UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-51745
SGX Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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06-1523147
(I.R.S. Employer
Identification No.)
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10505 Roselle Street
San Diego, CA 92121
(Address of principal executive
offices, including zip code)
(858) 558-4850
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value per share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes
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No
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Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Securities Exchange Act of
1934). Yes
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No
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The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant computed by reference
to the price at which the common stock was last sold as of the
last business day of the Registrants most recently
completed second fiscal quarter was $36,098,501. Shares of
common stock held by each officer and director and by each
person who owns 10 percent or more of the outstanding
common stock have been excluded because these persons may be
considered affiliates. The determination of affiliate status for
purposes of this calculation is not necessarily a conclusive
determination for other purposes.
As of March 14, 2008, the Registrant had 20,511,868 shares
of Common Stock, $0.001 par value, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for our 2008 Annual
Meeting of Stockholders are incorporated by reference into
Part III of this Report.
SGX
PHARMACEUTICALS, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
Cautionary
Note Regarding Forward-Looking Statements
This annual report on
Form 10-K
contains forward-looking statements that involve many risks and
uncertainties. These statements relate to future events and our
future performance and are based on current expectations,
estimates, forecasts and projections about the industries in
which we operate and the beliefs and assumptions of our
management. In some cases, you can identify forward-looking
statements by terms such as would,
could, may, will,
should, expect, intend,
plan, anticipate, believe,
estimate, predict,
potential, targets, seek, or
continue, the negative of these terms or other
variations of such terms. In addition, any statements that refer
to projections of our future financial performance, our
anticipated growth and trends in our business and other
characterizations of future events or circumstances are
forward-looking statements. These statements are only
predictions based upon assumptions made that are believed to be
reasonable at the time, and are subject to risk and
uncertainties. Therefore, actual events or results may differ
materially and adversely from those expressed in any
forward-looking statement. In evaluating these statements, you
should specifically consider the risks described under the
caption Risks Factors in Item 1A of this
Form 10-K
and elsewhere in this
Form 10-K.
These factors may cause our actual results to differ materially
from any forward-looking statements. Except as required by law,
we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
1
PART I
Overview
SGX Pharmaceuticals, Inc. is a biotechnology company focused on
the discovery, development and commercialization of novel,
targeted therapeutics directed at addressing unmet medical needs
in oncology. We were incorporated in Delaware in July 1998. Our
most advanced drug development programs target the c-MET
receptor tyrosine kinase (or MET), an enzyme implicated in a
broad array of cancers, and the BCR-ABL tyrosine kinase enzyme,
for treatment of Chronic Myelogenous Leukemia, or CML, a cancer
of the bone marrow. Our earlier stage drug discovery activities
are focused on a portfolio of other protein and enzyme targets
that have been implicated in human cancers.
Our drug discovery and development strategy aims to design new
chemical entities with substantial commercial potential
resulting from selective inactivation of validated targets in
cancer patients that we believe are more likely to experience
clinical benefit. We are taking an integrated approach to the
discovery and development of innovative therapeutic agents for
oncology by seeking to identify small molecules that selectively
target and block (or inhibit) the actions of the proteins
responsible, either wholly or in part, for the uncontrolled
growth of malignant cells in human cancers. Generally, we have
selected targets for which there is strong scientific evidence
that DNA abnormalities activate the target protein and in turn
contribute to uncontrolled cellular growth and replication.
Uncontrolled cellular growth and replication are both typically
associated with cancer. We have chosen indications for which we
believe there are widely recognized unmet medical needs. Our
strategy for the clinical development of such targeted
inhibitors is to design and execute directed proof-of-concept
clinical trials involving patients, who appear to have the
requisite activating DNA abnormality. We believe this directed,
targeted therapy approach increases the potential for
demonstrating clinical benefit, potentially decreases the time
required to conduct the clinical trial, reduces the number of
patients enrolled in a clinical trial, and reduces the cost of
the clinical trial compared to conventional more inclusive
large-scale clinical trials. We believe this approach could
reduce the time required to obtain necessary regulatory
approvals.
Our approach to drug discovery combines a number of powerful
tools designed to enable the identification of high quality
development candidates. At the core is FAST, our fragment based,
protein structure-guided drug discovery technology, underpinned
by a state-of-the-art X-ray crystallographic platform for the
determination of protein structures. We utilize small molecule
scaffolds, drawing upon detailed three-dimensional information
predicting how they will bind to the target protein. This
approach typically provides multiple opportunities for lead
optimization from which to choose. Careful selection of starting
scaffolds in our compound library optimizes the drug-like
properties of the leads we generate. The three-dimensional
structural information is combined with biological data to
facilitate the design and subsequent optimization of our lead
compounds. We seek to maximize the potency and selectivity of
our lead compounds while, maintaining the beneficial drug-like
properties of the small molecule lead compounds.
2
The table below summarizes the status of our clinical and
preclinical development programs and our drug discovery
portfolio:
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Program/Target/Compound/Indications
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Status
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Marketing Rights
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MET
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SGX523 Solid tumors
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Clinical Development (Phase I)
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SGX (Worldwide)
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SGX126 Solid tumors
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Preclinical Development
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SGX (Worldwide)
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BCR-ABL
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SGX393 Second-line CML
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Preclinical Development
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SGX (Worldwide)*
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Oncology Drug Discovery Portfolio
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Various Front-Line CML
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Lead Optimization
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Novartis (Worldwide, except those rights available to SGX)
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SGX (U.S. and Canada Commercialization rights)
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Various including JAK2 and RAS
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Lead Identification and Lead Optimization
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SGX (Worldwide)
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Subject to a reacquisition right of Novartis which may be
exercisable at a later date.
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MET
Development Program
Our MET program is focused on the development of compounds that
inhibit both wild-type and activated mutant forms of the protein
target, MET. MET is a cellular signaling enzyme known as a
receptor tyrosine kinase, which has been implicated in a wide
range of cancers. Extensive laboratory studies of MET have
yielded a growing body of evidence suggesting that uncontrolled
stimulation/activation of MET plays a key role in various
effects associated with cancer, including uncontrolled cellular
growth and replication, increased cell movement and invasion,
and an increased ability of cancer cells to metastasize, or
spread beyond the organ of origin. Other observations have
implicated MET in increased angiogenesis, a process by which
tumors recruit new blood vessels to supply their increasing
nutritional needs. Studies of tumors in humans have associated
MET with more aggressive forms of cancer, such as lung and renal
cancers, and activating MET mutations have been observed in a
wide range of cancer types.
Conservative estimates based on scientific publications suggest
that in the US more than 130,000 new cancers diagnosed during
2007 have the potential to respond to therapy with a MET
inhibitor. Such cancers exhibit unusually high levels of MET
activation or signaling and are, therefore, thought to be
dependent on MET for their uncontrolled growth and
proliferation. MET inhibitors have potential applications in
both single-agent therapy and in combination with other
anti-cancer agents. In some of the estimated 130,000 cancer
patients newly diagnosed with MET-dependent tumors in 2007, our
current scientific understanding suggests that single-agent
treatment with a MET inhibitor may prove sufficient to control
tumor growth (e.g., those patients with hereditary papillary
renal cell carcinoma). In the majority of cases, however, growth
of the cancer is thought to be driven by multiple DNA
abnormalities and the appropriate role for a MET inhibitor is
more likely to be in combination with other anti-cancer agents.
Combination use of MET inhibitors may prove to be particularly
significant in the setting of emerging resistance to
standard-of-care drug regimens. Two examples provide evidence
for this opportunity. First, a recently published scientific
study demonstrated that non-small cell lung (NSCL) cancer cells
resistant to treatment with an epidermal growth factor receptor
(EGFR) inhibitor displayed MET gene amplification (i.e., an
increased number of copies of the MET gene). Inhibition of MET
activity in these cells
in vitro
restored their
sensitivity to the EGFR inhibitor, suggesting that a MET
inhibitor could be combined with either
Tarceva
®
(erlotinib) or
Iressa
®
(gefitinib) for treatment of drug resistant NSCL cancer. Second,
increased MET protein signaling has also been observed in
pancreatic cancer cells resistant to gemcitabine. Both EGFR
resistance and gemcitabine resistance are accompanied by changes
in the behavior of tumor cells that increase the likelihood of
cell movement and cell invasion of surrounding tissues, both of
which are thought to be controlled by MET.
3
We have identified a number of low molecular weight, selective
MET inhibitors, including SGX523 and SGX126, which have
demonstrated potency in cell based assays, oral bioavailability
in multiple animal species and potent
anti-tumor
effects in multiple
in vivo
mouse models of human cancer.
SGX523
SGX523 is an internally developed, small molecule inhibitor of
MET. In January 2008, we initiated two parallel, multi-center
Phase I clinical trials to establish the safety and tolerability
of an oral, twice daily dosing of SGX523 in patients with solid
tumor cancers. The first trial has been designed to examine
twice daily, oral dosing on a continuous
28-day
cycle
and the second trial has been designed to examine interrupted
dosing (a repeating 21 day cycle of 14 days on therapy
followed by 7 days off).
In both trials we have observed dose limiting toxicity (DLT)
earlier than anticipated. The toxicity is of a nature that was
not anticipated based on the preclinical profile of SGX523. In
the continuous dosing trial, patients are continuing to be
treated at a lower dose level, and we are evaluating the safety
and efficacy of treatment at that dose level. The interrupted
dosing trial started at a higher dose than the continuous dosing
trial. No patients are currently receiving treatment in the
interrupted dosing trial.
With this early identification of DLT, we are reassessing the
clinical profile of SGX523 and its future development path is
uncertain. We may consider exploring alternate dosing levels
and/or
schedules in both trials to seek to identify a safe and
efficacious dose.
SGX126
In November 2007, we announced the nomination of a second MET
development candidate, SGX126, for IND-enabling preclinical
development, to broaden our MET program. SGX126 is an internally
developed, orally bioavailable small molecule inhibitor of MET,
with potent
in vitro
and
in vivo
activity.
Pending successful completion of IND-enabling studies, we are
targeting filing an IND for SGX126 in the fourth quarter of
2008. We are assessing whether to conduct any supplemental
preclinical studies of SGX126 in light of the recent
developments in our SGX523 clinical studies.
BCR-ABL
Development Program
Our BCR-ABL development program is focused on a compound that
inhibits both wild-type and drug-resistant mutant forms of the
BCR-ABL kinase, the target for second-line treatment of Chronic
Myelogenous Leukemia.
Chronic
Myelogenous Leukemia (CML)
CML is a bone marrow cancer characterized by rapid and abnormal
growth of white blood cells. The disease has an incidence of
between 1 and 2 new patients per 100,000 individuals in the
general population. In the US, this represents approximately
4,600 new patients a year. CML accounts for approximately
20 percent of adult leukemias in the US. All patients with
CML possess an abnormal chromosome, known as the Philadelphia
chromosome, in their leukemia cells.
Prior to the introduction of
Gleevec
®
(imatinib mesylate), a large majority of CML patients failed
other treatments and inevitably succumbed to their disease. In
2001, Gleevec was approved by the FDA and has become the
standard of care for patients with CML.
Gleevec works by targeting leukemic cells and inhibiting the
activity of the BCR-ABL tyrosine kinase protein, the enzyme
responsible for their uncontrolled growth. Data from a five-year
clinical study of Gleevec published in the New England Journal
of Medicine documents the life-saving impact of this therapy for
CML patients. Specifically, this study demonstrated that
following five years of continuous daily therapy, 83% of
patients remained in clinical remission with an overall survival
rate of 89%. This level of efficacy contributes to the clinical
and commercial success of Gleevec, which had sales of
approximately $3.1 billion in 2007, and the market is
anticipated to continue to increase. Not all patients will,
however, benefit indefinitely from single agent treatment with
Gleevec. Over time, drug resistance emerges, with approximately
17% of patients relapsing within five years, and 4% of patients
intolerant of Gleevec or discontinuing therapy due to adverse
events. The New England Journal
4
of Medicine publication further documented that 31% of patients
receiving Gleevec failed to eliminate leukemic cells from their
bone marrow within 12 months of commencing therapy. These
patients are at significantly higher risk of relapse versus
those patients who do eliminate leukemic cells from the bone
marrow in this time. In approximately two-thirds of cases,
patient relapse has been linked to the emergence of mutant forms
of BCR-ABL that are not inhibited by Gleevec. A large number of
drug-resistant BCR-ABL mutants have been described, and the
single mutant that has proved the most challenging is known as
the T315I mutant. None of the currently approved BCR-ABL
inhibitors, including Gleevec and
Tasigna
®
(nilotinib), both marketed by Novartis Pharmaceuticals
Corporation, and
Sprycel
®
(dasatinib), marketed by Bristol Meyers Squibb Corporation,
inhibit the T315I mutant form of BCR-ABL. Although there are a
number of compounds being developed to address this mutant, to
our knowledge there is no oral drug presently on the market that
inhibits the T315I mutant form of BCR-ABL.
SGX393
Relapsed/Refractory CML
The goal of this program is to develop an oral therapy for the
second-line treatment of CML, that is patients that relapse
while on Gleevec and those intolerant of Gleevec. Our
development candidate, SGX393, is currently in IND-enabling
preclinical development. SGX393 is an internally developed,
potent, selective, orally bioavailable small molecule that
inhibits wild-type BCR-ABL and many drug-resistant mutant forms
of BCR-ABL, including the T315I mutant. Pending successful
completion of IND-enabling activities, including formulation
studies, we are targeting filing an IND application for SGX393
in the second quarter of 2008.
At present, we plan to conduct a Phase I dose escalation trial
in relapsed/refractory CML patients to assess safety and
tolerability and establish the maximum tolerated dose (MTD) or
biologically effective dose (BED; i.e., the dose at which
BCR-ABL enzyme activity is reduced by more than 90%) followed by
administration of SGX393 to a cohort of pre-qualified CML
patients possessing the T315I mutation. Subsequent clinical
trials will be designed once the results of the initial trial
are available, but they likely would involve pre-qualified CML
patients bearing the T315I mutation, other relapsed/refractory
CML patients and those intolerant of Gleevec.
SGX393 initially fell within the purview of our collaboration
with the Novartis Institute for Biomedical Research (Novartis).
We obtained the right to further develop and commercialize
SGX393 following an amendment to our agreement with Novartis
that was signed in September 2007, and it is subject to a
reacquisition right of Novartis which may be exercisable at a
future date.
Oncology
Drug Discovery Portfolio
The SGX drug discovery technologies are being applied to a broad
portfolio of oncology targets, including JAK2, RAS, and three
undisclosed tyrosine kinases. During 2008, our objective is to
nominate two new development candidates, which could lead to IND
submission in 2009.
BCR-ABL
We have been collaborating with Novartis under a license and
collaboration agreement that we entered into in March 2006, to
discover, develop and commercialize oral BCR-ABL inhibitors for
the front-line treatment of CML. The research term of this
agreement concluded in late March 2008. Novartis remains
responsible for the further preclinical and clinical development
of the BCR-ABL inhibitors identified under the collaboration,
other than SGX393. A number of compounds discovered within the
collaboration are now undergoing further evaluation at Novartis.
At this time, an IND for a drug candidate under the
collaboration is not anticipated in 2008.
JAK2
JAK2 is a non-receptor tyrosine kinase involved in
cytokine-induced signaling and growth regulation, survival, and
differentiation of cells. Enhanced JAK2 activation has been
implicated in various blood disorders. A particular JAK2
mutation, V617F, has been strongly correlated with a group of
blood diseases known as myeloproliferative disorders (MPDs),
such as Polycythemia Vera, Essential Thrombocythemia, and
Chronic Idiopathic Myelofibrosis. We have identified JAK2
inhibitors that have good potency against both wild-type and
mutant JAK2 in cell-based assays. Oral bioavailability and
selectivity versus JAK3 have also been demonstrated, and current
studies are aimed at optimizing the potency and drug-like
properties of these compounds. This program is in the lead
optimization
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stage. Lead optimization is the stage at which lead compounds
are further modified to improve their potency, specificity,
in vivo
efficacy and safety.
RAS
RAS is a protein that regulates cell growth. RAS activating
mutations, which result in a cancer causing form of RAS, have
been found in
20-30%
of
all cancers. As a result, RAS has been implicated in a large
number of diseases. However, RAS has proven a challenging target
for the pharmaceutical industry and thus far, to our knowledge,
there are currently no drugs on the market that directly target
RAS. Applying our FAST platform, we have taken a novel approach
to the modulation of RAS activity and we have identified
inhibitors that have demonstrated cell-based activity. Our RAS
program is currently in the lead identification stage. Lead
identification is the stage at which compounds are identified
and further characterized in preparation for the lead
optimization stage.
Additional
Drug Discovery Targets
In addition to BCR-ABL, JAK2 and RAS, we are pursuing lead
identification/lead optimization for three additional
undisclosed oncology targets, all of which are tyrosine kinases.
Like MET, BCR-ABL, JAK2, and RAS, these targets have been chosen
on the basis of their potential roles in human cancers. In each
case, we believe there is strong scientific evidence that DNA
abnormalities activate the target protein and in turn contribute
to uncontrolled cellular growth and replication, both of which
are associated with cancer. Our structural biology technologies
are used to support all aspects of SGX drug discovery, including
assessment of target suitabilitiy, X-ray crystallographic
screening, lead identification, and lead optimization.
Our Drug
Discovery Platform
FAST is our proprietary approach to drug discovery that uses
X-ray crystallography and complementary biophysical and
biochemical methods, combined with medicinal and computational
chemistry for the rapid discovery and optimization of novel,
potent and selective small molecule inhibitors of drug targets
with good drug-like properties. Through the application of FAST,
we are building a pipeline of oncology drug candidates. FAST
addresses many of the limitations of traditional approaches to
identify and optimize lead compounds, making it an attractive
technology for a broad range of drug discovery targets,
particularly those that have not yielded promising leads from
high-throughput screening. Unlike traditional lead discovery
approaches, which require ultra high-throughput screening of
very large numbers of compounds, FAST focuses on a much smaller
number of diverse, low molecular weight, water-soluble
fragments, or scaffolds, as starting points for optimization.
Rapid synthesis and optimization using protein structure-guided
design enables the delivery of novel, potent and selective
modulators of drug targets.
FAST encompasses the integration of the following technologies:
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a high-throughput capability to generate many different crystals
of a target protein in parallel;
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the crystallographic screening of our library of scaffolds and
elaborated scaffolds bound to the target protein of interest by
direct visualization of bound compounds utilizing X-ray
crystallography;
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the use of additional screening methods to characterize the
scaffolds and elaborated scaffolds in terms of potency,
selectivity, pharmacokinetics, and physicochemical properties;
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the use of novel computational design methods and iterative
synthetic chemistry to optimize these scaffolds into drug-like
lead compounds; and
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the use of protein structure guided drug design to enable the
rapid optimization of lead compounds into drug candidates with
low molecular weight, high ligand efficiency, and good drug-like
properties
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Supporting FAST is an extensive X-ray crystallography platform.
We have invested significant resources in the development and
optimization of the technologies required to produce large
numbers of protein variants and to evaluate their ability to
provide high quality protein crystals. We have developed
customized, robotic technologies for setup, storage, retrieval
and imaging of protein crystallization experiments and our
current instrumentation supports in excess of 40,000
crystallization experiments per day. We generate protein
structures through our
6
proprietary beamline facility, housed at the Advanced Photon
Source at the Argonne National Laboratory, a national
synchrotron-radiation facility funded by the
U.S. Department of Energy, Office of Science, and Office of
Basic Energy Sciences, located in Argonne, Illinois. This
facility produces an extremely intense, highly focused X-ray
beam to generate high-resolution data from approximately 50
crystals per day. This platform allows very rapid screening of
our scaffold library, typically within 3-5 days.
Collaborations,
Commercial Agreements and Grants
Since our inception, we have entered into multiple
revenue-generating collaborations, commercial agreements and
grants based upon FAST and related technologies with
pharmaceutical and biotechnology companies, as well as
government and other agencies. We generated aggregate revenues
from collaborations, commercial agreements and grants of
approximately $84.2 million for the three years of 2007,
2006, and 2005. Our active agreements include:
Collaborations
and Grants:
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Party
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Scope
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Start Date
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Payments to SGX
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Novartis Institutes for Biomedical Research, Inc.
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Drug discovery, development and commercialization
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Mar. 2006
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Upfront payment, research funding, milestones and royalties
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Cystic Fibrosis Foundation Therapeutics, Inc.
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Drug discovery
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Jul. 2005
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Upfront payment; technology access fees; research funding;
milestones; royalties
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National Institutes of Health
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Protein Structure Initiative
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Jul. 2005
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Research funding
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Eli Lilly & Company
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Structural data on Eli Lilly targets and compounds
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Apr. 2003
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Upfront payment; research funding; technology access fees
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License
and Collaboration Agreement
Novartis
Institutes for Biomedical Research, Inc.
In March 2006, we entered into a License and Collaboration
Agreement with Novartis Institutes for Biomedical Research,
Inc., (Novartis) focused on the development and
commercialization of BCR-ABL inhibitors for the treatment of
CML. Under the agreement, the parties are collaborating to
develop one or more BCR-ABL inhibitors and Novartis will have
exclusive worldwide rights to such compounds, subject to our
commercialization option in the United States and Canada.
Pursuant to an amendment to our agreement with Novartis signed
in September 2007, we have the right, but not the obligation, to
develop and commercialize SGX393 outside of the collaboration,
subject to a reacquisition right of Novartis that may be
exercisable at a future date. We have also granted Novartis
rights to include certain compounds that we do not pursue under
the collaboration in Novartis screening library and we
will be entitled to receive royalties on sales of products based
on those compounds. The research term under this agreement
concluded in late March 2008 and Novartis remains responsible
for further development of BCR-ABL inhibitors identified
pursuant to the collaboration, other than SGX393.
Under the terms of the agreement, we received $25.0 million
of upfront payments, including $5.0 million for the
purchase by Novartis Pharma AG of shares of our common stock. We
were also entitled to receive research funding over the first
two years of the collaboration of $9.1 million. With
payments for achievement of specified development, regulatory
and commercial milestones, including $9.5 million for
events up to and including commencement of the first Phase I
clinical trial, total payments to us could exceed
$515 million. To date, under the collaboration, we have not
received any milestone payments. At this time, an IND for a drug
candidate under the collaboration is not anticipated in 2008.
Novartis is responsible for funding 100% of the development
costs of product candidates from the collaboration, other than
SGX393. The research and development activities of the parties
are overseen by committees with equal representation of the
parties, with Novartis having the right to make the final
decision on certain matters. We are also eligible to receive
royalties based on net sales. In addition, we retain an option
to co-commercialize in the
7
United States and Canada oncology products developed under the
agreement through a sales force trained and funded by Novartis.
While the research term of the agreement ended in late March
2008, the agreement will continue until the expiration of all of
Novartis royalty payment obligations, unless the agreement
is terminated earlier by either party. Novartis and we each have
the right to terminate the agreement early if the other party
commits an uncured material breach of its obligations. If
Novartis terminates the agreement for material breach by us,
Novartis licenses under the agreement will continue
subject to certain milestone and royalty payment obligations. If
we terminate the agreement for material breach by Novartis, all
rights to compounds developed under the collaboration will
revert to us. Further, Novartis may terminate the agreement
without cause if it reasonably determines that further
development of compounds or products from the collaboration is
not viable, in which event all rights to the compounds and
products revert to us. In the event of a change in control of
our company, in certain circumstances Novartis may terminate
only the joint committees and co-commercialization option, with
all other provisions of the agreement remaining in effect,
including Novartis licenses and its obligations to make
milestone and royalty payments.
Cystic
Fibrosis Foundation Therapeutics, Inc.
In July 2005, we entered into a drug discovery collaboration
agreement with Cystic Fibrosis Foundation Therapeutics, Inc., or
CFFT, the drug discovery and development arm of the Cystic
Fibrosis Foundation. Under the collaboration, we are continuing
our structural biology work and have employed our proprietary
FAST lead generation technology with the objective of generating
novel small molecule therapies that function as
correctors of the F508 deletion mutation found in
the cystic fibrosis transmembrane conductance regulator, or
CFTR. No such correctors have yet been identified. The F508
deletion mutation is the most commonly observed mutation in
patients with cystic fibrosis. Individuals with the mutation
fail to transport the CFTR protein to the cell surface,
resulting in impaired function of the lung epithelium.
Correctors of the mutant protein are expected to increase the
amount of the mutant protein that is transported to the cell
surface, resulting in more rapid clearing of lung infections and
improved lung function. The research term of this collaboration
agreement continues until July 2008. Our drug discovery
agreement with CFFT may be terminated earlier by either party in
the event of a material breach by the other party, subject to
prior notice and the opportunity to cure. In addition, CFFT has
the right to terminate the drug discovery agreement at any time
upon 60 days notice.
NIH
Cooperative Agreement Award
In July 2005, we received a $48.5 million National
Institutes of Health Cooperative Agreement Award from the
National Institute of General Medical Sciences, or NIGMS. The
award is part of the NIH Protein Structure Initiative, which
aims to facilitate discovery of three dimensional structures of
proteins to help reveal their role in disease and aid in the
design of new medicines. The award provides five years of
funding for a consortium administered by us. We anticipate
retaining approximately 50% of the funding under the award, with
the remainder being distributed to academic collaborators.
Eli
Lilly & Company
In April 2003, we entered into a research and technology
agreement with Eli Lilly, which was extended in April 2005.
Within this agreement, we apply our target-to-structure
technology to key Eli Lilly drug targets to determine their
three-dimensional structures. Our researchers subsequently
generate data on Eli Lilly compounds that bind to the drug
targets, providing input for their lead generation and
optimization efforts. In parallel with the first two years of
research under the agreement, we conducted a comprehensive
program of technology transfer involving installation of
components of our technology in a high-throughput structural
biology facility for Eli Lilly, which includes modular
automation systems and process technology we developed for
protein engineering, crystallization and structure determination.
In December 2007, the research term of this agreement was
extended until June 2010. The general terms of this commercial
agreement continue until the later of the expiration of the last
to expire of the patent rights covering technology developed
under the agreement or April 2018, unless the agreement is
earlier terminated. Either party may terminate the agreement in
the event of material breach by the other party, subject to
prior notice and the
8
opportunity to cure. In addition, Eli Lilly may terminate the
agreement if certain of our key employees leave our employment
and significantly curtail participation in the project, or in
the event we are acquired by one of the top 25 pharmaceutical
companies ranked by worldwide sales.
In December 2003, we also expanded our research and technology
agreement with Eli Lilly to provide Eli Lilly with long-term
access to our beamline facility at the Advanced Photon Source in
Argonne, Illinois, to support Eli Lilly drug discovery programs.
Under the terms of our beamline services agreement with Eli
Lilly, we generate crystal structure data on Eli Lilly drug
targets and compounds in exchange for upfront access fees and
maintenance fees paid by Eli Lilly. Eli Lilly also has the
option to extend the term of its access to our beamline facility
in the future for additional payments. The term of this beamline
agreement continues until January 2012, unless Eli Lilly
exercises its option to extend the term of its access to our
beamline facility or the agreement is earlier terminated. Either
party may terminate the agreement in the event of a material
breach by the other party, subject to prior notice and the
opportunity to cure. In addition, Eli Lilly may terminate the
agreement at any time, subject to prior notice.
Our
Strategy
Our goal is to create a leading biotechnology company that
discovers, develops and commercializes novel cancer drugs. Key
elements of our strategy are to:
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Focus on oncology.
Despite recent advances in
the treatment of cancer, there continue to be areas of
significant unmet medical need. New approaches to cancer
treatment, such as targeted therapies, to which we believe our
technology is ideally suited, provide companies such as ours an
opportunity to advance our pipeline through preclinical and
clinical development to provide patients with life saving
therapies. Furthermore, we consider drug development for the
cancer markets attractive because relatively small clinical
trials of short duration can provide meaningful data on patient
outcomes.
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Utilize our drug discovery platform to generate lead
candidates.
Our structure-guided drug discovery
platform, centered on FAST, provides us with the capability to
support a sustainable pipeline of oncology drug discovery
programs. The SGX platform builds on our considerable expertise
and experience in structural biology, with particular emphasis
on protein kinases, nuclear hormone receptors, proteases, and
nucleotide binding proteins. We have assembled an extensive
portfolio of drug discovery targets, which we believe are
implicated in various solid tumor and blood cancers. For these
targets, we will seek to provide high-resolution X-ray
structures and continuing support of structure-guided drug
discovery using our FAST technology platform. In so doing, will
seek to advance a sustainable portfolio of high value targeted
anti-cancer agents towards development candidate nomination and
subsequent IND submission.
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Advance development candidates and commercialize product
candidates.
Our goal is to progress our product
candidates through preclinical and clinical development, and
ultimately to commercialization, while utilizing strategic
partnering as appropriate.
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Continue to access capabilities and generate revenue through
strategic partnering.
Revenue generation from
strategic partnering will continue to be important to us in the
near term by providing funds for reinvestment in internal drug
discovery and development. Our business development activities
will involve strategic partnering of certain of our oncology
programs. Oncology partnerships will be sought with
organizations that provide complementary capabilities to allow
rapid progression of our product candidates to the market. We
will remain open to opportunities to apply FAST to targets
outside the oncology area, particularly where there are
attractive financial or strategic opportunities.
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Intellectual
Property
We seek to protect our novel lead compounds, and proprietary
technologies by filing appropriate patent applications. We have
over 100 U.S. and foreign pending patent applications
covering compositions of matter, drug discovery methods, protein
structures and elements of our high-throughput structure
determination platform. We intend to continue to file patent
applications on lead series and drug discovery methods, to
support our drug discovery platform. We currently have two
issued U.S. patents directed to aspects of our
high-throughput structure determination platform.
9
There can be no assurance that any of our patent applications
will issue in any jurisdiction. Moreover, we cannot predict the
breadth of claims that may be allowed or the actual enforceable
scope of our patents. In the United States, we may lose our
patent rights if we were not the first to invent the subject
matter covered by each of our issued patents or pending patent
applications. Outside of the United States we will not be able
to obtain patent rights if we were not the first to file patent
applications on the subject matter covered in our pending patent
applications. We cannot be certain that our patents will be
found valid and enforceable, or that we will not be found to
infringe issued patent claims of any third party or that third
parties will be found to infringe any of our issued patent
claims.
Although we have taken steps to protect our trade secrets and
unpatented know-how, including entering into confidentiality
agreements with third parties, and confidential information and
inventions agreements with employees, consultants and advisors,
third parties may still obtain this information or we may be
unable to protect our rights. Enforcing a claim that a third
party illegally obtained and is using our trade secrets or
unpatented know-how is expensive and time consuming, and the
outcome is unpredictable. In addition, courts outside the United
States may be less willing to protect trade secret information.
Moreover, our competitors may independently develop equivalent
knowledge, methods and know-how, and we would not be able to
prevent their use.
Third
Party Intellectual Property
Numerous U.S. and foreign issued patents and pending patent
applications, which are owned by third parties, exist in the
field of small molecule kinase inhibitors and fields in which we
and our collaborators are developing products. Because patent
applications are not published until 18 months after the
first filing in the United States and can take many years to
issue, there may be currently pending applications, unknown to
us, which may later result in issued patents that our product
candidates or proprietary technologies may infringe.
We may be exposed to, or threatened with, future litigation by
third parties having patent or other intellectual property
rights alleging that our product candidates
and/or
proprietary technologies infringe their intellectual property
rights. If one of these patents was found to cover our product
candidates, proprietary technologies or their uses, we or our
collaborators could be required to pay damages and could be
restricted from commercializing our product candidates or using
our proprietary technologies unless we or they obtain a license
to the patent. A license may not be available to us or our
collaborators on acceptable terms, if at all. In addition,
during litigation, the patent holder could obtain a preliminary
injunction or other equitable right, which could prohibit us
from making, using or selling our products, technologies or
methods.
There is a substantial amount of litigation involving patent and
other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third party claims
that we or our collaborators infringe its intellectual property
rights, we may face a number of issues, including but not
limited to:
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infringement and other intellectual property claims which, with
or without merit, may be expensive and time-consuming to
litigate and may divert our managements attention from our
core business;
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substantial damages for infringement, including treble damages
and attorneys fees, which we may have to pay if a court
decides that the product or proprietary technology at issue
infringes on or violates the third partys rights;
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a court prohibiting us from selling or licensing the product or
using the proprietary technology unless the third party licenses
its technology to us, which it is not required to do;
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if a license is available from the third party, we may have to
pay substantial royalties, fees
and/or
grant
cross licenses to our technology; and
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redesigning our products or processes so they do not infringe,
which may not be possible or may require substantial funds and
time.
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We have not conducted an extensive search of patents issued to
third parties, and no assurance can be given that such patents
do not exist, have not been filed, or could not be filed or
issued, which contain claims covering our product candidates.
Because of the number of patents issued and patent applications
filed in our technical areas or
10
fields, we believe there is a significant risk that third
parties may allege they have patent rights encompassing our
product candidates.
Sales and
Marketing
We currently do not have sales and marketing capabilities and we
have no plans to develop such capabilities in the near future.
If we do advance any of our product candidates through clinical
development, we will need to build a sales and marketing
infrastructure, either on our own or in collaboration with other
organizations. Under our license and collaboration agreement
with Novartis, we retain an option to co-commercialize in the
United States and Canada oncology products developed under the
agreement through a sales force trained and funded by Novartis.
For other programs, we may pursue strategic collaborations, as
appropriate, to commercialize our product candidates on a
world-wide basis.
Competition
We operate in highly competitive segments of the biotechnology
and biopharmaceutical markets. We face competition from many
different sources, including commercial pharmaceutical and
biotechnology enterprises, academic institutions, government
agencies, and private and public research institutions. There is
also intense competition for fragment-based lead discovery
collaborations. Many of our competitors have significantly
greater financial, product development, manufacturing and
marketing resources than us. Large pharmaceutical companies have
extensive experience in clinical testing and obtaining
regulatory approval for drugs. These companies also have
significantly greater research capabilities than us. In
addition, many universities and private and public research
institutes are active in cancer research, some in direct
competition with us. We also compete with these organizations to
recruit scientists and clinical development personnel. Smaller
or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements
with large and established companies.
Each cancer indication for which we are developing products has
a number of established therapies with which our candidates will
compete. Most major pharmaceutical companies and many
biotechnology companies are aggressively pursuing new cancer
development programs, including both therapies with traditional,
as well as novel, mechanisms of action.
We are aware of competitive products and technologies in each of
the markets we target. The competitive products include approved
and marketed products as well as products in development.
We expect that any MET inhibitor that we may potentially develop
for treatment of cancers, to compete with: XL880 and XL184,
under development by Exelixis, Inc.; ARQ197, under development
by Arqule, Inc.; PF02341066, under development by Pfizer, Inc.;
MP470, under development by SuperGen, Inc.; MGCD265, under
development by Methylgene Inc.; and inhibitors under development
by Merck & Co. Other potential competing products are
in clinical trials and preclinical development.
We expect that any BCR-ABL inhibitor that we may potentially
develop for treatment of CML to compete with:
Gleevec
®
(imatinib), marketed by Novartis, Inc.;
Tasigna
®
(nilotinib), marketed by Novartis, Inc.;
Sprycel
®
(dasatinib), marketed by Bristol Myers Squibb, Inc.; MK0457,
under development by Merck and Co.; SKI-606, under development
by Wyeth, Inc.; INNO-406, under development by Innovive
Pharmaceuticals, Inc.; homoharringtonine, under development by
ChemGenex, Inc.; KW-2449, under development by Kyowa Pharma,
Inc.; XL228, under development by Exelixis, Inc.; and AP24534,
under development by ARIAD Pharmaceuticals, Inc. Other potential
competing products are in clinical trials and preclinical
development.
In each of our development programs addressing indications for
which there are therapies available, we intend to complete
clinical trials designed to evaluate the potential advantages of
our drug candidates as compared to or in conjunction with the
current standard of care. Key differentiating elements affecting
the success of all of our drug candidates are likely to be their
efficacy, safety and side-effect profile compared to commonly
used therapies.
Significant competitors in the area of fragment-based drug
discovery include Astex Therapeutics Limited, Plexxikon Inc.,
Evotec AG, Vernalis Plc., Sunesis Pharmaceuticals, Inc., and
Active Site, Inc. In addition, many large pharmaceutical
companies are exploring the internal development of
fragment-based drug discovery methods.
11
Government
Regulation and Product Approvals
The clinical development, manufacturing and future marketing of
our products are subject to regulation by various authorities in
the United States, the E.U., and other countries. The Federal
Food, Drug, and Cosmetic Act, or FD&C Act, and the Public
Health Service Act in the United States, and numerous
directives, regulations, local laws, and guidelines in the E.U.
govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of
pharmaceutical products. Product development and approval within
these regulatory frameworks takes a number of years, and
involves the expenditure of substantial resources.
Regulatory approval to conduct clinical trials will be required
in any territories in which we, or our licensors, seek to test
our development product candidates. Prior to human testing, such
approval requires evaluation of product candidate quality as
well as animal data relating to safety and, where relevant,
efficacy. In general, new chemical entities are tested in
animals to determine whether the product candidate is reasonably
safe for initial human testing. Clinical trials for new products
are typically conducted in three sequential phases that may
overlap. Within oncology, Phase I trials typically involve the
initial introduction of the pharmaceutical into patients with
advanced malignancy and the emphasis is on testing for safety,
dosage tolerance, metabolism, distribution, excretion and
clinical pharmacology. Phase II trials involve the
evaluation of effectiveness of the drug for a particular
indication in patients with the disease under study, and to
determine the common short-term side effects and risks
associated with the drug. Phase II trials are typically
closely monitored and conducted in a relatively small number of
patients, usually involving no more than fifty to one hundred
subjects. Phase III trials are generally expanded,
well-controlled clinical trials. They are performed after
preliminary evidence suggesting effectiveness of the drug has
been obtained, and are intended to gather the additional
information about safety and effectiveness needed to evaluate
the overall risk-benefit relationship of the drug and to provide
an adequate basis for product labeling.
In the United States an IND must be submitted to the FDA prior
to the initiation of human studies. Absent an objection from the
FDA, the application will become effective 30 days
following receipt by the FDA. Prior regulatory approval to
initiate human studies is also required in member states of the
E.U. Additional requirements designed to protect the rights of
participating patients also exist. Approval by an appropriately
constituted Institutional Review Boards (IRB) in the United
States or an equivalent Ethics Committee in other territories
(EC) is also required prior to the commencement of
any
clinical trial. The ongoing conduct of the study is monitored on
a periodic basis by the sponsor, institutional committees, as
well as regulatory authorities. The submission of relevant
safety data on both an episodic and periodic basis to such
parties is required, as well as well-defined processes to
support this activity. Authorities could demand discontinuation
of studies at any time if significant safety issues arise. In
all cases, it is our responsibility to ensure that we conduct
our business in accordance with the regulations of each relevant
territory.
In order to gain marketing approval, we must submit a dossier to
the relevant authority for review, which is known in the United
States as a new drug application (NDA) and in the E.U. as a
marketing authorization application (MAA). The format of a
marketing application has recently been standardized and
includes information specified by each authority, and requires
information on the quality of the chemistry, manufacturing and
pharmaceutical aspects of the product, as well as non-clinical
and clinical data. Failure to adequately demonstrate the
quality, safety and efficacy of a therapeutic drug under
development would delay or prevent regulatory approval of the
product. There can be no assurance that if clinical trials are
completed, either we or our collaborative partners will submit
applications for required authorizations to manufacture or
market potential products, including a marketing authorization
application or an NDA, or that any such application will be
reviewed and approved by appropriate regulatory authorities in a
timely manner, if at all.
In general, the competent regulatory authority may approve a
product if the data is considered to be of a high quality and
supportive of the indication requested. Quality of data is
usually determined through regulatory audits of the various
components of the dossier, and may include site visits to
clinical trial sites and manufacturing facilities. In some
circumstances, additional data or clinical trials may be
requested during the review and may delay marketing approval and
involve unbudgeted costs. Regulatory authorities may find data
to be of an unacceptable quality or not supportive of the
indication sought; in these circumstances, regulatory approval
to market products may be denied or deferred.
12
As a condition of marketing approval, competent regulatory
authorities also require post-marketing surveillance to monitor
adverse effects, and may also request other additional studies
as deemed appropriate. After approval for the initial
indication, further clinical studies are usually necessary to
gain approval for additional indications. The terms of any
approval, including labeling content, may be more restrictive
than expected and could affect product marketability.
The FDA has implemented special programs to facilitate the
development and to expedite the review of drugs intended to
treat serious and life-threatening conditions so that this type
of product can be approved and reach the market quickly. A drug
that demonstrates a meaningful therapeutic advantage over
existing treatments or shows the potential to address an unmet
medical need in a serious or life-threatening condition may be
considered for expedited approval. In some cases, where approval
is granted on the basis of a surrogate measure of benefit,
further clinical trials (as post-approval commitments) are
generally required to further define the safety and efficacy of
the product. If such clinical trials fail to confirm the early
benefits seen during the accelerated approval process, the FDA
may withdraw approval. A similar set of mechanisms exist within
the E.U.
The United States and the E.U. may grant
orphan drug
designation to drugs intended to treat a rare disease
or condition, which, in the United States, is generally a
disease or condition that affects fewer than 200,000 individuals
nationwide. In the E.U., orphan drug designation can be granted
if:
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The disease affects no more than 50 in 100,000 persons in
the E.U.;
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The drug is intended for a life-threatening, seriously
debilitating, or serious and chronic condition;
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The medical plausibility of the proposed orphan indication;
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Without incentives it is unlikely that the drug would generate
sufficient return to justify the necessary investment; and
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No satisfactory method of treatment for the condition exists or,
if it does, the new drug will provide a significant benefit to
those affected by the condition.
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The designation of an
orphan drug
status provides the
company with a limited period of market exclusivity for the
indication of interest (seven years in the United States, and
ten years in the E.U.). Orphan drug designation does not prevent
competitors from developing or marketing different drugs for an
orphan indication or the same drug for a different indication.
Throughout the period of active marketing of any medicinal
product, the company retains the responsibility to periodically
and systematically review the safety profile of the marketed
product. This requires an active pharmacovigilance program, and
the company is required to report certain adverse events, safety
trends, relevant literature reports and similar data to the
competent regulatory authority. Similarly, the advertising and
promotion of pharmaceutical products is also closely regulated
and monitored by regulatory agencies. Moreover, quality control
and manufacturing procedures must continue to conform to current
Good Manufacturing Practices (cGMPs) after approval, and the FDA
periodically inspects manufacturing facilities to assess cGMP
compliance. Accordingly, manufacturers must continue to expend
resources on production, quality control and quality assurance
to maintain compliance with GMP and other regulatory
requirements.
Failure to comply with applicable regulatory requirements after
obtaining regulatory approval can, among other things, result in
suspension of regulatory approval, and possible civil and
criminal sanctions. Renewals of the license in Europe may
require additional data, which may result in an approval being
withdrawn. In the United States and the E.U., regulators have
the authority to revoke, suspend or withdraw approvals of
previously approved products, to prevent companies and
individuals from participating in the drug-approval process, to
request recalls, to seize violative products, to obtain
injunctions to close manufacturing plants not operating in
conformity with regulatory requirements and to stop shipments of
violative products. In addition, changes in regulation could
harm our financial condition and results of operation.
13
Employees
As of December 31, 2007, we had 123 full-time
employees, including 44 who hold Ph.D.
and/or
M.D.
degrees. We had 105 full-time employees engaged in research
and development, and our remaining employees are management or
administrative staff. None of our employees are subject to a
collective bargaining agreement. We believe that we have good
relations with our employees.
You should carefully consider the following information about
these risks, together with the other information appearing
elsewhere in this report. If any of the following risks actually
occur, our business, financial condition, results of operations
and future growth prospects would likely be materially and
adversely affected. In these circumstances, the market price of
our common stock could decline, and you may lose all or part of
your investment in our common stock.
Risks
Relating to Our Business
Our
drug discovery approach and technologies are unproven and may
not allow us to establish or maintain a clinical development
pipeline or result in the discovery or development of
commercially viable products.
Our drug discovery approach and the technologies on which we
rely are unproven and may not result in the discovery or
development of commercially viable products. There are currently
no drugs on the market that have been discovered or developed
using our proprietary technologies.
The process of successfully discovering and developing product
candidates is expensive, time-consuming and unpredictable, and
the historical rate of failure for drug candidates is extremely
high. Research programs to identify product candidates require a
substantial amount of our technical, financial and human
resources even if no product candidates are identified. Our
product candidates and drug discovery research and development
programs are in early stages and require significant
time-consuming and costly research and development, testing and
regulatory approvals. We have only one clinical stage product
candidate, SGX523, an inhibitor of the MET protein kinase and we
have observed dose limiting toxicity in our Phase 1 clinical
trials of SGX523 at lower doses than anticipated. As a result,
the future clinical development of SGX523 is uncertain and we
may never be able to identify a safe and efficacious dose for
SGX523 or advance it through clinical development and develop a
commercially viable product. Our other programs are at the
preclinical or research stage. There is no guarantee that we
will be successfully create and advance product candidates
through preclinical or clinical development or that our approach
to drug discovery will lead to the development of approvable or
marketable drugs. Moreover, other than BCR-ABL, there is
presently little or no clinical validation for the targets which
are the focus of the programs in our oncology pipeline. Although
drugs have been approved that inhibit the activity of kinases
and other enzymes, to our knowledge no company has received
regulatory approval for a MET kinase inhibitor and there is no
guarantee that we will be able to successfully advance SGX523 or
any other compounds from our kinase inhibitor programs. In
addition, compounds we recommend for clinical development in any
of our programs may not be effective or safe for their
designated use, which would prevent their advancement into and
through clinical trials and impede our ability to maintain or
expand our clinical development pipeline. Although it has been
our goal to file one IND per year, to date, we have filed only
one IND for an internally developed product candidate. We may
never successfully file any other INDs or commence clinical
trials of any other internally developed compounds.
Because
the results of preclinical studies are not necessarily
predictive of results in humans, any product candidate we
advance into clinical trials may not have favorable results or
receive regulatory approval.
There can be no assurance that additional preclinical work
conducted in the future will be positive or supportive of
continued development of any product candidate. Even if product
candidates advance through preclinical development, positive
results from preclinical studies should not be relied upon as
evidence that clinical trials will succeed. We will be required
to demonstrate through clinical trials that our product
candidates are safe and effective for use in a diverse
population before we can seek regulatory approvals for their
commercial sale. Success in preclinical testing does not mean
that clinical trials will be successful because product
candidates in clinical trials may fail to demonstrate sufficient
safety and efficacy despite having progressed through
preclinical
14
testing. For example, in our SGX523 clinical trials we observed
toxicity in patients that was not anticipated from the
preclinical studies. Companies frequently suffer significant
setbacks in clinical trials, even after preclinical and earlier
clinical trials have shown promising results. If negative
preclinical results are seen in one compound from a particular
chemical series, there may be an increased likelihood that
additional compounds from that series will demonstrate the same
or similar negative results. There is typically an extremely
high rate of attrition from the failure of drug candidates
proceeding through clinical trials.
Since SGX523 has demonstrated dose limiting toxicities at lower
doses than anticipated, its future clinical development is
uncertain. If any product candidate fails to demonstrate
sufficient safety and efficacy in any clinical trial we are able
to undertake, we would experience potentially significant delays
in, or be required to abandon, development of that product
candidate which may cause our stock price to decline and may
materially and adversely affect our business.
Part of our strategy is to select drug discovery and development
targets for which there is strong scientific evidence that DNA
abnormalities activate the target protein and to design and
execute initial clinical trials involving patients who are
selected on the basis of strong scientific evidence of the
requisite activating DNA abnormality. Our goal from this
strategy is to potentially decrease the time required to conduct
the clinical trial, reduce the number of patients enrolled in
the clinical trial, and reduce the cost of the clinical trial as
compared to conventional more inclusive large-scale clinical
trials. However, there is no guarantee that this strategy will
be successful and that we will be able to decrease the time
required to conduct clinical trials or reduce the number of
patients or costs of such trials.
Delays
in the commencement or completion of clinical testing could
result in increased costs to us and delay our ability to
generate significant revenues.
Delays in the commencement or completion of clinical testing of
SGX523 or any other product candidate we advance into clinical
studies could significantly impact our product development costs
and delay our ability to generate significant revenues. While
the Phase 1 clinical trials for SGX523 commenced on schedule, we
have experienced a setback in the clinical trials and we do not
know whether they will be completed on schedule, or at all, or
if any other clinical trials that we may plan in the future will
begin on time or be completed on schedule, if at all. The
commencement of clinical trials can be delayed for a variety of
reasons, including delays in:
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identifying and selecting a suitable development candidate;
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successful completion of toxicology, formulation or other
preclinical studies;
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obtaining any required approvals from our collaborators, such as
Novartis for any BCR-ABL product candidates that may be selected
under our license and collaboration agreement with Novartis;
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obtaining regulatory approval to commence a clinical trial;
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reaching agreement on acceptable terms with prospective contract
research organizations and trial sites;
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manufacturing sufficient quantities of a product candidate;
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obtaining institutional review board approval to conduct a
clinical trial at a prospective site; and
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identifying, recruiting and enrolling patients to participate in
a clinical trial.
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In addition, once a clinical trial has begun, patient
recruitment and enrollment may be slower than we anticipate for
a number of reasons including unexpected safety issues or
patient availability. For instance, for SGX393 or any other
BCR-ABL product candidate that may be selected for clinical
development, we may have difficulty in recruiting a sufficient
number of patients on an acceptable timeline due to the
competing product candidates in clinical development and the
relatively small number of patients available in the initial
indication which we would expect to target. Patient enrollment
may also slow as a result of safety issues that emerge during
the trial, the relatively small number of patients and the
significant health issues of patients suffering from the
indication we are targeting. Further a clinical trial may be
suspended or terminated by us, our data and safety monitoring
board, our collaborators, the FDA or other regulatory
authorities due to a number of factors, including:
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failure to conduct the clinical trial in accordance with
regulatory requirements or our clinical protocols;
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15
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inspection of the clinical trial operations or trial site by the
FDA or other regulatory authorities resulting in the imposition
of a clinical hold;
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unforeseen safety issues or insufficient efficacy; or
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lack of adequate funding to continue the clinical trial.
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If we experience delays in the completion of, or termination of,
any clinical trial of SGX523, SGX393, or any other product
candidate we advance into clinical trials, the commercial
prospects for product candidates we may develop will be harmed,
and our ability to generate product revenues from any product
candidate we may develop will be delayed. In addition, many of
the factors that cause, or lead to, a delay in the commencement
or completion of clinical trials may also ultimately lead to the
denial of regulatory approval of a product candidate. Even if we
are able to ultimately commercialize product candidates, other
therapies for the same indications may have been introduced to
the market during the period we have been delayed and such
therapies may have established a competitive advantage over our
products.
Any
product candidate we advance into clinical trials may cause
undesirable side effects that could delay or prevent its
regulatory approval or commercialization.
Undesirable side effects caused by SGX523 such as those we have
observed in our Phase 1 clinical trials or any other product
candidate we advance into clinical trials could interrupt, delay
or halt clinical trials and could result in the denial of
regulatory approval by the FDA or other regulatory authorities
for any or all targeted indications. This, in turn, could
inhibit or prevent us from partnering or commercializing SGX523
or any other product candidates we advance into clinical trials
and our business would be materially adversely affected. In
addition, if any product candidate receives marketing approval
and we or others later identify undesirable side effects caused
by the product:
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regulatory authorities may withdraw their approval of the
product;
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we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product; or
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our reputation may suffer.
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Any one or a combination of these events could prevent us from
achieving or maintaining market acceptance of the affected
product or could substantially increase the costs and expenses
of commercializing the product, which in turn could delay or
prevent us from generating significant revenues from the sale of
the product.
We
have limited manufacturing experience. We primarily rely on
third parties to provide sufficient quantities of our product
candidates to conduct preclinical and clinical studies. We have
no control over our manufacturers and suppliers
compliance with manufacturing regulations, and their failure to
comply could result in an interruption in the supply of our
product candidates.
To date, our product candidates have been manufactured in
relatively small quantities for preclinical and clinical trials.
We have no experience in manufacturing any of our product
candidates and have contracted with third party manufacturers to
provide material for preclinical studies and clinical trials and
to assist in the development and optimization of our
manufacturing processes and methods. We currently rely on a
single manufacturer for SGX523 and SGX126 and another single
manufacturer for SGX393. Our ability to conduct clinical trials
and commercialize our product candidates will depend on the
ability of such third parties to manufacture our product
candidates on the timeline we have set and in accordance with
cGMP and other regulatory requirements, and for clinical studies
beyond the Phase 1 studies, to manufacture on a large scale and
at a competitive cost. Significant
scale-up
of
manufacturing which will be required for large scale clinical
studies may require additional validation studies, which the FDA
must review and approve. If we are not able to obtain contract
cGMP manufacturing on commercially reasonable terms, obtain or
develop the necessary materials and technologies for
manufacturing, or obtain intellectual property rights necessary
for manufacturing, we may not be able to conduct or complete
clinical trials or commercialize our product candidates. There
can be no assurance that we will be able to obtain such
requisite terms, materials, technologies and intellectual
property necessary to successfully manufacture our product
candidates for clinical trials or commercialization. Our product
candidates require precise, high-quality
16
manufacturing. The failure to achieve and maintain these high
manufacturing standards, including the incidence of
manufacturing errors or the failure to maintain consistent
standards across different batches, could result in delays in
commencement of clinical studies, patient injury or death,
product recalls or withdrawals, delays or failures in product
testing or delivery, cost overruns or other problems that could
seriously hurt our business. For SGX393 we have not yet
determined the appropriate formulation for clinical studies and
there is no guarantee that we will successfully determine an
appropriate formulation to move the product candidate into
clinical studies.
The facilities used by our contract manufacturers must undergo
inspections by the FDA for compliance with cGMP regulations
before our product candidates produced there can receive
marketing approval. If these facilities do not receive a
satisfactory cGMP inspection result in connection with the
manufacture of our product candidates, we may need to conduct
additional validation studies, or find alternative manufacturing
facilities, either of which would result in significant cost to
us as well as a delay of up to several years in obtaining
approval for any affected product candidate. In addition, after
approval of a product candidate for commercial use our contract
manufacturers, and any alternative contract manufacturer we may
utilize, will be subject to ongoing periodic inspection by the
FDA and corresponding state and foreign agencies for compliance
with cGMP regulations, similar foreign regulations and other
regulatory standards. We do not have control over our contract
manufacturers compliance with these regulations and
standards. Any failure by our third-party manufacturers or
suppliers to comply with applicable regulations could result in
sanctions being imposed on them (including fines, injunctions
and civil penalties), failure of regulatory authorities to grant
marketing approval of our product candidates, delays, suspension
or withdrawal of approvals, license revocation, seizures or
recalls of product candidates or products, operating
restrictions and criminal prosecution.
Materials
necessary to manufacture our product candidates currently under
development may not be available on commercially reasonable
terms, or at all, which may delay our development and
commercialization of these drugs.
Some of the materials necessary for the manufacture of our
product candidates currently under development may, from time to
time, be available either in limited quantities, or from a
limited number of manufacturers, or both. We
and/or
our
collaborators need to obtain these materials for our clinical
trials and, potentially, for commercial distribution when and if
we obtain marketing approval for these compounds. Suppliers may
not sell us these materials at the time we need them or on
commercially reasonable terms. If we are unable to obtain the
materials needed for the conduct of our clinical trials, product
testing and potential regulatory approval could be delayed,
adversely impacting our ability to develop the product
candidates. If it becomes necessary to change suppliers for any
of these materials or if any of our suppliers experience a
shutdown or disruption in the facilities used to produce these
materials, due to technical, regulatory or other problems, it
could significantly hinder or prevent manufacture of our drug
candidates and any resulting products.
The
success of our BCR-ABL inhibitor program depends heavily on the
activities of Novartis. If Novartis is unable to identify any
development candidates or is unwilling to further develop or
commercialize development candidates that may be identified
under the collaboration, or experiences significant delays in
doing so, our business may be harmed.
As the research term of our collaboration with Novartis ended in
late March 2008 and Novartis is responsible for the further
discovery and development of drug candidates identified under
the collaboration, other than SGX393, the future success of our
BCR-ABL program for the treatment of front-line CML will depend
in large part on the activities of Novartis with respect to
compounds and potential drug candidates licensed to Novartis
under the collaboration agreement. To date, the nomination of a
development candidate has taken longer than anticipated, and we
may experience further delays in the collaborations
progress. It is possible that we and Novartis may never select a
development candidate or commence clinical trials. We do not
have a significant history of working together with Novartis and
cannot predict the progress and success of the collaboration.
While Novartis is subject to certain diligence obligations under
the collaboration agreement, we cannot guarantee that Novartis
will not reduce or curtail its efforts to discover and develop
product candidates under the collaboration, because of changes
in its research and development budget, its internal development
priorities, the success or failure of its other product
candidates or other factors affecting its business or
operations. For example, Novartis markets
Gleevec
®
(imatinib mesylate) and has other drug candidates under
development that could compete with any BCR-ABL inhibitor that
17
may be developed under our collaboration with Novartis. It is
possible that Novartis may devote greater resources to its other
competing programs, or may not pursue as aggressively our
BCR-ABL program or market as aggressively any BCR-ABL product
that may result from our collaboration.
Any
product candidates we advance into clinical trials are subject
to extensive regulation, compliance with which can be costly and
time consuming, cause unanticipated delays or prevent the
receipt of the required approvals to commercialize our product
candidates.
The clinical development, manufacturing, labeling, storage,
record-keeping, advertising, promotion, export, marketing and
distribution of any other product candidates we advance into
clinical trials are subject to extensive regulation by the FDA
in the United States and by comparable governmental authorities
in foreign markets. In the United States, neither we nor our
collaborators are permitted to market our product candidates
until we or our collaborators receive approval of an NDA from
the FDA. The process of obtaining NDA approval is expensive,
often takes many years, and can vary substantially based upon
the type, complexity and novelty of the products involved.
Approval policies or regulations may change. In addition, as a
company, we have not previously filed an NDA with the FDA. This
lack of experience may impede our ability to obtain FDA approval
in a timely manner, if at all, for our product candidates for
which development and commercialization is our responsibility.
Despite the time and expense invested, regulatory approval is
never guaranteed. The FDA or any of the applicable European,
Canadian or other regulatory bodies can delay, limit or deny
approval of a product candidate for many reasons, including:
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a product candidate may not be safe and effective;
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regulatory agencies may not find the data from preclinical
testing and clinical trials to be sufficient;
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regulatory agencies may not approve of our third party
manufacturers processes or facilities; or
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regulatory agencies may change their approval policies or adopt
new regulations.
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In addition, while we may seek to take advantage of various
regulatory processes intended to accelerate drug development and
approval for SGX393 , there is no guarantee that the FDA will
review or accept an NDA under the accelerated approval
regulations, based on our clinical trial design, the results of
any clinical trials we may conduct or other factors.
Also, recent events implicating questions about the safety of
marketed drugs, including those pertaining to the lack of
adequate labeling, may result in increased cautiousness by the
FDA in reviewing new drugs based on safety, efficacy or other
regulatory considerations and may result in significant delays
in obtaining regulatory approvals. Any delay in obtaining, or
inability to obtain, applicable regulatory approvals would
prevent us from commercializing our product candidates.
We
have limited clinical development and commercialization
experience.
We have very limited experience conducting clinical trials and
have never obtained regulatory approvals for any drug. To date,
we have filed only one IND application, initiated two Phase 1
clinical trials, and one Phase 2/3 clinical trial (which
was ultimately suspended and terminated). We have not filed an
NDA or commercialized a drug. We have no experience as a company
in the sale, marketing or distribution of pharmaceutical
products and do not currently have a sales and marketing
organization. Developing commercialization capabilities will be
expensive and time-consuming, could delay any product launch,
and we may not be able to develop a successful commercial
organization. To the extent we are unable or determine not to
acquire these resources internally, we would be forced to rely
on third-party clinical investigators, clinical research or
marketing organizations. If we were unable to establish adequate
capabilities independently or with others, our drug development
and commercialization efforts could fail and we may be unable to
generate product revenues.
18
We
rely on third parties to conduct our clinical trials. If these
third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to obtain
regulatory approval for or commercialize our product
candidates.
We rely on third parties, such as medical institutions, clinical
investigators and contract laboratories, to conduct our SGX523
clinical trials and any other future clinical trials. We may not
be able to control the amount and timing of resources that third
parties devote to any clinical trials we may commence or the
quality or timeliness of the services performed by such third
parties. In any of our clinical trials, in the event that we are
unable to maintain our relationship with any clinical trial
sites, or elect to terminate the participation of any clinical
trial sites, we may experience the loss of
follow-up
information on patients enrolled in such clinical trial unless
we are able to transfer the care of those patients to another
qualified clinical trial site. In addition, principal
investigators for our clinical trials may serve as scientific
advisors or consultants to us from time to time and receive cash
or equity compensation in connection with such services. If
these relationships and any related compensation result in
perceived or actual conflicts of interest, the integrity of the
data generated at the applicable clinical trial site may be
jeopardized. If these third parties do not successfully carry
out their contractual duties or obligations or meet expected
deadlines in connection with any future clinical trials, or if
the quality or accuracy of the clinical data is compromised due
to the failure to adhere to clinical protocols or for other
reasons, our clinical trials may be extended, delayed or
terminated, our reputation in the industry and in the investment
community may be significantly damaged, and we may not be able
to obtain regulatory approval for or successfully commercialize
our product candidates.
Even
if any product candidate we advance into clinical trials
receives regulatory approval, our product candidates may still
face future development and regulatory
difficulties.
If any product candidate we advance into clinical trials
receives U.S. regulatory approval, the FDA may still impose
significant restrictions on the indicated uses or marketing of
the product candidate or impose ongoing requirements for
potentially costly post-approval studies. In addition,
regulatory agencies subject a product, its manufacturer and the
manufacturers facilities to continual review and periodic
inspections. If a regulatory agency discovers previously unknown
problems with a product, such as adverse events of unanticipated
severity or frequency, or problems with the facility where the
product is manufactured, a regulatory agency may impose
restrictions on that product, our collaborators or us, including
requiring withdrawal of the product from the market. Our product
candidates will also be subject to ongoing FDA requirements for
the labeling, packaging, storage, advertising, promotion,
record-keeping and submission of safety and other post-market
information on the drug. If our product candidates fail to
comply with applicable regulatory requirements, a regulatory
agency may:
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issue warning letters;
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impose civil or criminal penalties;
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withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to
approved applications filed by us or our collaborators;
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impose restrictions on operations, including costly new
manufacturing requirements; or
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seize or detain products or require a product recall.
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Moreover, in order to market any products outside of the United
States, we and our collaborators must establish and comply with
numerous and varying regulatory requirements of other countries
regarding safety and efficacy. Approval procedures vary among
countries and can involve additional product testing and
additional administrative review periods. The time required to
obtain approval in other countries might differ from that
required to obtain FDA approval. The regulatory approval process
in other countries may include all of the risks described above
regarding FDA approval in the United States. Regulatory approval
in one country does not ensure regulatory approval in another,
but a failure or delay in obtaining regulatory approval in one
country may negatively impact the regulatory process in others.
Failure to obtain regulatory approval in other countries or any
delay or setback in obtaining such approval could have the same
adverse effects detailed above regarding FDA approval in the
United
19
States. As described above, such effects include the risk that
our product candidates may not be approved for all indications
requested, which could limit the uses of our product candidates
and adversely impact potential royalties and product sales, and
that such approval may be subject to limitations on the
indicated uses for which the product may be marketed or require
costly, post-marketing
follow-up
studies. If we or our collaborators fail to comply with
applicable domestic or foreign regulatory requirements, we and
our collaborators may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecution.
We are
dependent on our collaborations, and events involving these
collaborations or any future collaborations could prevent us
from developing or commercializing product
candidates.
The success of our current business strategy and our near and
long-term viability will depend in part on our ability to
successfully maintain our existing collaborations and establish
new strategic collaborations. Since we do not currently possess
the resources necessary to independently develop and
commercialize all of the product candidates that we have
discovered and that may be discovered through our drug discovery
platform, we may need to enter into additional collaborative
agreements to assist in the development and commercialization of
some of these product candidates or in certain markets for a
particular product candidate. Establishing strategic
collaborations is difficult and time-consuming. Potential
collaborators may reject collaborations based upon their
assessment of our financial, regulatory or intellectual property
position or the safety or efficacy profiles of product
candidates. And our discussions with potential collaborators may
not lead to the establishment of new collaborations on
acceptable terms. In addition, if as a result of our financial
condition or other factors we enter into a strategic
collaboration while a drug candidate program is in early
preclinical development, we may not generate as much near- or
longer-term revenue from such program as we could have generated
if we had the resources to further independently develop such
program.
We have entered into drug discovery collaborations, such as
those with Novartis and the Cystic Fibrosis Foundation. In each
case, our collaborators have agreed to finance the clinical
trials for product candidates resulting from these
collaborations and, if they are approved, manufacture and market
them. Accordingly, we are dependent on our collaborators to gain
regulatory approval of, and to commercialize, product candidates
resulting from most of our collaborations. Depending upon the
success of our collaboration with Novartis, we may derive a
substantial portion of our near-term revenues from Novartis.
However, it has taken longer than anticipated to identify a
development candidate under this collaboration and there is no
guarantee that a development candidate will be identified. No
further research funding will be received under the
collaboration as a result of the conclusion of the research term
of the collaboration in late March 2008. At this time, an IND
for a development candidate under the collaboration is not
anticipated in 2008 and it is possible that an IND may never be
filed. While Novartis is subject to certain diligence
obligations under the collaboration agreement, we cannot
guarantee that Novartis will not reduce or curtail its efforts
to develop product candidates that may be identified under the
collaboration, because of changes in its research and
development budget, its internal development priorities, the
success or failure of its other product candidates or other
factors affecting its business or operations. If no development
candidates are identified under the collaboration or Novartis
determines that the further development of compounds being
developed under the collaboration is not viable for competitive,
safety or efficacy reasons, our business may be materially and
adversely affected.
We have limited control over the amount and timing of resources
that our current collaborators or any future collaborators
(including collaborators resulting from a change of control)
devote to our programs or potential products. In some instances,
our collaborators, such as Novartis, may have competing internal
programs or programs with other parties, and such collaborators
may devote greater resources to their internal or other programs
than to our collaboration and any product candidates developed
under our collaboration. Our collaborators may prioritize other
drug development opportunities that they believe may have a
higher likelihood of obtaining regulatory approval or may
potentially generate a greater return on investment. These
collaborators may breach or terminate their agreements with us
or otherwise fail to conduct their collaborative activities
successfully and in a timely manner. Further, our collaborators
may not develop products that arise out of our collaborative
arrangements, such as SGX393, or devote sufficient resources to
the development, manufacture, marketing or sale of these
products. Moreover, in the event of termination of a
collaboration agreement, termination negotiations may result in
less favorable terms than we would otherwise choose.
20
We and our present and future collaborators may fail to develop
or effectively commercialize products covered by our present and
future collaborations for a variety of reasons, including:
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we do not achieve our objectives under our collaboration
agreements;
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we or our collaborators are unable to obtain patent protection
for the product candidates or proprietary technologies we
discover in our collaborations;
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we are unable to manage multiple simultaneous product discovery
and development collaborations;
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our potential collaborators are less willing to expend their
resources on our programs due to their focus on other programs,
including their internal programs, or as a result of general
market conditions;
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our collaborators become competitors of ours or enter into
agreements with our competitors;
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we or our collaborators encounter regulatory hurdles that
prevent the further development or commercialization of our
product candidates; or
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we develop products and processes or enter into additional
collaborations that conflict with the business objectives of our
other collaborators.
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If we or our collaborators are unable to develop or
commercialize products as a result of the occurrence of any one
or a combination of these events, our business may be seriously
harmed.
Conflicts
may arise between us and our collaborators that could delay or
prevent the development or commercialization of our product
candidates.
Conflicts may arise between our collaborators and us, such as
conflicts concerning which compounds, if any, to select for
pre-clinical or clinical development, the interpretation of
clinical data, the achievement of milestones, the interpretation
of financial provisions, the exercise of reacquisition or other
rights or the ownership of intellectual property developed
during the collaboration. If any conflicts arise with existing
or future collaborators, they may act in their self-interest,
which may be adverse to our best interests. Any such
disagreement between us and a collaborator could result in one
or more of the following, each of which could delay or prevent
the development or commercialization of our product candidates,
and in turn prevent us from generating sufficient revenues to
achieve or maintain profitability:
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disagreements regarding the payment of research funding,
milestone payments, royalties or other payments we believe are
due to us under our collaboration agreements or from us under
our licensing agreements;
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uncertainty regarding ownership of intellectual property rights
arising from our collaborative activities, which could prevent
us from entering into additional collaborations;
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actions taken by a collaborator inside or outside a
collaboration which could negatively impact our rights under or
benefits from such collaboration;
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unwillingness on the part of a collaborator to keep us informed
regarding the progress of its development and commercialization
activities or to permit public disclosure of the results of
those activities; or
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slowing or cessation of a collaborators development or
commercialization efforts with respect to our product candidates.
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If we
fail to establish new collaborations and other commercial
agreements, we may have to reduce or limit our internal drug
discovery and development efforts and our business may be
adversely affected.
Revenue generation utilizing compounds identified by us from the
application of our technologies, such as SGX523, and our FAST
drug discovery platform and related technologies, is important
to us to provide us with funds for reinvestment in our internal
drug discovery and development programs. If we fail to enter
into a collaboration or out-licensing agreement on SGX523 or
SGX126 or establish other collaborations, commercial agreements
or out-licensing arrangements on acceptable terms, we may not
generate sufficient revenue to support our internal discovery
and development efforts. In addition, since our existing
collaborations and commercial
21
agreements are generally not long-term contracts, we cannot be
sure we will be able to continue to derive comparable revenues
from these or other collaborations or commercial agreements in
the future. Even if we successfully establish collaborations,
these relationships may never result in the successful
development or commercialization of any product candidates or
the generation of sales or royalty revenue. Under our commercial
arrangements with other pharmaceutical and biotechnology
companies, such as under all of our beamline services
agreements, we are providing specific services for fees without
any interest in future product sales or profits. While we
believe these commercial arrangements help to offset the
expenses associated with our drug discovery efforts, they may
force us to divert valuable resources from our own discovery
efforts in order to fulfill our contractual obligations.
Our
drug discovery efforts are dependent on continued access to and
use of our beamline facility, which is subject to various
governmental regulations and policies and a user agreement with
the University of Chicago and the U.S. Department of Energy. If
we are unable to continue the use of our beamline facility, we
may be required to delay, reduce the scope of or abandon some of
our drug discovery efforts, and may fail to perform under our
collaborations, commercial agreements and grants, which would
result in a material reduction in our revenue.
We generate protein structures through our beamline facility,
housed at the Advanced Photon Source at the Argonne National
Laboratory, a national synchrotron-radiation facility funded by
the U.S. Department of Energy, Office of Science, and
Office of Basic Energy Sciences, located in Argonne, Illinois.
Accordingly, our access to and use of the facility is subject to
various government regulations and policies. In addition, our
access to the beamline facility is subject to a user agreement
with the University of Chicago and the U.S. Department of
Energy with an initial five year term expiring in
January 1, 2009. Although the term of our user agreement
automatically renews for successive one-year periods, the
University of Chicago may terminate the agreement and our access
to the beamline facility by providing 60 days notice
prior to the beginning of each renewal period. In addition, the
University of Chicago may terminate the agreement for our
breach, subject to our ability to cure the breach within
30 days. In the event our access to or use of the facility
is restricted or terminated, we would be forced to seek access
to alternate beamline facilities. There are currently only a
very small number of alternate beamline facilities worldwide,
which we believe are comparable to ours. To obtain equivalent
access at a single alternate beamline facility would likely
require us building out a new beamline at such facility which
could take over two years and would involve significant expense.
However, we cannot be certain that we would be able to obtain
equivalent access to such a facility on acceptable terms or at
all. In the interim period, we would have to obtain beamline
access at a combination of facilities, and there is no guarantee
that we would be able to obtain sufficient access time on
acceptable terms or at all. If alternate beamline facilities are
not available, we may be required to delay, reduce the scope of
or abandon some of our early drug discovery efforts. We may also
be deemed to be in breach of certain of our commercial
agreements. Even if alternate beamline facilities are available,
we cannot be certain that the quality of or access to the
alternate facilities will be adequate and comparable to those of
our current facility. Failure to maintain adequate access to and
use of beamline facilities may materially adversely affect our
ability to pursue our own discovery efforts and perform under
our collaborations, commercial agreements and grants, which are
our current primary source of revenue.
If our
competitors develop treatments for cancer indications we target
that are approved more quickly, marketed more effectively or
demonstrated to be more effective or safer than our current or
future product candidates, our ability to generate product
revenue will be reduced or eliminated.
Most cancer indications for which we are developing products
have a number of established therapies with which our product
candidates will compete. Most major pharmaceutical companies and
many biotechnology companies are aggressively pursuing new
cancer development programs, including both therapies with
traditional as well as novel mechanisms of action. In addition
to programs that specifically compete with ours, our product
candidates could be adversely affected by new approaches to the
treatment of cancer.
We are aware of competitive products in each of the markets we
target. These competitive products include approved and marketed
products as well as products in development. With respect to
SGX523, we are aware of a number of companies working in the
area of small molecule inhibitors of MET, which are at varying
stages of
22
preclinical or clinical development, including Exelixis, Inc.,
Arqule, Inc., Pfizer, Inc., SuperGen, Inc., Methylgene Inc., and
Merck and Co. Ltd. We are also aware of a number of companies
working in the area of biological agents that interfere with
MET, which are at varying stages of preclinical or clinical
development, including Amgen, Inc., Schering Plough Corporation,
Takeda Pharmaceutical Company Limited, Genentech, Inc. and Astra
Zeneca Ltd.
With respect to our BCR-ABL inhibitors, we are aware of a number
of companies working in this area which are at varying stages of
preclinical or clinical development, including Bristol Myers
Squibb, Inc., Merck and Co., Wyeth, Inc., Innovive
Pharmaceuticals, Inc., ChemGenex, Inc., Kyowa Hakko Kogyo
Pharma, Inc., Exelixis, Inc., Ariad Pharmaceuticals, Inc., Kinex
Pharmaceuticals, Inc., Pfizer, Inc., and Deciphera
Pharmaceuticals, Inc.
Significant competitors in the area of fragment-based drug
discovery include Astex Therapeutics Limited, Plexxikon Inc.,
Evotec AG, Vernalis Plc., Sunesis Pharmaceuticals, Inc., and
Active Site, Inc. In addition, many large pharmaceutical
companies are exploring the internal development of
fragment-based drug discovery methods.
Many of our competitors have significantly greater financial,
product development, manufacturing and marketing resources than
us. Large pharmaceutical companies have extensive experience in
clinical testing and obtaining regulatory approval for drugs.
These companies also have significantly greater research
capabilities than us. In addition, many universities and private
and public research institutes are active in cancer research,
some in direct competition with us. Smaller or early-stage
companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and
established companies.
Our competitors may succeed in developing products for the
treatment of diseases in oncology therapeutic areas in which our
drug discovery programs are focused that are more effective,
better tolerated or less costly than any which we may offer or
develop. Our competitors may succeed in obtaining approvals from
the FDA and foreign regulatory authorities for their product
candidates sooner than we do for ours. We will also face
competition from these third parties in recruiting and retaining
qualified scientific and management personnel, establishing
clinical trial sites and patient registration for clinical
trials, and in acquiring and in-licensing technologies and
products complementary to our programs or advantageous to our
business.
We
have limited experience in identifying, acquiring or
in-licensing, and integrating third parties products,
businesses and technologies into our current infrastructure. If
we determine that future acquisition, in-licensing or other
strategic opportunities are desirable and do not successfully
execute on and integrate such targets, we may incur costs and
disruptions to our business.
An important part of our business strategy is to continue to
develop a broad pipeline of product candidates. These efforts
may include potential licensing and acquisition transactions.
Although we are not currently a party to any in-licensing
agreements or commitments, we may, seek to expand our product
pipeline and technologies, at the appropriate time and as
resources allow, by acquiring or in-licensing products, or
combining with businesses that we believe are a strategic fit
with our business and complement our existing internal drug
development efforts and product candidates, research programs
and technologies. Future transactions, however, may entail
numerous operational and financial risks including:
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exposure to unknown liabilities;
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disruption of our business and diversion of our
managements time and attention to the development of
acquired products or technologies;
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incurrence of substantial debt or dilutive issuances of
securities to pay for acquisitions;
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dilution to existing stockholders in the event of an acquisition
by another entity;
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higher than expected acquisition and integration costs;
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increased amortization expenses;
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difficulties in and costs of combining the operations and
personnel of any businesses with our operations and personnel;
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impairment of relationships with key suppliers or customers of
any acquired businesses due to changes in management and
ownership; and
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inability to retain key employees.
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Finally, we may devote resources to potential in-licensing
opportunities or strategic transactions that are never completed
or fail to realize the anticipated benefits of such efforts.
If we
are unable to establish sales and marketing capabilities or
enter into agreements with third parties to market and sell any
products we may develop, we may not be able to generate product
revenue.
We do not currently have a sales organization for the sales,
marketing and distribution of pharmaceutical products. In order
to commercialize any products, we must build our sales,
marketing, distribution, managerial and other non-technical
capabilities or make arrangements with third parties to perform
these services. In North America, we currently expect to
commercialize any BCR-ABL product candidates that may result
from our collaboration with Novartis, and certain other
potential product candidates for other indications that are of
strategic interest to us, and plan to establish internal sales
and marketing capabilities for those product candidates. We plan
to seek third party partners for indications and in territories,
such as outside North America, which may require more extensive
sales and marketing capabilities. The establishment and
development of our own sales force to market any products we may
develop in North America will be expensive and time consuming
and could delay any product launch, and we cannot be certain
that we would be able to successfully develop this capacity. If
we are unable to establish our sales and marketing capability or
any other non-technical capabilities necessary to commercialize
any products we may develop, we will need to contract with third
parties to market and sell any products we may develop in North
America. If we are unable to establish adequate sales, marketing
and distribution capabilities, whether independently or with
third parties, we may not be able to generate product revenue
and may not become profitable.
The
commercial success of any product that we may develop depends
upon market acceptance among physicians, patients, health care
payors and the medical community.
Even if any product we may develop obtains regulatory approval,
our products, if any, may not gain market acceptance among
physicians, patients, health care payors and the medical
community. The degree of market acceptance of any of our
approved products will depend on a number of factors, including:
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our ability to provide acceptable evidence of safety and
efficacy;
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relative convenience and ease of administration;
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the prevalence and severity of any adverse side effects;
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availability of alternative treatments;
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pricing and cost effectiveness;
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effectiveness of our or our collaborators sales and
marketing strategies; and
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our ability to obtain sufficient third party coverage or
reimbursement.
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If any of our product candidates is approved, but does not
achieve an adequate level of acceptance by physicians,
healthcare payors and patients, we may not generate sufficient
revenue from these products and we may not become profitable.
We are
subject to uncertainty relating to health care reform measures
and reimbursement policies which, if not favorable to our
product candidates, could hinder or prevent our product
candidates commercial success.
The continuing efforts of the government, insurance companies,
managed care organizations and other payors of health care costs
to contain or reduce costs of health care may adversely affect
one or more of the following:
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our ability to set a price we believe is fair for our products;
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our ability to generate revenues and achieve profitability;
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the future revenues and profitability of our potential
customers, suppliers and collaborators; and
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the availability of capital.
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In certain foreign markets, the pricing of prescription drugs is
subject to government control and reimbursement may in some
cases be unavailable. In the United States, given recent federal
and state government initiatives directed at lowering the total
cost of health care, Congress and state legislatures will likely
continue to focus on health care reform, the cost of
prescription drugs and the reform of the Medicare and Medicaid
systems. For example, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 provided a new
Medicare prescription drug benefit beginning in 2006 and
mandated other reforms in the Medicare and Medicaid systems that
have been subject to various amendments and modifications over
the past several years. We are not yet able to assess the full
impact of this legislation and it is possible that the new
Medicare prescription drug benefit, which will be managed by
private health insurers and other managed care organizations,
will result in decreased reimbursement for prescription drugs,
which may further exacerbate industry-wide pressure to reduce
prescription drug prices. In addition, because we are
approaching an election year, there may be significant
healthcare reform and other measures that may adversely impact
our business. This could harm our ability to market our products
and generate revenues. It is also possible that other proposals
having a similar effect will be adopted.
Our ability to commercialize successfully any product candidates
we advance into clinical trials will depend in part on the
extent to which governmental authorities, private health
insurers and other organizations establish appropriate coverage
and reimbursement levels for the cost of our products and
related treatments. Third party payors are increasingly
challenging the prices charged for medical products and
services. Also, the trend toward managed health care in the
United States, which could significantly influence the purchase
of health care services and products, as well as legislative
proposals to reform health care or reduce government insurance
programs, may result in lower prices for our product candidates
or exclusion of our product candidates from coverage and
reimbursement programs. The cost containment measures that
health care payors and providers are instituting and the effect
of any health care reform could significantly reduce our
revenues from the sale of any approved product.
We may
need to increase or decrease the size of our organization, and
we may experience difficulties in managing those organizational
changes.
Since we were incorporated in 1998, we have increased the number
of our full-time employees to 123 as of December 31, 2007.
In the future, we may need to expand our managerial,
operational, financial and other resources in order to manage
and fund our operations, continue our research and development
and collaborative activities, progress our product candidates
through preclinical studies and clinical trials, and eventually
commercialize any product candidates for which we are able to
obtain regulatory approval. It is possible that our management
and scientific personnel, systems and facilities currently in
place may not be adequate to support this potential future
growth. Our need to effectively manage our operations, potential
future growth and various projects requires that we manage our
internal research and development efforts effectively while
carrying out our contractual obligations to collaborators and
third parties, continue to improve our operational, financial
and management controls, reporting systems and procedures and to
attract and retain sufficient numbers of talented employees. We
may be unable to successfully implement these tasks on a larger
scale and, accordingly, may not achieve our research,
development and commercialization goals.
Alternatively, we may need to decrease the number of our
full-time employees in the future in response to adverse
business events. Reducing our workforce may lead to additional
unanticipated attrition. If our future staffing is inadequate
because of additional unanticipated attrition or because we
failed to retain the staffing level required to accomplish our
business objectives we may be delayed or unable to continue the
development or of our product candidates, which could impede our
ability to generate revenues and achieve or maintain
profitability.
If we
fail to attract and keep key management and scientific
personnel, we may be unable to successfully develop or
commercialize our product candidates.
We will need to expand and effectively manage our managerial,
operational, financial and other resources in order to
successfully pursue our research, development and
commercialization efforts for any future product candidates.
Our success depends on our continued ability to attract, retain
and motivate highly qualified management and chemists,
biologists, and preclinical and clinical personnel. The loss of
the services of any of our senior management, particularly
Michael Grey, our President and Chief Executive Officer, or
Stephen Burley, our Senior
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Vice President and Chief Scientific Officer and Senior Vice
President, Research, could have an adverse effect on our
business. We do not maintain key man insurance
policies on the lives of these individuals or the lives of any
of our other employees. We employ these individuals on an
at-will basis and their employment can be terminated by us or
them at any time, for any reason and with or without notice. We
have scientific and clinical advisors who assist us in
formulating our research, development and clinical strategies.
These advisors are not our employees and may have commitments
to, or consulting or advisory contracts with, other entities
that may limit their availability to us. In addition, our
advisors may have arrangements with other companies to assist
those companies in developing products or technologies that may
compete with ours.
We may not be able to attract or retain qualified management and
scientific personnel in the future due to the intense
competition for qualified personnel among biotechnology,
pharmaceutical and other businesses, particularly in the
San Diego, California area. If we are not able to attract
and retain the necessary personnel to accomplish our business
objectives, we may experience constraints that will impede
significantly the achievement of our research and development
objectives, our ability to raise additional capital and our
ability to implement our business strategy. In particular, if we
lose any members of our senior management team, we may not be
able to find suitable replacements and our business may be
harmed as a result.
Earthquake
or fire damage to our facilities, systems failures or other
adverse events affecting our facilities could delay our research
and development efforts and adversely affect our
business.
Our headquarters and research and development facilities in
San Diego are located in a seismic zone, and there is the
possibility of an earthquake, which could be disruptive to our
operations and result in delays in our research and development
efforts. In addition, while our facilities were not adversely
impacted by the wildfires in recent years, there is the
possibility of future fires in the area. Our internal computer
systems are also vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, and
telecommunications and electrical failures. In the event of an
earthquake or fire or any systems failure, if our facilities,
the equipment in our facilities or our computer or other systems
are significantly damaged, destroyed or disrupted for any
reason, we may not be able to rebuild or relocate our
facilities, replace any damaged equipment or repair any systems
failures in a timely manner and our business, financial
condition, and results of operations could be materially and
adversely affected. We do not have insurance for damages
resulting from earthquakes. While we do have fire insurance for
our property and equipment located in San Diego, any damage
sustained in a fire could cause a delay in our research and
development efforts and our results of operations could be
materially and adversely affected.
Risks
Relating to our Finances and Capital Requirements
We
will need substantial additional funding and may be unable to
raise capital when needed, which would force us to delay, reduce
or eliminate our research and development programs or
commercialization efforts.
Historically, we have funded our operations through a
combination of proceeds from offerings of our equity securities,
collaborations, commercial agreements, grant revenue, and debt
financing. As part of our business strategy, we expect to
continue to establish new collaborations and commercial
agreements. We believe that our existing cash, cash equivalents
and short-term investments, together with interest thereon and
cash from existing and new collaborations, commercial agreements
and grants, will be sufficient to meet projected operating
requirements into the second half of 2009. Because we do not
anticipate that we will generate significant continuing revenues
for several years, if at all, we will need to raise substantial
additional capital to finance our operations in the future. Our
additional funding requirements will depend on, and could
increase significantly as a result of, many factors, including
the:
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terms and timing of, and material developments under, any new or
existing collaborative, licensing and other arrangements,
including potentially partnering our internal discovery and
development programs, such as MET, or potentially retaining such
programs through later stages of preclinical and clinical
development;
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rate of progress and cost of our preclinical studies and
clinical trials and other research and development activities;
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scope, prioritization and number of clinical development and
research programs we pursue;
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costs and timing of preparing regulatory submissions and
obtaining regulatory approval;
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costs of establishing or contracting for sales and marketing
capabilities;
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costs of manufacturing;
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extent to which we acquire or in-license new products,
technologies or businesses;
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effect of competing technological and market
developments; and
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costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights.
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We expect to continue to finance our future cash needs through
the sale of equity securities, strategic collaboration
agreements and debt financing. However, we may not be successful
in obtaining additional collaboration agreements or commercial
agreements, or in receiving milestone or royalty payments under
existing agreements. In addition, we cannot be sure 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 or
development programs or to relinquish greater or all rights to
product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose. Failure to
obtain adequate financing may also adversely affect our ability
to operate as a going concern.
If adequate funds are not available, we may be required to
delay, reduce the scope of or eliminate one or more of our
research and development programs or our commercialization
efforts.
We
expect our net operating losses to continue for at least several
years, and we are unable to predict the extent of future losses
or when we will become profitable, if ever.
We have incurred substantial net operating losses since our
inception. For the year ended December 31, 2007 and 2006,
we had a net loss attributable to common stockholders of
$16.0 million and $28.1 million, respectively. As of
December 31, 2007, we had an accumulated deficit of
approximately $179.7 million. We expect our annual net
operating losses to continue over the next several years as we
conduct our research and development activities, and incur
preclinical and clinical development costs. Because of the
numerous risks and uncertainties associated with our research
and development efforts and other factors, we are unable to
predict the extent of any future losses or when we will become
profitable, if ever. We will need to commence clinical trials,
obtain regulatory approval and successfully commercialize a
product candidate or product candidates before we can generate
revenues which would have the potential to lead to profitability.
We
currently lack a significant continuing revenue source and may
not become profitable.
Our ability to become profitable depends upon our ability to
generate significant continuing revenues. To obtain significant
continuing revenues, we must succeed, either alone or with
others, in developing, obtaining regulatory approval for, and
manufacturing and marketing product candidates with significant
market potential. However, we cannot guarantee when, if ever,
products resulting from our MET, BCR-ABL or other oncology
programs will generate product sales, or that any such sales
will be sufficient to allow us to become profitable. We had
revenues from collaborations, commercial agreements and grants
totaling $34.7 million and $27.8 million for years
ended December 31, 2007 and 2006, respectively. Though we
anticipate that our collaborations, commercial agreements and
grants will continue to be our primary sources of revenues for
the next several years, these revenues alone will not be
sufficient to lead to profitability.
Our ability to generate continuing revenues depends on a number
of factors, including:
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obtaining new collaborations and commercial agreements;
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performing under current and future collaborations, commercial
agreements and grants, including achieving milestones;
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successful completion of clinical trials for any product
candidate we advance into clinical trials;
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achievement of regulatory approval for any product candidate we
advance into clinical trials; and
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successful selling, manufacturing, distribution and marketing of
our future products, if any.
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If we are unable to generate significant continuing revenues, we
will not become profitable, and we may be unable to continue our
operations.
Raising
additional funds by issuing securities or through licensing
arrangements may cause dilution to existing stockholders,
restrict our operations or require us to relinquish proprietary
rights.
We may raise additional funds through public or private equity
offerings, debt financings or licensing arrangements. To the
extent that we raise additional capital by issuing equity
securities, our existing stockholders ownership will be
diluted. Any debt financing we enter into may involve covenants
that restrict our operations. These restrictive covenants may
include limitations on additional borrowing, specific
restrictions on the use of our assets as well as prohibitions on
our ability to create liens, pay dividends, redeem our stock or
make investments. In addition, if we raise additional funds
through licensing arrangements, as we did in our recent
collaboration with Novartis, it may be necessary to relinquish
potentially valuable rights to our potential products or
proprietary technologies, or grant licenses on terms that are
not favorable to us.
Our
quarterly operating results may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. The revenues we generate, if any, and our
operating results will be affected by numerous factors,
including:
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our addition or termination of research programs or funding
support;
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variations in the level of expenses related to our product
candidates or research programs;
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our execution of collaborative, licensing or other arrangements,
and the timing of payments we may make or receive under these
arrangements;
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any intellectual property infringement lawsuit in which we may
become involved; and
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changes in accounting principles.
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Quarterly fluctuations in our operating results may, in turn,
cause the price of our stock to fluctuate substantially. We
believe that quarterly comparisons of our financial results are
not necessarily meaningful and should not be relied upon as an
indication of our future performance.
We may
incur substantial liabilities from any product liability claims
if our insurance coverage for those claims is
inadequate.
We face an inherent risk of product liability exposure related
to the testing of our product candidates in human clinical
trials, and will face an even greater risk if we sell our
product candidates commercially. An individual may bring a
liability claim against us if one of our product candidates
causes, or merely appears to have caused, an injury. If we
cannot successfully defend ourselves against the product
liability claim, we will incur substantial liabilities.
Regardless of merit or eventual outcome, liability claims may
result in any one or a combination of the following:
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decreased demand for our product candidates;
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injury to our reputation;
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withdrawal of clinical trial participants;
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costs of related litigation;
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substantial monetary awards to patients or other claimants;
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loss of revenues; and
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the inability to commercialize our product candidates.
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We have product liability insurance that covers our Phase 1
clinical trials of SGX 523. We intend to expand our insurance
coverage to include the sale of commercial products if marketing
approval is obtained for any of our product candidates. However,
insurance coverage is increasingly expensive. We may not be able
to maintain
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insurance coverage at a reasonable cost, and we may not be able
to obtain insurance coverage that will be adequate to satisfy
any liability that may arise.
We use
biological and hazardous materials, and any claims relating to
improper handling, storage or disposal of these materials could
be time consuming or costly.
We use hazardous materials, including chemicals, biological
agents and radioactive isotopes and compounds, which could be
dangerous to human health and safety or the environment. Our
operations also produce hazardous waste products. Federal, state
and local laws and regulations govern the use, generation,
manufacture, storage, handling and disposal of these materials
and wastes. Compliance with applicable environmental laws and
regulations may be expensive, and current or future
environmental laws and regulations may impair our drug
development efforts.
In addition, we cannot entirely eliminate the risk of accidental
injury or contamination from these materials or wastes. If one
of our employees was accidentally injured from the use, storage,
handling or disposal of these materials or wastes, the medical
costs related to his or her treatment would be covered by our
workers compensation insurance policy. However, we do not
carry specific biological or hazardous waste insurance coverage
and our property and casualty and general liability insurance
policies specifically exclude coverage for damages and fines
arising from biological or hazardous waste exposure or
contamination. Accordingly, in the event of contamination or
injury, we could be held liable for damages or penalized with
fines in an amount exceeding our resources, and our clinical
trials or regulatory approvals could be suspended.
Negative
conditions in the global credit markets may impair the liquidity
of a portion of our investment portfolio.
Our investment securities consist of government agency
securities, corporate debt securities and auction rate
securities (ARS). As of December 31, 2007, our short-term
investments included $1.5 million of an AAA/Aaa rated ARS
which experienced failed auctions due to market uncertainties at
the time its interest rate was to reset. The recent negative
conditions in the global credit markets have prevented some
investors from liquidating their holdings, including their
holdings of auction rate securities. As a result, our ARS has
experienced a decline in value. In the event we need to access
these funds, we will not be able to do so without a loss of
principal, until a future auction on this investment is
successful, the security is redeemed by the issuer or the
security matures. As of December 31, 2007, the fair value
of our ARS was reduced by $0.5 million, from
$1.5 million to $1.0 million at December 31,
2007, reflecting the change in fair market value. Although the
ARS continues to pay interest according to its stated terms,
based on valuation models and an analysis of
other-than-temporary impairment factors, a realized loss of
approximately $0.5 million was recognized in the fourth
quarter of 2007, reflecting an other-than-temporary decline in
value. If the credit ratings of the ARS issuer deteriorate or if
uncertainties in these markets continue and any decline in
market value is determined to be other-than-temporary, we would
be required to adjust the fair value of the investment through
an additional impairment charge, which could negatively affect
the Companys financial condition. There is no guarantee
that we will be able to liquidate our ARS or that we will not
incur further realized losses.
Risks
Relating to our Intellectual Property
Our
success depends upon our ability to protect our intellectual
property and our proprietary technologies.
Our commercial success depends on obtaining and maintaining
patent protection and trade secret protection for our product
candidates, proprietary technologies and their uses, as well as
successfully defending these patents against third party
challenges. There can be no assurance that our patent
applications will result in patents being issued or that issued
patents will afford protection against competitors with similar
technology, nor can there be any assurance that the patents
issued will not be infringed, designed around, or invalidated by
third parties. Even issued patents may later be found
unenforceable, or be modified or revoked in proceedings
instituted by third parties before various patent offices or in
courts.
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The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and
factual questions for which important legal principles remain
unresolved. Changes in either the patent laws or in the
interpretations of patent laws in the United States and other
countries may diminish the value of our intellectual property.
Accordingly, we cannot predict the breadth of claims that may be
allowed or enforced in our patents or in third party patents.
The degree of future protection for our proprietary rights is
uncertain. Only limited protection may be available and may not
adequately protect our rights or permit us to gain or keep any
competitive advantage. For example:
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we might not have been the first to file patent applications for
these inventions;
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we might not have been the first to make the inventions covered
by each of our pending patent applications and issued patents;
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others may independently develop similar or alternative
technologies or duplicate any of our technologies;
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the patents of others may have an adverse effect on our business;
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it is possible that none of our pending patent applications will
result in issued patents;
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our issued patents may not encompass commercially viable
products, may not provide us with any competitive advantages, or
may be challenged by third parties;
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our issued patents may not be valid or enforceable; or
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we may not develop additional proprietary technologies that are
patentable.
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Patent applications in the U.S. are maintained in
confidence for up to 18 months after their filing.
Consequently, we cannot be certain that we were the first to
invent, or the first to file, patent applications on our
compounds or drug candidates. We may not have identified all
U.S. and foreign patents or published applications that may
affect our business by blocking our ability to commercialize any
drugs for which we are able to successfully develop and obtain
regulatory approval.
Proprietary trade secrets and unpatented know-how are also very
important to our business. Although we have taken steps to
protect our trade secrets and unpatented know-how, including
entering into confidentiality agreements with third parties, and
confidential information and inventions agreements with
employees, consultants and advisors, third parties may still
obtain this information or we may be unable to protect our
rights. Enforcing a claim that a third party illegally obtained
and is using our trade secrets or unpatented know-how is
expensive and time consuming, and the outcome is unpredictable.
In addition, courts outside the United States may be less
willing to protect trade secret information. Moreover, our
competitors may independently develop equivalent knowledge,
methods and know-how, and we would not be able to prevent their
use.
If we
are sued for infringing intellectual property rights of third
parties, it will be costly and time consuming, and an
unfavorable outcome in that litigation would have a material
adverse effect on our business.
Our commercial success also depends upon our ability and the
ability of our collaborators to develop, manufacture, market and
sell our product candidates and use our proprietary technologies
without infringing the proprietary rights of third parties.
Numerous U.S. and foreign issued patents and pending patent
applications, which are owned by third parties, exist in the
fields in which we and our collaborators are developing
products. Because patent applications can take many years to
issue, there may be currently pending applications which may
later result in issued patents that our product candidates or
proprietary technologies may infringe.
We may be exposed to, or threatened with, future litigation by
third parties having patent, trademark or other intellectual
property rights alleging that we are infringing their
intellectual property rights. If one of these patents was found
to cover our product candidates, research methods, proprietary
technologies or their uses, or one of these trademarks was found
to be infringed, we or our collaborators could be required to
pay damages and could be unable to commercialize our product
candidates or use our proprietary technologies unless we or they
obtain a license to the patent or trademark, as applicable. A
license may not be available to us or our collaborators on
acceptable terms, if at all. In addition, during litigation, the
patent or trademark holder could obtain a preliminary injunction
or other
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equitable right which could prohibit us from making, using or
selling our products, technologies or methods. In addition, we
or our collaborators could be required to designate a different
trademark name for our products, which could result in a delay
in selling those products.
There is a substantial amount of litigation involving patent and
other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third party claims
that we or our collaborators infringe its intellectual property
rights, we may face a number of issues, including, but not
limited to:
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infringement and other intellectual property claims which, with
or without merit, may be expensive and time-consuming to
litigate and may divert our managements attention from our
core business;
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substantial damages for infringement, including treble damages
and attorneys fees, which we may have to pay if a court
decides that the product or proprietary technology at issue
infringes on or violates the third partys rights;
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a court prohibiting us from selling or licensing the product or
using the proprietary technology unless the third party licenses
its technology to us, which it is not required to do;
|
|
|
|
if a license is available from the third party, we may have to
pay substantial royalties, fees
and/or
grant
cross licenses to our technology; and
|
|
|
|
redesigning our products or processes so they do not infringe
which may not be possible or may require substantial funds and
time.
|
There can be no assurance that third party patents containing
claims covering our product candidates, technology or methods do
not exist, have not been filed, or could not be filed or issued.
Because of the number of patents issued and patent applications
filed in our areas or fields of interest, particularly in the
area of protein kinase inhibitors, we believe there is a
significant risk that third parties may allege they have patent
rights encompassing our product candidates, technology or
methods. In addition, we have not conducted an extensive search
of third party trademarks, so no assurance can be given that
such third party trademarks do not exist, have not been filed,
could not be filed or issued, or could not exist under common
trademark law. If there is uncertainty with respect to our
intellectual property rights related to our product candidates,
technologies or methods, we may have difficulty entering into
collaboration or licensing arrangements with third parties with
respect to such product candidates, technologies or methods.
Other product candidates that we may develop, either internally
or in collaboration with others, could be subject to similar
risks and uncertainties.
Risks
Relating to the Securities Markets and Ownership of our Common
Stock
Market
volatility may affect our stock price.
Until our initial public offering in February 2006, there was no
market for our common stock, and despite our initial public
offering, an active public market for these shares may not
develop or be sustained. We have had relatively low volume of
trading in our stock since our initial public offering and we do
not know if the trading volume of our common stock will increase
in the future. In addition, the market price of our common stock
may fluctuate significantly in response to a number of factors,
most of which we cannot control, including:
|
|
|
|
|
changes in the preclinical or clinical development status of or
clinical trial results for our product candidates;
|
|
|
|
announcements of new products or technologies, commercial
relationships or collaboration arrangements or other events by
us or our competitors, or investor expectations with respect to
such arrangements or events;
|
|
|
|
events affecting our collaborations, commercial agreements and
grants;
|
|
|
|
variations in our quarterly operating results;
|
|
|
|
changes in securities analysts estimates of our financial
performance;
|
|
|
|
regulatory developments in the United States and foreign
countries;
|
31
|
|
|
|
|
fluctuations in stock market prices and trading volumes of
similar companies;
|
|
|
|
sales of large blocks of our common stock, including sales by
our executive officers, directors and significant stockholders;
|
|
|
|
additions or departures of key personnel;
|
|
|
|
discussion of us or our stock price by the financial and
scientific press and in online investor communities; and
|
|
|
|
changes in accounting principles generally accepted in the
United States.
|
In addition, class action litigation has often been instituted
against companies whose securities have experienced periods of
volatility in market price, such as the decline in our stock
price following the announcement in August 2006 of the
termination of our Phase II/III clinical trial for Troxatyl. Any
such litigation brought against us could result in substantial
costs and a diversion of managements attention and
resources, which could hurt our business, operating results and
financial condition.
Anti-takeover
provisions in our charter documents and under Delaware law could
make an acquisition of us, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current
management.
Provisions in our amended and restated certificate of
incorporation and bylaws may delay or prevent an acquisition of
us or a change in our management. These provisions include a
classified board of directors, a prohibition on actions by
written consent of our stockholders, and the ability of our
board of directors to issue preferred stock without stockholder
approval. In addition, because we are incorporated in Delaware,
we are governed by the provisions of Section 203 of the
Delaware General Corporation Law, which, subject to certain
exceptions, prohibits stockholders owning in excess of 15% of
our outstanding voting stock from merging or combining with us.
Although we believe these provisions collectively provide for an
opportunity to receive higher bids by requiring potential
acquirors to negotiate with our board of directors, they would
apply even if the offer may be considered beneficial by some
stockholders. In addition, these provisions may frustrate or
prevent any attempts by our stockholders to replace or remove
our current management by making it more difficult for
stockholders to replace members of our board of directors, which
is responsible for appointing the members of our management.
We may
incur increased costs as a result of changes in laws and
regulations relating to corporate governance
matters.
Changes in the laws and regulations affecting public companies,
including the provisions of the Sarbanes-Oxley Act of 2002 and
rules adopted by the Securities and Exchange Commission and by
the Nasdaq Stock Market, have resulted in and will continue to
result in increased costs to us as we respond to their
requirements. These laws and regulations could make it more
difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same
or similar coverage. The impact of these requirements could also
make it more difficult for us to attract and retain qualified
persons to serve on our board of directors, our board committees
or as executive officers. We are presently evaluating and
monitoring developments with respect to these laws and
regulations and cannot predict or estimate the amount or timing
of additional costs we may incur to respond to their
requirements.
If our
executive officers, directors and largest stockholders choose to
act together, they may be able to control our operations and act
in a manner that advances their best interests and not
necessarily those of other stockholders.
Our executive officers, directors and holders of 5% or more of
our outstanding common stock beneficially own approximately 62%
of our common stock. As a result, these stockholders, acting
together, are able to control all matters requiring approval by
our stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
The interests of this group of stockholders may not always
coincide with our interests or the interests of other
stockholders, and they may act in a manner that advances their
best interests
32
and not necessarily those of other stockholders. These
stockholders also may not act together and disputes may arise
among these stockholders with respect to matters that require
stockholder approval. Any disagreements among our significant
stockholders, including among significant stockholders that are
affiliated with members of our Board of Directors, may also make
it more difficult for us to obtain stockholder approval of
certain matters and may lead to distraction of management or
have other adverse impact on our operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
We lease approximately 60,568 square feet of laboratory and
office space in San Diego, California under three lease
agreements that terminate in September 2013. We believe that our
facilities will adequately meet our present research and
development needs.
|
|
Item 3.
|
Legal
Proceedings
|
We are not currently involved in any material legal proceedings.
We may be subject to various claims and legal actions arising in
the ordinary course of business from time to time.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter ended December 31, 2007.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Common
Stock Market Price
Our common stock commenced trading on the Nasdaq Global Market
on February 1, 2006 under the symbol SGXP.
Prior to that time, there was no public market for our common
stock. The following table sets forth the high and low closing
sales prices for our common stock for the periods indicated, as
reported on the Nasdaq Global Market. Such quotations represent
inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
9.71
|
|
|
$
|
5.75
|
|
Second Quarter
|
|
|
8.18
|
|
|
|
4.65
|
|
Third Quarter
|
|
|
5.50
|
|
|
|
1.88
|
|
Fourth Quarter
|
|
|
3.56
|
|
|
|
2.50
|
|
33
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
5.91
|
|
|
$
|
3.20
|
|
Second Quarter
|
|
|
5.50
|
|
|
|
4.61
|
|
Third Quarter
|
|
|
7.40
|
|
|
|
5.29
|
|
Fourth Quarter
|
|
|
6.59
|
|
|
|
4.71
|
|
The closing price for our common stock as reported by the Nasdaq
Global Market on March 24, 2008 was $4.04 per share. As of
March 14, 2008, there were approximately 118 stockholders
of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our capital
stock. The payment of dividends by us on our common stock is
limited by our debt agreements. We currently intend to retain
all of our future earnings, if any, to finance the growth and
development of our business. We do not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to dividend policy will be made at
the discretion of our board of directors.
Recent
Sales of Unregistered Securities
There were no unregistered sales of equity securities during the
year ended December 31, 2007.
34
Performance
Measurement Comparison(1)
The following graph shows the total stockholder return of an
investment of $100 in cash on February 1, 2006 in
(i) the Companys common stock, (ii) the Nasdaq
Composite Index (the Nasdaq) and (iii) the
NASDAQ Biotechnology Index (the NBI). All values
assume reinvestment of the full amount of all dividends.
Comparison of Cumulative Total Return on Investment since our
Initial Public Offering on February 1, 2006:
COMPARISON
OF 23 MONTH CUMULATIVE TOTAL RETURN*
Among SGX Pharmaceuticals, Inc., The NASDAQ Composite Index
And The NASDAQ Biotechnology Index
|
|
|
*
|
|
$100 invested on 2/1/06 in stock or on 1/31/06 in
index-including reinvestment of dividends. Fiscal year ending
December 31.
|
|
(1)
|
|
This section is not soliciting material, is not
deemed filed with the SEC, is not subject to the
liabilities of Section 18 of the Securities Exchange Act of
1934, as amended, or the Exchange Act, and is not to be
incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended, or the Exchange Act whether
made before or after the date hereof and irrespective of any
general incorporation language in any such filing.
|
35
|
|
Item 6.
|
Selected
Financial Data
|
You should read the following selected consolidated financial
and operating information for SGX Pharmaceuticals, Inc. together
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and notes thereto included
elsewhere in this Annual Report on
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2007, 2006 and 2005, and the
consolidated balance sheet data as of December 31, 2007 and
2006 are derived from the audited consolidated financial
statements included elsewhere in this report. The consolidated
statements of operations data for the years ended
December 31, 2004 and 2003, and the consolidated balance
sheet data as of December 31, 2005, 2004 and 2003 are
derived from audited consolidated financial statements not
included in this report. Historical results for any prior period
are not necessarily indicative of the results to be expected for
any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborations and commercial agreements
|
|
$
|
22,367
|
|
|
$
|
19,906
|
|
|
$
|
14,604
|
|
|
$
|
15,941
|
|
|
$
|
10,135
|
|
Grants subcontractor reimbursements
|
|
|
8,702
|
|
|
|
5,120
|
|
|
|
5,083
|
|
|
|
4,976
|
|
|
|
4,599
|
|
Grants
|
|
|
3,670
|
|
|
|
2,754
|
|
|
|
1,949
|
|
|
|
6,380
|
|
|
|
3,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
34,739
|
|
|
|
27,780
|
|
|
|
21,636
|
|
|
|
27,297
|
|
|
|
18,078
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,249
|
|
|
|
46,942
|
|
|
|
37,881
|
|
|
|
31,444
|
|
|
|
28,587
|
|
General and administrative
|
|
|
8,642
|
|
|
|
9,588
|
|
|
|
11,820
|
|
|
|
6,719
|
|
|
|
7,353
|
|
In-process technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,891
|
|
|
|
56,530
|
|
|
|
49,701
|
|
|
|
42,163
|
|
|
|
35,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,152
|
)
|
|
|
(28,750
|
)
|
|
|
(28,065
|
)
|
|
|
(14,866
|
)
|
|
|
(17,862
|
)
|
Interest income
|
|
|
961
|
|
|
|
1,805
|
|
|
|
284
|
|
|
|
175
|
|
|
|
320
|
|
Interest expense
|
|
|
(816
|
)
|
|
|
(1,107
|
)
|
|
|
(422
|
)
|
|
|
(669
|
)
|
|
|
(1,219
|
)
|
Interest expense associated with debenture
|
|
|
|
|
|
|
|
|
|
|
(1,188
|
)
|
|
|
(3,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(16,007
|
)
|
|
|
(28,052
|
)
|
|
|
(29,391
|
)
|
|
|
(18,752
|
)
|
|
|
(18,761
|
)
|
Accretion to redemption value of redeemable convertible
preferred stock
|
|
|
|
|
|
|
(49
|
)
|
|
|
(472
|
)
|
|
|
(329
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(16,007
|
)
|
|
$
|
(28,101
|
)
|
|
$
|
(29,863
|
)
|
|
$
|
(19,081
|
)
|
|
$
|
(19,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common stockholders
per share
|
|
$
|
(1.01
|
)
|
|
$
|
(2.03
|
)
|
|
$
|
(48.32
|
)
|
|
$
|
(39.84
|
)
|
|
$
|
(44.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss attributable
to common stockholders per share
|
|
|
15,915
|
|
|
|
13,814
|
|
|
|
618
|
|
|
|
479
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
38,990
|
|
|
$
|
33,877
|
|
|
$
|
17,718
|
|
|
$
|
11,512
|
|
|
$
|
13,635
|
|
Working capital (deficit)
|
|
|
17,892
|
|
|
|
17,263
|
|
|
|
618
|
|
|
|
(8,634
|
)
|
|
|
1,042
|
|
Total assets
|
|
|
51,056
|
|
|
|
48,464
|
|
|
|
33,112
|
|
|
|
28,332
|
|
|
|
35,943
|
|
Long-term debt obligations (including current portion)
|
|
|
4,194
|
|
|
|
7,552
|
|
|
|
15,733
|
|
|
|
23,420
|
|
|
|
13,487
|
|
Redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
46,837
|
|
|
|
74,850
|
|
|
|
88,306
|
|
Accumulated deficit
|
|
|
(179,736
|
)
|
|
|
(163,729
|
)
|
|
|
(135,628
|
)
|
|
|
(105,765
|
)
|
|
|
(86,684
|
)
|
Total stockholders equity (deficit)
|
|
|
25,023
|
|
|
|
13,613
|
|
|
|
(41,677
|
)
|
|
|
(78,782
|
)
|
|
|
(78,044
|
)
|
36
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our Consolidated financial statements and
related notes included elsewhere in this report. This discussion
and other parts of this report may contain forward-looking
statements based upon current expectations that involve risks
and uncertainties. Our actual results and the timing of selected
events could differ materially from those anticipated in these
forward-looking statements as a result of several factors,
including those set forth under Risk Factors in
Item 1A of Part I of this report and elsewhere in this
report.
Overview
We are a biotechnology company focused on the discovery,
development and commercialization of novel, targeted
therapeutics directed at addressing unmet medical needs in
oncology. Our most advanced drug development programs target the
c-MET receptor tyrosine kinase (or MET), an enzyme implicated in
a broad array of solid and blood tumors, and the BCR-ABL
tyrosine kinase enzyme, for treatment of Chronic Myelogenous
Leukemia, or CML, a cancer of the bone marrow. Our earlier stage
drug discovery and development activities are focused on a
portfolio of other protein and enzyme targets that have been
implicated in human cancers.
We generated approximately $34.7 million,
$27.8 million, and $21.6 million in revenues from
collaborations, commercial agreements and grants during the
years ended December 31, 2007, 2006 and 2005, respectively.
We have incurred significant losses since our inception in 1998,
as we have devoted substantially all of our efforts to research
and development activities. As of December 31, 2007, our
accumulated deficit was approximately $179.7 million. We
expect to incur substantial and possibly increasing losses for
the next several years as we develop and expand our oncology
pipeline.
We were incorporated in Delaware in July 1998. To date, we have
not generated any revenues from the sale of therapeutic drugs.
We have financed our operations and internal growth through
private placements of our equity securities, our initial public
offering, our collaboration, commercial agreement and grant
revenue and debt financings.
Financial
Operations Overview
Collaboration,
Commercial Agreement and Grant Revenue
Collaboration, commercial agreement and grant revenue has
primarily been a result of various contractual agreements with
pharmaceutical companies and biotechnology companies, as well as
government and other agencies. We also periodically receive
non-refundable payments for achieving certain milestones during
the term of our agreements.
Research
and Development Expense
Research and development expense consists primarily of costs
associated with our internal research programs and certain
clinical trial costs, compensation, including stock-based, and
other expenses related to research and development personnel,
facilities costs and depreciation. We charge all research and
development expenses to operations as they are incurred.
Our research activities are focused on building an internal
oncology pipeline and generating lead compounds for ourselves
and our potential partners through application of our FAST drug
discovery platform and related technologies. Our most advanced
programs are focused on compounds that inhibit MET and BCR-ABL.
We incurred $3.6 million, $2.8 million, and
$1.9 million of internal research expenses in connection
with our NIH grants in 2007, 2006 and 2005, respectively. We
also incurred $3.7 million, $5.1 million, and
$5.1 million of expenses to subcontractors in connection
with our research under NIH grants in 2007, 2006, and 2005,
respectively.
We incurred $11.3 million and $3.3 million in expenses
related to the research and development of our MET and BCR-ABL
programs, respectively, during 2007. We incurred
$0.6 million, $9.5 million, and $6.5 million of
expenses related to the development of Troxatyl in 2007, 2006
and 2005 respectively, for a total of $22.1 million
cumulatively expended on Troxatyl, a drug development program
which we discontinued in 2006.
37
All other research and development expenses are for various
programs in the preclinical and research and discovery stages.
For these preclinical programs, we use our internal resources,
including our employees and discovery infrastructure, across
several projects, and many of our costs are not attributable to
a specific project but are directed to broadly applicable
research projects. Accordingly, we do not account for our
internal research costs on a project basis. Research and
development expense also includes stock-based compensation
expense associated with employees performing research and
development activities.
We anticipate that our existing level of expenditures will
support our planned research and development activities.
However, drug discovery and development outcomes and timelines
and associated costs are uncertain and therefore vary widely. We
anticipate that we will make determinations as to which research
and development projects to pursue and how much funding to
direct toward each project on an on-going basis in response to
the scientific and clinical success in each program.
General
and Administrative Expense
General and administrative expense consists primarily of
compensation, including stock-based, and other expenses related
to our corporate administrative employees, legal fees and other
professional services expenses. We anticipate that we will
maintain our existing level of general and administrative
expenditures. However, we will make determinations as to the
necessary levels of general and administrative expenditures on
an on-going basis relative to our research and development
activities and regulatory obligations.
Interest
Income
Interest income consists of interest earned on our cash and cash
equivalents and short-term investments.
Interest
Expense
Interest expense in 2007 and 2006 includes interest charges
associated with the line of credit and equipment financing
facility which we entered into with Silicon Valley Bank and
Oxford Finance Corporation in September 2005. Interest expense
in 2005 represents interest on our debt and secured promissory
notes in an aggregate principal amount of $13.4 million
that we issued in two tranches in a secured bridge financing in
July and September 2004, which were converted into redeemable
convertible preferred stock in April 2005.
Critical
Accounting Policies and Estimates
The 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. The preparation of financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, expenses and
related disclosures. Actual results could differ from those
estimates. While our significant accounting policies are
described in more detail in Note 1 of the Notes to
Consolidated Financial Statements included elsewhere in this
report, we believe the following accounting policies to be
critical to the judgments and estimates used in the preparation
of our financial statements:
Revenue
Recognition
Our collaboration agreements and commercial agreements contain
multiple elements, including non-refundable upfront fees,
payments for reimbursement of research costs, payments for
ongoing research, payments associated with achieving specific
milestones and, in the case of our collaboration agreements,
development milestones and royalties based on specified
percentages of net product sales, if any. We apply the revenue
recognition criteria outlined in Staff Accounting
Bulletin No. 104,
Revenue Recognition
and
Emerging Issues Task Force Issue
00-21,
Revenue Arrangements with Multiple Deliverables
, or
EITF 00-21.
In applying these revenue recognition criteria, we consider a
variety of factors in determining the appropriate method of
revenue recognition under these arrangements, such as whether
the elements are separable, whether there are determinable fair
values and whether there is a unique earnings process associated
with each element of a contract.
38
Cash received in advance of services being performed is recorded
as deferred revenue and recognized as revenue as services are
performed over the applicable term of the agreement.
When a payment is specifically tied to a separate earnings
process, revenues are recognized when the specific performance
obligation associated with the payment is completed. Performance
obligations typically consist of significant and substantive
milestones pursuant to the related agreement. Revenues from
milestone payments may be considered separable from funding for
research services because of the uncertainty surrounding the
achievement of milestones for products in early stages of
development. Accordingly, these payments could be recognized as
revenue if and when the performance milestone is achieved if
they represent a separate earnings process as described in
EITF 00-21.
In connection with certain research collaborations and
commercial agreements, revenues are recognized from
non-refundable upfront fees, which we do not believe are
specifically tied to a separate earnings process, ratably over
the term of the agreement. Research services provided under some
of our collaboration agreements and commercial agreements are on
a fixed fee basis. Revenues associated with long-term fixed fee
contracts are recognized based on the performance requirements
of the agreements and as services are performed.
Revenues derived from reimbursement of direct out-of-pocket
expenses for research costs associated with grants are recorded
in compliance with EITF Issue
99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent
, and EITF Issue
01-14,
Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred.
According
to the criteria established by these EITF Issues, in
transactions where we act as a principal, with discretion to
choose suppliers, bear credit risk and perform part of the
services required in the transaction, we record revenue for the
gross amount of the reimbursement. The costs associated with
these reimbursements are reflected as a component of research
and development expense in the statements of operations.
None of the payments that we have received from collaborators to
date, whether recognized as revenue or deferred, is refundable
even if the related program is not successful.
Stock-Based
Compensation Expense
In December 2004, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards, or
SFAS, No. 123R,
Share-Based Payment
, which requires
companies to expense the estimated fair value of employee stock
options and similar awards. This statement is a revision to
SFAS No. 123,
Accounting for Stock-Based
Compensation
, and supersedes Accounting Principles Board, or
APB, Opinion No. 25,
Accounting for Stock Issued to
Employees
, and amends FASB Statement No. 95,
Statement of Cash Flows.
The accounting provisions of
SFAS No. 123R became effective for us at the beginning
of the first quarter of 2006.
We grant options to purchase our common stock to our employees
and directors under our stock option plans. Eligible employees
can also purchase shares of our common stock under the employee
stock purchase plan at the lower of: (i) 85% of the fair
market value on the first day of a two-year offering period; or
(ii) 85% of the fair market value on the last date of each
six-month purchase period within the two-year offering period.
The benefits provided under these plans are stock-based payments
subject to the provisions of SFAS 123R. Effective
January 1, 2006, we began to use the fair value method to
apply the provisions of SFAS 123R with a modified
prospective application which provides for certain changes to
the method for valuing stock-based compensation. The valuation
provisions of SFAS 123R apply to new awards and to awards
that were outstanding on January 1, 2006 and subsequently
modified or cancelled. Under the modified prospective
application, prior periods are not revised for comparative
purposes. Prior to adopting the provisions of SFAS 123R, we
recorded estimated compensation expense for employee stock
options based upon their intrinsic value on the date of grant
pursuant to APB Opinion 25. Stock-based compensation expense
recognized under SFAS 123R for the years ended
December 31, 2007 and 2006 was $3.3 million and
$4.4 million, respectively (excluding stock-based
compensation expense for share based awards to non-employees).
At December 31, 2007, total unrecognized estimated
compensation expense related to non-vested stock options granted
prior to that date was $2.6 million, which is expected to
be recognized over a weighted average period of 2.45 years.
Total stock options granted during the year ended
December 31, 2007 and 2006 represented 4.1% and 5.0% of
total outstanding shares as of the end of 2007 and 2006,
respectively.
39
Both prior and subsequent to the adoption of SFAS 123R, we
estimated the value of stock-based awards on the date of grant
using the Black-Scholes option pricing model. Prior to the
adoption of SFAS 123R, the value of each stock-based award
was estimated on the date of grant using the Black-Scholes model
for the pro forma information required to be disclosed under
SFAS 123. The determination of the fair value of
stock-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards,
risk-free interest rate and the expected term of the awards.
For purposes of estimating the fair value of stock options
granted during the years ended December 31, 2007 and 2006
using the Black-Scholes model, we have made a subjective
estimate regarding our stock price volatility (weighted average
of 73%). Expected volatility is based on average volatilities of
the common stock of comparable publicly traded companies using a
blend of historical, implied and average of historical and
implied volatilities for this peer group of 10 companies,
consistent with the guidance in SFAS 123R and Staff
Accounting Bulletin No. 107,
Share Based Payment
or SAB 107. If our stock price volatility assumption
were increased to 78%, the weighted average estimated fair value
of stock options granted during the year ended December 31,
2007 and 2006 would increase by $0.11 per share, or 4.1%, from
$2.69 to $2.80 and $0.49 per share, or 11%, from $4.36 to $4.85,
respectively.
As permitted by SAB 107, we utilize the shortcut
approach to estimate an options expected term, which
represents the period of time that an option granted is expected
to be outstanding. The expected term of options granted is
derived from the average midpoint between vesting and the
contractual term.
The risk-free interest rate for the expected term of the option
is based on the average U.S. Treasury yield curve on the
first day of each month for which the option is granted for the
expected term (weighted average of 4.6% and 4.7% for the years
ended December 31, 2007 and 2006, respectively) which, if
increased to 6.00%, would increase the weighted average
estimated fair value of stock options granted during the years
ended December 31, 2007 and 2006 by $0.05 per share, or
1.9% and $0.10 per share, or 2.4%, respectively.
We are required to assume a dividend yield as an input to the
Black-Scholes model. The dividend yield assumption is based on
our history. As we have never issued dividends and as we do not
anticipate paying dividends in the foreseeable future, we have
utilized a dividend yield of 0.0% for the years ended
December 31, 2007 and 2006.
Prior to 2006, stock-based compensation expense for stock
options granted to employees and directors had been determined
as the difference between the exercise price and the fair value
of our common stock on the date of grant, as estimated by us for
financial reporting purposes, on the date those options were
granted. It also included stock-based compensation for options
granted to consultants that has been determined in accordance
with Statement of Financial Accounting Standards, or SFAS,
No. 123,
Accounting for Stock-Based Compensation
, or
SFAS 123, and EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling
Goods and Services
, as the fair value of the equity
instruments issued and is periodically revalued as the options
vest. Stock-based compensation expense depends on the amount of
stock options and other equity compensation awards we grant to
our employees, consultants and directors and the exercise price
of those options.
Deferred stock compensation, which is a non-cash charge, results
from employee stock option grants at exercise prices that, for
financial reporting purposes, are deemed to be below the
estimated fair value of the underlying common stock on the date
of grant. Given the absence of an active market for our common
stock through 2005, our board of directors considered, among
other factors, the liquidation preferences, anti-dilution
protection and voting preferences of the preferred stock over
the common stock in determining the estimated fair value of the
common stock for purposes of establishing the exercise prices
for stock option grants.
As a result of initiating our initial public offering, we
revised our estimate of the fair value of our common stock for
the year ended December 31, 2005 for financial reporting
purposes. This was done retrospectively by management and we did
not obtain contemporaneous valuations from an independent
valuation specialist. In reassessing the value of our common
stock in 2005, we considered the price we received in April 2005
for our Series B preferred stock and then steadily
increased the estimated fair value to $14.06 per common share up
to the
40
time of our initial public offering based on an assessment of
market considerations, including discussions with the
underwriters who managed the initial public offering, and other
factors. Furthermore, we believe this valuation approach is
consistent with valuation methodologies applied to other similar
companies for financial reporting purposes pursuing an initial
public offering.
For stock option and restricted stock grants to employees and
non-employee directors prior to December 31, 2005, we
recorded deferred stock compensation, net of forfeitures,
totaling $13.6 million in 2005 which represents the
difference between the revised fair value for financial
reporting purposes of our common stock and the option exercise
price at the date of grant. We also recorded deferred stock
compensation of $1.7 million for the issuance of equity
instruments to former employees and consultants in 2005.
Deferred compensation was to be amortized to expense over the
vesting period of the related options using an accelerated
method. As a result of the adoption of SFAS 123R on
January 1, 2006, these deferred compensation amounts,
totaling $5.1 million, were reversed out of deferred
compensation against additional paid-in capital and the expense
will be taken in accordance with SFAS 123R for all
remaining unvested grants.
Accrued
Expenses
As part of the process of preparing financial statements, we are
required to estimate accrued expenses. This process involves
identifying services which have been performed on our behalf,
and estimating the level of service performed and the associated
costs incurred for such service as of each balance sheet date in
our financial statements. Examples of estimated expenses for
which we accrue include contract service fees paid to contract
manufacturers in conjunction with the production of clinical
drug supplies and to contract research organizations,
particularly in conjunction with the conduct of our clinical
trials. In connection with such service fees, our estimates are
most affected by our understanding of the status and timing of
services provided relative to the actual levels of services
incurred by such service providers. The majority of our service
providers invoice us monthly in arrears for services performed.
The date on which certain services commence, the level of
services performed on or before a given date and the cost of
such services are often determined based on subjective
judgments. We make these judgments based upon the facts and
circumstances known to us in accordance with United States
generally accepted accounting principles.
Deferred
Tax Asset Valuation Allowance
Our estimate for the valuation allowance for deferred tax assets
requires us to make significant estimates and judgments about
our future operating results. Our ability to realize the
deferred tax assets depends on our future taxable income as well
as limitations on utilization. A deferred tax asset must be
reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be
realized prior to its expiration. The projections of our
operating results on which the establishment of a valuation
allowance is based involve significant estimates regarding
future demand for our products, competitive conditions, product
development efforts, approvals of regulatory agencies and
product cost. We have recorded a full valuation allowance on our
net deferred tax assets as of December 31, 2007 and 2006
due to uncertainties related to our ability to utilize our
deferred tax assets in the foreseeable future. These deferred
tax assets primarily consist of certain net operating loss
carry-forwards and research and development tax credits.
Results
of Operations
Year
Ended December 31, 2007 Compared to 2006
Collaboration, Commercial Agreement and Grant
Revenue.
Collaboration, commercial agreement and
grant revenue increased to $34.7 million for the year ended
December 31, 2007 from $27.8 million for the year
ended December 31, 2006. The increase of $6.9 million,
or 25%, was primarily due to reimbursement of overhead costs,
which includes $3.5 million recognized as revenue during
the three months ended March 31, 2007 arising from the
agreement reached with the National Institute of Health in
February 2007 for the reimbursement of overhead costs incurred
on grant research efforts since the commencement of the grant in
July 2005, and increased research efforts related to our grants,
which increased by $1.0 million during 2007. Additionally,
revenues related to our collaboration agreement with Novartis
increased by $1.8 million during 2007. The
$1.8 million increase associated
41
with the Novartis collaboration, is comprised of an increase of
$1.7 million related to the amortization into revenue of
the $20 million upfront payment received in 2006,
$0.8 million increase in research services, which concluded
in March 2008, and a decrease of $0.7 million related to
reimbursement of out of pocket expenditures. Revenue related to
our beamline services increased by approximately
$0.5 million during 2007, as a result of an increased
customer base combined with an increase in rates over prior year.
Research and Development Expense.
Research and
development expense decreased to $42.2 million for the year
ended December 31, 2007 from $46.9 million for the
year ended December 31, 2006. The decrease of
$4.7 million, or 10%, was primarily attributable to a
$1.4 million decrease in depreciation expense,
$1.4 million decrease in the use of outside services in
connection with our MET and BCR-ABL programs, $1.3 million
decrease in grant subcontractor expense, $0.4 million
decrease in stock-based compensation expense and a
$0.2 million decrease in external development costs. We
anticipate that our existing level of expenditures will support
our planned research and development activities in 2008.
However, drug discovery and development outcomes, timelines and
associated costs are uncertain and therefore vary widely. We
anticipate that we will make determinations as to which research
and development projects to pursue and how much funding to
direct toward each project on an on-going basis in response to
the scientific and clinical success of each program.
General and Administrative.
General and
administrative expense decreased to $8.6 million for the
year ended December 31, 2007 from $9.6 million for the
year ended December 31, 2006. The decrease of
$1.0 million, or 10%, was primarily attributable to a
decrease of $0.8 million in stock-based compensation
expense, $0.3 million decrease in consulting expense, and
$0.3 million decrease in legal and professional fees offset
by an increase of $0.3 million in license and patent
services and a $0.2 million increase in facilities and
utilities expense. We anticipate that we will maintain our
existing level of general and administrative expenditures in
2008. However, we will make determinations as to the necessary
levels of general and administrative expenditures on an on-going
basis relative to our research and development activities and
regulatory obligations.
Interest Income.
Interest income decreased to
$1.0 million for the year ended December 31, 2007 from
$1.8 million for the year ended December 31, 2006. The
decrease of $0.8 million, or 44%, was due primarily to a
realized loss of $0.5 million on a short-term investment in
2007 and lower cash balances during the majority of 2007
compared to 2006. Consistent with our investment policy
guidelines, we purchased an auction rate security (ARS) during
2007. This security had an AAA/Aaa credit rating at the time of
purchase, which remains unchanged. With the liquidity issues
experienced in global credit and capital markets, the ARS held
by us at December 31, 2007 has experienced multiple failed
auctions. The estimated market value of this ARS at
December 31, 2007 was $1.0 million, which reflects a
$0.5 million adjustment to the par value of
$1.5 million. Although the ARS continues to pay interest
according to its stated terms, based on uncertainties
surrounding this investment, continued failure of auctions and a
downward trend on bid quotes through December 31, 2007, we
recorded an impairment charge of $0.5 million in the fourth
quarter of 2007, reflecting an other-than-temporary decline in
value.
Interest Expense.
Interest expense decreased
to $0.8 million for the year ended December 31, 2007
from $1.1 million for the year ended December 31,
2006, due to the decrease in our debt obligations.
Year
Ended December 31, 2006 Compared to 2005
Collaboration, Commercial Agreement and Grant
Revenue.
Collaboration, commercial agreement and
grant revenue increased to $27.8 million for the year ended
December 31, 2006 from $21.6 million for the year
ended December 31, 2005. The increase of $6.1 million,
or 28%, was primarily due to the amortization into revenue of
the $20 million upfront payment received from Novartis
(approximately $3.8 million), the initiation of the
research services (approximately $3.4 million) and
reimbursement of out of pocket expenses (approximately
$1.6 million), both in connection with the collaboration
with Novartis, increased research grant efforts (approximately
$0.8 million) and the increase in the level of research
services performed in connection with the Cystic Fibrosis
Foundation Therapeutics, Inc. (approximately $0.9 million).
These additional revenues were offset by a reduction in revenues
due to the conclusion of research services in 2006 which were
ongoing in 2005.
Research and Development Expense.
Research and
development expense increased to $46.9 million for the year
ended December 31, 2006 from $37.9 million for the
year ended December 31, 2005. The increase of
$9.0 million, or 24%, was primarily attributable to
$3.7 million of additional clinical development costs for
42
Troxatyl, $2.1 million related to increased laboratory
supply usage, $1.7 million related to an increased use of
outside services, $2.2 million related to additional
headcount and salaries, and $1.1 million related to
additional facilities costs, offset by a $2.0 million net
reduction in stock-based compensation expense.
General and Administrative.
General and
administrative expense decreased to $9.6 million for the
year ended December 31, 2006 from $11.8 million for
the year ended December 31, 2005. The decrease of
$2.2 million, or 19%, was primarily attributable to a
decrease of $3.6 million in stock-based compensation
expense offset by an increase of $0.5 million in legal and
other professional services and a $0.5 million increase in
accrued salaries and related costs.
Interest Income.
Interest income increased to
$1.8 million for the year ended December 31, 2006 from
$284,000 for the year ended December 31, 2005. The increase
of $1.5 million, or 536%, was due primarily to higher cash
and cash equivalent balances. The higher cash balances are the
result of the proceeds received from our initial public offering
in February 2006 and the Novartis agreement in March 2006.
Interest Expense.
Interest expense (excluding
interest expense associated with our bridge notes issued in July
and September 2004) increased to $1.1 million for the
year ended December 31, 2006 from $422,000 for the year
ended December 31, 2005. We did not receive any funds under
the line of credit and equipment financing agreements with
Silicon Valley Bank and Oxford Finance Corporation until
September 2005. We also received funds under these arrangements
in December 2005 and December 2006. Accordingly, the increase in
interest expense was due to the higher debt levels in 2006
compared to 2005 (excluding indebtedness under our bridge notes
issued in July and September 2004).
Interest Expense Associated with Bridge
Notes.
We recorded interest expense of
$1.2 million during the year ended December 31, 2005
related to the bridge notes issued in July and September 2004.
We did not record any interest expense during the year ended
December 31, 2006 related to these bridge notes as the
notes were converted into preferred stock in April 2005.
Liquidity
and Capital Resources
Sources
of Liquidity
We have historically funded our operations primarily through the
sale of our equity securities and funds received from our
collaborations, commercial agreements, grants and debt
financings.
We have recorded revenues from our collaborations, commercial
agreements and grants totaling $34.7 million,
$27.8 million, and $21.6 million for the years ended
December 31, 2007, 2006, and 2005, respectively.
In November 2007, we completed a private placement offering of
an aggregate of 4,943,154 shares of our common stock,
together with warrants to purchase an aggregate of
1,482,944 shares of our common stock, and raised net
proceeds of approximately $23.2 million, after deducting
offering expenses of approximately $1.8 million. In
February 2006, we completed an initial public offering of an
aggregate of 4,152,904 shares of our common stock and
raised net proceeds of approximately $20.6 million, after
deducting the underwriting discount and offering expenses, and
including the underwriters over-allotment option which was
exercised in March 2006. Upon the completion of our initial
public offering in February 2006, all of our previously
outstanding shares of preferred stock converted into an
aggregate of 8,346,316 shares of our common stock and a
convertible note of $6.0 million converted into
1,000,000 shares of our common stock.
In September 2005, we entered into a line of credit and
equipment financing agreement with Silicon Valley Bank and
Oxford Finance Corporation to provide $8.0 million of
general purpose working capital financing and
$2.0 million of equipment and leasehold improvements
financing. The debt bears interest at a rate of approximately
10% per annum and is due in monthly installments over three
years. In September and December 2005, we borrowed approximately
$4.0 million and $4.9 million, respectively, of the
funds available under this line of credit and equipment
financing agreement for general purpose working capital needs
and capital expenditures spending, and issued the lenders
warrants to purchase an aggregate of 45,184 shares of our
common stock, at an exercise price of $9.42 per share. In
November and December of 2006, we borrowed the remainder of the
available financing
43
under this line of credit and equipment financing agreement of
approximately $1.1 million, and issued the lenders warrants
to purchase an aggregate of 5,771 shares of our common
stock at an exercise price of $9.42 per share.
As of December 31, 2007, an aggregate of approximately
$4.2 million was outstanding under our line of credit and
equipment financing agreement with Silicon Valley Bank and
Oxford Finance Corporation entered into in 2005 and other lines
of credit entered into prior to 2005. The debt agreements
subject us to certain financial and non-financial covenants. As
of December 31, 2007, we were in compliance with these
covenants. These obligations are secured by our assets,
excluding intellectual property, and are due in monthly
installments through 2010. They bear interest at effective rates
ranging from approximately 9.71% to 11.03% and are subject to
prepayment fees of up to 4% of the outstanding principal balance
as of the prepayment date. We made principal payments on our
debt of approximately $3.5 million, $3.5 million, and
$3.0 million for the years ended December 31, 2007,
2006, and 2005, respectively.
In March 2006, we entered into a license and collaboration
agreement with Novartis to develop and commercialize BCR-ABL
inhibitors for the treatment of CML. In connection with the
license and collaboration agreement, Novartis paid us a
non-refundable, non-creditable license fee of
$20.0 million, which was received in May 2006. As of
December 31, 2007, we had $10.8 million in deferred
revenue related to the license fee, which will be amortized into
revenue through the end of the research term, which ended in
late March 2008.
In addition, Novartis Pharma AG purchased 637,755 shares of
our common stock for $5.0 million in March 2006.
Cash
Flows
Our cash flows for 2008 and beyond will depend on a variety of
factors, some of which are discussed below.
As of December 31, 2007, cash and cash equivalents and
short-term investments totaled approximately $39.0 million
compared to $33.9 million at December 31, 2006, an
increase of $5.1 million. The increase resulted primarily
from the $23.2 million in net proceeds received from our
private placement in November 2007, partially offset by net cash
used to fund ongoing operations.
Net cash used in operating activities during 2007 was
$14.3 million compared to $5.9 million in 2006. This
increase is primarily due to the amortization of up-front fees
received from Novartis during 2006 into revenue in 2007, offset
by a decrease in our net loss. Net cash used in operating
activities during 2006 was $5.9 million compared to
$11.8 million in 2005. This decrease is primarily due to
the receipt of up-front fees received from Novartis of
$20.0 million during 2006 offset by a decrease in non-cash
share-based compensation.
Net cash provided by investing activities was $4.1 million
for 2007, and net cash used in investing activities was
$7.5 million for 2006 and $1.3 million for 2005. These
fluctuations resulted primarily from timing differences in
investment purchases, sales and maturities and the fluctuations
in our portfolio mix between cash equivalents and short-term
investment holdings. We expect similar fluctuations to continue
in future periods. Capital equipment purchases for 2007, 2006,
and 2005 were $0.4 million, $1.5 million, and
$1.3 million, respectively.
Net cash provided by financing activities during 2007 was
$20.3 million compared to $23.5 million in 2006 and
$19.4 million in 2005. In November 2007, we completed a
private placement of shares of our common stock and warrants to
purchase shares of our common stock pursuant to a securities
purchase agreement. We received net proceeds after offering
expenses of approximately $23.2 million from this
transaction. During 2006, we received net proceeds of
$25.6 million from the issuance of common stock in
connection with our initial public offering ($20.6 million)
and our collaboration agreement with Novartis
($5.0 million) and $1.1 million of proceeds from our
line of credit and equipment financings. During 2005, we
received net proceeds of $13.4 million from the issuance of
preferred and common stock and $8.9 million in connection
with proceeds from our line of credit and equipment financings.
Principal payments on debt were $3.5 million,
$3.5 million and $3.0 million in 2007, 2006 and 2005,
respectively.
In June 2007, we provided notice of termination of our license
agreement with Shire Biochem Inc. (Shire) for
Troxatyl. This termination became effective in September 2007.
We do not expect to incur any future costs related to Troxatyl.
44
We are unable to estimate with certainty the costs we will incur
in the preclinical and clinical development of product
candidates we may develop. We expect our cash outflow to
increase as we advance product candidates through preclinical
and clinical development if such development is not funded by a
collaborator, such as Novartis in the case of the BCR-ABL
compounds other than SGX393. We are funding the preclinical and
any clinical development of SGX393. We are also currently
funding the clinical development of SGX523. We expect to
continue to expand our research and development activities
relating to the clinical development and preclinical research of
treatments in the oncology area, including programs focused on
MET, BCR-ABL, and other oncology targets. We anticipate that we
will make determinations as to which research and development
projects to pursue, which to license to or partner with a third
party, and how much funding to direct toward each project on an
on-going basis in response to the scientific and clinical
success of each product candidate and the potential terms
associated with any particular licensing or partnering
opportunity.
Funding
Requirements
Our future capital uses and requirements depend on numerous
factors, including but not limited to the following:
|
|
|
|
|
terms and timing of, and material developments under, any new or
existing collaborative, licensing and other arrangements,
including potentially partnering of our internal discovery and
development programs, such as MET, or potentially retaining such
programs through later stages of preclinical and clinical
development;
|
|
|
|
rate of progress and cost of our preclinical studies and
clinical trials and other research and development activities;
|
|
|
|
scope, prioritization and number of clinical development and
research programs we pursue;
|
|
|
|
costs and timing of preparing regulatory submissions and
obtaining regulatory approval;
|
|
|
|
costs of establishing or contracting for sales and marketing
capabilities;
|
|
|
|
costs of manufacturing;
|
|
|
|
extent to which we acquire or in-license new products,
technologies or businesses;
|
|
|
|
effect of competing technological and market
developments; and
|
|
|
|
costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights.
|
Historically, we have funded our operations through a
combination of proceeds from offerings of our equity securities,
collaborations, commercial agreements, grant revenue, and debt
financing. As part of our business strategy, we expect to
continue to establish new collaborations and commercial
agreements. We believe that our existing cash, cash equivalents
and short-term investments, together with interest thereon and
cash from existing and new collaborations, commercial agreements
and grants, will be sufficient to meet projected operating
requirements into the second half of 2009. We expect to continue
to finance our future cash needs through the sale of equity
securities, strategic collaboration agreements and debt
financing. However, we may not be successful in obtaining
additional collaboration agreements or commercial agreements, or
in receiving milestone or royalty payments under existing
agreements. In addition, we cannot be sure 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 or
development programs or to relinquish greater or all rights to
product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose. Failure to
obtain adequate financing may also adversely affect our ability
to operate as a going concern. If we raise additional funds by
issuing equity securities, substantial dilution to existing
stockholders may 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.
45
Off-Balance
Sheet Arrangements
As of December 31, 2007 and 2006, we have not invested in
any variable interest entities. We do 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. We do not have
relationships or transactions with persons or entities that
derive benefits from their non-independent relationship with us
or our related parties other than as described in the Notes to
Financial Statements included elsewhere in this report.
Contractual
Obligations
The following summarizes our long-term contractual obligations
as of December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 to
|
|
|
4 to
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
5 Years
|
|
|
Long-term debt obligations
|
|
$
|
4,344
|
|
|
$
|
3,661
|
|
|
$
|
683
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
10,636
|
|
|
|
1,817
|
|
|
|
3,538
|
|
|
|
3,784
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,980
|
|
|
$
|
5,478
|
|
|
$
|
4,221
|
|
|
$
|
3,784
|
|
|
$
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
As of December 31, 2007, we had federal and California net
operating loss carryforwards of approximately
$124.2 million and $95.9 million, respectively, which
begin to expire in 2019 and 2009, respectively, if not utilized.
We also had federal and California research and development tax
credit carryforwards totaling approximately $4.8 million
and $3.2 million, respectively. The federal research and
development tax credit carryforward will begin to expire in
2019, unless previously utilized and the California research and
development tax credit will carry forward indefinitely until
utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, and
similar state provisions, use of our net operating loss and tax
credit carryforwards may be limited as a result of certain
cumulative changes in our stock ownership. The annual
limitations may result in the expiration of net operating losses
and credits prior to utilization.
At December 31, 2007 and 2006, we had deferred tax assets
of $10.8 million and $61.2 million, respectively. We
did not record a benefit for the deferred tax assets because
realization of the deferred tax assets was uncertain and,
accordingly, a valuation allowance has been provided to
completely offset the deferred tax assets.
Recently
Issued Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48)
, which clarifies the accounting
for uncertainty in income taxes. FIN 48 requires that the
Company recognize the impact of a tax position in its financial
statements if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 were effective as of
January 1, 2007, with the cumulative effect of the change
in accounting principle recorded as an adjustment to retained
earnings as of that date. The adoption of FIN 48 did not
have a material impact on our consolidated financial statements.
As a result of the adoption of FIN 48, we have not recorded
any changes to retained earnings on January 1, 2007,
because we had no unrecognized tax benefits that, if recognized,
would affect our effective income tax rate in future periods. At
December 31, 2007, we had no unrecognized tax benefits. Our
continuing practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
We had no accrued interest or penalties at either
January 1, 2007 or December 31, 2007. All of our tax
years remain subject to future examination by the major tax
jurisdictions in which it is subject to tax.
We have not completed a study to assess whether a change in
control has occurred, or whether there have been multiple
changes of control since our formation, due to the significant
complexity and cost associated with such study and the
possibility that there could be additional changes in the
future. If we experienced a greater than
46
50 percent change or shift in ownership over a
3-year
time
frame since its formation, utilization of its net operating
losses or research and development credit carry forwards would
be subject to an annual limitation under Sections 382 and
383. The annual limitation generally is determined by
multiplying the value of our stock at the time of the ownership
change (subject to certain adjustments) by the applicable
long-term tax-exempt rate. Any limitation may result in
expiration of a portion of the NOL or R&D credit carry
forwards before utilization. Further, until a study is completed
and any limitation known, no amounts are being presented as a
deferred tax asset as these items represent an uncertain tax
position under FIN 48.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements,
or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. This Statement applies only to fair value
measurements that are already required or permitted by other
accounting standards. Accordingly, this SFAS No. 157
does not require any new fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after December 15, 2007. We do not currently expect the
adoption of SFAS No. 157 will have a material impact
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement
No. 115
(SFAS No. 159).
SFAS No. 159 expands the use of fair value accounting
but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under
SFAS No. 159, a company may elect to use fair value to
measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts
payable, guarantees and issued debt. Other eligible items
include firm commitments for financial instruments that
otherwise would not be recognized at inception and non-cash
warranty obligations where a warrantor is permitted to pay a
third party to provide the warranty goods or services. If the
use of fair value is elected, any upfront costs and fees related
to the item must be recognized in earnings and cannot be
deferred. The fair value election is irrevocable and generally
made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to measure based on fair value. At the adoption date,
unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment
to beginning retained earnings. Subsequent to the adoption of
SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be
adopted by us in the first quarter of fiscal 2008. We do not
currently expect the adoption of SFAS No. 159 to have
a material impact on our consolidated financial statements.
In June 2007, the FASB ratified the consensus reached by the
EITF on EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities,
or
EITF 07-3.
EITF Issue
No. 07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are
delivered or the related services are performed or such time
when the entity does not expect the goods to be delivered or
services to be performed. EITF
No. 07-3
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. We do not currently expect the
adoption of EITF
No. 07-3
to have a material impact on our consolidated financial
statements.
In November 2007, the EITF issued EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property,
or
EITF 07-1.
Companies may enter into arrangements with other companies to
jointly develop, manufacture, distribute, and market a product.
Often the activities associated with these arrangements are
conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a
virtual joint venture). The arrangements generally
provide that the collaborators will share, based on
contractually defined calculations, the profits or losses from
the associated activities. Periodically, the collaborators share
financial information related to product revenues generated (if
any) and costs incurred that may trigger a sharing payment for
the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of
activities for which they act as the principal on a gross basis
and report any payments received from (made to) other
collaborators based on other applicable GAAP or, in the absence
of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election. EITF
No. 07-1
is effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15,
2008.
47
We do not currently expect the adoption of EITF
No. 07-1
to have a material impact on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The primary objective of our investment activities is to
preserve principal while maximizing income without significantly
increasing risk. Some of the securities in which we invest may
be subject to market risk. This means that a change in
prevailing interest rates may cause the market value of the
investment to fluctuate. To minimize this risk, we may maintain
our portfolio of cash equivalents and short-term investments in
a variety of securities, including commercial paper, money
market funds, debt securities, certificates of deposit and
auction rate securities (ARS). We are exposed to
market risk primarily in the area of changes in conditions in
the credit markets, particularly because we have an ARS.
Consistent with our investment policy guidelines, we purchased
an ARS during 2007. Our ARS investment had an AAA/Aaa credit
rating at the time of purchase, which remains unchanged. With
the liquidity issues experienced in global credit and capital
markets, the ARS held by us at December 31, 2007 has
experienced multiple failed auctions as the amount of securities
submitted for sale has exceeded the amount of purchase orders.
The estimated market value of our ARS at December 31, 2007
was $1.0 million, which reflects a $0.5 million
adjustment to the principal value of $1.5 million. Although
the ARS continue to pay interest according to their stated
terms, based on uncertainties surrounding this asset-backed
investment, continued failure of auctions and a downward trend
on bid quotes through December 31, 2007, we recorded a
pre-tax impairment charge of $0.5 million in the fourth
quarter of 2007, reflecting an other-than-temporary decline in
value. In October 2007, our investment policy was updated to
eliminate future purchases of ARS.
We do not have any material foreign currency or other derivative
financial instruments. The risk associated with fluctuating
interest rates is limited to our investment portfolio and we do
not believe that a 1% change in interest rates would have had a
significant impact on our interest income for 2007 or 2006. As
of December 31, 2007, all of our cash equivalents were held
in operating accounts, money market accounts, commercial paper
and government agency securities.
48
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Financial Statements
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SGX Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of
SGX Pharmaceuticals, Inc. as of December 31, 2007 and 2006
and the related consolidated statements of operations,
stockholders equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2007.
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. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits 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, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of SGX Pharmaceuticals, Inc., at
December 31, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, SGX Pharmaceuticals, Inc. changed its method of
accounting for share based payments in accordance with Statement
of Financial Accounting Standards No. 123 (revised
2004) effective January 1, 2006.
San Diego, California
March 24, 2008
50
SGX
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except par value and share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,022
|
|
|
$
|
27,877
|
|
Short-term investments
|
|
|
968
|
|
|
|
6,000
|
|
Accounts receivable
|
|
|
2,706
|
|
|
|
3,532
|
|
Prepaid expenses, deposits and other current assets
|
|
|
1,187
|
|
|
|
1,616
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
42,883
|
|
|
|
39,025
|
|
Property and equipment, net
|
|
|
3,889
|
|
|
|
5,435
|
|
Goodwill and intangible assets, net
|
|
|
3,426
|
|
|
|
3,412
|
|
Other assets
|
|
|
858
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,056
|
|
|
$
|
48,464
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,964
|
|
|
$
|
2,109
|
|
Accrued liabilities
|
|
|
4,543
|
|
|
|
4,774
|
|
Other current liabilities
|
|
|
250
|
|
|
|
330
|
|
Current portion of line of credit
|
|
|
4,194
|
|
|
|
7,552
|
|
Deferred revenue
|
|
|
13,040
|
|
|
|
6,997
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
24,991
|
|
|
|
21,762
|
|
Deferred rent
|
|
|
|
|
|
|
66
|
|
Deferred revenue, long-term
|
|
|
1,042
|
|
|
|
13,023
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001; Authorized shares
5,000,000 at December 31, 2007 and 2006; and no shares
issued and outstanding at December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001; Authorized shares
75,000,000 at December 31, 2007 and 2006;
issued and outstanding shares 20,480,282 and
15,166,109 at December 31, 2007 and 2006, respectively
|
|
|
21
|
|
|
|
16
|
|
Notes receivable from stockholders
|
|
|
|
|
|
|
(21
|
)
|
Additional paid-in capital
|
|
|
204,739
|
|
|
|
177,355
|
|
Accumulated other comprehensive loss
|
|
|
(1
|
)
|
|
|
(8
|
)
|
Accumulated deficit
|
|
|
(179,736
|
)
|
|
|
(163,729
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
25,023
|
|
|
|
13,613
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
51,056
|
|
|
$
|
48,464
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
51
SGX
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborations and commercial agreements
|
|
$
|
22,367
|
|
|
$
|
19,906
|
|
|
$
|
14,604
|
|
Grants
|
|
|
8,702
|
|
|
|
2,754
|
|
|
|
1,949
|
|
Grants subcontractor reimbursements
|
|
|
3,670
|
|
|
|
5,120
|
|
|
|
5,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
34,739
|
|
|
|
27,780
|
|
|
|
21,636
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,249
|
|
|
|
46,942
|
|
|
|
37,881
|
|
General and administrative
|
|
|
8,642
|
|
|
|
9,588
|
|
|
|
11,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,891
|
|
|
|
56,530
|
|
|
|
49,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,152
|
)
|
|
|
(28,750
|
)
|
|
|
(28,065
|
)
|
Interest income
|
|
|
961
|
|
|
|
1,805
|
|
|
|
284
|
|
Interest expense
|
|
|
(816
|
)
|
|
|
(1,107
|
)
|
|
|
(422
|
)
|
Interest expense associated with bridge notes
|
|
|
|
|
|
|
|
|
|
|
(1,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(16,007
|
)
|
|
|
(28,052
|
)
|
|
|
(29,391
|
)
|
Accretion to redemption value of redeemable convertible
preferred stock
|
|
|
|
|
|
|
(49
|
)
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(16,007
|
)
|
|
$
|
(28,101
|
)
|
|
$
|
(29,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(1.01
|
)
|
|
$
|
(2.03
|
)
|
|
$
|
(48.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss per share
attributable to common stockholders
|
|
|
15,915
|
|
|
|
13,814
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
52
SGX
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Common Stock
|
|
|
from
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stockholders
|
|
|
Capital
|
|
|
Compensation
|
|
|
Loss
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2004
|
|
|
500,436
|
|
|
$
|
1
|
|
|
$
|
(138
|
)
|
|
$
|
27,120
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(105,765
|
)
|
|
$
|
(78,782
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
213,417
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
Conversion of preferred stock into common stock for
non-participation in the Series B financing
|
|
|
70,392
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Accrued interest on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Deferred compensation for issuance of equity instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,944
|
|
|
|
(12,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,233
|
|
|
|
|
|
|
|
|
|
|
|
10,233
|
|
Repurchase of unvested restricted stock
|
|
|
(85
|
)
|
|
|
|
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Issuance of restricted stock
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
654
|
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of equity instruments to former employees and
consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,736
|
|
|
|
(1,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants to lenders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
Deemed dividend and accretion to redemption value of redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(472
|
)
|
|
|
(472
|
)
|
Reduction of redemption value on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,530
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,391
|
)
|
|
|
(29,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
854,160
|
|
|
|
1
|
|
|
|
(59
|
)
|
|
|
99,110
|
|
|
|
(5,101
|
)
|
|
|
|
|
|
|
(135,628
|
)
|
|
|
(41,677
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,052
|
)
|
|
|
(28,052
|
)
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,060
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
115,606
|
|
|
|
1
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
Issuance of common stock pursuant to employee stock purchase plan
|
|
|
59,368
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Issuance of common stock pursuant to initial public offering,
net of offering costs
|
|
|
4,152,904
|
|
|
|
4
|
|
|
|
|
|
|
|
20,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,629
|
|
Conversion of redeemable convertible preferred stock into common
stock pursuant to initial public offering
|
|
|
8,346,316
|
|
|
|
8
|
|
|
|
|
|
|
|
46,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,886
|
|
Conversion of note payable into common stock pursuant to initial
public offering
|
|
|
1,000,000
|
|
|
|
1
|
|
|
|
|
|
|
|
5,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
Issuance of common stock pursuant to collaboration agreement
|
|
|
637,755
|
|
|
|
1
|
|
|
|
|
|
|
|
5,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,010
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Elimination of deferred compensation upon adoption of
SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,101
|
)
|
|
|
5,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,539
|
|
Issuance of warrants to lenders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Deemed dividend and accretion to redemption value of redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
15,166,109
|
|
|
|
16
|
|
|
|
(21
|
)
|
|
|
177,355
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(163,729
|
)
|
|
|
13,613
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,007
|
)
|
|
|
(16,007
|
)
|
Unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,000
|
)
|
Issuance of common stock upon exercise of stock options and
restricted stock awards
|
|
|
176,414
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
Issuance of common stock pursuant to employee stock purchase plan
|
|
|
194,605
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
Issuance of common stock pursuant to private placement offering,
net of offering costs
|
|
|
4,943,154
|
|
|
|
5
|
|
|
|
|
|
|
|
23,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,215
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Compensation expense related to share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
20,480,282
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
204, 739
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
(179,736
|
)
|
|
$
|
25,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
53
SGX
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,007
|
)
|
|
$
|
(28,052
|
)
|
|
$
|
(29,391
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,923
|
|
|
|
3,332
|
|
|
|
3,976
|
|
Stock-based compensation
|
|
|
3,368
|
|
|
|
4,569
|
|
|
|
10,233
|
|
Issuance of common stock for services
|
|
|
260
|
|
|
|
56
|
|
|
|
|
|
Amortization of discount on warrants
|
|
|
168
|
|
|
|
167
|
|
|
|
72
|
|
Amortization of discount on warrants associated with bridge notes
|
|
|
|
|
|
|
|
|
|
|
727
|
|
Realized loss on investment
|
|
|
532
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
(66
|
)
|
|
|
(103
|
)
|
|
|
(97
|
)
|
Accrual of interest on bridge notes payable
|
|
|
|
|
|
|
|
|
|
|
411
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
826
|
|
|
|
(2,669
|
)
|
|
|
56
|
|
Prepaid expenses and other current assets
|
|
|
429
|
|
|
|
(452
|
)
|
|
|
(151
|
)
|
Accounts payable and accrued liabilities
|
|
|
544
|
|
|
|
(40
|
)
|
|
|
2,874
|
|
Deferred revenue
|
|
|
(5,938
|
)
|
|
|
15,223
|
|
|
|
737
|
|
Other assets
|
|
|
(291
|
)
|
|
|
2,078
|
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(14,252
|
)
|
|
|
(5,891
|
)
|
|
|
(11,842
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(18,300
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
Sales and maturity of short-term investments
|
|
|
22,800
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(366
|
)
|
|
|
(1,483
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
4,134
|
|
|
|
(7,483
|
)
|
|
|
(1,303
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from lines of credit and notes payable
|
|
|
|
|
|
|
1,132
|
|
|
|
8,868
|
|
Principal payments on lines of credit and notes payable
|
|
|
(3,526
|
)
|
|
|
(3,474
|
)
|
|
|
(2,974
|
)
|
Proceeds from repayment of notes receivable from stockholders
|
|
|
21
|
|
|
|
39
|
|
|
|
79
|
|
Issuance of common stock for cash, net of repurchases and
offering expenses
|
|
|
23,768
|
|
|
|
25,836
|
|
|
|
219
|
|
Issuance of preferred stock, net
|
|
|
|
|
|
|
|
|
|
|
13,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
20,263
|
|
|
|
23,533
|
|
|
|
19,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
10,145
|
|
|
|
10,159
|
|
|
|
6,206
|
|
Cash and cash equivalents at beginning of year
|
|
|
27,877
|
|
|
|
17,718
|
|
|
|
11,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
38,022
|
|
|
$
|
27,877
|
|
|
$
|
17,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
643
|
|
|
$
|
1,093
|
|
|
$
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
$
|
|
|
|
$
|
46,886
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of note payable to common stock
|
|
$
|
|
|
|
$
|
6,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclass of deferred compensation to additional paid in capital
|
|
$
|
|
|
|
$
|
5,101
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrant related to line of credit
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of bridge notes and redeemable convertible preferred
stock to equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of bridge notes to preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
54
SGX
Pharmaceuticals, Inc.
(In thousands, except share and per share data)
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
and Business
SGX Pharmaceuticals, Inc. (SGX or the
Company, formerly known as Structural GenomiX,
Inc.), was incorporated in Delaware on July 1998. SGX is
biotechnology company focused on the discovery, development and
commercialization of novel, targeted therapeutics directed at
addressing unmet medical needs in oncology.
SGX is subject to risks common to companies in the biotechnology
industry including, but not limited to, risks and uncertainties
related to drug discovery, development and commercialization,
obtaining regulatory approval of any products it or its
collaborators may develop, competition from other biotechnology
and pharmaceutical companies, its effectiveness at managing its
financial resources, its ability to enter into and perform new
collaborations, difficulties or delays in its preclinical
studies or clinical trials, difficulties or delays in
manufacturing its clinical trial materials, implementation of,
and the level of success under, its collaborations, the level of
efforts that its collaborative partners devote to development
and commercialization of its product candidates, its ability to
successfully discover and develop products and market and sell
any products it develops, the scope and validity of patent
protection for its products and proprietary technology,
dependence on key personnel, product liability, litigation, its
ability to comply with U.S. Food and Drug Administration
(FDA) and other government regulations and its
ability to obtain additional funding to support its operations.
Reverse
Stock Split
In April 2005, the Companys board of directors authorized
a 0.126453-for-1 reverse stock split for all outstanding
preferred and common shares. All share information has been
retroactively restated to reflect the reverse stock split.
In January 2006, the Companys board of directors and
stockholders authorized a
1-for-2
reverse stock split of the common stock that was effected on
January 3, 2006. As a result, each share of the
Companys then outstanding preferred stock became
convertible into one-half of a share of the Companys
common stock. All common share information has been
retroactively restated to reflect the
1-for-2
reverse stock split. In connection with the closing of the
Companys initial public offering in February 2006, all
shares of preferred stock were converted to common stock.
Initial
Public Offering
The Companys initial public offering of common stock was
effected through a Registration Statement on
Form S-1
(File number
333-128059)
that was declared effective by the Securities and Exchange
Commission on January 31, 2006. On February 6, 2006,
4,000,000 shares of common stock were sold on the
Companys behalf at an initial public offering price of
$6.00 per share, resulting in aggregate proceeds of
approximately $19.8 million, net of underwriting discounts
and commissions and offering expenses. In addition, during March
2006, the Company closed the sale of an additional
152,904 shares of common stock pursuant to the exercise by
the underwriters of an over-allotment option that resulted in
additional net proceeds to us of $0.9 million, net of
underwriting discounts and commissions and offering expenses.
Principles
of Consolidation
The consolidated financial statements include the assets,
liabilities, and results of operations of the Company and its
wholly-owned subsidiary. All material inter-company balances and
transactions have been eliminated in consolidation.
55
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Use of
Estimates
The preparation of 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 consolidated financial
statements and disclosures made in the accompanying notes to the
consolidated financial statements. Actual results could differ
from those estimates.
Cash
and Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with
original maturities of less than three months when purchased to
be cash equivalents. Cash equivalents are recorded at cost,
which approximate market value.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
, the
Companys short-term investments are carried at fair value
and classified as available-for-sale. Unrealized holding gains
and losses, net of tax, are reported as a component of
accumulated other comprehensive income in stockholders
equity. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are
included in interest income. The cost of the securities is based
on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in
interest income.
Fair
Value of Financial Statements
The carrying value of cash equivalents, accounts receivable,
accounts payable, accrued expenses and liabilities and line of
credit are considered to be reasonable estimates of their
respective fair values due to their short-term nature.
Accounts
Receivable
The Companys accounts receivable consist of amounts due
from governmental agencies for costs incurred under funded
projects and amounts due from corporate partners under various
collaboration agreements. When necessary, the Company maintains
an allowance for potentially uncollectible accounts receivable
arising from its customers inability to make required
payments. The Company has a limited number of accounts
receivable and uses the specific identification method as a
basis for determining this estimate. The Company did not
maintain an allowance for doubtful accounts as of
December 31, 2007 or 2006.
The percentage of total revenues from significant customers is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Customer A
|
|
|
36%
|
|
|
|
28%
|
|
|
|
33%
|
|
Customer B
|
|
|
30%
|
|
|
|
31%
|
|
|
|
%
|
|
Customer C
|
|
|
16%
|
|
|
|
22%
|
|
|
|
38%
|
|
Property
and Equipment
Property and equipment is stated at cost less accumulated
depreciation and amortization. Costs of major additions and
betterments are capitalized; maintenance and repairs, which do
not improve or extend the life of the respective assets are
charged as expenses. On disposal, the related cost and
accumulated depreciation or amortization is removed from the
accounts and any resulting gain or loss is included in the
results of operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets which range from three to fifteen years. Leasehold
improvements are amortized over the estimated useful lives of
the assets or related lease terms, whichever is shorter.
56
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Long-Lived
Assets
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, if indicators
of impairment exist, the Company assesses the recoverability of
the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through the
undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by
comparing the carrying value of the asset to the present value
of the expected future cash flows associated with the use of the
asset. Although the Company has accumulated losses since
inception, the Company believes the future cash flows to be
received from the long-lived assets will exceed the assets
carrying value, and accordingly, the Company has not recognized
any impairment losses through December 31, 2007.
Deferred
Rent
Rent expense is recorded on a straight-line basis over the term
of the lease. The difference between rent expense accrued and
amounts paid under the lease agreement is recorded as deferred
rent in the accompanying consolidated balance sheets.
Adoption
of SFAS 123(R), Share-Based Payment
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of the SFAS No. 123
(revised 2004),
Share-Based Payment
(SFAS 123(R)) using the modified
prospective method of recognition of compensation expense
related to share-based payments. The Companys statement of
operations for the years ended December 31, 2007 and 2006
reflect the impact of adopting SFAS 123R. Under this
method, stock-based compensation expense recognized during the
years ended December 31, 2007 and 2006 includes:
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS 123,
Accounting for
Stock-Based Compensation
(SFAS No. 123) and
(b) compensation cost for all share-based payments granted
on or subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of
SFAS 123R. In accordance with SFAS 123R, the estimated
grant date fair value of each stock-based award is recognized as
expense on a ratable basis over the requisite service period
(generally the vesting period). In accordance with the modified
prospective transition method, the consolidated statement of
operations for the year ended December 31, 2005 has not
been restated to reflect, and do not include, the impact of
SFAS 123R.
Expected volatility is based on average volatilities of the
common stock of comparable publicly traded companies using a
blend of historical, implied and average of historical and
implied volatilities for this peer group of 10 companies.
As permitted by Staff Accounting Bulletin No. 107,
Share-Based Payment
(SAB 107), the
Company utilized the shortcut approach to estimate
an options expected term, which represents the period of
time that an option granted is expected to be outstanding. The
expected term of options granted is derived from the average
midpoint between vesting and the contractual term. The
risk-free interest rate is based on the average of the
5-year
and
7-year
U.S. Treasury yield curve at the beginning of each month
for that months options granted, given their expected
term. The weighted average risk-free interest rates were 4.6%
and 4.7% for 2007 and 2006, respectively.
Since the Company has never paid a dividend and does not expect
to pay dividends in the near future, the Company uses a zero
dividend rate.
As stock-based compensation expense recognized in the
Consolidated Statements of Operations for the years ended
December 31, 2007 and 2006 is based on awards ultimately
expected to vest, it should be reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Pre-vesting forfeitures were estimated to be approximately 12%
during the years ended December 31, 2007 and 2006, based on
historical experience. In the
57
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Companys pro forma information required under
SFAS 123 for the periods prior to fiscal 2006, the Company
accounted for forfeitures as they occurred. Compensation expense
related to stock-based compensation is recognized on a ratable
basis for those awards issued on January 1, 2006 or later.
Compensation expense for awards issued prior to January 1,
2006 is continuing to be recognized on an accelerated method
until vesting is complete. Compensation expense related to
stock-based compensation is allocated to research and
development or general and administrative expense based upon the
department to which the associated employee or non-employee
reports.
The adoption of SFAS 123R did not impact the cash flow from
operations, investing or financing activities during the years
ended December 31, 2007 or 2006.
Stock-Based
Compensation prior to SFAS 123R
In 2005 and prior years, the Company elected to follow
Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees
(APB 25), and related Interpretations in
accounting for its employee and director stock options, and
provided the required pro forma disclosures of
SFAS No. 123. Under APB 25, if the exercise price of
the Companys employee and director stock options equaled
or exceeded the estimated fair value of the underlying stock on
the date of grant, no compensation expense was recognized.
Options or stock awards issued to non-employees were recorded at
their fair value as determined in accordance with
SFAS No. 123
, and Emerging Issues Task Force
(EITF)
96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods and Services
, were periodically revalued as the
options vested and recognized as expense over the related
service period.
The Companys board of directors estimated the fair value
of the Companys common stock for purposes of establishing
exercise prices of stock options. Given the absence of an active
market for the Companys common stock through its initial
public offering in February 2006, the board of directors
considered, among other factors, the liquidation preferences,
anti-dilution protection and voting preferences of the preferred
stock over the common stock in determining the estimated fair
value of the common stock for purposes of establishing the
exercise prices for stock option grants.
In preparation for its initial public offering, the Company
revised its estimate of the fair value for financial reporting
purposes of common stock for all of 2005, and January of 2006.
This valuation was done retrospectively by management, and the
Company did not obtain contemporaneous valuations from an
independent valuation specialist. In reassessing the value of
common stock in 2005 and January 2006, the Company considered
the price it received in April 2005 for its Series B
preferred stock and then the Company steadily increased the
estimated fair value to $14.06 per common share up to the time
of the Companys initial public offering based on an
assessment of market considerations, including discussions with
the underwriters in the initial public offering. The Company
believed this valuation approach was consistent with valuation
methodologies applied for financial reporting purposes to other
similar companies pursuing an initial public offering.
The Company recorded deferred stock compensation, net of
forfeitures, for employee and non-employee directors stock
option and restricted stock grants within stockholders
deficit of $13.6 million in 2005, which represents the
difference between the revised fair value of the common stock
for financial reporting purposes and the option exercise price
at the date of grant. The weighted-average exercise price and
the weighted-average revised fair value were $1.00 and $11.40
for the options granted during 2005, respectively. Deferred
compensation was to be amortized to expense over the vesting
period of the related options using an accelerated method in
accordance with Financial Accounting Standards Board
Interpretation (FIN) No. 28,
Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Award Plans.
The Company recorded amortization of deferred stock compensation
of $10.2 million during the year ended December 31,
2005. On January 1, 2006, the Company reclassified the
remaining deferred stock compensation of $5.1 million to
additional paid-in capital in accordance with SFAS 123R.
58
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The table below illustrates the effect on net loss and net loss
per share had the Company applied the fair value provisions of
SFAS No. 123 to employee stock compensation in 2005
(in thousands, except per share data).
|
|
|
|
|
|
|
2005
|
|
|
Net loss attributable to common stockholders, as reported
|
|
$
|
(29,863
|
)
|
Add: Stock-based employee compensation expense included in net
loss attributable to common stockholders
|
|
|
8,785
|
|
Deduct: Stock-based employee compensation determined under the
fair value method
|
|
|
(6,859
|
)
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$
|
(27,937
|
)
|
|
|
|
|
|
Basic and diluted net loss attributable to common stockholders
per share, as reported
|
|
$
|
(48.32
|
)
|
|
|
|
|
|
Pro forma basic and diluted net loss attributable to common
stockholders per share
|
|
$
|
(45.21
|
)
|
|
|
|
|
|
The fair value of these stock option and restricted stock grants
used to compute pro forma net loss is estimated at the date of
grant, using a Black-Scholes option pricing model with the
following weighted-average assumptions for the year ended
December 31, 2005:
|
|
|
|
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
3%
|
|
Expected volatility
|
|
|
63%
|
|
Expected lives
|
|
|
4 years
|
|
Expected dividend
|
|
|
|
|
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions. Because the Companys employee stock option
and restricted stock grants have characteristics significantly
different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimates, in managements opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options and restricted
stock grants.
Revenue
Recognition
The Companys collaboration agreements and commercial
agreements contain multiple elements, including non-refundable
upfront fees, payments for reimbursement of research costs,
payments for ongoing research, payments associated with
achieving specific milestones and, in the case of collaboration
agreements, development milestones and royalties based on
specified percentages of net product sales, if any. The Company
applies the revenue recognition criteria outlined in Staff
Accounting Bulletin No. 104,
Revenue
Recognition,
and EITF
Issue 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
In applying these revenue recognition criteria, the Company
considers a variety of factors in determining the appropriate
method of revenue recognition under these arrangements, such as
whether the elements are separable, whether there are
determinable fair values and whether there is a unique earnings
process associated with each element of a contract.
Cash received in advance of services being performed is recorded
as deferred revenue and recognized as revenue as services are
performed over the applicable term of the agreement.
When a payment is specifically tied to a separate earnings
process, revenues are recognized when the specific performance
obligation associated with the payment is completed. Performance
obligations typically consist of significant and substantive
milestones pursuant to the related agreement. Revenues from
non-refundable milestone payments may be considered separable
from funding for research services because of the uncertainty
surrounding the achievement of milestones for products in early
stages of development. Accordingly, these payments could be
59
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
recognized as revenue if and when the performance milestone is
achieved if they represent a separate earnings process as
described in
EITF 00-21.
In connection with certain research collaborations and
commercial agreements, revenues are recognized from
non-refundable upfront fees, which the Company does not believe
are specifically tied to a separate earnings process, ratably
over the term of the agreement. Research services provided under
some of the Companys agreements are on a fixed fee basis.
Revenues associated with long-term fixed fee contracts are
recognized based on the performance requirements of the
agreements and as services are performed.
Revenues derived from reimbursement of direct out-of-pocket
expenses for research costs associated with grants are recorded
in compliance with EITF Issue
99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent
(EITF 99-19),
and EITF Issue
01-14,
Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred
(EITF 01-14).
According to the criteria established by these EITF Issues, in
transactions where the Company acts as a principal, with
discretion to choose suppliers, bears credit risk and performs
part of the services required in the transaction, the Company
records revenue for the gross amount of the reimbursement. The
costs associated with these reimbursements are reflected as a
component of research and development expense in the statements
of operations.
None of the payments that the Company has received from
collaborators to date, whether recognized as revenue or
deferred, is refundable even if the related program is not
successful.
Research
and Development
Research and development costs are expensed as incurred and
consist primarily of costs associated with preclinical and
clinical trials, compensation, including stock-based
compensation, and other expenses related to research and
development, including personnel costs, facilities costs and
depreciation.
Income
Taxes
The Company accounts for income taxes using the liability method
in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes.
Under this method, deferred
tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of the
Companys assets and liabilities and are estimated using
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is
provided when the Company determines that it is more likely than
not that some portion or all of a deferred tax asset will not be
realized.
Net
Loss Per Share Attributable to Common Stockholders
The Company computes net loss per share attributable to common
stockholders in accordance with SFAS No. 128,
Earnings Per Share
(SFAS 128). Under the
provisions of SFAS 128, basic net loss per share
attributable to common stockholders (Basic EPS) is
computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares
outstanding. Diluted net loss per share attributable to common
stockholders (Diluted EPS) is computed by dividing
net loss attributable to common stockholders by the weighted
average number of common shares and dilutive common share
equivalents then outstanding. Common share equivalents consist
of the incremental common shares issuable upon the conversion of
preferred stock and note payable, shares issuable upon the
exercise of stock options, vesting of restricted stock units,
and shares issuable upon the exercise of warrants. For the
periods presented, Diluted EPS is identical to Basic EPS because
common share equivalents, including all of the Companys
preferred stock, note payable, outstanding stock options and
outstanding warrants, are excluded from the calculation, as
their effect is anti-dilutive. Had the Company been in a
60
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
net income position, these securities may have been included in
the calculation. These potentially dilutive securities consist
of the following on a weighted average basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
5,686,849
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
Outstanding common stock options
|
|
|
853,725
|
|
|
|
604,869
|
|
|
|
636,927
|
|
Restricted stock
|
|
|
76,563
|
|
|
|
145,727
|
|
|
|
28,971
|
|
Outstanding warrants
|
|
|
361,879
|
|
|
|
195,928
|
|
|
|
70,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,292,167
|
|
|
|
946,524
|
|
|
|
7,423,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon the completion of the Companys initial public
offering in February 2006, all of the Companys previously
outstanding preferred shares converted into an aggregate of
8,346,316 shares of the Companys common stock and a
note payable converted into 1.0 million shares of the
Companys common stock.
Comprehensive
Income (Loss)
SFAS No. 130,
Reporting Comprehensive Income
,
requires that all components of comprehensive income, including
net income, be reported in the financial statements in the
period in which they are recognized. Comprehensive income (loss)
is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner
sources. Net income (loss) and other comprehensive income
(loss), including foreign currency translation adjustments and
unrealized gains and losses on investments, are to be reported,
net of their related tax effect, to arrive at comprehensive
income (loss).
Segment
Reporting
The Company has adopted SFAS No. 131,
Disclosure
About Segments of an Enterprise and Related Information
,
which requires companies to report selected information about
operating segments, as well as enterprise wide disclosures about
products, services, geographical areas, and major customers.
Operating segments are determined based on the way management
organizes its business for making operating decisions and
assessing performance. The Company has only one operating
segment, the discovery, development and commercialization of
drug products, thus, this statement did not have an impact on
the Companys financial statements.
Recently
Issued Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48)
, which clarifies the accounting
for uncertainty in income taxes. FIN 48 requires that the
Company recognize the impact of a tax position in its financial
statements if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 were effective as of
January 1, 2007, with the cumulative effect of the change
in accounting principle recorded as an adjustment to retained
earnings as of that date. The adoption of FIN 48 did not
have a material impact on the Companys consolidated
financial statements.
As a result of the adoption of FIN 48, the Company has not
recorded any change to retained earnings on January 1,
2007, as the Company had no unrecognized tax benefits that, if
recognized, would affect the Companys effective income tax
rate in future periods. At December 31, 2007, the Company
had no unrecognized tax benefits. The Companys continuing
practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The Company had no accrued interest or penalties at either
January 1, 2007 or December 31, 2007. All of the
Companys tax years remain subject to future examination by
the major tax jurisdictions in which it is subject to tax.
61
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The Company has not completed a study to assess whether a change
in control has occurred, or whether there have been multiple
changes of control since the Companys formation, due to
the significant complexity and cost associated with such study
and the possibility that there could be additional changes in
the future. If the Company experienced a greater than
50 percent change or shift in ownership over a
3-year
time
frame since its formation, utilization of its net operating
losses or research and development credit carry forwards would
be subject to an annual limitation under Sections 382 and
383. The annual limitation generally is determined by
multiplying the value of the Companys stock at the time of
the ownership change (subject to certain adjustments) by the
applicable long-term tax-exempt rate. Any limitation may result
in expiration of a portion of the NOL or R&D credit carry
forwards before utilization. Further, until a study is completed
and any limitation known, no amounts are being presented as a
deferred tax asset as it represents an uncertain tax position
under FIN 48.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements,
or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. This Statement applies only to fair value
measurements that are already required or permitted by other
accounting standards. Accordingly, this SFAS No. 157
does not require any new fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after December 15, 2007. The Company does not currently
expect the adoption of SFAS No. 157 will have a
material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement
No. 115
(SFAS No. 159).
SFAS No. 159 expands the use of fair value accounting
but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under
SFAS No. 159, a company may elect to use fair value to
measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts
payable, guarantees and issued debt. Other eligible items
include firm commitments for financial instruments that
otherwise would not be recognized at inception and non-cash
warranty obligations where a warrantor is permitted to pay a
third party to provide the warranty goods or services. If the
use of fair value is elected, any upfront costs and fees related
to the item must be recognized in earnings and cannot be
deferred. The fair value election is irrevocable and generally
made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to measure based on fair value. At the adoption date,
unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment
to beginning retained earnings. Subsequent to the adoption of
SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be
adopted by the Company in the first quarter of fiscal 2008. The
Company does not currently expect the adoptions of
SFAS No. 159 to have a material impact on its
consolidated financial statements.
In June 2007, the FASB ratified the consensus reached by the
EITF on EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities,
or
EITF 07-3.
EITF Issue
No. 07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are
delivered or the related services are performed or such time
when the entity does not expect the goods to be delivered or
services to be performed. EITF
No. 07-3
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. The Company does not currently
expect the adoption of EITF
No. 07-3
to have a material impact on its consolidated financial
statements.
In November 2007, the EITF issued EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property,
or
EITF 07-1.
Companies may enter into arrangements with other companies to
jointly develop, manufacture, distribute, and market a product.
Often the activities associated with these arrangements are
conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a
virtual joint venture). The arrangements generally
provide that the collaborators will share, based on
contractually defined calculations, the profits or losses from
the
62
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
associated activities. Periodically, the collaborators share
financial information related to product revenues generated (if
any) and costs incurred that may trigger a sharing payment for
the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of
activities for which they act as the principal on a gross basis
and report any payments received from (made to) other
collaborators based on other applicable GAAP or, in the absence
of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election. EITF
No. 07-1
is effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15,
2008. The Company does not currently expect the adoption of EITF
No. 07-1
to have a material impact on its consolidated financial
statements.
Short-term
Investments
Short-term investments held as of December 31, 2007 and
2006 consist of auction rate securities (ARS). There
were no unrealized gains or losses associated with these
securities as of December 31, 2007 and 2006. These auction
rate securities are debt instruments with a long-term maturity
and an interest rate that is reset in short-term intervals
through auctions.
Short-term investments at December 31, 2007 consisted of
one ARS that matures in 2017 and was purchased within the
Companys investment policy guidelines during 2007. The ARS
had an AAA/Aaa credit rating at the time of purchase, which
remains unchanged. With the liquidity issues experienced in
global credit and capital markets, this ARS has experienced
multiple failed auctions as the amount of securities submitted
for sale has exceeded the amount of purchase orders. The
estimated market value at December 31, 2007 was
$1.0 million, which reflects a $0.5 million adjustment
to the principal value of $1.5 million. Although the ARS
continues to pay interest according to its stated terms, based
on uncertainties surrounding this asset class, continued failure
of auctions and a downward trend on bid quotes through
December 31, 2007, the Company recorded an impairment
charge of $0.5 million in the fourth quarter of 2007,
reflecting an other-than-temporary decline in value. In October
2007, the Company changed its investment policy to prevent
future purchases of ARS.
Property
and Equipment
Property and equipment consist of the following (in thousands,
except estimated life in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
|
|
Life in Years
|
|
|
2007
|
|
|
2006
|
|
|
Lab equipment
|
|
|
5 - 7
|
|
|
$
|
14,338
|
|
|
$
|
14,066
|
|
Computers and equipment
|
|
|
3 - 5
|
|
|
|
8,154
|
|
|
|
7,963
|
|
Leasehold improvements
|
|
|
4 - 15
|
|
|
|
5,139
|
|
|
|
5,139
|
|
Furniture
|
|
|
10
|
|
|
|
411
|
|
|
|
411
|
|
Construction in progress
|
|
|
NA
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,042
|
|
|
|
27,834
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(24,153
|
)
|
|
|
(22,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
3,889
|
|
|
$
|
5,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense related to property and equipment was
$1.9 million, $3.2 million and $3.4 million for
the years ended December 31, 2007, 2006 and 2005,
respectively, which is net of asset dispositions. Cost and
accumulated depreciation of assets under equipment lines of
credit was $17.0 million and $15.1 million,
respectively, at December 31, 2007, and $17.0 million
and $14.1 million, respectively, at December 31, 2006.
Depreciation of assets under equipment lines of credit is
included in depreciation expense.
63
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
A majority of the Companys property and equipment
collateralizes the outstanding obligations under the existing
line of credit agreements as of December 31, 2007 and 2006.
Goodwill
and Intangible Assets
Intangible assets include the following (in thousands, except
estimated life in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Life in Years
|
|
|
Amount
|
|
|
Amortization
|
|
|
Goodwill
|
|
|
Indefinite
|
|
|
$
|
3,914
|
|
|
$
|
(522
|
)
|
Licenses
|
|
|
3 - 10
|
|
|
|
1,014
|
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
4,928
|
|
|
$
|
(1,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Life in Years
|
|
|
Amount
|
|
|
Amortization
|
|
|
Goodwill
|
|
|
Indefinite
|
|
|
$
|
3,914
|
|
|
$
|
(522
|
)
|
Licenses
|
|
|
3 - 10
|
|
|
|
989
|
|
|
|
(969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
4,903
|
|
|
$
|
(1,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net amortization expense of intangible assets, excluding
goodwill, done on a straight-line basis for the years ended
December 31, 2007 and 2006 was approximately $11,000 and
$39,000, respectively.
Estimated amortization of intangible assets for the years ending
December 31 (in thousands):
|
|
|
|
|
2008
|
|
$
|
7
|
|
2009
|
|
|
6
|
|
2010
|
|
|
6
|
|
2011
|
|
|
6
|
|
2012
|
|
|
5
|
|
Thereafter
|
|
|
4
|
|
|
|
|
|
|
|
|
$
|
34
|
|
|
|
|
|
|
In September 2002, the Company entered into a line of credit
agreement under which it could borrow up to $6.5 million to
finance equipment. Borrowings under the line of credit bear
interest at effective rates ranging between 9.71% and 11.09% per
annum and are collateralized solely by the financed equipment.
Principal and interest are payable monthly over either
35 months or 47 months depending on the type of
equipment financed. As of December 31, 2007, there are no
amounts available for future draws under this line of credit.
In September 2005, the Company entered into a line of credit and
equipment financing agreement with Silicon Valley Bank and
Oxford Finance Corporation to provide $8.0 million of
general purpose working capital financing and $2.0 million
of equipment and leasehold improvements financing. One-half of
the proceeds were immediately made available to the Company
under the line of credit and equipment financing agreements. The
remainder of the line of credit became available in the fourth
quarter of 2005 and the remainder of the equipment financing
agreement became available in the second quarter of 2006.
64
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In September 2005, the Company borrowed $4.0 million for
general purpose working capital under the line of credit
facility. In December 2005, the Company borrowed an additional
$4.0 million for general purpose working capital purposes
under the line of credit facility and $0.9 million for
equipment financing purposes. In November and December 2006, the
Company borrowed the remainder of the available financing of
$1.1 million under the equipment financing agreement. These
debt agreements subject us to certain financial and
non-financial covenants. As of December 31, 2007, we were
in compliance with these covenants. These obligations are
secured by the Companys assets, excluding intellectual
property, and are due in monthly installments through 2010. They
bear interest at effective rates ranging from approximately
10.19% to 11.03% and are subject to prepayment fees of up to 4%
of the outstanding principal balance as of the prepayment date.
The Company made debt repayments of approximately
$3.5 million, $3.5 million, and $3.0 million for
the years ended December 31, 2007, 2006, and 2005,
respectively.
The facility with Silicon Valley Bank and Oxford Finance
Corporation is subject to a material adverse event
clause and the Companys cash and cash equivalent accounts
are subject to the control of the lenders if a material
adverse event occurs. In accordance with the provisions of
EITF
No. 95-22,
Balance Sheet Classifications of Borrowings Outstanding under
Revolving Credit Agreements that include both a Subjective
Acceleration Clause and a Lock-Box Arrangement,
and FASB
Technical
Bulletin No. 79-3,
Subjective Acceleration Clauses in Long-Term Debt
Agreements
, the Company has classified the borrowings
outstanding under this arrangement as a current liability in the
consolidated balance sheets as of December 31, 2007 and
2006.
Future minimum principal payments due on the above equipment and
working capital lines of credit as of December 31, 2007 are
as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
3,661
|
|
2009
|
|
|
665
|
|
2010
|
|
|
18
|
|
|
|
|
|
|
Total
|
|
|
4,344
|
|
Less: Amount representing debt discount at December 31, 2007
|
|
|
(150
|
)
|
|
|
|
|
|
Total minimum principal payments, net of debt discount
|
|
$
|
4,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Commitments
and Collaborative Research and Development Agreements
|
The Company leases its office and research facilities and
certain office equipment under non-cancelable operating leases,
which expire on September 30, 2013. The leases include
escalation clauses beginning on the first anniversary of the
respective lease and continuing through the end of the leases.
The leases require the Company to pay for all maintenance,
insurance and property taxes.
Future minimum lease payments are as follows at
December 31, 2007 (in thousands):
|
|
|
|
|
2008
|
|
$
|
1,817
|
|
2009
|
|
|
1,737
|
|
2010
|
|
|
1,801
|
|
2011
|
|
|
1,855
|
|
2012
|
|
|
1,929
|
|
Thereafter
|
|
|
1,497
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
10,636
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2007, 2006
and 2005 was $1.9 million, $1.8 million and
$2.2 million, respectively.
65
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Sponsored
Research and Drug Discovery Collaboration Agreements with Cystic
Fibrosis Foundation Therapeutics, Inc.
In January 2001, the Company entered into a sponsored research
agreement with Cystic Fibrosis Foundation Therapeutics, Inc.
(CFFT), the drug discovery and development arm of
the Cystic Fibrosis Foundation. Through December 31, 2007,
the Company recognized revenue of $15.4 million related to
research funding and $1.9 million related to the
achievement of milestones. In July 2005, the Company entered
into a new three-year drug discovery collaboration agreement
with CFFT.
Collaboration
and License Agreement with Eli Lilly and Company
In April 2003, the Company entered into a two-year research and
technology agreement with Eli Lilly and Company (Eli
Lilly). Under the terms of the agreement, the Company has
received research, license, technology access and technology
installation fees of $30.2 million through
December 31, 2007. These payments were initially recorded
as deferred revenue and recognized as collaborations and
commercial agreements revenue as services were performed
pursuant to the agreement.
In December 2003, the Company also expanded its research and
technology agreement with Eli Lilly to provide Eli Lilly with
long-term access to its beamline facility at the Advanced Photon
Source in Argonne, Illinois, to support Eli Lilly drug discovery
programs. Under the terms of the Companys beamline
services agreement with Eli Lilly, the Company generates crystal
structure data on Eli Lilly drug targets and compounds in
exchange for upfront access fees and maintenance fees paid by
Eli Lilly. Upon execution of the agreement, the Company received
a $2.0 million upfront access fee payment and will receive
payments for annual operating costs in future years. In December
2007, the research term of the agreement was extended for an
additional three years.
License
and Collaboration Agreement with Novartis
In March 2006, the Company entered into a License and
Collaboration Agreement (the Agreement) with
Novartis Institutes for Biomedical Research, Inc.,
(Novartis) focused on the development and
commercialization of BCR-ABL inhibitors for the treatment of
CML. Under the agreement, the parties will collaborate to
develop one or more BCR-ABL inhibitors and Novartis will have
exclusive worldwide rights to such compounds, subject to the
Companys commercialization option in the United States and
Canada. Pursuant to an amendment to the Companys agreement
with Novartis signed in September 2007, the Company has the
right, but not the obligation, to develop and commercialize
SGX393 outside of the collaboration, subject to a reacquisition
right of Novartis that may be exercisable at a future date. The
Company has also granted Novartis rights to include certain
compounds that the Company does not want to pursue under the
collaboration in Novartis screening library and the
Company will be entitled to receive royalties on sales of
products based on those compounds. The research term under this
agreement concluded in late March 2008 and Novartis remains
responsible for further development of BCR-ABL inhibitors
identified pursuant to the collaboration, other than SGX393.
Under the terms of the agreement, the Company received
$25.0 million of upfront payments, including
$5.0 million for the purchase by Novartis Pharma AG of
shares of the Companys common stock. The Company is also
entitled to receive research funding over the first two years,
which ended in late March 2008, of the collaboration of
$9.1 million. With payments for achievement of specified
development, regulatory and commercial milestones, including
$9.5 million for events up to and including commencement of
the first Phase I clinical trial, total payments to the Company
could exceed $515 million. To date, under the
collaboration, the Company has not received any milestone
payments. At this time, an Investigational New Drug application
(IND) for a drug candidate under the collaboration
is not anticipated in 2008.
Novartis is responsible for funding 100% of the development
costs of product candidates from the collaboration, other than
SGX393. The research and development activities of the parties
are overseen by committees with equal representation of the
parties, with Novartis having the right to make the final
decision on certain matters. The
66
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Company is also eligible to receive royalties based on net
sales. In addition, the Company retains an option to
co-commercialize in the United States and Canada oncology
products developed under the agreement through a sales force
trained and funded by Novartis.
While the research term of the agreement ended in late March
2008, the agreement will continue until the expiration of all of
Novartis royalty payment obligations, unless the agreement
is terminated earlier by either party. Novartis and the Company
each have the right to terminate the agreement early if the
other party commits an uncured material breach of its
obligations. If Novartis terminates the agreement for material
breach by the Company, Novartis licenses under the
agreement will continue subject to certain milestone and royalty
payment obligations. If the Company terminates the agreement for
material breach by Novartis, all rights to compounds developed
under the collaboration will revert to the Company. Further,
Novartis may terminate the agreement without cause if it
reasonably determines that further development of compounds or
products from the collaboration is not viable, in which event
all rights to the compounds and products revert to the Company.
In the event of a change in control of the Company, in certain
circumstances Novartis may terminate only the joint committees
and co-commercialization option, with all other provisions of
the agreement remaining in effect, including Novartis
licenses and its obligations to make milestone and royalty
payments.
|
|
5.
|
Bridge
Financing and Redeemable Convertible Preferred Stock
|
In July and September 2004, the Company entered into a Loan and
Security Agreement whereby the Company borrowed from certain
preferred stockholders an aggregate principal amount of
approximately $13.4 million under Secured Convertible
Promissory Notes (the Secured Bridge Notes) and
issued to those preferred stockholders warrants (the
Bridge Warrants) to purchase shares of common stock
of the Company. The Company determined the fair value of the
Bridge Warrants on the grant date, using the Black-Scholes
pricing model with a resulting aggregate expense of
approximately $1.7 million, which was recorded against the
principal balance and was amortized over the term of the Secured
Bridge Notes. Of the debt discount, approximately
$0.4 million was recognized as interest expense during the
year ended December 31, 2005. The principal and accrued
interest under the Secured Bridge Notes converted into shares of
preferred stock in connection with the closing of preferred
stock financing during 2004.
In connection with the closing of the Companys initial
public offering in February 2006, all shares of redeemable
convertible preferred stock were converted into shares of common
stock. Prior to the Companys initial public offering, the
carrying value of redeemable convertible preferred stock was
increased by periodic accretions so that the carrying amount
would equal the redemption value at the redemption date. These
accretions were effected through charges against the
Companys accumulated deficit.
|
|
6.
|
Equity
Incentive Plans and Warrants
|
2000
Equity Incentive Plan
In February 2000, the Company adopted its 2000 equity incentive
plan (the 2000 Plan). The 2000 Plan provided for the
grant of up to 1,755,000 shares pursuant to incentive and
non-statutory stock options, stock bonuses or sales of
restricted stock. Options granted under the 2000 Plan generally
expire no later than ten years from the date of grant (five
years for a 10% stockholder). Options generally vest over a
period of four years. The exercise price of incentive stock
options must be equal to at least the fair value of the
Companys common stock on the date of grant, and the
exercise price of non-statutory stock options may be no less
than 85% of the fair value of the Companys common stock on
the date of grant. The exercise price of any option granted to a
10% stockholder may not be less than 110% of the fair value of
the Companys common stock on the date of grant. On
February 1, 2006, the effective date of the Companys
initial public offering, the 2000 Plan terminated and the
remaining 249,427 shares available under the 2000 Plan were
transferred to the 2005 equity incentive plan (the 2005
Plan).
67
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
2005
Equity Incentive Plan
The Company adopted in August 2005, and the stockholders
approved in October 2005, the 2005 Plan. The 2005 Plan became
effective upon the effectiveness of the Companys initial
public offering (see Note 1). An aggregate of
750,000 shares of the Companys common stock were
initially authorized for issuance under the 2005 Plan, plus the
number of shares remaining available for future issuance under
the 2000 Plan that are not covered by outstanding options as of
the termination of the 2000 Plan on the effective date of the
initial public offering. In addition, this amount is
automatically increased annually on the first day of the
Companys fiscal year, from 2007 until 2015, by the lesser
of (a) 3.5% of the aggregate number of shares of common
stock outstanding on December 31 of the preceding fiscal year or
(b) 500,000 shares of common stock. Options granted
under the 2005 Plan generally expire no later than ten years
from the date of grant (five years for a 10% stockholder).
Options generally vest over a period of four years. The exercise
price of incentive stock options must be equal to at least the
fair value of the Companys common stock on the date of
grant, and the exercise price of non-statutory stock options may
be no less than 85% of the fair value of the Companys
common stock on the date of the grant. The exercise price of any
option granted to a 10% stockholder may not be less than 110% of
the fair value of the Companys common stock on the date of
grant.
The shares reserved under the 2005 Plan automatically increased
by 500,000 shares of the Companys common stock on
January 1, 2007 and an additional 500,000 shares of
the Companys common stock on January 1, 2008.
2005
Non-Employee Directors Stock Option Plan
The Company adopted in August 2005, and the stockholders
approved in October 2005, the 2005 non-employee directors
stock option plan (the Directors Plan). The
Directors Plan became effective upon the effectiveness of
the Companys initial public offering (see Note 1).
The Directors Plan provides for the automatic grant of
non-qualified options to purchase shares of the Companys
common stock to non-employee directors. An aggregate of
75,000 shares of common stock was initially reserved for
issuance under the Directors Plan. This amount is
increased annually on the first day of the Companys fiscal
year, from 2007 until 2015, by the aggregate number of shares of
common stock subject to options granted as initial grants and
annual grants under the Directors Plan during the
immediately preceding year. There were 62,500 options granted
and 4,167 options cancelled during 2007 and, as a result, the
shares reserved under the Directors Plan automatically increased
by 58,333 shares of the Companys common stock on
January 1, 2008, to bring the shares available for issuance
back to 75,000. There were no options granted from the
Directors Plan during 2006.
68
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Stock
Option Activity:
The following table summarizes activity related to stock options
to purchase shares of the Companys common stock (intrinsic
value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual Term
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
in Years
|
|
|
Intrinsic Value
|
|
|
Outstanding at December 31, 2004
|
|
|
164,475
|
|
|
$
|
10.67
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,396,627
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(213,417
|
)
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(200,999
|
)
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
1,146,686
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
677,750
|
|
|
$
|
6.77
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(96,856
|
)
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(143,480
|
)
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,584,100
|
|
|
$
|
3.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
847,960
|
|
|
$
|
3.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(121,727
|
)
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(170,439
|
)
|
|
$
|
4.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
2,139,894
|
|
|
$
|
4.02
|
|
|
|
8.00
|
|
|
$
|
3,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
1,009,923
|
|
|
$
|
3.66
|
|
|
|
8.15
|
|
|
$
|
2,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected information regarding stock options as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Term in Years
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$1.00
|
|
|
694,173
|
|
|
|
7.15
|
|
|
$
|
1.00
|
|
|
|
591,194
|
|
|
$
|
1.00
|
|
$1.58 - $2.55
|
|
|
24,450
|
|
|
|
7.37
|
|
|
$
|
2.02
|
|
|
|
11,678
|
|
|
$
|
1.86
|
|
$3.63 - $3.63
|
|
|
649,627
|
|
|
|
9.07
|
|
|
$
|
3.63
|
|
|
|
|
|
|
$
|
|
|
$3.96 - $13.44
|
|
|
771,644
|
|
|
|
7.87
|
|
|
$
|
7.12
|
|
|
|
407,051
|
|
|
$
|
7.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00 - $13.44
|
|
|
2,139,894
|
|
|
|
8.00
|
|
|
$
|
4.02
|
|
|
|
1,009,923
|
|
|
$
|
3.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The Company recognized share-based compensation expense
(excluding non-employee stock options and restricted stock
awards) in accordance with SFAS No. 123R as follows
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Research and development
|
|
$
|
1,210
|
|
|
$
|
1,771
|
|
General and administrative
|
|
|
1,384
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense and impact on net loss
applicable to common stockholders
|
|
$
|
2,594
|
|
|
$
|
3,784
|
|
|
|
|
|
|
|
|
|
|
Impact on net loss per share applicable to common stockholders,
basic and diluted
|
|
$
|
0.16
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $2.6 million of
unrecognized compensation cost related to non-vested option
arrangements. The cost is expected to be recognized over a
weighted average period of 2.45 years. The per share
weighted-average grant date fair value of options granted (as
determined through the use of the Black-Scholes option pricing
model) during 2007, 2006 and 2005 was $2.69, $4.36 and $10.15,
respectively. For 2007 and 2006, the Black-Scholes model with
the following assumptions was used (weighted averages):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
|
73
|
%
|
|
|
67
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.7
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Restricted
Stock and Restricted Stock Unit Grants
In May 2005, the Company granted a restricted stock award under
the 2000 Plan of 70,000 shares of the Companys common
stock. Twenty-five percent of the shares subject to the award
were immediately vested as of the date of grant and the
remaining shares subject to the award vest in equal monthly
installments over a two year period.
In March 2006, the Company granted restricted stock unit awards
in the amount of 75,000 each to two members of the
Companys executive management team under the 2005 Plan.
Twenty-five percent of the shares subject to the restricted
stock awards will vest on the one-year anniversary of their
respective hire dates, with the remaining shares subject to such
awards vesting in equal monthly installments over the following
three years.
At December 31, 2007 and 2006, there were
76,563 shares and 142,188 shares, respectively, of
unvested restricted common stock and restricted common stock
units subject to these agreements.
Changes in the Companys restricted stock and restricted
stock units for the year ended December 31, 2007 were as
follows (in thousands except for fair values):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested restricted stock at January 1, 2007
|
|
|
142,188
|
|
|
$
|
7.87
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(65,625
|
)
|
|
|
8.11
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2007
|
|
|
76,563
|
|
|
$
|
7.66
|
|
|
|
|
|
|
|
|
|
|
70
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
For the year ended December 31, 2007, the Company recorded
stock-based compensation expense of $0.4 million related to
outstanding restricted stock and restricted stock unit grants.
As of December 31, 2007, there was $0.4 million of
unrecognized compensation cost related to non-vested restricted
stock arrangements. The cost is expected to be recognized over a
weighted average period of 1.99 years. The total fair value
of shares vested during the year ended December 31, 2007
was $0.5 million.
Common
Stock Options to Consultants
As of December 31, 2007, the Company has outstanding
options to purchase 119,854 shares of common stock that
were granted to consultants. Of the total shares granted, 58,232
were exercised, and 8,082 were unvested. These options were
granted in exchange for consulting services to be rendered and
vest over periods of up to four years. The Company recorded
charges to operations for stock options granted to consultants
using the graded-vesting method of $38,000 and $145,000 during
the years ended December 31, 2007 and 2006, respectively.
There was no charge to operations in 2005. The unvested shares
held by consultants have been and will be revalued using the
Companys estimate of fair value at each balance sheet date
pursuant to EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
Total stock-based compensation expense recognized for the years
ended December 31, 2007 and 2006, related to all of the
Companys stock-based awards granted, was comprised as
follows (in thousands except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Research and development
|
|
$
|
1,728
|
|
|
$
|
2,124
|
|
General and administrative
|
|
$
|
1,640
|
|
|
$
|
2,445
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
3,368
|
|
|
$
|
4,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense per common share, basic and
diluted:
|
|
$
|
0.21
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Employee Stock Purchase Plan
The Company adopted the 2005 Employee Stock Purchase Plan (the
Purchase Plan) in 2005 and it became effective upon
the effectiveness of the Companys initial public offering
(See Note 1). Under the Purchase Plan, employees can choose
to have up to 15% of their annual compensation withheld to
purchase shares of common stock, subject to certain limitations.
The shares of common stock may be purchased over an offering
period with a maximum duration of two years at 85% of the lower
of the fair market value of the Companys common stock on
the first day of the applicable offering period or on the last
day of the six-month purchase period. The Purchase Plan will
terminate at the time that all of the shares of the
Companys common stock then reserved for issuance under the
Purchase Plan have been issued under the terms of the Purchase
Plan, unless the Companys board of directors terminates it
earlier. An aggregate of 375,000 shares of the
Companys common stock were initially reserved for issuance
under the Purchase Plan. This amount is increased annually on
the first day of the Companys fiscal year, from 2007 until
2015, by the lesser of (i) 1% of the fully-diluted shares
of common stock outstanding on January 1 of the current fiscal
year or (ii) 150,000 shares of the Companys
common stock. An additional 150,000 shares of common stock
were automatically reserved for issuance under the Purchase Plan
on January 1, 2007 and 2008, respectively, for a total of
675,000 shares authorized for issuance under the Purchase
Plan on January 1, 2008. During the years ended
December 31, 2007 and 2006, 194,605 and 59,368 shares,
respectively, were purchased under the Purchase Plan and
recorded as common stock and additional paid in capital in the
amounts of $0.4 million and $0.1 million for each
year, respectively. As of December 31, 2007, a total of
253,973 shares have been issued
71
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
since inception of the Purchase Plan. The Company recorded stock
compensation expense of $0.3 million and $0.1 million
for the years ending December 31, 2007 and 2006,
respectively.
The table below sets forth the assumptions and estimated per
share fair value of the options to purchase stock granted under
the Purchase Plan for multiple offering periods during the years
ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
Years Ended
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Expected volatility (weighted average)
|
|
73%
|
|
67%
|
Risk-free interest rate
|
|
4.1% to 5.1%
|
|
4.9% to 5.1%
|
Dividend yield
|
|
0%
|
|
0%
|
Expected term
|
|
6 months to
|
|
6 months to
|
|
|
2 years
|
|
2 years
|
Estimated fair value per share of options granted under the
Purchase Plan
|
|
$0.83 to $3.37
|
|
$0.83 to $1.17
|
Warrants
In connection with certain debt arrangements and consulting
service agreements, the Company has issued warrants to purchase
shares of common stock. In November 2007, in connection with a
private placement, the Company issued warrants to purchase an
aggregate of up to 1,482,944 shares of the Companys
common stock with an exercise price of $5.77. As of
December 31, 2007, the Company had outstanding warrants to
purchase 1,682,009 shares of the Companys common
stock with exercise prices ranging from $1.00 to $13.44. These
warrants expire at various times between July 2010 and December
2015.
|
|
7.
|
Stockholders
equity (deficit)
|
Common
Stock
Shares Reserved
for Future Issuance
The Company has reserved shares of common stock for future
issuance as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Equity Incentive Plans
|
|
|
2,915,085
|
|
Restricted Stock Units
|
|
|
76,563
|
|
Employee Stock Purchase Plan
|
|
|
271,027
|
|
Warrants
|
|
|
1,682,009
|
|
|
|
|
|
|
Total Shares Reserved for Issuance
|
|
|
4,944,684
|
|
|
|
|
|
|
During the years ended December 31, 2007, 2006 and 2005 the
Company received cash proceeds of $0.6 million, $0.2
million and $0.2 million, respectively from the issuance of
common stock related to its equity plans.
PIPE
Financing
In November 2007, the Company completed a private placement
pursuant to a securities purchase agreement with certain
investors under which the Company issued an aggregate of
4,943,154 shares of common stock and warrants to purchase
up to an aggregate of 1,482,944 shares of common stock for
net proceeds after offering expenses of approximately
$23.2 million. The warrants will become exercisable in May
2008 at an exercise price of $5.77 per share and expire on the
seven-year anniversary of issuance. Both the common stock and
warrants have
72
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
been recorded in stockholders equity in accordance with
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock
.
Notes
Receivable
From 1999 to 2002, the board of directors authorized the
issuance of an aggregate of approximately $2 million in
loans to employees and consultants, related to the exercise of
their stock options and purchase of their restricted stock. The
notes were full recourse and were also secured by the underlying
stock. The notes bear interest at 7%. The principal amount of
the notes and the related interest were required to be repaid on
the earlier of five years from the origination date of the
loans, upon termination of employment by or association with the
Company or upon the sale of the underlying stock securing the
note.
As of December 31, 2006, approximately $21,000 of aggregate
principal and accrued interest remained outstanding on the
notes. During 2007, all remaining outstanding principal and
interest was paid to the Company.
Significant components of the Companys deferred tax assets
as of December 31, 2007 and 2006 are shown below. A
valuation allowance has been recognized to offset the deferred
tax assets, as realization of such assets is uncertain.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets (in thousands):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
42,030
|
|
Research and development credits
|
|
|
|
|
|
|
7,284
|
|
Capitalized research and development
|
|
|
1,114
|
|
|
|
1,335
|
|
Accrued vacation
|
|
|
288
|
|
|
|
274
|
|
Deferred revenue
|
|
|
5,738
|
|
|
|
8,157
|
|
Other
|
|
|
1,879
|
|
|
|
1,107
|
|
Depreciation and amortization
|
|
|
1,732
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
10,751
|
|
|
|
61,183
|
|
Valuation allowance for deferred tax assets
|
|
|
(10,751
|
)
|
|
|
(61,183
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company had federal and
California tax net operating loss carryforwards
(NOL) of approximately $124.2 million and
$95.9 million, respectively. The federal and California tax
loss carryforwards will begin to expire in 2019 and 2009,
respectively, unless previously utilized. The Company also has
federal and California research and development tax credit
carryforwards totaling approximately $4.8 million and
$3.2 million, respectively. The federal research and
development tax credit carry forward will begin to expire in
2019, unless previously utilized and the California research and
development tax credit will carry forward indefinitely until
utilized.
Utilization of the NOL and tax credit carryforwards may be
subject to a substantial annual limitation due to ownership
change limitations that may have occurred or that could occur in
the future, as required by Section 382 of the Internal
Revenue Code of 1986, as amended (the Code), as well
as similar state provisions. These ownership changes may limit
the amount of NOL and research and development credit
carryforwards that can be utilized annually to offset future
taxable income and tax, respectively. In general, an
ownership change as defined by Section 382 of
the Code results from a transaction, or series of transactions,
over a three-year period resulting in an
73
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
ownership change of more than 50 percentage points of the
outstanding stock of a company by certain stockholders or public
groups. Since the Companys formation, the Company has
raised capital through the issuance of capital stock (both
before and after its public offering) which, combined with the
purchasing stockholders subsequent disposition of those
shares, may have resulted in such an ownership change, or could
result in an ownership change in the future upon subsequent
disposition.
The Company has not completed a study to assess whether an
ownership change has occurred or whether there have been
multiple ownership changes since the Companys formation
due to the complexity and cost associated with such a study, and
the fact that there may be additional such ownership changes in
the future. If the Company has experienced an ownership change
at any time since its formation, utilization of the NOL or tax
credit carryforwards would be subject to an annual limitation
under Section 382 of the Code, which is determined by first
multiplying the value of the Companys stock at the time of
the ownership change by the applicable long-term, tax-exempt
rate, and then could be subject to additional adjustments, as
required. Any limitation may result in expiration of all or a
portion of the NOL or tax credit carryforwards before
utilization. Until this analysis has been completed the Company
has removed the deferred tax assets for net operating losses of
$49.0 million and research and development credits of
$6.9 million generated through 2007 from its deferred tax
asset schedule and has recorded a corresponding decrease to its
valuation allowance. When this analysis is finalized, the
Company plans to update its unrecognized tax benefits under
FIN No. 48. Due to the existence of the valuation
allowance, future changes in the Companys unrecognized tax
benefits will not impact the Companys effective tax rate.
The Company adopted the provisions of FIN 48 on
January 1, 2007. There were no unrecognized tax benefits as
of the date of adoption and there are no unrecognized tax
benefits included in the balance sheet at December 31,
2007, that would, if recognized, affect the effective tax rate.
The Company files income tax returns in the United States and in
various state jurisdictions with varying statutes of limitations.
Due to net operating losses incurred, the Companys income
tax returns from inception to date are subject to examination by
taxing authorities. The Companys policy is to recognize
interest expense and penalties related to income tax matters as
a component of income tax expense. As of December 31, 2007,
the Company has no interest or penalties accrued for uncertain
tax positions.
Effective October 1, 1999, the Company adopted a defined
contribution 401(k) profit sharing plan (the 401(k)
Plan) covering substantially all employees that meet
certain age requirements. Employees may contribute up to 100% of
their compensation per year (subject to a maximum limit set by
federal law). The 401(k) Plan does allow for employer matching;
however, to date, the Company has not contributed to the 401(k)
Plan.
74
SGX
Pharmaceuticals, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
10.
|
Quarterly
Financial Data (unaudited)
|
The following tables summarize certain of the Companys
operating results by quarter for 2007 and 2006 (in thousands,
except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
Revenues
|
|
$
|
10,968
|
|
|
$
|
8,506
|
|
|
$
|
7,586
|
|
|
$
|
7,679
|
|
|
$
|
34,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,098
|
)
|
|
$
|
(4,013
|
)
|
|
$
|
(4,773
|
)
|
|
$
|
(6,123
|
)
|
|
$
|
(16,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(1.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
Revenues
|
|
$
|
4,729
|
|
|
$
|
7,848
|
|
|
$
|
6,767
|
|
|
$
|
8,436
|
|
|
$
|
27,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,415
|
)
|
|
$
|
(9,354
|
)
|
|
$
|
(3,398
|
)
|
|
$
|
(4,885
|
)
|
|
$
|
(28,052
|
)
|
Accretion of redeemable convertible preferred stock issuance
costs
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(10,464
|
)
|
|
$
|
(9,354
|
)
|
|
$
|
(3,398
|
)
|
|
$
|
(4,885
|
)
|
|
$
|
(28,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(1.06
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(2.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share applicable to common stockholders
|
|
$
|
(1.06
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(2.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts for the quarters and full years have been
calculated separately. Accordingly, quarterly amounts may not
add to the annual amount because of differences in the weighted
average common shares outstanding during each period principally
due to the effect of the Company issuing shares of its common
stock during the year. Diluted and basic net loss per share is
identical since common equivalent shares are excluded from the
calculation, as their effect is anti-dilutive.
75
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Prior to the filing of this report, an evaluation was performed
under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer (collectively, our certifying
officers), of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
of
the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this report. Based on their evaluation,
our certifying officers concluded that these disclosure controls
and procedures were effective, as of the end of the period
covered by this report. Disclosure controls and procedures are
designed to ensure that the information required to be disclosed
by us in our periodic reports filed with the Securities and
Exchange Commission (SEC) is recorded, processed,
summarized and reported within the time periods specified by the
SECs rules and SEC reports and that such information is
accumulated and communicated to our management, including our
certifying officers, to allow timely decisions regarding
required disclosure.
We believe that a controls system, no matter how well designed
and operated, is based in part upon certain assumptions about
the likelihood of future events, and therefore can only provide
reasonable, not absolute, assurance that the objectives of the
controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
An evaluation was also performed under the supervision and with
the participation of our management, including our certifying
officers, of any change in our internal control over financial
reporting that occurred during the quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting. That evaluation did not identify any
change in our internal control over financial reporting that
occurred during the quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Our management, including our certifying officers, is
responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rule 13a-15(f)
of the Exchange Act. Under the supervision and with the
participation of our management, including our certifying
officers, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of
December 31, 2007. In conducting its evaluation, our
management, including our certifying officers, used the criteria
set forth by the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that
evaluation, our management, including our certifying officers,
believes our internal control over financial reporting was
effective as of December 31, 2007.
This annual report does not include an attestation report of the
companys registered public accounting firm regarding
internal control over financial reporting. Managements
report was not subject to attestation by the companys
registered public accounting firm pursuant to temporary rules of
the SEC that permit the company to provide only
managements report in this annual report.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to directors
and executive officers is incorporated by reference from the
information under the captions Election of
Directors, Executive Officers,
Section 16(a) Beneficial Ownership Reporting
Compliance, and Information Regarding the Board of
Directors and Corporate
76
Governance contained in the proxy statement to be filed
with the SEC pursuant to Regulation 14A within
120 days following the fiscal year ended December 31,
2007 (Proxy Statement) in connection with our 2008
annual meeting of stockholders.
We have adopted a Code of Business Conduct and Ethics that
applies to all officers, directors and employees. The text of
the Companys Code of Business Conduct and Ethics is posted
on the Companys internet website and may be accessed at
www.sgxpharma.com
. If we make any substantive amendments
to the Code of Business Conduct and Ethics or grant any waiver
from a provision of the code to any executive officer or
director, we will promptly disclose the nature of the amendment
or waiver on our website.
There have been no material changes to the procedures under
which security holders may recommend nominees to the
Companys Board of Directors.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item will be set forth in the
sections entitled Executive Compensation,
Compensation Committee Processes and Procedures,
Compensation Committee Report and Compensation
Committee Interlocks and Insider Participation in the
Proxy Statement and is incorporated in this report by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item will be set forth in the
sections entitled Security Ownership of Certain Beneficial
Owners and Management and Securities Authorized for
Issuance under Equity Compensation Plans in the Proxy
Statement and is incorporated in this report by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item will be set forth in the
sections entitled Transactions with Related Persons
and Information Regarding the Board of Directors and
Corporate Governance in the Proxy Statement and is
incorporated in this report by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item will be set forth in the
section entitled Ratification of Selection of Independent
Registered Public Accounting Firm in the Proxy Statement
and is incorporated in this report by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) 1.
Financial Statements
See Index to Consolidated Financial Statements in Item 8 of
this Annual Report on
Form 10-K,
which is incorporated herein by reference.
2.
Financial Statement Schedules
None
3.
Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Form of Registrants Amended and Restated Certificate of
Incorporation.
|
|
3
|
.2(9)
|
|
Form of Registrants Amended and Restated Bylaws.
|
77
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
4
|
.1(4)
|
|
Form of Common Stock Certificate of Registrant.
|
|
4
|
.2(1)
|
|
Form of Warrant to Purchase Common Stock issued by Registrant in
July 2005 to Timothy Harris and Linda Grais.
|
|
4
|
.3(4)
|
|
Form of Warrants issued by Registrant in July 2002 to GATX
Ventures, Inc.
|
|
4
|
.4(3)
|
|
Amended and Restated Warrant issued by Registrant in January
2005 to Oxford Finance Corporation.
|
|
4
|
.5(4)
|
|
Warrant issued by Registrant in July 2002 to Silicon Valley Bank.
|
|
4
|
.6(1)
|
|
Amended and Restated Investor Rights Agreement dated
April 21, 2005 between Registrant and certain of its
stockholders.
|
|
4
|
.7(2)
|
|
Form of Warrant issued by Registrant in September and December
2005 to Oxford Finance Corporation and Silicon Valley Bank.
|
|
4
|
.8(9)
|
|
First and Second Amendments to Amended and Restated Investor
Rights Agreement, dated October 31, 2005 and March 27,
2006, respectively, each between Registrant and certain of its
stockholders.
|
|
4
|
.9(10)
|
|
Form of Warrant issued by Registrant to Silicon Valley Bank.
|
|
4
|
.10(13)
|
|
Form of Warrant issued by Registrant in November 2007.
|
|
10
|
.1+(1)
|
|
Form of Indemnity Agreement by and between Registrant and its
directors and executive officers.
|
|
10
|
.2+(4)
|
|
2000 Equity Incentive Plan and Form of Option Agreement and Form
of Stock Option Grant Notice thereunder.
|
|
10
|
.3+(4)
|
|
2005 Equity Incentive Plan and Form of Stock Option Agreement
and Form of Stock Option Grant Notice thereunder.
|
|
10
|
.4+(4)
|
|
2005 Employee Stock Purchase Plan and Form of Offering Document
thereunder.
|
|
10
|
.5+(11)
|
|
2005 Non-Employee Directors Stock Option Plan and Form of
Stock Option Agreement and Form of Stock Option Grant Notice
thereunder.
|
|
10
|
.6+(1)
|
|
Amended and Restated Executive Employment Agreement dated
January 1, 2005 between Registrant and Michael Grey.
|
|
10
|
.7+(1)
|
|
Executive Employment Agreement dated January 1, 2002
between Registrant and Stephen Burley, M.D., D.Phil. and
related relocation loan agreement dated July 29, 2002.
|
|
10
|
.8+(1)
|
|
Chairmanship Letter Agreement dated January 16, 2004
between Registrant and Christopher Henney, Ph.D., DSc.
|
|
10
|
.9(1)
|
|
Lease Agreement dated September 20, 1999 between Registrant
and ARE-10505 Roselle Street, LLC, as amended.
|
|
10
|
.10(1)
|
|
Lease Agreement dated May 18, 2000 between Registrant and
ARE-3770 Tansy Street, LLC.
|
|
10
|
.11(1)
|
|
Lease Agreement dated June 1, 2001 between Registrant and
BRS Torrey I, LLC.
|
|
10
|
.12*(4)
|
|
Patent and Know How License dated July 23, 2004 between
Registrant, Shire Biochem Inc., Tanaud Ireland Inc. and Tanaud
International B.V., as amended, and related novation agreements.
|
|
10
|
.13*(3)
|
|
Collaboration and License Agreement dated April 14, 2003
between Registrant and Eli Lilly and Company.
|
|
10
|
.14*(3)
|
|
Amendment to Agreement dated July 1, 2003 between
Registrant and Eli Lilly and Company.
|
|
10
|
.15*(1)
|
|
Amendment to Agreement dated January 30, 2004 between
Registrant and Eli Lilly and Company.
|
|
10
|
.16*(3)
|
|
Amendment to Agreement dated November 11, 2004 between
Registrant and Eli Lilly and Company.
|
|
10
|
.17*(1)
|
|
Amendment to Agreement dated March 31, 2005 between
Registrant and Eli Lilly and Company.
|
|
10
|
.18*(3)
|
|
Collaboration Agreement dated December 1, 2003 between
Registrant and UroGene, S.A. (which was acquired by Pierre Fabre
Medicament in July 2005).
|
|
10
|
.19*(1)
|
|
Amendment to Agreement dated December 16, 2004 between
Registrant and UroGene, S.A.
(predecessor-in-interest
to Pierre Fabre Medicament) and related assignment agreements.
|
|
10
|
.20*(4)
|
|
Drug Discovery Agreement dated July 1, 2005 between
Registrant and Cystic Fibrosis Foundation Therapeutics, Inc.
|
78
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.21(1)
|
|
Memorandum of Understanding dated July 26, 2000 between the
Advanced Photon Source and the Structural GenomiX Collaborative
Access Team and related Collaborative Access Team User Agreement
dated May 15, 2001 between Registrant, The University of
Chicago and United States Department of Energy.
|
|
10
|
.22(1)
|
|
Master Loan and Security Agreement No. 2081008 dated
August 28, 2002 between Registrant and Oxford Finance
Corporation, as amended.
|
|
10
|
.23(2)
|
|
First Amendment to Lease Agreement dated August 30, 2005
between Registrant and ARE-3770 Tansy Street, LLC.
|
|
10
|
.24(2)
|
|
Third Amendment to Lease Agreement dated August 30, 2005
between Registrant and ARE-10505 Roselle Street, LLC.
|
|
10
|
.25(2)
|
|
Loan and Security Agreement dated September 16, 2005 among
Registrant, Oxford Finance Corporation and Silicon Valley Bank.
|
|
10
|
.26*(3)
|
|
Amendment to Agreement effective as of October 1, 2005
between Registrant, F. Hoffmann-La Roche Ltd. and
Hoffmann-La Roche Inc.
|
|
10
|
.27+(4)
|
|
Offer Letter Agreement dated November 16, 2005 between
Registrant and William Todd Myers.
|
|
10
|
.28+(4)
|
|
Offer Letter Agreement dated December 13, 2005 between
Registrant and Siegfried Reich, Ph.D.
|
|
10
|
.29*(5)
|
|
Termination Agreement effective February 15, 2006 between
Registrant and Pierre Fabre Medicament S.A.
|
|
10
|
.30+(8)
|
|
Form of Restricted Stock Unit Grant Notice and Restricted Stock
Unit Agreement for Executive Officers under the
Registrants 2005 Equity Incentive Plan.
|
|
10
|
.31(8)
|
|
Stock Purchase Agreement dated March 27, 2006, between
Registrant and Novartis Pharma AG.
|
|
10
|
.32(6)*
|
|
License and Collaboration Agreement between SGX and Novartis,
dated March 27, 2006.
|
|
10
|
.33(7)
|
|
Form of Change in Control Severance Agreement.
|
|
10
|
.34+(9)
|
|
Change of Control Severance Agreement dated December 18,
2006 between Registrant and Michael Grey
|
|
10
|
.35+(9)
|
|
Change of Control Severance Agreement dated February 9,
2007 between Registrant and Stephen K. Burley
|
|
10
|
.36+(9)
|
|
Change of Control Severance Agreement dated December 15,
2006 between Registrant and W. Todd Myers
|
|
10
|
.37+(9)
|
|
Change of Control Severance Agreement dated December 18,
2006 between Registrant and Annette North
|
|
10
|
.38+(9)
|
|
Change of Control Severance Agreement dated January 2, 2007
between Registrant and Siegfried Reich
|
|
10
|
.39+(9)
|
|
Change of Control Severance Agreement dated December 18,
2006 between Registrant and Terence Rugg
|
|
10
|
.40+(9)
|
|
Summary of 2007 Bonus Award Program
|
|
10
|
.41+(9)
|
|
Letter Agreement dated February 9, 2007 between Registrant
and Stephen K. Burley
|
|
10
|
.42(9)
|
|
Fifth Amendment to Collaboration and License Agreement dated
March 1, 2007 between Registrant and Eli Lilly and Company
|
|
10
|
.43(9)
|
|
First Amendment to the Drug Discovery Agreement dated
March 1, 2007 between Registrant and Cystic Fibrosis
Foundation Therapeutics, Inc.
|
|
10
|
.44(9)
|
|
Fourth Amendment to Lease Agreement dated March 28, 2007
between Registrant and ARE-10505 Roselle Street, LLC.
|
|
10
|
.45(9)
|
|
Second Amendment to Lease Agreement dated March 28, 2007
between Registrant and ARE-3770 Tansy Street, LLC.
|
|
10
|
.46(11)
|
|
Non-Employee Director Compensation Arrangement.
|
|
10
|
.47(12)*
|
|
First Amendment to License and Collaboration Agreement between
the Registrant and Novartis Pharma AG dated August 22, 2007
|
79
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.48(13)
|
|
Securities Purchase Agreement between the Registrant and the
Investors named therein dated November 19, 2007.
|
|
10
|
.49(14)*
|
|
Amendment to Agreement dated December 7, 2007 between the
Registrant and Eli Lilly and Company.
|
|
10
|
.50(15)
|
|
Fifth Amendment to Lease Agreement dated December 10, 2007
between the Registrant and ARE-10505 Roselle Street, LLC
|
|
10
|
.51(15)
|
|
Third Amendment to Lease Agreement dated December 10, 2007
between the Registrant and ARE-3770 Tansy Street, LLC.
|
|
10
|
.52(16)
|
|
Third Amendment to Lease dated December 21, 2007 between
the Registrant and BRS Torrey I, L.L.C.
|
|
10
|
.53+
|
|
Offer Letter Agreement dated July 11, 2006 between
Registrant and Terence A. Rugg, M.D.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page of
this report.
|
|
31
|
.1
|
|
Certification of principal executive officer required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
31
|
.2
|
|
Certification of principal financial officer required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
32
|
|
|
Certification by the Chief Executive Officer and the Chief
Financial Officer of the Registrant, as required by
Rule 13a-14(b)
or 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350).
|
|
|
|
+
|
|
Indicates management contract or compensatory plan.
|
|
*
|
|
Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
|
|
(1)
|
|
Filed with the Registrants Registration Statement on
Form S-1
on September 2, 2005 and incorporated herein by reference.
|
|
(2)
|
|
Filed with Amendment No. 1 to the Registrants
Registration Statement on
Form S-1
on October 14, 2005 and incorporated herein by reference.
|
|
(3)
|
|
Filed with Amendment No. 3 to the Registrants
Registration Statement on
Form S-1
on November 14, 2005 and incorporated herein by reference.
|
|
(4)
|
|
Filed with Amendment No. 4 to the Registrants
Registration Statement on
Form S-1
on January 4, 2006 and incorporated herein by reference.
|
|
(5)
|
|
Filed with the Registrants Current Report on Form
8-K
on
March 13, 2006 and incorporated herein by reference.
|
|
(6)
|
|
Filed with the Registrants Current Report on Form
8-K
on
April 5, 2006 and incorporated herein by reference.
|
|
(7)
|
|
Filed with the Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 filed on
November 13, 2006 and incorporated herein by reference.
|
|
(8)
|
|
Filed as an Exhibit to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2005 filed with the
Commission on March 31, 2006, and incorporated herein by
reference.
|
|
(9)
|
|
Filed with the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 filed with the
Commission on March 30, 2007, and incorporated herein by
reference.
|
|
(10)
|
|
Filed with the Registrants Quarterly Report on Form
10-Q
for the
quarter ended March 31, 2007 filed with the Commission on
May 15, 2007, and incorporated herein by reference.
|
|
(11)
|
|
Filed with the Registrants Quarterly Report on Form
10-Q
for the
quarter ended June 30, 2007 filed with the Commission on
August 14, 2007, and incorporated herein by reference.
|
|
(12)
|
|
Filed with the Registrants Current Report on
Form 8-K
on September 10, 2007 and incorporated herein by reference.
|
80
|
|
|
(13)
|
|
Filed with the Registrants Current Report on
Form 8-K
on November 20, 2007 and incorporated herein by reference.
|
|
(14)
|
|
Filed with the Registrants Current Report on
Form 8-K
on December 12, 2007 and incorporated herein by reference.
|
|
(15)
|
|
Filed with the Registrants Current Report on
Form 8-K
on December 13, 2007 and incorporated herein by reference.
|
|
(16)
|
|
Filed with the Registrants Current Report on
Form 8-K
on December 21, 2007 and incorporated herein by reference.
|
(b)
Exhibits
See Item 15(a) above.
(c)
Financial Statement Schedules
See Item 15(a) above.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SGX PHARMACEUTICALS, INC.
Michael Grey
President and Chief Executive Officer
Dated: March 26, 2008
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Todd Myers. and
Michael Grey, and each of them, acting individually, as his or
her attorney-in-fact, each with full power of substitution and
resubstitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments
to this annual report on
Form 10-K,
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 and about the premises, as fully
to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
Grey
Michael
Grey
|
|
President, Chief Executive Officer and Member of the Board of
Directors
(Principal Executive Officer)
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Todd
Myers
Todd
Myers, C.P.A.
|
|
Chief Financial Officer
(Principal Financial and Accounting
Officer)
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Christopher
S. Henney
Christopher
S. Henney, Ph.D., D.Sc.
|
|
Chairman of the Board of Directors
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Louis
C. Bock
Louis
C. Bock
|
|
Member of the Board of Directors
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Karin
Eastham
Karin
Eastham, C.P.A.
|
|
Member of the Board of Directors
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Jean-Francois
Formela
Jean-Francois
Formela, M.D.
|
|
Member of the Board of Directors
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Joseph
Turner
Joseph
Turner
|
|
Member of the Board of Directors
|
|
March 26, 2008
|
82
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Form of Registrants Amended and Restated Certificate of
Incorporation.
|
|
3
|
.2(9)
|
|
Form of Registrants Amended and Restated Bylaws.
|
|
4
|
.1(4)
|
|
Form of Common Stock Certificate of Registrant.
|
|
4
|
.2(1)
|
|
Form of Warrant to Purchase Common Stock issued by Registrant in
July 2005 to Timothy Harris and Linda Grais.
|
|
4
|
.3(4)
|
|
Form of Warrants issued by Registrant in July 2002 to GATX
Ventures, Inc.
|
|
4
|
.4(3)
|
|
Amended and Restated Warrant issued by Registrant in January
2005 to Oxford Finance Corporation.
|
|
4
|
.5(4)
|
|
Warrant issued by Registrant in July 2002 to Silicon Valley Bank.
|
|
4
|
.6(1)
|
|
Amended and Restated Investor Rights Agreement dated April 21,
2005 between Registrant and certain of its stockholders.
|
|
4
|
.7(2)
|
|
Form of Warrant issued by Registrant in September and December
2005 to Oxford Finance Corporation and Silicon Valley Bank.
|
|
4
|
.8(9)
|
|
First and Second Amendments to Amended and Restated Investor
Rights Agreement, dated October 31, 2005 and March 27, 2006,
respectively, each between Registrant and certain of its
stockholders.
|
|
4
|
.9(10)
|
|
Form of Warrant issued by Registrant to Silicon Valley Bank.
|
|
4
|
.10(13)
|
|
Form of Warrant issued by Registrant in November 2007.
|
|
10
|
.1+(1)
|
|
Form of Indemnity Agreement by and between Registrant and its
directors and executive officers.
|
|
10
|
.2+(4)
|
|
2000 Equity Incentive Plan and Form of Option Agreement and Form
of Stock Option Grant Notice thereunder.
|
|
10
|
.3+(4)
|
|
2005 Equity Incentive Plan and Form of Stock Option Agreement
and Form of Stock Option Grant Notice thereunder.
|
|
10
|
.4+(4)
|
|
2005 Employee Stock Purchase Plan and Form of Offering Document
thereunder.
|
|
10
|
.5+(11)
|
|
2005 Non-Employee Directors Stock Option Plan and Form of
Stock Option Agreement and Form of Stock Option Grant Notice
thereunder.
|
|
10
|
.6+(1)
|
|
Amended and Restated Executive Employment Agreement dated
January 1, 2005 between Registrant and Michael Grey.
|
|
10
|
.7+(1)
|
|
Executive Employment Agreement dated January 1, 2002 between
Registrant and Stephen Burley, M.D., D.Phil. and related
relocation loan agreement dated July 29, 2002.
|
|
10
|
.8+(1)
|
|
Chairmanship Letter Agreement dated January 16, 2004 between
Registrant and Christopher Henney, Ph.D., DSc.
|
|
10
|
.9(1)
|
|
Lease Agreement dated September 20, 1999 between Registrant and
ARE-10505 Roselle Street, LLC, as amended.
|
|
10
|
.10(1)
|
|
Lease Agreement dated May 18, 2000 between Registrant and
ARE-3770 Tansy Street, LLC.
|
|
10
|
.11(1)
|
|
Lease Agreement dated June 1, 2001 between Registrant and BRS
Torrey I, LLC.
|
|
10
|
.12*(4)
|
|
Patent and Know How License dated July 23, 2004 between
Registrant, Shire Biochem Inc., Tanaud Ireland Inc. and Tanaud
International B.V., as amended, and related novation agreements.
|
|
10
|
.13*(3)
|
|
Collaboration and License Agreement dated April 14, 2003 between
Registrant and Eli Lilly and Company.
|
|
10
|
.14*(3)
|
|
Amendment to Agreement dated July 1, 2003 between Registrant and
Eli Lilly and Company.
|
|
10
|
.15*(1)
|
|
Amendment to Agreement dated January 30, 2004 between Registrant
and Eli Lilly and Company.
|
|
10
|
.16*(3)
|
|
Amendment to Agreement dated November 11, 2004 between
Registrant and Eli Lilly and Company.
|
|
10
|
.17*(1)
|
|
Amendment to Agreement dated March 31, 2005 between Registrant
and Eli Lilly and Company.
|
|
10
|
.18*(3)
|
|
Collaboration Agreement dated December 1, 2003 between
Registrant and UroGene, S.A. (which was acquired by Pierre Fabre
Medicament in July 2005).
|
83
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.19*(1)
|
|
Amendment to Agreement dated December 16, 2004 between
Registrant and UroGene, S.A. (predecessor-in-interest to Pierre
Fabre Medicament) and related assignment agreements.
|
|
10
|
.20*(4)
|
|
Drug Discovery Agreement dated July 1, 2005 between Registrant
and Cystic Fibrosis Foundation Therapeutics, Inc.
|
|
10
|
.21(1)
|
|
Memorandum of Understanding dated July 26, 2000 between the
Advanced Photon Source and the Structural GenomiX Collaborative
Access Team and related Collaborative Access Team User Agreement
dated May 15, 2001 between Registrant, The University of Chicago
and United States Department of Energy.
|
|
10
|
.22(1)
|
|
Master Loan and Security Agreement No. 2081008 dated August 28,
2002 between Registrant and Oxford Finance Corporation, as
amended.
|
|
10
|
.23(2)
|
|
First Amendment to Lease Agreement dated August 30, 2005 between
Registrant and ARE-3770 Tansy Street, LLC.
|
|
10
|
.24(2)
|
|
Third Amendment to Lease Agreement dated August 30, 2005 between
Registrant and ARE-10505 Roselle Street, LLC.
|
|
10
|
.25(2)
|
|
Loan and Security Agreement dated September 16, 2005 among
Registrant, Oxford Finance Corporation and Silicon Valley Bank.
|
|
10
|
.26*(3)
|
|
Amendment to Agreement effective as of October 1, 2005 between
Registrant, F. Hoffmann-La Roche Ltd. and
Hoffmann-La Roche Inc.
|
|
10
|
.27+(4)
|
|
Offer Letter Agreement dated November 16, 2005 between
Registrant and William Todd Myers.
|
|
10
|
.28+(4)
|
|
Offer Letter Agreement dated December 13, 2005 between
Registrant and Siegfried Reich, Ph.D.
|
|
10
|
.29*(5)
|
|
Termination Agreement effective February 15, 2006 between
Registrant and Pierre Fabre Medicament S.A.
|
|
10
|
.30+(8)
|
|
Form of Restricted Stock Unit Grant Notice and Restricted Stock
Unit Agreement for Executive Officers under the
Registrants 2005 Equity Incentive Plan.
|
|
10
|
.31(8)
|
|
Stock Purchase Agreement dated March 27, 2006, between
Registrant and Novartis Pharma AG.
|
|
10
|
.32(6)*
|
|
License and Collaboration Agreement between SGX and Novartis,
dated March 27, 2006.
|
|
10
|
.33(7)
|
|
Form of Change in Control Severance Agreement.
|
|
10
|
.34+(9)
|
|
Change of Control Severance Agreement dated December 18, 2006
between Registrant and Michael Grey
|
|
10
|
.35+(9)
|
|
Change of Control Severance Agreement dated February 9, 2007
between Registrant and Stephen K. Burley
|
|
10
|
.36+(9)
|
|
Change of Control Severance Agreement dated December 15, 2006
between Registrant and W. Todd Myers
|
|
10
|
.37+(9)
|
|
Change of Control Severance Agreement dated December 18, 2006
between Registrant and Annette North
|
|
10
|
.38+(9)
|
|
Change of Control Severance Agreement dated January 2, 2007
between Registrant and Siegfried Reich
|
|
10
|
.39+(9)
|
|
Change of Control Severance Agreement dated December 18, 2006
between Registrant and Terence Rugg
|
|
10
|
.40+(9)
|
|
Summary of 2007 Bonus Award Program
|
|
10
|
.41+(9)
|
|
Letter Agreement dated February 9, 2007 between Registrant and
Stephen K. Burley
|
|
10
|
.42(9)
|
|
Fifth Amendment to Collaboration and License Agreement dated
March 1, 2007 between Registrant and Eli Lilly and Company
|
|
10
|
.43(9)
|
|
First Amendment to the Drug Discovery Agreement dated March 1,
2007 between Registrant and Cystic Fibrosis Foundation
Therapeutics, Inc.
|
|
10
|
.44(9)
|
|
Fourth Amendment to Lease Agreement dated March 28, 2007 between
Registrant and ARE-10505 Roselle Street, LLC.
|
84
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.45(9)
|
|
Second Amendment to Lease Agreement dated March 28, 2007 between
Registrant and ARE-3770 Tansy Street, LLC.
|
|
10
|
.46(11)
|
|
Non-Employee Director Compensation Arrangement.
|
|
10
|
.47(12)*
|
|
First Amendment to License and Collaboration Agreement between
the Registrant and Novartis Pharma AG dated August 22, 2007
|
|
10
|
.48(13)
|
|
Securities Purchase Agreement between the Registrant and the
Investors named therein dated November 19, 2007.
|
|
10
|
.49(14)*
|
|
Amendment to Agreement dated December 7, 2007 between the
Registrant and Eli Lilly and Company.
|
|
10
|
.50(15)
|
|
Fifth Amendment to Lease Agreement dated December 10, 2007
between the Registrant and ARE-10505 Roselle Street, LLC
|
|
10
|
.51(15)
|
|
Third Amendment to Lease Agreement dated December 10, 2007
between the Registrant and ARE-3770 Tansy Street, LLC.
|
|
10
|
.52(16)
|
|
Third Amendment to Lease dated December 21, 2007 between the
Registrant and BRS Torrey I, L.L.C.
|
|
10
|
.53+
|
|
Offer Letter Agreement dated July 11, 2006 between
Registrant and Terence A. Rugg, M.D.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page of
this report.
|
|
31
|
.1
|
|
Certification of principal executive officer required by Rule
13a-14(a) or Rule 15d-14(a).
|
|
31
|
.2
|
|
Certification of principal financial officer required by Rule
13a-14(a) or Rule 15d-14(a).
|
|
32
|
|
|
Certification by the Chief Executive Officer and the Chief
Financial Officer of the Registrant, as required by Rule
13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350).
|
|
|
|
+
|
|
Indicates management contract or compensatory plan.
|
|
*
|
|
Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
|
|
(1)
|
|
Filed with the Registrants Registration Statement on
Form S-1
on September 2, 2005 and incorporated herein by reference.
|
|
(2)
|
|
Filed with Amendment No. 1 to the Registrants
Registration Statement on
Form S-1
on October 14, 2005 and incorporated herein by reference.
|
|
(3)
|
|
Filed with Amendment No. 3 to the Registrants
Registration Statement on
Form S-1
on November 14, 2005 and incorporated herein by reference.
|
|
(4)
|
|
Filed with Amendment No. 4 to the Registrants
Registration Statement on
Form S-1
on January 4, 2006 and incorporated herein by reference.
|
|
(5)
|
|
Filed with the Registrants Current Report on Form
8-K
on
March 13, 2006 and incorporated herein by reference.
|
|
(6)
|
|
Filed with the Registrants Current Report on Form
8-K
on
April 5, 2006 and incorporated herein by reference.
|
|
(7)
|
|
Filed with the Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 filed on
November 13, 2006 and incorporated herein by reference.
|
85
|
|
|
(8)
|
|
Filed as an Exhibit to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2005 filed with the
Commission on March 31, 2006, and incorporated herein by
reference.
|
|
(9)
|
|
Filed with the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 filed with the
Commission on March 30, 2007, and incorporated herein by
reference.
|
|
(10)
|
|
Filed with the Registrants Quarterly Report on Form
10-Q
for the
quarter ended March 31, 2007 filed with the Commission on
May 15, 2007, and incorporated herein by reference.
|
|
(11)
|
|
Filed with the Registrants Quarterly Report on Form
10-Q
for the
quarter ended June 30, 2007 filed with the Commission on
August 14, 2007, and incorporated herein by reference.
|
|
(12)
|
|
Filed with the Registrants Current Report on
Form 8-K
on September 10, 2007 and incorporated herein by reference.
|
|
(13)
|
|
Filed with the Registrants Current Report on
Form 8-K
on November 20, 2007 and incorporated herein by reference.
|
|
(14)
|
|
Filed with the Registrants Current Report on
Form 8-K
on December 12, 2007 and incorporated herein by reference.
|
|
(15)
|
|
Filed with the Registrants Current Report on
Form 8-K
on December 13, 2007 and incorporated herein by reference.
|
|
(16)
|
|
Filed with the Registrants Current Report on
Form 8-K
on December 21, 2007 and incorporated herein by reference.
|
86
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