Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
þ | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2009, or
o | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE | 22-2389839 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(Address of principal executive offices) (zip code)
(858) 452-2323
(Registrant’s telephone number including area code)
(Registrant’s telephone number including area code)
Indicate by checkþ whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by checkþ whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by checkþ 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. (Check one):
Large accelerated filero | Accelerated filerþ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ
At May 5, 2009, 38,058,754 shares of Common Stock, par value $.001, of the registrant were issued and outstanding.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
12 | ||||||||
19 | ||||||||
19 | ||||||||
20 | ||||||||
20 | ||||||||
20 | ||||||||
42 | ||||||||
42 | ||||||||
42 | ||||||||
42 | ||||||||
42 | ||||||||
43 | ||||||||
EX-3.3 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
2
Table of Contents
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Note) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 57,747,514 | $ | 52,490,414 | ||||
Short-term investments | 102,615,314 | 93,004,191 | ||||||
Receivable from Forest Laboratories | 157,177 | 165,880 | ||||||
Prepaid expenses and other current assets | 1,323,921 | 1,048,668 | ||||||
Total current assets | 161,843,926 | 146,709,153 | ||||||
Property and equipment, net | 1,216,592 | 1,088,749 | ||||||
Goodwill | 26,465,627 | 26,465,627 | ||||||
Restricted cash | 487,100 | — | ||||||
Other assets | 321,494 | 328,994 | ||||||
Total assets | $ | 190,334,739 | $ | 174,592,523 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,044,423 | $ | 2,055,567 | ||||
Accrued compensation | 1,324,513 | 1,055,056 | ||||||
Accrued liabilities | 857,974 | 377,992 | ||||||
Payable to Forest Laboratories | 1,118,000 | 1,118,000 | ||||||
Current portion of deferred revenue | 5,202,056 | 3,351,416 | ||||||
Total current liabilities | 9,546,966 | 7,958,031 | ||||||
Deferred rent | 18,153 | 16,452 | ||||||
Deferred revenue, net of current portion | 27,301,678 | 6,702,832 | ||||||
Other liabilities | 487,100 | — | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.001 par value; 15,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, $.001 par value; 60,000,000 shares of common stock authorized; 38,058,754 and 37,906,994 shares issued and outstanding at March 31, 2009 (unaudited) and December 31, 2008, respectively | 38,059 | 37,907 | ||||||
Additional paid-in capital | 330,100,757 | 327,595,174 | ||||||
Accumulated other comprehensive income | 201,557 | 481,154 | ||||||
Accumulated deficit | (177,359,531 | ) | (168,199,027 | ) | ||||
Total stockholders’ equity | 152,980,842 | 159,915,208 | ||||||
Total liabilities and stockholders’ equity | $ | 190,334,739 | $ | 174,592,523 | ||||
See accompanying notes to consolidated financial statements.
Note: The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by U.S. generally accepted accounting principles.
3
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Revenues: | ||||||||
Revenues under collaborative agreement | $ | 7,855,557 | $ | 14,215,700 | ||||
Revenues from personalized medicine services | 2,837 | — | ||||||
Total revenues | 7,858,394 | 14,215,700 | ||||||
Operating expenses: | ||||||||
Cost of personalized medicine services | 359,392 | — | ||||||
Research and development | 7,237,392 | 2,669,624 | ||||||
Selling, general and administrative | 10,057,251 | 3,538,062 | ||||||
In-process research and development | — | 12,590,000 | ||||||
Total operating expenses | 17,654,035 | 18,797,686 | ||||||
Loss from operations | (9,795,641 | ) | (4,581,986 | ) | ||||
Interest income | 635,137 | 1,701,005 | ||||||
Net loss | $ | (9,160,504 | ) | $ | (2,880,981 | ) | ||
Net loss per share — basic and diluted | $ | (0.24 | ) | $ | (0.08 | ) | ||
Shares used in computing net loss per share —basic and diluted | 37,981,814 | 37,523,645 | ||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Operating Activities | ||||||||
Net loss | $ | (9,160,504 | ) | $ | (2,880,981 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 104,162 | 11,120 | ||||||
In-process research and development | — | 12,590,000 | ||||||
Amortization of premium/discount on short-term investments | (60,488 | ) | (685,317 | ) | ||||
Share-based compensation for options issued to non-employees | — | 7,750 | ||||||
Share-based compensation for stock and options issued to employees | 2,126,760 | 1,980,805 | ||||||
Non-cash portion of asset acquisition | 487,100 | — | ||||||
Changes in operating assets and liabilities, net of effects from purchase of Proprius | 21,922,932 | (806,536 | ) | |||||
Net cash provided by operating activities | 15,419,962 | 10,216,841 | ||||||
Investing Activities | ||||||||
Cash paid to acquire Proprius, net of cash acquired | — | (39,084,627 | ) | |||||
Purchases of short-term investments | (37,061,706 | ) | (28,832,146 | ) | ||||
Proceeds from sale of short-term investments | 27,231,474 | 70,656,000 | ||||||
Purchases of property and equipment | (224,505 | ) | (57,385 | ) | ||||
Deposit of restricted cash | (487,100 | ) | — | |||||
Net cash (used in) provided by investing activities | (10,541,837 | ) | 2,681,842 | |||||
Financing Activities | ||||||||
Proceeds from exercise of stock options | 378,975 | 399,892 | ||||||
Net cash provided by financing activities | 378,975 | 399,892 | ||||||
Increase in cash and cash equivalents | 5,257,100 | 13,298,575 | ||||||
Cash and cash equivalents at beginning of period | 52,490,414 | 70,093,425 | ||||||
Cash and cash equivalents at end of period | $ | 57,747,514 | $ | 83,392,000 | ||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
CYPRESS BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
We provide therapeutics and personalized medicine services, facilitating improved and individualized patient care. Our goal is to address the evolving needs of specialist physicians and their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid arthritis. We believe this approach to improving patient care creates a unique partnership with physicians, and expect that offering personalized medicine services and therapeutic products through the same sales organization will provide us with a differentiated commercial strategy and sustainable competitive advantage.
2. Basis of Presentation
The accompanying financial statements have been prepared by our management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles for interim financial statements. Certain information and disclosures normally included in complete audited year end financial statements have been condensed or omitted. In the opinion of our management, all adjustments necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements are reflected herein. All such adjustments are normal and recurring in nature. Interim results are not necessarily indicative of results for the full year. For more information, these financial statements should be read in conjunction with the audited financial statements and the related disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009.
The condensed consolidated financial statements include the accounts of Cypress Bioscience, Inc. and its wholly-owned subsidiary, Proprius Pharmaceuticals, Inc. (“Proprius”), collectively referred to as Cypress Bioscience, Inc. All significant intercompany accounts and transactions have been eliminated.
3. Recent Accounting Pronouncements
In November 2007, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force (“EITF”) Issue No. 07-1,Accounting for Collaborative Arrangements. The objective of EITF Issue No. 07-1 is to define collaborative arrangements and to establish reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and the third parties. EITF Issue No. 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. EITF Issue No. 07-1 shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The adoption of EITF Issue No. 07-1 did not have a material impact on our financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition related costs as incurred. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after
6
Table of Contents
December 15, 2008 and will apply prospectively to business combinations completed on or after that date. The adoption of SFAS No. 141(R) did not have a material impact on our financial statements.
In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51(“SFAS 160”). SFAS No. 160 improves the relevance, comparability and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way. Additionally, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. As of March 31, 2009, we did not hold any noncontrolling interests in subsidiaries, and will apply the provisions of SFAS No. 160 when the Company acquires such noncontrolling interests.
4. Short-Term Investments
Our short-term investments consist of securities of the U.S. government or its agencies, corporate debt securities, commercial paper and certificates of deposit. We have classified our short-term investments as available-for-sale and carry them at fair value with unrealized gains and losses, if any, reported as a separate component of stockholders’ equity and included in comprehensive income or loss. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available-for-sale is included in interest income.
At March 31, 2009 and December 31, 2008, short-term investments consisted of the following:
March 31, 2009 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt | $ | 96,506,138 | $ | 293,393 | $ | (102,737 | ) | $ | 96,696,794 | |||||||
Corporate debt securities | 2,908,392 | 8,762 | (3,298 | ) | 2,913,856 | |||||||||||
Commercial paper | 1,999,227 | 713 | — | 1,999,940 | ||||||||||||
Certificates of deposit | 1,000,000 | 4,724 | — | 1,004,724 | ||||||||||||
$ | 102,413,757 | $ | 307,592 | $ | (106,035 | ) | $ | 102,615,314 | ||||||||
December 31, 2008 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt | $ | 87,637,614 | $ | 468,401 | $ | (11,312 | ) | $ | 88,094,703 | |||||||
Corporate debt securities | 600,000 | 2,208 | — | 602,208 | ||||||||||||
Commercial paper | 1,985,423 | 8,763 | — | 1,994,186 | ||||||||||||
Certificates of deposit | 2,300,000 | 13,094 | — | 2,313,094 | ||||||||||||
$ | 92,523,037 | $ | 492,466 | $ | (11,312 | ) | $ | 93,004,191 | ||||||||
7
Table of Contents
5. Revenue Recognition
Revenues under our collaborative agreement include upfront license fees, sponsored development reimbursements, funding for certain of our employees, development and commercial milestones and royalties. In accordance with Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition in Financial Statements, and Emerging Issues Task Force (“EITF”) No. 00-21,Revenue Arrangements with Multiple Deliverables, revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. Amounts received for upfront license fees under multiple-element arrangements are deferred and recognized over the period such arrangements require on-going services or performance. Amounts received for sponsored development activities, including funding received for certain of our employees, are recognized as research costs are incurred over the period specified in the related agreement or as the services are performed. Amounts received for development milestones are recognized upon achievement of the milestone, which requires substantive effort and was not readily assured at the inception of the agreement. Revenue from commercial milestones is recognized over the remaining patent life, which corresponds with the term of the collaboration agreement. Royalties will be recognized when earned. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.
In connection with our personalized medicine services, such services are performed based on a written test requisition form. We generally bill third-party payers for these services upon generation and delivery of a report to the ordering physician. As such, we take assignment of benefits and the risk of collection with the third-party payer. We currently do not have any contracts with third-party payers. We usually bill the patient directly for amounts owed after multiple requests for payment have been denied or only partially paid by the insurance carrier as allowed by law. As relatively new tests, the personalized medicine services offered by us may not be covered under their reimbursement policies. Consequently, we pursue case-by-case reimbursement where policies are not in place or payment history has not been established. As a result, at the time of delivery of the report to the ordering physician, and in the absence of a reimbursement contract or sufficient payment history, collectibility cannot reasonably be assured and revenues are therefore only recognized at the time cash is collected. For the three months ended March 31, 2009, we recognized $2,837 in revenue from personalized medicine services. For the three months ended March 31, 2008, we did not recognize any revenue from personalized medicine services as our personalized medicine services were launched in the fourth quarter of 2008.
6. Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel expenses for our research and development personnel, fees paid to external service providers to conduct clinical trials, patient enrollment costs, fees and milestone payments under our license and development agreements, validation activities for our personalized medicine services and costs for facilities (including our laboratory), supplies, materials and equipment. All such costs are charged to research and development expenses as incurred. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We accrue clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known. There were no material adjustments for the three months ended March 31, 2009 and 2008 for a change in estimate.
8
Table of Contents
7. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of common stock outstanding and is presented for basic and diluted net loss per share. Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the potential common shares had been issued. The dilutive effect of outstanding stock options and warrants is reflected in diluted net loss per share by application of the treasury stock method. We have excluded all outstanding stock options and warrants from the calculation of diluted loss per share for the three months ended March 31, 2009 and 2008 because such securities are antidilutive for these periods. The total number of potential common shares excluded from the calculation of diluted loss per common share was 745,078 and 906,596 for the three months ended March 31, 2009 and 2008, respectively.
8. Comprehensive Loss
The components of comprehensive loss are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Net loss | $ | (9,160,504 | ) | $ | (2,880,981 | ) | ||
Unrealized (loss) gain on short-term investments | (279,597 | ) | 156,573 | |||||
Comprehensive loss | $ | (9,440,101 | ) | $ | (2,724,408 | ) | ||
9. Share-Based Compensation
Total share-based compensation expense related to stock options granted to employees and non-employee directors recognized for the three months ended March 31, 2009 and 2008 was comprised as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Cost or personalized medicine services | $ | 36,796 | $ | — | ||||
Research and development expenses | 357,165 | 283,276 | ||||||
Selling, general and administrative expenses | 1,732,799 | 1,697,529 | ||||||
$ | 2,126,760 | $ | 1,980,805 | |||||
As of March 31, 2009, there was $17.8 million of unamortized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted average vesting period of 2.9 years.
9
Table of Contents
10. Collaboration Agreement
Food and Drug Administration (“FDA”) Approval of New Drug Application (“NDA”) for Savella
During January 2009, the FDA approved the NDA forSavellafor the treatment of fibromyalgia filed by us and Forest Laboratories. In connection with the approval of the NDA, we received a $25.0 million milestone payment from Forest Laboratories. Of this amount, $1.25 million was paid to Pierre Fabre as a sublicense fee based on 5% of the milestone payment received from Forest Laboratories. We also received $6.5 million from Forest Laboratories upon NDA approval as reimbursement for the remaining two-thirds of the costs paid in connection with the second Phase III trial forSavella. Additionally, we paid Pierre Fabre a $3.0 million milestone payment in January 2009 upon the approval of the NDA filing.
11. Asset Purchase Agreement
Cellatope Transaction
In February 2009, we entered into an asset purchase agreement with Cellatope Corporation (“Cellatope”) whereby we acquired Cellatope’s technology platform that uses cell-bound complement activation products (“CB-CAP”) to diagnose and monitor debilitating autoimmune disorders, including systemic lupus erythematosus (“SLE/Lupus”). We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to Cellatope for the diagnostic technology, as well as an additional $3.0 million potential milestone payment associated with the commercial development of the Lupus monitoring application.
The acquisition price included $0.2 million which is held in an escrow account and will be available to satisfy any claims for indemnification we may have until the escrow is released, which will be 18 months following the closing of the transaction. In addition to the escrow funds, $0.5 million was withheld from the closing consideration to be paid by July 2012, subject to conditions in the asset purchase agreement, and is classified as restricted cash.
Pursuant to SFAS No. 141R,Business Combinations, we determined that the assets acquired from Cellatope do not constitute a business and accordingly, the transaction has been accounted for as an asset acquisition. The $2.0 million upfront payment was charged to research and development expenses during the first quarter of 2009 as the ultimate commercialization of the related product is uncertain and the technology has no alternative uses.
12. Fair Value Disclosures
The following table presents information about our financial assets measured at fair value on a recurring basis as of March 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We classify money market funds and certificates of deposits as Level 1 assets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. We classify U. S. government and agency debt, corporate debt securities and commercial paper holdings as Level 2 assets. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. At March 31, 2009, we did not hold any Level 3-classified financial assets. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest
10
Table of Contents
level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Fair Value Measurements at March 31, 2009 | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Balance as of | Active Markets | Observable Inputs | Unobservable | |||||||||||||
Description | March 31, 2009 | (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Financial instruments owned: | ||||||||||||||||
Money market funds | $ | 58,932,405 | $ | 58,932,405 | $ | — | $ | — | ||||||||
Certificates of deposit | 1,004,724 | 1,004,724 | — | — | ||||||||||||
U.S. government and agency debt | 96,696,794 | — | 96,696,794 | — | ||||||||||||
Corporate debt securities | 2,913,856 | — | 2,913,856 | — | ||||||||||||
Commercial paper | 1,999,940 | — | 1,999,940 | — | ||||||||||||
Total financial instruments owned | $ | 161,547,719 | $ | 59,937,129 | $ | 101,610,590 | $ | — | ||||||||
11
Table of Contents
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the information contained herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, statements about our plans, strategies and prospects. These statements, which may include words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “anticipate,” “estimate,” “should,” or similar words, are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Although we believe that our beliefs, expectations and assumptions reflected in these statements are reasonable, our actual results and financial performance may prove to be very different from what we might have predicted on the date of this Form 10-Q. Factors that could cause or contribute to differences include, but are not specifically limited to, our ability to successfully commercialize Savella, our ability to create a successful commercial organization, our ability to market our personalized medicine services, our ability to acquire and develop any compounds or products to treat any other indications we may pursue in a timely manner, or at all, as well as the other risks detailed in this Form 10-Q and in our other SEC filings.
We undertake no obligation to publicly release revisions in such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as required by securities and other applicable laws.
We own or have rights to various copyrights, trademarks and service marks used in our business, including the following: Cypress Bioscience, Inc.,Avise PGSM andAvise MCV SM .SavellaTM is a trademark of Forest Laboratories, Inc. This report also includes other trademarks, service marks, and trade names of other companies.
Company Overview
Cypress Bioscience, Inc. provides therapeutics and personalized medicine services, facilitating improved and individualized patient care. Cypress’ goal is to address the evolving needs of specialist physicians and their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid arthritis. We believe this approach to improving patient care creates a unique partnership with physicians, and expect that offering personalized medicine services and therapeutic products through the same sales organization will provide Cypress a differentiated commercial strategy and sustainable competitive advantage.
In January 2009, we received approval from the U.S. Food and Drug Administration (“FDA”) to marketSavella(milnacipran HCl) for the management of fibromyalgia (“FM”).Savellais a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role in the symptoms for FM. We exercised the right granted by our partner, Forest Laboratories, Inc., or Forest Laboratories, to co-promoteSavellafor FM, and at the beginning of May 2009 began detailing it to rheumatologists, pain centers, and physical medicine and rehabilitation specialists in the U.S. At the end of October 2008, with our initial 11 person sales force, we launched our first two novel personalized medicine services,Avise PGandAvise MCV, which are detailed to rheumatologists. By early 2009, we expanded the sales force to 115 field based personnel in anticipation of the launch ofSavella.
12
Table of Contents
Personalized medicine services are tests which are validated analytically and clinically to provide physicians with actionable information to help manage their patients’ care, including predicting the likelihood of developing disease or optimizing therapy.Avise PGis a test that supports dose optimization and therapeutic decision making for patients taking methotrexate (“MTX”), a widely used first-line therapy for rheumatoid arthritis (“RA”).Avise MCVis a test that aids in the diagnosis and prognosis of RA. We believe that offering integrated personalized medicine services and pharmaceutical products through the same sales organization will facilitate physician access and improve the quality of the sales call, as well as help establish Cypress as a leader targeting these specific specialists. We began this process at the beginning of May 2009 when we initiated promotion ofSavellato the same rheumatologists that we currently call upon for our first two personalized medicine services.Savellawas shipped to wholesalers and became available at pharmacies at the end of April 2009. Now that we are detailingSavellato physicians, we will be reimbursed by Forest Laboratories for theSavellasales calls based on Forest Laboratories’ cost to conduct such sales calls.
We also have a number of Proof of Concept (“POC”) stage opportunities in development, including two pharmaceutical candidates acquired in connection with our acquisition in March 2008 of Proprius, Inc., or Proprius, and intend to pursue these opportunities on an ongoing basis. We continue to evaluate various other potential strategic transactions, including the acquisition of products, product candidates, technologies and companies, and other alternatives.
Milnacipran HCl has been approved for a non-pain condition in over 50 countries, with commercial experience outside the U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre Fabre Medicament, or Pierre Fabre, in 2001.
In January 2004, we entered into a collaboration agreement with Forest Laboratories, a leading marketer of central nervous system, or CNS, drugs with a strong franchise in the primary care and psychiatric markets. As part of this collaboration with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the United States, with an option to extend the territory to include Canada, which was exercised in July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have licensed any patents that may issue from our patent applications related to FM and milnacipran to Forest Laboratories and Pierre Fabre.
The efficacy ofSavellafor the management of fibromyalgia was established in two double-blind, placebo-controlled, multicenter studies in adult patients (18-74 years of age), 888 subjects in Study 1 and 1,196 subjects in Study 2. Enrolled patients met the American College of Rheumatology (“ACR”) criteria for fibromyalgia (a history of widespread pain for 3 months and pain present at 11 or more of the 18 specific tender point sites). Approximately 35% of patients had a history of depression. Study 1 was six months in duration and Study 2 was three months in duration. A larger proportion of patients treated withSavellathan with placebo experienced a simultaneous reduction in pain from baseline of at least 30% (VAS) and also rated themselves as much improved or very much improved based on the patient global assessment (PGIC). In addition, a larger proportion of patients treated withSavellamet the criteria for treatment response, as measured by the composite endpoint that concurrently evaluated improvement in pain (VAS), physical function (SF-36 PCS), and patient global assessment (PGIC), in fibromyalgia as compared to placebo.
In December 2008, we announced positive top-line results from the third Phase III trial forSavella, a 1,025 patient, multicenter, double-blind, placebo controlled phase III study ofSavella for the management of FM. These results, which confirm the findings from the two previous phase III trials, showed thatSavellademonstrated a highly statistically significant difference compared to placebo in responder analyses based on a concurrent and clinically meaningful improvement in pain, patient global impression of change, and physical functioning.
13
Table of Contents
On January 14, 2009, Cypress and Forest announced thatSavellawas approved by the FDA for the management of fibromyalgia.Savellawas shipped to wholesalers and became available at pharmacies at the end of April 2009.
Additional information on our ongoing post approval clinical development program forSavella can be found atwww.clinicaltrials.gov.
In March 2008, we announced the closing of the acquisition of Proprius that included an upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5 million in potential milestone related payments associated with the development of Proprius’ early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis.
In February 2009, we announced the closing of a transaction to acquire Cellatope Corporation’s technology platform that uses cell-bound complement activation products (“CB-CAP”) to diagnose and monitor debilitating autoimmune disorders, including systemic lupus erythematosus (“SLE/Lupus”). We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to Cellatope for the diagnostic technology as well as an additional $3.0 million potential milestone payment associated with the commercial development of the Lupus monitoring application.
Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and the related notes contained elsewhere in this quarterly report.
Comparison of Three Months Ended March 31, 2009 and 2008
Revenue
We recognized revenues under our collaborative agreement with Forest Laboratories of $7.9 million for the three months ended March 31, 2009 compared to $14.2 million for the three months ended March 31, 2008. Revenues in the first quarter of 2009 included a $6.5 million reimbursement for the remaining two-thirds of the costs paid in advance by us in connection with the second Phase III trial forSavellareceived from Forest Laboratories in January 2009 upon approval of our New Drug Application (“NDA”). This compares to a $10.0 million milestone payment and $3.2 million reimbursement for one-third of the costs paid in connection with the second Phase III trial forSavellareceived from Forest Laboratories in February 2008 upon acceptance of our NDA. The revenues recorded during 2009 and 2008 consist almost entirely of amounts earned or reimbursed to us pursuant to our collaboration agreement with Forest Laboratories, entered into in January 2004, for the development and marketing ofSavella. Such revenues include the recognition of the $25.0 million upfront payment received in January 2004 from Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license payment received from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a straight-line basis over the remainder of the 8 year amortization period, a $25.0 million milestone payment received in January 2009 upon NDA approval recognized on a straight-line basis over the remaining patent life forSavellawhich is estimated to be 13 years, sponsored development reimbursements and funding received from Forest Laboratories for certain of our employees devoted to the development ofSavella. The amount of sponsored development reimbursements from Forest Laboratories and funding received from Forest Laboratories for certain of our employees devoted to the development ofSavellachanges periodically and may be eliminated based on the level of development activity.
14
Table of Contents
Revenues for our personalized services business are recognized as cash payments for the services are received. We recognized revenue of approximately $3,000 during the first quarter of 2009 in connection with our personalized medicine services business, which was launched during the fourth quarter of 2008.
Cost of Personalized Medicine Services
Cost of personalized medicine testing services primarily consists of the compensation and benefits (including bonuses, if any, and share-based compensation) of laboratory personnel, laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related expenses. We incurred costs of $0.4 million during the first quarter of 2009 in connection with our personalized medicine services business, which was launched during the fourth quarter of 2008.
Research and Development
Research and development expenses for the three months ended March 31, 2009 were $7.2 million compared to $2.7 million for the three months ended March 31, 2008. The increase in research and development expenses is primarily attributable to a $3.0 million milestone payment owed to Pierre Fabre upon NDA approval in connection with our collaboration agreement with Forest Laboratories and a $2.0 million payment recognized as research and development expense during the first quarter of 2009 in connection with our asset purchase agreement with Cellatope, as well as costs incurred during the first quarter of 2009 in connection with our proof of concept studies for new compounds. This increase in research and development expenses was partially offset by a $1.0 million milestone payment and $0.5 million sublicense fee owed to Pierre Fabre upon NDA acceptance in the first quarter of 2008.
Effective January 9, 2004, pursuant to our collaboration agreement with Forest Laboratories, Forest Laboratories assumed responsibility for funding all continuing development ofSavella, including the funding of clinical trials and regulatory approvals. This funding received from Forest Laboratories for sponsored development reimbursements is included as a component of our revenue under collaborative agreement on the consolidated statement of operations. We agreed upon an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial only. In connection with this arrangement, we paid for a majority of the external costs of the second Phase III trial only, which were approximately $9.7 million. Forest has repaid us $3.2 million in February 2008 upon NDA acceptance and $6.5 million in January 2009 upon NDA approval.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended March 31, 2009 were $10.1 million compared to $3.5 million for the three months ended March 31, 2008. The increase in selling, general and administrative expenses is primarily due to the costs associated with building our sales force, including salary, commission and benefits, travel expenses, training costs and automobile fleet costs, as well as marketing expenses incurred during the first quarter of 2009 in connection with our personalized medicine services business.
In-Process Research and Development
We incurred in-process research and development in 2008 but not in 2009. In-process research and development represents the fair value of acquired, to-be-completed research projects, including those related to personalized medicine services and therapeutic candidates, obtained in connection with the Proprius acquisition in March 2008 that had not reached technological feasibility at the acquisition date and are not expected to have an alternative future use. Accordingly, the $12.6 million of in-process research and development, consisting of $10.2 million related to personalized medicine services and $2.4
15
Table of Contents
million related to therapeutic candidates, was charged to our consolidated statement of operations during the first quarter of 2008. The total estimated value of approximately $12.6 million of the research projects was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the future net cash flows from the project once commercially viable, and discounting the net cash flows to their present value using a discount rate of 30%.
The personalized medicine services required certain validation work prior to the anticipated launch in late 2008. The validation work was completed and our laboratory was certified prior to the October 2008 launch. The personalized medicine services are being marketed to rheumatologists.
The therapeutic products acquired from Proprius consisted of early clinical-stage candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. Substantial additional research and development will be required prior to any of our acquired therapeutic programs reaching technological feasibility. In addition, once proof of concept studies are completed, each product candidate acquired will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Due to the early stage of development for these therapeutic products, we are unable to estimate with certainty the time and investment required to develop these products. These programs may never reach technological feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. The successful development of Proprius’ therapeutic products could result in potential milestone payments of up to $37.5 million.
Interest Income
Interest income for the three months ended March 31, 2009 was $0.6 million compared to $1.7 million for the three months ended March 31, 2008. The decrease in interest income for the three months ended March 31, 2009 compared to the corresponding period in 2008 is primarily due to a general decrease in interest rates and related yields experienced during the first quarter of 2009 compared to the first quarter of 2008.
Liquidity and Capital Resources
At March 31, 2009, we had cash, cash equivalents and short-term investments of $160.4 million compared to cash, cash equivalents and short-term investments of $145.5 million at December 31, 2008. Working capital at March 31, 2009 totaled $152.3 million compared to $138.8 million at December 31, 2008. We have invested a substantial portion of our available cash in money market funds, marketable debt instruments of governmental agencies, corporate debt securities, commercial paper and certificates of deposit, which are within federally insured limits. We have established guidelines relating to our investments to preserve principal and maintain liquidity.
Net cash provided by operating activities as disclosed in our Condensed Consolidated Statement of Cash Flows was $15.4 million for the three months ended March 31, 2009, compared to $10.2 million for the three months ended March 31, 2008. The primary source of cash from operations during the three months ended March 31, 2009 was the $25.0 million milestone payment and the $6.5 million reimbursement of expenses received from Forest Laboratories, offset by cash used in operations including $1.8 million for changes in operating assets and liabilities (excluding impact of initial deferred revenue amount from milestone payment) and non-cash charges of $2.7 million. The primary source of cash from operations during the three months ended March 31, 2008 was the $10.0 million milestone payment and the $3.2 million reimbursement of expenses received from Forest Laboratories, offset by cash used in operations including $0.8 million for changes in operating assets and liabilities and non-cash charges of
16
Table of Contents
$13.9 million that includes $12.6 million of the write-off of in-process research and development related to the acquisition of Proprius.
Net cash used in investing activities as disclosed in our Condensed Consolidated Statement of Cash Flows was $10.5 million for the three months ended March 31, 2009, compared to net cash provided by investing activities of $2.7 million for the three months ended March 31, 2008. The fluctuation in net cash from investing activities during the three months ended March 31, 2009 compared to the corresponding prior year period was primarily a result of a net increase in purchases of short-term investments during the three months ended March 31, 2009 compared to a net increase in proceeds from the sale of short-term investments offset by $39.1 million in cash paid for the acquisition of Proprius during the three months ended March 31, 2008.
Net cash provided by financing activities as disclosed in our Condensed Consolidated Statement of Cash Flows was $0.4 million for the three months ended March 31, 2009, compared to $0.4 million for the three months ended March 31, 2008. Net cash provided by financing activities consisted of proceeds of approximately $0.4 million from the exercise of stock options during the three months ended March 31, 2009 and 2008.
The following table summaries our long-term contractual obligations as of March 31, 2009:
Less than | ||||||||||||||||||||
1 year | 1 - 3 years | 3 - 5 years | More than 5 | |||||||||||||||||
Total | (2009) | (2010- 2012) | (2013-2015) | years (2016 +) | ||||||||||||||||
Operating leases | $ | 808,584 | $ | 261,831 | $ | 546,753 | $ | — | $ | — | ||||||||||
Purchase obligations (1) | 226,420 | 226,420 | — | — | — | |||||||||||||||
Total | $ | 1,035,004 | $ | 488,251 | $ | 546,753 | $ | — | $ | — | ||||||||||
(1) | Purchase obligations include agreements to purchase goods or services, including consulting services, that are enforceable and legally binding on us and that specify all significant terms. This includes contracts that are cancelable with notice and the payment of an early termination penalty. Purchase obligations exclude agreements that are cancelable without penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of March 31, 2009. |
Other commercial and contractual commitments include potential milestone payments of up to $0.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront and milestone payments received from Forest Laboratories, milestone payments up to $37.5 million associated with the development of Proprius’ therapeutic candidates, milestone payments of up to $116.0 million to AlphaRx in connection with the successful development and commercialization of a product associated with the in-license of a topical NSAID therapy, milestone payments of up to $4.3 million to Collegium Pharmaceutical, Inc. in connection with the reformulation and new product agreement entered into with Collegium, milestone payments up to approximately $42.0 million in connection with license agreements related to our POC programs, milestone payments up to $3.0 million to Cellatope in connection with the commercial development of a Lupus monitoring application and milestone payments up to $3.9 million in connection with license agreements related to certain personalized medicine services. In the event we move forward with development of a product or service under any of these arrangements, in most instances, we would also be obligated to make royalty payments.
Unless and until we can consistently generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities, from revenue under our collaboration agreement with Forest and, if available to us, cash from financings.
17
Table of Contents
Our current expected primary cash needs on both a short term and long-term basis are for supporting a commercial infrastructure, the development of candidates under our POC trials, including the pharmaceutical candidates obtained in connection with the Proprius acquisition, our personalized medicine services, and general research, working capital and other general corporate purposes and the identification, acquisition or license, and development of potential future products and services. Excluding the amounts payable under our merger agreement with Proprius and our agreements with Pierre Fabre, AlphaRx, Collegium, Cellatope and various licensors under our POC trials and personalized medicine services business, the costs of in-licensing or acquiring additional compounds or companies, funding clinical development for any product (other than our ongoing POC trials) that we may in-license or acquire and the milestone payment and reimbursement for clinical trial costs received from Forest Laboratories in January 2009, we estimate that based on our current business plan, net cash required to fund operating expenses will approximate $45 million to $50 million for the year 2009. If we include the milestone payment and reimbursement for clinical trial costs received from Forest Laboratories in January 2009, we will require cash of approximately $15 million to $20 million to fund our operations for 2009. In addition, one of our ongoing goals is to continue to identify and in-license new products and product candidates. In the event we acquire, license or develop any new products or product candidates, or begin any new POC, the amount to fund our operations for 2009 would increase, possibly materially. We expect that our net losses will continue for at least the next several years as we seek to acquire, license or develop additional products, product candidates and services. Such losses may fluctuate, and the fluctuations may be substantial.
Based on our current business plan, we believe our cash and cash equivalents and short-term investments balances at March 31, 2009 are sufficient to fund operations through at least 2010. However, we are actively continuing to evaluate various potential strategic transactions, including the potential acquisitions of products, product candidates and companies, and other alternatives. In order to acquire or develop additional products and product candidates, we will likely require additional capital. The amount of capital we require is dependent upon many forward-looking factors that could significantly increase our capital requirements, including the following:
• | the costs of funding our commercial infrastructure; | ||
• | the costs and timing of development and regulatory approvals for all our products and services; | ||
• | the costs associated with operating a clinical laboratory; | ||
• | the extent to which we acquire or invest in other products, product candidates and businesses; | ||
• | the costs of in-licensing drug candidates; | ||
• | the ability of Forest Laboratories and us to reach sales milestones and other events under our collaboration agreement; and | ||
• | the costs of commercialization of any future products and services. |
Because we are unable to predict the outcome of the foregoing factors, some of which are beyond our control, we are unable to estimate with certainty our mid to long-term capital needs. Unless and until we can generate a sufficient amount of product and service revenue, if ever, we expect to finance future capital needs through public or private debt or equity offerings or collaboration and licensing arrangements, as well as interest income earned on cash balances. We do not currently have any commitments or specific plans for future external funding. We may not be able to raise additional capital and the funds we raise, if any, may not allow us to maintain our current and planned operations. If we are unable to obtain additional capital, we may be required to delay, scale back or eliminate our sales force or
18
Table of Contents
some or all of our development of existing or future product candidates and personalized medicine services and discontinue the evaluation or completion of any proposed acquisitions or strategic transactions.
To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
There were no significant changes in critical accounting policies or estimates from those at December 31, 2008.
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have invested our excess cash in United States government securities, corporate debt securities, commercial paper, certificates of deposit and money market funds with strong credit ratings. As a result, our interest income is most sensitive to changes in the general level of United States interest rates. We do not use derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve over a three month period would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.
ITEM 4 — CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
19
Table of Contents
PART II OTHER INFORMATION
Item 1 — Legal Proceedings
From time to time we are involved in certain litigation arising out of our operations. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition.
Item 1A — Risk Factors
We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2008.
Risks related to our business
* We may not be successful in creating a successful commercial infrastructure.
In a period of a few months, we hired 115 field based sales employees to create a commercial infrastructure in order to launchSavellaalong with our corporate partner, Forest Laboratories. We initially began with an 11 person sales force which launched the first two of our personalized medicine services in October 2008 and hired the remainder of our current sales field personnel only recently. Our launch ofSavellaat the beginning of May 2009 is a result of us exercising our co-promotion right which allows us to co-promoteSavellaunder our agreement with Forest Laboratories and be paid by Forest for theSavellaportion of the sales details.Savellawas shipped to wholesalers on April 24, 2009 and became available at pharmacies beginning on April 28,2009. AfterSavellawas approved by the U.S. Food and Drug Administration (FDA) on January 14, 2009, Cypress and Forest submitted a minor post-approval cosmetic formulation change to the FDA which now has been approved. The delay in launchingSavelladelayed our ability to generate royalty revenues under our collaboration with Forest and prevented us from being reimbursed for the portion of our sales force calls that would have been devoted to the promotion ofSavella, which will cause the net cost of our sales force to be a larger portion of our expected expenses for the year 2009.
The co-promotion right is subject to our maintaining our own sales capabilities, which includes our sales force. In the event we are unable to maintain our sales force, we would lose our co-promotion right with respect toSavella. In addition, although we now have the number of required sales personnel, the performance of our sales personnel as measured by actual sales may be disappointing. Many of our competitors have significantly greater experience than we do in selling, marketing and distributing products and services, and we may not be able to compete successfully with them with the sales force we have developed. Even though we intend to offer integrated personalized medicine services and therapeutic products through the same sales organization, this may not facilitate greater physician access or improve the quality of the sales call, and it may not help establish Cypress as a leader targeting these specific specialists. In addition, because only a small portion of our sales force is offering both personalized medicine services andSavella, and because our initial personalized medicine services are targeted only to rheumatologists, the potential synergies exist in only a small portion of our sales calls at this time.
In the event that our agreement with Forest Laboratories is terminated, or with respect to any other product we may develop which is not covered by our collaboration with Forest Laboratories or is not sold to the specialists that we are currently calling upon, we may have to obtain the assistance of a pharmaceutical company or other entity with a large distribution system and a large direct sales force, or build a substantial marketing and sales force with appropriate technical expertise and supporting distribution capabilities. We may not be able to enter into such arrangements with third parties in a timely manner or on acceptable terms or to establish sales, marketing and distribution capabilities of our own. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are
20
Table of Contents
likely to be lower than if we directly marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, and these efforts may not be successful.
We may encounter challenges in our personalized medicine services business.
We launched the first of our two personalized medicine services in October 2008. These services were acquired in March 2008, when we acquired Proprius, a formerly private San Diego-based personalized medicine services and specialty pharmaceutical company. We have limited experience in the personalized medicine services space. The launch of our personalized medicine services has exposed us to potential operational and financial risks, including:
• | higher development or commercialization costs than we anticipate for the personalized medicine services; | ||
• | challenges with running a service business; | ||
• | higher than expected licensing and integration costs; | ||
• | exposure to liabilities of licensed and acquired intellectual property, compounds, products and services; | ||
• | disruption of our business and diversion of our management’s time and attention as part of integrating Proprius’ business with our operations; and | ||
• | potential significant impairement charges related to goodwill. |
We will devote significant resources to our new business and we may fail to realize the anticipated benefit of this strategic transaction with Proprius.
* If third-party payers, including managed care organizations and Medicare, do not provide reimbursement for Avise PG or Avise MCV, their commercial success could be compromised.
Avise PGhas a current list price of $295 andAvise MCVhas a current list price of $129. Although we began marketing our personalized medicine services in October 2008, the cycle time for payment is long, and we have only received payment for a small number of the tests that have been performed. Further, physicians and patients may decide not to order our tests unless third-party payers, such as managed care organizations as well as government payers such as Medicare and Medicaid, establish coverage policies for the tests or pay a substantial portion of the test price. Reimbursement by a third-party payer may depend on a number of factors, including a payer’s determination that tests using our technologies are:
• | not experimental or investigational, | ||
• | medically necessary, | ||
• | appropriate for the specific patient and diagnosis, | ||
• | cost-effective, | ||
• | supported by peer-reviewed publications, and | ||
• | included in clinical practice guidelines. |
21
Table of Contents
There is significant uncertainty concerning third-party reimbursement of any test incorporating new technology, including ourAvise PGandAvise MCVtests. Several entities conduct technology assessments of new medical tests and devices and provide the results of their assessments for informational purposes to other parties. These assessments may be used by third-party payers and health care providers as grounds to deny coverage for a test or procedure.
Since each payer makes its own decision as to whether to establish a policy to reimburse our test, seeking these approvals is a time-consuming and costly process. We do not yet have any third-party payers reimbursement agreements.
Insurers, including managed care organizations as well as government payers such as Medicare, have increased their efforts to control the cost, utilization and delivery of health care services. From time to time, Congress has considered and implemented changes in the Medicare fee schedules in conjunction with budgetary legislation. Further reductions of reimbursement for Medicare services may be implemented from time to time. Reductions in the reimbursement rates of other third-party payers have occurred and may occur in the future. These measures have resulted in reduced prices and decreased test utilization for the clinical laboratory industry. If we are unable to obtain reimbursement approval from private payers and Medicare and Medicaid programs for ourAvise PGandAvise MCVtests, or if the amount reimbursed is inadequate, our ability to generate revenues from these tests could be limited. Even if we are being reimbursed, insurers may withdraw their coverage policies or cancel their contracts with us at any time or stop paying for our test, which would reduce our revenue.
* We have recently substantially increased the size of our organization and will continue to need to increase the size of our organization, and we may experience difficulties in managing growth.
In a period of a few months, we hired 115 field based sales employees and management to create a commercial infrastructure in order to launchSavellaalong with our corporate partner, Forest Laboratories, which contributed to an increase in our full-time employees from 37 as of September 30, 2008 to 145 as of March 31, 2009. We will need to continue to expand our managerial, operational and other resources in order to manage and fund our existing business, including the development activities relating to our personalized medicine services, and in order to perform under our co-promotion arrangement forSavellawe will need to manage activities relating to the commercialization ofSavella. Our management and personnel, systems and facilities currently in place may not be adequate to support this recent and future growth. Our need to effectively manage our operations, growth and various projects requires that we:
• | manage our internal development and commercialization efforts for our personalized medicine services andSavellaeffectively while carrying out our contractual obligations to collaborators and other third parties and complying with all applicable laws, rules and regulations; | ||
• | continue to improve our operational, financial and management controls, reporting systems and procedures; and | ||
• | attract and retain sufficient numbers of talented employees. |
We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercialization goals.
22
Table of Contents
We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to obtain regulatory approval.
Pursuant to the terms of our collaboration agreement with Forest Laboratories, we granted Forest Laboratories an exclusive sublicense for the development and marketing ofSavella, for all indications in the United States. Forest exercised its option to extend the territory to include Canada. In addition, Forest Laboratories has the option to acquire an exclusive license from us in the United States and Canada to any compounds developed under our agreement with Collegium Pharmaceutical, Inc.Forest Laboratories is responsible for funding the further development ofSavella, including further clinical trials and further regulatory approval. With the FDA approval ofSavella, Forest Laboratories has primary responsibility for the marketing and sale of the approved product and will share responsibility for compliance with regulatory requirements. We have limited control over the amount and timing of resources that Forest Laboratories will dedicate to the further development and marketing ofSavella. Our ability to generate milestone and royalty payments from Forest Laboratories depends on Forest Laboratories’ ability to achieve market acceptance ofSavellafor the management of FM.
We are subject to a number of additional risks associated with our dependence on our collaboration with Forest Laboratories, including:
• | Forest Laboratories could fail to devote sufficient resources to the commercialization, marketing and distribution ofSavellaor any other products developed under our collaboration agreement, including by failing to develop or expand sales forces if such sales forces appear necessary for the most effective promotion ofSavellaor any other approved product; | ||
• | We and Forest Laboratories could disagree as to post approval development plans, including the number and timing of clinical trials, or as to which additional indications forSavellashould be pursued, if any, and thereforeSavellamay never be sold for any indications other than FM; | ||
• | Forest could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing ofSavellawhich could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications. | ||
• | Forest Laboratories could independently develop, develop with third parties or acquire products that could compete withSavella, including drugs approved for other indications used by physicians off-label for the treatment of FM; | ||
• | Forest Laboratories could abandon or underfund the post approval development ofSavella, repeat or conduct additional clinical trials or require a new formulation of milnacipran for further clinical testing, or delay the commencement of any post approval clinical trials forSavellafor the management of FM; and | ||
• | Disputes regarding the collaboration agreement that delay or terminate the post approval development or commercialization, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration. |
Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material breach or our bankruptcy and may also terminate our agreement upon 120 days’ notice in the event Forest Laboratories reasonably determines that the development program indicates issues of safety or efficacy that are likely to prevent or significantly delay the filing or approval of any future NDA or to result in labeling or indications that would significantly adversely affect the marketing of any product developed
23
Table of Contents
under the agreement. If any of these events occur, we may not be able to find another collaborator for further development or commercialization, and even if we elected to pursue further development and continued commercialization ofSavella, we might not be able to do so successfully on a stand-alone basis and would experience substantially increased capital requirements that we might not be able to fund.
All of our personalized medicine services are performed at a single laboratory and, in the event this facility was to be affected by man-made or natural disasters, our operations could be severely impaired.
We are performing all our personalized medicine testing services in our laboratory located in San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In addition, we are leasing the facilities where our lab operates and anytime a lab is moved, it could also cause substantial delay in our operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory, we may be unable to perform our personalized medicine testing services in a timely manner or at all and therefore would be unable to operate our business in a commercially competitive manner. We cannot assure you that we could recover quickly from a serious natural or man-made disaster or that we would not permanently lose customers as a result of any such business interruption. This could harm our operating results and financial condition.
In order to rely on a third party to perform our personalized medicine testing services, we could only use another facility with established state licensure and accreditation under Clinical Laboratory Improvement Amendments (CLIA). We may not be able to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure by various states, which would take a significant amount of time and result in delays in our ability to begin or continue commercial operations.
Failure to timely or accurately bill for our personalized medicine services could have a material adverse effect on our net revenues and bad debt expense.
Billing for personalized medicine testing can be extremely complicated and we have very limited experience performing such billing. Depending on the billing arrangement and applicable law, we must bill various payers, such as insurance companies, Medicare, Medicaid, physicians, hospitals, employer groups and patients, all of which have different billing requirements. Additionally, compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further complexity to the billing process. Changes in laws and regulations could negatively impact our ability to bill our clients or increase our costs. The Centers for Medicare and Medicaid Services (CMS) also establishes procedures and continuously evaluates and implements changes to the reimbursement process for billing government programs.
Missing or incorrect information on test requisitions adds complexity to and slows the billing process, creates backlogs of unbilled tests, and generally increases the aging of accounts receivable and bad debt expense. Failure to timely or correctly bill may lead to our not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing federal healthcare programs could also lead to various penalties, including:
• | exclusion from participation in Medicare/Medicaid programs; | ||
• | asset forfeitures; |
24
Table of Contents
• | civil and criminal fines and penalties; and | ||
• | the loss of various licenses, certificates and authorizations necessary to operate our business. | ||
Any of these penalties or sanctions could have a material adverse effect on our results of operations or cash flows. |
We have a financial risk related to collections for our services.
With respect to our personalized medicine services, we bill on a fee-for-service basis. Billing for personalized medicine services is a complex process and we bill many different payers such as insurance companies, governmental payer programs and patients, each of which has different billing requirements. We have very limited experience in the collection of accounts receivable and we face risks in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles for accounts receivable, including reimbursements by third party payers, such as Medicare, Medicaid and other governmental payer programs, hospitals, private insurance plans and managed care organizations. As a result of the current economic climate, we may face increased risks in our collection efforts, which could adversely affect our business. In addition, large write-offs of doubtful accounts (particularly in response to a recent increase in personal bankruptcies), delays in receiving payments or potential retroactive adjustments and penalties resulting from audits by payers could adversely affect our business, results of operations and financial condition.
We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella, and our ability to pursue the further development and commercialization of Savella for the management of FM depends upon the continuation of our license from Pierre Fabre.
Our license agreement with Pierre Fabre provides us with an exclusive license to develop and sell any products with the compound milnacipran as an active ingredient for any indication in the United States and Canada, with a right to sublicense certain rights to Forest Laboratories under our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license agreement for cause upon 90 days’ prior written notice to the other party upon the bankruptcy or dissolution of the other party, or upon a breach of any material provision of the agreement if the breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the right to terminate the agreement upon 90 days’ prior notice to us if we and Forest terminate our development and marketing activities with respect toSavella, if we challenge certain patent rights of Pierre Fabre and under specified other circumstances. If our license agreement with Pierre Fabre were terminated, we would lose our rights to develop and commercialize products using the compound milnacipran as an active ingredient, as the compound is manufactured under Pierre Fabre patents and using Pierre Fabre know-how and trade secrets, and it would be unlikely that we could obtain the active ingredient in milnacipran from any other source.
We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savellaand if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may delay or prevent us from commercializing Savella.
Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive supplier to us and Forest Laboratories of the active pharmaceutical ingredient inSavella. Neither we nor Forest Laboratories have facilities for the manufacture of the active pharmaceutical ingredient inSavella. Currently, Pierre Fabre manufactures milnacipran in its facility in Gaillac, France. Pierre Fabre is the only worldwide supplier of milnacipran, which is currently approved for sale for a non-pain indication outside the United States. Pierre Fabre’s facility has been initially inspected by the FDA for compliance with current good manufacturing practices, or cGMP, requirements and after this initial inspection, may be inspected from time to time. In addition, Pierre Fabre has qualified an additional manufacturing facility, and the second manufacturing site that has been identified by Pierre Fabre is also subject to inspection by
25
Table of Contents
the FDA for compliance with cGMP. In the event an inspection results in written deficiencies, it may result in a disruption or termination of the supply to Forest of milnacipran. We do not have control over Pierre Fabre’s or its sublicensee’s compliance with cGMP requirements. If Pierre Fabre fails to timely and economically supply us sufficient quantities for commercial sale ofSavella, our product sales and market acceptance ofSavellacould be adversely affected.
Furthermore, our purchase and supply agreement may be terminated for cause either by us or by Pierre Fabre upon 90 days’ prior written notice to the other party upon a material breach of the agreement if the breach is not cured within 90 days following the written notice. We have the right to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event that we terminate our license agreement with Pierre Fabre under certain circumstances. If our purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to qualify another supplier of the active ingredient within a reasonable time period, and our ability to further develop and commercializeSavellawill be significantly impaired.
Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified compounds, which limits how we can expand our product candidates.
Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other than milnacipran for FM for a specified period of time, which shall not be less than three years. We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to Pierre Fabre. In addition, each of us is subject to limitations related to each party’s development of any serotonin norephinephrine reuptake inhibitor, or SNRI, products other than milnacipran. These limitations include: (i) a prohibition on developing an SNRI product for specified indications for which milnacipran is being developed; and (ii) a prohibition on developing an SNRI product for any indication for a specified time period, and after such specified time period, a requirement that if one of the parties launches and sells an SNRI product that is prescribed off-label for any indication for which milnacipran is being developed, the selling party must reimburse the other parties for lost sales due to the off-label use.
Provisions in our collaboration agreement with Forest Laboratories and our license agreement with Pierre Fabre may prevent or delay a change in control.
Our collaboration agreement with Forest Laboratories provides that Forest Laboratories may elect to terminate our co-promotion rights forSavellaor any other product developed under the collaboration agreement and we may lose our decision-making authority with respect to the development ofSavellaif we engage in a merger, consolidation or sale of all or substantially all of our assets, or if another person or entity acquires at least 50% of our voting capital stock. Our license agreement with Pierre Fabre provides that Pierre Fabre may elect to terminate the agreement upon a change in control transaction in which a third party acquirer of us controls an SNRI product, and the acquirer does not take certain actions (e.g., divestiture of such SNRI product) within a specified time period to cure the breach of certain restrictions in the agreement that results from such SNRI product. These provisions may have the effect of delaying or preventing a change in control or a sale of all or substantially all of our assets, or may reduce the number of companies interested in acquiring us.
* We are at an early stage of commercialization and we may never generate any significant revenues.
We are at an early stage of development as a biotechnology company and only recently launched our personalized medicine services in October 2008 and only in May 2009 launchedSavella. Without a history of sales, we may not accurately predict future sales, and our sales may be much smaller than we have forecasted, especially in light of the state of the economy. In addition, given our increased costs associated with a laboratory and a sales force, and the fact that Forest only reimburses for the portion of the sales calls that are made forSavella, it is likely that our costs of running our business will exceed our
26
Table of Contents
sales on the personalized medicine services and the royalty we will receive for sales ofSavellain the initial years following launch. Further, our current product and service candidates, as well as any future products and services that we may acquire or develop, will require significant additional development, appropriate regulatory approval, and additional investments before they can be commercialized, if ever. Our product development and product acquisition efforts may not lead to any further commercial services or drugs, either because the service and product candidates are not shown to be accurate and clinically useful in the case of personalized medicine service product candidates, or safe and effective in the case of drug product candidates, or because we have inadequate financial or other resources to pursue clinical development of the service and product candidate or because the FDA, CMS or state authorities do not grant or otherwise withdraw or revoke a regulatory approval.
Rheumatologists do not currently use personalized medicine services to determine the level of methotrexate (MTX) polyglutamates among their patients on MTX. Therefore,Avise PGis not the current standard of care. In addition, there are other tests for the diagnosis of RA that compete withAvise MCV. We may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine services, and therefore may be unable to successfully commercialize these products and services.
It is possible that we are never able to realize material cash inflows in the sales of our personalized medicine services or that even if we do, that such material cash flows do not occur until after 2010. Further, if we are unable to realize significant revenues in the sale of any of our current personalized medicine tests or if Forest Laboratories and Cypress are unable to achieve significant sales ofSavella, we will be unable to generate sufficient revenues (including revenues from royalties), may be unsuccessful in raising additional capital and may cease our operations. Even with the launch of our two initial personalized medicine services andSavella, because of the increased costs associated with running a commercial organization, we still may never achieve profitability.
Our failure to comply with the HIPAA security and privacy regulations and other state regulations may increase our operational costs.
The HIPAA privacy and security regulations establish comprehensive federal standards with respect to the uses and disclosures of personal health information, or PHI, by health plans and healthcare providers, in addition to setting standards to protect the confidentiality, integrity and availability of electronic PHI. The regulations establish a complex regulatory framework on a variety of subjects, including:
• | the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for services and healthcare operations activities; | ||
• | a patient’s rights to access, amend and receive an accounting of certain disclosures of PHI; | ||
• | the content of notices of privacy practices for PHI; and | ||
• | administrative, technical and physical safeguards required of entities that use or receive PHI electronically. |
We have implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent. Therefore, we are required to comply with both federal privacy regulations and varying state privacy laws. The federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for disclosures for
27
Table of Contents
various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we also could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information.
* Our business presents the risk of product liability claims.
Now that we are sellingSavella, we may be subject to legal actions asserting product liability claims relating to the use ofSavella. In connection with exercising our co-promotion right, we agreed to indemnify Forest Laboratories with respect to the promotion ofSavella. Although we currently maintain product liability coverage, litigation is inherently subject to uncertainties and we may be required to expend substantial amounts in the defense or resolution of some of these matters, some or all of which may not be covered by insurance.
The FDA approval of any future product candidate is uncertain and will involve the commitment of substantial time and resources.
We may never receive regulatory approval from the FDA or any other regulatory body required for the commercial sale of any future products in the United States for any number of reasons.
The regulatory approval of a new drug typically takes many years and the outcome is uncertain. Despite the time and resources expended, regulatory approval is never guaranteed. If we fail to obtain regulatory approval for any future therapeutic product candidates, we will be unable to market and sell any future therapeutic products and therefore may never generate any revenues from product sales for future therapeutic product candidates or become profitable. In addition, our collaborators, or our third-party manufacturers’ failure to comply with the FDA and other applicable United States or foreign regulations may subject us to administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production and refusal to approve new drug approval applications.
As part of the regulatory approval process, we must conduct, at our own expense, preclinical research and clinical trials for each product candidate sufficient to demonstrate its safety and efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and other countries where the product candidate will be marketed if approved. The number of preclinical studies and clinical trials that will be required varies depending on the product, the disease or condition that the product is in development for and the regulations applicable to any particular product. The regulatory process typically also includes a review of the manufacturing process to ensure compliance with applicable regulations and standards, including the cGMP requirements. The FDA can delay, limit or decline to grant approval for many reasons, including:
• | a product candidate may not be safe or effective; | ||
• | we may not achieve statistical significance for the primary endpoint; | ||
• | FDA officials may interpret data from preclinical testing, clinical trials, and/or pharmacovigilance data in different ways than we interpret such data; | ||
• | the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers; | ||
• | the FDA may change its approval policies or adopt new regulations; and |
28
Table of Contents
• | the FDA may request additional data. |
* In light of our regulatory approval for Savella and if we ever receive regulatory approval for any other future product candidate, and secure and maintain regulatory approvals related to our personalized medicine services, we will be subject to ongoing FDA, CLIA and state regulatory obligations and continuing regulatory review by applicable regulatory authorities.
Our regulatory approval forSavellahas been and regulatory approval for any future product candidates will be limited to the indications, dosages and restrictions on the product label. The FDA has approvedSavellafor the management of fibromyalgia, and has imposed additional limitations on the indicated uses, has required post-marketing surveillance and the performance of potentially costly post-marketing studies. Even though we have received FDA approval forSavella, as we have seen with other products on the market,Savellaor any of our other future product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. We and Forest Laboratories continue to be subject to strict FDA regulation after approval, including regulation of product labeling and packaging, adverse event reporting, manufacture, storage, advertising, promotion and recordkeeping. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. Federal and state regulatory approvals we may receive related to planned or future personalized medicine services will mandate specific clinical laboratory approval standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality and inspections, and our failure to meet and maintain those approvals could adversely affect our ability to offer personalized medicine products and services. In addition, the FDA has in the past and may in the future claim regulatory authority over laboratory-developed tests, in which event our personalized medicine services may directly or indirectly become subject to FDA approval.
If advances in technology allow others to perform and/or provide personalized medicine services which are similar to or better than ours or to perform such services in a more efficient or cost-effective manner than is currently possible, our personalized medicine services may not meet with demand in the marketplace or the demand for these services may decrease.
The diagnostic industry is characterized by rapidly advancing technology that may enable clinical laboratories, hospitals, physicians or other medical providers to perform and/or provide personalized medicine services similar to or better than ours in a more efficient or cost-effective manner than is currently possible. With respect to our personalized medicine services, other advances in technology may result in a decreased demand for our personalized medicine services, which would cause our financial condition and results of operations to be harmed. In addition, in order for our business to be successful, we may need to develop new personalized medicine tests or improve existing personalized medicine tests. There is no assurance, however, that we will be able to develop or improve these personalized medicine services in the future. Even if we successfully develop such services in a timely manner, these new tests may not be utilized by our customers. If we fail to develop new services or release new or improved tests on a timely basis, or if such tests do not obtain market acceptance, our financial condition and results of operations could also be harmed.
The FDA may decide to exercise enforcement discretion and require FDA approval or clearance of our personalized medicine services.
Laboratory-developed tests, likeAvise MCVandAvise PG,are regulated by CLIA, as administered by the Centers for Medicare & Medicaid Service, or CMS, as well as applicable stated laws. The FDA has in the past also claimed regulatory authority over laboratory-developed tests, but had stated that it was exercising enforcement discretion in not regulating laboratory-developed tests performed by
29
Table of Contents
high complexity, CLIA-certified laboratories. Our current personalized medicine services have not been cleared or approved by the FDA. Due to the evolving regulatory environment, there is always the risk that the FDA could decide to exercise its oversight with respect to any one of our tests and determine that FDA approval or clearance is required. This would require additional time and money and could require us to cease offering our services, which could have a material adverse effect on our business. If we fail to properly develop our personalized medicine services or if we fail to validate them accurately or inaccurately measure the performance specifications of the personalized medicine services we develop due to human error, deficiencies in our quality control process or otherwise, we may become subject to legal action as well as damage to our reputation with customers, which could have a material adverse effect upon our business.
Further, in September 2006, the FDA published a draft guidance document that described certain laboratory-developed tests that the FDA intends to regulate as in vitro diagnostic test systems (i.e., as medical devices). The FDA calls this category of laboratory-developed tests “In Vitro Diagnostic Multivariate Index Assays,” or IVDMIAs. The FDA issued a revised draft guidance pertaining to IVDMIAs in July 2007. In the revised guidance, the FDA defines an IVDMIA as a device that combines the values of multiple variables using an interpretation function to yield a single, patient-specific result that is intended for use in the diagnosis of a disease or other condition, or in the cure, mitigation, treatment, or prevention of disease, and that provides a result that cannot be independently derived or verified by the end user and whose derivation is non-transparent. The IVDMIA draft guidance, if adopted as published, would extend FDA oversight over laboratories that offer laboratory-developed tests which meet this definition. It is possible thatAvise MCVandAvise PGwill be subject to the recently proposed FDA regulatory guidance and even if not covered by the IVDMIA draft, that new legislation will extend FDA oversight to our laboratory-developed tests.
* We rely on third parties to conduct all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for any of our other future product candidates.
As of March 31, 2009, we had only 145 full-time employees. Although we have more employees than we have had historically, 115 of these employees are devoted to our sales organization, and therefore, as we have in the past, we expect to continue to rely on third parties to conduct all of our clinical trials. Because we do not conduct our own clinical trials, we must rely on the efforts of others and cannot always control or predict accurately the timing of such trials, the costs associated with such trials or the procedures that are followed for such trials. We expect to continue to rely on third parties to conduct all of our future clinical trials. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, or if they fail to maintain compliance with applicable government regulations and standards, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize any of our future product candidates.
Even if our product candidates are approved, the market may not accept these products or service or our existing products and services.
Avise PG,Avise MCV, Savella, or any future product candidates that we may develop and for which we obtain the required regulatory approvals may not gain market acceptance among physicians, patients, healthcare payers and the medical community. A number of factors may limit the market acceptance of our services and products including the following:
• | timing of market entry relative to competitive services and products; |
30
Table of Contents
• | extent of marketing efforts by us and with respect toSavella, the marketing efforts of Forest Laboratories; | ||
• | rate of adoption by healthcare practitioners; | ||
• | rate of a product’s acceptance by the target community; | ||
• | availability of alternative therapies; | ||
• | price of our services and products relative to alternative therapies; | ||
• | availability of third-party reimbursement; and | ||
• | the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products. |
IfAvise PG,Avise MCV,Savella, or any future product candidates that we may develop do not achieve market acceptance, we may lose our investment in that product candidate, which may cause our stock price to decline.
Our competitors may develop and market products and services that are less expensive, more effective or safer, which may diminish or eliminate the commercial success of any products or services we may commercialize.
The pharmaceutical and personalized medicine services industries are highly competitive and require an ongoing, extensive search for technological innovation. They also require, among other things, the ability to effectively discover, develop, test, commercialize, market and promote products, including communicating the effectiveness, safety and value of products to actual and prospective customers, including medical professionals. Many of our competitors have greater resources than we have. This enables them, among other things, to spread their marketing and promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and personalized medicine services industries include quality and price, product technology, reputation, customer service and access to technical information.
It is possible that future developments by our competitors could make our products, personalized medicine services or technologies less competitive or obsolete. Our future growth depends, in part, on our ability to provide products and services which are more effective than those of our competitors and to keep pace with rapid medical and scientific change. Sales of our services and products may decline rapidly if a new service or product is introduced by a competitor, particularly if a new service or product represents a substantial improvement over any of our existing services or products. In addition, the high level of competition in our industry could force us to reduce the price at which we sell our services or products or require us to spend more to market our services or products.
With respect to our pharmaceutical product for the management of FM,Savella(milnacipran HC1), in June 2007, the FDA approved Pfizer Inc.’s drug pregabalin (Lyrica®) for the management of FM and in June 2008 approved Eli Lilly and Company’s duloxetine (Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology toSavella. Tricyclic antidepressants, or TCAs, which are available as inexpensive generic formulations, are also used to treat FM and are less expensive thanSavella. Pfizer Inc.’s drug pregabalin (Lyrica®) and Eli Lilly and Company’s duloxetine (Cymbalta®) are competitive withSavellaand these products, and any other future products will affectSavella’ssales and may cause sales to be lower than anticipated.
31
Table of Contents
The market potential for FM is considerable and a number of pharmaceutical companies focused on therapies for alleviating pain or antidepressant therapies could decide to evaluate their current product candidates for the treatment of FM at any time. Due to the prevalence and incidence of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have significant research and product development programs in FM. We expect to encounter significant competition both in the United States and in foreign markets for each of the drugs that we seek to develop.
With respect to our personalized medicine services, we compete with large, national laboratories including Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of America Holdings, and also compete with regional and esoteric laboratories. The larger competitors have substantially greater financial and human resources, existing access to the medical community, as well as a much larger infrastructure than we do. Other companies may develop personalized medicine services that are more sensitive, specific, easy to use, or cost-effective than our personalized medicine services, and we may therefore be unable to compete with them in the marketplace.
Our competition for pharmaceutical products will be partially determined by the potential indications that are ultimately cleared for marketing by regulatory authorities, the timing of any clearances and market introductions and whether any currently available drugs, or drugs under development by others, are effective in the same indications. Accordingly, the relative speed with which we can develop, complete the clinical trials for, receive regulatory clearance for and supply commercial quantities ofSavellaor other products to the market is expected to be an important competitive factor. We expect that competition among products approved for sale will be based, among other factors described above, on product efficacy, safety, tolerability, cost, reliability, availability and patent protection.
We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our products or services or product candidates, could hinder or prevent the commercial success of our products, services or product candidates.
The continuing efforts of the government, insurance and managed care organizations and other health care payers to contain or reduce prescription drug costs may adversely affect:
• | our ability to set a price we believe is fair for our products and services; | ||
• | our ability to generate revenues and achieve or maintain profitability; | ||
• | the future revenues and profitability of our potential customers, suppliers and collaborators; and | ||
• | the availability of capital. |
Successful commercialization ofSavellain the United States will depend in part on the extent to which government, insurance and managed care organizations and other health care payers establish appropriate coverage forSavellaand related treatments. Third-party payers are increasingly challenging the prices charged for prescription drugs. Third-party payers are also encouraging the use of generic drugs. These trends could influence health care coverage policies, as well as legislative proposals to reform health care or reduce government insurance programs and result in the exclusion of our products, services and product candidates from coverage and reimbursement programs or lower the prices of our products, services and product candidates. Our revenues from the sale of our products and services could be significantly reduced as a result of these cost containment measures and reforms.
Market acceptance of our personalized medicine services and the majority of our anticipated sales from these services will likely depend, in large part, on the availability of adequate payment or reimbursement from insurance plans, including government plans such as Medicare, managed care organizations, private insurance plans and other third-party payers. Reimbursement by a third-party payer may depend on a number of factors, including a payer’s determination that a service is not experimental
32
Table of Contents
or investigational, and that it is medically necessary, appropriate for a specific patient or diagnosis, cost effective or supported by peer-reviewed publications. Because each third-party payer individually approves payment or reimbursement, obtaining these approvals can be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of these services to each third-party payer separately with no assurance that approval will be obtained. This individualized process or any action by the government negatively affecting payment for or reimbursement of our services can delay the market acceptance of new services and may have a negative effect on our revenues and operating results.
We believe third-party payers are increasingly limiting coverage for personalized medicine services, and in many instances are exerting pressure on service suppliers to reduce their prices. Consequently, third-party payment or reimbursement may not be consistently available or adequate to cover the cost of our services. Additionally, third-party payers who have previously approved a specific level of payment or reimbursement may reduce that level. Under prospective payment systems, in which healthcare providers may be paid or reimbursed a set amount based on the type of personalized medicine service procedure performed, such as those utilized by Medicare and in many private managed care systems, the cost of our personalized medicine services may not be justified and reimbursed. Any limitations on payment or reimbursement for our services could limit our ability to commercialize and sell new services or to continue to sell our existing services, or may cause the selling prices of our existing services to be reduced, which would adversely affect our revenues and operating results.
* We rely on our employees and consultants for their scientific and technical expertise in connection with our business operations.
We rely significantly on the scientific and technical expertise of our employees and consultants to conduct our business. As of March 31, 2009, we had only 145 full-time employees and therefore, we rely heavily on each of our employees. In addition, because we have a small number of employees, we rely much more on consultants than do other companies. If any of our relationships with our employees or consultants are terminated, we may lose access to scientific knowledge and expertise necessary for the further development and commercialization ofSavella,our personalized medicine services or any future product candidates. We expect to continue to rely on consultants and our current employees for scientific and technical knowledge and expertise essential to our business.
Our employment agreement with our chief executive officer provides for “at will” employment, which means that he may terminate his services to us at any time. In addition, although we have employment agreements with the four employees that joined us in connection with the acquisition of Proprius, they may choose to terminate services to us at any time. Were these employees to terminate their services with us, our ability to integrate Proprius’ operations with our own and effectively direct Proprius’ business would be diminished, at least temporarily. There is no guarantee that these employees will remain with Cypress. In addition, our scientific advisors may terminate their services to us at any time.
We may be subject to product liability claims that could cause us to incur liabilities beyond our insurance coverage.
We plan to continue conducting clinical trials on humans using milnacipran and our other Proof of Concept stage development candidates and the use of milnacipran and these other development candidates may result in adverse effects. Although we are aware that there are side effects associated with milnacipran and these other development candidates, we cannot predict all possible harm or side effects that may result from the treatment of patients with milnacipran or any of our future product candidates, and the amount of insurance coverage we currently hold may not be adequate to protect us from any liabilities. We currently maintain $10,000,000 in insurance for product liability claims. We may not have sufficient resources to pay any liability resulting from such a claim beyond our insurance coverage.
33
Table of Contents
* We have a history of operating losses and we may never be profitable.
We have incurred substantial losses during our history. For the three months ended March 31, 2009 and the years ended December 31, 2008 and 2006, we incurred net losses of $9.2 million, $18.2 million and $8.3 million, respectively. As of March 31, 2009, we had an accumulated deficit of $177.4 million. We do not expect to be profitable in the near future, and our ability to become profitable will depend upon our and Forest Laboratories’ ability to further develop, market and commercializeSavella, and our ability to develop, market and commercialize our personalized medicine services and any other products we may develop. We may not become profitable in the foreseeable future and may never achieve profitability.
* We will need substantial additional funding and may be unable to raise capital when needed, which could force us to scale back or discontinue the completion of any proposed acquisitions or adversely affect our ability to realize the expected benefits of any completed acquisitions.
We will incur certain non-reimbursable expenses in connection with the sales ofSavella, and will also incur costs in the development of additional personalized medicine services. We are also incurring expenses in connection with our Proof of Concept trials, the evaluation of potential acquisitions or other strategic transactions and will incur additional expenses in the event we close any such transactions or enter into any co-promotion, in-licensing or collaboration agreements in connection with any such transactions. We may also be required to pay up to $37.5 million in potential milestone-related payments associated with the development of certain therapeutic candidates acquired in our merger with Proprius and a $3.0 million in a milestone payment in connection with our acquisition of Cellatope. We do not have any committed external sources of funding and although we expect to have revenues, it is likely our revenues will be less than we expect to spend in the year 2009 and at some time we will likely need to raise additional capital through the sale of equity or debt. The amount of capital we will require will depend upon many factors, including but not limited to, the amount we spend on our sales force that is not reimbursed by Forest Laboratories, how much is ultimately required to develop the products and personalized medicine services that are in development and the evaluation and potential closing of any strategic transactions. If we are unable to raise capital when we need it, we may have to scale back or eliminate our sales force or some or all of our development of existing or future product candidates and personalized medicine services and discontinue the evaluation or completion of any proposed acquisitions or strategic transactions.
Raising additional funds by issuing securities, or through collaboration and licensing arrangements, may cause dilution to existing stockholders, restrict our operations, or require us to relinquish propriety rights.
We may attempt to raise additional funds through public or private equity offerings, as we did in June 2007 with a public equity offering, or through debt financings. However, the credit crisis and the current economic conditions may prevent us from raising money through debt or equity financings. We may also issue equity or other securities in connection with corporate collaborations and licensing arrangements, or raise funds through arrangements like these. For example, under our reformulation and new product agreement with Collegium Pharmaceutical, Inc., or Collegium, Collegium may require that any milestone payments we are required to make to Collegium be paid with shares of our common stock. In addition, the potential milestone payments due to the stockholders of Proprius may be paid in up to 50% stock of Cypress, at our election. To the extent that we are able to raise additional capital by issuing equity securities, or otherwise issue equity securities in connection with corporate collaboration and licensing arrangements, our existing stockholders’ ownership percentage will be diluted. In addition, if we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish potential valuable rights to our potential products on terms that are not favorable to us.
34
Table of Contents
* The investment of our cash balance and short-term investments are subject to risks which may cause losses and affect the liquidity of these investments.
As of March 31, 2009, we had $57.7 million in cash and cash equivalents and $102.6 million in short-term investments. We have historically invested these amounts in United States government securities, corporate debt securities, commercial paper, certificates of deposit and money market funds. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. During the quarter ended March 31, 2009, we determined that any declines in the fair value of our investments were temporary. There may be further declines in the value of these investments, which we may determine to be other-than-temporary. These market risks associated with our investment portfolio may have a negative adverse effect on our results of operations, liquidity and financial condition.
We may lose our net operating loss carryforwards, which could prevent us from offsetting future taxable income.
We have incurred substantial losses during our history and do not expect to become profitable in 2009 and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in which they were generated. The carryforward period is 15 years for losses incurred prior to 1996 and 20 years for losses incurred subsequent to 1997. Our federal net operating losses will begin to expire this year, in 2009, and our California tax loss carryforwards will begin to expire in 2012. Additionally, the future utilization of our net operating loss carryforwards to offset future taxable income is subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have occurred in prior years, which could prevent us from fully utilizing our net operating loss carryforwards.
* Our stock price has been very volatile and will likely continue to be volatile.
The market prices of the stock of technology companies, particularly biotechnology companies, have been highly volatile. For the period from January 1, 2006 through December 31, 2008, the low and high sales prices for our common stock ranged from $4.90 to $18.20. For the three months ended March 31, 2009, our low and high sales prices were $6.78 and $10.10, respectively. As of March 31, 2009, the last reported sale price of our common stock was $7.11. Our stock price has been and will likely continue to be affected by market volatility, as well as by our own performance. We expect our stock price to be volatile in the near future. The following factors, among other risk factors, may have a significant effect on the market price of our common stock:
• | the commercial sales ofSavella; | ||
• | development of our personalized medicine services and other product candidates; | ||
• | developments in our relationship with Forest Laboratories, including the termination of our agreement; | ||
• | developments in our relationship with Pierre Fabre, including the termination of our agreement; | ||
• | our entering into, or failing to enter into, an agreement for the acquisition of any products, product candidates or companies, or an agreement with any corporate collaborator; | ||
• | our available cash; | ||
• | announcements of technological innovations or new products by us or our competitors; | ||
• | developments in our patent or other proprietary rights; |
35
Table of Contents
• | fluctuations in our operating results; | ||
• | litigation initiated by or against us; | ||
• | developments in domestic and international governmental policy or regulation; and | ||
• | economic and other external factors or other disaster or crisis. |
* The concentration of ownership among our existing officers, directors and principal stockholders may result in the entrenchment of management, prevent other stockholders from influencing significant corporate decisions and depress our stock price.
As of March 31, 2009, our executive officers, directors and stockholders who hold at least 5% of our stock beneficially owned and controlled approximately 45% of our outstanding common stock. If these officers, directors and principal stockholders act together, they will be able to help entrench management and to influence matters requiring approval by our stockholders, including a financing in which we sell more than 20% of our voting stock at a discount to the market price, the removal of any directors up for election, the election of the members of our board of directors, mergers, a sale of all or substantially all of our assets, going private transactions and other fundamental transactions. This concentration of ownership could also depress our stock price.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our second amended and restated certificate of incorporation and our third amended and restated bylaws may delay, impede or prevent an acquisition or change in control of us. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management team. These provisions include, among others, a requirement that our board of directors be divided into three classes with directors serving three year terms and with only one class of directors being elected in any given year, a requirement that special meetings of our stockholders may only be called by the chairman of the board, our chief executive officer or a majority of our board of directors and a prohibition on actions by our stockholders by written consent. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advanced notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders.
We expect to continue incurring significant costs as a result of enacted and proposed changes in laws and regulations relating to corporate governance matters.
Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by the NASDAQ Stock Market LLC, have and we expect will continue to result in significant costs to us. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm’s audit of internal control over financial reporting has
36
Table of Contents
required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant financial resources and management time related to compliance activities. Additionally, these laws and regulations could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors’ view of us.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404 related to internal controls, and the related rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 and other requirements will increase our costs and will continue to require additional management resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy reporting requirements. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock price.
Risks related to our intellectual property
* We rely primarily on method of use patents to protect our proprietary technology for the sales of Savella, and our ability to compete may decrease or be eliminated if we are not able to protect our proprietary technology.
Our ability to realized the full sales potential forSavella(milnacipran HCl), our only therapeutic product, may decrease or be eliminated if we are not able to protect our proprietary technology. The composition of matter patent for milnacipran (U.S. Patent 4,478,836) expired in June 2002. Accordingly, we rely on the patent for the method of synthesis of milnacipran (U.S. Patent 5,034,541), which expires on December 27, 2009 and was assigned to Pierre Fabre and licensed to us and on patents on the method of use of milnacipran to treat symptoms of FM (U.S. Patent 6,602,911, which we refer to as the ‘911 patent), the method of use of milnacipran to treat pain (U.S. Patent 6,992,110) and the method of use of milnacipran to treat symptoms of chronic fatigue syndrome (U.S. Patent 6,635,675) issued to us, to protect our proprietary technology with respect to the development of milnacipran. The method of use patent directly relevant to our current milnacipran product candidate is the ‘911 patent; the other two method of use patents may have future applicability. We have also filed additional patent applications related to milnacipran and to the use of milnacipran for FM (and other related pain syndromes and disorders), although no patents have issued on these patent applications. Because there is no patent protection for the composition of matter of milnacipran, other companies may be able to sell milnacipran in competition with us and Forest Laboratories for indications for which we do not have use patent protection unless we and Forest Laboratories are able to obtain additional protection through milnacipran-related patents or additional use patents that may issue from our pending patent applications or from regulatory exclusivity. It may be more difficult to establish infringement of methods of synthesis, formulation or use patents as compared to a patent on a compound. If we or Forest Laboratories are not able to obtain and enforce these patents, a competitor could use milnacipran for a treatment or use not covered by any of our patents.
In connection with our acquisition of Proprius, we acquired right to an issued patent (U.S. patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to theAvise PGtest and a number of patents in prosecution on theAvise MCV. Although we have the right to one issued
37
Table of Contents
patent covering theAvise PGtest we may not be able to secure any additional patent protection and the existing patent may not ensure exclusivity through the patent term. In addition, as part of our acquisition of Proprius we acquired rights to a patent family directed to PRO-406 (the topical NSAID therapy for the symptomatic treatment of osteoarthritis) including one issued patent (U.S. patent No. 7,138,394, which expires in 2023) and several pending U.S. and foreign patent applications. It is uncertain whether we will be able to obtain any claim with reasonable coverage for PRO-406.
The validity of a United States patent depends, in part, on the novelty of the invention it discloses. The pharmaceutical industry is characterized by constant investment in new drug discovery and development, and this results in a steady stream of publications regarding the product of this investment, any of which would act to defeat the novelty of later-discovered inventions. Issued United States patents enjoy a presumption of validity that can only be overcome by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be invalidated if a court determines, retrospectively, that despite the action of the Patent and Trademark Office in issuing the patent, the corresponding patent application did not meet the statutory requirements. If a competitor or other third party were to successfully challenge our patents, and claims in these patents are narrowed or invalidated, our ability to protect the related product from competition would be compromised.
We also expect to rely on the United States Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Amendments, for protection ofSavellaand our other future products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as that inSavella. Once a drug containing a new molecule is approved by the FDA, the FDA cannot accept an abbreviated NDA for a generic drug containing that molecule for five years, although the FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by independent clinical data. Amendments have been proposed that would narrow the scope of Hatch-Waxman exclusivity and permit generic drugs to compete with our drug. After the Hatch-Waxman exclusivity period expires, assuming our patents are valid, we still expect to rely on our method of use patents to protect our proprietary technology with respect to the development of milnacipran. The patent positions of pharmaceutical companies are uncertain and may involve complex legal and factual questions. We may incur significant expense in protecting our intellectual property and defending or assessing claims with respect to intellectual property owned by others. Any patent or other infringement litigation by or against us is likely and could result in significant expense to us, including diversion of the resources of management.
Others may file patent applications or obtain patents on similar technology or compounds that compete withSavellafor the treatment of FM, for any of our personalized medicine services or any of the products that may be developed under our POC trials. We cannot predict the breadth of claims that will be allowed and issued in patent applications. Once patents have issued, we cannot predict how the claims will be construed or enforced. We may infringe on intellectual property rights of others without being aware of the infringement. If another party claims we are infringing their technology, we could have to defend an expensive and time consuming lawsuit, pay a large sum if we are found to be infringing, or be prohibited from selling or licensing our products unless we obtain a license or redesign our product, which may not be possible.
We also rely on trade secrets and proprietary know-how to develop and maintain our competitive position. Some of our current or former employees, consultants or scientific advisors, or current or prospective corporate collaborators, may unintentionally or willfully disclose our confidential information to competitors or use our proprietary technology for their own benefit. Furthermore, enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop similar knowledge, methods and know-how or gain access to our proprietary information through some other means.
38
Table of Contents
Our ability to compete may decline if we do not adequately protect our proprietary rights.
Our commercial success depends on obtaining and maintaining proprietary rights to our products and services and product candidates and technologies and their uses as well as successfully defending these rights against third party challenges. We will only be able to protect our products and services and product candidates, proprietary technologies and their uses from unauthorized use by third parties to the extent that valid and enforceable patents or effectively-protected trade secrets cover them.
Our ability to obtain patent protection for our products and services and product and service candidates and technologies is uncertain due to a number of factors, including:
• | we may not have been the first to make the inventions covered by our pending patent applications or issued patents; | ||
• | we may not have been the first to file patent applications for our products and services and product and service candidates or the technologies we rely upon; | ||
• | others may independently develop similar or alternative technologies or duplicate any of our technologies; | ||
• | our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability; | ||
• | any or all of our pending patent applications may not result in issued patents; | ||
• | we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity; | ||
• | any patents issued to us or our collaborators may not provide a basis for commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties; | ||
• | some of our technologies may not be patentable; | ||
• | others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or | ||
• | others may identify prior art which could invalidate our patents. |
Even if we obtain patents covering our product and service candidates or technologies, we may still be barred from making, using and selling our product candidates or technologies because of the patent rights of others. Others may have filed and in the future are likely to file patent applications covering compounds, assays, genes, gene products or therapeutic or personalized medicine services that are similar or identical to ours. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the area of the fields in which we have developed and are developing products and services. These could materially affect our ability to develop our product and service candidates or sell our products and services. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products and services and product and service candidates or technologies may infringe. These patent applications may have priority over patent applications filed by us. Disputes may arise regarding the ownership or inventorship of our inventions. It is difficult to determine how such disputes will be resolved. Others may challenge the validity of our patents. If our patents are found to be invalid we will lose the ability to exclude others from making, using or selling the inventions claimed therein.
39
Table of Contents
Some of our research collaborators and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, in-licensed technology is important to our business. We generally will not control the patent prosecution, maintenance or enforcement of in-licensed technology.
A dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and costly and an unfavorable outcome could harm our business.
There is significant litigation in the industry regarding patent and other intellectual property rights. We may be exposed to future litigation by third parties based on claims that our products and services and product and service candidates, technologies or activities infringe the intellectual property rights of others. If our drug development activities are found to infringe any such patents, we may have to pay significant damages. There are many patents relating to chemical compounds and the uses thereof. If our compounds are found to infringe any such patents, we may have to pay significant damages. A patentee could prevent us from making, using or selling the patented compounds. We may need to resort to litigation to enforce a patent issued to us, protect our trade secrets or determine the scope and validity of third party proprietary rights. From time to time, we may hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us. Either we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, whether we win or lose. We may not be able to afford the costs of litigation. Any legal action against our company or our collaborators could lead to:
• | payment of damages, potentially treble damages, if we are found to have willfully infringed such parties’ patent rights; | ||
• | injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products, services and product and service candidates; or | ||
• | we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. As a result, we could be prevented from commercializing current or future products, services and product and service candidates. |
The patent applications of pharmaceutical, biotechnology and personalized medicine companies involve highly complex legal and factual questions, which could negatively impact our patent position.
The patent positions of pharmaceutical and biotechnology and personalized medicine services companies can be highly uncertain and involve complex legal and factual questions. The United States Patent and Trademark Office’s standards are uncertain and could change in the future. Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to reexamination proceedings in the United States Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Accordingly, rights under any issued patents may not provide us with sufficient protection against competitive products or processes.
40
Table of Contents
In addition, changes in or different interpretations of patent laws in the United States and foreign countries may permit others to use our discoveries or to develop and commercialize our technology and products and services without providing any compensation to us. The laws of some countries do not protect intellectual property rights to the same extent as United States laws and those countries may lack adequate rules and procedures for defending our intellectual property rights. For example, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our product, services or product and service candidates.
If we fail to obtain and maintain patent protection and trade secret protection of our products, services and product and service candidates, proprietary technologies and their uses, we could lose our competitive advantage and competition we face would increase, reducing our potential revenues and adversely affecting our ability to attain or maintain profitability.
41
Table of Contents
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3 — Defaults Upon Senior Securities
Not applicable
Item 4 — Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 — Other Information
Not applicable
Item 6 — Exhibits
3.1 | Second Amended and Restated Certificate of Incorporation. (1) | |
3.3 | Fourth Amended and Restated By-Laws. | |
4.1 | Form of Stock Certificate. (2) | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a — 14(a) or Rule 15d — 14(a) of the Securities Exchange Act of 1934, as amended. | |
31.2 | Certification of Chief Financial Officer pursuant to to Rule 13a — 14(a) or Rule 15d — 14(a) of the Securities Exchange Act of 1934, as amended. | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a — 14(b) or Rule 15d — 14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference to Appendix C of our Definitive Proxy Statement filed with the SEC on August 11, 2003 | |
(2) | Incorporated by reference to Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225 |
42
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.
Cypress Bioscience, Inc. | ||||
Date: May 11, 2009 | By: | /s/ JAY D. KRANZLER | ||
Chief Executive Officer and Chairman of the | ||||
Board(Principal Executive Officer) | ||||
Date: May 11, 2009 | By: | /s/ SABRINA MARTUCCI JOHNSON | ||
Chief Financial Officer, Chief Operating | ||||
Officer and Executive Vice President (Principal Financial Officer) |
43