corporation based in Massachusetts, and, in connection with the merger, changed its name to Nuvelo, Inc. On March 25, 2004, Nuvelo was reincorporated from Nevada to Delaware. On January 27, 2009, in connection with the Merger with ARCA Colorado described above, Nuvelo changed its name to ARCA biopharma, Inc. Our principal offices are located in Broomfield, Colorado.
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 electronically with the SEC. The public may read or copy any materials that have been filed with the SEC at the SEC’s Public Reference Rooms at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 a.m. and 3:00 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports on our website at http://www.arcabiopharma.com on the earliest practicable date following the filing with the SEC or by contacting the Investor Relations Department at our corporate office by calling (720) 940-2200. Information found on our website is not incorporated by reference into this report.
The following table shows for the fiscal years ended December 31, 2012 and December 31, 2011, compensation awarded to, paid to, or earned by the Company’s principal executive officers and its other named executive officers as of December 31, 2012, collectively, the Named Executive Officers:
SUMMARY COMPENSATION TABLE FOR FISCAL 2012 AND 2011
Name and Principal Position | Year | Salary ($) | Option Awards ($)(1) | Bonus ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||
Michael R. Bristow, President and Chief Executive Officer | 2012 | 260,009 | — | 13,000 | 10,172 | 283,181 | ||||||||||||||||||
| 2011 | 272,950 | 54,756 | — | 10,912 | 338,618 | |||||||||||||||||||
Patrick M. Wheeler, Chief Financial Officer | 2012 | 200,157 | — | — | 8,006 | 208,163 | ||||||||||||||||||
| 2011 | 221,450 | 36,504 | — | 8,853 | 266,807 | |||||||||||||||||||
Christopher D. Ozeroff, Senior Vice President and General Counsel | 2012 | 241,119 | — | — | 4,606 | 245,725 | ||||||||||||||||||
| 2011 | 266,770 | 36,504 | — | 4,509 | 307,783 | |||||||||||||||||||
| (1) | The amounts reported under “Option Awards” in the above table reflect the grant date fair value of these awards as determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation – Stock Compensation, excluding the effects of estimated forfeitures. The value of stock option awards was estimated using the Black-Scholes option-pricing model. The valuation assumptions used in the valuation of option awards may be found in Note 9 to the Company’s consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2012 and filed with the SEC on March 21, 2013. |
The following table sets forth certain information regarding the ownership of the Company’s Common Stock as of February 28, 2013 by: (i) each director; (ii) each of our named executive officers; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its Common Stock. Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o ARCA biopharma, Inc., 8001 Arista Place, Suite 430, Broomfield, CO 80021.
We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission, or the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws. The table is based upon information supplied by officers, directors and principal stockholders and Schedules 13G or 13D filed with the SEC. For purposes of this table, certain of our outstanding warrants that may be exercisable for fractional shares have been rounded down to the nearest whole number.
In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of February 28, 2013. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.
The percentages below prior to the offering are based on 3,185,562 shares of our common stock outstanding as of February 28, 2013. The percentages below after the offering are based on shares of our common stock to be outstanding immediately after the completion of this offering, which gives effect to the issuance of shares of common stock in this offering.
| Percentage of Shares Beneficially Owned | ||||||||||||
Beneficial Owner | Shares Beneficially Owned | Before the Offering | After the Offering | |||||||||
Directors and Named Executive Officers | ||||||||||||
Michael R. Bristow, M.D., Ph.D. (1) (2) | 603,071 | 17.6 | % | % | ||||||||
Patrick M. Wheeler (3) | 15,849 | * | * | |||||||||
Christopher D. Ozeroff (4) | 28,667 | * | * | |||||||||
Jean-Francois Formela, M.D. (5) | 318,530 | 9.8 | % | % | ||||||||
Linda Grais, M.D. (6) | 2,999 | * | * | |||||||||
Burton Sobel, M.D. (7) | 3,477 | * | * | |||||||||
John L. Zabriskie, Ph.D. (8) | 48,171 | 1.5 | % | % | ||||||||
All current directors and executive officers as a group (7 persons) (10) | 1,020,765 | 28.9 | % | % | ||||||||
5% Stockholders | ||||||||||||
Michael R. Bristow, M.D., Ph.D. (1) | 603,071 | 17.6 | % | % | ||||||||
Investocor Trust (2) | 243,393 | 7.4 | % | % | ||||||||
Atlas Venture Fund VII, L.P. (9) | 315,504 | 9.7 | % | % | ||||||||
| * | Represents beneficial ownership of less than 1% of our Common Stock. |
| (1) | Includes the following owned by (i) Investocor Trust: (a) 139,082 shares and (b) 104,311 shares issuable upon the exercise of warrants, which warrants are immediately exercisable. Dr. Bristow is the sole trustee of Investocor Trust; (ii) NFS as Custodian for Michael Bristow’s IRA: (a) 178,215 shares and (b) 124,750 shares issuable upon the exercise of warrants, which warrants are immediately exercisable; and (iii) options to purchase 10,034 shares that are exercisable within 60 days of February 28, 2013. |
| (2) | Includes (a) 139,082 shares and (b) 104,311 shares issuable upon the exercise of warrants, which warrants are immediately exercisable. Dr. Bristow is the sole trustee of Investocor Trust. |
| (3) | Includes options to purchase 12,511 shares that are exercisable within 60 days of February 28, 2013. |
| (4) | Includes (a) options to purchase 3,195 shares that are exercisable within 60 days of February 28, 2013, and (b) 7,934 shares issuable upon the exercise of warrants, which warrants are immediately exercisable. |
| (5) | Includes the following owned directly by Atlas Venture Fund VII, L.P. (“AV VII”): (a) 263,257 shares and (b) 52,247 shares issuable upon exercise of warrants, which warrants are immediately exercisable. Atlas Venture Associates VII, L.P. (“AVA VII LP”) is the general partner of AV VII. Atlas Venture Associates VII, Inc (“AVA VII Inc.”) is the general partner of AVA VII LP. Each AVA VII LP and AVA VII Inc., may also be deemed to beneficially own these shares. Dr. Formela, a director at AV VII Inc., and one of the Company’s directors may be deemed to beneficially own these shares. Dr. Formela disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. Each of AV VII, AVA VII LP and AVA VII Inc. disclaims beneficial ownership of the shares except to the extent of its pecuniary interest therein. Also includes options to purchase 3,026 shares that are exercisable within 60 days of February 28, 2013. These options were granted to Dr. Formela and the proceeds of any sale of the Company’s Common Stock issued to Dr. Formela upon the exercise of this option will be transferred to Atlas Venture Advisors, Inc. (“Atlas Advisors”) and therefore Dr. Formela disclaims beneficial ownership of such shares which belong to Atlas Advisors. The address for Dr. Formela is 25 First Street, Suite 303, Cambridge, MA 02141. |
| (6) | Includes options to purchase 2,999 shares that are exercisable within 60 days of February 28, 2013. |
| (7) | Includes options to purchase 3,477 shares that are exercisable within 60 days of February 28, 2013. |
| (8) | Consists of (a) options to purchase 6,282 shares that are exercisable within 60 days of February 28, 2013 granted to Dr. Zabriskie, and (b) 26,021 shares and 15,868 shares issuable upon the exercise of warrants, which warrants are immediately exercisable, owned directly by Lansing Brown Investments, LLC. Dr. Zabriskie, one of the Company’s directors, is the President of Lansing Brown Investments, LLC. Dr. Zabriskie has shared voting and dispositive powers over the shares held by Lansing Brown Investments, LLC. He disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest in them. |
| (9) | Consists of the following owned directly by Atlas Venture Fund VII, L.P., or AV VII, (a) 263,257 shares and (b) 52,247 shares issuable upon exercise of warrants, which warrants are immediately exercisable. AVA VII LP is the general partner of AVA VII. AV VII Inc. is the general partner of AVA VII LP. Each of AV VII, AVA VII LP, and AVA VII Inc. disclaims beneficial ownership of the shares except to the extent of its pecuniary interest therein. The address for Atlas Venture Fund VII, L.P. is 25 First Street, Suite 303, Cambridge, MA 02141. |
| (10) | See Notes (1) through (8) above. |
As of the date of this prospectus, our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2012, 2,660,315 shares of our common stock were outstanding and no shares of our preferred stock were outstanding.
The following summary description of our capital stock is based on the provisions of our amended and restated certificate of incorporation and amended and restated bylaws and the applicable provisions of the Delaware General Corporation Law. This information may not be complete in all respects and is qualified entirely by reference to the provisions of our amended and restated certificate of incorporation, amended and restated bylaws and the Delaware General Corporation Law. For information on how to obtain copies of our amended and restated certificate of incorporation and amended and restated bylaws, which are exhibits to the registration statement of which this prospectus is a part, see “Where You Can Find Additional Information.”
Common Stock
Voting Rights. Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors; provided, however, holders of our common stock may not, unless otherwise required by law, vote on any amendment to our amended and restated certificate of incorporation that relates solely to the terms of one or more series of preferred stock that we may issue if the holders of such preferred stock are entitled to vote on such amendment. In all such matters other than the election of directors, the affirmative vote of the majority of shares present in person, by remote communication, or represented by proxy at a meeting of the stockholders and entitled to vote generally on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, or represented by proxy at a meeting of the stockholders and entitled to vote generally on the election of directors. Our stockholders do not have cumulative voting rights in the election of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the directors to be elected at any particular time.
Dividends. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.
Liquidation. In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences. Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no redemption provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of our preferred stock that we may designate in the future.
Fully Paid and Nonassessable. All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, fully paid and nonassessable.
Warrants
As of the date of this prospectus, we had outstanding warrants to purchase an aggregate of shares of our common stock, with a weighted average exercise price of $per share.
Preferred Stock
Our board of directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with financings, possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring, discouraging or preventing a change in control of our company, may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock, and may reduce the likelihood that common stockholders will receive dividend payments and payments upon liquidation.
Registration Rights
On October 22, 2012, ARCA sold approximately $325,000 of our common stock and warrants for common stock in a private placement transaction. ARCA issued to investors 137,530 shares of common stock together with warrants to purchase 103,148 shares of common stock. The net proceeds, after deducting offering expenses, were approximately $280,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of approximately $2.36 per unit.
The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of approximately $1.80 per share, equal to 100% of the closing sales price of ARCA’s common stock on the Nasdaq Capital Market on October 22, 2012.
ARCA Director and Chief Executive Officer Dr. Michael Bristow, ARCA Director John Zabriskie, and ARCA Senior Vice President and General Counsel Chris Ozeroff were investors in the private placement. Atlas Venture, a current investor in the Company affiliated with ARCA Director Dr. Jean-Francois Formela, was also an investor in the private placement.
On December 18, 2012, ARCA sold approximately $250,000 of our common stock and warrants for common stock in a private placement transaction with its Chief Executive Officer, Dr. Michael Bristow. ARCA issued 86,186 shares of common stock together with warrants to purchase 64,640 shares of common stock. The net proceeds, after deducting offering expenses were approximately $230,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of approximately $2.90 per unit.
The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of approximately $2.34 per share, equal to 100% of the closing sales price of ARCA’s common stock on the Nasdaq Capital Market on December 18, 2012.
On January 22, 2013, ARCA sold approximately $1 million of its common stock and warrants for common stock in a private placement transaction with accredited investors and its Chief Executive Officer. ARCA issued 356,430 shares of common stock together with warrants to purchase 249,501 shares of common stock. The net proceeds, after deducting a placement agent fee and other offering expenses, were approximately $850,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.70 shares of common stock was sold at a purchase price of approximately $2.81 per unit.
The warrants were exercisable upon issuance, expire 7 years from the date of issuance, and have an exercise price of approximately $2.28 per share, equal to 100% of the closing bid price of ARCA’s common stock on the Nasdaq Capital Market on January 22, 2013.
Pursuant to the terms of the Registration Rights Agreements (the Rights Agreements) entered into as part of each of these transactions, ARCA granted to the investors certain registration rights related to the shares underlying the units sold in these private placements. ARCA filed a registration statement, in accordance with the terms of the Rights Agreements, for the resale of the shares underlying the units sold in these private placements. That registration statement was declared effective by the Securities and Exchange Commission on January 26, 2012.
The foregoing is only a brief description of the material terms of the private placements and the associated Purchase Agreements, the Rights Agreements and the Warrants and does not purport to be a complete description of the rights and obligations of the parties hereunder. The foregoing is qualified in its entirety by reference to the forms of Purchase agreements the forms of Rights Agreements and forms of Warrants, which were filed as Exhibits to our reports on Forms 8K filed October 23, 2012, December 19, 2012 and January 23, 2013, respectively.
Anti-takeover effects of provisions of our certificate of incorporation and bylaws and Delaware law
Certificate of incorporation and bylaws.Our amended and restated certificate of incorporation and amended and restated bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:
Issuance of undesignated preferred stock. Under our amended and restated certificate of incorporation, our board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors. The existence of authorized but unissued shares of preferred stock enables our board of directors to make it more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
Classified board. Our amended and restated certificate of incorporation provides for a classified board of directors consisting of three classes of directors, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. This provision may have the effect of delaying a change in control of the board.
Board of directors vacancies. Our amended and restated certificate of incorporation and amended and restated bylaws authorize only our board of directors to fill vacant directorships, unless our board of directors determines by resolution that the stockholders shall fill such vacant directorships. In addition, the number of directors constituting our board of directors may be set only by resolution adopted by a majority vote of our entire board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees.
Stockholder action; special meetings of stockholders. Our amended and restated certificate of incorporation provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. Stockholders will not be permitted to cumulate their votes for the election of directors. Our amended and restated bylaws further provide that special meetings of the stockholders may be called by the chief executive officer, president, the board of directors, or by holders of common stock who hold, in the aggregate, not less than fifty percent (50%) of the outstanding shares of Common Stock for the purpose or purposes stated in the call of the meeting. These provisions may prevent stockholders from corporate actions as stockholders at times when they otherwise would like to do so.
Advance notice requirements for stockholder proposals and director nominations. Our amended and restated bylaws provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders. Our bylaws also specify certain requirements as to the form and content of a stockholder’s notice. These provisions may make it more difficult for our stockholders to bring matters before our annual meeting of stockholders or to nominate directors at our annual meeting of stockholders.
These provisions are intended to enhance the likelihood of continuity andcontinued stability in the composition of the Boardour board of Directorsdirectors and in theits policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened changeacquisition of control of the Company.us. These provisions are designed to reduce theour vulnerability of the Company to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, suchthese provisions could have the effect of discouraging others from making tender offers for the Company's shares. Asour shares and, as a consequence, they may also may inhibitreduce fluctuations in the market price of the
Company'sour shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management
Section 203 of the Company. See "Risk Factors--Anti-Takeover Provisions."
Nevada Statutory Provisions
Nevada "Combination with Interested Stockholders Statute." Nevada Revised
Statutes Sections 78.411 through 78.444 (the "Combination with Interested
Stockholders Statute") prohibit an "interested stockholder,"Delaware General Corporation Law
We aresubject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits certain Delaware corporations from engaging, under certain circumstances, from entering intoin a "combination"“business combination” with any “interested stockholder for a Nevada corporation,
unless certain conditions are met. A "combination" includes (a) any merger
withperiod of three years following the time that such stockholder became an "interestedinterested stockholder," unless:
prior to such time the board of directors approved either the business combination or any other corporationtransaction which is or afterresulted in the merger would be,stockholder becoming an affiliate or associateinterested stockholder;
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) certain sales, leases, exchanges, mortgages, pledges, transfersemployee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
at or subsequent to such time the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include:
any merger or consolidation involving the corporation and the interested stockholder;
any sale, lease, exchange, mortgage, pledge, transfer or other dispositions of assets, indisposition (in one transaction or a series of transactions,transactions) involving the interested stockholder of 10% or more of the assets of the corporation (or its majority-owned subsidiary);
subject to or
with an "interested stockholder," (c)exceptions, any transaction that results in the issuance or transfer by the corporation of sharesany stock of the corporation or its subsidiaries, to the "interested stockholder," having
an aggregate market value equalinterested stockholder;
subject to 5% or
55
more of the aggregate market value of all the outstanding shares ofexceptions, any transaction involving the corporation (d)that has the adoptioneffect, directly or indirectly, of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would result in increasing the proportionate share of sharesthe stock or any class or series of the corporation beneficially owned by the "interested stockholder," or (f) interested stockholder; and
the receipt of benefits by anthe interested stockholder exceptof the benefit, directly or indirectly (except proportionately as a stockholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits, other than certain benefits set forth in Section 203, provided by or through the corporation. An "interested stockholder" is a
In general, Section 203 defines an interested stockholder as any entity or person who, together with
affiliates and associates, beneficially owns (or within the prior three years,
did beneficially own) 10%owning 15% or more of the corporation'soutstanding voting stock. A
corporation to which the statute applies may not engage in a "combination"
within three years after the interested stockholder acquired its shares,
unless the combination or the interested stockholder's acquisition of shares
was approved by the board of directors before the interested stockholder
acquired the shares. Generally, the combination may be consummated after the
three-year period expires if either (i) the board of directorsstock of the corporation approved, prior toand any entity or person that is an affiliate or associate of such person becomingentity or person.
A Delaware corporation may “opt out” of these provisions with an interested stockholder,
the combinationexpress provision in its original certificate of incorporation or the purchase of shares by the interested stockholderan express provision in its certificate or (ii) the combination isincorporation or bylaws resulting from a stockholders’ amendment approved by the affirmative vote of holders of a majority of the outstanding voting powershares. We have not beneficially owned by the interested stockholder
at“opted out” of these provisions and do not plan to do so. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.
WARRANTS
The warrants will be issued in registered form under a meeting called no earlier than three years after the date the interested
stockholder became an interested director.
Nevada "Control Share Acquisition Statute." Nevada Revised Statutes Sections
78.378 through 78.3793 (the "Control Share Acquisition Statute") prohibit an
acquirer, under certain circumstances, from voting shares ofwarrant agency agreement between Computershare Trust Company, N.A., as warrant agent, and us. You should review a target
corporation's stock after crossing certain threshold ownership percentages,
unless the acquirer obtains the approvalcopy of the target corporation's
stockholders. The Control Share Acquisition Statute only applieswarrant agency agreement, which has been filed as an exhibit to Nevada
corporations that do business directly or indirectly in Nevada. The Company
does not intend to "do business" in Nevada within the meaningregistration statement of which this prospectus is a part, for a complete description of the Control
Share Acquisition Statute. Therefore, it is unlikely that the Control Share
Acquisition Statute will applyterms and conditions applicable to the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability
As permitted by the Nevada General Corporation Law, the Company's Articleswarrants.
Transfer Agent and By-Laws provide that officers and directors of the Company shall not be
personally liable for monetary damages to the Company for certain breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to the Company or its stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions,
or derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
nonmonetary relief, such as an injunction or rescission for breach of the duty
of care. Directors will, however, no longer be liable for monetary damages
arising from decisions involving violations of the duty of care which could be
deemed grossly negligent.
Indemnification
The By-Laws provide that directors of the Company shall be indemnified by
the Company to the fullest extent authorized by Nevada law, as it now exists
or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of the
Company. The By-Laws also authorizes the Company to enter into one or more
agreements with any person which provide for indemnification greater or
different from that provided in the Articles. The Company has entered into
indemnification agreements with all current officers and members of the Board
of Directors. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A. Its address is 250 Royall Street, Canton, MA 02021.
Listing on The NASDAQ Capital Market
Our common stock is listed on The NASDAQ Capital Market under the Common Stocksymbol “ABIO”.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain Transactions With or Involving Related Persons
The following is U.S. Stock Transfer
Corporation, 1745 Gardena Ave., Glendale, California 91204, (818) 502-1404.
56
SHARES ELIGIBLE FOR FUTURE SALE
a summary of transactions since January 1, 2012 to which we have been a party in which the amount involved exceeded the lesser of $120,000 or one percent of the average of our total assets at fiscal years ended 2011 and 2012, and in which any of our executive officers, directors or holders of more than 5% of our capital stock, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, other than compensation arrangements previously reported in our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated by reference in this prospectus.
The numberPrivate Placements
The following tables summarize private placement purchases of our common stock and warrants by our executive officers, directors or holders of more than 5% of our capital stock, or any member of the immediate family of any of the foregoing persons and their affiliated entities.
October 2012 PIPES Offering | Name of Purchaser | Dollars Invested | Post-Split Shares | Post-Split Warrant Shares | ||||||||||
5% shareholder and Affiliate | Atlas Venture Fund VII, L.P. Jean Francios Formela, Director | $ | 125,000.00 | 52,896 | 39,672 | |||||||||
5% shareholder and Affiliate | Investocor Trust Dr. Michael Bristow, M.D., Ph.D., CEO and Director | $ | 125,000.00 | 52,896 | 39,672 | |||||||||
Affiliate | Lansing Brown Investments, LLC John L. Zabriskie, Ph.D. Director | $ | 50,000.00 | 21,159 | 15,868 | |||||||||
Affiliate | Christopher D. Ozeroff | $ | 25,000.00 | 10,579 | 7,934 | |||||||||
On October 22, 2012, we entered into a subscription agreement with certain investors named in the table above pursuant to which we agreed to sell 137,530 units, with each unit consisting of one share of our common stock and a warrant to purchase 0.75 shares of Common Stock availableour common stock (the “October Private Placement”). The warrants (the “October Warrants”) have an exercise price of approximately $1.80, became exercisable on October 25, 2012 and expire five years after becoming exercisable, unless earlier terminated. In connection with the closing of the private placement on October 25, 2012, we also entered into a registration rights agreement with the investors, pursuant to which we agreed to file this registration statement with the Securities Exchange Commission to register for saleresale the shares issued in the public market
is limitedprivate placement and the shares issuable upon exercise of the warrants issued in the private placement. On October 25, 2012, we closed the private placement and received gross proceeds of approximately $325,000, before deduction of offering expenses.
December 2012 PIPES Offering | Name of Purchaser | Dollars Invested | Post-Split Shares | Post-Split Warrant Shares | ||||||||||
5% shareholder and Affiliate | Investocor Trust Dr. Michael Bristow, M.D., Ph.D., CEO and Director | $ | 250,000.00 | 86,186 | 64,639 | |||||||||
On December 18, 2012, we entered into a subscription agreement with an investor named in the table above pursuant to which we agreed to sell 86,186 units, with each unit consisting of one share of our common stock and a warrant to purchase 0.75 shares of our common stock (the “December Private Placement”). The warrants (the “December Warrants”) have an exercise price of approximately $2.34, became exercisable on December 20, 2012 and expire five years after becoming exercisable, unless earlier terminated. In connection with the closing of the private placement, on December 20, 2012, we also entered into a registration rights agreement with the investor, pursuant to which we agreed to file this registration statement with the Securities Exchange Commission to register for resale the shares issued in the private placement and the shares issuable upon exercise of the warrants issued in the private placement. On December 20, 2012, we closed the private placement and received gross proceeds of approximately $250,000, before deduction of offering expenses.
Registered Direct Offerings
The following tables summarize registered direct offering purchases of our common stock and warrants by restrictionsour executive officers, directors or holders of more than 5% of our capital stock, or any member of the immediate family of any of the foregoing persons and their affiliated entities.
August 2012 Registered Direct Offering | Name of Purchaser | Dollars Invested | Post-Split Shares | Post-Split Warrant Shares | ||||||||||
5% shareholder | Sabby Healthcare Volatility Master Fund, Ltd. | $ | 333,333.76 | 142,086 | 106,564 | |||||||||
5% shareholder | Sabby Volatility Warrant Master Fund, Ltd. | $ | 166,666.10 | 71,042 | 53,282 | |||||||||
On August 2, 2012, we sold approximately $953,000 of ARCA’s common stock and warrants for common stock in a Registered Direct Offering under the Company’s registration statement on Form S-3 (File No.333-172686) (the “Registration Statement”) in which we issued 406,099 shares of common stock and warrants to purchase 304,575 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses payable by us, was approximately $741,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a purchase price of $2.35 per unit, which was a 15 percent discount to the consolidated price of the stock and warrants, based on the closing bid price of $2.76 as reported on the NSADAQ Capital Market on August 2, 2012. The warrants become exercisable six months after issuance, expire 6 years thereafter, and have an exercise price of $2.76 per share, equal to 100% of the closing bid price of ARCA’s common stock on the Nasdaq Capital Market on August 2, 1012. The Registered Direct Offering was effected as a takedown off the Registration Statement, which became effective on April 4, 2011, pursuant to a prospectus supplement filed with the Securities Act and Exchange Commission on August 3, 2012.
Policies and Procedures for Related Party Transactions
In January 2009, in conjunction with our merger with Nuvelo, Inc., our board of directors adopted an audit committee charter that provides that the audit committee will review and approve all related party transactions. Accordingly, all related party transactions are reviewed and approved by the lock-up
agreements (the "Lock-Up Agreements"), both restrictions being described
below. Upon completion of this offering andour audit committee, including the Private Placement, the CompanyPlacements described above. This review covers any material transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, and a related party had or will have 12,127,418 sharesa direct or indirect material interest, including, purchases of Common Stock outstanding (assuming no exercisegoods or services by or from the related party or entities in which the related party has a material interest, indebtedness, guarantees of outstanding warrants or options). Of these shares,indebtedness and employment by us of a related party.
MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary describes the 2,750,000 shares
soldmaterial U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock acquired in this offering willby Non-U.S. Holders (as defined below). This discussion does not address all aspects of U.S. federal income and estate taxes and does not deal with foreign, state and local consequences that may be freely transferable without restriction or
further registrationrelevant to Non-U.S. Holders in light of their particular circumstances, nor does it address U.S. federal tax consequences other than income and estate taxes. Special rules different from those described below may apply to certain Non-U.S. Holders that are subject to special treatment under the Securities Act, unless purchased by
"affiliates"Code, such as financial institutions, insurance companies, tax-exempt organizations, broker-dealers and traders in securities, U.S. expatriates, “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, persons that hold our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or integrated investment or other risk reduction strategy, persons subject to the alternative minimum tax or Medicare contribution tax, partnerships and other pass-through entities, and investors in such pass-through entities. Such Non-U.S. Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Company,Code, and Treasury regulations, rulings and judicial decisions thereunder as that term is defined underof the Securities Act
("Affiliates"). Such shares would generally onlydate hereof, and such authorities may be soldrepealed, revoked or modified, perhaps retroactively, so as to result in complianceU.S. federal income and estate tax consequences different from those discussed below. We have not requested a ruling from the U.S. Internal Revenue Service, or IRS, with respect to the limitations of Rule 144 described below. The remaining 9,377,418
(includingstatements made and the 597,849 shares of Common Stock, based on an assumed initial
public offering price of $13.00 per share in this offering, soldconclusions reached in the Private Placement) are deemed "Restricted Shares" under Rule 144. The Company
intends to register the shares sold in the Private Placement following the
expiration of the 180 day lock-up agreements covering these shares as
described below. Chironsummary, and Perkin-Elmer have no present intentions to dispose
of any shares of Common Stock which will be owned by them at the completion of
this offering. However, there can be no assurance that the IRS will agree with such intentionsstatements and conclusions. This discussion assumes that the Non-U.S. Holder holds our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment).
The following discussion is for general information only and is not tax advice. Persons considering the purchase of our common stock pursuant to this offering should consult their own tax advisors concerning the U.S. federal income and estate tax consequences of acquiring, owning and disposing of our common stock in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction, including any state, local or foreign tax consequences.
For the purposes of this discussion, a “Non-U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of common stock that is neither a U.S. Holder, a partnership (or other entity treated as a partnership for U.S. federal income tax purposes regardless of its place of organization or formation), nor an entity that is treated as a disregarded entity for U.S. federal income tax purposes (regardless of its place of organization or formation). A “U.S. Holder” means a beneficial owner of our common stock that is for U.S. federal income tax purposes (a) an individual who is a citizen or resident of the United States, (b) a corporation or other entity treated as a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (d) a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
Distributions
Subject to the discussion below, distributions, if any, made on our common stock to a Non-U.S. Holder of our common stock to the extent made out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles) generally will constitute dividends for U.S. tax purposes and will be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide us with a properly executed IRS Form W-8BEN, or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. In the case of a Non-U.S. Holder that is an entity, Treasury Regulations and the relevant tax treaty provide rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends will be treated as paid to the entity or to those holding an interest in that entity. If a Non-U.S. Holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may be able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.
We generally are not required to withhold tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that such holder maintains in the United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us (or, if stock is held through a financial institution or other agent, to such agent). In general, such effectively connected dividends will be subject to U.S. federal income tax, on a net income basis at the regular graduated rates, unless a specific treaty exemption applies. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments.
To the extent distributions on our common stock, if any, exceed our current and accumulated earnings and profits, they will first reduce your adjusted basis in our common stock, but not below zero, and then will be treated as gain to the extent of any excess, and taxed in the same manner as gain realized from a sale or other disposition of common stock as described in the next section.
Gain on Disposition of Our Common Stock
Subject to the discussion below regarding backup withholding and foreign accounts, a Non-U.S. Holder generally will not changebe subject to U.S. federal income tax with respect to gain realized on a sale or other disposition of our common stock unless (a) the gain is effectively connected with a trade or business of such holder in the future.United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that such holder maintains in the United States), (b) the Non-U.S. Holder is a nonresident alien,an individual and is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, or (c) we are or have been a “United States real property holding corporation” within the meaning of Code Section 897(c)(2) at any time within the shorter of the five-year period preceding such disposition or such holder’s holding period. In general, we would be a United States real property holding corporation if interests in U.S. real estate comprised (by fair market value) at least half of our business assets. We believe that we are not, and do not anticipate becoming, a United States real property holding corporation. Even if we are treated as a United States real property holding corporation, gain realized by a Non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly and constructively, no more than five percent of our common stock at all times within the shorter of (i) the five-year period preceding the disposition or (ii) the holder’s holding period and (2) our common stock is regularly traded on an established securities market. There can be no assurance that our common stock will continue to qualify as regularly traded on an established securities market.
If you are a Non-U.S. Holder described in (a) above, you will be required to pay tax on the net gain derived from the sale at regular graduated U.S. federal income tax rates, unless a specific treaty exemption applies, and corporate Non-U.S. Holders described in (a) above may be subject to the additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If you are an individual Non-U.S. Holder described in (b) above, you will be required to pay a flat 30% tax on the gain derived from the sale, which gain may be offset by U.S. source capital losses (even though you are not considered a resident of the United States).
Information Reporting Requirements and Backup Withholding
Generally, we must report information to the IRS with respect to any dividends we pay on our common stock including the amount of any such dividends, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder to whom any such dividends are paid. Pursuant to tax treaties or certain other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.
Dividends paid by us (or our paying agents) to a Non-U.S. Holder may also be subject to U.S. backup withholding. U.S. backup withholding generally will not apply to a Non-U.S. Holder who provides a properly executed IRS Form W-8BEN or otherwise establishes an exemption.
Under current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of any broker, U.S. or foreign, except that information reporting and such requirements may be avoided if the holder provides a properly executed IRS Form W-8BEN or otherwise meets documentary evidence requirements for establishing Non-U.S. Holder status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding requirements will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. Information reporting and backup withholding requirements may, however, apply to a payment of disposition proceeds if the broker has actual knowledge, or reason to know, that the holder is, in fact, a U.S. person. For information reporting purposes, certain brokers with substantial U.S. ownership or operations will generally be treated in a manner similar to U.S. brokers.
Any amounts of tax withheld under the backup withholding rules may be credits against the tax liability of persons subject to backup withholding, provided that the required information is timely furnished to the IRS.
Foreign Accounts
A U.S. federal withholding tax of 30% may apply on dividends and the gross proceeds of a disposition of our common stock paid to a foreign financial institution (as specifically defined by applicable rules ) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). This U.S. federal withholding tax of 30% will also apply on dividends and the gross proceeds of a disposition of our common stock to a non-financial foreign entity unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes. Holders are encouraged to consult with their own tax advisors regarding the possible implications of the legislation onthese rules for their investment in our common stock.
Although these rules currently apply to applicable payments made after December 31, 2012, the IRS has issued guidance providing that thewithholding provisions described above will generally apply to payments of dividends made on or after January 1, 2014 and to payments of gross proceeds from a sale or other disposition of common stock on or after January 1, 2017.
Federal Estate Tax
An individual Non-U.S. Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in our common stock will be required to include the value thereof in his or her gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise, even though such individual was not a citizen or resident of the United States at the time of his or her death.
THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW.
We are offering up to shares of our common stock and warrants to purchase up to shares of our common stock to purchasers in this offering. Each share of common stock will be accompanied by a warrant to purchase up to shares of common stock. The common stock and warrants are immediately separable and will be issued separately. However, there is no minimum offering amount required as a condition to closing and we may sell significantly fewer shares of common stock and warrants in the offering. The offering will terminate on , 2013, unless the offering is fully subscribed before that date or we decide to terminate the offering prior to that date.
The Subscription Agreement entered into with investors in the January 2013 Private Placement, which has previously been filed by us as an exhibit to the Form 8-K on January 23, 2013, grants to each of those investors, until the earlier of the twelve month anniversary of the Subscription Agreement or the date whereby we generate aggregate gross proceeds in excess of $10 million in new funding from the issuance of equity or equity-linked securities, the right to participate in any financing by us through an issuance of our common stock for cash, indebtedness or a combination thereof, up to an amount equal to 50% of such financing and on the same pricing and other terms and conditions as such financing. As a result, each of the investors in the January 2013 Private Placement may choose to acquire up to 50% of the securities issued in the offering. Following the effectiveness of this registration statement, the investors in the January 2013 Private Placement will be offered the right to acquire such portion of the securities offered by us in this offering.
In determining the offering price of the common stock and the exercise price of the warrants, we will consider a number of factors including, but not limited to, the current market price of our common stock, trading prices of our common stock over time, the illiquidity and volatility of our common stock, our current financial condition and the prospects for our future cash flows and earnings, and market and economic conditions at the time of the offering. Once the offering price is determined, the offering price for the common stock and the exercise price of the warrants will remain fixed for the duration of the offering.
Dawson James Securities, Inc., referred to as the placement agent or Dawson, has entered into a placement agent agreement with us in which it has agreed to act as lead placement agent in connection with the offering. The Placement Agent may retain other brokers or dealers to act as sub-agents or selected-dealers on its behalf in connection with the offering. The placement agent is not purchasing or selling the securities offered by us, and is not required to sell any specific number or dollar amount of securities, but will assist us in this offering on a reasonable best efforts basis. Subject to the terms and conditions contained in the placement agent agreement, the placement agent is using its reasonable best efforts to introduce us to investors which will purchase the securities. We may enter into one or more securities purchase agreements directly with certain institutional investors in connection with this offering, which will set forth the terms of the Lock-Up Agreements, all officers, directorsoffering, as described in this prospectus, will include customary representations and substantially all stockholders (including Chironwarranties regarding the offering, the units to be issued and Perkin-Elmer),
optionholderssold, and warrantholdersour business, and will contain customary conditions to closing and other customary terms. The placement agent agreement terminates upon the closing of the Companyoffering and further provides that the agreement may be terminated by the placement agent or us at any time upon ten days prior written notice.
We have agreed not to (1) offer,
pledge, sell, contractpay Dawson a placement fee equal to sell, engage6.0% of the aggregate gross proceeds to us from the sale of the securities in any shortthe offering and, subject to compliance with FINRA Rule 5110(f)(2)(D), a non-accountable expense allowance equal to 2.0% of the aggregate gross proceeds to us from the sale sell any optionof the securities in the offering and an accountable legal expense allowance in the amount of $75,000. We estimate total expenses of this offering, excluding the placement agent fees, will be approximately $ . The following table shows the per share and total fees we will pay to the placement agent assuming the sale of all of the shares offered pursuant to this prospectus.
Per share | $ | |||
Total | $ |
In addition to the cash fees set forth above, we have agreed to issue to the placement agent, or contractits designees as permitted by FINRA Rule 5110(g), warrants to purchase purchase any option or contractup to sell, grant any
option, right or warrant to purchase, or otherwise transfer or disposean aggregate of directly or indirectly,5.0% of the aggregate number of shares of common stock sold in this offering (excluding any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or similar agreement that transfers, in whole or in part, the
economic risk of ownershipcommon stock issuable upon exercise of the Common Stockwarrants). The placement agent warrants shall have substantially the same terms as the warrants offered by this prospectus, except that the exercise price shall be 125% of the Company, until 180 days
afterpublic offering price per unit, or $ per share, and the expiration date shall be five years from the effective date of the registration statement filedof which this prospectus forms a part. Pursuant to FINRA Rule 5110(f)(2)(H)(vi), the placement agent warrants will not have anti-dilution protections. Pursuant to FINRA Rule 5110(g)(1), neither the placement agent warrants nor any shares of common stock issued upon exercise of the placement agent warrants may be sold, transferred, assigned, pledged, or hypothecated, or be subject to any hedging, short sale, derivative, put, or call transaction that would result in connection
withthe effective economic disposition of such securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of this offering, (the "Lock-Up Period"), withoutexcept the prior consenttransfer of Lehman
Brothers Inc. However, Lehman Brothers Inc. may,any security: (i) by operation of law or by reason of reorganization, (ii) to any FINRA member firm participating in its sole discretionthe offering and at
anythe officers and partners thereof, if all securities so transferred remain subject to the lock-up restriction described above for the remainder of the time without notice, release allperiod, (iii) if the aggregate amount of our securities held by the placement agent or any portionrelated person does not exceed 1% of the securities subject
to Lock-Up Agreements. Asbeing offered, (iv) that is beneficially owned on a resultpro-rata basis by all equity owners of these contractual restrictions,
Restricted Sharesan investment fund, provided that wouldno participating member manages or otherwise be eligible for sale after 90 days
under Rules 144 or 701, or eligible for sale pursuant to a subsequent
registration, as described below, willdirects investments by the fund, and participating members in the aggregate do not be eligible for sale without prior
written consent of Lehman Brothers Inc. until the endown more than 10% of the Lock-Up Period.
Ofequity in the 9,377,418 Restricted Shares, 1,612,339 shares will be freely
transferable pursuant to Rule 144 atfund, or (v) the endexercise or conversion of the Lock-Up Period and
2,262,778 shares will be held by affiliates and transferable pursuant to Rules
144 and 701any security, if all securities received remain subject to the volume limitations of Rule 144 atlock-up restriction set forth above for the endremainder of the Lock-Up Period. Additional Restricted Shares, which will be transferable attime period. The warrants and the end ofshares underlying the Lock-Up Period subjectwarrants issuable to volume limitations of Rule 144, will
become freely transferable pursuant to Rule 144(k) as follows: 66,980 shares
at various time during February and March 1998; 2,585,280 at various times
during April and May 1998; and 81,600 at various times during December 1998
and January 1999. An additional 1,462,132 Restricted Shares will not be
transferable pursuant to Rule 144 until the expiration of their one-year
holding periods, beginning at various times following the end of the Lock-Up
Period. An additional 708,480 shares are expected to remain in a blocked
account and will therefore not be voted or transferable pursuant to
restrictions imposed by the U.S. Department of Treasury. The 597,849 shares of
Common Stock (based on an assumed initial public offering price of $13.00 per
share in this offering) soldplacement agent in the Private Placement will be freely
transferable followingoffering are not being registered under the effectiveness of a registration statement of which this prospectus forms a part. Because there is no minimum offering amount required as a condition to closing, the Company intends to file at the end of the Lock-Up Period.
In addition, 1,324,307 shares will be issuable upon the exercise of optionsactual total proceeds received by us and total offering commissions and warrants which will have vested 180 days after the effective date of this
offering of which 1,178,319 shares will be subjectissuable to the one-year holding
period requirement of Rule 144 upon issuanceplacement agent, if any, are not presently determinable and an additional 119,514 shares
willmay be subjectsubstantially less than the maximum amount set forth above.
We have agreed to volume limitations of Rule 144 upon issuance. The Company
intends to file a registration statement on Form S-8indemnify the placement agent against certain liabilities under the Securities Act covering certain of these shares subject1933, as amended. The placement agent may be deemed to issuance upon exercisebe an underwriter within the meaning of options,
as described below. The remaining 26,473 shares issuable upon exercise of
options and warrants which will have vested 180 days after the effective dateSection 2(a)(11) of the offering willSecurities Act, and any commissions received by it and any profit realized on the resale of the securities sold by it while acting as principal might be freely transferable upon exercise.
Pursuantdeemed to certain registration rights agreements among the Company and
certain of its securities holders, 3,892,140 shares of Common Stock and
216,422 shares issuable upon the exercise of warrants will be entitled to
certain rights with respect to the registration of such sharesunderwriting discounts or commissions under the Securities Act. Registration rights covering
57
227,760 of such shares will expire prior
As an underwriter, the placement agent would be required to the end of the Lock-Up Period;
registration rights covering an additional 2,652,240 of such shares will
expire between the end of the Lock-Up Period and May 1998; and registration
rights covering 67,800 of such shares will expire in January 1999. See
"Description of Capital Stock--Registration Rights." Registration of such
shares undercomply with the Securities Act would result in such shares becoming freely
tradable without restriction under Securities Act immediately upon the
effectiveness of such registration, subject to the contractual obligations
discussed above.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated), who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including persons who may be deemed Affiliates of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of the Common Stock (approximately 121,000 shares immediately after the
offering) or the average weekly trading volume of Common Stock in the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who owns shares within the definition of "restricted securities" under Rule
144 under the Securities Act that were purchased from the Company (or any
Affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers up to the date the
Company becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), pursuantincluding without limitation, Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales of shares of common stock and warrants by the placement agent acting as principal. Under these rules and regulations, the placement agent:
The validity of the shares of Common Stockour common stock offered herebyby this prospectus will be passed upon for us by Cooley LLP, Broomfield, Colorado. Ellenoff Grossman & Schole LLP, New York, New York is counsel to the Company by Sachnoff & Weaver, Ltd., Chicago, Illinois. Sachnoff &
Weaver, Ltd. and certain of its members own shares of Common Stock. A member
of Sachnoff & Weaver, Ltd. is the spouse of Lewis S. Gruber, Chief Executive
Officer of the Company. See "Certain Transactions." Certain legal mattersplacement agent in connection with the offering will be passed upon for the Underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
this offering.
The consolidated financial statements of Hyseq,ARCA biopharma, Inc. at(a development stage enterprise) and subsidiaries (the Company) as of December 31, 19952012 and 19962011, and for each of the three years in the two year period ended December 31, 19962012, and for the period from August 14, 1992 (inception) toInception (December 17, 2001) through December 31, 1996,
appearing in this Prospectus and Registration Statement,2012, have been auditedincorporated by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewherereference herein and are includedin the registration statement in reliance upon suchthe report givenof KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of suchsaid firm as experts in accounting and auditing. Certain legal matters with respectThe audit report covering the December 31, 2012, consolidated financial statements contains an explanatory paragraph that states that the Company’s recurring losses from operations and its dependence upon raising additional funds from strategic transactions, sales of equity, and/or issuance of debt raise substantial doubt about the entity’s ability to information contained incontinue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Any person to whom this Prospectus under the captions "Risk Factors--Dependence upon Proprietary
Rights; Risksprospectus is delivered may request copies of Infringement,"this prospectus and "Business--Patents and Proprietary
Technology" will be passed upon for the Companyany related amendments or supplements, without charge, by McCutchen, Doyle, Brown &
Enersen LLP, Palo Alto, California, patent counselwritten or telephonic request directed to the Company.
ADDITIONAL INFORMATION
The Company hasCorporate Secretary, 8001 Arista Place, Suite 430, Broomfield, Colorado; telephone: (720) 940-2200.
We have filed with the Commission in Washington, D.C.SEC a Registration
Statement, of which this Prospectus constitutes a part,registration statement on Form S-1 under the Securities Act (herein, together with all amendments and exhibits referred to
herein as the "Registration Statement") with respect to the Common Stockshares of our common stock offered hereby.under this prospectus. This Prospectusprospectus does not contain all of the information set forth in the Registration Statementregistration statement and the exhibits and schedules toaccompanying exhibits. Some items included in the Registration Statement, as certain parts have beenregistration statement are omitted from this prospectus in accordance with the rules and regulations of the Commission.SEC. For further information with respect to the Companyus and the Common Stockcommon stock offered hereby, reference is madein this prospectus, we refer you to the Registration Statementregistration statement and the exhibits and schedules filed as a part of the
Registration Statement.accompanying exhibits. Statements contained or incorporated by reference in this Prospectus concerningprospectus as to the contents of any contract, agreement or any other document referredare summaries of the material terms of these contract, agreement or other document. With respect to are not
necessarily complete; reference is made in each instance to the copy of such
contractthese contracts, agreements or documentother documents filed as an exhibit to the Registration Statement. Each
suchregistration statement, reference is qualified in all respects by such referencemade to such exhibit.exhibit for a more complete description of the matter involved. A copy of the Registration Statement, includingregistration statement, and the accompanying exhibits, and schedules
thereto, may be inspected without charge and obtainedcopied at the prescribed ratesSEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference SectionRoom. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the Commission at its principal offices,
located at 450 Fifth Street, N.W., Washington, D.C. 20549, andSEC’s website is http://www.sec.gov.
In addition, all of the documents incorporated by reference into this registration statement may be inspected withoutaccessed via the Internet at our website: http://www.arcabiopharma.com. Our website, and the information contained on the website, is not incorporated into and are not part of this prospectus. You may access our annual reports 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 Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. SEC.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Registration Statement, including the exhibits and schedules thereto, is also
available at the Commission's site on the World Wide Web at
http://www.sec.gov.
The Company intendsSEC allows us to furnish its stockholders annual reports containing
consolidated financial statements audited“incorporate by its independent auditors and
quarterly reports containing unaudited consolidated financial information.
61
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statement of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements.................................. F-9
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Hyseq, Inc.
We have audited the accompanying consolidated balance sheets of Hyseq, Inc.
(a development-stage company) as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996 and
for the periodreference” information from August 14, 1992 (inception) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards requireother documents that we plan and perform the auditfile with it, which means that we can disclose important information 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 madeyou 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 referredreferring you to above present fairly,
in all material respects, the consolidated financial position of Hyseq, Inc.
at December 31, 1995 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, and for the period from August 14, 1992 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.
Palo Alto, California
February 20, 1997, except for
Note 10 as to which the datethose documents. The information incorporated by reference is June , 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be issued upon completion of
the matters discussed in the sixth and seventh paragraphs of Note 10 of Notes
to Consolidated Financial Statements.
ERNST & YOUNG LLP
Palo Alto, California
June 12, 1997
F-2
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------------ MARCH 31, MARCH 31,
1995 1996 1997 1997
----------- ----------- ------------ -------------
(UNAUDITED) (NOTE 10)
ASSETS
Current assets:
Cash and cash
equivalents........... $ 750,291 $ 6,707,288 $ 4,743,260
Accounts receivable.... 136,336 146,400 272,373
Notes receivable from
officers.............. 120,000 -- --
Prepaid expenses and
other current assets.. 55,386 311,855 291,153
----------- ----------- ------------
Total current assets..... 1,062,013 7,165,543 5,306,786
Equipment and leasehold
improvements, net....... 1,022,260 1,638,922 1,707,494
Patents, licenses and
other assets, net....... 655,406 561,349 534,953
----------- ----------- ------------
$ 2,739,679 $ 9,365,814 $ 7,549,233
=========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....... $ 220,279 $ 572,049 $ 272,919
Accrued professional
fees.................. 403,278 88,620 396,193
Other current
liabilities........... 75,396 284,916 311,431
Current portion of
capital lease
obligations........... 31,809 132,173 136,730
Current portion of loan
obligation............ -- 133,114 138,163
----------- ----------- ------------
Total current
liabilities............. 730,762 1,210,872 1,255,436
Noncurrent portion of
capital lease
obligations............. 32,360 174,519 138,580
Noncurrent portion of
loan obligation......... -- 616,886 580,393
Commitments and
contingencies
Stockholders' equity:
Preferred stock, $0.001
par value:
Authorized shares--
8,000,000
Series A convertible
preferred stock:
Authorized shares--
3,000,000
Issued and
outstanding shares--
789,085 in 1995 and
2,170,460 in 1996
and 1997
Aggregate liquidation
value of $21,704,600
at March 31, 1997... 4,920,496 14,780,013 14,780,013 $ --
Common stock, $0.001
par value:
Authorized shares--
20,000,000
Issued and
outstanding shares--
7,124,956 in 1995
and 4,472,716 in
1996 and 1997....... 507,422 2,032,570 5,396,571 20,176,584
Notes receivable from
stockholders.......... (78,370) (1,237,120) (3,905,705) (3,905,705)
Deferred compensation.. -- -- (568,064) (568,064)
Deficit accumulated
during the development
stage................. (3,372,991) (8,211,926) (10,127,991) (10,127,991)
----------- ----------- ------------ -----------
Total stockholders'
equity.................. 1,976,557 7,363,537 5,574,824 $ 5,574,824
----------- ----------- ------------ ===========
$ 2,739,679 $ 9,365,814 $ 7,549,233
=========== =========== ============
See accompanying Notes to Consolidated Financial Statements.
F-3
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM PERIOD FROM
AUGUST 14, 1992 THREE MONTHS ENDED AUGUST 14, 1992
YEAR ENDED DECEMBER 31, (INCEPTION) TO MARCH 31, (INCEPTION) TO
------------------------------------ DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1996 1996 1996 1997 1997
----------- ---------- ----------- --------------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
Contract revenues....... $ 50,000 $2,127,000 $ 426,099 $ 2,603,099 $ 78,327 $ 272,373 $ 2,875,472
Operating expenses:
Research and
development............ 850,707 1,811,212 3,735,925 6,397,844 946,324 1,306,233 7,704,077
General and
administrative......... 1,477,664 937,656 1,749,086 4,676,161 400,670 931,298 5,607,459
----------- ---------- ----------- ----------- ----------- ----------- ------------
Total operating
expenses............... 2,328,371 2,748,868 5,485,011 11,074,005 1,346,994 2,237,531 13,311,536
----------- ---------- ----------- ----------- ----------- ----------- ------------
Loss from operations.... (2,278,371) (621,868) (5,058,912) (8,470,906) (1,268,667) (1,965,158) (10,436,064)
Interest expense........ (318) (2,655) (42,560) (45,533) (9,072) (42,776) (88,309)
Interest income......... 16,244 23,259 262,537 304,513 3,232 91,869 396,382
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net loss................ $(2,262,445) $ (601,264) $(4,838,935) $(8,211,926) $(1,274,507) $(1,916,065) $(10,127,991)
=========== ========== =========== =========== =========== =========== ============
Pro forma net loss per
share.................. $ (0.52) $ (0.21)
=========== ===========
Shares used in computing
pro forma net loss per
share.................. 9,403,000 9,067,000
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-4
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE TOTAL
------------------ ------------------- FROM DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION STAGE EQUITY
------- ---------- --------- -------- ------------ ------------ ----------- -------------
Issuance of common stock
to founders for cash at
inception in August
1992................... -- $ -- 100,435 $ 35,000 $ -- $-- $ -- $ 35,000
Issuance of common stock
for cash and
stockholders' note
receivable in May 1993. -- -- 495,329 202,750 (180,000) -- -- 22,750
Issuance of common stock
for cash in September
1993................... -- -- 93,717 38,361 -- -- -- 38,361
Issuance of common stock
to acquire patent in
November 1993.......... -- -- 2,125,440 243,540 -- -- -- 243,540
Issuance of Series A
convertible preferred
stock for cash at $5.56
per share in November
1993................... 282,399 1,458,148 -- -- -- -- -- 1,458,148
Issuance of common stock
for cash at $0.001 per
share in November 1993
to Hyseq One Trust..... -- -- 5,446,502 2,837 -- -- -- 2,837
Issuance of common stock
for cash at $0.001 per
share in December 1993
to Hyseq One Trust..... -- -- 9,033 4 -- -- -- 4
Repurchase of common
stock for cash at
$0.002 per share from
Hyseq One Trust in
December 1993.......... -- -- (172,663) (256) -- -- -- (256)
Cash payment of note
receivable from
stockholder in December
1993................... -- -- -- -- 125,000 -- -- 125,000
Net loss................ -- -- -- -- -- -- (509,282) (509,282)
------- ---------- --------- -------- --------- ---- ----------- -----------
Balances at December 31,
1993................... 282,399 1,458,148 8,097,793 522,236 (55,000) -- (509,282) 1,416,102
Issuances of Series A
preferred stock for
cash and stockholders'
note receivable at
$6.56 per share in
January through
November 1994.......... 366,545 2,372,575 -- -- (13,120) -- -- 2,359,455
Issuance of Series A
preferred stock for
property and license in
lieu of cash at $6.56
per share in June and
November 1994.......... 21,516 141,145 -- -- -- -- -- 141,145
Issuance of common stock
for stockholders' note
receivable and cash at
$0.78 per share in
March 1994............. -- -- 88,320 69,000 (67,500) -- -- 1,500
Repurchase of common
stock at $0.41 per
share and repayment of
stockholders' note
receivable in March
1994................... -- -- (205,056) (84,372) 55,000 -- -- (29,372)
Issuance of common stock
at $0.001 per share in
March 1994 to Hyseq One
Trust.................. -- -- 191,873 100 -- -- -- 100
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through November 1994.. -- -- (820,214) (1,282) -- -- -- (1,282)
Net loss................ -- -- -- -- -- -- (2,262,445) (2,262,445)
------- ---------- --------- -------- --------- ---- ----------- -----------
Balances at December 31,
1994 (carried forward). 670,460 $3,971,868 7,352,716 $505,682 $ (80,620) $-- $(2,771,727) $ 1,625,203
See accompanying Notes to Consolidated Financial Statements.
F-5
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(CONTINUED)
DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE TOTAL
--------------------- ---------------------- FROM DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION STAGE EQUITY
--------- ----------- ---------- ---------- ------------ ------------ ----------- -------------
Balance at December
31, 1994 (brought
forward)............. 670,460 $ 3,971,868 7,352,716 $ 505,682 $ (80,620) $ -- $(2,771,727) $ 1,625,203
Issuance of Series A
preferred stock for
cash at $8.00 per
share in January
through December
1995, less issuance
costs of $372....... 118,625 948,628 -- -- -- -- -- 948,628
Issuance of common
stock for cash at
$0.78 per share in
December 1995....... -- -- 2,688 2,100 -- -- -- 2,100
Cash payment of note
receivable from
stockholders........ -- -- -- -- 2,250 -- -- 2,250
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through December
1995................ -- -- (230,448) (360) -- -- -- (360)
Net loss............. -- -- -- -- -- -- (601,264) (601,264)
--------- ----------- ---------- ---------- ----------- ------ ----------- -----------
Balances at December
31, 1995............. 789,085 4,920,496 7,124,956 507,422 (78,370) -- (3,372,991) 1,976,557
Issuance of Series A
preferred stock for
cash at $8.00 per
share in April and
May 1996, less
issuance costs of
$1,191,483.......... 1,381,375 9,859,517 -- -- -- -- -- 9,859,517
Issuance of common
stock for cash at
$4.17 per share in
September 1996...... -- -- 80,640 336,000 -- -- -- 336,000
Issuance of common
stock upon exercise
of stock option
grants for cash and
stockholders' note
receivable at $1.56
per share in
September and
December 1996....... -- -- 67,200 105,000 (75,000) -- -- 30,000
Issuance of common
stock upon exercise
of warrants for
stockholders' note
receivable at $2.90
per share in
December 1996....... -- -- 144,000 417,000 (417,000) -- -- --
Issuance of common
stock for
stockholders' note
receivable at $4.17
per share in
December 1996....... -- -- 161,280 672,000 (672,000) -- -- --
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through December
1996................ -- -- (3,105,360) (4,852) -- -- -- (4,852)
Cash payment of note
receivable from
stockholders........ -- -- -- -- 5,250 -- -- 5,250
Net loss............. -- -- -- -- -- -- (4,838,935) (4,838,935)
--------- ----------- ---------- ---------- ----------- ------ ----------- -----------
Balances at December
31, 1996 (carried
forward)............. 2,170,460 $14,780,013 4,472,716 $2,032,570 $(1,237,120) $ -- $(8,211,926) $ 7,363,537
See accompanying Notes to Consolidated Financial Statements.
F-6
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(CONTINUED)
DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE TOTAL
--------------------- --------------------- FROM DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION STAGE EQUITY
--------- ----------- --------- ---------- ------------ ------------ ------------ -------------
Balances at December
31, 1996 (brought
forward).............. 2,170,460 $14,780,013 4,472,716 $2,032,570 $(1,237,120) $ -- $ (8,211,926) $ 7,363,537
Issuance of common
stock for services and
stockholders' note
receivable at $6.51
per share in January
1997 (unaudited)...... -- -- 76,800 500,000 (397,585) -- -- 102,415
Forfeiture of note
receivable from
stockholders at $0.78
per share in February
1997 (unaudited)...... -- -- (86,400) (67,500) 67,500 -- -- --
Purchase of common
stock at $0.001 per
share by Hyseq One
Trust in February 1997
(unaudited)........... -- -- 86,400 45 -- -- -- 45
Issuance of common
stock for
stockholders' note
receivable at $6.51
per share in March
1997 (unaudited)...... -- -- 359,424 2,340,000 (2,340,000) -- -- --
Issuance of common
stock upon exercise of
stock option grants
for cash at $1.56 per
share in March 1997
(unaudited)........... -- -- 7,680 12,000 -- -- -- 12,000
Repurchase of common
stock at $0.002 per
share from Hyseq One
Trust in January
through March 1997
(unaudited)........... -- -- (443,904) (694) -- -- -- (694)
Deferred compensation
(unaudited)........... -- -- -- 580,150 -- (580,150) -- --
Amortization of
deferred compensation
(unaudited)........... -- -- -- -- -- 12,086 -- 12,086
Cash payment of note
receivable from
stockholders
(unaudited)........... -- -- -- -- 1,500 -- -- 1,500
Net loss (unaudited)... -- -- -- -- -- -- (1,916,065) (1,916,065)
--------- ----------- --------- ---------- ----------- --------- ------------ -----------
Balances at March 31,
1997 (unaudited)...... 2,170,460 $14,780,013 4,472,716 $5,396,571 $(3,905,705) $(568,064) $(10,127,991) $ 5,574,824
========= =========== ========= ========== =========== ========= ============ ===========
See accompanying Notes to Consolidated Financial Statements.
F-7
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
AUGUST 14,
1992 PERIOD FROM
(INCEPTION) THREE MONTHS ENDED AUGUST 14,
YEAR ENDED DECEMBER 31, TO MARCH 31, 1992
------------------------------------ DECEMBER 31, ------------------------ (INCEPTION) TO
1994 1995 1996 1996 1996 1997 MARCH 31, 1997
----------- ---------- ----------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(2,262,445) $ (601,264) $(4,838,935) $(8,211,926) $(1,274,508) $(1,916,065) $(10,127,991)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 91,164 286,844 444,036 822,044 93,660 165,542 987,586
Amortization of
deferred
compensation.......... -- -- -- -- -- 12,086 12,086
Shares of common stock
issued for services... -- -- -- -- -- 102,415 102,415
License fees acquired
through issuance of
preferred stock....... 100,000 -- -- 100,000 -- -- 100,000
Changes in assets and
liabilities:
Accounts receivable.. -- (136,336) (10,064) (146,400) 136,336 (125,973) (272,373)
Notes receivable from
officers............ -- (120,000) 120,000 -- 120,000 -- --
Prepaid expenses and
other current
assets.............. (64,256) 8,870 (256,469) (311,855) 16,812 20,702 (291,153)
Other assets......... -- (26,498) (23,678) (50,176) (91,598) 738 (49,438)
Accounts payable and
other current
liabilities......... 105,694 (8,706) 351,770 572,049 90,584 (299,130) 272,919
Accrued professional
fees................ 391,320 11,958 (314,658) 88,620 15,834 307,573 396,193
Other current
liabilities......... -- 75,396 209,520 284,916 67,143 26,515 311,431
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating activities... (1,638,523) (509,736) (4,318,478) (6,852,728) (825,737) (1,705,597) (8,558,325)
----------- ---------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Expenditures for
property and equipment. (415,397) (678,635) (943,319) (2,037,351) (111,560) (208,456) (2,245,807)
Organization costs...... -- -- -- (14,763) -- -- (14,763)
Patents and other
intangibles............ (90,000) (210,000) -- (571,527) -- -- (571,527)
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (505,397) (888,635) (943,319) (2,623,641) (111,560) (208,456) (2,832,097)
----------- ---------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments of
stockholders' notes
receivable............. 55,000 2,250 -- 57,250 -- 1,500 58,750
Cash proceeds from
issuance of:
Series A preferred
stock................. 2,359,455 948,628 9,859,517 14,625,748 279,000 -- 14,625,748
Common stock........... 1,600 2,100 371,250 598,646 1,000 12,000 610,646
Cash used to repurchase
common stock........... (85,654) (360) (4,852) (90,866) (105) (649) (91,515)
Cash proceeds from sale
leaseback.............. -- -- 369,350 369,350 369,350 -- 369,350
Principal payments on
capital lease.......... -- -- (126,471) (126,471) (29,331) (31,382) (157,853)
Financing loan.......... -- -- 750,000 750,000 -- -- 750,000
Principal payments on
financing loan......... -- -- -- -- -- (31,444) (31,444)
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............. 2,330,401 952,618 11,218,794 16,183,657 619,914 (49,975) 16,133,682
----------- ---------- ----------- ----------- ----------- ----------- ------------
Net (decrease) increase
in cash and cash
equivalents............ 186,481 (445,753) 5,956,997 6,707,288 (317,383) (1,964,028) 4,743,260
Cash and cash
equivalents at
beginning of period.... 1,009,563 1,196,044 750,291 -- 750,291 6,707,288 --
----------- ---------- ----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period................. $ 1,196,044 $ 750,291 $ 6,707,288 $ 6,707,288 $ 432,908 $ 4,743,260 $ 4,743,260
=========== ========== =========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
INFORMATION
Cash paid for interest.. $ 318 $ 2,655 $ 42,560 $ 45,533 $ 9,072 $ 42,776 $ 88,309
=========== ========== =========== =========== =========== =========== ============
SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING
ACTIVITIES
Equipment acquired under
capital leases......... $ -- $ 64,169 $ -- $ 64,169 $ -- $ -- $ 64,169
=========== ========== =========== =========== =========== =========== ============
Issuance of 708,480
shares of common stock
for patent............. $ -- $ -- $ -- $ 243,540 $ -- $ -- $ 243,540
=========== ========== =========== =========== =========== =========== ============
Issuance of 21,516
shares of Series A
preferred stock in
exchange for equipment
and license............ $ 141,145 $ -- $ -- $ 141,145 $ -- $ -- $ 141,145
=========== ========== =========== =========== =========== =========== ============
Issuance of 15,728
shares of common stock
in exchange for legal
services............... $ -- $ -- $ -- $ -- $ -- $ 102,415 $ 102,415
=========== ========== =========== =========== =========== =========== ============
See accompanying Notes to Consolidated Financial Statements.
F-8
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Hyseq, Inc. (the "Company") was established in August 1992 as an Illinois
corporation and subsequently reincorporated as a Nevada corporation on
November 12, 1993. The Company's wholly owned subsidiary, Hyseq Diagnostics,
Inc. ("HDI"), was formed as a Nevada corporation on July 18, 1995. The Company
applies the proprietary DNA array technology of its integrated HyX genomics
platform (the "HyX Platform") to develop gene-based therapeutic product
candidates and diagnostic products and tests. The Company believes that its
HyX Platform, which utilizes the Company's proprietary sequencing by
hybridization ("SBH") technology as its foundation, generates higher gene
sequence throughput with greater analytical flexibility and accuracy and lower
cost than prevailing technologies. To date, the Company's primary activities
have involved establishment of operations, recruiting of personnel and pursuit
of its research and development programs. Accordingly, it is classified as a
development-stage company.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiary. All significant intercompany transactions and
accounts have been eliminated.
All common stock and common per share amounts have been retroactively
restated to reflect a 1.92-for-1 stock split of the Company's outstanding
common stockconsidered to be effected beforepart of this prospectus. Information in this prospectus supersedes information incorporated by reference that we filed with the completion of the Company's initial
public offering -- See Note 10. All preferred share and preferred share
amounts are presented on a historical basis.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements at March 31, 1997 and for the three-
month periods ended March 31, 1996 and 1997 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that management
of the Company believes are necessary for presentation of its financial
position and results of operations in accordance with generally accepted
accounting principles. The results of operations and cash flows for the three
months ended March 31, 1997 are not necessarily indicative of the resultsSEC prior to
be expected for the full year 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid interest-bearing deposits with
original maturities of less than 90 days and insignificant interest rate risk
to be cash equivalents. The Company invests its excess cash in money market
accounts, certificates of deposit and other bank instruments.
F-9
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives ranging from three to five years, except that leasehold
improvements are amortized over the remaining life of the lease or the life of
the improvement, whichever is less.
REVENUE RECOGNITION
Revenues from research, technology and license agreements are recognized
when the Company has satisfied milestones and payments received or to be
received are nonrefundable. Nonrefundable up-front payments are recognized
upon execution of the agreements and government grant revenue is recognized as
the reimbursable services are performed. See Notes 6 and 10.
Revenues from collaborative agreements representing 10% or more of total
revenue are as follows:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- ------------
1994 1995 1996 1996 1997
---- ---- ---- ------ ------
Source:
NIST Grant........................... -- 33% 100% 100% 100%
Collaboration Partner A.............. -- 57% -- -- --
Collaboration Partner B.............. 100% -- -- -- --
ACCOUNTING FOR STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee and director stock options
rather than the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as
this alternative requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expensethis prospectus. We incorporate by reference into this prospectus and the registration statement of which this prospectus is recognized.
NET LOSS PER SHARE
Except as noteda part the information or documents listed below historical net loss per share is computed usingthat we have filed with the weighted-average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options and
warrants) issued during the 12-month period prior to the initial filing of the
proposed offering at prices below the assumed public offering price have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method).
Historical net loss per share information is as follows:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Net loss per share...... $ (0.26) $ (0.07) $ (0.61) $ (0.16) $ (0.25)
Shares used in computing
net loss per share..... 8,820,000 8,140,000 7,888,000 7,910,000 7,552,000
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of the Company's initial
public offering (using the if-converted method) from the original date of
issuance.
F-10
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which is required to be adoptedSEC (Commission File No.000-22873):
We will furnish without charge to you, on written or oral request, a copy of any or all of the agreement. For each of the three months ended March 31, 1996 and 1997,
amortization expense was $18,750. As of December 31, 1996, the Company had a
purchase commitmentdocuments incorporated by reference, including exhibits to these documents. You should direct any requests for 10 remaining additional robotic units for a total
remaining commitment of approximately $700,000 through 1998. These purchase
commitments may be met by reselling such unitsdocuments to third parties.
F-11
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PATENTS, LICENSES AND OTHER ASSETS--(CONTINUED)
PATENT AGREEMENT
In 1994, the Company entered into a patent agreement for the exclusive
license to use certain SBH proprietary technology (developed by one of the
Company's two Co-Senior Vice Presidents for Research) and to develop, use, and
sell licensed products or processes under the license patent rights. The
Company issued 15,244 shares of Series A Preferred Stock and must pay minimum
royalties ranging from $25,000 to $100,000 per annum beginning in 1997 and
expiring at expiration of the related patents. The agreement requires that the
Company incur research and development costs relating to the patent technology
in the amount of $2,500,000 through June 1998. At March 31, 1997, the Company
estimates that its remaining obligation is less than $640,000.
4. LOAN OBLIGATION
In December 1996, the Company entered into a $1,000,000 loan agreement with
a capital management partnership and issued a warrant to purchase 9,600 shares
of common stock at $5.21 per share in connection with such loan. The loan has
an imputed interest rate of 14.9% per annum. As of December 31, 1996, the
Company had borrowed $750,000 under the loan agreement which amount is secured
by certain equipment owned by the Company.
Future minimum loan payments under the loan agreement are as follows:
Years ending December 31:
1997........................................................ $ 236,610
1998........................................................ 236,610
1999........................................................ 236,610
2000........................................................ 311,610
----------
Total loan payments........................................... 1,021,440
Loan amount representing interest............................. 271,440
----------
Present value of future loan payments......................... 750,000
Less current portion.......................................... 133,114
----------
Noncurrent portion............................................ $ 616,886
==========
F-12
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LEASE COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS
During December 1995, the Company entered into capital lease agreements to
finance certain equipment purchases. In February and July 1996, the Company
entered into sale and leaseback transactions for certain equipment.
Future minimum lease payments under capital leases are as follows:
CAPITAL
LEASES
---------
Years ending December 31:
1997......................................................... $ 162,194
1998......................................................... 159,068
1999......................................................... 26,758
---------
Total minimum lease payments................................... 348,020
Less amount representing interest.............................. (41,328)
---------
Present value of future lease payments......................... 306,692
Less current portion........................................... (132,173)
---------
Noncurrent portion............................................. $ 174,519
=========
OPERATING LEASE COMMITMENTS
The Company leases its facilities under an operating lease agreement that
expires in 1999. The Company also leases certain equipment under operating
leases. Rental expense was approximately $86,000 in 1994, $182,000 in 1995,
$183,000 in 1996 and $453,000 for the period from August 14, 1992 (inception)
to December 31, 1996. Minimum future rental commitments under operating leases
at December 31, 1996 are approximately $181,000, $169,000 and $159,000 in
1997, 1998 and 1999, respectively. Rental expense was approximately $46,000
for each of the three months ended March 31, 1996 and 1997.
CONTINGENCIES
On May 10, 1996, Sands Brothers & Co.Patrick Wheeler, Chief Financial Officer, ARCA biopharma, Inc., Ltd. ("Sands") filed a suit against
the Company arising out of the Company's prior engagement of Sands to act as a
placement agent8001 Arista Place, Suite 430, Broomfield, CO 80021; telephone: (720) 940-2200.
Any statement contained in a private placement. The complaint seeks, among other
things, damagesdocument incorporated or deemed to be incorporated by reference in the aggregate amount of at least $12 million. The Company
filed a motion to dismiss the complaint on July 25, 1996. The court has not
yet ruled on the Company's motion. The Company believes that the suit has no
merit and that it has valid defenses to the claims. There can be no assurance,
however, that the Company will prevail in its defense of the claims asserted
by Sands. Any such failure to prevail could have a material adverse effect on
the Company's business, financial condition and operating results.
On March 3, 1997, the Company brought suit against Affymetrix, Inc.
("Affymetrix"), alleging infringement by Affymetrix of two of the Company's
patents covering SBH technology. The Company may incur substantial costs and
expend substantial personnel time in asserting the Company's patent rights
against Affymetrix or others and there can be no assurance that the Companythis prospectus will be successful in asserting its patent rights. See Note 10.
6. COLLABORATIVE AGREEMENTS
In January 1995, the Company received a grant award from the National
Institute of Standards and Technology ("NIST") to further the development of
the Company's SBH technology. Under this award, the Company is entitled to
receive approximately 80% of actual direct costsdeemed modified, superseded or replaced for purposes of this program up to
$2,000,000 over a three-year period. Total revenue recognized under the NIST
agreement for the years ended December 31, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997 was $700,000, $426,098, $78,327 and
$272,373, respectively.
F-13
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COLLABORATIVE AGREEMENTS--(CONTINUED)
The Company entered into collaborative agreements with two pharmaceutical
companies, which provided for total contract fees of $1,250,000 and royalty
payments for any future sales of products generated from the agreements.
Contract fees are payable upon achievement of milestones and are
nonrefundable. During 1994, 1995 and 1996, the Company recorded revenues of
$50,000, $1,200,000 and zero, respectively, under these agreements. No
revenues were recorded under these agreements during each of the three months
ended March 31, 1996 and 1997.
Under the terms of another agreement with a clinical reference laboratory,
the Company has received an initial payment of $200,000 and will grant its
corporate partner a non-exclusive license to use, promote, commercialize,
market and sell certain technology for clinical diagnostic purposes upon
payment of the license fee. The corporate partner and the Company are in the
process of evaluating whether to enter into a broader license agreement. See
Note 10.
7. STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
Each share of Series A Preferred Stock is convertible at any time into one
share of common stock, subject to adjustment for antidilution. Conversion is
automatic upon the closing of an underwritten public offering with aggregate
offering proceeds exceeding $15,000,000 and a preoffering valuation of the
Company exceeding $42,000,000.
The Series A preferred stockholders have one vote per share and are entitled
to receive, ratably with common stockholders, dividends when and if declared
by the board of directors. Through December 31, 1996, no such dividends have
been declared. The Series A preferred stockholders have liquidation
preferences equal to $10.00 per share, plus all dividends declared and unpaid.
COMMON STOCK
At December 31, 1996, an aggregate of 8,099,792 shares of common stock were
reserved for issuance upon the exercise of warrants (see "Warrants" below),
conversion of Series A Preferred Stock (5,760,000 shares) outstanding stock
options granted and stock options reserved for issuance.
In December 1996, an officer of the Company purchased 161,280 shares of
common stock at $4.17 per share for a total purchase price of $672,000.
Simultaneously with the purchase of such stock, the officer borrowed from the
Company $672,000 as evidenced by a promissory note that bears interest at 3%
per annum, matures in December 2001, and is secured by and with recourse only
to the 161,280 shares. The Company has the right, but not the obligation to
repurchase certain of the shares if the officer's employment with the Company
terminates before December 1997. Also in December 1996, another officer
exercised options to purchase 48,000 shares of common stock at an exercise
price of $1.56 per share and exercised warrants to purchase 144,000 shares of
common stock at $2.90 per share. Simultaneously with exercise, the officer
borrowed from the Company $492,000, as evidenced by a promissory note that
bears interest at 3% per annum, matures in December 2001, and is secured by
and with recourse only to 118,080 shares.
In March 1997, the Company sold a total of 359,424 shares of common stock
for $6.51 per share to two officers of the Company in exchange for promissory
notes with terms similar to those described above. Such shares are subject to
repurchase by the Company if the officers do not remain employed by the
Company through March 1999; such repurchase rights of the Company expire
ratably over this two-year period. Additionally, the Company granted options
to purchase a total of 86,131 shares of common stock at an exercise price of
$6.51 per share to officers and employees.
F-14
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY--(CONTINUED)
DEFERRED COMPENSATION
The Company has recorded deferred compensation of $580,150 representing the
difference between the issuance and exercise prices related to stock awards
and options and the deemed fair value for financial reporting purposes of the
Company's common stock for 359,424 shares subject to stock awards and 86,131
shares subject to stock options granted during the three-months ended March
31, 1997. The deferred stock compensation will be amortized to expense over
the vesting period of the options and over the two year repurchase period for
the stock awards.
SHARES HELD IN TRUST
In November 1993, the Company sold 5,446,502 shares of common stock to the
Hyseq One Trust (the "Trust") for $2,837 or $0.001 per share. The Trust was
formed to maintain certain agreed upon ownership ratios and avoid dilution to
existing stockholders. A trustee holds the shares in accordance with terms of
the trust agreement. The trustee retained all voting rights attributable to
those shares held in the Trust.
The Company has the right to purchase from the Trust (i) the equal number of
shares of its preferred or common stock that it issues in the same period
(excluding shares issued as a result of a stock split or stock dividend) to
any person other than the Trust and (ii) the number of shares calculated as
the Company's revenues prior to May 1, 1994 divided by $2.90 or the Company's
revenues subsequent to May 1, 1994 divided by $5.21. The price that the
Company pays to purchase shares from the Trust is $0.002 per share. At such
time as the Company reacquires shares of common or preferred stock from anyone
other than the Trust, an equivalent number of common shares are to be issued
to the Trust at $0.001 per share.
As of March 31, 1997, the Trust owned 961,219 shares of the Company's common
stock; 4,686,190 shares of common stock had been purchased from the Trust and
retired by the Company. The Trust shall terminate at such time as there are no
shares held thereunder, at which time any remaining trust property shall be
distributed to the Company. The Trust will terminate upon completion of the
Company's proposed initial public offering. See Note 10.
WARRANTS
As of December 31, 1996, the Company has issued warrants to purchase up to
1,010,000 shares of common stock at exercise prices ranging from $2.90 to
$5.21 ($3.73 average exercise price) per share to certain investors, an
executive officer and the private placement agent for the 1996 Series A
Preferred Stock financing. The value of these warrants is not material. In
1996, an executive officer of the Company exercised a warrant to purchase
144,000 shares of common stock at $2.90 per share.
In January 1997, the Company obtained a commitment for an additional
$500,000 under its loan agreement with a capital management partnership
entered into in December 1996. The Company is committed to issuing an
additional warrant to purchase 4,800 shares of common stock at $5.21 per share
related to this loan commitment. This loan will be secured by certain
equipment owned by the Companyprospectus to the extent it is used.
F-15
HYSEQ, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY--(CONTINUED)
STOCK OPTION PLANS
During 1995, the Company adopted the 1995that a statement contained in this prospectus modifies, supersedes or replaces such statement
Shares of Common Stock Option Plan (the "Stock
Option Plan"). The Company reserved a total of 576,000 common shares
Warrants for issuance under the Plan. Under the Plan, stock options may be granted by the
board of directors to employees and consultants. Options granted may be either
incentive stock options or nonstatutory stock options. Incentive stock options
may be granted to employees or consultants with exercise prices of no less
than fair value and nonstatutory options may be granted to employees or
consultants at exercise prices of no less than par value of the common stock
on the date of grant as determined by the board of directors. Options vest as
determined by the board of directors and expire 10 years from the date of
grant.
The Company had granted options to purchase common stock to several key
employees, directors, and scientists prior to adoption of the Plan. Each
option gives the holder the right to purchase common stock at prices between
$0.78 and $4.17 per share. The options vest over periodsPurchase up to four years. AsShares of December 31, 1996, 615,552 options were outstanding which were issued
outsideCommon Stock
Shares of Common Stock Underlying the Warrants
Common Stock Option Plan.
During 1996, the Company adopted the Non-Employee Directors Stock Option
Plan (the "Directors' Plan")
PRELIMINARY PROSPECTUS
, which provides for the issuance of nonqualified
stock options to nonemployee members of the board of directors. An aggregate
of 138,240 shares of the Company's authorized but unissued common stock has
been reserved for issuance upon the exercise of options granted under the
Directors' Plan.
As adjusted information regarding net loss and net loss per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method. The fair value for these
options was estimated at the date of grant using the minimum value method with
the following weighted-average assumptions:
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
| Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth the costsfees and expenses, other than underwriting discounts and commissions,estimated placement agent’s fees, payable by the Company in connection with the saleregistration of the Common Stock being registered hereby.common stock hereunder. All the amounts shown are estimated,estimates except the SEC registration fee the NASD filing fee and the Nasdaq National Market listingFINRA filing fee.
| Amount Paid or to be Paid | ||||
SEC registration fee | $ | 2,728 | ||
FINRA filing fee | * | |||
Printing expenses | * | |||
Legal fees and expenses | * | |||
Accounting fees and expenses | * | |||
Transfer agent and registrar fees | * | |||
Miscellaneous expenses | * | |||
|
| |||
Total | $ | * | ||
|
| |||
* To be suppliedProvided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Nevada corporation, subject to the applicable
indemnification provisionsAmendment.
| Item 14. | Indemnification of Directors and Officers |
Section 145 of the NevadaDelaware General Corporation Law (the "NGCL").
The NGCL requires the Company to indemnify officers and directors for any
expenses incurred by any officer or director in connection with any actions or
proceedings, whether civil, criminal, administrative, or investigative,
brought against such officer or director because of his or her status as an
officer or director, to the extent that the director or officer has been
successful on the merits or otherwise in defense of the action or proceeding.
The NGCL permits a corporation to indemnify an officer or director, eveninclude in its charter documents, and in agreements between the absencecorporation and its directors and officers, provisions expanding the scope of an agreementindemnification beyond that specifically provided by the current law.
The Registrant’s amended and restated certificate of incorporation provides for the indemnification of directors to do so,the fullest extent permissible under Delaware law.
The Registrant’s amended and restated bylaws provide for expenses incurred in connection with
any action or proceedingthe indemnification of officers, directors and third parties acting on the Registrant’s behalf if such officer of director actedpersons act in good faith and in a manner in which he or she reasonably believed to be in orand not opposed to the Registrant’s best interests of the corporationinterest, and, such indemnification is authorized
by the stockholders, by a quorum of disinterested directors, by independent
legal counsel in a written opinion authorized by a majority vote of a quorum
of directors consisting of disinterested directors or by independent legal
counsel in a written opinion if a quorum of disinterested directors cannot be
obtained. The NGCL prohibits indemnification of a director or officer if a
final adjudication establishes that the officer's or director's acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and were material to the cause of action. Despite the foregoing
limitations on indemnification, the NGCL may permit an officer or director to
apply to the court for approval of indemnification even if the officer or
director is adjudged to have committed intentional misconduct, fraud or a
knowing violation of the law. The NGCL also provides that indemnification of
directors is not permitted for the unlawful payment of distributions, except
for those directors registering their dissent to the payment of the
distribution.
The Company's Amended and Restated Articles of Incorporation, as amended,
and By-Laws eliminate personal liability of directors or officers for any
expenses, claims, damages or liability incurred by reason of their position in
the Company to the fullest extent allowed under the NGCL.
The Company's By-Laws provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a partywith respect to any threatened,
pending or completedcriminal action suit or proceeding, because he or
II-1
she was or is a director, officer, employee or agent of the Company. In
addition, the Company's By-Laws provide that the Company shall indemnify any
person who was or is asuch indemnified party or is threatenedhad no reason to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company because he or she was or is a director, officer, employee or agent of
the Company against expenses, actually and reasonably incurred if he or she
acted in good faith, unless adjudged liable to the Company. Further, the
Company's By-Laws provide that to the extent that a director, officer,
employee or agent of the Company has been successful on the merits or
otherwise, in defense of any action, suit or proceeding referred to above or
in defense of any claim, matter or issue therein, he or she shall be
indemnified against expenses actually and reasonably incurred by himbelieve his or her in
connection therewith.
conduct was unlawful.
The CompanyRegistrant has entered into indemnification agreements with each of its directors and executive officers, and directors in which the Company agrees to indemnify and hold
harmless the officer or directoraddition to the fullest extent permitted by applicable
law against anyindemnification provisions provided for in its charter documents, and all reasonable attorneys' fees and all other reasonable
expense, cost, liability and loss (including a mandatory obligation by the CompanyRegistrant intends to advance reimbursement of legal fees and expenses) paid or
reasonably incurred by such officer or director or on his or her behalf in
connectionenter into indemnification agreements with any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation not initiated by the officer or
director that he or she believes in good faith might lead to a proceeding,
inquiry or investigation (a "Proceeding"), because the officer or director is
or was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee,
trustee, agent or fiduciary of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, or by reason of any
action or inaction by the officer or director in such capacity. However, the
Company's obligation to indemnify the officer or director is subject to a
determination by: (i) the Company's Board of Directors, by vote of the
majority of disinterested directors; (ii) under certain circumstances,
independent legal counsel appointed by the Board of Directors in a written
opinion; (iii) stockholders of the Company; or (iv) a court of competent
jurisdiction in a final, non-appealable adjudication, that the officer or
director acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal Proceeding, the officer or director acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal Proceeding, the
officer or director had no reasonable cause to believe that his or her conduct
was unlawful.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the Company and itsnew directors and executive officers in the offeringfuture.
The Registrant maintains insurance on behalf of any person who is or was a director or officer against any loss arising from any claim asserted against him or her and incurred by him or her in that capacity, subject to certain exclusions and limits of the Common Stock registered hereby, and each person, if any,
who controlsamount of coverage.
| Item 15. | Recent Sales of Unregistered Securities |
Since January 1, 2012, the Company, for certain liabilities, including liabilities
arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1994, the CompanyRegistrant has issued and sold the following unregistered securities (share amounts and per share amounts have been retroactively adjusted to give effect to a 1-for-6 reverse stock split that became effective on March 4, 2013):
| (a) | Issuances of Capital Stock and Warrants |
| 1. | On October 22, 2012, ARCA sold approximately $325,000 of our common stock and warrants for common stock in a private placement transaction. ARCA issued to investors 137,530 shares of common stock together with warrants to purchase 103,148 shares of common stock. The net proceeds, after deducting offering expenses, were approximately $280,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of approximately $2.36 per unit. |
The warrants were not registered underexercisable upon issuance, expire 5 years from the Securities Act:
In an offering that commenced in April 1994, the Company sold 740,962 sharesdate of Series A Preferred Stock for total consideration of $2,545,681issuance, and issued
warrants to purchase 418,114 shares of Common Stock athave an exercise price of $3.42approximately $1.80 per share. In June 1997,share, equal to 100% of the closing sales price of ARCA’s common stock on the Nasdaq Capital Market on October 22, 2012. ARCA Director and Chief Executive Officer Dr. Michael Bristow, ARCA Director John Zabriskie, and ARCA Senior Vice President and General Counsel Chris Ozeroff were investors in the private placement. Atlas Venture, a current investor in the Company issued 194,020affiliated with ARCA Director Dr. Jean-Francois Formela, was also an investor in the private placement
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| 2. | On December 18, 2012, ARCA sold approximately $250,000 of our common stock and warrants for common stock in a private placement transaction with its Chief Executive Officer, Dr. Michael Bristow. ARCA issued 86,186 shares of common stock together with warrants to purchase 64,640 shares of common stock. The net proceeds, after deducting offering expenses were approximately $230,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of approximately $2.90 per unit. |
The warrants were exercisable upon issuance, expire 5 years from the date of Common
Stockissuance, and have an exercise price of approximately $2.34 per share, equal to 100% of the closing sales price of ARCA’s common stock on the Nasdaq Capital Market on December 18, 2012
| 3. | On January 22, 2013, the ARCA sold approximately $1 million of its common stock and warrants for common stock in a private placement transaction with accredited investors and our Chief Executive Officer. ARCA issued 356,430 shares of common stock together with warrants to purchase 249,501 shares of common stock. The net proceeds, after deducting a placement agent fee and other offering expenses, were approximately $850,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.70 shares of common stock was sold at a purchase price of approximately $2.81 per unit. |
The warrants were exercisable upon issuance, expire 7 years from the date of issuance, and have an exercise price of approximately $2.28 per share, equal to 100% of the closing bid price of ARCA’s common stock on the Nasdaq Capital Market on January 22, 2013. Pursuant to the holderterms of the Registration Rights Agreements (the Rights Agreements) entered into as part of each of these transactions, ARCA granted to the investors certain registration rights related to the shares underlying the units sold in these private placements. ARCA filed a warrant representing 251,873registration statement, in accordance with the terms of the Rights Agreements, for the resale of the shares underlying the warrantsunits sold in satisfactionthese private placements. That registration statement was declared effective by the Securities and Exchange Commission on January 26, 2012
The issuances of the exercise of such warrant.
In June 1994, an officer of the Company was granted an option to purchase
345,600 shares of Common Stock at $1.56 per sharesecurities described above in connection with his
employment. In September 1996, the Company issued 19,200 shares of Common
Stock to this officer upon the exercise of a portion of the option at $1.56
per share for total consideration of $30,000. In December 1996, the Company
issued 48,000 shares of Common Stock to this officer upon the exercise of a
portion of this option at $1.56 per share for total consideration of $75,000,
which the officer borrowedparagraphs 1 through 3 were exempt from the Company. In March 1997, the Company issued
7,680 shares of Common Stock to this officer upon the exercise of a portion of
the option at $1.56 per share for total consideration of $12,000. In June
1997, the Company issued 2,880 shares of Common Stock to this officer upon
exercise of a portion of the optional $1.56 share for total consideration of
$4,500.
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In August 1994, the Company granted options to two officers and one employee
to purchase a total of 278,400 shares of Common Stock at $1.56 in connection
with their employment.
In September 1994, the Company issued 1,920 shares of Common Stock to a
member of the Scientific Advisory Board ("SAB") upon the exercise of a portion
of options granted in March 1994 at the exercise price of $0.78 per share for
total consideration of $1,500.
In November 1994, the Company granted options to purchase a total of 34,560
shares of Common Stock at an exercise price of $1.82 per share to two
directors in consideration of their services.
In an offering that commenced in May 1995, the Company sold 2,880,000 shares
of Series A Preferred Stock for total consideration of $12,000,000 and issued
warrants to purchase 202,800 shares at an exercise price of $4.17 per share
and warrants to purchase 206,822 shares of Common Stock at an exercise price
of $4.58 per share. Fahnestock & Co. Inc. acted as placement agent in
connection with this offering. In consideration for placing 2,585,280 shares
of Series A Preferred Stock, it received the aforementioned warrants to
purchase 206,822 shares of Common Stock and a private placement fee equal to
7.0% of the gross proceeds from the sale of such shares. In June 1997, the
Company issued 46,994 shares of Common Stock to the holder of a warrant
representing 65,280 of the shares underlying the warrants in satisfaction of
the exercise of such warrant.
In December 1995, the Company issued 2,688 shares of Common Stock to an SAB
member upon the exercise of a portion of options granted in March 1994 at the
exercise price of $0.78 per share for total consideration of $2,100.
In September and December 1996, the Company sold a total of 241,920 shares
of Common Stock at $4.17 per share for total consideration of $1,008,000. An
officer of the Company purchased 161,280 of these shares and two directors
purchased a total of 80,640 these shares. The officer borrowed $672,000 from
the Company to pay for his shares.
In October 1996, the Company issued options to purchase 46,080 shares of
Common Stock at an exercise price of $4.17 per share to each of its two new
independent directorsregistration under the Directors' Plan.
In December 1996,Securities Act of 1933, as amended, or the Company issued 144,000 shares of Common Stock to an
officer the exercise of a warrant granted in 1993 at $2.90 per share for total
consideration of $417,000, which the officer borrowed from the Company to pay
for his shares.
In December 1996, the Company issued a warrant to purchase 9,600 shares of
Common Stock at $5.21 per share to Aberlyn Capital in connection with the
funding of a $750,000 loan to the Company.
In January 1997, the Company issued 76,800 shares of Common Stock at $6.51
per share to Sachnoff & Weaver, Ltd. Sachnoff & Weaver, Ltd. paid $102,415 and
delivered a promissory note to the Company for the balance in the amount of
$397,585 secured by 61,069 shares of Common Stock. The note bears interest at
8.25% per annum and is due on March 18, 2001. As of May 16, 1997, the note had
an outstanding balance of $374,887.
In March 1997, two officers each purchased 179,712 shares of Common Stock at
$6.51 per share for total consideration of $2,340,000. The officers each
borrowed $1,170,000 from the Company to pay for these shares.
In April 1997, the Company granted three directors options to purchase a
total of 2,880 shares of Common Stock at $8.33 per share pursuant to the terms
of the Directors' Plan.
In May 1997, the Company issued shares of Series B Preferred Stock which are
convertible into 427,350 shares of Common Stock at a post-conversion price of
$11.70 per share to a collaboration partner for total consideration of
$5,000,000.
Between April 1995 and June 30, 1997, the Company granted options to
purchase an aggregate of 739,515 shares of Common Stock, net of cancelled
options, at exercise prices ranging from $4.17 to $8.33, pursuant to the Stock
Option Plan for the purpose of incentivizing employees and attracting and
retaining executive officers and other key employees, directors and members of
its SAB.
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Immediately prior to the closing of this offering, the Company will issue
shares of Common Stock in connection with a 1.92-for-1 stock split.
Except as described above, no underwriters were engaged in connection with
the foregoing sales of securities. Such sales of shares of Common Stock and
Series A Preferred Stock were madeSecurities Act, in reliance upon the exemption from
registration set forth inon Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated thereunder, foras transactions by an issuer not involving aany public offering and, withoffering. The purchasers of the exception of certain persons who purchased sharessecurities in the April 1994 offering, all purchasersthese transactions represented that they were accredited investors as such term
is defined in Rule 501(a) of Regulation D. Issuances of options toand that they were acquiring the Company's employees, directorssecurities for investment only and members of its SAB werenot with a view toward the public sale or distribution hereof. Such purchasers received written disclosures that the securities had not been registered under the Securities Act, and that any resale must be made pursuant to Rule 701 promulgated undera registration statement or an available exemption from registration. All purchasers either received adequate financial statement or non-financial statement information about the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Registrant or had adequate access, through their relationship with the Registrant, to financial statement or non-financial statement information about the Registrant. The sale of these securities was made without general solicitation or advertising.
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| Item 16. | Exhibits |
EXHIBIT INDEX
| Exhibit | ||
| Number | Description | |
| 2.1 | Agreement and Plan of | |
| 2.2 | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated October 28, 2008, by and among Nuvelo, Inc., Dawn Acquisition Sub, Inc. and ARCA biopharma, Inc.(6) | |
| 3.1 | Amended and Restated | |
| 3.1(a) | Certificate of Amendment to Restated Certificate of Incorporation.(34) | |
| 3.2 | Second Amended and Restated Bylaws of the Registrant, as amended.(9) | |
| 4.1 | Form of Common Stock Certificate.(7) | |
| 4.2 | Certificate of Designations | |
| 4.3 | Warrant to Purchase Stock | |
| 4.4 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and SVB Financial Group.(8) | |
| 4.5 | Warrant to Purchase Stock Agreement, dated August 19, 2008, by and between ARCA biopharma, Inc. and Silicon Valley Bank.(8) | |
| 4.6 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and SVB Financial Group.(8) | |
| 4.7 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Boulder Ventures IV, L.P.(8) | |
| 4.8 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Boulder Ventures IV, L.P.(8) | |
| 4.9 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Boulder Ventures IV (Annex), L.P.(8) | |
| 4.10 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Boulder Ventures IV (Annex), L.P.(8) | |
| 4.11 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and InterWest Partners IX, LP.(8) | |
| 4.12 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and InterWest Partners IX, LP.(8) | |
| 4.13 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Atlas Venture Fund VII, L.P.(8) | |
| 4.14 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Atlas Venture Fund VII, L.P.(8) | |
| 4.15 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and The Peierls Foundation, Inc.(8) | |
| 4.16 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and The Peierls Foundation, Inc.(8) | |
| 4.17 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Skyline Venture Partners Qualified Purchaser Fund IV, L.P.(8) | |
| 4.18 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Skyline Venture Partners Qualified Purchaser Fund IV, L.P.(8) | |
| 4.19 | Warrant to Purchase Stock Agreement, dated October 18, 2009, by and between ARCA biopharma, Inc. and BioMed Realty, L.P.(16) | |
| 4.20 | Form of | |
| 4.21 | Form of Warrant to Purchase Common Stock.(27) | |
| 4.22 | Form of Common Stock Purchase Warrant. (29) | |
| 4.23 | Form of Warrants to Purchase Shares of Common Stock, dated October 22, 2012. (30) | |
| 4.24 | Form of Warrants to Purchase Shares of Common Stock, dated December 20, 2012. (31) | |
| 4.25 | Form of Warrants to Purchase Shares of Common Stock. (32) | |
| 4.26 | Form of Common Stock Purchase Warrant. (33) | |
| 4.27** | Warrant Agency Agreement | |
| 5.1** | Opinion of | |
| 10.1§ | Amended and Restated Collaboration and License Agreement, dated July 31, 2006, by and between Nuvelo, Inc. and Archemix Corp.(2) | |
| 10.2§ | Second Amended and Restated Collaboration and License Agreement, dated April 20, 2010, by and between ARCA biopharma, Inc. and Archemix Corp.(17) | |
| 10.3 | Lease, dated February 8, 2008, by and between ARCA Discovery, Inc. and Arista Place, LLC.(8) | |
| 10.4 | Loan and Security Agreement, dated July 17, 2007, by and between ARCA Discovery, Inc. and Silicon Valley Bank.(8) | |
| 10.5 | First Amendment to Loan and Security Agreement, dated January 21, 2009, by and between ARCA biopharma, Inc. and Silicon Valley Bank.(8) | |
| 10.6 | Second Amendment to Loan and Security Agreement, dated March 23, 2009, by and between ARCA biopharma Colorado, Inc. and Silicon Valley Bank.(8) | |
| 10.7 | Third Amendment to Loan and Security Agreement, dated April 6, 2009, by and between ARCA biopharma Colorado, Inc. and Silicon Valley Bank.(14) | |
| 10.8 | Fourth Amendment to Assumption of Loan and Security Agreement, dated April 10, 2009, by and between ARCA biopharma, Inc., ARCA biopharma Colorado, Inc. and Silicon Valley Bank.(14) | |
| 10.9§ | License and Sublicense Agreement, dated October 28, 2003, by and between ARCA Discovery, Inc. and CPEC, L.L.C.(12) | |
| 10.10§ | Amendment to License and Sublicense Agreement, dated February 22, 2006, by and between ARCA Discovery, Inc. and CPEC L.L.C.(13) | |
| 10.11§ | Exclusive License Agreement, dated October 14, 2005, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.12§ | First Amendment to Exclusive License Agreement, dated June 23, 2006, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.13§ | Second Amendment to Exclusive License Agreement, dated July 20, 2006, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.14 | Third Amendment to Exclusive License Agreement, dated July 19, 2007, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
II-3
| 10.15§ | Fourth Amendment to Exclusive License Agreement, dated August 22, 2007, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.16§ | Diagnostic, Collaboration and Option Agreement, dated June 23, 2006, by and between ARCA Discovery, Inc. and CardioDX, Inc.(12) | |
| 10.17§ | Amendment to Diagnostic, Collaboration and Option Agreement, dated October 1, 2007, by and between ARCA Discovery, Inc. and CardioDX, Inc.(12) | |
| 10.18§ | Manufacturing Agreement, dated September 11, 2006, by and between ARCA Discovery, Inc. and Patheon, Inc.(12) | |
| 10.19§ | Development, Commercialization and Licensing Agreement, dated February 1, 2007, by and between ARCA Discovery, Inc. and Laboratory Corporation of America Holdings, Inc.(13) | |
| 10.20 | Amendment No. 1 to Development, Commercialization and Licensing Agreement, dated May 14, 2007, by and between ARCA Discovery, Inc. and Laboratory Corporation of America Holdings, Inc.(12) | |
| 10.21§ | Amendment No. 2 to Development, Commercialization and Licensing Agreement, dated June 10, 2008, by and between ARCA Discovery, Inc. and Laboratory Corporation of America Holdings, Inc.(12) | |
| 10.22 | Materials Transfer Agreement, dated October 14, 2005, by and between ARCA Discovery, Inc. and the University of Colorado.(12) | |
| 10.23 | Lease Surrender and Termination Agreement, dated August 5, 2009, by and between ARCA biopharma, Inc. and The Irvine Company LLC.(9) | |
| 10.24 | Lease Termination and Warrant Purchase Agreement, dated September 18, 2009, by and between ARCA biopharma, Inc., BMR-201 Industrial Road LLC and BioMed Realty, L.P.(10) | |
| 10.25§ | Exclusive Option Agreement, dated December 2, 2009, by and between ARCA biopharma, Inc. and the University of Cincinnati. (16) | |
| 10.26 | Agreement Term Extension Letter dated December 8, 2010, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(19) | |
| 10.27 | Agreement Term Extension Letter dated December 21, 2010, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(20) | |
| 10.28 | Agreement Term Extension Letter dated January 21, 2011, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(21) | |
| 10.29† | ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.30† | Amendment No. 1 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.31† | Amendment No. 2 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.32† | Amendment No. 3 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.33† | Amendment No. 4 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.34† | Amendment No. 5 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.35† | Amendment No. 6 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.36† | ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of Executive Incentive Stock Option Agreement.(7) | |
| 10.37† | ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of Non-Executive Incentive Stock Option Agreement.(7) | |
| 10.38† | ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of Nonqualified Stock Option Agreement.(7) | |
| 10.39† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Partial Acceleration Stock Option Agreement.(8) | |
| 10.40† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of No Acceleration Stock Option Agreement.(8) | |
| 10.41† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Director Stock Option Agreement.(8) | |
| 10.42† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Notice of Grant of Stock Option.(8) | |
| 10.43† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Notice of Director Grant of Stock Option.(8) | |
| 10.44† | Form of Indemnification Agreement between Nuvelo, Inc. and its directors and officers.(1) | |
| 10.45† | Nuvelo, Inc. Amended Executive Change in Control and Severance Benefit Plan.(4) | |
| 10.46† | Amended and Restated Employment and Retention Agreement, dated June 4, 2008, by and between ARCA biopharma, Inc. and Michael R. Bristow.(8) | |
| 10.47 | Assignment and Assumption Agreement, dated January 26, 2009, by and between ARCA biopharma, Inc. and ARCA biopharma Colorado, Inc.(8) | |
| 10.48† | Amended and Restated Employment Agreement, dated June 12, 2008, by and between ARCA biopharma, Inc. and Christopher D. Ozeroff.(8) | |
| 10.49 | Assignment and Assumption Agreement, dated January 26, 2009, by and between ARCA biopharma, Inc. and ARCA biopharma Colorado, Inc.(8) | |
| 10.50† | Amended and Restated ARCA biopharma, Inc. 2004 Equity Incentive Plan.(11) | |
| 10.51† | ARCA biopharma, Inc. Employee Severance Benefit Plan.(18) | |
| 10.52† | ARCA biopharma, Inc. 2009 Reduction in Force Severance Benefit Plan.(18) | |
| 10.53† | Form of Option Amendment pursuant to ARCA biopharma, Inc. 2004 Equity Incentive Plan and ARCA biopharma, Inc. 2004 Stock Option Plan (change of control).(18) | |
| 10.54† | Form of Option Agreement and Grant Notice pursuant to ARCA biopharma, Inc. 2004 Equity Incentive Plan (NDA/change of control acceleration).(18) | |
| 10.55† | Employment Agreement, dated February 11, 2009, by and between ARCA biopharma, Inc. and Patrick Wheeler. (16) | |
| 10.56 | Form of Indemnification Agreement between ARCA biopharma, Inc. and its directors and officers.(8) | |
| 10.57 | Agreement Term Extension Letter dated March 31, 2011, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(22) | |
| 10.58 | Form of Subscription Agreement.(23) | |
| 10.59§ | License Agreement, dated April 15, 2011, by and between ARCA biopharma and the University of Cincinnati.(24) | |
| 10.60 | First Amendment to Lease Agreement, dated June 14, 2011, by and between Arista Place, LLC and ARCA biopharma Inc., (f/k/a ARCA Discovery, Inc.).(25) | |
| 10.61§ | Amended and Restated Exclusive License Agreement, dated August 12, 2011, by and between the Regents of the University of Colorado and ARCA biopharma, Inc.(26) | |
| 10.62 | Form of Subscription Agreement.(27) | |
| 10.63 | Form of Registration Rights Agreement.(27) | |
| 10.64 | Waiver and Amendment Agreement, dated March 30, 2012, by and between ARCA biopharma, Inc. and Michael Bristow. (28) | |
| 10.65 | Waiver and Amendment Agreement, dated March 30, 2012, by and between ARCA biopharma, Inc. and Patrick Wheeler. (28) | |
| 10.66 | Waiver and Amendment Agreement, dated March 30, 2012, by and between ARCA biopharma, Inc. and Christopher Ozeroff. (28) | |
| 10.67 | Form of Subscription Agreement. (29) | |
| 10.68 | Form of Subscription Agreement by and among the Company and | |
| 10.69 | Form of | |
| 10.70 | Form of Subscription Agreement by and | |
| 10.71 | Form of Registration Rights Agreement. (31) | |
| 10.72 | Form of Amendment to the Registration Rights Agreement, | |
II-4
| 10.73 | Form of Subscription Agreement by and among the Company and | |
| 10.74 | Form of Registration Rights Agreement. (32) | |
| 10.75 | Subscription Agreement. (33) | |
| 14.1 | Code of Business Conduct and | |
| 16.1 | Letter from Ernst & Young LLP | |
| 23.1* | Consent of | |
| 24.1* | Power of Attorney (included in the signature page hereto). | |
| * | Filed herewith |
| ** | To be filed by amendment |
| † | Compensatory plan or agreement. |
| § | Confidential treatment has been requested for portions of this document, which are omitted and filed separately with the SEC. |
| ‡ | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
| (1) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Hyseq, Inc.’s Form S-1, filed on |
| (2) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Nuvelo, Inc.’s Form 10-Q, filed on November 8, 2006, File No. 000-22873. |
| (3) | Previously filed with the SEC as an Appendix to and incorporated herein by reference from Nuvelo, Inc.’s Proxy Statement on Schedule 14A, filed on April 18, 2007, File No. 000-22873. |
| (4) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Nuvelo, Inc.’s Form 10-Q, filed on November 7, 2007, File No. 000-22873. |
| (5) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Nuvelo, Inc.’s Form 8-K, filed on September 25, 2008, File No. 000-22873. |
| (6) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Nuvelo, Inc.’s Form 8-K, filed on October 29, 2008, File No. 000-22873. |
| (7) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on January 28, 2009, File No. 000-22873. |
| (8) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-K, filed on March 27, 2009, File No. 000-22873. |
| (9) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on November 16, 2009, File No. 000-22873. |
| (10) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on September 24, 2009, File No. 000-22873. |
| (11) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q/A, filed on August 21, 2009, File No. 000-22873. |
| (12) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on May 15, 2009, File No. 000-22873. |
| (13) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q/A, filed on November 6, 2009, File No. 000-22873. |
| (14) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on April 10, 2009, File No. 000-22873. |
| (15) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on March 30, 2009, File No. 000-22873. |
| (16) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-K, filed on March 4, 2010, File No. 000-22873. |
| (17) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on August 10, 2010, File No. 000-22873. |
| (18) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on August 10, 2009, File No. 000-22873. |
| (19) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on December 14, 2010, File No. 000-22873. |
| (20) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on December 22, 2010, File No. 000-22873. |
| (21) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on January 26, 2011, File No. 000-22873. |
| (22) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K, filed on April 5, 2011, File No. 000-22873. |
| (23) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K filed on April 18, 2011, File No. 000-22873. |
| (24) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on May 16, 2011, File No. 000-22873. |
| (25) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K filed on June 20, 2011, File No. 000-22873. |
| (26) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on August 15, 2011, File No. 000-22873. |
| (27) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 8-K filed on December 22, 2011, File No. 000-22873. |
| (28) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from ARCA biopharma, Inc.’s Form 10-Q, filed on May 14, 2012, File No. 000-22873. |
| (29) | Previously filed with the SEC as an exhibit and incorporated herein by reference from ARCA biopharma, Inc’s Form 8-K, filed on August 3, 2012, File No. 000-22873. |
| (30) | Previously filed with the SEC as an exhibit and incorporated herein by reference from ARCA biopharma, Inc’s Form 8-K, filed on October 23, 2012, File No. 000-22873. |
| (31) | Previously filed with the SEC as an exhibit and incorporated herein by reference from ARCA biopharma, Inc’s Form 8-K, filed on December 19, 2012, File No. 000-22873. |
| (32) | Previously filed with the SEC as an exhibit and incorporated herein by reference from ARCA biopharma, Inc’s Form 8-K, filed on January 23, 2013, File No. 000-22873. |
| (33) | Previously filed with the SEC as an exhibit and incorporated herein by reference from ARCA biopharma, Inc’s Form 8-K, filed on February 1, 2013, File No. 000-22873. |
| (34) | Previously filed with the SEC as an exhibit and incorporated herein by reference from ARCA biopharma, Inc’s Form 8-K, filed on March 5, 2013, File No. 000-22873. |
II-5
| Item 17. | Undertakings |
The undersigned Registrant hereby undertakes as follows:
To provide to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described Item 14 above or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
| (a) | For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this registration statement as of the time it was declared effective. |
| (b) | For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Companyregistrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,Broomfield, State of California,Colorado, on the 12th25th day of June, 1997.
HYSEQ, INC.
By: /s/ Lewis S. Gruber
-----------------------------------
LEWIS S. GRUBER
President and Chief Executive
Officer
March 2013.
| ARCA BIOPHARMA, INC. | ||
| By: | /s/ Michael R. Bristow | |
| Michael R. Bristow | ||
| President and Chief Executive Officer | ||
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES AND APPOINTS
LEWIS S. GRUBER AND CHRISTOPHER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael R. WOLF, AND EACH OF THEM, WITH FULL POWER OF
SUBSTITUTION AND FULL POWER TO ACT WITHOUT THE OTHER, AS HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION,
FOR SUCH PERSON AND IN SUCH PERSON'S NAME, PLACE AND STEAD, TO SIGN THE
REGISTRATION STATEMENT FILED HEREWITH AND ANY OR ALL AMENDMENTS TO SAID
REGISTRATION STATEMENT (INCLUDING POST-EFFECTIVE AMENDMENTS AND REGISTRATION
STATEMENTS FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AND
ANY OR ALL AMENDMENTS THERETO, AS AMENDED AND OTHERWISE) AND TO FILE THE SAME,
WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH
THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS THE FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT
AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE FOREGOING, AS
FULL TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF
THEM, OR HIS OR HER SUBSTITUTE, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
Bristow and Patrick M. Wheeler, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her, and in his or her name, place and stead, in any and all capacities, to sign the Registration Statement on Form S-1 of ARCA biopharma, Inc. and any or all amendments (including post-effective amendments) thereto and any new registration statement with respect to the offering contemplated thereby filed pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated on the 12th day of June, 1997.
SIGNATURE TITLE
--------- -----
/s/ Robert D. Weist Chairman of the Board
---------------------------
ROBERT D. WEIST
/s/ Lewis S. Gruber President and Chief Executive
--------------------------- Officer, Director (Principal
LEWIS S. GRUBER Executive Officer)
/s/ Christopher R. Wolf Executive Vice President and
--------------------------- Chief Financial Officer
CHRISTOPHER R. WOLF (Principal Financial and
Accounting Officer)
/s/ Radoje T. Drmanac Director
---------------------------
RADOJE T. DRMANAC
/s/ Radomir B. Crkvenjakov Director
---------------------------
RADOMIR B. CRKVENJAKOV
/s/ Raymond F. Baddour Director
---------------------------
RAYMOND F. BADDOUR
/s/ Greta E. Marshall Director
---------------------------
GRETA E. MARSHALL
Director
---------------------------
THOMAS N. MCCARTER III
Director
---------------------------
KENNETH D. NOONAN
II-6
Signature | Title | Date | ||
| /s/ Michael R. Bristow | President and Chief Executive Officer and Director | March 25, 2013 | ||
| Michael R. Bristow | (Principal Executive Officer) | |||
| /s/ Patrick M. Wheeler | Chief Financial Officer | March 25, 2013 | ||
| Patrick M. Wheeler | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Jean-Francois Formela | Director | March 25, 2013 | ||
| Jean-Francois Formela | ||||
| /s/ Linda Grais | Director | March 25, 2013 | ||
| Linda Grais | ||||
| /s/ Burton E. Sobel | Director | March 25, 2013 | ||
| Burton E. Sobel | ||||
| /s/ John L. Zabriskie | Director | March 25, 2013 | ||
| John L. Zabriskie | ||||
II-7
EXHIBIT INDEX
| Exhibit | ||
| Number | Description | |
| 2.1 | Agreement and Plan of | |
| 2.2 | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated October 28, 2008, by and among Nuvelo, Inc., Dawn Acquisition Sub, Inc. and ARCA biopharma, Inc.(6) | |
| 3.1 | Amended and Restated | |
| 3.1(a) | Certificate of Amendment to Restated Certificate of Incorporation.(34) | |
| 3.2 | Second Amended and Restated Bylaws of the Registrant, as amended.(9) | |
| 4.1 | Form of Common Stock Certificate.(7) | |
| 4.2 | Certificate of Designations | |
| 4.3 | Warrant to Purchase Stock | |
| 4.4 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and SVB Financial Group.(8) | |
| 4.5 | Warrant to Purchase Stock Agreement, dated August 19, 2008, by and between ARCA biopharma, Inc. and Silicon Valley Bank.(8) | |
| 4.6 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and SVB Financial Group.(8) | |
| 4.7 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Boulder Ventures IV, L.P.(8) | |
| 4.8 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Boulder Ventures IV, L.P.(8) | |
| 4.9 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Boulder Ventures IV (Annex), L.P.(8) | |
| 4.10 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Boulder Ventures IV (Annex), L.P.(8) | |
| 4.11 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and InterWest Partners IX, LP.(8) | |
| 4.12 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and InterWest Partners IX, LP.(8) | |
| 4.13 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Atlas Venture Fund VII, L.P.(8) | |
| 4.14 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Atlas Venture Fund VII, L.P.(8) | |
| 4.15 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and The Peierls Foundation, Inc.(8) | |
| 4.16 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and The Peierls Foundation, Inc.(8) | |
| 4.17 | Warrant to Purchase Stock Agreement, dated October 10, 2008, by and between ARCA biopharma, Inc. and Skyline Venture Partners Qualified Purchaser Fund IV, L.P.(8) | |
| 4.18 | Amendment No. 1 to Warrant to Purchase Stock Agreement, dated February 19, 2009, by and between ARCA biopharma, Inc. and Skyline Venture Partners Qualified Purchaser Fund IV, L.P.(8) | |
| 4.19 | Warrant to Purchase Stock Agreement, dated October 18, 2009, by and between ARCA biopharma, Inc. and BioMed Realty, L.P.(16) | |
| 4.20 | Form of | |
| 4.21 | Form of Warrant to Purchase Common Stock.(27) | |
| 4.22 | Form of Common Stock Purchase Warrant. (29) | |
| 4.23 | Form of Warrants to Purchase Shares of Common Stock, dated October 22, 2012. (30) | |
| 4.24 | Form of Warrants to Purchase Shares of Common Stock, dated December 20, 2012. (31) | |
| 4.25 | Form of Warrants to Purchase Shares of Common Stock. (32) | |
| 4.26 | Form of Common Stock Purchase Warrant. (33) | |
| 4.27** | Warrant Agency Agreement | |
| 5.1** | Opinion of | |
| 10.1§ | Amended and Restated Collaboration and License Agreement, dated July 31, 2006, by and between Nuvelo, Inc. and Archemix Corp.(2) | |
| 10.2§ | Second Amended and Restated Collaboration and License Agreement, dated April 20, 2010, by and between ARCA biopharma, Inc. and Archemix Corp.(17) | |
| 10.3 | Lease, dated February 8, 2008, by and between ARCA Discovery, Inc. and Arista Place, LLC.(8) | |
| 10.4 | Loan and Security Agreement, dated July 17, 2007, by and between ARCA Discovery, Inc. and Silicon Valley Bank.(8) | |
| 10.5 | First Amendment to Loan and Security Agreement, dated January 21, 2009, by and between ARCA biopharma, Inc. and Silicon Valley Bank.(8) | |
| 10.6 | Second Amendment to Loan and Security Agreement, dated March 23, 2009, by and between ARCA biopharma Colorado, Inc. and Silicon Valley Bank.(8) | |
| 10.7 | Third Amendment to Loan and Security Agreement, dated April 6, 2009, by and between ARCA biopharma Colorado, Inc. and Silicon Valley Bank.(14) | |
| 10.8 | Fourth Amendment to Assumption of Loan and Security Agreement, dated April 10, 2009, by and between ARCA biopharma, Inc., ARCA biopharma Colorado, Inc. and Silicon Valley Bank.(14) | |
| 10.9§ | License and Sublicense Agreement, dated October 28, 2003, by and between ARCA Discovery, Inc. and CPEC, L.L.C.(12) | |
| 10.10§ | Amendment to License and Sublicense Agreement, dated February 22, 2006, by and between ARCA Discovery, Inc. and CPEC L.L.C.(13) | |
| 10.11§ | Exclusive License Agreement, dated October 14, 2005, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.12§ | First Amendment to Exclusive License Agreement, dated June 23, 2006, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.13§ | Second Amendment to Exclusive License Agreement, dated July 20, 2006, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.14 | Third Amendment to Exclusive License Agreement, dated July 19, 2007, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.15§ | Fourth Amendment to Exclusive License Agreement, dated August 22, 2007, by and between ARCA Discovery, Inc. and the University of Colorado’s License Equity Holdings, Inc.(12) | |
| 10.16§ | Diagnostic, Collaboration and Option Agreement, dated June 23, 2006, by and between ARCA Discovery, Inc. and CardioDX, Inc.(12) | |
II-8
| 10.17§ | Amendment to Diagnostic, Collaboration and Option Agreement, dated October 1, 2007, by and between ARCA Discovery, Inc. and CardioDX, Inc.(12) | |
| 10.18§ | Manufacturing Agreement, dated September 11, 2006, by and between ARCA Discovery, Inc. and Patheon, Inc.(12) | |
| 10.19§ | Development, Commercialization and Licensing Agreement, dated February 1, 2007, by and between ARCA Discovery, Inc. and Laboratory Corporation of America Holdings, Inc.(13) | |
| 10.20 | Amendment No. 1 to Development, Commercialization and Licensing Agreement, dated May 14, 2007, by and between ARCA Discovery, Inc. and Laboratory Corporation of America Holdings, Inc.(12) | |
| 10.21§ | Amendment No. 2 to Development, Commercialization and Licensing Agreement, dated June 10, 2008, by and between ARCA Discovery, Inc. and Laboratory Corporation of America Holdings, Inc.(12) | |
| 10.22 | Materials Transfer Agreement, dated October 14, 2005, by and between ARCA Discovery, Inc. and the University of Colorado.(12) | |
| 10.23 | Lease Surrender and Termination Agreement, dated August 5, 2009, by and between ARCA biopharma, Inc. and The Irvine Company LLC.(9) | |
| 10.24 | Lease Termination and Warrant Purchase Agreement, dated September 18, 2009, by and between ARCA biopharma, Inc., BMR-201 Industrial Road LLC and BioMed Realty, L.P.(10) | |
| 10.25§ | Exclusive Option Agreement, dated December 2, 2009, by and between ARCA biopharma, Inc. and the University of Cincinnati. (16) | |
| 10.26 | Agreement Term Extension Letter dated December 8, 2010, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(19) | |
| 10.27 | Agreement Term Extension Letter dated December 21, 2010, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(20) | |
| 10.28 | Agreement Term Extension Letter dated January 21, 2011, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(21) | |
| 10.29† | ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.30† | Amendment No. 1 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.31† | Amendment No. 2 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.32† | Amendment No. 3 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.33† | Amendment No. 4 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.34† | Amendment No. 5 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.35† | Amendment No. 6 to the ARCA Discovery, Inc. 2004 Stock Incentive Plan.(7) | |
| 10.36† | ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of Executive Incentive Stock Option Agreement.(7) | |
| 10.37† | ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of Non-Executive Incentive Stock Option Agreement.(7) | |
| 10.38† | ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of Nonqualified Stock Option Agreement.(7) | |
| 10.39† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Partial Acceleration Stock Option Agreement.(8) | |
| 10.40† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of No Acceleration Stock Option Agreement.(8) | |
| 10.41† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Director Stock Option Agreement.(8) | |
| 10.42† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Notice of Grant of Stock Option.(8) | |
| 10.43† | ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Notice of Director Grant of Stock Option.(8) | |
| 10.44† | Form of Indemnification Agreement between Nuvelo, Inc. and its directors and officers.(1) | |
| 10.45† | Nuvelo, Inc. Amended Executive Change in Control and Severance Benefit Plan.(4) | |
| 10.46† | Amended and Restated Employment and Retention Agreement, dated June 4, 2008, by and between ARCA biopharma, Inc. and Michael R. Bristow.(8) | |
| 10.47 | Assignment and Assumption Agreement, dated January 26, 2009, by and between ARCA biopharma, Inc. and ARCA biopharma Colorado, Inc.(8) | |
| 10.48† | Amended and Restated Employment Agreement, dated June 12, 2008, by and between ARCA biopharma, Inc. and Christopher D. Ozeroff.(8) | |
| 10.49 | Assignment and Assumption Agreement, dated January 26, 2009, by and between ARCA biopharma, Inc. and ARCA biopharma Colorado, Inc.(8) | |
| 10.50† | Amended and Restated ARCA biopharma, Inc. 2004 Equity Incentive Plan.(11) | |
| 10.51† | ARCA biopharma, Inc. Employee Severance Benefit Plan.(18) | |
| 10.52† | ARCA biopharma, Inc. 2009 Reduction in Force Severance Benefit Plan.(18) | |
| 10.53† | Form of Option Amendment pursuant to ARCA biopharma, Inc. 2004 Equity Incentive Plan and ARCA biopharma, Inc. 2004 Stock Option Plan (change of control).(18) | |
| 10.54† | Form of Option Agreement and Grant Notice pursuant to ARCA biopharma, Inc. 2004 Equity Incentive Plan (NDA/change of control acceleration).(18) | |
| 10.55† | Employment Agreement, dated February 11, 2009, by and between ARCA biopharma, Inc. and Patrick Wheeler. (16) | |
| 10.56 | Form of Indemnification Agreement between ARCA biopharma, Inc. and its directors and officers.(8) | |
| 10.57 | Agreement Term Extension Letter dated March 31, 2011, of the Exclusive Option Agreement by and between ARCA biopharma, Inc. and the University of Cincinnati.(22) | |
| 10.58 | Form of Subscription Agreement.(23) | |
| 10.59§ | License Agreement, dated April 15, 2011, by and between ARCA biopharma and the University of Cincinnati.(24) | |
| 10.60 | First Amendment to Lease Agreement, dated June 14, 2011, by and between Arista Place, LLC and ARCA biopharma Inc., (f/k/a ARCA Discovery, Inc.).(25) | |
| 10.61§ | Amended and Restated Exclusive License Agreement, dated August 12, 2011, by and between the Regents of the University of Colorado and ARCA biopharma, Inc.(26) | |
| 10.62 | Form of Subscription Agreement.(27) | |
| 10.63 | Form of Registration Rights Agreement.(27) | |
| 10.64 | Waiver and Amendment Agreement, dated March 30, 2012, by and between ARCA biopharma, Inc. and Michael Bristow. (28) | |
| 10.65 | Waiver and Amendment Agreement, dated March 30, 2012, by and between ARCA biopharma, Inc. and Patrick Wheeler. (28) | |
| 10.66 | Waiver and Amendment Agreement, dated March 30, 2012, by and between ARCA biopharma, Inc. and Christopher Ozeroff. (28) | |
| 10.67 | Form of Subscription Agreement. (29) | |
| 10.68 | Form of Subscription Agreement by and among the Company and | |
| 10.69 | Form of | |
| 10.70 | Form of Subscription Agreement by and | |
| 10.71 | Form of Registration Rights Agreement. (31) | |
| 10.72 | Form of Amendment to the Registration Rights Agreement, | |
| 10.73 | Form of Subscription Agreement by and among the Company and | |
| 10.74 | Form of Registration Rights Agreement. (32) | |
| 10.75 | Subscription Agreement. (33) | |
II-9
| 14.1 | Code of Business Conduct and | |
| 16.1 | Letter from Ernst & Young LLP | |
| 23.1* | Consent of | |
| 24.1* | Power of Attorney (included in the signature page hereto). | |
| * | Filed herewith |
| ** | To be filed by amendment |
| † | Compensatory plan or agreement. |
| § | Confidential treatment has been requested for portions of this document, which are omitted and filed separately with the SEC. |
| ‡ | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
| (1) | Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Hyseq, Inc.’s Form S-1, filed on |