Halozyme Therapeutics, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File Number: 000-49616
Halozyme Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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88-0488686 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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11588 Sorrento Valley Road, Suite 17,
San Diego, California
(Address of principal executive offices) |
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92121
(Zip Code) |
(858) 794-8889
(Registrants Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $.001
(Title of Class)
Check whether the issuer is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange
Act. o
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Check if there is no disclosure of delinquent filers in response
to Item 405 of
Regulation S-B
contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-KSB or any
amendment to this
Form 10-KSB.
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
State issuers revenues for its most recent fiscal year:
$127,000.
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of
February 28, 2006 was approximately $167,000,000, based
upon the closing price on the American Stock Exchange reported
for such date. Shares of common stock held by each officer and
director and by each person who is known to own 10% or more of
the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates of the Company. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 28, 2006, there were 60,300,795 shares
of the issuers $.001 par value common stock issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuers Definitive Proxy Statement to be
filed with the Commission pursuant to Regulation 14A in
connection with the registrants 2006 Annual Meeting of
Stockholders, to be filed subsequent to the date hereof, are
incorporated by reference into Parts II and III of
this Annual Report. Such Definitive Proxy Statement will be
filed with the Securities and Exchange Commission not later than
120 days after the conclusion of the issuers fiscal
year ended December 31, 2005.
Transitional Small Business Disclosure format (check
one): Yes o No þ
TABLE OF CONTENTS
PART I
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Item 1. |
Description of Business. |
This Annual Report contains forward-looking statements
regarding our business, financial condition, results of
operations and prospects. Words such as expects,
anticipates, intends, plans,
believes, seeks, estimates
and similar expressions or variations of such words are intended
to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in
this Annual Report. Additionally, statements concerning future
matters such as the development or regulatory approval of new
products, enhancements of existing products or technologies,
revenue and expense levels and other statements regarding
matters that are not historical are forward-looking
statements.
Although forward-looking statements in this Annual Report
reflect the good faith judgment of our management, such
statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes
discussed in or anticipated by the forward-looking statements.
Factors that could cause or contribute to such differences in
results and outcomes include without limitation those discussed
under the heading Risk Factors below, as well as
those discussed elsewhere in this Annual Report. Readers are
urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Annual
Report. Readers are urged to carefully review and consider the
various disclosures made in this Annual Report, which attempt to
advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations
and prospects.
Overview
We are a biopharmaceutical company dedicated to the development
and commercialization of recombinant human enzymes for the drug
delivery, palliative care, oncology, and infertility markets.
Our operations to date have been limited to organizing and
staffing the Company, acquiring, developing and securing its
technology and undertaking product development for our existing
products and for a limited number of product candidates. In June
2005, we launched our first product,
Cumulasetm,
a product used for in vitro fertilization, and transitioned
from a development-stage organization to a commercial entity.
Our offices and research facilities are located at 11588
Sorrento Valley Road, Suite 17, San Diego, California
92121. Our telephone number is (858) 794-8889 and our
e-mail address is
info@halozyme.com. Additional information about Halozyme
can be found on our website, at www.halozyme.com, and in
our periodic and current reports filed with the Securities and
Exchange Commission (SEC). Copies of our current and
periodic reports filed with the SEC are available at the SEC
Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and online at www.sec.gov
and our website at www.halozyme.com.
Technology
Our technology is based on recombinant human PH20 (rHuPH20), a
human synthetic version of hyaluronidase that degrades
hyaluronic acid, a space-filling, gel-like substance that is a
major component of tissues throughout the body, such as skin and
cartilage. The PH20 enzyme is a naturally occurring enzyme that
digests hyaluronic acid to temporarily break down the gel,
thereby facilitating the penetration and diffusion of other
drugs and fluids that are injected under the skin or in the
muscle. It also degrades the cumulus matrix surrounding oocytes
(eggs) facilitating in vitro fertilization (IVF).
Bovine and ovine-derived hyaluronidases have been used in
multiple therapeutic areas, including in vitro
fertilization and ophthalmology, where an FDA-approved bovine
version was used as a drug delivery agent to enhance dispersion
of local anesthesia for over 50 years. Despite the multiple
potential therapeutic
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applications for hyaluronidase, there are problems with existing
and potential animal-derived product offerings, including:
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Impurity: Most such commercial enzyme preparations are
crude extracts from cattle testes and are typically 1-10% pure. |
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Prion disease: Cattle testes are an organ with the
highest concentration of hyaluronidase, but also with the
highest levels of a protein implicated in the development of
neurodegenerative disorders associated with prion disease. |
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Immunogenicity: Hyaluronidases can also be found in
bacteria, leeches, certain venoms, and marine organisms. Such
preparations, in addition to bovine and ovine, are non-human,
and may elicit immune reactions, possess endotoxin, or have some
of the same defects as slaughterhouse derivations. |
As an alternative to the existing animal-derived drugs, our
proprietary technology, as evidenced by our exclusive license
with the University of Connecticut of the patent covering the
DNA sequence that encodes human hyaluronidase, may both expand
existing markets and create new ones. Gaps in existing
hyaluronidase offerings may create demand for our solution, and
provide new market opportunities. Our objective is to apply our
products under development to key markets in multiple
therapeutic areas, beginning with the in vitro
fertilization (IVF) and palliative care markets.
Strategy
Our objective is to develop and commercialize our first enzyme,
recombinant human hyaluronidase (rHuPH20), as a medical device,
drug enhancement agent, and therapeutic drug. Key aspects of our
corporate strategy include the following:
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Continue to commercialize
Cumulasetm
through our distributors; |
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Begin to commercialize
Hylenextm
through our distributor; |
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Initiate Phase I/ IIa trials for our oncology developmental
product,
Chemophasetm; and |
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Conduct proof of concept clinical studies with our
Enhanzetm
Technology. |
Product Development Programs
We have multiple product candidates targeting several
indications in various stages of development. The following
table summarizes our lead clinical product and pipeline
candidates:
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Product |
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Indication (Brief Description) |
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Development Status |
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Cumulase
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In vitro fertilization |
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Marketed |
Hylenex
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Agent for drug and fluid infusion |
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NDA Approved |
Chemophase
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Chemoadjuvant for superficial bladder cancer |
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Phase I |
Enhanzed Products
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Agent for enhanced drug delivery |
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Pre-Clinical |
HTI-101
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Inflammation, oncology |
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Pre-Clinical |
HTI-201
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Inflammation, oncology |
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Research |
HTI-401
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Central nervous system trauma and wound healing |
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Research |
Cumulase is an ex vivo (used outside of the body) formulation of
rHuPH20 to replace the bovine enzyme currently used for the
preparation of oocytes (eggs) prior to IVF during the
process of intracytoplasmic sperm injection (ICSI), in
which the enzyme is an essential component. The enzyme strips
away the hyaluronic acid that surrounds the oocyte. This allows
the clinician to then perform the ICSI procedure, injecting the
sperm into the oocyte. The FDA considers hyaluronidase IVF
products to be medical devices subject to 510(k) approval and we
filed our 510(k) application during September 2004. We received
a CE (European
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Conformity) Mark for Cumulase in December 2004, which allows the
Company to market Cumulase in the European Union. We received
FDA clearance in April 2005. We launched Cumulase in the
European Union and in the United States in June 2005. We believe
the total ICSI market consists of an estimated 500,000
intracytoplasmic sperm injection cycles worldwide in 2005
(Source: CDC, 2001; ESHRE, 2002).
Hylenex is a human recombinant formulation of rHuPH20 to
facilitate the absorption and dispersion of other injected drugs
or fluids. When injected under the skin or in the muscle,
hyaluronidase can digest the hyaluronic acid gel, allowing for
temporarily enhanced penetration and dispersion of other
injected drugs or fluids. We filed a New Drug Application
(NDA) in March 2005 and we received approval of our Hylenex
NDA in December 2005.
Advanced subcutaneous infusion (ASI): Hylenex facilitates
subcutaneous delivery of fluids up to one liter without the need
for intraveneous access, a procedure known as ASI. Importantly,
ASI for fluid replacement in terminal patients may be achieved
with limited or no need for nursing assistance. Over
1.1 million subcutaneous fluid infusions are performed per
year with hospice patients alone (Source: Company estimates
based on National Hospice and Palliative Care Organization data,
2001). In addition, over 500 million infusion bags are
utilized annually in the United States, some of which could
potentially convert to ASI using Hylenex, giving rise to
additional market potential (Source: B. Braun, 2003).
INFUSE-LR Study: During January 2006, we completed the
INcreased Flow Utilizing
Subcutaneously-Enabled Lactated
Ringers clinical trial, or INFUSE-LR study, which
was designed to determine the subcutaneous
(Sub-Q) infusion flow
rate of Lactated Ringers solution with and without
Hylenex, determine the
Sub-Q infusion flow
rate dose response to Hylenex over one order of magnitude of
dose, and assess safety and tolerability. This prospective,
double-blind, randomized, placebo-controlled, within-subject,
dose-comparison study enrolled 54 volunteer subjects who
received Sub-Q
infusions simultaneously in both upper arms through 24 gauge
catheters. Key results from the study included:
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The use of Hylenex compared to placebo preceding
Sub-Q infusion, under
gravity flow, to accelerate the flow rate was assessed. Hylenex
accelerated flow versus placebo in every subject studied, and by
an overall mean ratio of approximately four-fold. The overall
mean flow rate for
Sub-Q infusion with
Hylenex was 464 mL/hr versus 118 mL/hr with placebo
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The faster flow rates did not result in an increase in edema. A
total of 94% of subjects had moderate or severe arm edema with
placebo compared to 17% with Hylenex (p < 0.0001). |
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In the study, there were no serious or severe adverse events
(AE). Based on the AE profile, Hylenex was at least as well
tolerated as placebo. |
Local anesthesia and other small molecule drugs: A
natural extension of Hylenex may be applying this technology,
used as a spreading factor for local anesthetics around the eye,
to other areas of the body. For example, lidocaine and
bupivacaine are administered for most minor surgical operations
requiring local anesthesia and we believe that the dispersion
rates of these local anesthetics might be improved through a
combination with Hylenex.
Chemophase, our lead oncology product candidate, is an
investigative chemoadjuvant designed to enhance the transport of
chemotherapeutic agents to tumor tissue, increasing diffusion in
tissues without affecting vascular permeability. Chemophase is
being developed for potential use in the treatment of patients
with various solid tumor malignancies. Many solid tumor types
(e.g., colon, breast, prostate) accumulate hyaluronic acid,
creating a barrier to the effective penetration of current or
future chemotherapeutics. Previous clinical trials of bovine
(bull) PH20 in patients showed some promise in enhancing
chemotherapy regimens using adjunctive systemic hyaluronidase in
previously chemo-refractory patients.
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Furthermore, we have observed significant reduction of tumor
interstitial fluid pressure following the administration of
rHuPH20 in solid tumors grown in mice. Tumor interstitial
pressure is widely believed to be an important factor limiting
the access of cytostatic regimens to solid tumors. By digesting
the hyaluronic acid gel, Chemophase may reduce interstitial
pressure in the tumor and promote more effective delivery of
chemotherapy throughout the tumor, as it does under the skin in
the case of Hylenex. This could potentially lead to increased
patient survival and extend the product lifecycles of many
commonly used chemotherapeutic agents.
As we continue development of an intravenous formulation of
rHuPH20, we hope to realize time and cost savings by leveraging
our current manufacturing process and toxicology package to
support a clinical program for a local oncology application.
During June 2005, we submitted an investigational new drug
application (IND) in order to begin clinical testing
of our Chemophase product candidate in superficial bladder
cancer. We received authorization to initiate clinical testing
of Chemophase in August 2005, and we commenced patient
enrollment in our initial clinical protocol under this IND in
October 2005. In March 2006, we completed enrollment in our
Chemophase Phase I clinical trial.
Each year there are approximately 63,000 new cases of urinary
bladder cancer in the United States (Source: American Cancer
Society, 2005). Approximately 70% of these new cases are
superficial bladder cancer (Source: AUA Bladder
Cancer Guidelines Panel, 1999). There are approximately 500,000
prevalent cases of urinary bladder cancer (Source: NCI SEER
Cancer Statistics Review, 2002) in the United States.
Approximately 30% of treated patients have a recurrence within
12 months (Source: Southwest Oncology Group Study, 1995).
Enhanzetm
Technology, a proprietary drug enhancement system using
Halozymes first approved enzyme, rHuPH20, is the
companys broader technology opportunity that can
potentially lead to proprietary partnerships with other
pharmaceutical companies. When co-formulated with other
injectable drugs, Enhanze Technology may act as a
molecular machete to facilitate the penetration and
dispersion of these drugs by temporarily opening flow channels
under the skin. Molecules as large as 200 nanometers may pass
freely through the perforated extracellular matrix, which
recovers its normal density within approximately 24 hours,
leading to a drug delivery platform which does not permanently
alter the architecture of the skin. Halozyme is seeking
partnerships with pharmaceutical companies that market drugs
requiring or benefiting from injection via the subcutaneous or
intramuscular routes that could benefit from this technology.
Our other research products include HTI-101, 201, and 401 and
are being investigated for potential use in oncology,
inflammation, and central nervous system trauma and wound
healing.
Sales and Marketing
Our sales and marketing strategy in the IVF market consists of a
multi-channel approach that targets patients, clinicians,
suppliers, and regulators. We are currently seeking to raise
public awareness of the current risk of using animal-derived
products in IVF applications among industry professionals and
the general public through direct contact with target audiences,
advertising in trade journals, presentations and booths at
conferences and trade shows, mass mailings, Web initiatives, and
brand-building efforts such as press releases and other public
relations efforts. Direct contact could include communicating
with key advocacy groups, meeting with regulatory officials, and
attending specialty conferences.
One of the highest impact target audiences is the Society for
Assisted Reproductive Technology (SART), which is the leading
organization of professionals dedicated to the practice of
assisted reproductive technologies in the United States. The
organization includes over 370 members, which represents over
95% of the IVF clinics in the nation, and sponsors a
highly-attended annual conference and exhibitor program.
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Likewise, the European Society of Human Reproduction and
Embryology (ESHRE) is the leading non-profit organization
for IVF in Europe and also sponsors an annual meeting. We plan
on using efficacy and safety data to recruit key thought leaders
and practitioners from this organization to help promote the use
of Cumulase over existing preparations.
There are approximately eight known suppliers of IVF reagents
and media, including micromanipulation media that contain
hyaluronidase preparations. All of these suppliers sell
animal-derived enzymes, and may benefit from having the
opportunity to supply clinics with a human recombinant
hyaluronidase. We are seeking to establish non-exclusive
distribution agreements with a subset of these suppliers to
serve the worldwide marketplace. We have signed worldwide
distribution agreements with MediCult AS (MediCult), a
Denmark-based distributor with strengths in the European market
and MidAtlantic Diagnostics, Inc. (MidAtlantic), a New
Jersey-based distributor with strengths in the United States
market. These agreements are non-exclusive distribution
agreements, having five-year terms with renewal options for an
additional two or three years, and granting each of our
distributors the right to purchase Cumulase from us and resell
it to end users. Currently, we are selling to both MediCult and
MidAtlantic.
The sales and marketing strategy for Hylenex consists of
building a strong clinical foundation with post marketing
trials. Post-marketing clinical trials are ongoing to explore
the potential of Hylenex in a variety of situations, since
limited or no data with Hylenex exist in most situations in
which our partner will market it. Clinical trials have inherent
risk, and it is possible that not all trials will meet their
endpoints. Examples of the trials include the completed
INFUSE-LR study and the ongoing INFUSE-Morphine study, which is
designed to determine the time to maximal blood levels of
morphine after subcutaneous administration with and without
Hylenex, maximal blood levels after intravenous administration
of morphine, and to assess safety and tolerability. In addition,
we plan to educate clinicians about the potential benefits of
Hylenex by engaging key opinion leaders and enrolling clinical
Centers of Excellence.
During August 2004, we signed an Exclusive Distribution
Agreement (the Distribution Agreement) with Baxter
Healthcare Corporation (Baxter) to market,
distribute and sell Hylenex in the United States and Puerto Rico.
During March 2005, we entered into a Development and Supply
Agreement (the Supply Agreement) and a First
Amendment to the existing Distribution Agreement with Baxter.
Under the terms of the agreements we will supply Baxter with the
active pharmaceutical ingredient, and Baxter will fill and
finish Hylenex and hold it for subsequent distribution. The
Supply Agreement provides for additional product development
opportunities that the parties may mutually decide to pursue. In
addition, Baxter has a right of first refusal on certain product
line extensions and select new products. The First Amendment
provides for specific and consistent definitions among the
Supply Agreement and Distribution Agreement and modifies various
covenants of Baxter relating to the definition of marketing and
incremental sales costs, including a cap on the annualized
amount of marketing and incremental sales costs to be solely
paid by Baxter. In the event that both parties agree in advance
to incur combined marketing and incremental sales costs in
excess of the cap, such excess marketing and incremental sales
costs shall be shared equally. Currently, the parties anticipate
that combined marketing and incremental sales costs for 2006
will be in excess of the cap. As such, it is possible that
aggregate revenues from sales of Hylenex will be less than our
portion of these shared additional marketing and incremental
sales costs.
Competition
A key clinical selling point for Cumulase is that it may
eliminate the risk of animal pathogen transmission and toxicity
inherent in slaughterhouse preparations. The competing enzymes
are of animal origin, creating an opportunity for Halozyme to
enter the market with a recombinant human enzyme alternative.
The leading IVF suppliers are CooperSurgical, Irvine Scientific,
and Cook Ob/ Gyn (all three of these companies produce bovine
products) in the US, and MediCult (ovine product) and Vitrolife
(bovine product) outside the US.
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Cumulase is priced at a premium to the animal-derived products
sold by these leading IVF suppliers, which may make market
penetration difficult.
Some commercial pharmacies now compound hyaluronidase
preparations for institutions and physicians. However, there are
some concerns with using a compounded sterile product.
Compounded preparations are not FDA-approved products. Some
compounding pharmacies do not test every batch of product for
drug concentration, sterility, and lack of pyrogens. In
addition, other manufacturers have FDA approved products for use
as spreading agents, including ISTA Pharmaceuticals, Inc.
(ISTA), with an ovine (ram) hyaluronidase,
Vitrase®,
Amphastar Pharmaceuticals, Inc., with a bovine
(bull) hyaluronidase,
Amphadasetm,
and Primapharm, Inc. also with a bovine hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are distinct new chemical entities and hence afforded
five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. As each of these
products are established as distinctly different new chemical
entities the marketing exclusivity granted does not prohibit the
marketing of the products. In addition, we anticipate that
Hylenex will be priced at a significant premium to the
animal-derived hyaluronidases currently in the marketplace. This
anticipated price premium may slow market adoption of Hylenex
and make market penetration difficult.
Patents and Proprietary Rights
Our success will depend in part on our ability to obtain patent
protection for our inventions, to preserve our trade secrets and
to operate without infringing the proprietary rights of third
parties. Our strategy is to actively pursue patent protection in
the United States and certain foreign jurisdictions for
technology that we believe to be proprietary and that offers a
potential competitive advantage for our inventions. Our patent
portfolio includes six issued patents and a number of pending
patent applications. We believe our patent position surrounding
recombinant human hyaluronidases and their methods of
manufacture presents a barrier to entry for potential
competitors looking to utilize these hyaluronidases.
In addition to patents, we rely on trade secrets and proprietary
know-how. We seek protection of these trade secrets and
proprietary know-how, in part, through confidentiality and
proprietary information agreements. Our policy is to require our
employees, directors, consultants and advisors, outside
scientific collaborators and sponsored researchers, other
advisors and other individuals and entities to execute
confidentiality agreements upon the start of employment,
consulting or other contractual relationships with us. These
agreements provide that all confidential information developed
or made known to the individual or entity during the course of
the relationship is to be kept confidential and not disclosed to
third parties except in specific circumstances. In the case of
employees and some other parties, the agreements provide that
all inventions conceived by the individual will be our exclusive
property. Despite the use of these agreements and our efforts to
protect our intellectual property, there will always be a risk
for unauthorized use or disclosure of information. Furthermore,
our trade secrets may otherwise become known to, or be
independently developed by, our competitors.
We also file trademark applications to protect the names of our
products. These applications may not mature to registration and
may be challenged by third parties. We are pursuing trademark
protection in a number of different countries around the world.
Development and Manufacturing
We have signed a commercial supply agreement with Avid
Bioservices, Inc. (Avid), a contract manufacturing
organization, to produce bulk recombinant enzyme product for
clinical and commercial use. Avid will manufacture the active
pharmaceutical ingredient under commercial good manufacturing
practices for commercial scale production and will provide
support for chemistry, manufacturing and controls sections for
any FDA regulatory filings. We have not established and may not
be able to establish arrangements with additional manufacturers
for these ingredients or products should the existing supplies
become unavailable or
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in the event that Avid is unable to adequately perform its
responsibilities. Difficulties in our relationship with Avid or
delays or interruptions in Avids supply of its
requirements could limit or stop its ability to provide
sufficient quantities of our products, on a timely basis, for
clinical trials and commercial sales, which would have a
material adverse effect on our business and financial condition.
In the event that any of our product candidates are used in
clinical trials or receive the necessary regulatory approval for
commercialization, we rely on third parties to prepare, package
and fill and finish the products prior to their distribution. If
we are unable to locate third parties to perform these functions
on terms that are economically acceptable to us, the progress of
clinical trials could be delayed or even suspended and the
commercialization of approved product candidates could be
delayed or prevented. We currently utilize a third party to fill
and finish Cumulase. We also utilize Baxter Pharmaceutical
Solutions (BPS), a subsidiary of Baxter Healthcare Corporation,
to fill and finish Hylenex. Baxter has only limited experience
manufacturing Hylenex batches and we rely on its ability to
successfully manufacture Hylenex batches according to product
specifications. Any delays or interruptions in Baxters
ability to manufacture Hylenex batches could limit its ability
to provide sufficient quantities of our Hylenex product, on a
timely basis, for commercial sales, which would have a material
adverse effect on our business and financial condition.
Research and Development Activities
Our research and development expenses consist primarily of costs
associated with the development and manufacturing of our product
candidates, compensation and other expenses for research and
development personnel, supplies and materials, costs for
consultants and related contract research, facility costs,
amortization and depreciation. We charge all research and
development expenses to operations as they are incurred.
Historically, our research and development activities were
primarily focused on the development of our Cumulase and Hylenex
products, but we are also developing our Chemophase product
candidate, and have recently completed patient enrollment in a
Phase I clinical trial for Chemophase. Our industry is
subject to rapid technological advancements, developing industry
standards and new product introductions and enhancements. As a
result, our success depends, in large part, on our ability to
develop and commercialize products.
Our research and development expenditures in fiscal 2005 and
2004 totaled approximately $10.2 million and
$6.5 million, respectively. Research and development
expenditures in fiscal 2005 were primarily related to the
development of our Cumulase and Hylenex products, and our
Chemophase product candidate. In fiscal 2004, our research and
development expenditures were primarily related to the
development of our Cumulase and Hylenex products. We anticipate
that we will have significant research and development expenses
in the future in connection with the development of product
candidates.
Human Resources
As of February 28, 2006, we had 34 full-time
employees, including 24 engaged in research and clinical
development activities. Ten employees hold Ph.D. or M.D.
degrees. We currently anticipate hiring approximately five
additional employees by the end of 2006. We believe our
relationship with our employees is good.
Risks Related To Our Business
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We have generated only minimal revenue from product sales
to date; we have a history of net losses and negative cash flow,
and we may never achieve or maintain profitability. |
We have generated only minimal revenue from product sales to
date and may never generate significant revenues from future
product sales. Even if we do achieve significant revenues from
product sales, we expect to incur significant operating losses
over the next several years. We have never been profitable, and
we may never become profitable. Through December 31, 2005,
we have incurred aggregate net losses of $26,347,254.
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We may need to raise funds in the next twelve months, and
there can be no assurance that such funds will be
available. |
During the next twelve months we may need to raise additional
capital to complete the steps required to continue development
of our product candidates and to fund general operations. If we
engage in acquisitions of companies, products, or technology in
order to execute our business strategy, we may need to raise
additional capital. We may be required to raise additional
capital in the future through the public offering of securities,
collaborative agreements, private financings and various other
equity or debt financings, including calling outstanding
warrants to purchase our common stock.
Currently, warrants to purchase approximately 11.5 million
shares of our common stock are outstanding and this amount of
outstanding warrants may make us a less desirable candidate for
investment for some potential investors. Approximately
5.9 million of our outstanding warrants contain a call
feature that, potentially, may allow us to raise funds from the
holders of these warrants. If our common stock closes at a price
equal to or greater than $2.00 per share for twenty
consecutive trading days, we have the ability, at our sole
discretion, to call warrants exercisable for up to approximately
1,971,000 shares of common stock, provided that we have not
exercised a call right in the preceding three months. Upon such
a call, the holders of these warrants have thirty days to decide
whether to either exercise their warrants at a price of
$1.75 per share or receive $0.01 from us for each share of
common stock that is not exercised. If we need to raise funds in
the future and we wish to utilize this call right, we will not
be able to exercise the call right if we do not meet the minimum
closing price condition and, even if we meet this condition, we
cannot be sure of the amounts that will be raised by such a call
because some or all warrant holders may decide not to exercise
their warrants.
Considering our stage of development and the nature of our
capital structure, when we are required to raise additional
capital in the future, the additional financing may not be
available on favorable terms, or at all. If we are successful in
raising additional capital, a substantial number of additional
shares will be outstanding and would dilute the ownership
interest of our investors.
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If we do not receive and maintain regulatory approvals for
our product candidates, we will not be able to commercialize our
products, which would substantially impair our ability to
generate revenues. |
With the exception of the December 2004 receipt of a CE
(European Conformity) Mark and April 2005 FDA clearance for
Cumulase, and the December 2005 FDA approval for Hylenex, none
of our product candidates have received regulatory approval from
the FDA or from any similar national regulatory agency or
authority in any other country in which we intend to do
business. Approval from the FDA is necessary to manufacture and
market pharmaceutical products in the United States. Most other
countries in which we may do business have similar requirements.
In December 2005, we received FDA approval for Hylenex. Other
manufacturers have FDA approved products for use as spreading
agents, including ISTA Pharmaceuticals, Inc. (ISTA),
with an ovine-derived hyaluronidase,
Vitrase®,
Amphastar Pharmaceuticals, Inc. (Amphastar), with a
bovine-derived hyaluronidase,
Amphadasetm,
and Primapharm, Inc. also with a bovine-derived hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are each distinct new chemical entities and hence
afforded five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. For so long as
each of these products are established as distinctly different
new chemical entities the marketing exclusivity granted does not
prohibit the marketing of any of these products, including
Hylenex. If the FDA changes its earlier determination that
Hylenex is a distinct new chemical entity, our ability to market
Hylenex will be materially impaired.
The processes for obtaining FDA approval are extensive,
time-consuming and costly, and there is no guarantee that the
FDA will approve any NDAs that we intend to file with respect to
any of our product candidates, or that the timing of any such
approval will be appropriate for our product launch schedule and
other business priorities, which are subject to change. We have
not currently begun the NDA approval process for any of our
other potential products, and we may not be successful in
obtaining such approvals for any of our potential products.
8
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We may not receive regulatory approvals for our product
candidates for a variety of reasons, including unsuccessful
clinical trials. |
Clinical testing of pharmaceutical products is also a long,
expensive and uncertain process. Even if initial results of
pre-clinical studies or clinical trial results are promising, we
may obtain different results that fail to show the desired
levels of safety and efficacy, or we may not obtain FDA approval
for a variety of other reasons. The clinical trials of any of
our product candidates could be unsuccessful, which would
prevent us from obtaining regulatory approval and
commercializing the product. FDA approval can be delayed,
limited or not granted for many reasons, including, among others:
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FDA officials may not find a product candidate safe or effective
enough to merit either continued testing or final approval; |
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FDA officials may not find that the data from pre-clinical
testing and clinical trials justify approval, or they may
require additional studies that would make it commercially
unattractive to continue pursuit of approval; |
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the FDA may not approve our manufacturing processes or
facilities, or the processes or facilities of our contract
manufacturers or raw material suppliers; |
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the FDA may change its formal or informal approval policies, act
contrary to previous guidance, or adopt new regulations; or |
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the FDA may approve a product candidate for indications that are
narrow or under conditions that place the product at a
competitive disadvantage, which may limit our sales and
marketing activities or otherwise adversely impact the
commercial potential of a product. |
If the FDA does not approve our product candidates in a timely
fashion on commercially viable terms or we terminate development
of any of our product candidates due to difficulties or delays
encountered in the regulatory approval process, it will have a
material adverse impact on our business and we will be dependent
on the development of our other product candidates and/or our
ability to successfully acquire other products and technologies.
We may not receive regulatory approval of Chemophase, or any
other product candidates, in a timely manner, or at all.
In addition, we intend to market certain of our products, and
perhaps have certain of our products manufactured, in foreign
countries. The process of obtaining regulatory approvals in
foreign countries is subject to delay and failure for many of
the same reasons set forth above as well as for reasons that
vary from jurisdiction to jurisdiction.
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If our product candidates are approved by the FDA but do
not gain market acceptance, our business will suffer because we
may not be able to fund future operations. |
Assuming that we obtain the necessary regulatory approvals, a
number of factors may affect the market acceptance of any of our
existing product candidates or any other products we develop or
acquire in the future, including, among others:
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the price of our products relative to other therapies for the
same or similar treatments; |
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the perception by patients, physicians and other members of the
health care community of the effectiveness and safety of our
products for their prescribed treatments; |
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our ability to fund our sales and marketing efforts; |
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the degree to which the use of our products is restricted by the
product label approved by the FDA; |
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the effectiveness of our sales and marketing efforts; and |
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the introduction of generic competitors. |
9
If our products do not gain market acceptance, we may not be
able to fund future operations, including the development or
acquisition of new product candidates and/or our sales and
marketing efforts for our approved products, which would cause
our business to suffer.
In addition, our ability to market and promote our product
candidates will be restricted to the labels approved by the FDA.
If the approved labels are restrictive, our sales and marketing
efforts may be negatively affected.
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If we are unable to sufficiently develop our sales,
marketing and distribution capabilities or enter into agreements
with third parties to perform these functions, we will not be
able to commercialize products. |
We may not be successful in marketing and promoting our existing
product candidates or any other products we develop or acquire
in the future. We are currently in the process of developing our
sales, marketing and distribution capabilities. However, our
current capabilities in these areas are very limited. In order
to commercialize any products successfully, we must internally
develop substantial sales, marketing and distribution
capabilities, or establish collaborations or other arrangements
with third parties to perform these services. We do not have
extensive experience in these areas, and we may not be able to
establish adequate in-house sales, marketing and distribution
capabilities or engage and effectively manage relationships with
third parties to perform any or all of such services. To the
extent that we enter into co-promotion or other licensing
arrangements, our product revenues are likely to be lower than
if we directly marketed and sold our products, and any revenues
we receive will depend upon the efforts of third parties, whose
efforts may not meet our expectations or be successful.
We have entered into non-exclusive distribution agreements with
MediCult AS, a Denmark-based distributor and MidAtlantic
Diagnostics, Inc., a New Jersey-based distributor, to market and
sell our Cumulase product. We have entered into an exclusive
sales and marketing agreement with Baxter Healthcare Corporation
(Baxter) to market and sell our Hylenex product
candidate in the United States and Puerto Rico. Baxter may also
market and sell Hylenex on an exclusive basis in the European
Union, if and when we seek and receive the applicable regulatory
approvals in Europe.
We depend upon the efforts of these third parties to promote and
sell our current products, but there can be no assurance that
the efforts of these third parties will meet our expectations or
result in any significant product sales.
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If our sole contract manufacturer is unable to manufacture
our products, our product development and commercialization
efforts could be delayed or stopped. |
We have signed a commercial supply agreement with Avid
Bioservices, Inc. (Avid), a contract manufacturing
organization, to produce bulk recombinant human hyaluronidase
for clinical trials and commercial use. Avid will produce the
active pharmaceutical ingredient used in each of Cumulase,
Hylenex and Chemophase under current Good Manufacturing
Practices for commercial scale production and will provide
support for the chemistry, manufacturing and controls sections
for FDA regulatory filings. If Avid does not maintain its status
as an FDA-approved manufacturing facility, or is unable to
manufacture the active pharmaceutical ingredient used in our
products and product candidates for any other reason, the
commercialization of our products and the development of our
product candidates will be delayed and our business will be
adversely affected. We have not established and may not be able
to establish arrangements with additional manufacturers for
these ingredients or products should the existing supplies
become unavailable or in the event that our sole contract
manufacturer is unable to adequately perform its
responsibilities. Any delays or interruptions in the supply of
materials by Avid could cause the delay of clinical trials and
could delay or prevent the commercialization of product
candidates that may receive regulatory approval. Such delays or
interruptions would have a material adverse effect on our
business and financial condition.
10
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If we have problems with the third parties that prepare,
fill, finish, and package our product candidates for
distribution, our product development and commercialization
efforts for these candidates could be delayed or stopped. |
In the event that any of our product candidates are used in
clinical trials or receive the necessary regulatory approval for
commercialization, we rely on third parties to prepare, fill,
finish, and package the products prior to their distribution. If
we are unable to locate third parties to perform these functions
on terms that are economically acceptable to us, the progress of
clinical trials could be delayed or even suspended and the
commercialization of approved product candidates could be
delayed or prevented. We currently utilize a third-party to
prepare, fill, finish, and package Cumulase. In addition, we
currently utilize a subsidiary of Baxter Healthcare Corporation
(Baxter) to prepare, fill, finish, and package
Hylenex under a development and supply agreement. Baxter has
only limited experience manufacturing Hylenex batches and we
rely on its ability to successfully manufacture Hylenex batches
according to product specifications. Any delays or interruptions
in Baxters ability to manufacture Hylenex batches could
have a material adverse impact on our business and financial
condition.
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Our inability to attract, hire and retain key management
and scientific personnel, and to recruit qualified independent
directors, could negatively affect our business. |
Our success depends on the performance of key management and
scientific employees with biotechnology experience. Given our
small staff size and programs currently under development, we
depend substantially on our ability to hire, train, retain and
motivate high quality personnel, especially our scientists and
management team in this field. In addition, we rely on the
expertise and guidance of independent directors to develop
business strategies and to guide our execution of these
strategies. Due to changes in the regulatory environment for
public companies over the past few years, the demand for
independent directors has increased and it may be difficult for
us, due to competition from both like-sized and larger
companies, to recruit qualified independent directors.
Furthermore, if we were to lose key management personnel,
particularly Jonathan Lim, M.D., our chief executive
officer, or Gregory Frost, Ph.D., our chief scientific
officer, then we would likely lose some portion of our
institutional knowledge and technical know-how, potentially
causing a substantial delay in one or more of our development
programs until adequate replacement personnel could be hired and
trained. For example, Dr. Frost has been with us from soon
after our inception, and he possesses a substantial amount of
knowledge about our development efforts. If we were to lose his
services, we would experience delays in meeting our product
development schedules. We have not entered into any retention or
other agreements specifically designed to motivate officers or
other employees to remain with Halozyme other than standard
agreements relating to the vesting of stock options that every
optionee of Halozyme must enter into as a condition of receiving
an option grant.
We do not have key man life insurance policies on the lives of
any of our employees, including Dr. Lim and Dr. Frost.
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If actual future payments for allowances, discounts,
returns and rebates exceed the estimates we made at the time of
the sale of our products, our financial position, results of
operations and cash flows may be negatively impacted. |
We recognize product revenue net of estimated allowances for
discounts, returns and rebates. Such estimates are inherently
difficult because we have limited experience selling our
products and any judgments that we make relating to discounts,
returns and rebates are subjective. We will accept the return of
our product that is damaged in accordance with our return goods
policy and procedures. We may also give credits for expired
product. Actual results may differ significantly from our
estimated allowances for discounts, returns and rebates. Any
changes in estimates and assumptions based upon actual results
may have an impact on our results of operations and/or financial
condition. In addition, our financial position, results of
operations and cash flows may be negatively impacted if actual
future payments for discounts, returns and rebates exceed the
estimates we made at the time of the sale of our products.
11
Risks Related To Our Stock
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Future sales of shares of our common stock upon the
exercise of currently outstanding securities or pursuant to our
universal shelf registration statement may negatively affect our
stock price. |
As a result of our January 2004 private financing transaction,
we issued warrants to private investors for the purchase of
10,461,943 shares of common stock at purchase prices
ranging from $0.77 to $1.75 per share. Currently,
approximately 8.2 million shares of common stock remain
issuable upon the exercise of these warrants. As a result of our
October 2004 financing transaction, we issued warrants for the
purchase of 2,709,542 shares of common stock. The exercise
of these warrants could result in significant dilution to
stockholders at the time of exercise which could negatively
affect our stock price.
As a result of our December 2005 financing transaction, we
issued 10,000,000 shares of common stock to certain
institutional and accredited investors for $17.5 million in
gross proceeds, or $1.75 per share. These shares were sold
under our universal shelf registration statement in a registered
direct offering. We currently have the ability, from time to
time, to offer and sell up to $32.5 million of additional
equity or debt securities under this universal shelf
registration statement. Sales of substantial amounts of shares
of our common stock or other securities under our universal
shelf registration statement could lower the market price of our
common stock and impair the Companys ability to raise
capital through the sale of equity securities. In the future, we
may issue additional options, warrants or other derivative
securities convertible into Halozyme common stock.
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Our stock price is subject to significant
volatility. |
We participate in a highly dynamic industry, which often results
in significant volatility in the market price of common stock
irrespective of company performance. As a result, our closing
high and low stock prices during the twelve months ended
February 28, 2006 were $3.07 and $1.50, respectively. We
expect our stock price to continue to be subject to significant
volatility and, in addition to the other risks and uncertainties
described elsewhere in this report, any of the following factors
may lead to a significant drop in our stock price:
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general negative conditions in the healthcare industry; |
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general negative conditions in the financial markets; |
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the failure, for any reason, to obtain FDA approval for any of
our products; |
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for those products that are approved by the FDA, the failure of
the FDA to approve such products in a timely manner consistent
with the FDAs historical approval process; |
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the suspension of our Chemophase clinical trial due to safety or
patient tolerability issues; |
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our failure, or the failure of our third-party partners, to
successfully commercialize products approved by the FDA; |
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our failure, or the failure of our third-party partners, to
generate product revenues anticipated by investors; |
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problems with our sole API contract manufacturer or our sole
fill and finish manufacturer for Hylenex; |
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the exercise of our right to redeem certain outstanding warrants
to purchase our common stock; and |
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the sale of additional debt and/or equity securities by us. |
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Trading in our stock has been limited, so investors may
not be able to sell as much stock as they want to at prevailing
market prices. |
During the ninety-day period ending February 28, 2006, our
average daily trading volume was approximately
193,000 shares. If limited trading in our stock continues,
it may be difficult for stockholders to sell their shares in the
public market at any given time at prevailing prices.
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Our decision to redeem outstanding warrants may drive down
the market price of our stock. |
We may have the ability to redeem certain outstanding warrants,
under certain conditions, that may be exercised for
approximately 5.9 million shares of common stock. The
redemption price for these warrants is $0.01 per share, but
the warrant holders have the opportunity to exercise their
warrants prior to redemption at the price of $1.75 per
share. If we decide to redeem any portion of our outstanding
warrants in the future, some selling security holders may choose
to sell outstanding shares of common stock in order to finance
the exercise of the warrants prior to their redemption. This
pattern of selling may result in a reduction of our common
stocks market price.
Risks Related To Our Industry
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Compliance with the extensive government regulations to
which we are subject is expensive and time consuming, and may
result in the delay or cancellation of product sales,
introductions or modifications. |
Extensive industry regulation has had, and will continue to
have, a significant impact on our business. All pharmaceutical
companies, including Halozyme, are subject to extensive,
complex, costly and evolving regulation by the federal
government, principally the FDA and, to a lesser extent, the
U.S. Drug Enforcement Administration (DEA) and
foreign and state government agencies. The Federal Food, Drug
and Cosmetic Act, the Controlled Substances Act and other
domestic and foreign statutes and regulations govern or
influence the testing, manufacturing, packaging, labeling,
storing, record keeping, safety, approval, advertising,
promotion, sale and distribution of our products. Under certain
of these regulations, Halozyme and its contract suppliers and
manufacturers are subject to periodic inspection of its or their
respective facilities, procedures and operations and/or the
testing of products by the FDA, the DEA and other authorities,
which conduct periodic inspections to confirm that Halozyme and
its contract suppliers and manufacturers are in compliance with
all applicable regulations. The FDA also conducts pre-approval
and post-approval reviews and plant inspections to determine
whether our systems, or our contract suppliers and
manufacturers processes, are in compliance with current
good manufacturing practices and other FDA regulations. If we,
or our contract supplier, fail these inspections, we may not be
able to commercialize our product in a timely manner without
incurring significant additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory
requirements on entities that advertise and promote
pharmaceuticals, including, but not limited to, standards and
regulations for
direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific
and educational activities, and promotional activities involving
the Internet.
We are dependent on receiving FDA and other governmental
approvals prior to manufacturing, marketing and shipping our
products. Consequently, there is always a risk that the FDA or
other applicable governmental authorities will not approve our
products, or will take post-approval action limiting or revoking
our ability to sell our products, or that the rate, timing and
cost of such approvals will adversely affect our product
introduction plans or results of operations.
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Our suppliers and sole manufacturer are subject to
regulation by the FDA and other agencies, and if they do not
meet their commitments, we would have to find substitute
suppliers or manufacturers, which could delay the supply of our
products to market. |
Regulatory requirements applicable to pharmaceutical products
make the substitution of suppliers and manufacturers costly and
time consuming. We have no internal manufacturing capabilities
and are, and expect to be in the future, entirely dependent on
contract manufacturers and suppliers for the manufacture of our
products and for their active and other ingredients. The
disqualification of these manufacturers and suppliers through
their failure to comply with regulatory requirements could
negatively impact our business because the delays and costs in
obtaining and qualifying alternate suppliers (if such
alternative suppliers are available, which we cannot assure)
could delay clinical trials or otherwise inhibit our ability to
bring approved products to market, which would have a material
adverse effect on our business and financial condition.
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We may be required to initiate or defend against legal
proceedings related to intellectual property rights, which may
result in substantial expense, delay and/or cessation of the
development and commercialization of our products. |
We rely on patents to protect our intellectual property rights.
The strength of this protection, however, is uncertain. For
example, it is not certain that:
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our patents and pending patent applications cover products
and/or technology that we invented first; |
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we were the first to file patent applications for these
inventions; |
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others will not independently develop similar or alternative
technologies or duplicate our technologies; |
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any of our pending patent applications will result in issued
patents; and |
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any of our issued patents, or patent pending applications that
result in issued patents, will be held valid and infringed in
the event the patents are asserted against others. |
We currently own or license several U.S. patents and also
have pending patent applications. There can be no assurance that
our existing patents, or any patents issued to us as a result of
such applications, will provide a basis for commercially viable
products, will provide us with any competitive advantages, or
will not face third-party challenges or be the subject of
further proceedings limiting their scope or enforceability.
We may become involved in interference proceedings in the
U.S. Patent and Trademark Office to determine the priority
of our inventions. In addition, costly litigation could be
necessary to protect our patent position. We also rely on
trademarks to protect the names of our products. These
trademarks may be challenged by others. If we enforce our
trademarks against third parties, such enforcement proceedings
may be expensive. We also rely on trade secrets, unpatented
proprietary know-how and continuing technological innovation
that we seek to protect with confidentiality agreements with
employees, consultants and others with whom we discuss our
business. Disputes may arise concerning the ownership of
intellectual property or the applicability or enforceability of
these agreements, and we might not be able to resolve these
disputes in our favor.
In addition to protecting our own intellectual property rights,
third parties may assert patent, trademark or copyright
infringement or other intellectual property claims against us
based on what they believe are their own intellectual property
rights. If we become involved in any intellectual property
litigation, we may be required to pay substantial damages,
including but not limited to treble damages, for past
infringement if it is ultimately determined that our products
infringe a third-partys intellectual property rights. Even
if infringement claims against us are without merit, defending a
lawsuit takes significant time, may be expensive and may divert
managements attention from other business concerns.
Further, we may be stopped from developing, manufacturing or
selling our products until we obtain a license from the owner of
the relevant technology or other intellectual property rights.
If such a license is available at all, it may require us to pay
substantial royalties or other fees.
Future acquisitions could
disrupt our business and harm our financial condition.
In order to remain competitive, we may decide to acquire
additional businesses, products and technologies. As we have
limited experience in evaluating and completing acquisitions,
our ability as an organization to make such acquisitions is
unproven. Acquisitions could require significant capital
infusions and could involve many risks, including, but not
limited to, the following:
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we may have to issue convertible debt or equity securities to
complete an acquisition, which would dilute our stockholders and
could adversely affect the market price of our common stock; |
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an acquisition may negatively impact our results of operations
because it may require us to incur large one-time charges to
earnings, amortize or write down amounts related to goodwill and
other intangible assets, or incur or assume substantial debt or
liabilities, or it may cause adverse tax consequences,
substantial depreciation or deferred compensation charges; |
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we may encounter difficulties in assimilating and integrating
the business, technologies, products, personnel or operations of
companies that we acquire; |
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certain acquisitions may disrupt our relationship with existing
customers who are competitive with the acquired business; |
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acquisitions may require significant capital infusions and the
acquired businesses, products or technologies may not generate
sufficient revenue to offset acquisition costs; |
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an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management; |
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acquisitions may involve the entry into a geographic or business
market in which we have little or no prior experience; and |
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key personnel of an acquired company may decide not to work for
us. |
If any of these risks occurred, it could adversely affect our
business, financial condition and operating results. We cannot
assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. If we do
pursue any acquisitions, it is possible that we may not realize
the anticipated benefits from such acquisitions or that the
market will not view such acquisitions positively.
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If third-party reimbursement and customer contracts are
not available, our products may not be accepted in the
market. |
Our ability to earn sufficient returns on our products will
depend in part on the extent to which reimbursement for our
products and related treatments will be available from
government health administration authorities, private health
insurers, managed care organizations and other healthcare
providers.
Third-party payers are increasingly attempting to limit both the
coverage and the level of reimbursement of new drug products to
contain costs. Consequently, significant uncertainty exists as
to the reimbursement status of newly approved healthcare
products. Third-party payers may not establish adequate levels
of reimbursement for the products that we commercialize, which
could limit their market acceptance and result in a material
adverse effect on our financial condition.
Customer contracts, such as with group paying organizations and
hospital formularies, will often not offer contract or formulary
status without either the lowest price or substantial proven
clinical differentiation. If our products are compared to
animal-extracted hyaluronidases by these entities, it is
possible that neither of these conditions will be met, which
could limit market acceptance and result in a material adverse
effect on our financial condition.
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The rising cost of healthcare and related pharmaceutical
product pricing has led to cost-containment pressures that could
cause us to sell our products at lower prices, resulting in less
revenue to us. |
Any of our products that have been or in the future are approved
by the FDA may be purchased or reimbursed by state and federal
government authorities, private health insurers and other
organizations, such as health maintenance organizations and
managed care organizations. Such third-party payors increasingly
challenge pharmaceutical product pricing. The trend toward
managed healthcare in the United States, the growth of such
organizations, and various legislative proposals and enactments
to reform healthcare and government insurance programs,
including the Medicare Prescription Drug Modernization Act of
2003, could significantly influence the manner in which
pharmaceutical products are prescribed and purchased, resulting
in lower prices and/or a reduction in demand. Such cost
containment measures and healthcare reforms could adversely
affect our ability to sell our products. Furthermore, individual
states have become increasingly aggressive in passing
legislation and implementing regulations designed to control
pharmaceutical product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain
product access, importation from other countries and bulk
purchasing. Legally mandated price controls on payment amounts
by third-party payors or other restrictions could negatively and
materially impact our revenues and financial
15
condition. We anticipate that we will encounter similar
regulatory and legislative issues in most other countries
outside the United States.
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We face intense competition and rapid technological change
that could result in the development of products by others that
are superior to the products we are developing. |
We have numerous competitors in the United States and abroad,
including, among others, major pharmaceutical and specialized
biotechnology firms, universities and other research
institutions that may be developing competing products. Such
competitors include, but are not limited to, Sigma-Aldrich
Corporation, ISTA Pharmaceuticals, Inc. (ISTA), Amphastar
Pharmaceuticals, Inc., and Primapharm, Inc., among others. These
competitors may develop technologies and products that are more
effective, safer, or less costly than our current or future
product candidates or that could render our technologies and
product candidates obsolete or noncompetitive. Many of these
competitors have substantially more resources and product
development, manufacturing and marketing experience and
capabilities than we do. In addition, many of our competitors
have significantly greater experience than we do in undertaking
pre-clinical testing and clinical trials of pharmaceutical
product candidates and obtaining FDA and other regulatory
approvals of products and therapies for use in healthcare. Other
manufacturers have FDA approved products for use as spreading
agents, including ISTA Pharmaceuticals, Inc. (ISTA),
with an ovine-derived hyaluronidase,
Vitrase®,
Amphastar Pharmaceuticals, Inc., with a bovine-derived
hyaluronidase,
Amphadasetm,
and Primapharm, Inc., also with a bovine-derived hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are distinct new chemical entities and hence afforded
five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. As each of these
products are established as distinctly different new chemical
entities the marketing exclusivity granted does not prohibit the
marketing of the products.
|
|
|
We are exposed to product liability claims, and insurance
against these claims may not be available to us on reasonable
terms or at all. |
We might incur substantial liability in connection with clinical
trials or the sale of our products. Product liability insurance
is expensive and in the future may not be available on
commercially acceptable terms, or at all. We currently carry a
limited amount of product liability insurance. A successful
claim or claims brought against us in excess of our insurance
coverage could materially harm our business and financial
condition.
|
|
|
We may have difficulty implementing in a timely manner the
internal controls over financial reporting necessary to allow
our management to report on the effectiveness of our internal
controls over financial reporting, and we may incur substantial
costs in order to comply with the requirements of the
Sarbanes-Oxley Act of 2002. |
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we will be required to furnish a report of managements
assessment of the effectiveness of our internal controls over
financial reporting as part of our Annual Report for the fiscal
year ending December 31, 2006. Our registered public
accountant will then be required to attest to, and report on,
our assessment. In order to issue our report, our management
must document both the design for our internal controls over
financial reporting and the testing processes that support
managements evaluation and conclusion. There can be no
assurance that we will be able to complete the work necessary
for our management to issue its management report in a timely
manner, or that management will be able to report that our
internal controls over financial reporting are effective.
|
|
Item 2. |
Description of Property. |
Our administrative offices and research facilities are located
in San Diego, California. We lease an aggregate of
approximately 12,000 square feet of office and research
space for approximately $21,000 per month. We have three
separate leases for our facilities, two of which expire on
June 30, 2006 (10,800 square feet) and the third lease
is a month-to-month
lease (1,200 square feet). We believe the space is adequate
for our immediate needs, but additional space may be required
and may be relatively more costly as we expand
16
our research and development activities. We do not foresee any
significant difficulties in obtaining any required additional
facilities.
|
|
Item 3. |
Legal Proceedings. |
From time to time, Halozyme may be involved in litigation
relating to claims arising out of its operations in the normal
course of business. Any of these claims could subject us to
costly litigation and, while we generally believe that we have
adequate insurance to cover many different types of liabilities,
our insurance carriers may deny coverage or our policy limits
may be inadequate to fully satisfy any damage awards or
settlements. If this were to happen, the payment of any such
awards could have a material adverse effect on our results of
operations and financial position. Additionally, any such
claims, whether or not successful, could damage our reputation
and business. Halozyme currently is not a party to any legal
proceedings, the adverse outcome of which, in managements
opinion, individually or in the aggregate, would have a material
adverse effect on our results of operations or financial
position.
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|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
There were no matters submitted to a vote of security holders of
Halozyme during the fourth quarter of fiscal 2005.
PART II
|
|
Item 5. |
Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities. |
Since November 1, 2004, our common stock has traded under
the symbol HTI on The American Stock Exchange (the
AMEX). From March 12, 2004 through
October 31, 2004 our common stock traded under the symbol
HZYM on the
Over-the-Counter
Bulletin Board. Prior to the effectiveness of the merger
between Global Yacht Services, Inc. and our predecessor company
DeliaTroph Pharmaceuticals, Inc. on March 11, 2004, our
common stock traded under the symbol GYHT on the
Over-the-Counter
Bulletin Board. The following table sets forth the high and
low sales prices per share of our common stock:
|
|
|
|
|
|
|
|
|
Fiscal Year 2005 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
2.24 |
|
|
$ |
1.50 |
|
Second Quarter
|
|
$ |
2.10 |
|
|
$ |
1.60 |
|
Third Quarter
|
|
$ |
2.22 |
|
|
$ |
1.60 |
|
Fourth Quarter
|
|
$ |
2.36 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2004 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
4.75 |
|
|
$ |
0.02 |
|
Second Quarter
|
|
$ |
4.68 |
|
|
$ |
2.55 |
|
Third Quarter
|
|
$ |
3.35 |
|
|
$ |
1.41 |
|
Fourth Quarter
|
|
$ |
3.10 |
|
|
$ |
1.80 |
|
On February 28, 2006, the closing sales price of Common
Stock was $3.00 per share. As of February 15, 2006, we
had approximately 1,300 stockholders of record. We have not paid
any dividends on our common stock since our inception and do not
expect to pay dividends on our common stock in the foreseeable
future.
|
|
Item 6. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
In addition to historical information, the following
discussion contains forward-looking statements that are subject
to risks and uncertainties. Actual results may differ
substantially from those referred to herein due to a number of
factors, including but not limited to risks described in the
section entitled Risks Related to Our Business and elsewhere in
this Annual Report.
17
We are a biopharmaceutical company dedicated to the development
and commercialization of recombinant human enzymes for the drug
delivery, palliative care, oncology, and infertility markets.
Our existing products and our products under development are
based on intellectual property covering the family of human
enzymes known as hyaluronidases. Hyaluronidases are enzymes
(proteins) that break down hyaluronic acid, which is a
naturally occurring substance in the human body. Our technology
is based on recombinant human PH20 (rHuPH20), a human synthetic
version of hyaluronidase that degrades hyaluronic acid, a
space-filling, gel-like substance that is a major component of
tissues throughout the body, such as skin and cartilage. The
PH20 enzyme is a naturally occurring enzyme that digests
hyaluronic acid to temporarily break down the gel, thereby
facilitating the penetration and diffusion of other drugs and
fluids that are injected under the skin or in the muscle. It
also degrades the cumulus matrix surrounding oocytes
(eggs) facilitating in vitro fertilization (IVF).
Currently, we have only limited revenue from Cumulase product
sales and all of our potential products, with the exception of
Cumulase and Hylenex, are either in the research, pre-clinical,
or clinical stage. It may be years, if ever, before we are able
to obtain the regulatory approvals necessary to generate
meaningful revenue from the sale of these product candidates. In
addition, we have only generated minimal revenue from our
biopharmaceutical operations and we have had operating and net
losses each year since inception, with an accumulated deficit of
$26,347,254 as of December 31, 2005.
Additionally, in December 2005, we issued 10,000,000 shares
of common stock to certain institutional and accredited
investors for $17.5 million in gross proceeds, or
$1.75 per share. These shares were sold under our universal
shelf registration statement in a registered direct offering. We
currently have $32.5 million remaining under our universal
shelf registration statement which will permit us, from time to
time, to offer and sell up to $32.5 million of additional
equity or debt securities. Sales of substantial amounts of
shares of our common stock, or even the potential for such sales
through the exercise of warrants, could lower the market price
of our common stock and impair the Companys ability to
raise capital through the sale of equity securities. In the
future, we may issue additional options, warrants or other
derivative securities convertible into Halozyme common stock to
fund the continued development of our product candidates and
general corporate purposes.
|
|
|
Current Products and Product Candidates |
We currently have two FDA-approved products, Cumulase and
Hylenex. We also have one product candidate, Chemophase, which
is currently in clinical development. All of our other product
candidates are in the research or pre-clinical stage of
development. We received a CE (European Conformity) Mark for
Cumulase in December 2004 and FDA clearance in April 2005. We
launched Cumulase in the European Union and in the United States
in June 2005.
During March 2005, we filed a new drug application
(NDA) for the spreading agent Hylenex. Other
manufacturers have FDA approved products for use as spreading
agents, including ISTA Pharmaceuticals, Inc. (ISTA),
with an ovine (ram) hyaluronidase,
Vitrase®,
Amphastar Pharmaceuticals, Inc., with a bovine
(bull) hyaluronidase,
Amphadasetm,
and Primapharm, Inc. also with a bovine hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are distinct new chemical entities and hence afforded
five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. As each of these
products are established as distinctly different new chemical
entities the marketing exclusivity granted does not prohibit the
marketing of the products. During December 2005, we received FDA
approval for our Hylenex NDA.
During June 2005, we submitted an investigational new drug
application (IND) in order to begin clinical testing
of our Chemophase product candidate. We received authorization
to initiate clinical testing of Chemophase in August 2005, and
we commenced patient enrollment in our initial clinical protocol
under this IND in October 2005. In March 2006, we completed
enrollment in our Chemophase Phase I clinical trial.
18
During August 2004, we signed an Exclusive Distribution
Agreement (the Distribution Agreement) with Baxter
Healthcare Corporation (Baxter) to market,
distribute and sell Hylenex in the United States and Puerto Rico.
During March 2005, we entered into a Development and Supply
Agreement (the Supply Agreement) and a First
Amendment to the existing Distribution Agreement with Baxter.
Under the terms of the agreements, we will supply Baxter with
the active pharmaceutical ingredient, and Baxter will fill and
finish Hylenex and hold it for subsequent distribution. The
Supply Agreement provides for additional product development
opportunities that the parties may mutually decide to pursue. In
addition, Baxter has a right of first refusal on certain product
line extensions and select new products. The First Amendment
provides for specific and consistent definitions among the
Supply Agreement and Distribution Agreement, modifies various
covenants of Baxter relating to the definition of marketing and
incremental sales costs, including a cap on the annualized
amount of marketing and incremental sales costs to be paid by
Baxter. In the event that both parties agree in advance to
combined marketing and incremental sales costs in excess of the
cap, such excess marketing and incremental sales costs shall be
shared equally. Currently, the parties anticipate that combined
marketing and incremental sales costs for 2006 will be in excess
of the cap. As such, it is possible that aggregate revenues from
sales of Hylenex will be less than our portion of these shared
additional marketing and incremental sales costs.
Product revenue will depend on our ability to develop,
manufacture, obtain regulatory approvals for and successfully
commercialize our product candidates. We received a CE (European
Conformity) Mark for Cumulase in December 2004, which allows the
Company to market Cumulase in the European Union. In addition,
we received FDA clearance for Cumulase in April 2005, which
allows the Company to market Cumulase in the United States. In
June 2005, Cumulase was launched in the European Union and
United States.
Cost of Sales. Cost of sales consists primarily of raw
materials, third-party manufacturing costs, fill and finish
costs, freight associated with the sales of Cumulase, and the
write-off related to short dating of certain Cumulase inventory.
Research and Development. Our research and development
expenses consist primarily of costs associated with the
development and manufacturing of our product candidates,
compensation and other expenses for research and development
personnel, supplies and materials, costs for consultants and
related contract research, facility costs, amortization and
depreciation. We charge all research and development expenses to
operations as they are incurred. Our research and development
activities are primarily focused on the development of our
Chemophase and Hylenex product candidates which are both based
on our recombinant human PH20 (rHuPH20) enzyme, a human
synthetic version of hyaluronidase. We are also developing
Chemophase, which is also based on our rHuPH20 enzyme, and we
completed enrollment in our Chemophase Phase I clinical
trial in March 2006.
Since our inception through December 31, 2005, we have
incurred research and development costs of $19.1 million.
From January 1, 2002 through December 31, 2005,
approximately 69% of our research and development costs were
associated with the research and development of our recombinant
human PH20 enzyme used in our Cumulase and Hylenex product
candidates. In addition, for the year ended December 31,
2005, approximately 33% of our research and development costs
were associated with the development of our Chemophase product
candidate. Due to the uncertainty in obtaining FDA approval, our
reliance on third parties, and competitive pressures, we are
unable to estimate with any certainty the additional costs we
will incur in the continued development of our Hylenex and
Chemophase product candidates for commercialization. However, we
expect our research and development costs to increase
substantially if we are able to advance our product candidates
into later stages of clinical development.
19
Clinical development timelines, likelihood of success, and total
costs vary widely. Although we are currently focused primarily
on advancing Chemophase, we anticipate that we will make
determinations as to which research and development projects to
pursue and how much funding to direct to each project on an
ongoing basis in response to the scientific and clinical
progress of each product candidate and other market and
regulatory developments.
Product candidate completion dates and costs vary significantly
for each product candidate and are difficult to estimate. The
lengthy process of seeking regulatory approvals, and the
subsequent compliance with applicable regulations, require the
expenditure of substantial resources. Any failure by us to
obtain, or any delay in obtaining, regulatory approvals could
cause our research and development expenditures to increase and,
in turn, have a material adverse effect on our results of
operations. We received FDA approval for our Hylenex product
candidate in December 2005. We submitted an IND for our
Chemophase product candidate in June 2005, and initiated
Phase I clinical trials in October 2005. In March 2006, we
completed enrollment in our Chemophase Phase I clinical
trial. We cannot be certain when or if our Chemophase product
candidate, or any of our other product candidates, will receive
regulatory approval or whether any net cash inflow from our
Chemophase product candidate, or any of our other product
candidates, or development projects, will commence.
Selling, General and Administrative. Selling, general and
administrative expenses consist primarily of compensation and
other expenses related to our corporate operations and
administrative employees, legal fees, other professional
services expenses, and marketing expenses.
Other Income and Expense, Net. Other income and expense,
net consists primarily of interest income earned on our cash and
cash equivalents. For the prior year, other income and expense,
net, also includes the liabilities assumed as a result of our
reverse merger.
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|
|
Critical Accounting Policies and Estimates |
Our discussion and analysis of our financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. We review our estimates on an
ongoing basis. We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions. We believe
the following accounting policies to be critical to the
judgments and estimates used in the preparation of our financial
statements.
We recognize revenue from product sales in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 48, Revenue Recognition When Right of Return
Exists, when there is persuasive evidence that an
arrangement exists, when title has passed, the price is fixed or
determinable, and we are reasonably assured of collecting the
resulting receivable. We recognize product sales net of
estimated allowances for product returns, managed care rebates,
reimbursements relating to Medicare, patient coupons,
chargebacks from distributors, wholesaler fees and prompt
payment and other discounts. Such estimates require our most
subjective and complex judgment due to the need to make
estimates about matters that are inherently uncertain. If actual
future payments for returns, rebates, coupons, chargebacks and
discounts exceed the estimates we made at the time of sale, our
financial position, results of operations and cash flows would
be negatively impacted.
Cumulase revenue is recognized when the transfer of ownership
occurs, upon shipment to the distributor. Accounts receivable is
recorded net of an allowance for doubtful accounts. Currently,
the allowance for doubtful accounts is zero as the
collectibility of accounts receivable is reasonably assured. We
are not
20
obligated to accept from customers the return of any Cumulase
product that have reached their expiration date. Thus, no
allowance for product returns has been established.
Under the terms of our Baxter agreement, we will supply Baxter
the active pharmaceutical ingredient for Hylenex and Baxter will
fill and finish Hylenex and hold it for subsequent distribution.
During the fourth quarter of 2005, the Company transferred
$254,000 of the active pharmaceutical ingredient for Hylenex to
Baxter for filling and finishing. Because of our continued
involvement in the development and production process of Hylenex
under the terms of the Supply Agreement, the earnings process is
not considered to be complete. Accordingly, the Company defers
revenue and the related product costs resulting from transfers
of inventory to Baxter until the product is ultimately sold to
customers.
Research and development expenditures are charged to operations
as incurred. Our expenses related to clinical trials are based
on estimates of the services received and efforts expended
pursuant to contracts with multiple research institutions,
clinical research organizations, and other vendors that conduct
and manage clinical trials on our behalf. The financial terms of
these agreements are subject to negotiation and vary from
contract to contract and may result in uneven payment flows.
Generally, these agreements set forth the scope of work to be
performed at a fixed fee or unit price. Payments under the
contracts depend on factors such as the successful enrollment of
patients or the completion of clinical trial milestones.
Expenses related to clinical trials generally are accrued based
on contracted amounts applied to the level of patient enrollment
and activity according to the protocol. If timelines or
contracts are modified based upon changes in the clinical trial
protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
In addition, we have several contracts that extend across
multiple reporting periods, including our largest contract
representing a $1 million research study. We recognize
expenses as the services are provided pursuant to
managements assessment of the progress that has been made
to date. Such contracts require an assessment of the work that
has been completed during the period, including measurement of
progress, analysis of data that justifies the progress and
managements judgment. A 5% variance in our estimate of the
work completed in our largest contract could increase or
decrease our operating expenses by $50,000.
Inventory consists of our Cumulase product and our Hylenex API.
Inventory primarily represents raw materials used in production
and finished goods inventory on hand, valued at standard cost.
Inventories are reviewed periodically for slow-moving or
obsolete status. If a launch of a new product is delayed,
inventory may not be fully utilized and could be subject to
impairment, at which point we would record a reserve to adjust
inventory to its net realizable value.
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. We have considered future taxable income and ongoing
tax planning strategies in assessing the need for the valuation
allowance. In the event we were to determine that we would be
able to realize our deferred tax assets in the future in excess
of their net recorded amounts, an adjustment to the deferred tax
assets would increase our income in the period such
determination was made. Likewise, should we determine that we
would not be able to realize all or part of our net deferred tax
assets in the future, an adjustment to the deferred tax assets
would be charged to income in the period such determination was
made. We had $11.6 million as of December 31, 2005 and
$5.5 million as of December 31, 2004 in gross deferred
tax assets, which were fully offset by a valuation allowance.
The above listing is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by GAAP. There are also areas in which our managements
judgment in selecting any available alternative would not
produce a materially different result. Please see our audited
financial statements and notes thereto included elsewhere in
this annual report, which contain accounting policies and other
disclosures required by GAAP.
21
Results of Operations Comparison of Year Ended
December 31, 2005 and 2004
Revenues Product sales were $127,000 for the
year ended December 31, 2005 and consisted of sales of
Cumulase, which we launched in June 2005.
Cost of Sales Cost of sales were $52,000 for
the year ended December 31, 2005 and consisted primarily of
third-party manufacturing costs, fill and finish costs, freight
costs and the write-off related to certain Cumulase inventory
that was approaching expiration.
Research and Development Research and
development expenses were $10,220,000 for the year ended
December 31, 2005 compared to $6,517,000 for the year ended
December 31, 2004. Our research and development expenses
consisted primarily of costs associated with the development and
manufacturing of our product candidates, compensation and other
expenses for research and development personnel, supplies and
materials, costs for consultants and related contract research,
facility costs, amortization and depreciation. Research and
development expenses increased by $3,703,000 due primarily to
completion of Cumulase 510(k) requirements, the completion of
Hylenex chemistry manufacturing and controls work, the
completion of Chemophase toxicology work, the hiring of
additional research and development personnel, and contract
manufacturing costs for development and production of our
rHuPH20 enzyme for research and clinical use. We expect research
and development costs to continue to increase in future periods
as we increase our research efforts and continue to develop and
manufacture our product candidates.
General and Administrative General and
administrative expenses were $3,417,000 for the year ended
December 31, 2005 compared to $2,571,000 for the year ended
December 31, 2004. General and administrative expenses
increased by $846,000 due to the hiring of additional
administrative personnel and increased legal fees. We anticipate
that compliance with provisions of the Sarbanes-Oxley Act of
2002, including Section 404 relating to audits of our
internal controls, will increase our general and administrative
costs in future periods.
Other Income and Expense Other income was
$286,000 for the year ended December 31, 2005 compared to
other expense of $4,000 for the year ended December 31,
2004. The increase in other income was due to higher interest
income as a result of maintaining higher average cash balances
during 2005.
Net Loss Net loss for the year ended
December 31, 2005 was $13,275,000, or $0.26 per common
share, compared to $9,091,000, or $0.26 per common share
for the year ended December 31, 2004. The increase in net
loss was due to an increase in operating expenses, reflecting
our increased research and development efforts and additional
personnel costs.
Liquidity and Capital Resources As of
December 31, 2005, cash and cash equivalents were
$19,132,000 versus $16,008,000 as of December 31, 2004, an
increase of $3,124,000. This increase resulted primarily from
the sale of common stock for approximately $16,472,000, net of
issuance costs during the year ended December 31, 2005,
offset by our net cash used in operations and for the purchase
of property and equipment for the year ended December 31,
2005.
Net cash used in operations was $12,996,000 during the year
ended December 31, 2005 compared to $7,718,000 of cash used
in operations during the year ended December 31, 2004. This
increase was due to an increase in our research and development
efforts and additional personnel.
Net cash used in investing activities was $351,000 during the
year ended December 31, 2005 compared to $228,000 during
the year ended December 31, 2004. This was due to the
increased purchase of property and equipment during 2005.
Net cash provided by financing activities was $16,472,000 during
the year ended December 31, 2005 versus $23,450,000 during
the year ended December 31, 2004. In December 2005, we sold
common stock for approximately $17,500,000, or
$16,021,000 net of issuance costs. Additionally, we
received approximately $232,000 in proceeds from warrant
exercises during the year ended December 31, 2005. In
January 2004, we sold common stock and warrants to purchase
common stock for approximately $8,057,000, or
$7,670,000 net of issuance costs. In October 2004, we sold
common stock and warrants to purchase common stock for
22
approximately $13,870,000, or $12,717,000 net of issuance
costs. Additionally, we received approximately $2,863,000 in
proceeds from warrant exercises during the year ended
December 31, 2004.
We expect our cash requirements to increase significantly as we
continue to increase our research and development for, seek
regulatory approvals of, and develop and manufacture our current
product candidates. As we expand our research and development
efforts and pursue additional product opportunities, we
anticipate significant cash requirements for hiring of
personnel, capital expenditures and investment in additional
internal systems and infrastructure. The amount and timing of
cash requirements will depend on the research, development,
manufacture, regulatory and market acceptance of our product
candidates, if any, and the resources we devote to researching,
developing, manufacturing, commercializing and supporting our
product candidates.
We believe that our current cash and cash equivalents will be
sufficient to fund our operations for at least the next twelve
months. Until we can 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 from our most recent private financing. We may finance
future cash needs through the sale of other equity securities,
the exercise of our callable warrants, strategic collaboration
agreements, debt financing, or any combination of the foregoing.
On June 10, 2005, we filed a shelf registration statement
on Form S-3
(Registration
No. 333-125731),
which was declared effective on June 17, 2005, which will
permit us, from time to time, to offer and sell up to
$50 million of equity or debt securities. We currently have
the ability to issue debt and equity securities for an aggregate
of $32.5 million under our shelf registration statement. We
cannot be certain that our existing cash and cash equivalents
will be adequate or that additional financing will be available
when needed or that, if available, financing will be obtained on
terms favorable to us or our stockholders. Having insufficient
funds may require us to delay, scale back or eliminate some or
all of our research and development programs or delay the launch
of our product candidates. If we raise additional funds by
issuing equity securities, substantial dilution to existing
stockholders would likely result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve
significant cash payment obligations as well as covenants and
specific financial ratios that may restrict our ability to
operate our business.
Off-Balance Sheet Arrangements As of
December 31, 2005, we did not have any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123(R)).
SFAS No. 123(R) supersedes APB 25, Accounting
for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. We expect to
adopt SFAS 123(R) on January 1, 2006.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB 25s
intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options when the exercise
price is equal to or in excess of the fair value of the stock at
the date of grant. Accordingly, the adoption of
SFAS No. 123(R)s fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact
of that standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
23
forma net loss and net loss per share in Note 2 to our
financial statements. SFAS No. 123(R) also requires
the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4. This statement amends the guidance in ARB
No. 43 Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage).
The provision of this statement will be effective for inventory
costs during the fiscal years beginning after June 15,
2005. As a result of our manufacturing process being outsourced,
we do not believe that the adoption of this statement will have
a material impact on our financial condition or results of
operations.
|
|
Item 7. |
Financial Statements. |
Our financial statements are annexed to this report beginning on
page F-1.
|
|
Item 8. |
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. |
None.
|
|
Item 8A. |
Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined
under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this Annual
Report.
Changes in Internal Controls Over Financial Reporting
There have been no significant changes in our internal controls
over financial reporting that occurred during the quarter ended
December 31, 2005, that have materially affected, or are
reasonably likely to materially affect our internal control over
financial reporting.
|
|
Item 8B. |
Other Information. |
None.
PART III
|
|
Item 9. |
Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act. |
The information required by this item regarding directors is
incorporated by reference to our Definitive Proxy Statement to
be filed with the Securities and Exchange Commission in
connection with our 2006 Annual Meeting of Stockholders (the
Proxy Statement) under the heading Election of
Directors. The information required by this item regarding
compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, is incorporated by reference to the
information under the caption Compliance with
Section 16(a) of the Exchange Act contained in the
Proxy Statement. The information required by this item regarding
our code of ethics is incorporated by reference to the
information under the caption Code of Ethics
contained in our Proxy Statement.
24
Executive Officers
Jonathan E. Lim, MD (34), President, Chief Executive
Officer and Director. Dr. Lim joined Halozyme in 2003. From
2001 to 2003, Dr. Lim was a management consultant at
McKinsey & Company, where he specialized in the health
care industry, serving a wide range of
start-ups to Fortune
500 companies in the biopharmaceutical, medical products,
and payor/provider segments. From 1999 to 2001, Dr. Lim was
a recipient of a National Institutes of Health Postdoctoral
Fellowship, during which time he conducted clinical outcomes
research at Harvard Medical School. He has published articles in
peer-reviewed medical journals such as the Annals of Surgery and
the Journal of Refractive Surgery. Dr. Lims prior
experience also includes two years of clinical training in
general surgery at the New York Hospital-Cornell Medical Center
and Memorial Sloan-Kettering Cancer Center; Founder and
President of a health care software company; Founding
Editor-in-Chief of the
McGill Journal of Medicine; and basic science and clinical
research at the Salk Institute for Biological Studies and
Massachusetts Eye and Ear Infirmary. Dr. Lim is currently a
California licensed physician and was a member of
the strategic planning committee of the American Medical
Association from 2002 to 2005. He earned his BS, with honors,
and MS degrees in molecular biology from Stanford University,
his MD degree from McGill University, and his MPH degree in
health care management from Harvard University.
Gregory I. Frost, PhD (34), Vice President &
Chief Scientific Officer and Director. Dr. Frost co-founded
Halozyme in 1999 and has spent more than twelve years
researching the hyaluronidase family of enzymes. From 1998 to
1999, he was a Senior Research Scientist at the Sidney Kimmel
Cancer Center (SKCC), where he focused much of his work
developing the hyaluronidase technology. Prior to SKCC, his
research in the Department of Pathology at the University of
California, San Francisco, led directly to the
purification, cloning, and characterization of the human
hyaluronidase gene family, and the discovery of several
metabolic disorders. He has authored multiple scientific
peer-reviewed and invited articles in the Hyaluronidase field
and is an inventor on several key patents. Dr. Frosts
prior experience includes serving as a scientific consultant to
a number of biopharmaceutical companies, including Q-Med (SE),
Biophausia AB (SE), and Active Biotech (SE). Dr. Frost is
registered to practice before the US Patent Trademark Office,
and earned his BA in biochemistry and molecular biology from the
University of California, Santa Cruz, and his PhD in the
department of Pathology at the University of California,
San Francisco, where he was an ARCS-Scholar.
Richard C. Yocum, MD (50), Vice President of Clinical
Development and Medical Affairs. Dr. Yocum has over
23 years of professional experience in clinical drug
development, project team management, clinical research trial
design and implementation, and the practice of general internal
medicine. His experience spans all phases of clinical
development, including IND submissions;
Phase I, II, III, and IV trials; multinational
clinical trials; NDA, NDS and MAA preparation and submissions,
including proven successes with multiple NDA and MAA approvals
and new product launches; FDA advisory panel meetings and CHMP
Oral Hearing; and lifecycle management. Dr. Yocums
broad-based training and experience in Internal Medicine has
enabled him to successfully lead drug development efforts in
multiple therapeutic areas, including oncology, dermatology,
cardiovascular, immunology, endocrinology, and gastroenterology.
Prior to Halozyme, from May 2002 to March 2005, Dr. Yocum
was Vice President of Clinical Development and Medical Affairs
at Chugai Pharma USA, LLC (CPUSA), a member of the Chugai-Roche
group. From 1995 to 2002, Dr. Yocum was responsible for the
clinical development of several retinoid-based drugs for the
treatment of various cancers and benign dermatological diseases
at Ligand Pharmaceuticals, where he was involved in the approval
of seven of seven new drug registration dossiers, and served
most recently as Executive Medical Director of Clinical
Development. From 1993 to 1995, Dr. Yocum was employed in
the Clinical Research department at Gensia. Dr. Yocum is
board-certified in general internal medicine, and maintained a
clinical practice for nine years before transitioning to the
pharmaceutical industry. He received his AB in Chemistry from
Dartmouth College, his MD from Johns Hopkins University, and
completed his medical residency at the University of California,
San Diego.
David A. Ramsay, MBA (41), Vice President &
Chief Financial Officer. Mr. Ramsay joined Halozyme in 2003
and brings 18 years of corporate financial experience
spanning several industries. From 2000 to 2003, he was Vice
President, Chief Financial Officer of Lathian Systems, a
provider of technology-based sales solutions for the life
sciences industry. Prior to Lathian, Mr. Ramsay was the
Vice President, Treasurer of
25
ICN Pharmaceuticals, now called Valeant Pharmaceuticals
International, a multinational, specialty pharmaceutical
company. Mr. Ramsay joined ICN in 1998 from ARCO, where he
spent four years in various financial roles, most recently
serving as Manager of Financial Planning & Analysis for
the companys
1,700-station West
Coast Retail Marketing Network. Prior to ARCO, he served as Vice
President, Controller for Security Pacific Asian Bank, a
subsidiary of Security Pacific Corporation. He began his career
as an Auditor at Deloitte & Touche, where he obtained
his CPA license. Mr. Ramsay serves on the Board of
Directors for Axxora Life Sciences, Inc., a privately held,
worldwide research reagent company. He is also Chairman of the
Audit Committee of Axxora. Mr. Ramsay graduated from the
University of California, Berkeley, with a BS degree in
Business Administration and earned his MBA degree with a dual
major in Finance and Strategic Management from The Wharton
School at the University of Pennsylvania.
Don A. Kennard (59), Vice President of Regulatory
Affairs & Quality Assurance. Mr. Kennard joined
Halozyme in 2004 and brings to Halozyme nearly 30 years of
professional senior management experience in the fields of
regulatory affairs (RA), clinical programs, and quality
assurance (QA). He has worked directly with the U.S. Food
and Drug Administration (FDA), as well as regulatory authorities
of various foreign ministries of health, to secure registration,
authorize commercialization, and successfully implement quality
programs, for a broad range and extensive number of product
approvals across pharmaceuticals, biologics, medical devices,
and diagnostics. Prior to Halozyme, Mr. Kennard was Vice
President of Worldwide RA/ QA at Quidel, Inc., a manufacturer of
diagnostic products, where he led the RA/ QA and Clinical
functions, while also establishing a Quality System CE marking
program that enabled Quidel to expand and sustain sales in the
European Union. From 1991 to 2001, he was Vice President of RA/
QA/ R&D for Nobel Biocare, Inc. and Steri-Oss (acquired by
Nobel Biocare), where he directed all regulatory affairs,
quality assurance, clinical trials, and R&D activities. From
1981 to 1991, Mr. Kennard was Director of RA/ QA at
Allergan, Inc., where he directed regulatory affairs, quality
assurance and quality control in the development and manufacture
of prescription and OTC ophthalmic and dermatological drugs,
injectable drugs, biotechnology products, and ophthalmic
products. Prior to Allergan, he was Director of Quality Control
at B. Braun. Mr. Kennard holds a BS degree in Microbiology
and a Regulatory Affairs Certificate.
Carolyn M. Rynard, PhD (51), Vice President of Product
Development & Manufacturing. Dr. Rynard joined
Halozyme in 2003. Dr. Rynards career in drug
development spans 20 years in the pharmaceutical and
biotech industries. Her broad experience includes project
management, formulation, manufacturing, clinical supplies,
validation, medical devices, and quality systems. From 2001 to
2003, Dr. Rynard was Vice President of Product Development
at Medinox, Inc., where she was directly responsible for
Medinoxs Chemistry, Manufacturing, and Control,
formulation, analytical methods, and specification development.
From 1994 to 2001, she worked for Amylin Pharmaceuticals, Inc.,
a San Diego, California-based pharmaceutical company where
she held various positions of increasing responsibility, serving
most recently as Senior Director of Product Development. At
Amylin, Dr. Rynard managed seven functional areas and wrote
chemistry manufacturing and controls sections for US NDAs and
investigational new drug applications; European marketing
authorization applications and clinical trial exemptions; as
well as device 510(k) and CE mark technical files. Prior to
joining Amylin, Dr. Rynard held various R&D positions
at Baxter Healthcare and at DuPont. Dr. Rynard earned her
BSc degree in Chemistry and Biochemistry from the University of
Toronto, and her PhD in Physical and Organic Chemistry from
Stanford University.
Mark S. Wilson, MBA (45), Vice President of Business
Development. Mr. Wilson joined Halozyme in 2003 and has
spent more than 15 years in the
biotechnology/pharmaceutical industry, having most recently
served as Founder and CEO of Biophysica Science, Inc. and
Director of Strategic External Alliance Management at Pfizer
Global R&D La Jolla from 2001 to 2003. From
1996 to 2001, Mr. Wilson was Associate Director of
Materials at Agouron Pharmaceuticals, Inc., where he identified
and negotiated international supply agreements in excess of
$120 million annually and served as Materials Manager for
the launch of Viracept. From 1991 to 1996, Mr. Wilson was
an Associate Director at Gensia Laboratories, Ltd., where he
directed a wide range of business operations. Prior experience
also includes various management and operational roles at
Hybritech, Ferro Corporation, and TRW, Inc. Mr. Wilson
earned his BS degree in engineering from the University of
California, Berkeley, and his MBA degree at the Anderson
Graduate School of Management at the University of California,
Los Angeles.
26
|
|
Item 10. |
Executive Compensation. |
The information required by this item is incorporated by
reference to the information under the caption Executive
Compensation contained in the Proxy Statement.
|
|
Item 11. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The information required by this item is incorporated by
reference to the information under the caption Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters contained in the Proxy
Statement.
|
|
Item 12. |
Certain Relationships and Related Transactions. |
The information required by this item is incorporated by
reference to the information under the caption Certain
Relationships and Related Transactions contained in the
Proxy Statement.
The following documents are filed as part of this Annual Report:
(a) Financial Statements:
|
|
|
|
|
|
|
Page | |
|
|
| |
Report of Independent Registered Accounting Firm
|
|
|
F-1 |
|
Consolidated Balance Sheet at December 31, 2005
|
|
|
F-2 |
|
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004
|
|
|
F-3 |
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004
|
|
|
F-4 |
|
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2005 and 2004
|
|
|
F-5 |
|
Notes to Consolidated Financial Statements
|
|
|
F-6 |
|
(b) Exhibits:
|
|
|
|
|
|
3 |
.1 |
|
Amended and Restated Articles of Incorporation, as filed with
the Nevada Secretary of State on March 11, 2004 |
|
|
3 |
.2 |
|
Bylaws as Amended(1) |
|
|
10 |
.1 |
|
License Agreement between University of Connecticut and
Registrant, dated November 15, 2002(2) |
|
|
10 |
.2* |
|
Agreement for Services between Avid Bioservices, Inc. and
Registrant, dated November 19, 2003(2) |
|
|
10 |
.3* |
|
Distribution Agreement between MidAtlantic Diagnostics, Inc. and
Registrant, dated January 30, 2004(2) |
|
|
10 |
.4* |
|
Distribution Agreement between MediCult AS and Registrant, dated
February 9, 2004(2) |
|
|
10 |
.5* |
|
Distribution Agreement between Cook Ob/ Gyn Incorporated and
Registrant, dated April 13, 2004(2) |
|
|
10 |
.6 |
|
2004 Stock Plan and Form of Option Agreement thereunder(3) |
|
|
10 |
.7 |
|
Form of Indemnity Agreement for Directors and Executive
Officers(3) |
|
|
10 |
.8* |
|
Exclusive Distribution Agreement between Baxter Healthcare and
Registrant, dated August 13, 2004(4) |
|
|
10 |
.9 |
|
Form of Callable Stock Purchase Warrant(3) |
|
|
10 |
.10 |
|
Securities Purchase Agreement between Registrant and the other
signatories thereto, dated as of October 12, 2004(5) |
|
|
10 |
.11 |
|
Form of Common Stock Purchase Warrant(5) |
|
|
10 |
.12 |
|
Registration Rights Agreement between Registrant and the other
signatories thereto, dated as of October 12, 2004(5) |
27
|
|
|
|
|
|
|
10 |
.13 |
|
DeliaTroph Pharmaceuticals, Inc. 2001 Amended and Restated Stock
Plan and form of Stock Option Agreements for options assumed
thereunder(6) |
|
|
10 |
.14 |
|
Nonstatutory Stock Option Agreement With Andrew Kim(6) |
|
|
10 |
.15* |
|
Commercial Supply Agreement with Avid Bioservices, Inc. and
Registrant, dated February 16, 2005(7) |
|
|
10 |
.16* |
|
Development and Supply Agreement with Baxter Healthcare
Corporation and Registrant, dated March 24, 2005(8) |
|
|
10 |
.17* |
|
First Amendment to the Exclusive Distribution Agreement between
Baxter Healthcare Corporation and Registrant, dated
March 24, 2005(8) |
|
|
10 |
.18 |
|
Halozyme Therapeutics, Inc. 2005 Outside Directors Stock
Plan(9) |
|
|
10 |
.19* |
|
Second Amendment to the Exclusive Distribution Agreement between
Baxter Healthcare Corporation and Registrant, dated
December 8, 2005 |
|
|
10 |
.20 |
|
Placement Agent Agreement, dated as of December 12, 2005
between Halozyme, SG Cowen & Co., LLC,
Rodman & Renshaw, LLC and Roth Capital Partners, LLC(10) |
|
|
10 |
.21 |
|
Placement Agent Agreement, dated as of December 13, 2005
between Halozyme, SG Cowen & Co., LLC,
Rodman & Renshaw, LLC and Roth Capital Partners, LLC(11) |
|
|
10 |
.22 |
|
First Amendment to the License Agreement between University of
Connecticut and Registrant, dated January 9, 2006(12) |
|
|
31 |
.1 |
|
Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
31 |
.2 |
|
Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
32 |
.1 |
|
Certification of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
32 |
.2 |
|
Certification of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
(1) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
December 14, 2004, and Exhibit 99.2 of
Registrants Current Report on
Form 8-K, filed
July 6, 2005. |
|
|
(2) |
Incorporated by reference to the Registrants Registration
Statement on
Form SB-2 filed
with the Commission on April 23, 2004. |
|
|
(3) |
Incorporated by reference to the Registrants amendment
number two to the Registration Statement on
Form SB-2 filed
with the Commission on July 23, 2004. |
|
|
(4) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-QSB, filed
November 12, 2004. |
|
|
(5) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
October 15, 2004. |
|
|
(6) |
Incorporated by reference to the Registrants Registration
Statement on
Form S-8 filed
with the Commission on October 26, 2004. |
|
|
(7) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
February 22, 2005. |
|
|
(8) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
March 30, 2005. |
|
|
(9) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
July 6, 2005. |
|
|
(10) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
December 13, 2005. |
|
(11) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
December 14, 2005. |
|
(12) |
Incorporated by reference to the Registrants Current
Report on
Form 8-K, filed
January 12, 2006. |
|
|
|
|
* |
Confidential treatment has been requested for certain portions
of this exhibit. These portions have been omitted from this
agreement and have been filed separately with the Securities and
Exchange Commission. |
|
|
Item 14. |
Principal Accountant Fees and Services. |
The information required by this item is incorporated by
reference to the information under the caption Principal
Accountant Fees and Services contained in the Proxy
Statement.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned in the City of San Diego, on
March 24, 2006.
|
|
|
Halozyme Therapeutics, Inc., |
|
a Nevada corporation |
|
|
|
|
|
Jonathan E. Lim, MD |
|
President and Chief Executive Officer |
Date: March 24, 2006
POWER OF ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Jonathan E. Lim
and David A. Ramsay, and each of them, as his true and lawful
attorneys-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Annual
Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said
attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming that all said
attorneys-in-fact and
agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Annual Report has been signed by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Jonathan E. Lim, M.D.
Jonathan E. Lim, M.D. |
|
President and Chief Executive Officer (Principal Executive
Officer) |
|
March 24, 2006 |
|
/s/ David A. Ramsay
David A. Ramsay |
|
Secretary and Chief Financial Officer (Principal Financial
and Accounting Officer) |
|
March 24, 2006 |
|
/s/ Gregory I. Frost, Ph.D.
Gregory I. Frost, Ph.D. |
|
Vice President and Chief Scientific Officer, Director |
|
March 24, 2006 |
|
/s/ Kenneth J. Kelley
Kenneth J. Kelley |
|
Chairman of the Board |
|
March 24, 2006 |
|
/s/ Robert L. Engler, M.D.
Robert L. Engler, M.D. |
|
Director |
|
March 24, 2006 |
|
/s/ John S. Patton, Ph.D.
John S. Patton, Ph.D. |
|
Director |
|
March 24, 2006 |
|
/s/ Steven T. Thornton
Steven T. Thornton |
|
Director |
|
March 24, 2006 |
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Halozyme Therapeutics, Inc.
We have audited the accompanying consolidated balance sheet of
Halozyme Therapeutics, Inc. and subsidiary (the
Company) as of December 31, 2005, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the years
in the two year period ended December 31, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company has determined that
it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes, examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2005, and the results of its
operations and its cash flows for each of the years in the two
year period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ CACCIAMATTA
ACCOUNTANCY CORPORATION
Irvine, California
March 12, 2006
F-1
HALOZYME THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2005
|
|
|
|
|
|
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
19,132,194 |
|
Accounts receivable, net
|
|
|
413,829 |
|
Inventory
|
|
|
278,958 |
|
Prepaid expenses
|
|
|
281,191 |
|
|
|
|
|
|
Total current assets
|
|
|
20,106,172 |
|
PROPERTY AND EQUIPMENT, net
|
|
|
381,248 |
|
OTHER ASSETS
|
|
|
22,835 |
|
|
|
|
|
|
Total Assets
|
|
$ |
20,510,255 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
Accounts payable
|
|
$ |
1,379,932 |
|
Accrued expenses
|
|
|
669,298 |
|
Deferred revenue
|
|
|
254,138 |
|
|
|
|
|
|
Total current liabilities
|
|
|
2,303,368 |
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized; 60,246,997 shares issued and outstanding
|
|
|
60,247 |
|
Additional paid-in-capital
|
|
|
44,493,894 |
|
Accumulated deficit
|
|
|
(26,347,254 |
) |
|
|
|
|
|
Total Stockholders Equity
|
|
|
18,206,887 |
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
20,510,255 |
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-2
HALOZYME THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
REVENUES:
|
|
|
|
|
|
|
|
|
Product Sales
|
|
$ |
127,209 |
|
|
$ |
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
51,968 |
|
|
|
|
|
Research and development
|
|
|
10,220,079 |
|
|
|
6,517,254 |
|
Selling, general and administrative
|
|
|
3,416,579 |
|
|
|
2,570,595 |
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
13,688,626 |
|
|
|
9,087,849 |
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(13,561,417 |
) |
|
|
(9,087,849 |
) |
Other income (expense), net
|
|
|
286,044 |
|
|
|
(3,527 |
) |
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(13,275,373 |
) |
|
|
(9,091,376 |
) |
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$ |
(13,275,373 |
) |
|
$ |
(9,091,376 |
) |
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$ |
(0.26 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
Shares used in computing net loss per share, basic and diluted
|
|
|
50,317,021 |
|
|
|
35,411,127 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-3
HALOZYME THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(13,275,373 |
) |
|
$ |
(9,091,376 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
206,348 |
|
|
|
123,350 |
|
|
Gain on disposal of equipment
|
|
|
(1,200 |
) |
|
|
|
|
|
Issuance of common stock and stock options for goods and services
|
|
|
186,402 |
|
|
|
98,200 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(391,669 |
) |
|
|
|
|
|
|
Inventory
|
|
|
(227,136 |
) |
|
|
(51,821 |
) |
|
|
Prepaid expenses and other assets
|
|
|
(217,555 |
) |
|
|
(95,868 |
) |
|
|
Accounts payable and accrued expenses
|
|
|
469,816 |
|
|
|
1,299,859 |
|
|
|
Deferred revenue
|
|
|
254,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(12,996,229 |
) |
|
|
(7,717,656 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(350,891 |
) |
|
|
(227,951 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(350,891 |
) |
|
|
(227,951 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock net
|
|
|
16,020,809 |
|
|
|
12,716,875 |
|
Proceeds from exercise of stock options net
|
|
|
218,422 |
|
|
|
|
|
Proceeds from exercise of warrants net
|
|
|
232,369 |
|
|
|
2,862,720 |
|
Contributed capital net
|
|
|
|
|
|
|
7,870,146 |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
16,471,600 |
|
|
|
23,449,741 |
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
3,124,480 |
|
|
|
15,504,134 |
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
16,007,714 |
|
|
|
503,580 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$ |
19,132,194 |
|
|
$ |
16,007,714 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Conversion of contributed capital to common stock
|
|
$ |
|
|
|
$ |
7,870,146 |
|
|
|
|
|
|
|
|
|
|
Conversion of Series C preferred stock to common stock
|
|
$ |
|
|
|
$ |
1,004,486 |
|
|
|
|
|
|
|
|
|
|
Accrued cost for redemption of unexercised callable warrants
|
|
$ |
|
|
|
$ |
6,114 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
HALOZYME THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
Total | |
|
|
| |
|
Paid-In | |
|
Accumulated | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
BALANCE, DECEMBER 31, 2003
|
|
|
8,196,362 |
|
|
|
8,196 |
|
|
|
4,346,116 |
|
|
|
(3,980,505 |
) |
|
|
373,807 |
|
Redemption of common stock, March 10, 2004
|
|
|
(4,296,362 |
) |
|
|
(4,296 |
) |
|
|
(38,007 |
) |
|
|
|
|
|
|
(42,303 |
) |
Issuance of shares for merger with DeliaTroph net
|
|
|
35,521,906 |
|
|
|
35,522 |
|
|
|
7,876,927 |
|
|
|
|
|
|
|
7,912,449 |
|
Exercise of warrants
|
|
|
282,780 |
|
|
|
283 |
|
|
|
128,716 |
|
|
|
|
|
|
|
128,999 |
|
Exercise of callable warrants, net
|
|
|
1,571,682 |
|
|
|
1,571 |
|
|
|
2,726,036 |
|
|
|
|
|
|
|
2,727,607 |
|
Issuance of common stock for cash, net
|
|
|
7,925,715 |
|
|
|
7,926 |
|
|
|
12,708,949 |
|
|
|
|
|
|
|
12,716,875 |
|
Issuance of common stock options to consultants
|
|
|
|
|
|
|
|
|
|
|
98,200 |
|
|
|
|
|
|
|
98,200 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,091,376 |
) |
|
|
(9,091,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2004
|
|
|
49,202,083 |
|
|
$ |
49,202 |
|
|
$ |
27,846,937 |
|
|
$ |
(13,071,881 |
) |
|
$ |
14,824,258 |
|
Exercise of stock options
|
|
|
620,146 |
|
|
|
620 |
|
|
|
217,802 |
|
|
|
|
|
|
|
218,422 |
|
Exercise of warrants
|
|
|
424,768 |
|
|
|
425 |
|
|
|
231,944 |
|
|
|
|
|
|
|
232,369 |
|
Issuance of common stock option to consultants
|
|
|
|
|
|
|
|
|
|
|
186,402 |
|
|
|
|
|
|
|
186,402 |
|
Issuance of common stock for cash, net
|
|
|
10,000,000 |
|
|
|
10,000 |
|
|
|
16,010,809 |
|
|
|
|
|
|
|
16,020,809 |
|
Net loss (PRELIMINARY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,275,373 |
) |
|
|
(13,275,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
60,246,997 |
|
|
$ |
60,247 |
|
|
$ |
44,493,894 |
|
|
$ |
(26,347,254 |
) |
|
$ |
18,206,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial Statements
|
|
1. |
Organization and Business |
Halozyme Therapeutics, Inc. (Halozyme or the
Company) is a biopharmaceutical company dedicated to
the development and commercialization of recombinant human
enzymes for the infertility, palliative care, drug delivery and
oncology markets.
The Companys operations to date have been limited to
organizing and staffing the Company, acquiring, developing and
securing its technology and undertaking product development for
its existing products and for a limited number of product
candidates. In June 2005, the Company launched its first
product,
Cumulasetm,
a product used for in vitro fertilization, and transitioned
from a development-stage organization to a commercial entity.
|
|
2. |
Summary of Significant Accounting Policies |
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the U.S. and with the rules and regulations of the
Securities and Exchange Commission related to an annual report
on Form 10-KSB.
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as
well as disclosures of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents consist of highly liquid investments
with maturities of three months or less from the original
purchase date.
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist of cash and
cash equivalents. The Company maintains its cash balances with
one major commercial bank. The balances are insured by the
Federal Deposit Insurance Corporation up to $100,000.
The Company sells its products to established distributors in
the pharmaceutical industry. Credit is extended based on an
evaluation of the customers financial condition.
Approximately 91% of the accounts receivable balance as of
December 31, 2005 represents amounts due from three
customers. The Company evaluates the collectibility of its
accounts receivable based on a variety of factors, including the
length of time the receivables are past due, the financial
health of the customer and historical experience. Based upon the
review of these factors, the Company did not record an allowance
for doubtful accounts at December 31, 2005.
The Company relies on a single third-party manufacturer for the
supply of the active pharmaceutical ingredient in each of the
Companys current products. Payments due to this supplier
represent 41% of the accounts payable balance at
December 31, 2005.
Accounts receivable is recorded net of an allowance for doubtful
accounts. Currently, the allowance for doubtful accounts is zero
as the collectibility of accounts receivable is reasonably
assured. While we are not obligated to accept from customers the
return of products that have reached their expiration date, we
evaluate
F-6
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
the need for any reserve each reporting period in the event we
may decide to accept product returns that have reached their
expiration date. Currently, the allowance for product returns is
zero.
Inventories are stated at lower of cost or market and consist of
raw materials and work in process used in the manufacture of the
Companys Cumulase and Hylenex products. Inventories are
valued using a standard cost approach that approximates the
first-in, first-out
method. The inventory of work in process represents those units
the Company expects to sell in the United States or European
Union.
Property and equipment are recorded at cost. Equipment and
furniture are depreciated using the straight-line method over
their estimated useful lives of three years and leasehold
improvements are amortized using the straight-line method over
the estimated useful life of the asset or the lease term,
whichever is shorter.
|
|
|
Impairment of Long-Lived Assets |
The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statements of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In accordance with SFAS No. 144,
long-lived assets are reviewed for events of changes in
circumstances, which indicate that their carrying value may not
be recoverable. At December 31, 2005, the Company believes
there has been no impairment of the value of such assets.
|
|
|
Research and Development Costs |
Costs and expenses that can be clearly identified as research
and development are charged to expense as incurred in accordance
with FASB statement No. 2, Accounting for Research
and Development Costs. Our expenses related to clinical
trials are based on estimates of the services received and
efforts expended pursuant to contracts with multiple research
institutions, clinical research organizations, and other vendors
that conduct and manage clinical trials on our behalf. The
financial terms of these agreements are subject to negotiation
and vary from contract to contract and may result in uneven
payment flows. Generally, these agreements set forth the scope
of work to be performed at a fixed fee or unit price. Payments
under the contracts depend on factors such as the successful
enrollment of patients or the completion of clinical trial
milestones. Expenses related to clinical trials generally are
accrued based on contracted amounts applied to the level of
patient enrollment and activity according to the protocol. If
timelines or contracts are modified based upon changes in the
clinical trial protocol or scope of work to be performed, we
modify our estimates accordingly on a prospective basis. As a
result of our agreement with Baxter, both parties have agreed to
share equally the cost of any Hylenex post-approval clinical
trials. As such, we have recorded an accounts receivable at
December 31, 2005 for Baxters share of these costs.
In December 2002, Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
an amendment of FASB Statement No. 123 was issued.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees. In
addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, Accounting for
Stock-Based Compensation. The Company adopted the disclosure
requirements of SFAS No. 148 effective
December 31, 2002. As allowed by SFAS No. 123,
the Company has elected to continue to apply the intrinsic
value-based method of accounting prescribed in APB No. 25
and, accordingly, does not recognize compensa-
F-7
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
tion expense for stock option grants made to employees at an
exercise price equal to or in excess of the fair value of the
stock at the date of grant. Deferred compensation is recognized
and amortized on an accelerated basis in accordance with
Financial Accounting Standards Board Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans, over the vesting period of the
related options.
Had compensation cost for the Companys outstanding
employee stock options been determined based on the fair value
at the grant dates for those options consistent with
SFAS No. 123, the Companys net loss and basic
and diluted net loss per share, would have been changed to the
following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
In thousands (except per | |
|
|
share data) | |
Net loss, as reported
|
|
$ |
(13,275 |
) |
|
$ |
(9,091 |
) |
Deduct: Total stock-based employee compensation expense
determined under Fair value based method for all awards
|
|
|
(1,225 |
) |
|
|
(1,619 |
) |
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(14,500 |
) |
|
$ |
(10,710 |
) |
|
|
|
|
|
|
|
Net loss per share, basic and diluted, as reported
|
|
$ |
(0.26 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
Pro forma net loss per share, basic and diluted
|
|
$ |
(0.29 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
Pro forma information regarding net loss is required by
SFAS No. 123, and has been determined as if the
Company had accounted for its stock-based employee compensation
under the fair value method prescribed in
SFAS No. 123. The fair value of the options was
estimated at the date of grant using the Black-Scholes pricing
model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Risk free interest rate
|
|
|
3.9 |
% |
|
|
3.0 |
% |
Expected life (years)
|
|
|
4 |
|
|
|
4 |
|
Expected volatility
|
|
|
76 |
% |
|
|
100 |
% |
Expected dividends
|
|
|
|
|
|
|
|
|
The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
The Company accounts for options issued to nonemployees under
SFAS No. 123 and Emerging Issues Task Force
(EITF) Issue 96-18, Accounting for Equity
Investments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services.
As such, the value of such options is periodically remeasured
and income or expense is recognized during their vesting terms.
In accordance with SFAS No. 128, Earnings Per
Share, and SEC Staff Accounting Bulletin (SAB)
No. 98, basic net loss per common share is computed by
dividing net loss for the period by the weighted average number
of common shares outstanding during the period. Under
SFAS No. 128, diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares,
such as stock options and warrants, outstanding during the
period.
F-8
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
Such common equivalent shares have not been included in the
Companys computation of net loss per share as their effect
would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Numerator Net loss
|
|
$ |
(13,275,373 |
) |
|
$ |
(9,091,376 |
) |
|
|
|
|
|
|
|
Denominator Weight average shares outstanding
|
|
|
50,317,021 |
|
|
|
35,411,127 |
|
|
|
|
|
|
|
|
Net loss per share
|
|
$ |
(0.26 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
Incremental common shares (not included because of their
anti-dilutive nature)
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
8,535,751 |
|
|
|
8,700,397 |
|
|
Stock warrants
|
|
|
11,561,578 |
|
|
|
11,886,346 |
|
|
|
|
|
|
|
|
|
Potential common equivalents
|
|
|
20,097,329 |
|
|
|
20,586,743 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
Comprehensive income (loss) includes certain changes in
stockholders equity that are excluded from net income
(loss). At December 31, 2005 and 2004, the Company has no
reportable differences between net loss and comprehensive loss.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the
Companys consolidated financial statements and
accompanying notes. On an ongoing basis, the Company evaluates
its estimates and judgments, which are based on historical and
anticipated results and trends and on various other assumptions
that the Company believes to be reasonable under the
circumstances. By their nature, estimates are subject to an
inherent degree of uncertainty and, as such, actual results may
differ from the Companys estimates.
We recognize revenue from product sales in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 48, Revenue Recognition When Right of Return
Exists, when there is persuasive evidence that an
arrangement exists, when title has passed, the price is fixed or
determinable, and we are reasonably assured of collecting the
resulting receivable. We recognize product sales net of
estimated allowances for product returns, managed care rebates,
reimbursements relating to Medicare, patient coupons,
chargebacks from distributors, wholesaler fees and prompt
payment and other discounts. Such estimates require our most
subjective and complex judgment due to the need to make
estimates about matters that are inherently uncertain. If actual
future payments for returns, rebates, coupons, chargebacks and
discounts exceed the estimates we made at the time of sale, our
financial position, results of operations and cash flows would
be negatively impacted.
Cumulase revenue is recognized when the transfer of ownership
occurs, upon shipment to the distributor. Accounts receivable is
recorded net of an allowance for doubtful accounts. Currently,
the allowance for doubtful accounts is zero as the
collectibility of accounts receivable is reasonably assured. We
are not obligated to accept from customers the return of any
Cumulase product that have reached their expiration date. Thus,
no allowance for product returns has been established.
F-9
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
Under the terms of our Baxter agreement, we will supply Baxter
the active pharmaceutical ingredient for Hylenex and Baxter will
fill and finish Hylenex and hold it for subsequent distribution.
During the fourth quarter of 2005, the Company transferred
$254,000 of the active pharmaceutical ingredient for Hylenex to
Baxter for filling and finishing. Because of our continued
involvement in the development and production process of Hylenex
under the terms of the Supply Agreement, the earnings process is
not considered to be complete. Accordingly, the Company defers
revenue and the related product costs resulting from transfers
of inventory to Baxter until the product is ultimately sold to
customers.
|
|
|
Recent Accounting Pronouncements |
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123(R)).
SFAS No. 123(R) supersedes APB 25, Accounting
for Stock Issued to Employees, and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. We expect to
adopt SFAS 123(R) on January 1, 2006.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB 25s
intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options when the exercise
price is equal to or in excess of the fair value of the stock at
the date of grant. Accordingly, the adoption of
SFAS No. 123(R)s fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact
of that standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
forma net loss and net loss per share in Note 2 to our
financial statements. SFAS No. 123(R) also requires
the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4. This statement amends the guidance in ARB
No. 43 Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage).
The provision of this statement will be effective for inventory
costs during the fiscal years beginning after June 15,
2005. As a result of our manufacturing process being outsourced,
we do not believe that the adoption of this statement will have
a material impact on our financial condition or results of
operations.
Inventories are stated at the lower of cost or market and
consist of raw materials of $259,452 and $22,870 and work in
process of $19,506 and $28,951 used in the manufacture of the
Companys Cumulase and Hylenex products as of
December 31, 2005 and 2004, respectively. Raw materials
inventory includes $254,000 of costs associated with the
transfer of the active pharmaceutical ingredient
(API) for Hylenex to Baxter in the fourth quarter of
2005 under the Development and Supply Agreement (the
Supply Agreement). The Supply Agreement provides for
Baxter to purchase the API and fill and finish the product for
subsequent distribution to customers. The transfer of the API to
Baxter is recorded as a deferred charge and is included in raw
materials inventory at December 31, 2005.
F-10
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
Inventories are valued using a standard cost approach that
approximates the
first-in, first-out
method. The inventory of raw materials and work in process
represents those units the Company expects to sell in the
European Union and the United States.
|
|
4. |
Property and Equipment |
Property and equipment consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Research equipment
|
|
$ |
615,455 |
|
|
$ |
333,403 |
|
Computer and office equipment
|
|
|
149,320 |
|
|
|
102,775 |
|
Leasehold improvements
|
|
|
148,486 |
|
|
|
131,567 |
|
|
|
|
|
|
|
|
|
|
|
913,261 |
|
|
|
567,745 |
|
Less accumulated depreciation and amortization
|
|
|
(532,013 |
) |
|
|
(332,240 |
) |
|
|
|
|
|
|
|
|
|
$ |
381,248 |
|
|
$ |
235,505 |
|
|
|
|
|
|
|
|
Depreciation expense totaled $206,348 and $123,350 in 2005 and
2004, respectively.
Accrued expenses consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued expenses
|
|
|
548,372 |
|
|
|
20,065 |
|
Accrued employee benefits
|
|
|
120,926 |
|
|
|
72,105 |
|
|
|
|
|
|
|
|
|
|
$ |
669,298 |
|
|
$ |
92,170 |
|
|
|
|
|
|
|
|
During August 2004, the Company signed an Exclusive Distribution
Agreement (the Distribution Agreement) with Baxter
Healthcare Corporation (Baxter) to market,
distribute and sell Hylenex in the United States and Puerto
Rico. During March 2005, the Company entered into a Development
and Supply Agreement (the Supply Agreement) and a
First Amendment to the existing Distribution Agreement with
Baxter. Under the terms of the agreements, Halozyme will supply
Baxter the active pharmaceutical ingredient, and Baxter will
fill and finish Hylenex and hold it for subsequent distribution.
In December 2005, Hylenex received FDA approval for use in the
United States.
During the fourth quarter of 2005, the Company transferred
$254,000 of the active pharmaceutical ingredient for Hylenex to
Baxter for filling and finishing. Because of Halozymes
continued involvement in the development and production process
of Hylenex under the terms of the Supply Agreement, the earnings
process is not considered to be complete. Accordingly, the
Company defers revenue and the related product costs resulting
from transfers of inventory to Baxter until the product is
ultimately sold to customers.
Issuance of Common Stock In January 2004, the
purchasers of the Series C stock exercised their option and
the Company issued 15,304,804 shares of common stock in a
private placement, at $0.4647 per share, generating
approximately $7.1 million in gross proceeds. In addition,
the Company sold 756,286 shares of common stock for
$1.25 per share, or $0.9 million in gross proceeds.
Net proceeds from this transaction totaled approximately
$7.9 million. In March 2004, the Company issued
3,900,000 shares of common stock as
F-11
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
a result of the reverse merger. In October 2004, the Company
issued 7,925,715 shares of common stock in a private
placement at a price per share of $1.75, generating
approximately $12.7 million in net proceeds. In December
2005, the Company issued 10,000,000 shares of common stock
in a registered direct offering at a price per share of $1.75,
generating approximately $16,021,000 in net proceeds.
Issuance of Common Stock Options for Services
In 2005, 50,000 common stock options were issued to members of
it Scientific Advisory Board for services valued at $77,000 and
74,000 common stock options were issued to consultants for
services valued at $109,000. In 2004, 10,000 common stock
options were issued to members of its Scientific Advisory Board
valued at $33,000 and 30,000 common stock options were issued to
consultants for services valued at $65,000. These options were
fully exercisable and fully vested on the date of grant and
shall expire in ten years based on the terms of the options. The
fair value of these options was recorded as a noncash stock
issuance cost by the Company.
Warrants In November and December of 2001,
the Company granted warrants to purchase 252,721 shares of
common stock at an exercise price of $0.4748 per share to
purchasers of the Series B. From January to May 2002, the
Company granted warrants to purchase 109,248 shares of
common stock at an exercise price of $0.4748 per share to
purchasers of the Series B. These warrants were exercised
during 2004 and 2005. In June 2002, the Company granted, to
outside parties for services, warrants to
purchase 67,129 shares of common stock at an exercise
price of $0.13 per share, and 51,334 of these warrants were
still outstanding as of December 31, 2005. These warrants
were fully exercisable and fully vested on the date of grant and
shall expire in ten years based on the terms of the warrants.
The fair value of these warrants, totaling $8,500, was recorded
as a non-cash stock issuance cost by the Company.
In connection with the notes issued in 2002 and 2003, the
Company granted warrants to purchase 867,419 shares of
common stock at an exercise price of $0.4496 per share.
These warrants are exercisable until October 20, 2007 and
629,436 of these warrants were still outstanding as of
December 31, 2005. In October 2003, in conjunction with the
issuance of its Series C convertible preferred stock, the
Company granted warrants to purchase 2,367,114 shares
of common stock to purchasers of the Series C at an
exercise price of $0.7667 per share. These warrants are
exercisable until October 15, 2008 and 2,259,518 of these
warrants were still outstanding as of December 31, 2005.
In connection with the January 2004 private placement, the
Company issued warrants (the Callable Warrants) to
purchase 8,094,829 shares of common stock at an
exercise price of $1.75 per share, as amended. These
warrants are exercisable until January 28, 2009 and are
callable by the Company under certain conditions. In December
2004, the Company called the first tranche of the Callable
Warrants and holders of the Callable Warrants exercised warrants
to purchase 1,571,682 shares of common stock at
$1.75 per share, or approximately $2.7 million in net
proceeds. In addition, the Company redeemed 611,399 of these
warrants at a redemption price of $0.01 per share. As of
December 31, 2005, there were 5,911,748 of the Callable
Warrants still outstanding. In connection with the October 2004
private placement, the Company issued warrants to
purchase 2,709,542 shares of common stock at an
exercise price of $2.25 per share. These warrants are
exercisable until October 12, 2009 and were still
outstanding as of December 31, 2005.
The Companys 2004 Stock Plan (the Plan) and
2001 Stock Plan, as amended, provide for the granting of
non-statutory or incentive stock options to acquire shares of
the Companys common stock to employees of the Company. The
Plan is administered by the Board of Directors and permits the
issuance of options for the purchase of up to
10,000,000 shares, as amended, of the Companys common
stock at exercise prices of not less than the fair market value
of the underlying shares on the date of grant. Options granted
under the Plan generally vest over a four-year period and expire
up to a maximum of 10 years from the date of grant.
F-12
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following table summarizes stock option activity for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Shares | |
|
Weighted | |
|
|
Underlying | |
|
Average Option | |
|
|
Stock Options | |
|
Price per Share | |
|
|
| |
|
| |
Outstanding, December 31, 2003
|
|
|
6,392,567 |
|
|
$ |
0.38 |
|
Granted
|
|
|
2,814,240 |
|
|
$ |
2.01 |
|
Exercised
|
|
|
(506,410 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
8,700,397 |
|
|
$ |
0.91 |
|
Granted
|
|
|
602,500 |
|
|
$ |
1.88 |
|
Exercised
|
|
|
(620,146 |
) |
|
$ |
0.35 |
|
Canceled
|
|
|
(147,000 |
) |
|
$ |
1.64 |
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
8,535,751 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
The following table summarizes information for outstanding and
exercisable options as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
Number | |
|
Average | |
|
|
Number | |
|
Contractual | |
|
Exercise | |
|
Vested and | |
|
Exercise | |
Exercise Price |
|
Outstanding | |
|
Life in Years | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.06
|
|
|
80,036 |
|
|
|
4.9 |
|
|
$ |
0.06 |
|
|
|
76,877 |
|
|
$ |
0.06 |
|
$0.39 - $0.43
|
|
|
5,655,215 |
|
|
|
7.1 |
|
|
$ |
0.40 |
|
|
|
3,366,802 |
|
|
$ |
0.40 |
|
$1.25
|
|
|
150,000 |
|
|
|
8.1 |
|
|
$ |
1.25 |
|
|
|
69,270 |
|
|
$ |
1.25 |
|
$1.68 - $2.25
|
|
|
2,167,500 |
|
|
|
9.0 |
|
|
$ |
2.01 |
|
|
|
772,649 |
|
|
$ |
2.01 |
|
$3.30 - $4.10
|
|
|
483,000 |
|
|
|
8.4 |
|
|
$ |
3.81 |
|
|
|
230,685 |
|
|
$ |
3.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,535,751 |
|
|
|
7.6 |
|
|
$ |
1.01 |
|
|
|
4,516,283 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes are recorded in accordance with
SFAS No. 109, Accounting for Income Taxes. This
statement requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events
that have been recognized in the Companys financial
statements or tax returns. Measurement of the deferred items is
based on enacted tax laws. In the event the future consequences
of differences between financial reporting bases and tax bases
of the Companys assets and liabilities result in a
deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the
future benefits indicated by such assets. A valuation allowance
related to a deferred tax asset is recorded when it is more
likely than not that some portion or the entire deferred tax
asset will not be realized. The Company had combined federal and
state deferred tax assets of approximately $11.6 million at
December 31, 2005 and $5.5 million at
December 31, 2004, consisting primarily of net operating
loss carryforwards. The Company has recorded a full valuation
allowance for all net deferred tax assets generated to date. The
deferred tax assets and valuation allowance increased
approximately $6.1 million in 2005. The federal and state
net operating losses total approximately $25.5 million, and
begin to expire in 2018 and 2008, respectively.
|
|
10. |
Commitments and Contingencies |
Operating Leases On May 20, 2003, the
Company signed a two-year lease for 5,728 square feet of
office and lab space in a building located at 11588 Sorrento
Valley Road, San Diego, California, commencing on
June 1, 2003. This lease was subsequently extended to
June 30, 2006. On October 28, 2004, the Company
F-13
Halozyme Therapeutics, Inc.
Notes to Consolidated Financial
Statements (Continued)
signed an 18-month
lease for an additional 5,060 square feet of office and lab
space in the same building, commencing on January 1, 2005.
The Company also leases 1,200 square feet on a
month-to-month
cancelable lease. Additionally the Company leases certain office
equipment under operating leases. Rent expense totaled $238,200
and $147,600 for the years ended December 31, 2005 and
2004, respectively.
Future minimum payments required under the Companys
non-cancelable operating lease obligations are $118,200 for the
year ending December 31, 2006.
Material Agreements During August 2004, we
signed an Exclusive Distribution Agreement (the
Distribution Agreement) with Baxter Healthcare
Corporation (Baxter) to market, distribute and sell
Hylenex in the United States and Puerto Rico. During March 2005,
we entered into a Development and Supply Agreement (the
Supply Agreement) and a First Amendment to the
existing Distribution Agreement with Baxter. Under the terms of
the agreements we will supply Baxter the active pharmaceutical
ingredient, and Baxter will fill and finish Hylenex and hold it
for subsequent distribution. The Supply Agreement provides for
additional product development opportunities that the parties
may mutually decide to pursue. In addition, Baxter has a right
of first refusal on certain product line extensions and select
new products. The First Amendment provides for specific and
consistent definitions among the Supply Agreement and
Distribution Agreement and modifies various covenants of Baxter
relating to the definition of marketing and incremental sales
costs, including a cap on the annualized amount of marketing and
incremental sales costs to be paid by Baxter. In the event that
both parties agree in advance to combined marketing and
incremental sales costs in excess of the cap, such excess
marketing and incremental sales costs shall be shared equally.
Currently, the parties anticipate that combined marketing and
incremental sales costs for 2006 will be in excess of the cap.
As such, it is possible that aggregate revenues from sales of
Hylenex will be less than our portion of these shared additional
marketing and incremental sales costs.
Effective December 30, 2005, the Company entered into a
First Amendment to a November 15, 2002 license agreement
(the Agreement) with the University of Connecticut
Health Center (UCHC). The original license agreement
provided for certain payments to be made to UCHC in connection
with the development and commercialization of certain products
defined in the Agreement. The First Amendment to the License
Agreement (the First Amendment) calls for payments
of a one time Supplemental License Fee of $25,000, a $250,000
Technology Access Fee and an Annualized Technology Fee of
$2,500,000 to be paid to UCHC in annual installments of $250,000
payable in February each year commencing with 2006 and ending
2015. The first two payments of $25,000 and $250,000 were paid
in accordance with the original Agreement in March and May 2005,
respectively. The first $250,000 annual technology fee
installment was paid in February 2006 in accordance with the
First Amendment. Other terms of the amendment include a
termination clause which allows the Company to discontinue
commercialization of certain products covered under the
Agreement and to cease making the annual $250,000 technology
fees with the payment of a $250,000 termination fee. Beginning
in 2006 the annual technology fee payments will be recognized to
expense on a straight-line basis.
Legal Contingencies In the ordinary course of
business, we may face various claims brought by third parties,
including claims relating to the safety or efficacy of our
products. Any of these claims could subject us to costly
litigation and, while we generally believe that we have adequate
insurance to cover many different types of liabilities, our
insurance carriers may deny coverage or our policy limits may be
inadequate to fully satisfy any damage awards or settlements. If
this were to happen, the payment of any such awards could have a
material adverse effect on our operations and financial
position. Additionally, any such claims, whether or not
successful, could damage our reputation and business.
F-14