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:
001-32629
AVALON PHARMACEUTICALS,
INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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52-2209310
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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20358 Seneca Meadows Parkway,
Germantown, Maryland
(Address of principal
executive offices)
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20876
(Zip
Code)
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Registrants telephone number, including area code:
(301) 556-9900
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, par value $0.01 per share
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The NASDAQ Stock 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 Section 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
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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.
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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
Act). Yes
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No
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The aggregate market value of our common stock held by
non-affiliates was $66.2 million based on the last sale
price of our common stock as reported by the NASDAQ Global
Market on June 29, 2007.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the most recent
practicable date.
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Class
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Outstanding on March 14, 2008
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Common Stock, par value $0.01 per share
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17,033,014 shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement to
be filed with the Commission pursuant to Regulation 14A in
connection with the registrants 2008 Annual Meeting of
Stockholders, subsequent to the date hereof, are incorporated by
reference into Part III of this Report. Such Definitive
Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the conclusion of
the registrants fiscal year ended December 31, 2007.
TABLE OF
CONTENTS
When used in this Annual Report on
Form 10-K,
except where the context otherwise requires, the terms
we, us, our,
Avalon, Avalon Pharmaceuticals, and
the Company refer to Avalon Pharmaceuticals, Inc.
1
Cautionary
Advice Regarding Forward-Looking Statements
Statements contained in this
Form 10-K
which are not historical facts may be forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act). We intend
such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in
Section 21E of the Exchange Act. Readers are cautioned not
to place undue reliance on these forward-looking statements,
which speak only as of the date this
Form 10-K
is filed with the Securities and Exchange Commission
(SEC).
The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of
many possible events or factors, not all of which are known to
us or are within our control. If a change occurs, our business,
financial condition and results of operations may vary
materially from those expressed in our forward-looking
statements. These statements (none of which is intended as a
guarantee of performance) are subject to certain risks and
uncertainties which could cause our actual future results,
achievements or transactions to differ materially from those
projected or anticipated. Some of the important factors that
could cause our actual results, performance or financial
condition to differ materially from expectations are:
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risks relating to the early stage of product candidates under
development;
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risks relating to our ability to secure and maintain
relationships with collaborators;
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uncertainties with, and unexpected results and related analyses
relating to clinical trials of our product candidates;
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the timing and content of future U.S. Food and Drug
Administration regulatory actions;
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dependence on efforts of third parties;
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dependence on intellectual property;
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risks that we may lack the financial resources and access to
capital to fund our operations; and
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risks relating to the commercialization, if any, of our product
candidates (such as marketing, regulatory, patent, product
liability, supply, competition and other risks).
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Further information on the factors and risks that could affect
our business, financial conditions and results of operations,
are contained below in Item 1A. Risk Factors.
2
PART I
Overview
We are a biopharmaceutical company focused on the discovery,
development and commercialization of
first-in-class
cancer therapeutics. Our lead product candidate, AVN944, an
IMPDH inhibitor, is in Phase II clinical development. We
have preclinical programs to develop inhibitors of the Beta
β-catenin and Aurora/Centrosome pathways, discovery
programs for inhibitors of the Survivin and Myc pathways, and
partnerships with Merck, AstraZeneca, ChemDiv, Medarex and
Novartis. We use
AvalonRx
®
,
our proprietary platform which is based on large-scale biomarker
identification and monitoring, to discover and develop
therapeutics for pathways that have historically been
characterized as undruggable.
AVN944 is a small molecule therapeutic being developed for the
treatment of hematologic and solid tumor cancers. AVN944
inhibits inosine monophosphate dehydrogenase (IMPDH), an enzyme
that is overexpressed in many cancers and is critical for DNA
synthesis, RNA synthesis, and cellular signaling. To date,
preclinical and clinical analyses of AVN944 have demonstrated
inhibition of IMPDH, a favorable safety profile, and signs of
biologic activity resulting in several patients exhibiting
stable disease. We initiated Phase II clinical testing of
AVN944 in patients with pancreatic cancer during 2007.
We have two advanced preclinical development programs. One is
designed to identify compounds that impact the β-catenin
pathway, which is activated in many cancers, including 85% of
colon cancers. The β-catenin pathway has traditionally been
difficult to target therapeutically. The other program targets
the Aurora/Centrosome pathway, which plays a critical role in
the uncontrolled growth of cancer cells.
Our preclinical product discovery programs focus on identifying
inhibitors of important undruggable targets and
pathways in cancer. We currently have a program targeting the
Survivin pathway, which is overexpressed in most cancers and
prevents cancer cell death, and a program targeting MYC, which
is one of the most frequently deregulated proteins in human
cancer and is critical for tumor cell survival.
AvalonRx
®
is a drug discovery platform that integrates well-defined
biomarkers and molecular profiling in all stages of drug
discovery and development.
AvalonRx
®
uses biomarkers for identification of compounds from high
throughput screens, for revealing a compounds mechanism of
action, for directing drug optimization efforts, and for
identification of pharmacodynamic markers used for clinical
development.
AvalonRx
®
provides a much broader and fundamental understanding of the
biological activity of drugs before they enter human clinical
trials.
AvalonRx
®
can identify biomarkers that specifically report on the activity
of well validated disease pathways overcoming many of the
problems encountered in current high-throughput screening
systems. Importantly,
AvalonRx
®
expands the range of therapeutic targets for drug intervention,
including targets and pathways frequently considered intractable
by conventional high-throughput screening approaches.
AvalonRx
®
provides the data to make more informed decisions about which
compounds to advance toward clinical trials, and facilitates
clinical drug development through identification of
pharmacodynamic markers for efficacy, patient stratification or
response.
The
AvalonRx
®
platform is composed of a comprehensive, innovative and
proprietary suite of technologies which is supported by a
combination of state-of-the-art robotics and computational
analysis capabilities.
3
Our Drug
Discovery and Development Programs
Our total research and development expenses for the years ended
December 31, 2007, 2006 and 2005 were $15.3 million,
$13.3 million, and $15.8 million, respectively. The
following table sets forth our drug discovery and development
programs:
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Program
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Status
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Planned 2008 Activities
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Commercial Rights
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IMPDH Inhibitor (AVN944)
Hematologic
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U.S. Phase I ongoing
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Complete US Phase I hematologic cancer studies;
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Avalon
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Pancreatic
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U.S. Phase II (Part A)
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Phase II solid tumor study (Part B)
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β-catenin Pathway Inhibitors
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Lead optimization
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Optimize and select a candidate for preclinical development
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Avalon
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Aurora/Centrosome
Pathway Inhibitors
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Lead optimization
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Name the novel target and optimize compound series
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Avalon
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Survivin Pathway Inhibitors
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Lead Identification
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Select compound series for optimization
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Avalon
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Myc Pathway Inhibitors
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Lead Identification
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Select compound series for optimization
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Avalon
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Therapeutic Antibodies
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Novel target identified
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Identify active antibodies
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Avalon/Medarex
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Hsp90
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Lead Identification
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Select compound series for optimization
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Avalon/ChemDiv
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AVN944
Program
AVN944 is an oral, small molecule drug being developed for the
treatment of hematologic and solid cancers. We filed an
Investigational New Drug application (IND) in
September 2005 with the Food and Drug Administration
(FDA) and initiated U.S. Phase I clinical
trials of AVN944 in cancer patients in January 2006 for the
treatment of hematologic cancers (leukemia, myeloma and
lymphoma). This Phase I trial is evaluating the maximum
tolerated dose (MTD), the safety, the pharmacokinetic and
pharmacodynamic profile and efficacy of AVN944. It is focused on
patients with hematologic cancers that have failed prior
therapies, or for whom there is no recommended treatment, and
includes analysis of a number of biomarkers that correlate with
IMPDH inhibition.
In 2006, and again in 2007, interim analysis of the Phase I
trial showed encouraging results in patients. Importantly, a
significant number of patients experienced stable disease after
one cycle of therapy with AVN944. Two patients with multiple
myeloma were on study with stable disease for 12 months. We
believe that these data, combined with a thorough analysis of
pharmacodynamic markers using
AvalonRx
®
,
demonstrate clear mechanism-based biologic activity of the drug
in patients. In November 2007, we discontinued enrollment of
patients with chronic lymphocytic leukemia because of difficulty
interpreting the safety profile in these patients. We are
continuing to enroll patients with multiple myeloma, lymphoma
and acute leukemia in this study. We initiated Phase II
clinical testing of AVN944 during 2007 with a study of AVN944
plus gemcitabine in patients with previously untreated, advanced
stage pancreatic cancer. The first portion of the study is
designed to find the optimal dose of AVN944 in combination with
a standard dose of gemcitabine.
β-Catenin
Program
For more than 10 years, cancer researchers have known that
proteins within the β-catenin pathway play key roles in the
initiation and progression of many types of cancer, most notably
colon cancer. It has been estimated that the β-catenin
pathway is abnormally activated in more than 85% of colon
tumors. Colon cancer is the fourth most common type of cancer,
causing approximately 105,000 new cancer cases and over 56,000
deaths each year in the United States. Despite intense interest
and significant research effort by the pharmaceutical industry,
little success has been had identifying and developing drugs
that specifically affect the β-catenin pathway. This is due
to inherent difficulties in targeting the β-catenin pathway
using traditional discovery approaches, which may be overcome by
using
AvalonRx
®
.
We developed a gene expression signature that tracks decreased
β-catenin activity and used it to identify structurally
different compounds from our chemical library. We are currently
conducting lead optimization
4
efforts around one chemical family from this program. We have
synthesized compounds in this family that kill human cancer
cells
in vitro,
cause a cell cycle arrest that is
characteristic of inhibition of the β-catenin pathway, and
cause a dose dependent decrease in β-catenin protein
levels. Studies with these compounds in animal models have shown
good pharmacological properties, bioavailability, modulation of
pharmacodynamic markers, and growth inhibition in tumor
xenograft studies. Our current plans are to complete
optimization of this compound family and select a compound for
preclinical development in 2008. To date, we are not aware of
any specific inhibitors of the β-catenin pathway that are
on the market or in clinical development.
Aurora/Centrosome
Pathway Program
The Aurora/Centrosome pathway is a key regulator of cell
division and survival and is defective in many human cancers.
Inhibition of the Aurora/Centrosome pathway is known to inhibit
the uncontrolled cell growth that characterizes cancer.
Application of
AvalonRx
®
has enabled us to identify structurally distinct compounds that
appear to modulate a novel target in the Aurora/Centrosome
pathway. We are currently conducting lead optimization efforts
around one chemical family from this program. These compounds
appear to work through a mechanism different than the multiple
clinical-stage compounds that directly inhibit Aurora kinases.
We have synthesized compounds from this family that are able to
potently kill human cancer cells,
in vitro,
and
cause cellular effects characteristic of pathway inhibition.
Studies with these compounds in animal models have shown good
pharmacological properties, bioavailability, and modulation of
pharmacodynamic markers in tumor xenograft studies. Our current
plans are to name a novel target in the Aurora/Centrosome
pathway and complete optimization of this compound family.
Survivin
Program
The Survivin pathway is recognized as a critical but elusive
pathway for intervention by cancer therapeutics. The Survivin
pathway intersects cellular networks critical for cancer cell
function including cell death, cell growth, and drug and
radiation resistance. The Survivin gene is broadly expressed in
multiple tumor types (including breast, lung, prostate, pancreas
and colon), but is undetectable in most normal adult cells.
Drugs targeted against the Survivin protein have been difficult
to develop because of its lack of enzymatic function. We
developed and conducted a high throughput screen to identify
compounds that affect the Survivin pathway and are currently
characterizing compounds from this screen. We plan to select a
compound family for lead optimization during 2008.
Myc
Program
We have recently initiated a drug discovery program targeting
the MYC oncoprotein, one of the most important and previously
undruggable cancer targets. MYC is one of the most frequently
deregulated proteins in human cancer, and is associated with
many types of aggressive tumors indicating a poor prognosis. We
have developed and conducted a high throughput screen to
identify compounds that affect the Myc pathway and identified
confirmed hit compounds that affect the Myc pathway. We plan to
select a compound family for lead optimization during 2008.
Therapeutic
Antibodies
In addition to our small molecule efforts, we have used
AvalonRx
®
as a basis for establishing a partnership related to antibody
drug candidates. Under a development agreement with Medarex,
Inc., we have identified a novel extracellular protein that is
strongly associated with cancer. We are working with our
collaboration partner to generate therapeutic antibodies and may
pursue
in vivo
proof of concept in animal models. After
completion of these studies by Medarex, a biologics drug
development program in this area, jointly resourced with
Medarex, could commence.
Hsp90
Program
We have recently initiated a drug discovery program in
conjunction with ChemDiv targeting the Hsp90 (heat shock
protein). Hsp90 is emerging as a major therapeutic target for
the treatment of a broad range of cancers
5
including gastrointestinal stromal tumors, non-small cell lung
cancer, and breast cancer. We have developed and conducted a
high throughput screen to identify compounds that affect the
Hsp90 pathway. We have identified hit compounds that affect the
Hsp90 pathway from the screen, and plan to select a compound
family for lead optimization during 2008.
Our
Technologies
AvalonRx
®
is a proprietary platform that uses polymerase chain reaction
(PCR), microarray technology, robotics and bioinformatics to
enable fast, fully-automated, large-scale analysis of gene
expression and its application to the discovery and development
of drugs. We believe
AvalonRx
®
has key advantages compared to conventional technologies.
First, unlike conventional drug discovery technologies that use
isolated proteins as screening targets,
AvalonRx
®
screens for drug candidates based on how they change the
expression of gene biomarkers in living cells. A cell-based
screening system may identify drug candidates that can not be
effectively identified using conventional protein-based
screening methods, and may allow the identification of multiple
drug candidates with different activities from a single screen.
Second,
AvalonRx
®
provides extensive information on the potential activities and
mechanisms of drug candidates. We have developed expertise in
the use of this information, which we believe can lead to a
deeper understanding of a drug candidates mechanism of
action, faster and improved decision-making regarding which
compound should be advanced into the next stage of development,
and a more accurate prediction of a drug candidates safety
and efficacy profile.
Third, we believe
AvalonRx
®
can identify gene expression signatures that may be used as
biomarkers of how a drug could behave in the human body, and for
identification of which patients might be appropriate candidates
for treatment. These gene expression signatures and biomarkers
can be valuable in guiding drug candidate selection, clinical
trial design and in drug commercialization. For example, we
currently use such biomarkers in our AVN944 development program.
For these reasons, we believe
AvalonRx
®
has the potential to discover drugs that conventional
technologies are inherently unable to find and to move lead
compounds and drug candidates through the development process
with greater success.
Our
Strategy
Our objective is to be a leading biopharmaceutical company
focused on the discovery, development and commercialization of
drug candidates for the treatment of cancer. The key elements of
our business strategy are as follows:
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Advance the development of AVN944.
We began
conducting a U.S. Phase I trial for AVN944 in hematologic
cancer patients in January 2006. We initiated Phase II
clinical trials in pancreatic cancer during 2007. During the
clinical development of AVN944 and the development of all of our
subsequent drug candidates, we intend to leverage
AvalonRx
®
to accelerate decision-making by: (1) selecting biomarkers
of responsive cancers, (2) identifying responsive patient
populations for improved clinical trial design and outcome,
(3) determining appropriate drug combinations more quickly
than with conventional methods, and (4) developing genetic
biomarker diagnostics.
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Advance our anti-cancer therapeutic
programs.
We plan to advance the development of
our lead candidates in both the β-catenin and the
Aurora/Centrosome pathway programs to select and optimize
pre-clinical candidates for both programs and to advance those
candidates to clinical trials. We also plan to advance the
Survivin pathway and the Myc pathway programs from the screening
stage to the lead optimization stage and to identify lead
candidates for both programs. We will continue to utilize
AvalonRx
®
to discover and develop new therapeutic candidates against
proprietary Avalon cancer targets and well-known cancer pathways
proven to be difficult for conventional technologies to address.
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Continue to deliver value for our partners and create new
valuable partnerships.
We have formed
collaborations with Merck & Co., Inc., AstraZeneca PLC
(through the acquisition of MedImmune, Inc.), Novartis
Institutes for Biomedical Research, Inc., Medarex, Inc. and
ChemDiv, Inc. We will continue to deliver value to our partners
by using
AvalonRx
®
to discover and develop compounds together with our partners. We
may form new partnerships involving some of our cancer pipeline
programs that would: (1) enhance clinical development and
maximize the potential therapeutic use and commercialization of
AVN944; (2) enhance the development and maximize the
potential therapeutic use and commercialization of our
β-catenin, Aurora/Centrosome pathway, Myc and Survivin
pathway programs; (3) discover, develop and commercialize
novel drug candidates for other undruggable targets.
Additionally, we may form new partnerships utilizing
AvalonRx
®
as it has very broad applications across many therapeutic fields.
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It is our intent to receive upfront payments for access to our
technology, research and development funding, additional fees
for the achievement of development milestones, and royalties on
sales of products developed in collaboration with other
companies.
Collaborative
Relationships
Merck &
Co., Inc.
In March 2007, we entered into a drug discovery, development and
commercialization agreement with Merck & Co., Inc., to
identify and develop inhibitors against a selected target in the
area of oncology.
Under the terms of the agreement, we are using our
AvalonRx
®
platform to screen a select set of compounds from Mercks
proprietary compound library and to identify hits against this
target, which is generally regarded as intractable
based on the difficulty in identifying inhibitors of this
target. We are responsible for the selection of compound
families and optimization of those compounds to a preclinical
candidate selection stage. Merck is responsible for the clinical
development, regulatory approval and commercialization of any
resulting product candidates. Under the agreement, we will
receive milestone payments based on meeting a number of
discovery, development and commercial milestones for multiple
indications. If we achieve all of the milestones under the
agreement, we will receive in excess of $200 million in
milestone payments. We will also receive royalties on net sales
of products marketed in the collaboration. The agreement does
not provide for any minimum guaranteed payments to us by Merck.
The term of the agreement expires upon the expiration of all
royalty obligations under the agreement. The agreement may be
terminated earlier by Merck upon 60 days advanced written
notice and in certain circumstances subject to the payment of
specified fees by Merck. Additionally, in certain circumstances,
we have the right to obtain licenses from Merck to continue the
development and commercialization of potential product
candidates derived from the research program. The agreement may
also be terminated either by us or by Merck upon a material,
uncured breach by the other party of the terms of the agreement,
following the expiration of a 90 day cure period.
This collaboration allows us to combine our unique approach of
targeting otherwise intractable cancer pathways with
Mercks strong drug discovery and development capabilities
and extensive compound library, and has the potential to lead to
the identification of
first-in-class
drug candidates against this target.
AstraZeneca
PLC
In June 2005, we entered into a collaboration and license
agreement with MedImmune, Inc. (acquired by AstraZeneca PLC) for
the discovery of small molecule therapeutic compounds in the
area of inflammatory disease. Under the terms of the agreement,
AstraZeneca is responsible for preclinical and clinical testing
of any resulting product candidates, as well as all future
development, sales and marketing activities.
We received an upfront technology access fee payment and
AstraZeneca is funding all research and development activities
at Avalon and AstraZeneca for the purpose of the collaboration.
We may receive up to $16 million in milestone payments from
AstraZeneca related to the discovery, development and
commercialization of compounds resulting from this
collaboration. We may also receive royalties on net sales of any
products discovered in the collaboration.
7
Additionally, AstraZeneca has the option to initiate two
additional small molecule drug discovery collaborations with us
under similar terms.
The term of the agreement expires on the earlier of
(i) 50 years from the date of the agreement or,
(ii) such time as AstraZenecas obligation to pay
royalties expires. The agreement also expires if, after the
research is completed, AstraZeneca does not select a clinical
candidate. The license agreement may be terminated sooner by
either us or AstraZeneca upon, among other events, a material,
uncured breach by the other party or by AstraZeneca for reason
other than our material breach, upon 90 days notice.
In 2007, MedImmune paused work under this program at the time of
their merger with AstraZeneca. AstraZeneca has informed us of
their intent to continue work under this contract for small
molecule therapeutic programs other than the original MedImmune
program. As of December 31, 2007, there remained a balance
of approximately $893,000 of deferred revenue and customer
advances related to this agreement.
ChemDiv,
Inc.
In July 2006, we entered into a collaboration agreement with
ChemDiv, Inc. for the discovery and development of small
molecule oncology therapeutics. Avalon and ChemDiv share in the
costs of development and will share in the value of any lead
candidate resulting from their joint research efforts.
Additional terms of the agreement allowed Avalon to select and
acquire 200,000 compounds from the ChemDiv library for use in
all of Avalons discovery programs. We are using our
proprietary
AvalonRx
®
platform to discover new active compounds in screens against
selected targets and target pathways. ChemDiv is providing us
with access to its Discovery
outSource
tm
services platform, including one of the worlds
largest commercially available chemical libraries, as well as
medicinal and synthetic chemistry for the discovery and
development of new active compounds.
In April 2007, Avalon initiated a joint Avalon/ChemDiv program
to identify inhibitors of the Hsp90 pathway. Avalon developed a
biomarker signature for pathway inhibition and initiated an
AvalonRx
®
based high-throughput screen of its small molecule library. We
expect to validate hits from this screen and select a compound
for lead optimization in 2008.
The term of the agreement expires 60 years from the
effective date. The collaboration may be terminated sooner upon
mutual written agreement of both parties.
Medarex,
Inc.
In October 2003, we entered into a collaboration with Medarex,
Inc. to jointly research, develop and commercialize human
antibodies against Avalon cancer targets. Using
AvalonRx
®
, we have identified what we believe are key cancer targets
based on the amplification of DNA and over expression of RNA in
certain cancer cells. Medarex plans to use its UltiMAb Human
Antibody Development
System
®
to generate antibodies to the identified disease targets. We
intend to develop jointly with Medarex these antibodies for
therapeutic intervention. Under the agreement, each party is
obligated to use commercially reasonable efforts to conduct
their respective research activities in accordance with jointly
developed project plans and budgets for the research,
development, manufacture and commercialization of human
antibodies resulting from this collaboration. The agreement
generally provides that all costs associated with the research,
development, manufacturing and commercialization of any such
antibodies are to be shared equally between Avalon and Medarex
and that any operating profits or losses with respect to
commercial products derived from the collaboration are to be
similarly shared equally between the two parties. The agreement
further provides that either party may voluntarily opt-out of
its research, development and commercialization obligations.
Upon the exercise of such opt-out right, the non-terminating
party has the option to unilaterally continue research,
development, manufacture and commercialization activities with
respect to these antibodies.
Novartis
Institutes for Biomedical Research, Inc.
In September 2005, we entered into an agreement with Novartis
Institutes for Biomedical Research, Inc. for the discovery of
small molecule therapeutic compounds targeted against a pathway
selected by Novartis. Under the terms of the agreement we are
using
AvalonRx
®
to identify and characterize compounds from Novartis
chemical
8
library. Novartis is responsible for lead optimization,
preclinical and clinical testing of any resulting product
candidates, as well as all future development and sales and
marketing activities.
We received an upfront technology access fee and Novartis is
funding all research activities at Avalon for the purpose of the
collaboration. We may receive milestone payments from Novartis
based on the achievement of the following milestones:
(1) identification of a validated hit compound,
(2) identification of a lead compound and,
(3) compound characterization.
In January 2007 the initial agreement term was amended from
18 months to 30 months from the date of inception. The
agreement may be terminated sooner by either us or Novartis upon
a material, uncured breach by the other party upon 60 days
notice. In February 2007, following Avalons successful
validation of an
AvalonRx
®
based screen for monitoring disruption of the selected pathway,
the parties agreed to initiate the primary screen against a
large subset of Novartis compound library. Under the terms
of the agreement, the initiation of the screening phase
triggered a $500,000 payment to Avalon for research support. In
December 2007, following the successful completion of an
AvalonRx
®
based screen and identification of candidate hit compounds, the
parties have agreed to initiate characterization of these
compounds using
AvalonRx
®
biomarker profiling. This initiation of compound profiling
triggered a $200,000 payment to Avalon for research support. In
February 2008, the agreement term was extended from
30 months to 36 months from the date of inception.
Patents,
Licenses and Proprietary Rights
We generally seek patent protection for our product candidates
in the United States and abroad and protect our technologies
through patents and trade secrets.
Vertex
license
In February 2005, we entered into a license agreement with
Vertex Pharmaceuticals for the development and commercialization
of AVN944 in oncology indications. Under the terms of the
license, we hold exclusive rights to develop and commercialize
AVN944 worldwide for the treatment or prevention of cancer. In
consideration for this license, we paid Vertex a total of
$5 million in upfront license fees. In addition, we have
agreed to pay Vertex milestone payments based on the achievement
of the following milestones: (1) initiation of the first
human clinical trial, the results of which are designed to
demonstrate the safety and efficacy of AVN944 on a sufficient
number of patients to support regulatory approval of the drug in
any country (generally a Phase III clinical trial);
(2) first filing of a new drug application for AVN944 in
any country; and (3) first regulatory approval of AVN944 in
any country. Assuming we achieve each of these milestones in
both hematologic and solid tumor indications, we will pay Vertex
up to $68 million in milestone payments. Upon
commercialization, we will pay Vertex royalties on product sales.
If we fail to obtain regulatory approval and initiate sales and
marketing efforts in any other countries within a year after
there are commercial sales in all of the following countries:
the United States, the United Kingdom, France, Germany, Italy,
Spain and Japan, Vertex has the right to market and sell AVN944
drug product on our behalf in any such other countries.
The term of the agreement expires with respect to a particular
country upon the later to occur of: (1) the expiration of
the last Vertex patent in such country containing a valid patent
claim covering AVN944 for use in the treatment or prevention of
cancer; or (2) if there is no such valid patent claim under
a Vertex patent, 10 years from the earlier of the date
regulatory approval is received in that country for sale of
AVN944 in a drug product or the first commercial sale of AVN944
in a drug product in that country. In all events, the term of
the agreement expires on February 14, 2055. Upon the
expiration of the term of the agreement, either as to a
particular country or in full, we are entitled to receive a
fully paid up license to any of Vertexs proprietary
material and information relating to the development,
utilization, manufacture or use of AVN944 or any drug product
derived therefrom.
The license agreement may be terminated sooner by either us or
Vertex upon, among other events, a material breach by the other
party of the terms of the license agreement (subject to prior
notice and an opportunity to cure) or by Vertex upon our failure
to achieve key development and regulatory milestones by
specified dates. Upon termination of the license agreement
(other than because of a material breach by Vertex), all
licensed rights to AVN944 revert to Vertex.
9
Patent
rights; licenses
We and our licensors have patents and continue to seek patent
protection for technologies that relate to our product
candidates, as well as technologies that may prove useful for
future product candidates. As of December 31, 2007, we held
or had licenses to 67 issued, allowed or pending patents
worldwide. These patents and patent applications pertain to
compounds, gene targets and methods and processes of discovering
future product candidates.
As described above, we licensed from Vertex exclusive rights to
develop and commercialize AVN944 worldwide for the treatment or
prevention of cancer, including patent rights to the composition
of matter for AVN944. We have been advised by Vertex that there
was a defect in the claims of the licensed United States patent
that covers AVN944. Vertex has filed revised claims which would
correct that defect. Although such claims have not yet been
allowed, based on the prior art and conversations between Vertex
and the patent examiner reviewing the patent application, we
believe that a patent containing claims covering AVN944 will be
granted. There can be no assurance, however, that such a patent
will ultimately be granted in the United States.
We anticipate that we will continue to seek to improve existing
technologies and to develop new technologies and, when possible,
secure patent protection for such improvements and new
technologies.
The patent position of biotechnology firms generally is highly
uncertain and involves complex legal and factual questions. Our
success will depend, in part, on whether we can:
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obtain patents to protect our own products;
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obtain licenses to use the technologies of third parties, which
may be protected by patents;
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protect our trade secrets and know-how; and
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operate without infringing the intellectual property and
proprietary rights of others.
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Trade
secrets
AvalonRx
®
,
our drug discovery platform, is protected as a trade secret. It
is our policy to require our employees, consultants,
contractors, manufacturers, collaborators and other advisors to
execute confidentiality agreements upon the commencement of
employment, consulting or collaborative relationships with us.
We also require signed confidentiality agreements from any
entity that is to receive confidential data. With respect to
employees, consultants and contractors, the agreements generally
provide that all inventions made by the individual while
rendering services to us shall be assigned to us as our property.
Competition
The pharmaceutical and biotechnology industries are very
competitive and characterized by rapid and continuous
technological innovation. We believe that there are a
significant number of potential drugs in preclinical studies and
clinical trials to treat cancer that may result in effective,
commercially successful treatments for the same cancers that we
target.
We face competition from many pharmaceutical and biotechnology
companies. We are aware that most large pharmaceutical companies
have small molecule development programs in the field of cancer.
We compete with a number of biotechnology companies, such as
Anadys Pharmaceuticals, Inc., Ariad Pharmaceuticals, Inc.,
ArQule, Inc., Array Biopharma, Inc., Biocryst Pharmaceuticals,
Inc., Chemgenex Pharmaceuticals, Inc., Coley Pharmaceuticals,
Inc., Cyclacel Pharmaceuticals, Inc., Exelixis, Inc., Infinity
Pharmaceuticals, Inc., Kosan Biosciences and Sunesis
Pharmaceuticals, Inc. that are developing small molecule
therapeutics as treatments for cancer. We are aware of other
companies that are developing IMPDH inhibitors as potential
therapeutics for diseases other than cancer.
Some of our competitors have a broader range of capabilities and
have greater access to financial, technical, scientific,
business development, recruiting and other resources than we do.
Their access to greater resources may allow them to develop
processes or technologies that would render our technologies
obsolete or uneconomical, or
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drug candidates that are more effective, safer or less costly
than drug candidates we develop or for which they obtain FDA
approval more rapidly than we do. We anticipate that we will
face increased competition in the future as new companies enter
the market and advanced technologies become available.
Manufacturing
and Supply
We currently use third party manufacturers who employ the
FDAs current Good Manufacturing Practices, or cGMP, for
production of our product candidates for clinical trials. We
have a research and development facility in Germantown, MD and
have established laboratories and staff to support the non-cGMP
production and process development of more advanced
manufacturing processes and product characterization methods for
our product candidates.
We currently have only one supplier for certain of our
manufacturing components, including components necessary for the
AVN944 drug product. Currently, we procure raw materials for the
production of AVN944 from a limited number of suppliers. We have
plans in place to develop multiple suppliers for all critical
supplies before the time we would put any of our product
candidates into commercial production.
Marketing
and Sales
We continue to explore opportunities for corporate alliances and
partners to help develop and ultimately commercialize our
product candidates. Our strategy is to enter into collaborative
arrangements with pharmaceutical and other companies for some or
all aspects of development, manufacturing, marketing, and sales
of our products that will require broad marketing capabilities
and overseas marketing. These collaborators are generally
expected to be responsible for funding or reimbursing all or a
portion of the development costs, including the costs of
clinical testing necessary to obtain regulatory clearances and
for commercial scale manufacturing, in exchange for rights to
market specific products in particular geographic territories.
Government
Regulation
Government authorities in the United States at the federal,
state, and local levels extensively regulate, among other
things, the research, development, testing, manufacture,
labeling, promotion, advertising, distribution, sampling,
marketing, and import and export of pharmaceutical products,
biologics, and medical devices. Our drug candidates are subject
to regulatory approval by the FDA prior to commercialization.
Various federal, state, and local statutes and regulations also
govern testing, manufacturing, safety, labeling, storage, and
record-keeping related to such products and their marketing. We
will also be required to obtain regulatory approval from
comparable agencies in foreign countries before commercial
marketing in those countries. Before a drug candidate is
approved by the FDA for commercial marketing, rigorous
preclinical and human clinical testing is conducted to test the
safety and effectiveness of the product.
Pharmaceutical
Product Regulation
In the United States, the FDA regulates drugs under the Federal
Food, Drug and Cosmetic Act, or FDCA, and implementing
regulations that are adopted under the FDCA. If we fail to
comply with the applicable requirements under these laws and
regulations at any time during the product development process,
approval process, or after approval, we may become subject to
administrative or judicial sanctions. These sanctions could
include the FDAs refusal to approve pending applications,
withdrawals of approvals, clinical holds, warning letters,
product recalls, product seizures, total or partial suspension
of our operations, injunctions, fines, civil penalties or
criminal prosecution. Any agency enforcement action could have a
material adverse effect on us.
Under the United States regulatory scheme, the development
process for new pharmaceutical products can be divided into two
distinct phases:
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Preclinical Phase.
The preclinical phase
involves the discovery, characterization, product formulation
and animal testing necessary to prepare an IND for submission to
the FDA. The IND must be accepted by the FDA before the drug can
be tested in humans. The review period for an IND submission is
30 days, after which, if no comments are made by the FDA,
the product candidate can be studied in Phase I clinical trials.
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Certain preclinical tests must be conducted in compliance with
the FDAs good laboratory practice regulations and the
United States Department of Agricultures Animal Welfare
Act.
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Clinical Phase.
The clinical phase of
development follows a successful IND submission and involves the
activities necessary to demonstrate the safety, tolerability,
efficacy, and dosage of the drug in humans, as well as the
ability to produce the drug in accordance with cGMP
requirements. Clinical trials are conducted under protocols
detailing, among other things, the objectives of the study and
the parameters to be used in assessing the safety and the
efficacy of the drug. Each protocol must be submitted to the FDA
as part of the IND prior to beginning the trial. Each trial must
be reviewed, approved, and conducted under the auspices of an
Institutional Review Board, or IRB, and each trial, with limited
exceptions, must include the patients informed consent.
Typically, clinical evaluation involves the following
time-consuming and costly three-phase sequential process:
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Phase I.
In Phase I clinical trials, a small
number of volunteers are tested with the drug to determine the
drugs safety and tolerability and includes biological
analyses to determine the availability and metabolism of the
active ingredient following administration.
Phase II.
Phase II clinical trials
involve administering the drug to individuals who suffer from
the target disease or condition to determine the drugs
potential efficacy and ideal dose. These clinical trials are
typically well controlled, closely monitored, and conducted in a
relatively small number of patients, usually involving no more
than several hundred subjects.
Phase III.
Phase III clinical trials are
performed after preliminary evidence suggesting effectiveness of
a drug has been obtained and safety, tolerability, and an ideal
dosing regimen have been established. Phase III clinical
trials are intended to gather additional information about the
effectiveness and safety that is needed to evaluate the overall
benefit-risk relationship of the drug and to complete the
information needed to provide adequate instructions for the use
of the drug. Phase III trials usually include from several
hundred to several thousand subjects.
Throughout the clinical phase, samples of the product made in
different batches are tested for stability to establish shelf
life constraints. In addition, large-scale production protocols
and written standard operating procedures for each aspect of
commercial manufacture and testing must be developed. These
trials require scale up for manufacture of increasingly larger
batches of bulk chemical. These batches require validation
analysis to confirm the consistent composition of the product.
Phase I, II, and III testing may not be completed
successfully within any specified time period, if at all. The
FDA closely monitors the progress of each of the three phases of
clinical trials that are conducted under an IND and may, at its
discretion, reevaluate, alter, suspend (place on clinical
hold), or terminate the testing based upon the data
accumulated to that point and the agencys assessment of
the risk/benefit ratio to the patient. The FDA may suspend or
terminate clinical trials at any time for various reasons,
including a finding that the subjects or patients are being
exposed to an unacceptable health risk. The FDA can also request
additional clinical trials be conducted as a condition to
product approval. Additionally, new government requirements may
be established that could delay or prevent regulatory approval
of products under development. Furthermore, IRBs, which are
independent entities constituted to protect human subjects at
the institutions in which clinical trials are being conducted,
have the authority to suspend clinical trials at their
respective institutions at any time for a variety of reasons,
including safety issues.
New
Drug Application
After the successful completion of Phase III clinical
trials, the sponsor of the new drug submits a New Drug
Application, or NDA, to the FDA requesting approval to market
the product for one or more indications. An NDA is a
comprehensive, multi-volume application that includes, among
other things, the results of all preclinical studies and
clinical trials, information about the drugs composition,
and the sponsors plans for producing, packaging, and
labeling the drug. Under the Pediatric Research Equity Act of
2003, an application also is required to include an assessment,
generally based on clinical study data, on the safety and
efficacy of drugs for all relevant pediatric populations before
the NDA is submitted. The statute provides for waivers or
deferrals in certain situations. In most cases, the NDA must be
accompanied by a substantial user fee. In return, the FDA
assigns a goal of 10 months from
12
acceptance of the application to return of a first
complete response, in which the FDA may approve the
product or request additional information.
The submission of the application is no guarantee that the FDA
will find it complete and accept it for filing. The FDA reviews
all NDAs submitted before it accepts them for filing. It may
refuse to file the application and request additional
information rather than accept the application for filing, in
which case, the application must be resubmitted with the
supplemental information. After the application is deemed filed
by the FDA, agency staff reviews an NDA to determine, among
other things, whether a product is safe and effective for its
intended use. The FDA has substantial discretion in the approval
process and may disagree with an applicants interpretation
of the data submitted in its NDA. As part of this review, the
FDA may refer the application to an appropriate advisory
committee, typically a panel of physicians, for review,
evaluation, and an approval recommendation. The FDA is not bound
by the opinion of the advisory committee. Drugs that
successfully complete NDA review may be marketed in the United
States, subject to all conditions imposed by the FDA.
Prior to granting approval, the FDA generally conducts an
inspection of the facilities, including outsourced facilities,
that will be involved in the manufacture, production, packaging,
testing, and control of the drug candidate for cGMP compliance.
The FDA will not approve the application unless cGMP compliance
is satisfactory. If the FDA determines that the marketing
application, manufacturing process, or manufacturing facilities
are not acceptable, it will outline the deficiencies in the
submission and will often request additional testing or
information. Notwithstanding the submission of any requested
additional information, the FDA ultimately may decide that the
marketing application does not satisfy the regulatory criteria
for approval and refuse to approve the application by issuing a
not approvable letter.
The length of the FDAs review ranges from a few months,
for some drugs related to life-threatening circumstances, to
many years.
Post
Approval Phase
If the FDA approves the NDA, the pharmaceutical product becomes
available for physicians to prescribe in the United States.
After approval, the NDA holder is still subject to continuing
regulation by the FDA, including record keeping requirements,
submitting periodic reports to the FDA, reporting of any adverse
experiences with the product, and complying with drug sampling
and distribution requirements. In addition, the NDA holder is
required to maintain and provide updated safety and efficacy
information to the FDA. The NDA holder is also required to
comply with requirements concerning advertising and promotional
labeling, including prohibitions against promoting any non-FDA
approved or off-label indications of products.
Failure to comply with those requirements could result in
significant enforcement action by the FDA, including warning
letters, orders to pull the promotional materials, and
substantial fines. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval.
Drug manufacturers and their subcontractors are required to
register their facilities and products manufactured annually
with the FDA and certain state agencies and are subject to
periodic unannounced inspections by the FDA to assess compliance
with cGMP regulations. Facilities may also be subject to
inspections by other federal, foreign, state or local agencies.
Accordingly, manufacturers must continue to expend time, money,
and effort in the area of production and quality control to
maintain compliance with cGMP and other aspects of regulatory
compliance.
In addition, following FDA approval of a product, discovery of
problems with a product or the failure to comply with
requirements may result in restrictions on a product,
manufacturer, or holder of an approved marketing application,
including withdrawal or recall of the product from the market or
other voluntary or FDA-initiated action that could delay further
marketing. Newly discovered or developed safety or effectiveness
data may require changes to a products approved labeling,
including the addition of new warnings and contraindications.
Also, the FDA may require post-market testing and surveillance
to monitor the products safety or efficacy, including
additional clinical studies, known as Phase IV trials, to
evaluate long-term effects.
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Hatch-Waxman
Act
Approved products would also be subject to the provisions of the
Drug Price Competition and Patent Term Restoration Act of 1984
(known as the Hatch-Waxman Act). Under the
Hatch-Waxman Act, newly approved drug products and changes to
the conditions of use of approved products may benefit from
periods of non-patent marketing exclusivity. During this period
(ranging from up to five years for new chemical
entities to up to three years for new use
approval of an existing drug), the FDA may not approve generic
versions of the drug product. The Hatch-Waxman Act also provides
for the restoration of up to five years of the patent term lost
during product development and FDA review of an application.
The Hatch-Waxman Act also provides a legal pathway for approving
generic versions of the innovators drug product once the
marketing exclusivity period has ended and all relevant patents
have expired (or have been successfully challenged and
defeated). Thus, the marketing exclusivity of the innovator
product will run through the remaining life of its patent(s) and
any additional non-patent marketing exclusivity, unless the
marketing exclusivity is shortened by a successful patent
challenge.
Pediatric
Exclusivity
The Best Pharmaceuticals for Children Act (BPCA) provides an
incentive for pioneer drug manufacturers to conduct research
into the safety and effectiveness of their products in children,
by making pediatric exclusivity available to a manufacturer that
conducts and submits to the FDA the results of a pediatric study
that fairly respond to a written request from the agency for
such research. Pediatric exclusivity extends for six months any
marketing exclusivity or patent protection in the United States.
The study need not have been successful to merit an award of
pediatric exclusivity. As reauthorized in 2007, the BPCA
authorizes the FDA to require labeling changes to reflect the
results of pediatric studies.
Pediatric
Assessment
Under the Pediatric Research Equity Act (PREA), the FDA can
require that most new drug or biologics license applications
(and supplemental applications for a new active ingredient,
indication, dosage form, dosing regimen, or route of
administration) include a pediatric assessment,
which is an evaluation of the safety and effectiveness of the
product for the claimed indication in relevant pediatric
populations. As reauthorized in 2007, PREA authorizes the agency
to order labeling changes to reflect the results of these
studies.
Orphan
Drug Designation and Exclusivity
Some jurisdictions, including the United States and the European
Union, designate drugs intended for relatively small patient
populations as orphan drugs. The FDA, for example,
grants orphan drug designation to drugs intended to treat rare
diseases or conditions that affect fewer than 200,000
individuals in the United States or drugs for which there is no
reasonable expectation that the cost of developing and making
the drugs available in the United States will be recovered. In
the United States, orphan drug designation must be requested
before submitting an application for approval of the product.
Orphan drug designation does not convey any advantage in, or
shorten the duration of, the regulatory review and approval
process. If a product which has an orphan drug designation
subsequently receives the first FDA approval for the indication
for which it has such designation, the product is entitled to
seven years of marketing exclusivity. During this time, the FDA
may not approve another drug application to market the
same drug for the same indication. The only
exception is where the second product is shown to be
clinically superior to the product with orphan drug
exclusivity, as that phrase if defined by the FDA, and if there
is an inadequate supply.
Foreign
Regulation
Whether or not we obtain FDA approval for a product, we must
obtain product approval by the comparable regulatory authorities
of foreign countries before we can commence clinical trials or
marketing of the product in those countries. The approval
process varies from country to country, and the time may be
longer or shorter than that required for FDA approval. Although
governed by the applicable country, clinical trials conducted
outside of the
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United States typically are administered under a three-phase
sequential process similar to that discussed above for
pharmaceutical products in the United States.
Other
Regulations
We are subject to other regulations, including regulations under
the Occupational Safety and Health Act, regulations promulgated
by the United States Department of Agriculture, and regulations
under other federal, state and local laws. We ourselves are not
directly regulated by the privacy regulations promulgated under
the Heath Insurance Portability and Accountability Act of 1996,
or HIPAA. However, we could face substantial criminal penalties
if we knowingly receive individually identifiable health
information from a healthcare provider that has not satisfied
the privacy regulations disclosure standards. Most
healthcare providers, including research institutions from whom
we or our third party contractors obtain patient information are
subject to these privacy regulations. In addition, certain state
privacy laws and genetic testing laws may apply directly to our
operations
and/or
those
of our partners and may impose restrictions on the use and
dissemination of individuals health information. Moreover,
patients about whom we or our partners obtain information, as
well as the providers who share this information with us, may
have contractual rights that limit our ability to use and
disclose the information. Claims that we have violated
individuals privacy rights or breached our contractual
obligations, even if we are not found liable, could be expensive
and time-consuming to defend and could result in adverse
publicity that could harm our business.
Other various federal, state and local laws and regulations
relating to the use, manufacture, storage, handling and disposal
of hazardous materials and waste products may also apply. These
environmental laws generally impose liability regardless of the
negligence or fault of a party and may expose us to liability
for the conduct of, or conditions caused by, others. We have not
incurred, and do not expect to incur, material costs to comply
with these laws and regulations.
Employees
As of December 31, 2007, we had 57 full-time
employees, 19 of whom hold M.D. or Ph.D. degrees and 13 of whom
hold other advanced degrees. Of our total workforce, 40 are
engaged primarily in research and development activities and 17
are engaged primarily in business development, finance,
marketing and administration functions. None of our employees is
represented by a labor union or covered by a collective
bargaining agreement, and we consider our employee relations to
be good.
Organization;
Principal Executive Offices
We were incorporated in Delaware in 1999. Our principal
executive offices are located at 20358 Seneca Meadows Parkway,
Germantown, Maryland 20876 and our telephone number at that
location is
(301) 556-9900.
Available
Information
For more information about us, visit our web site at
www.avalonrx.com. Our electronic filings with the SEC (including
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments to these reports) are available free of
charge through our web site as soon as reasonably practicable
after we electronically file with or furnish them to the SEC.
Risks
Related to Our Business
Because
we have a limited operating history, there is a limited amount
of information about us upon which you can evaluate our business
and prospects.
Our operations began in January 2000, and we have only a limited
operating history upon which you can evaluate our business and
prospects. In addition, we have limited experience and have not
yet demonstrated an ability to successfully overcome many of the
risks and uncertainties frequently encountered by companies in
new and rapidly evolving fields, particularly in the
biopharmaceutical area. For example, to execute our business
plan, we will need to successfully:
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advance AVN944 through the development process;
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demonstrate the advantages and reliability of our proprietary
drug discovery and development technology,
AvalonRx
®
;
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build and maintain a strong intellectual property portfolio;
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develop and maintain successful strategic relationships; and
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manage costs associated with our research and product
development plans, conducting clinical trials, obtaining
regulatory approvals and delivering pharmaceutical products to
the market.
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If we are unsuccessful in accomplishing these objectives, we may
not be able to develop drug candidates, raise capital, expand
our business or continue our operations.
We
will need substantial additional funding, which may not be
available to us on acceptable terms, or at all, and our
independent registered public accounting firm has expressed
substantial doubt as to our ability to continue as a going
concern.
We will continue to expend substantial resources for research
and development, including costs associated with developing our
technology and conducting preclinical testing and clinical
trials. In addition, our financial statements have been prepared
on the assumption that we will continue as a going concern,
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. However, our
independent registered public accounting firms report on
our financial statements as of and for the fiscal year ended
December 31, 2007, includes an explanatory paragraph that
states that our recurring losses and negative cash flows from
operations raise substantial doubt about our ability to continue
as a going concern. Accordingly, we will need to raise
substantial additional capital to continue as a going concern
and to fund our operations, including to:
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fund clinical trials and seek regulatory approvals;
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pursue the development of additional product candidates;
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maintain and expand our research and development activities;
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access manufacturing and commercialization capabilities;
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implement additional internal systems and infrastructure;
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maintain, defend and expand the scope of our intellectual
property portfolio; and
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hire additional personnel.
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Our future capital requirements will depend on a number of
factors, including:
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the size and complexity of research and development programs;
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our ability to attract and retain partners;
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the scope and results of preclinical testing and clinical trials;
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continued scientific progress in our research and development
programs;
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the time and expense involved in seeking regulatory approvals;
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competing technological and market developments;
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acquisition, licensing and protection of intellectual property
rights; and
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the cost of establishing manufacturing capabilities and
conducting commercialization activities.
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Until we can generate a sufficient amount of product revenue to
finance our cash requirements, which we may never do, we expect
to finance future cash needs primarily through public or private
equity offerings, debt financings or strategic collaborations.
We do not know whether additional funding will be available on
acceptable terms, or at all. If we are not able to secure
additional funding when needed, we may have to delay, reduce the
scope of, or eliminate one or more of our clinical trials or
research and development programs. In addition, we may have to
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partner one or more of our drug candidate programs at an earlier
stage of development, which would lower the economic value of
those programs to us.
We
have a history of losses, we expect to continue to incur losses
for the foreseeable future, and we may never achieve or sustain
profitability.
We have experienced significant operating losses since our
inception. We do not currently have any products that have been
approved for marketing, and we continue to incur research and
development and general and administrative expenses related to
our operations. We had net losses of $21.7 million for the
year ended December 31, 2007. We expect our annual
operating losses to continue over the next several years. Our
losses, among other things, have caused and will continue to
cause our working capital and stockholders equity to
decrease. To date, we have derived all of our revenue in
connection with collaborations. We do not anticipate that we
will generate revenue from the sale of products for the
foreseeable future. To become and remain profitable, we must
succeed in developing and commercializing novel drugs with
significant market potential. This will require us to succeed in
a range of challenging activities, including conducting clinical
trials, obtaining regulatory approvals, entering into
appropriate collaborations, and manufacturing, marketing and
selling commercial products. We may never succeed in these
activities, and may never generate revenues sufficient to
achieve profitability. If we do achieve profitability, we may
not be able to sustain it. If we fail to earn profits, or if we
cannot sustain profitability, the market price of our common
stock is likely to decline. In addition, we may be unable to
raise capital, expand our business, diversify our product
offerings or continue our operations.
We
have no products approved for commercial sale and do not expect
to have any products approved for commercial sale for the next
several years; our lead drug candidate, AVN944, is at an early
stage of development, and we may not successfully develop it or
any other future drug candidate into a commercial
product.
The drug discovery and development process is highly uncertain,
and we have not developed, and may never develop, a drug
candidate that ultimately leads to a commercial product. AVN944
is in the early stages of development, and we do not have any
drugs approved for commercial sale. AVN944 may prove
unsuccessful in clinical trials, may prove to be too costly to
develop into a commercially viable product or may fail to
receive regulatory approval for marketing. At any time, we may
decide to discontinue the development of AVN944 or any other
future drug candidate or not to commercialize a candidate.
The
drug discovery methods we employ through
AvalonRx
®
are new and unproven and may not lead to the development of
commercially viable drugs.
The drug discovery methods we employ through
AvalonRx
®
that are based upon gene expression analysis are new and, in
several ways, unproven. For instance, our drug discovery
technology profiles the effects of compounds on thousands of
genes in a cell rather than an isolated target, a process that
is novel and unproven in its usefulness to develop commercially
viable drugs. There is limited scientific understanding
generally relating to the regulation of gene expression and the
role of genes in complex diseases, and relatively few products
based on gene discoveries have been developed and commercialized
by drug manufacturers. Even if we are successful in identifying
compounds that show effects on the pathways that cells use to
control the expression of genes associated with cancer, these
discoveries may not lead to the development of effective drugs.
We may
be unable to accelerate the drug discovery
process.
Although we believe that one of the advantages of
AvalonRx
®
is its ability to accelerate the drug discovery process, we have
not yet identified a drug candidate using
AvalonRx
®
that has advanced beyond
in vivo
preclinical testing.
Therefore, we cannot confirm that
AvalonRx
®
performs as reliably as conventional drug discovery methods. Our
lead drug candidate, AVN944, was not discovered or developed
with
AvalonRx
®
. Until we succeed in discovering compounds that become approved
drugs, we will not be certain that the efficiency that we
believe is afforded by
AvalonRx
®
is commercially meaningful.
17
Preclinical
and clinical testing are time consuming, expensive, and
uncertain processes.
Before the FDA approves a drug candidate for marketing, it is
tested for safety and efficacy in preclinical testing and human
clinical trials. The preclinical phase involves the discovery,
characterization, product formulation and animal testing
necessary to prepare an IND for submission to the FDA. The IND
must be accepted by the FDA before the drug can be tested in
humans in the United States. The clinical phase of development
follows a successful IND submission and involves the activities
necessary to demonstrate the safety, tolerability, efficacy,
dose and dose schedule of the product candidate in humans, as
well as the ability to produce the substance in accordance with
cGMP requirements. Preclinical testing and clinical development
are long, expensive and uncertain processes. It may take us
several years to complete our testing, and failure can occur at
any stage of the process. During the process, we expect to incur
significant expenses to conduct trials and follow required
regulatory processes.
We do not know whether our IND for future products or the
protocols for any future clinical trials will be accepted by the
FDA. We do not know if our clinical trials will begin or be
completed on schedule or at all. Even if completed, we do not
know if these trials will produce clinically meaningful results
sufficient to support an application for marketing approval. The
commencement of our planned clinical trials could be
substantially delayed or prevented by several factors, including:
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a limited number of, and competition for, suitable patients with
particular types of cancer for enrollment in clinical trials;
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delays or failures in obtaining regulatory clearance to commence
a clinical trial;
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delays or failures in obtaining sufficient clinical materials;
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delays or failures in reaching agreement on acceptable clinical
trial agreement terms or clinical trial protocols with
prospective sites; and
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delays or failures in obtaining Institutional Review Board, or
IRB, approval to conduct a clinical trial at a prospective site.
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The completion of our clinical trials could also be
substantially delayed or prevented by several factors, including:
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slower than expected rates of patient recruitment and enrollment;
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failure of patients to complete the clinical trial;
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unforeseen safety issues;
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lack of efficacy during clinical trials;
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inability or unwillingness of patients or medical investigators
to follow our clinical trial protocols;
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inability to monitor patients adequately during or after
treatment; and
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regulatory action by the FDA for failure to comply with
regulatory requirements.
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Our clinical trials may be suspended or terminated at any time
by the FDA, other regulatory authorities, or by us. Any failure
or significant delay in completing clinical trials for our drug
candidates could harm our financial results and the commercial
prospects for our drug candidates. For example, in 2007 we
discontinued enrollment of patients with chronic lymphocytic
leukemia because of difficulty interpreting the safety profile
in these patients.
If we achieve success at any stage of the clinical trial
process, that success may not continue. Success in preclinical
testing and early clinical trials does not ensure that later
clinical trials will be successful. Interim results of trials do
not necessarily predict final results. A number of companies in
the pharmaceutical industry, including biotechnology companies,
have suffered significant setbacks in advanced clinical trials,
even after promising results in earlier trials. For example, a
single partial response or even a small number of partial
responses in cancer patients is not necessarily indicative of
success in demonstrating efficacy in Phase II and
Phase III clinical trials. Other
18
reasons why candidates that appear promising in preclinical
testing or clinical trials may fail to become marketed drugs
include:
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failing to demonstrate clinical effectiveness or having
significantly lower efficacy than existing therapies;
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producing harmful side effects;
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denial of regulatory approvals by the FDA or other regulators;
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failing to acquire, on reasonable terms, intellectual property
rights necessary for commercialization; and
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loss of market to competing drugs which are more effective or
economical.
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Any clinical trial may fail to produce results satisfactory to
the FDA. Preclinical and clinical data can be interpreted in
different ways, which could delay, limit or prevent regulatory
approval. Negative or inconclusive results or adverse medical
events during a clinical trial could cause a clinical trial to
be repeated or a program to be terminated.
In addition, the FDA could determine that the design of a
clinical trial is inadequate to produce reliable results and
require us to alter the design of the clinical trial or
terminate the clinical trial altogether. If we need to alter a
clinical trial design or perform more or larger clinical trials
than planned, our financial results will be harmed.
If we
fail to enter into new strategic collaborations, or if existing
collaborations are terminated, we will not grow our revenue and
our ability to exploit
AvalonRx
®
to discover drugs for diseases other than cancer will be
limited.
Our business strategy is based in part upon entering into
strategic collaborations. To date, all of our revenue has been
generated from strategic collaborations, and we continue to rely
on our strategic collaborations with Merck, Inc., AstraZeneca,
Inc., Medarex, Inc. and Novartis Institutes for Biomedical
Research, Inc. as a means of furthering our research
initiatives. Both the Merck and AstraZeneca collaborations have
provisions that could result in their termination without
material breach by Avalon. If we are unable to secure strategic
collaborations in the future, or if existing collaborations are
terminated prematurely, our revenue will not grow or will
decrease and our business will be harmed. Strategic
collaborations also provide us with insights into diseases other
than cancer by exposing us to the expertise of collaboration
partners which focus on these diseases. If we are unable to
secure strategic collaborations which expand our disease
expertise, we may harm our ability to broaden our drug discovery
and development activities to diseases other than cancer.
We
intend to rely on third parties to conduct clinical trials for
our drug candidates and those third parties may not perform
satisfactorily.
We do not have the ability to independently conduct clinical
trials for drug candidates, and we rely on third parties such as
contract research organizations, medical institutions and
clinical investigators to perform this function. If third
parties do not perform satisfactorily, meet expected deadlines,
or comply with regulatory requirements, any clinical trials
conducted for our drug candidates may be extended, delayed,
terminated, or subject to rejection by the FDA. We may not be
able to locate any necessary replacements or enter into
favorable agreements with them, if at all.
We do
not have any manufacturing capabilities for any of our drug
candidates.
We outsource all of our manufacturing to third parties, and we
intend to rely on third parties to manufacture bulk compounds
and finished investigational medicines for human clinical trials
and for commercial quantities of any of our drug candidates.
Consequently, in order to complete the commercialization process
of any of our drug candidates, we must either: (1) acquire,
build or expand our internal manufacturing capabilities to
produce drug candidates in compliance with cGMP requirements; or
(2) rely on third parties to manufacture these drug
candidates in compliance with cGMPs. We cannot be sure that we
will be able to accomplish either of these tasks. If we are not
able to do so, it would impede our efforts to bring our drug
candidates to market, which would adversely affect our business.
Moreover, if we decide to manufacture one or more of our drug
candidates ourselves (rather than engage a contract
manufacturer), we would incur substantial
start-up
expenses and regulatory obligations and would need to
19
expand our facilities and hire additional personnel.
Additionally, the manufacture of drug candidates on a limited
basis for investigational use in animal studies or human
clinical trials does not guarantee that large-scale, commercial
production is viable. Small changes in methods of manufacture
can affect the safety, efficacy, controlled release or other
characteristics of a product.
We
have no sales, marketing or distribution
experience.
To develop internal sales, distribution and marketing
capabilities, we would have to invest significant amounts of
financial and management resources. For drugs where we decide to
perform sales, marketing and distribution functions ourselves,
we could face a number of risks, including:
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we may not be able to attract and build a significant marketing
or sales force;
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the cost of establishing, training, and providing regulatory
oversight for a marketing or sales force may not be justifiable
in light of the revenues generated by any particular product;
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our direct sales and marketing efforts may not be
successful; and
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there are significant legal and regulatory risks in drug
marketing and sales that we have never faced, and any failure to
comply with all legal and regulatory requirements for sales,
marketing, and distribution could result in enforcement action
by the FDA or other authorities that could jeopardize our
ability to market the product or could subject us to substantial
liability.
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Alternatively, we may rely on third parties to launch and market
our drug candidates, if approved. We may have limited or no
control over the sales, marketing and distribution activities of
these third parties and our future revenue may depend on the
success of these third parties. Additionally, if these third
parties fail to comply with all applicable regulatory
requirements, the FDA could take enforcement action that could
jeopardize our ability to market the drug candidate.
Our
chemical library may be insufficient to meet our
needs.
Although we currently have more than 250,000 individual
compounds available for screening in our
AvalonRx
®
drug discovery platform, this may not be a sufficient number of
compounds to isolate rare hits against key drug targets or there
may be an insufficient number with appropriate drug-like
properties.
We
face intense competition in the development and
commercialization of our drug candidates.
Our business will be harmed if our competitors develop and
market drugs that are more effective, have fewer side effects or
are less expensive than our drug candidates. With respect to our
drug discovery programs, other companies have drug candidates in
clinical trials to treat types of cancer for which we are
seeking to discover and develop drug candidates. These competing
drugs are further advanced in development than are any of our
drug candidates and may result in effective, commercially
successful drugs. Even if we are successful in developing
effective drugs, our products may not receive marketing approval
or, if they do, may not be approved for a disease or with
labeling that allows our products to compete effectively with or
other commercial products. Our competitors may succeed in
developing and marketing drugs either that are more effective
than those that we may develop or that are marketed before any
drugs we develop are marketed.
In the area of small molecule anticancer therapeutics, we have
identified a number of companies that have clinical development
programs and focused research and development efforts in small
molecule approaches to cancer treatment, such as Anadys
Pharmaceuticals, Inc., Ariad Pharmaceuticals, Inc., ArQule,
Inc., Array Biopharma, Inc., Biocryst Pharmaceuticals, Inc.,
Chemgenex Pharmaceuticals, Inc., Coley Pharmaceuticals, Inc.,
Cyclacel Pharmaceuticals, Inc., Exelixis, Inc., Infinity
Pharmaceuticals, Inc., Kosan Biosciences and Sunesis
Pharmaceuticals, Inc. In addition, large pharmaceutical
companies with significant research capabilities are or may be
pursuing similar approaches. For example, Merck & Co.,
Inc., through its acquisition of Rosetta Pharmaceuticals, Inc.
in 2001, gained the ability to develop small molecule cancer
drugs using gene expression analysis technologies.
20
We are aware of other companies that are developing IMPDH
inhibitors as potential therapeutics for diseases other than
cancer. Additionally, our license from Vertex is limited to the
compound AVN944 and does not prevent Vertex from developing or
licensing to third parties the right to develop other IMPDH
inhibitors, including compounds similar to AVN944 that could
compete directly with it.
Many of the organizations competing with us have substantially
greater capital resources, larger research and development
staffs and facilities, greater experience in drug development
and in obtaining regulatory approvals and greater marketing
capabilities than we do. In addition, these organizations also
compete with us to:
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attract qualified personnel;
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attract parties for acquisitions, joint ventures or other
collaborations; and
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license technology that is competitive with our technology.
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We may
not be able to recruit and retain the experienced scientists and
managers we need to compete in the drug research and development
industry.
We had 57 full-time employees as of December 31, 2007,
and our future success depends upon our ability to attract,
retain and motivate highly skilled scientists and managers. We
compete with pharmaceutical and biotechnology companies,
contract research companies, government agencies and academic
and research institutions to recruit scientists. We may not be
successful in attracting new scientists or managers or in
retaining or motivating our existing personnel. Our future
success also depends on the personal efforts and abilities of
the principal members of our senior management and scientific
staff to provide strategic direction, manage our operations and
maintain a cohesive and stable environment.
If we cannot attract and retain qualified scientists and
managers, we will not be able to continue to provide or expand
our drug discovery efforts.
We may
face liability claims related to the use or misuse of our drug
candidates in clinical trials. If our insurance coverage is not
sufficient, a product liability claim against us could adversely
affect our business.
The administration of our drug candidates to humans in clinical
trials may expose us to liability claims. Such liability claims
may be expensive to defend and may result in large judgments
against us. We have obtained liability coverage for clinical
trials. However, we cannot be certain that our insurance
policies will be sufficient to cover all claims that may be made
against us. We intend to increase our coverage limits as we
progress into late-stage clinical trials. Liability insurance is
expensive, difficult to obtain and may not be available in the
future on acceptable terms.
Generally, our clinical trials will be conducted in patients
with serious life-threatening diseases for whom conventional
treatments have been unsuccessful or for whom no conventional
treatment exists, and, during the course of treatment, these
patients could suffer adverse medical effects or die for reasons
that may or may not be related to our drug candidates. Any of
these events could result in a claim of liability. Any such
claims against us, regardless of their merit, could result in
significant awards against us, or significant costs to defend,
that could materially harm our business, financial condition and
results of operations.
If we
are not able to successfully manage our growth, our business
could be materially harmed.
If we are successful in our plans, we expect rapid and
significant growth in all areas of our operations as we develop
our drug candidates. If our lead drug candidate, AVN944, and our
other drug candidates enter and advance through the clinical
trial process, we will need to rapidly expand our research,
development, regulatory, manufacturing and marketing
capabilities or contract with others to provide these functions
for us. As our operations expand, we will need to hire
additional personnel and add corporate capabilities we currently
do not have. In addition, we will need to manage relationships
with various manufacturers, collaborators, suppliers, contract
research and other organizations. Our ability to manage our
operations and growth will require us to improve our
operational, financial and management controls, as well as our
internal reporting systems and controls. We may not be able to
implement such improvements to our management information and
internal control systems in an
21
efficient and timely manner and may discover deficiencies in
existing systems and controls. Our failure to accomplish any of
these tasks could materially harm our business.
Our
operating results may vary significantly from period to period,
which may result in a decrease in the price of our common
stock.
Our future revenues and operating results may vary significantly
from period to period due to a number of factors, many of which
are outside of our control. These factors include:
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the introduction of new anticancer drugs by us or our
competitors;
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costs and expenses associated with delays in or changes to
preclinical testing and clinical trials;
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the timing of regulatory approvals;
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sales and marketing expenses; and
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the amount and timing of operating costs and capital
expenditures relating to the expansion of our business
operations and facilities.
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It is possible that in some future periods our operating results
may be below the expectations of analysts and investors. If this
happens, the price of our common stock may decrease.
Our
agreements with the Maryland Industrial Development Financing
Authority, or MIDFA, and Manufacturers and Traders
Trust Company, or M&T Bank, for the financing of our
corporate office and research facility contain restrictions on
our operations that could inhibit our ability to grow our
business and generate revenues, and any default under these
agreements could materially harm our business.
In order to finance improvements to our corporate office and
research facility, we have entered into a loan agreement with
MIDFA and a letter of credit agreement with M&T Bank that
contain, among other terms, extensive restrictions on our
operations, requires us to comply with certain affirmative
covenants and requires us to maintain or satisfy specified
financial tests, including among other things, as of
March 14, 2008, a $4.9 million minimum restricted cash
balance. Any breach or failure to comply with these
restrictions, covenants, financial tests or financial ratios
could result in an event of default under these agreements.
These agreements are secured by improvements to our corporate
office and research facility, certain financed equipment and a
collateral account which, as of February 29, 2008, had an
adjusted market value of $9.7 million. Upon an event of
default, MIDFA and M&T Bank have the right to declare all
amounts outstanding under these credit agreements to be
immediately due and payable and may enforce their rights by
foreclosing on collateral pledged under these agreements. In
addition, upon an event of default MIDFA and M&T Bank could
restrict our ability to make additional borrowings under these
agreements. Any decision by MIDFA or M&T Bank to enforce
any one or more of the foregoing remedies upon an event of
default could materially harm our business.
The loan agreement and letter of credit agreement also restrict
our ability, without MIDFAs
and/or
M&T Banks consent, to, among other things:
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declare dividends or make other distributions on existing stock
or create new classes of stock;
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change the nature of our business;
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incur additional debt;
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incur mortgages and pledges upon property owned or acquired;
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engage in mergers or consolidations, or acquire ownership
interests of, or all or substantially all of the assets of,
another entity;
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make loans; and
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guarantee indebtedness of any person or entity.
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22
These restrictions may interfere with our ability to obtain
financing or to engage in other business activities, which may
inhibit our ability to grow our business and generate revenues.
Risks
Related to Our Intellectual Property
We
license patent rights from a third party, Vertex Pharmaceuticals
Incorporated. If Vertex does not properly maintain or enforce
the patents underlying such licenses, our competitive position
and business prospects will be harmed.
Our license with Vertex gives us rights to third party
intellectual property that is necessary or useful for our
business, including the composition of matter for AVN944 . We
have been advised by Vertex that there was a defect in the
claims of the licensed United States patent that covers AVN944.
Vertex has filed revised claims which would correct that defect.
Although such claims have not yet been allowed, based on the
prior art and conversations between Vertex and the patent
examiner reviewing the patent application, we believe that a
patent containing claims covering AVN944 will be granted. There
can be no assurance, however, that such a patent will ultimately
be granted in the United States. In such event, other companies
might be able to offer substantially identical products for
sale, which could adversely affect our competitive business
position and harm our business prospects.
We may also enter into additional licenses to third party
intellectual property in the future. At the time we entered into
our license with Vertex we did not obtain a formal legal opinion
from patent counsel as to the validity of, or freedom to operate
under, the patents covered by the license, but relied on our own
due diligence, which we believe to be a standard practice in
licenses of this kind.
In addition, more generally, our success will depend in part on
the ability and willingness of our licensors to obtain, maintain
and enforce patent protection for our licensed intellectual
property, in particular, those patents to which we have secured
exclusive rights. Our licensors may not successfully prosecute
the patent applications for the intellectual property we have
licensed. Even if patents issue in respect of these patent
applications, our licensors may fail to maintain these patents,
may determine not to pursue litigation against other companies
that are infringing these patents, or may pursue such litigation
less aggressively than we would. Without protection for the
intellectual property we license, other companies might be able
to offer substantially identical products for sale, which could
adversely affect our competitive business position and harm our
business prospects.
If we
are unable to obtain and enforce patent protection for our drug
candidates, our business could be materially
harmed.
We have a number of pending patent applications covering our
gene expression technology and select novel compounds. We intend
to file United States and foreign patent applications for our
new inventions, as well as on improvements we make to our
existing proprietary technologies that are important to the
development of our business. However, we may not file patent
applications in all countries in which we could seek patent
protection. We cannot assure you that any patents that may be
issued or that may be licensed to us will be enforceable or
valid or will not expire prior to the commercialization of our
drug candidates, allowing others to more effectively compete
with us. Therefore, any patents that we may own in the future or
license may not adequately protect our drug candidates or any
drugs we market in the future. If we are not able to protect our
patent positions, our business could be materially harmed.
Issued patents may be challenged, invalidated or circumvented.
In addition, court decisions may introduce uncertainty in the
enforceability or scope of patents owned by biotechnology
companies. The legal systems of certain countries do not favor
the aggressive enforcement of patents, and the laws of foreign
countries may not protect our rights to the same extent as the
laws of the United States. Therefore, the enforceability or
scope of our future patents in the United States or in foreign
countries cannot be predicted with certainty, and, as a result,
any patents that we may potentially own or license may not
provide sufficient protection against competitors. We may not be
able to obtain or maintain patent protection for our pending
patent applications, those we may file in the future, or those
we may license from third parties.
23
Except for patent rights to the composition of matter for AVN944
that we licensed from Vertex, our pending patent applications
and granted patents do not cover all of the compounds that we
are actively pursuing. The U.S. and foreign patents under
which we have licensed rights from Vertex to AVN944 expire
beginning on March 18, 2020.
Third
parties may challenge the validity of our potential patents or
other intellectual property rights and could deprive us of
valuable rights. If we infringe patents or other proprietary
rights of third parties, we could incur substantial
liability.
If a third party legally challenges our future patents or other
intellectual property rights that we own or license, we could
lose certain of these rights. For example, third parties may
challenge the validity of our patent applications and any future
issued U.S. or foreign patents through reexaminations,
oppositions or other legal proceedings. If successful, a
challenge to our intellectual property rights could deprive us
of competitive advantages and permit our competitors to use our
technology to develop similar drug candidates. Failure to
protect our future patents and other proprietary rights may
materially harm our business, financial condition and results of
operations.
Other entities may have or obtain patents or proprietary rights
that could limit our ability to manufacture, use, sell, offer
for sale or import products or impair our competitive position.
We use chip-based microarray technology under a license from a
manufacturer. We may not be able to continue to obtain supplies
and materials from that manufacturer or obtain suitable
substitutes, at commercially reasonable terms, or at all. To the
extent that a third party develops new technology that covers
our products or processes, we may be required to obtain licenses
to that technology, which licenses may not be available on
commercially reasonable terms, or at all.
Third parties may have or obtain valid and enforceable patents
or proprietary rights that could block us from developing drug
candidates using our technology. Moreover, our failure to obtain
a license to any technology that we require may materially harm
our business, financial condition and results of operations.
In addition, legal or administrative proceedings may be
necessary to defend against claims of infringement or to enforce
our intellectual property rights. If we become involved in any
such proceeding, irrespective of the outcome, we may incur
substantial costs, and the efforts of our technical and
management personnel may be diverted, which could materially
harm our business.
Our
drug discovery technology is not patented, and the value of our
technology and drug candidates could be adversely affected if we
are unable to protect the confidentiality of our proprietary
information, know-how and trade secrets.
Our
AvalonRx
®
drug discovery technology is not patented. Instead, we rely
primarily on trade secrets to protect it. Trade secrets are
difficult to maintain. While we use reasonable efforts to
protect our trade secrets, our, or our collaboration
partners, employees, consultants, contractors or
scientific and other advisors may unintentionally or willfully
disclose our proprietary information to competitors. Enforcement
of claims that a third party has illegally obtained and is using
trade secrets is expensive, time consuming and uncertain. In
addition, foreign courts are sometimes less willing than
U.S. courts to protect trade secrets. If our competitors
independently develop equivalent knowledge, methods and know-how
related to
AvalonRx
®
, we would not be able to assert or prevent them from doing so
and our business could be harmed.
To maintain the confidentiality of trade secrets and proprietary
information, we enter into confidentiality agreements with our
employees, consultants and collaborators upon the commencement
of their relationships with us. These agreements require that
all confidential information developed by the individual or made
known to the individual by us during the course of the
individuals relationship with us be kept confidential and
not disclosed to third parties. Our agreements with employees
also provide that any inventions conceived by the individual in
the course of rendering services to us shall be our exclusive
property. However, we may not obtain these agreements in all
circumstances, and individuals with whom we have these
agreements may not comply with their terms. In the event of
unauthorized use or disclosure of our trade secrets or
proprietary information, these agreements, even if obtained, may
not provide meaningful protection, particularly for our trade
secrets or other confidential information. To the extent that
our employees, consultants or contractors use technology or
know-how owned by third
24
parties in their work for us, disputes may arise between us and
those third parties as to the rights in related inventions.
Adequate remedies may not exist in the event of unauthorized use
or disclosure of our confidential information. The disclosure of
our trade secrets would impair our competitive position and may
materially harm our business, financial condition and results of
operations.
Risks
Related to Regulatory Matters
Because
we must obtain regulatory approval to market our drug candidates
in the United States and foreign jurisdictions, we cannot
predict whether or when we will be permitted to commercialize
our drug candidates.
The pharmaceutical industry is subject to stringent regulation
by a wide range of authorities. We cannot predict whether
regulatory clearance will be obtained for any drug candidate we
develop. A pharmaceutical product cannot be marketed in the
United States until it has completed rigorous preclinical
testing and clinical trials and an extensive regulatory
clearance process implemented by the FDA. Satisfaction of
regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product, the safety
and efficacy data generated from clinical trials, and requires
the expenditure of substantial resources. Of particular
significance are the requirements covering research and
development, testing, manufacturing, quality control, labeling
and promotion of drugs for human use.
Before commencing clinical trials in humans in the United
States, we submitted an IND to the FDA. The IND for AVN944 was
accepted by the FDA and we were allowed to test the drug in
humans in the United States. The clinical trials for AVN944 and
others we may conduct in the future are subject to oversight by
IRBs and the FDA and:
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must be conducted in conformance with the FDAs good
clinical practices and other applicable regulations;
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must meet requirements for IRB oversight;
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must meet requirements for informed consent;
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are subject to continuing FDA oversight;
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may require large numbers of test subjects; and
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may be suspended by us or the FDA at any time, particularly if
it is believed that the subjects participating in these trials
are being exposed to unacceptable health risks or if the FDA
finds deficiencies in the IND or the conduct of these trials.
|
Before receiving FDA clearance to market a drug, we must
demonstrate the safety, tolerability, efficacy, and dosage of
the drug in the patient population intended to be treated, as
well as the ability to produce the drug in accordance with the
FDAs current Good Manufacturing Practices, or cGMP,
requirements. Delays, refusal by the FDA to accept an
application or rejections of regulatory approval may be
encountered for a number of reasons: additional government
regulation from future legislation, administrative action or
changes in FDA policy during the period of drug development,
incomplete or inconclusive clinical trials, differing
interpretations of the clinical data, or an FDA review process
that results in a request for additional data or limitations on
product labeling. Failure to comply with applicable FDA or other
applicable regulatory requirements may result in criminal
prosecution, civil penalties, recall or seizure of products,
total or partial suspension of production or injunction, as well
as other regulatory action against our potential products or us.
Outside the United States, our ability to market a drug
candidate is contingent upon receiving a marketing authorization
from the appropriate regulatory authorities. This foreign
regulatory approval process includes all of the risks associated
with FDA clearance described above.
25
Even
if our drug candidates obtain regulatory approval, we will be
subject to ongoing government regulation.
Even if our drug candidates obtain regulatory approval, our
products will be subject to continuing regulation by the FDA,
including record keeping requirements, submitting periodic
reports to the FDA, reporting of any adverse experiences with
the product, and complying with drug sampling and distribution
requirements. In addition, updated safety and efficacy
information must be maintained and provided to the FDA. We or
our collaborative partners must comply with requirements
concerning advertising and promotional labeling, including the
prohibition against promoting any non-FDA approved or
off-label indications of products. Failure to comply
with these requirements could result in significant enforcement
action by the FDA, including warning letters, orders to pull the
promotional materials, and substantial fines.
Also, quality control and manufacturing procedures must continue
to conform to cGMP after approval. Drug and biologics
manufacturers and their subcontractors are required to register
their facilities and products manufactured annually with the FDA
and certain state agencies and are subject to periodic
unannounced inspections by the FDA to assess compliance with
cGMP regulations. Accordingly, manufacturers must continue to
expend time, money, and effort in the area of production and
quality control to maintain compliance with cGMPs and other
aspects of regulatory compliance. Future FDA inspections may
identify compliance issues at our contract manufacturers that
may disrupt production or distribution or require substantial
resources to correct.
In addition, following FDA approval of a product, discovery of
problems with a product or the failure to comply with
requirements may result in restrictions on a product,
manufacturer, or holder of an approved marketing application,
including withdrawal or recall of the product from the market or
other voluntary or FDA-initiated action that could delay or
prevent further marketing. Newly discovered or developed safety
or effectiveness data may require changes to a products
approved labeling, including the addition of new warnings and
contraindications. Also, the FDA may require post-market testing
and surveillance to monitor the products safety or
efficacy, including additional clinical studies, known as
Phase IV trials, to evaluate long-term effects.
Compliance with post-marketing regulation may be time-consuming
and costly and could delay or prevent us from generating revenue
from the commercialization of our drug candidates.
We
have only limited experience in regulatory affairs which may
affect our ability or the time we require to obtain necessary
regulatory approvals.
We have only limited experience in preparing and submitting the
applications necessary to gain regulatory approvals. This lack
of experience may impede our ability to obtain timely regulatory
approval, if we receive such approval at all. We will not be
able to commercialize AVN944, or any of our drug candidates,
until we obtain FDA approval in the United States or approval by
comparable authorities in other countries.
Third
parties engaged to produce our drug candidates for clinical use
may fail to comply with regulatory requirements, which could
delay clinical trials.
We intend to rely on third parties to produce drug candidates
for clinical use. All facilities and manufacturing processes
used by third parties to produce our drug candidates for
clinical use in the United States must conform with cGMPs. These
facilities and practices are subject to periodic regulatory
inspections to ensure compliance with cGMP requirements. Their
failure to comply with applicable regulations could extend,
delay, or cause the termination of clinical trials conducted for
our drug candidates.
Healthcare
reform and cost control initiatives by third-party payors could
reduce the prices that can be charged for drugs, which could
limit the commercial success of our drug
candidates.
The commercial success of our drug candidates will depend
significantly on the availability of reimbursement to the
patient from third party payors, such as the government and
private insurance plans. In the United States, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
added prescription drug coverage to Medicare beginning in 2006
and added a voluntary drug discount card for Medicare
beneficiaries. Other governmental and private payer initiatives,
however, may limit reimbursement for drugs. Capitated payment
systems and
26
other cost containment systems are now widely used by public and
private payers and have caused hospitals and health maintenance
organizations to be more cost-conscious in their treatment
decisions, including decisions regarding the medicines to be
made available to their patients. Future legislation may limit
the prices that can be charged for drugs we develop and may
limit our commercial opportunity and reduce any associated
revenue and profits. For example, Congressional action regarding
drug reimportation into the United States may affect the pricing
of drugs. The Medicare Prescription Drug Plan legislation, which
became law in December 2003, requires the Secretary of Health
and Human Services to promulgate regulations for drug
reimportation from Canada into the United States under some
circumstances, including when the drugs are sold at a lower
price than in the United States. The Secretary retains the
discretion not to implement a drug reimportation plan if he
finds that the benefits do not outweigh the costs. Proponents of
drug reimportation may attempt to pass legislation that would
directly allow reimportation under certain circumstances. If
legislation or regulations were passed allowing the
reimportation of drugs, they could decrease the price we receive
for any products that we may develop, negatively affecting our
anticipated revenues and prospects for profitability.
In some countries other than the United States, pricing and
profitability of prescription pharmaceuticals and
biopharmaceuticals are subject to government control. Also, we
expect managed care will continue to put pressure on the pricing
of pharmaceutical and biopharmaceutical products. Cost control
initiatives could decrease the price that we or any potential
collaborators receive for any of our future products, which
could adversely affect our profitability. These initiatives may
also have the effect of reducing the resources that
pharmaceutical and biotechnology companies can devote to
in-licensing drug candidates and the research and development of
new drugs, which could reduce our resulting revenue.
We or
our future collaborators may not obtain favorable reimbursement
rates for our drug candidates.
Third party payors, such as government and private insurance
plans, frequently require companies to provide predetermined
discounts from list prices and are increasingly challenging the
prices charged for pharmaceuticals and other medical products.
For example, federal laws require drug manufacturers to pay
specified rebates for medicines reimbursed by Medicaid, to
provide discounts for outpatient medicines purchased by certain
public health service entities and disproportionate
share hospitals, and to provide minimum discounts off of a
defined non-federal average manufacturer price for
purchases by certain components of the federal government such
as the Department of Veterans Affairs and the Department of
Defense. Our drug candidates may not be considered
cost-effective, and reimbursement to the patient may not be
available or be sufficient to allow the sale of our drug
candidates on a competitive basis. We or our future
collaborators may not be able to negotiate favorable
reimbursement rates for our drug candidates. If we or our future
collaborators fail to obtain an adequate level of reimbursement
for our drug candidates by third-party payors, sales of our
products would be adversely affected or there may be no
commercially viable market for the products.
Our
operations involve hazardous materials and medical waste and are
subject to environmental, health and safety controls and
regulations. Any claim relating to our improper handing, storage
or disposal of biological and hazardous materials could be
time-consuming and costly, and may exceed our
resources.
We are subject to environmental, health and safety laws and
regulations, including those governing the use of biological and
hazardous materials as well as medical waste. The cost of
compliance with environmental, health and safety regulations is
substantial. Our business activities involve the controlled use
of hazardous materials, and we cannot eliminate the risk of
accidental contamination or injury from these materials. While
we believe that we are currently in compliance with all material
rules and regulations governing the use of hazardous materials
and, to date, we have not had any adverse experiences, in the
event of an accident or environmental discharge, we may be held
liable for any resulting damages, which may exceed our financial
resources and may materially harm our business, financial
condition and results of operations.
27
Our
business involves animal testing and changes in laws,
regulations or accepted clinical procedures or social pressures
could restrict our use of animals in testing and adversely
affect our research and development efforts.
Many of the research and development efforts we sponsor involve
the use of laboratory animals. Changes in laws, regulations or
accepted clinical procedures may adversely affect these research
and development efforts. Social pressures that would restrict
the use of animals in testing or actions against us or our
partners by groups or individuals opposed to testing using
animals could also adversely affect these research and
development efforts.
In addition, preclinical animal studies conducted by us or third
parties on our behalf may be subject to the United States
Department of Agriculture regulations for certain animal
species. Failure to comply with applicable regulations could
extend or delay clinical trials conducted for our drug
candidates.
Risks
Related to Our Common Stock and Organizational
Structure
Our
stock price is volatile.
Since our common stock commenced trading on September 29,
2005, our stock has experienced substantial price volatility.
Our stock price may continue to fluctuate for many reasons,
including as a result of public announcements regarding the
progress of our development efforts, regulatory developments,
clinical trial results, the addition or departure of our key
personnel, the commencement or termination of collaborations
with third parties, and variations in our quarterly operating
results.
In addition, the market price of our common stock may fluctuate
significantly in response to factors that are beyond our
control, including public announcements by other
biopharmaceutical companies regarding their business, financial
condition or results of operations. The stock market in general
has recently experienced extreme price and volume fluctuations.
The market prices of securities of pharmaceutical and
biotechnology companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or
disproportionate to the operating performance of these
companies. These broad market fluctuations could result in
extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your investment.
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.
We are subject to various restrictions and other requirements
that may have the effect of delaying, deterring, or preventing a
change in control of us, such as:
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our stockholder rights plan;
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provisions in our certificate of incorporation and
bylaws; and
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Section 203 of the Delaware General Corporation Law.
|
On April 25, 2007, our board of directors approved a
stockholder rights plan. Under this plan, each share of our
common stock is accompanied by a right that entitles the holder
of that share, upon the occurrence of specified events that may
be intended to effect a change in control, to purchase common
stock (or in certain instances, one one-thousandth of a share of
series C junior participating preferred stock) at an
exercise price of $60.00 per right. In the event that rights
become exercisable, the rights plan allows for our stockholders
(other than certain hostile acquirers of our stock) to acquire
our stock or the stock of the surviving corporation, whether or
not we are the surviving corporation, having a value twice that
of the exercise price of the rights. The effect of our
stockholder rights plan may delay or prevent an acquisition of
us.
Additionally, provisions in our certificate of incorporation and
our bylaws may delay or prevent an acquisition of us or a change
in our management. 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.
Because our board of directors is responsible for appointing the
members of our
28
management team, these provisions could in turn affect any
attempt by our stockholders to replace current members of our
management team. These provisions include:
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the requirement that actions by our stockholders by written
consent be unanimous;
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advance notice requirements for nominations to our board of
directors and for proposing matters that can be acted upon at
stockholder meetings.
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Moreover, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of
the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination
is approved in a prescribed manner. These provisions would apply
even if the proposed merger or acquisition could be considered
beneficial by some stockholders.
If significant shares eligible for future sales are sold, the
result may depress our stock price by increasing the supply of
our shares in the market at a time when demand may be limited.
As of March 14, 2008, we had 17,033,014 shares of
common stock outstanding, as well as stock options outstanding
to purchase an aggregate of approximately 2.1 million
shares of common stock and warrants outstanding to purchase
approximately 1.1 million shares of common stock. Of these
options, approximately 1.6 million were exercisable at
March 14, 2008, and all of the warrants were exercisable at
March 14, 2008. Furthermore, we have filed a universal
shelf registration statement with the SEC, which was declared
effective in November 2007, pursuant to which we may issue debt
securities, preferred stock, common stock and warrants to
purchase debt securities, preferred stock or common stock in an
aggregate amount of up to $50 million, all of which is
currently available for future issuance. To the extent that
these options or warrants for our common stock are exercised or
we issue additional shares to raise capital, the increase in the
number of our outstanding shares of common stock may adversely
affect the price for our common stock.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
|
None.
We currently lease 55,897 square feet for our corporate
offices and research and development laboratories located at
20358 Seneca Meadows Parkway, Germantown, Maryland. The lease
expires on February 1, 2013. We have options to extend the
term of this lease for two additional consecutive terms of
5 years each. We believe that these facilities are
sufficient for our current needs. We have additional space in
our current facilities to accommodate our anticipated growth
over the next several years.
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ITEM 3.
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LEGAL
PROCEEDINGS
|
We currently are not a party to any material legal proceedings.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITIES HOLDERS
|
We did not submit any matters for approval of our stockholders
during the quarter ended December 31, 2007.
PART II
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ITEM 5.
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MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock trades on the NASDAQ Global Market under the
symbol AVRX. Prior to September 29, 2005 our
common stock was not listed or quoted on any national exchange
or market system.
29
The following table sets forth, for the periods indicated, the
high and low sale price for our common stock as reported on the
NASDAQ Global Market.
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High
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Low
|
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2007:
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First Quarter
(January 1 March 31)
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$
|
5.85
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|
$
|
3.08
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|
Second Quarter
(April 1 June 30)
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|
$
|
6.38
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|
|
$
|
4.25
|
|
Third Quarter
(July 1 September 30)
|
|
$
|
6.25
|
|
|
$
|
4.10
|
|
Fourth Quarter
(October 1 December 31)
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|
$
|
5.75
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006:
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|
|
|
|
|
|
|
|
First Quarter
(January 1 March 31)
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$
|
5.99
|
|
|
$
|
3.80
|
|
Second Quarter
(April 1 June 30)
|
|
$
|
5.45
|
|
|
$
|
3.30
|
|
Third Quarter
(July 1 September 30)
|
|
$
|
3.98
|
|
|
$
|
2.20
|
|
Fourth Quarter
(October 1 December 31)
|
|
$
|
4.35
|
|
|
$
|
2.47
|
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On March 14, 2008, the last sale price reported on the
NASDAQ Global Market for our common stock was $1.98.
Stockholders
As of March 14, 2008, there were approximately 2732 holders
of record of our common stock.
Dividends
We have not paid any cash dividends since our inception and we
do not anticipate paying any cash dividends in the foreseeable
future.
Securities
Authorized for Issuance under Equity Compensation
Plans
Information regarding our equity compensation plans, including
both stockholder approved plans and non-stockholder approved
plans, is included in Item 12 of this Annual Report on
Form 10-K.
30
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ITEM 6.
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SELECTED
FINANCIAL DATA
|
The following table sets forth our selected financial data for
each of the years in the five-year period ended
December 31, 2007. The information below should be read in
conjunction with our financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Annual Report on
Form 10-K.
The historical results are not necessarily indicative of results
to be expected for future periods.
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|
|
|
|
|
|
|
|
|
|
|
|
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December 31,
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|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share and per share data)
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SUMMARY STATEMENTS OF OPERATIONS:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Revenue
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|
$
|
809
|
|
|
$
|
2,724
|
|
|
$
|
1,544
|
|
|
$
|
1,900
|
|
|
$
|
100
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,322
|
|
|
|
13,269
|
|
|
|
15,789
|
|
|
|
10,680
|
|
|
|
12,510
|
|
General and administrative
|
|
|
8,240
|
|
|
|
7,661
|
|
|
|
5,066
|
|
|
|
4,325
|
|
|
|
4,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
|
|
|
23,562
|
|
|
|
20,930
|
|
|
|
20,855
|
|
|
|
15,005
|
|
|
|
17,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(22,753
|
)
|
|
|
(18,206
|
)
|
|
|
(19,311
|
)
|
|
|
(13,105
|
)
|
|
|
(16,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,603
|
|
|
|
1,288
|
|
|
|
503
|
|
|
|
327
|
|
|
|
678
|
|
Interest expense
|
|
|
(633
|
)
|
|
|
(808
|
)
|
|
|
(1,147
|
)
|
|
|
(890
|
)
|
|
|
(701
|
)
|
Other
|
|
|
110
|
|
|
|
624
|
|
|
|
663
|
|
|
|
8
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
1,080
|
|
|
|
1,104
|
|
|
|
19
|
|
|
|
(555
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,673
|
)
|
|
|
(17,102
|
)
|
|
|
(19,292
|
)
|
|
|
(13,660
|
)
|
|
|
(17,075
|
)
|
Dividends on and accretion of convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,111
|
)
|
|
|
(1,449
|
)
|
|
|
(1,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common shareholders
|
|
$
|
(21,673
|
)
|
|
$
|
(17,102
|
)
|
|
$
|
(20,403
|
)
|
|
$
|
(15,109
|
)
|
|
$
|
(18,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(1.42
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(9.58
|
)
|
|
$
|
(117.65
|
)
|
|
$
|
(146.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock outstanding
|
|
|
15,298,590
|
|
|
|
9,841,235
|
|
|
|
2,129,388
|
|
|
|
128,417
|
|
|
|
126,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
SUMMARY BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities(1)
|
|
$
|
28,524
|
|
|
$
|
20,430
|
|
|
$
|
27,748
|
|
|
$
|
14,309
|
|
|
$
|
27,720
|
|
Working capital
|
|
|
18,384
|
|
|
|
8,629
|
|
|
|
17,070
|
|
|
|
5,545
|
|
|
|
15,300
|
|
Total assets
|
|
|
37,305
|
|
|
|
31,391
|
|
|
|
41,282
|
|
|
|
29,292
|
|
|
|
46,055
|
|
Total debt
|
|
|
7,211
|
|
|
|
8,725
|
|
|
|
10,944
|
|
|
|
13,631
|
|
|
|
16,234
|
|
Accumulated deficit
|
|
|
(124,377
|
)
|
|
|
(102,704
|
)
|
|
|
(85,602
|
)
|
|
|
(65,949
|
)
|
|
|
(51,454
|
)
|
Total stockholders equity
|
|
|
26,175
|
|
|
|
17,874
|
|
|
|
25,883
|
|
|
|
(65,971
|
)
|
|
|
(51,435
|
)
|
|
|
|
(1)
|
|
Includes restricted cash of $5.3 million,
$6.0 million, $6.3 million, $6.1 million and
$6.7 million at December 31, 2007, 2006, 2005, 2004
and 2003 respectively.
|
31
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a biopharmaceutical company focused on the discovery,
development and commercialization of
first-in-class
cancer therapeutics. Our lead product candidate, AVN944, an
IMPDH inhibitor, is in Phase II clinical development. We
have preclinical programs to develop inhibitors of the
β-catenin and Aurora/Centrosome pathways, discovery
programs for inhibitors of the Survivin and Myc pathways, and
partnerships with Merck, AstraZeneca, ChemDiv, Medarex and
Novartis. We use
AvalonRx
®
, our proprietary platform which is based on large-scale
biomarker identification and monitoring, to discover and develop
therapeutics for pathways that have historically been
characterized as undruggable.
Since our inception, our operations have consisted primarily of
developing
AvalonRx
®
,
utilizing our technology to seek to discover and develop novel
cancer therapeutics, and the in-license and development of
AVN944. During that period, we have generated limited revenue
from collaborative partners, and have had no revenue from
product sales. Our operations have been funded principally
through the offering of equity securities and debt financings.
We have never been profitable and, as of December 31, 2007,
we had an accumulated deficit of $124.4 million. We had net
losses of $21.7 million for the year ended
December 31, 2007, $17.1 million for the year ended
December 31, 2006, and $19.3 million for the year
ended December 31, 2005. We expect to incur significant
operating losses for the foreseeable future as we advance our
drug candidates from discovery through preclinical testing and
clinical trials and seek regulatory approval and eventual
commercialization. We will need to generate significant revenues
to achieve profitability, and we may never do so.
Financial
Operations Overview
Revenue
We have not generated any revenue from sales of commercial
products and do not expect to generate any product revenue for
the foreseeable future. To date, our revenue has consisted of
collaboration revenue.
Collaboration Revenue.
Since inception, we
have generated revenue solely in connection with our
collaboration and pilot study agreements. Our collaborations
with Merck, AstraZeneca and Novartis include upfront payments,
research funding,
and/or
payments for the achievement of certain discovery and
development related milestones. During 2007, we recognized
revenue from work performed and expenses incurred on our
collaboration agreement with Novartis and recognized no revenue
from our other collaboration agreements.
Research
and Development Expense
Research and development expense consists of expenses incurred
in connection with developing and advancing our drug discovery
technology and identifying and developing our drug candidates
and supporting our collaborative relationships. These expenses
consist primarily of salaries and related expenses, the purchase
of laboratory supplies, access to data sources, facility costs,
costs for preclinical development and expenses related to our
in-license and clinical trials of AVN944. We charge all research
and development expenses to operations as incurred.
Our total research and development expenses for the years ended
December 31, 2007, 2006 and 2005 were $15.3 million,
$13.3 million, and $15.8 million, respectively. During
2007, we incurred expenses of approximately $4.3 million
related to the development of AVN944. Other than for our
clinical candidate AVN944, we do not currently track our
internal research and development costs or our personnel and
related costs on an individual drug candidate basis. We use our
research and development resources, including employees and our
drug discovery technology, across multiple drug development
programs. As a result, we cannot state precisely the costs
incurred for each of our research and development programs or
our clinical and preclinical drug candidates. During 2007, we
estimate that 26% and 7% of research and development expenses
were attributable to research related to our
β-catenin
and Aurora/Centrosome pathway programs, respectively. We
estimate that 14% of research and
32
development expenses were attributable to collaborations with
AstraZeneca, Merck, ChemDiv, Medarex and Novartis. The remaining
expenses included all personnel and related expenses and other
research and development expenses not attributable to any
specified discovery and development program. We begin to track
development costs for a program after an individual molecule has
been selected for formal pre-clinical development. Research and
development expenses as a percentage of total operating expenses
for the years ended December 31, 2007, 2006 and 2005 were
65%, 63% and 76%, respectively.
We expect our research and development costs to be substantial
as we advance AVN944 through clinical trials and move other drug
candidates into preclinical testing and clinical trials. Based
on the results of our preclinical studies, we expect to
selectively advance some drug candidates into clinical trials.
We anticipate that we will select drug candidates and research
projects for further development on an ongoing basis in response
to their preclinical and clinical success and commercial
potential. In July 2007, we initiated U.S. Phase II
clinical trials of AVN944 in patients diagnosed with pancreatic
cancer.
General
and Administrative
General and administrative expense consists primarily of
salaries and related expenses for personnel in administrative,
finance, business development and human resource functions.
Other costs include legal costs of pursuing patent protection of
our intellectual property and other fees for legal services.
During 2007, we experienced increases in legal fees, accounting
fees and fees for investor relations and business development
services.
Quarterly
Results May Fluctuate
We anticipate that our quarterly results of operations will
fluctuate for several reasons, including:
|
|
|
|
|
the timing and extent of our development activities and clinical
trials for AVN944 and any other biopharmaceutical drug
candidates that we may develop in the future;
|
|
|
|
the timing and outcome of our applications for regulatory
approval for our drug candidates;
|
|
|
|
the timing and extent of our adding new employees and
infrastructure; and
|
|
|
|
the timing of any milestone payments, license fees, or royalty
payments that we may be required to make or that we would
receive from collaborations.
|
Critical
Accounting Policies and Significant Judgments and
Estimates
This discussion and analysis of our financial condition and
results of operations is based on our financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. The preparation of
these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets,
liabilities and expenses and the disclosure of contingent assets
and liabilities at the date of the financial statements, as well
as revenue and expenses during the reporting periods. We
evaluate our estimates and judgments on an ongoing basis. We
base our estimates on historical experience and on various other
factors we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results could therefore
differ materially from those estimates under different
assumptions or conditions.
Our significant accounting policies are more fully described in
Note 3 to our audited financial statements included under
Item 8 of this Annual Report on
Form 10-K.
We believe that the following critical accounting policies
reflect our more significant estimates and assumptions used in
the preparation of our financial statements.
Revenue
Recognition
Revenue is recognized when there is persuasive evidence that an
agreement exists, delivery has occurred, the price is fixed and
determinable, and collection is reasonably assured. Payments
received in advance of work performed are recorded as deferred
revenue and recognized ratably over the performance period.
Milestone payments are recognized as revenue when milestones, as
defined in the contract, are achieved.
33
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
cost incurred for such service as of each balance sheet date in
our financial statements. Examples of estimated expenses for
which we accrue estimated liabilities include contract service
fees paid to contract research organizations in connection with
our preclinical testing and legal and other professional
services. 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 in arrears for services performed. In the
event that we do not identify certain costs, which have begun to
be incurred, or we under- or over-estimate the level of services
performed or the costs of such services, our reported expenses
for such period would be too low or too high. The date on which
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
generally accepted accounting principles.
Stock-Based
Compensation
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123, revised 2004, or
SFAS 123(R),
Share-Based Payment.
SFAS 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25,
Accounting for
Stock Issued to Employees
(APB 25), and
requires companies to recognize compensation expense, using a
fair-value based method, for costs related to share-based
payments, including those made pursuant to stock option and
employee stock purchase plans.
We adopted SFAS 123(R) on January 1, 2006 using the
modified prospective transition method, which requires that
stock-based compensation cost is recognized for all awards
granted, modified or settled after the effective date as well as
for all awards granted to employees prior to the effective date
that remain unvested as of the effective date. Prior to the
adoption, we disclosed such costs on a pro forma basis in the
notes to our financial statements. In accordance with the
modified prospective method, the financial statements for prior
periods have not been restated to reflect the impact of
SFAS 123(R).
For the year ended December 31, 2007, we recorded
approximately $1.5 million of stock-based compensation
expenses, of which $0.2 million was included in research
and development expense and $1.3 million was included in
general and administrative expense. Since we continue to operate
in a net loss, the adoption of SFAS 123(R) had no impact
for tax-related effects on cash flow from operations and cash
flow from financing activities for the year ended
December 31, 2007. As of December 31, 2007,
unrecognized stock-based compensation expense of approximately
$737,000 remains to be recognized over a weighted-average period
of approximately 2.35 years. We amortize stock-based
compensation expenses on an accelerated basis over the vesting
period.
We estimated the fair value of stock options granted during the
year ended December 31, 2007 using the Black-Scholes option
pricing model. The assumptions used under this model are as
follows: (i) expected term of 6 years based on the
simplified method for estimating the expected term of stock
options; (ii) expected volatility of 69.8% based on
historical and peer volatility data; (iii) weighted average
risk-free interest rate of 4.95% based on the U.S. Treasury
yield curve in effect at the time of grant for periods
corresponding with the expected term of the option; and
(iv) expected dividend yield of zero percent. In addition,
under SFAS 123(R), the fair value of stock options granted
is recognized as expense over the service period, net of
estimated forfeitures. Based on historical data, we calculated a
4.2% annual forfeiture rate, which we believe is a reasonable
assumption. However, the estimation of forfeitures requires
judgment, and to the extent actual results or updated estimates
differ from our current estimates, such amounts will be recorded
as a cumulative adjustment in the same period estimates are
revised.
The Black-Scholes option pricing model requires the input of
highly subjective assumptions. Because our employee stock
options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models may not provide a
reliable single measure of the fair value of our employee stock.
In addition, management will continue to assess the assumptions
and methodologies used to calculate estimated fair value of
34
share-based compensation. Circumstances may change and
additional data may become available over time, which result in
changes to these assumptions and methodologies, and which could
materially impact our fair value determination.
Results
of Operations
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenue.
Total revenues for the twelve months
ended December 31, 2007 were $809,000, a decrease of
$1.9 million from the prior year. All 2007 revenue was
attributable to our collaboration agreement with Novartis and no
revenue was recognized under our other collaboration agreements.
During 2006, we recognized revenue from our collaboration
agreements with AstraZeneca, Novartis and the University of
Louisville.
Research and Development.
Research and
development expenses increased by $2.0 million, or 15%, to
$15.3 million for the twelve months ended December 31,
2007 from $13.3 million for the same period in 2006. The
increase in research and development expenses was primarily
attributable to increases in clinical trial costs related to our
AVN944 drug candidate, increases in laboratory supplies expense,
and an increase in salaries and benefits expense related to new
hires.
Research and development expenses consist of direct costs which
include salaries and related costs of research and development
personnel, and the costs of consultants, materials and supplies
associated with research and development projects. Indirect
research and development costs include facilities, depreciation,
patents and other indirect overhead costs.
General and Administrative.
General and
administrative expenses increased by $0.5 million, or 8%,
to $8.2 million for the twelve months ended
December 31, 2007 from $7.7 million for the same
period in 2006. This increase is primarily attributable to an
increase in consulting costs and an increase in compensation
expense related to stock options.
Interest Income.
Interest income increased by
$0.3 million, or 23%, to $1.6 million for the twelve
months ended December 31, 2007, compared to
$1.3 million for the same period in 2006. The increase in
interest income is a result of interest earned on higher average
cash balances at higher average interest rates.
Interest Expense.
Interest expense decreased
by $176,000, or 22%, to $633,000 for the twelve months ended
December 31, 2007, compared to $808,000 for the same period
in 2006. The decrease in interest expense was primarily related
to lower balances on our long term debt. This decrease was
offset, in part, by higher average interest rates on our
development bond financing.
Other Income.
Other income decreased by
$514,000, or 82%, to $110,000 for the twelve months ended
December 31, 2007, compared to $624,000 for the same period
in 2006. The decrease in other income was primarily related to
the discontinuation, during the first half of 2007, of income
from subletting part of our facility and the provision of shared
services to subtenants.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenue.
Total revenues increased by
$1.2 million, or 76%, to $2.7 million for the twelve
months ended December 31, 2006 from $1.5 million for
the same period in 2005. The increase in revenues was
attributable to our collaboration agreements with MedImmune,
Novartis and the University of Louisville, all of which were
initiated during 2005.
Research and Development.
Research and
development expenses decreased by $2.5 million, or 16%, to
$13.3 million for the twelve months ended December 31,
2006 from $15.8 million for the same period in 2005. The
decrease in research and development expenses was primarily
attributable to the inclusion in the prior year period of an
upfront payment of $5.0 million for the in-license of
AVN944. This decrease was offset by compensation expense related
to the issuance of stock options, an increase in clinical trial
costs related to our AVN944 drug candidate and an increase in
lab supplies expense related, in part, to collaboration and drug
development programs.
35
General and Administrative.
General and
administrative expenses increased by $2.6 million, or 51%,
to $7.7 million for the twelve months ended
December 31, 2006 from $5.1 million for the same
period in 2005. The increase is attributable to compensation
expense related to issuance of stock options, salaries and
bonuses for new hires, increases in compensation to executives
and staff, and other expenses from operating as a public company.
Interest Income.
Interest income increased by
$785,000, or 156%, to $1.3 million for the twelve months
ended December 31, 2006, compared to $503,000 for the same
period in 2005. The increase in interest income is a result of
interest earned on proceeds from the issuance of common stock,
including proceeds from our initial public offering, and higher
average interest rates.
Interest Expense.
Interest expense decreased
by $339,000, or 30%, to $808,000 for the twelve months ended
December 31, 2006, compared to $1.1 million for the
same period in 2005. The decrease in interest expense was
primarily related to the conversion of our outstanding
convertible notes into common stock at the close of our initial
public offering in October 2005, and lower balances on our long
term debt. This decrease was offset, in part, by higher average
interest rates on our long term development bond financing.
Other Income.
Other income decreased by
$39,000, or 6%, to $624,000 for the twelve months ended
December 31, 2006, compared to $663,000 for the same period
in 2005. The decrease in other income was primarily related to a
decrease in shared services utilized by subtenants in our
facility.
Liquidity
and Capital Resources
Overview
Our primary cash requirements are to:
|
|
|
|
|
fund our research, development and clinical programs;
|
|
|
|
obtain regulatory approvals;
|
|
|
|
prosecute, defend and enforce any patent claims and other
intellectual property rights;
|
|
|
|
fund general corporate overhead; and
|
|
|
|
support our debt service requirements and contractual
obligations.
|
Our cash requirements could change materially as a result of the
progress of our research and development and clinical programs,
licensing activities, acquisitions, divestitures or other
corporate developments.
We have incurred operating losses since our inception and
historically have financed our operations principally through
public stock offerings, debt financings, private placements of
equity securities, strategic collaborative agreements that
include research and development funding and development
milestones, and investment income.
In evaluating alternative sources of financing we consider,
among other things, the dilutive impact, if any, on our
stockholders, the ability to leverage stockholder returns
through debt financing, the particular terms and conditions of
each alternative financing arrangement and our ability to
service our obligations under such financing arrangements.
As of December 31, 2007, we had cash, cash equivalents and
marketable securities of approximately $28.5 million, which
is an increase of $8.1 million from December 31, 2006.
Of the $28.5 million balance at the end of 2007,
$5.3 million was held in a restricted account to serve as
collateral for our long-term debt. Our funds are currently
invested in investment grade and United States government
securities.
Sources
and Uses of Cash
Operating Activities.
Net cash used in
operating activities was $19.0 million, $12.0 million
and $13.4 million in 2007, 2006 and 2005, respectively. In
2007, our net loss of $21.7 million was reduced by non-cash
charges of $2.8 million, primarily for stock compensation
and depreciation and amortization, offset, in part, by changes
in our net operating assets and liabilities.
36
Investing Activities.
Net cash used in
investing activities was $4.6 million in 2007, net cash
provided by investing activities was $0.4 million in 2006,
and net cash used in investing activities was $6.3 million
in 2005. Cash provided by, or used in, investing activities
represents the amount used to purchase property and equipment
and marketable securities, net of proceeds from the sale of
marketable securities.
Financing Activities.
Net cash provided by
financing activities was $26.8 million, $4.9 million
and $27.2 million in 2007, 2006 and 2005, respectively. In
2007, net cash provided by financing activities included
$28.2 million of net proceeds from the issuance of common
stock. In 2006, net cash provided by financing activities
included $7.4 million of net proceeds from the issuance of
common stock. This amount was offset by $2.2 million of
repayments on debt. In 2005, net cash provided by financing
activities was driven by $30.1 million of proceeds from the
issuance of common stock and convertible notes.
Credit
Arrangements
In April 2003, we entered into a series of agreements with the
Maryland Industrial Development Financing Authority, or MIDFA,
and Manufacturers and Traders Trust Company, or M&T
Bank, in order to finance improvements to our corporate office
and research facility located in Germantown, Maryland. MIDFA
sold development bonds in the amount of $12.0 million. The
proceeds of the bond sale were put in trust to reimburse us for
the costs we incurred for improvements to our facility. We are
required to repay the trust $1.2 million annually for these
borrowings. The borrowing bears interest at a variable rate and
matures on April 8, 2013. The weighted-average interest
rate during 2007, 2006 and 2005 was 5.32%, 5.18% and 3.48%,
respectively.
In connection with the development bond financing, we entered
into an agreement with M&T Bank to issue the trustee an
irrevocable letter of credit to provide payment of the principal
and interest of the bonds. The amount of the letter of credit
changes annually, as principal payments are made. As of
December 31, 2007 and 2006, the letter of credit amount was
$7.3 million (consisting of $7.2 million of principal
and $118,000 in interest) and $8.5 million (consisting of
$8.4 million of principal and $138,000 in interest),
respectively. The letter of credit expires the earlier of
April 8, 2013, or the date the bonds have been paid in
full. In consideration of the letter of credit, we have granted
M&T Bank a security interest in certain facility
improvements, equipment and cash collateral held as restricted
cash. The Company is in compliance with all financial covenants
contained in the Companys letter of credit.
In June 2002, we entered into an equipment line of credit with
General Electric Capital Corporation (GE Capital)
that provided for borrowings of up to $5.0 million. In
2003, the line of credit was increased to allow for an
additional $2.0 million in borrowings. During 2002 and 2003
a total of $5.6 million was borrowed by us under the
equipment line of credit. No draws have been made since 2003 and
the availability of the line of credit has lapsed. Each draw has
been treated as a separate promissory note bearing interest
between 7.09% and 8.68% over 36- to
48-month
terms. The line of credit is secured by the applicable
equipment, fixtures, and personal property financed by the line
of credit. In connection with draws under the line of credit,
the lender received warrants to purchase a total of
39,306 shares of our Series B preferred stock at an
exercise price of $3.53, which subsequently automatically
converted into warrants to purchase 8,666 shares of common
stock at an exercise price of $28.24 per share in connection
with the closing of our initial public offering. At
December 31, 2007, roughly $11,000 in borrowings remained
outstanding under this line of credit.
Operating
Capital and Capital Expenditure Requirements
Our future funding requirements will depend on many factors,
including but not limited to:
|
|
|
|
|
the size and complexity of our research and development programs;
|
|
|
|
the scope and results of our preclinical testing and clinical
trials;
|
|
|
|
continued scientific progress in our research and development
programs;
|
|
|
|
the time and expense involved in seeking regulatory approvals;
|
|
|
|
competing technological and market developments;
|
|
|
|
acquisition, licensing and protection of intellectual property
rights; and
|
|
|
|
the cost of establishing manufacturing capabilities and
conducting commercialization activities.
|
37
Until we can generate a sufficient amount of product or royalty
revenue to finance our cash requirements, which we may never do,
we expect to finance future cash needs primarily through public
or private equity offerings, debt financings or strategic
collaborations. If we are successful in raising additional funds
through the issuance of equity securities, investors likely will
experience dilution, or the equity securities may have rights,
preferences or privileges senior to those of the holders of our
common stock. If we raise funds through the issuance of debt
securities, those securities would have rights, preferences and
privileges senior to those of our common stock. We do not know
whether additional funding will be available on acceptable
terms, or at all. If we are not able to secure additional
funding when needed, we may have to delay, reduce the scope of,
or eliminate one or more of our clinical trials or research and
development programs. In addition, we may have to partner one or
more of our drug candidate programs at an earlier stage of
development, which would lower the economic value of those
programs to our Company.
Contractual
Obligations
The following table discloses aggregate information about our
contractual obligations and the periods in which payments are
due as of December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
4-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-term debt(1)
|
|
$
|
15,294
|
|
|
$
|
2,873
|
|
|
$
|
8,180
|
|
|
$
|
4,240
|
|
|
$
|
|
|
Operating lease obligations(2)
|
|
|
3,997
|
|
|
|
740
|
|
|
|
2,355
|
|
|
|
903
|
|
|
|
|
|
Cooperative research and development agreements(3)
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
19,331
|
|
|
$
|
3,653
|
|
|
$
|
10,535
|
|
|
$
|
5,143
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes principal, interest and letter of credit fee payments
on our development bond financing and principal and interest
payments on our equipment financing. Our development bond
financing carries a variable interest rate. Amounts presented in
the table assume a fixed rate of 4.95% that was in effect on
December 31, 2007. The table does not include potential
discounts for debt prepayment.
|
|
(2)
|
|
Our operating lease obligations relate to the lease for our
headquarters in Germantown, Maryland.
|
|
(3)
|
|
Cooperative research and development agreements include
commitments into which we have entered as of December 31,
2007 to engage third parties to perform various aspects of our
research and development efforts subsequent to that date.
|
|
(4)
|
|
The table above reflects only payment obligations that are fixed
and determinable. Accordingly, the table does not include any
milestone payments under agreements we have entered into in
relation to our in-licensed technology, including our license
with Vertex Pharmaceuticals Incorporated for the development and
commercialization of AVN944, as the timing and likelihood of
such payments are not known. We also have service agreements
with clinical sites for the conduct of our U.S. Phase I
and II clinical trials of AVN944 in cancer patients. We
make payments to these sites based upon the actual number of
patients enrolled and the period of
follow-up
in
the trials. We do not have minimum payment obligations under
these agreements and the amount to be paid to each center and
the timing of those payments will vary based on the negotiated
amount paid for each patient to be treated and for each patient
screened who fails to or declines to participate in the clinical
trial. Due to the variability associated with these agreements
and the timing of patient enrollment, we are unable to estimate
with certainty the future patient enrollment costs we will incur.
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand
38
the use of fair value in any new circumstances. SFAS 57 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company believes the
adoption of SFAS 157 will not have a material impact on its
financial position and results of operations.
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 159). SFAS 159
expands the use of fair value accounting but does not affect
existing standards that require assets or liabilities to be
carried at fair value. Under SFAS 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, such as debt issuance costs. 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 159, changes in fair value are recognized in earnings.
SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the effect that the adoption of
SFAS 159 will have on its financial position and results of
operations.
In June 2007, the FASB ratified
EITF 07-03,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 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 and
recognized as an expense as the goods are delivered or the
related services are performed.
EITF 07-3
is effective, on a prospective basis, for financial statements
issued for fiscal years beginning after December 15, 2007.
The Company does not expect the adoption of
EITF 07-3
to have a material impact on its financial statements.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements, including
structured finance, special purpose or variable interest
entities.
Subsequent
Events
On February 14, 2008, we entered into an amendment with
M&T Bank and MIDFA to our letter of credit from M&T
Bank extending the expiry date of the letter of credit to
April 8, 2013 and removing our financial covenant
obligations under the letter of credit regarding the maintenance
of (i) a minimum ratio of current assets to current
liabilities and (ii) a minimum tangible net worth.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
We are exposed to market risk from changes in interest rates. At
December 31, 2007, we had $7.2 million of obligations
which were subject to variable rates of interest under our
development bond financing with MIDFA. If market interest rates
increased 1% from the rate at December 31, 2007, our annual
interest expense would increase approximately $72,000, assuming
that obligations subject to variable interest rates remained
constant.
In addition, the value of our portfolio of cash equivalents and
investments is subject to market risk from changes in interest
rates.
The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while
at the same time maximizing the income we receive from our
investments without significantly increasing risk. To achieve
these objectives, our investment policy allows us to maintain a
portfolio of cash equivalents and investments in a variety of
securities, including commercial paper, money market funds and
39
corporate debt securities. As of December 31, 2007, we had
cash and cash equivalents, short-term and long-term investments
and restricted cash of $28.5 million as follows:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6.3 million
|
|
Short-term investments
|
|
$
|
15.5 million
|
|
Long-term investments
|
|
$
|
1.4 million
|
|
Restricted cash and marketable securities
|
|
$
|
5.3 million
|
|
We maintain an investment portfolio of investment grade
securities, government agency notes and corporate bonds. The
securities in our investment portfolio are not leveraged, are
classified as available-for-sale and are, due to their
predominantly short-term nature, subject to minimal interest
rate risk. We currently do not hedge interest rate exposure on
our investment portfolio. As of December 31, 2007,
securities totaling $15.5 million mature in the next
12 months and $1.4 million mature after
December 31, 2008. While we do not believe that an increase
in market rates of interest would have any significant negative
impact on the realizable value of our investment portfolio,
changes in interest rates affect the investment income we earn
on our investments and, therefore, impact our cash flow and
results of operations.
We have operated in the United States and all revenues to date
have been received in U.S. dollars. Accordingly, we have
not had any material exposure to foreign currency rate
fluctuations.
40
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Avalon Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Avalon
Pharmaceuticals, Inc. as of December 31, 2007 and 2006, and
the related statements of operations, redeemable convertible
preferred stock and 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 audits 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 financial position
of Avalon Pharmaceuticals, Inc. at December 31, 2007 and
2006, and the 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.
The accompanying financial statements have been prepared
assuming that Avalon Pharmaceuticals, Inc. will continue as a
going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses and negative
cash flows from operations. These conditions raise substantial
doubt about the Companys ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 2. The 2007 financial statements do
not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
As discussed in Note 3 to the financial statements the
Company changed its method of accounting for stock-based
compensation in 2006 upon adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment.
McLean, Virginia
February 15, 2008
41
Avalon
Pharmaceuticals, Inc.
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,276
|
|
|
$
|
3,099
|
|
Short-term marketable securities
|
|
|
15,558
|
|
|
|
9,528
|
|
Accounts receivable
|
|
|
200
|
|
|
|
724
|
|
Interest receivable
|
|
|
190
|
|
|
|
175
|
|
Prepaid expenses
|
|
|
743
|
|
|
|
642
|
|
Deposits
|
|
|
102
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,069
|
|
|
|
14,270
|
|
Restricted cash and marketable securities
|
|
|
5,275
|
|
|
|
5,972
|
|
Property and equipment, net
|
|
|
7,325
|
|
|
|
8,923
|
|
Long-term marketable securities
|
|
|
1,416
|
|
|
|
1,831
|
|
Deposits
|
|
|
|
|
|
|
105
|
|
Deferred financing costs
|
|
|
220
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
37,305
|
|
|
$
|
31,391
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,063
|
|
|
$
|
1,857
|
|
Accrued expenses and other current liabilities
|
|
|
1,207
|
|
|
|
1,232
|
|
Deferred revenue and customer advances
|
|
|
1,204
|
|
|
|
1,034
|
|
Current portion of long-term debt
|
|
|
1,211
|
|
|
|
1,518
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,685
|
|
|
|
5,641
|
|
Deferred rent
|
|
|
446
|
|
|
|
469
|
|
Long-term deferred revenue, net of current portion
|
|
|
|
|
|
|
200
|
|
Long-term debt, net of current portion
|
|
|
6,000
|
|
|
|
7,207
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series C Junior Participating Preferred stock,
$0.01 par value; 300,000 shares authorized; no shares
issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 60,000,000 shares
authorized; 17,026,462 and 10,137,340 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
170
|
|
|
|
101
|
|
Additional capital
|
|
|
150,331
|
|
|
|
120,477
|
|
Other comprehensive income
|
|
|
50
|
|
|
|
|
|
Accumulated deficit
|
|
|
(124,377
|
)
|
|
|
(102,704
|
)
|
Total stockholders equity
|
|
|
26,174
|
|
|
|
17,874
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
37,305
|
|
|
$
|
31,391
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Financial Statements are an integral
part of these statements.
42
Avalon
Pharmaceuticals, Inc.
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues
|
|
$
|
809
|
|
|
$
|
2,724
|
|
|
$
|
1,544
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,322
|
|
|
|
13,269
|
|
|
|
15,789
|
|
General and administrative
|
|
|
8,240
|
|
|
|
7,661
|
|
|
|
5,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
23,562
|
|
|
|
20,930
|
|
|
|
20,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(22,753
|
)
|
|
|
(18,206
|
)
|
|
|
(19,311
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,603
|
|
|
|
1,288
|
|
|
|
503
|
|
Interest expense
|
|
|
(633
|
)
|
|
|
(808
|
)
|
|
|
(1,147
|
)
|
Other
|
|
|
110
|
|
|
|
624
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income:
|
|
|
1,080
|
|
|
|
1,104
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(21,673
|
)
|
|
|
(17,102
|
)
|
|
|
(19,292
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
|
$
|
(21,673
|
)
|
|
$
|
(17,102
|
)
|
|
$
|
(20,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders per common
share basic and diluted
|
|
$
|
(1.42
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(9.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares basic and
diluted
|
|
|
15,298,590
|
|
|
|
9,841,235
|
|
|
|
2,129,388
|
|
The accompanying Notes to Financial Statements are an integral
part of these statements.
43
Avalon
Pharmaceuticals, Inc.
Statements
of Redeemable Convertible Preferred Stock and Stockholders
Equity(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Bridge
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Financing
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at December 31, 2004
|
|
|
5,577,500
|
|
|
|
11,155
|
|
|
|
20,126,997
|
|
|
|
68,343
|
|
|
|
|
|
|
|
128,690
|
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(65,949
|
)
|
|
|
(65,971
|
)
|
Issuance of common stock to employee upon exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,521
|
|
|
|
0
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Proceeds from Convertible bridge financing and related accrued
interest of $267,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,294
|
|
Amortization of Series B offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
(361
|
)
|
|
|
(656
|
)
|
Amortization of Series B purchase stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
Conversion of Series B stock warrants to common stock
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656
|
|
Conversion of preferred stock to common upon close of credit
facility
|
|
|
(1,000,000
|
)
|
|
|
(2,000
|
)
|
|
|
(1,190,611
|
)
|
|
|
(4,109
|
)
|
|
|
|
|
|
|
273,826
|
|
|
|
3
|
|
|
|
6,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,109
|
|
Conversion of preferred stock, convertible notes and related
accrued interest upon IPO
|
|
|
(4,577,500
|
)
|
|
|
(9,155
|
)
|
|
|
(18,936,386
|
)
|
|
|
(65,346
|
)
|
|
|
(5,294
|
)
|
|
|
5,251,339
|
|
|
|
53
|
|
|
|
79,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,501
|
|
Issuance of common stock upon IPO, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,750,000
|
|
|
|
28
|
|
|
|
25,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,100
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,292
|
)
|
|
|
(19,292
|
)
|
Net unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
8,407,376
|
|
|
$
|
84
|
|
|
$
|
111,677
|
|
|
$
|
(250
|
)
|
|
$
|
(26
|
)
|
|
$
|
(85,602
|
)
|
|
$
|
25,883
|
|
Issuance of common stock to employee upon exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,152
|
|
|
|
0
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Issuance of common stock to board of directors as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,146
|
|
|
|
0
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Issuance of common stock, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,666,666
|
|
|
|
17
|
|
|
|
7,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,197
|
|
Expense fair value of options per FAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,674
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,102
|
)
|
|
|
(17,102
|
)
|
Net unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
Net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
10,137,340
|
|
|
$
|
101
|
|
|
$
|
120,477
|
|
|
$
|
0
|
|
|
$
|
(0
|
)
|
|
$
|
(102,704
|
)
|
|
$
|
17,874
|
|
Issuance of common stock to employee upon exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,140
|
|
|
|
0
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Issuance of common stock to board of directors as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,210
|
|
|
|
0
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
Issuance of common stock, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,838,772
|
|
|
|
68
|
|
|
|
28,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,247
|
|
Expense fair value of options per FAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,493
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,673
|
)
|
|
|
(21,673
|
)
|
Net unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
Net comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
17,026,462
|
|
|
$
|
170
|
|
|
$
|
150,332
|
|
|
$
|
0
|
|
|
$
|
50
|
|
|
$
|
(124,377
|
)
|
|
$
|
26,174
|
|
The accompanying Notes to Financial Statements are an integral
part of these statements.
44
Avalon
Pharmaceuticals, Inc.
Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,673
|
)
|
|
$
|
(17,102
|
)
|
|
$
|
(19,292
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,025
|
|
|
|
2,425
|
|
|
|
2,644
|
|
Non cash interest expense
|
|
|
217
|
|
|
|
282
|
|
|
|
623
|
|
Compensation expense related to stock and stock options
|
|
|
1,493
|
|
|
|
1,778
|
|
|
|
129
|
|
Amortization of premium on investments
|
|
|
(709
|
)
|
|
|
(37
|
)
|
|
|
148
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
509
|
|
|
|
196
|
|
|
|
(475
|
)
|
Prepaid expenses and other assets
|
|
|
4
|
|
|
|
190
|
|
|
|
(580
|
)
|
Accounts payable
|
|
|
(794
|
)
|
|
|
758
|
|
|
|
719
|
|
Accrued liabilities
|
|
|
(25
|
)
|
|
|
266
|
|
|
|
766
|
|
Deferred revenue
|
|
|
(30
|
)
|
|
|
(689
|
)
|
|
|
1,923
|
|
Deferred rent
|
|
|
(23
|
)
|
|
|
1
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,006
|
)
|
|
|
(11,932
|
)
|
|
|
(13,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(43,406
|
)
|
|
|
(19,974
|
)
|
|
|
(24,771
|
)
|
Proceeds from sale of marketable securities
|
|
|
39,247
|
|
|
|
20,723
|
|
|
|
18,671
|
|
Purchases of property and equipment
|
|
|
(427
|
)
|
|
|
(351
|
)
|
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,586
|
)
|
|
|
398
|
|
|
|
(6,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt, line of credit
|
|
|
(314
|
)
|
|
|
(1,018
|
)
|
|
|
(1,487
|
)
|
Proceeds from issuance of common stock, net
|
|
|
28,430
|
|
|
|
7,290
|
|
|
|
25,109
|
|
Principal payments on bond payable
|
|
|
(1,200
|
)
|
|
|
(1,200
|
)
|
|
|
(1,200
|
)
|
Deferred financing costs
|
|
|
(148
|
)
|
|
|
(171
|
)
|
|
|
(251
|
)
|
Proceeds from issuance convertible notes
|
|
|
|
|
|
|
|
|
|
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
26,768
|
|
|
|
4,901
|
|
|
|
27,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,176
|
|
|
|
(6,633
|
)
|
|
|
7,481
|
|
Cash and cash equivalents at beginning of year
|
|
|
3,099
|
|
|
|
9,732
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
6,276
|
|
|
$
|
3,099
|
|
|
$
|
9,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
415
|
|
|
$
|
515
|
|
|
$
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Financial Statements are an integral
part of these statements.
45
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS
Avalon Pharmaceuticals, Inc. (the Company), was incorporated on
November 10, 1999, under the laws of the state of Delaware.
Avalon Pharmaceuticals, Inc. is a biopharmaceutical company
using proprietary technology,
AvalonRx
®
,
to discover and develop novel therapeutics.
Inherent in the Companys business are various risks and
uncertainties, including its limited operating history, the fact
that the Companys technologies are new and may not allow
the Company or its collaboration partners to develop commercial
products, regulatory requirements associated with drug
development efforts, and the intense competition in the
pharmaceutical industry. The Companys success depends, in
part, upon its prospective drug discovery and development
efforts, the acceptance of the Companys technology by the
marketplace, including potential collaborators, and raising
additional capital.
|
|
2.
|
Liquity
Risks and Managements Plans
|
The accompanying financial statements have been prepared on a
going-concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of
business. Since inception, the Company has incurred, and
continues to incur, significant losses from operations. In
addition, the Company needs to raise additional capital to
continue its business operations and fund deficits in operating
cash flow. The Company plans to raise additional capital to
finance the development of its business operations, although
this capital raise cannot be assured.
The Companys ability to continue as a going concern is
dependent on its success at raising additional capital
sufficient to meet its obligations on a timely basis, and to
ultimately attain profitability. Management is confident of its
ability to raise the necessary funds for the Companys
growth and development activities. However, there is no
assurance that the Company will raise capital sufficient to
enable the Company to continue its operations for the next
12 months.
In the event the Company is unable to successfully raise
additional capital, it is unlikely that the Company will have
sufficient cash flows and liquidity to finance its business
operations as currently contemplated. Accordingly, in the event
new financing is not obtained, the Company will likely reduce
general and administrative expenses and delay research
development projects as well as further acquisition of
scientific equipment and supplies until it is able to obtain
sufficient financing to do so.
These factors could significantly limit the Companys
ability to continue as a going concern. The balance sheets do
not include any adjustments relating to recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
|
|
3.
|
Summary
of Significant Accounting Policies
|
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 financial statements and
accompanying notes. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. Cash equivalents consist primarily of money market
funds and commercial paper. The Company maintains cash balances
with financial institutions in excess of insured limits. The
Company does not anticipate any losses with such cash balances.
46
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Marketable
Securities
Marketable securities consist primarily of U.S. Treasury
and agency and corporate debt securities with various
maturities. Management classifies the Companys marketable
securities as available-for-sale. Such securities are stated at
market value, with the unrealized gains and losses included as
accumulated other comprehensive income (loss). Realized gains
and losses and declines in value judged to be
other-than-temporary on securities available for sale, if any,
are included in operations. A decline in the market value of any
available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in fair value. The
impairment is charged to earnings, and a new cost basis for the
security is established. Dividend and interest income are
recognized when earned. The cost of securities sold is
calculated using the specific identification method.
Property
and Equipment
Property and equipment is stated at cost. Property and equipment
is depreciated using the straight-line method over the estimated
useful lives of assets, generally three to five years for
equipment and seven years for furniture and fixtures. Leasehold
improvements are amortized over the shorter of the life of the
lease or the related asset. Maintenance and repairs are charged
to expense as incurred.
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Scientific equipment
|
|
$
|
7,115
|
|
|
$
|
6,730
|
|
Computer equipment
|
|
|
1,379
|
|
|
|
1,338
|
|
Leasehold improvements
|
|
|
12,093
|
|
|
|
12,093
|
|
Furniture and fixtures
|
|
|
463
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,050
|
|
|
|
20,624
|
|
Less accumulated depreciation
|
|
|
13,725
|
|
|
|
11,701
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,325
|
|
|
$
|
8,923
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment was
$2.0 million, $2.4 million and $2.6 million for
the years ended December 31, 2007, 2006, and 2005,
respectively.
Deferred
Financing Costs
Deferred financing costs consist primarily of costs incurred
related to the procurement of funding to finance leasehold
improvements and equipment. These costs are deferred and
amortized over the term of the related financing agreement using
the effective interest method.
Revenue
Recognition
During 2007, 2006 and 2005, the Company recognized revenue from
its collaboration partners for work performed and milestones
achieved. Corporate revenues include non-refundable license
fees, milestone payments and research & development
payments. Revenue is recognized when there is persuasive
evidence that an arrangement exists, delivery has occurred, the
price is fixed and determinable, and collection is reasonably
assured. Payments received in advance of work performed are
recorded as deferred revenue and recognized ratably over the
performance period. Milestone payments are recognized as revenue
in an amount commensurate with the level of effort expended when
the milestones are achieved, contract partner acknowledges
completion of the milestone, no further performance obligations
exist as defined in the agreements, collection is reasonably
assured and substantive effort was necessary to achieve the
milestone.
47
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Research
and Development Costs
The Company expenses its research and development costs as
incurred.
Income
Taxes
Income taxes are accounted for using the liability method.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating
loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce net deferred
tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during
the period in deferred tax assets and liabilities.
Restricted
Cash and Investments
In accordance with the terms of a financing arrangement
discussed in Note 5, the Company established an investment
account, which is pledged as collateral for a letter of credit.
The issuer of the letter of credit, a bank, maintains the
investment account. The banks security interest in the
account cannot exceed the minimum required cash collateral
amount, which as of December 31, 2007 and 2006, was defined
as an adjusted market value of approximately $5.3 million
and $6.0 million, respectively. This collateral agreement
defines adjusted market value as the product of the fair market
value of each permitted investment by a defined percentage
ranging from 60% to 100%, depending on the nature of the
permitted investment. The minimum cash collateral amount
automatically decreases each April 1 as specified in the
collateral agreement.
Stock-Based
Compensation
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plans under the recognition and
measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (Opinion 25), and related
Interpretations, as permitted by FASB Statement No. 123,
Accounting for Stock-Based Compensation
(Statement 123). Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment
(Statement 123(R)), using the
modified-prospective-transition method.
Under the modified-prospective-transition method, compensation
cost recognized after 2005 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
Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of Statement 123(R). Results for prior periods
have not been restated. The adoption of Statement 123(R) had no
impact on the cash flows from operating or financing activities.
The Company recognizes stock compensation expense using the
accelerated method for options with graded vesting.
48
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value
recognition provisions of Statement 123(R) to stock-based
employee compensation for the year ended December 31, 2005.
The reported and pro forma net loss and net loss per share for
the years ended December 31, 2007 and 2006 are the same
because stock-based compensation expense is calculated under the
provisions of Statement 123(R).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Actual net loss attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(21,673
|
)
|
|
$
|
(17,102
|
)
|
|
$
|
(20,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock compensation included in reported net loss
attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards
|
|
|
|
|
|
|
|
|
|
|
(681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
|
(21,673
|
)
|
|
|
(17,102
|
)
|
|
|
(20,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(1.42
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(9.58
|
)
|
Basic and diluted pro forma
|
|
$
|
(1.42
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(9.84
|
)
|
Weighted average number of common shares basic and
diluted
|
|
|
15,298,590
|
|
|
|
9,841,235
|
|
|
|
2,129,388
|
|
Disclosures prescribed by SFAS No. 123,
Accounting
for Stock-Based Compensation
(SFAS 123), are presented
in Note 8.
Basic
and Diluted Net Loss Attributable to Common Stockholders Per
Common Share
Basic net loss attributable to common stockholders per common
share is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted net loss attributable to
common stockholders per common share reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common
stock. Stock options and warrants were not considered in the
computation of diluted net loss attributable to common
stockholders per common share for the periods presented, as
their effect is antidilutive.
Comprehensive
Loss
SFAS No. 130,
Reporting Comprehensive Income
,
requires the presentation of comprehensive income or loss and
its components as part of the financial statements. For the
years ended December 31, 2007, 2006, and 2005, the
Companys net loss plus its unrealized gains (losses) on
available-for-sale securities reflects comprehensive loss.
Fair
Value of Financial Instruments and Concentration of Credit
Risk
The fair value of the Companys cash equivalents, accounts
receivable, accounts payable, and accrued liabilities have
approximated their carrying amounts due to the relatively short
maturity of these items. The fair value of debt approximated its
carrying amount as of December 31, 2007 and 2006, based on
rates currently available to the Company for debt with similar
terms and remaining maturities. Financial instruments, which
potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and
49
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
marketable securities. Management believes the risks associated
with its financial instruments are minimal, due to its policy of
investing in highly rated securities.
Segment
Information
The Company currently operates in one business segment, which is
the development and commercialization of pharmaceutical products
through its unique and proprietary drug discovery process. The
Company is managed and operated as one business. A single
management team that reports to the chief executive officer
comprehensively manages the entire business. The Company does
not operate separate lines of business with respect to its
products or product candidates. Accordingly, the Company does
not have separately reportable segments as defined by
SFAS No. 131,
Disclosure about Segments of an
Enterprise and Related Information.
Reclassification
Certain reclassifications of prior period amounts have been made
to conform with the current year presentation.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company believes the adoption of
SFAS 157 will not have a material impact on its financial
position and results of operations.
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 159). SFAS 159
expands the use of fair value accounting but does not affect
existing standards that require assets or liabilities to be
carried at fair value. Under SFAS 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, such as debt issuance costs. 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 159, changes in fair value are recognized in earnings.
SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the effect that the adoption of
SFAS 159 will have on its financial position and results of
operations.
In June 2007, the FASB ratified
EITF 07-03,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-03).
EITF 07-03
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 and
recognized as an expense as the goods are delivered or the
related services are performed.
EITF 07-03
is effective, on a prospective basis, for financial statements
issued for fiscal years beginning after December 15, 2007.
The Company does not expect the adoption of
EITF 07-03
to have a material impact on its financial statements.
50
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
4.
|
Marketable
Investments
|
Marketable investments held by the Company were as follows as of
December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Amortized
|
|
|
Gains
|
|
|
|
|
|
Amortized
|
|
|
Gains
|
|
|
|
|
Available for Sale
|
|
Cost
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Cost
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
202
|
|
|
$
|
5
|
|
|
$
|
207
|
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
204
|
|
Corporate debt securities
|
|
|
16,722
|
|
|
|
45
|
|
|
|
16,767
|
|
|
|
11,155
|
|
|
|
|
|
|
|
11,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,924
|
|
|
|
50
|
|
|
|
16,974
|
|
|
|
11,359
|
|
|
|
|
|
|
|
11,359
|
|
Restricted investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,506
|
|
|
|
|
|
|
|
1,506
|
|
|
|
1,447
|
|
|
|
|
|
|
|
1,447
|
|
U.S. Treasury and agencies
|
|
|
3,769
|
|
|
|
|
|
|
|
3,769
|
|
|
|
4,525
|
|
|
|
|
|
|
|
4,525
|
|
Corporate debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,275
|
|
|
|
|
|
|
|
5,275
|
|
|
|
5,972
|
|
|
|
|
|
|
|
5,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,199
|
|
|
$
|
50
|
|
|
$
|
22,249
|
|
|
$
|
17,331
|
|
|
$
|
|
|
|
$
|
17,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes maturities of the Companys
investments at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Maturity
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Less than one year
|
|
$
|
20,790
|
|
|
$
|
20,833
|
|
|
$
|
15,500
|
|
|
$
|
15,500
|
|
Due in one to two years
|
|
|
1,409
|
|
|
|
1,416
|
|
|
|
1,831
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,199
|
|
|
$
|
22,249
|
|
|
$
|
17,331
|
|
|
$
|
17,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bond payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Maryland Industrial Development Financing Authority Taxable
Variable Rate Demand Revenue Bond
|
|
$
|
7,200
|
|
|
$
|
8,400
|
|
Equipment financing
|
|
|
11
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,211
|
|
|
|
8,729
|
|
Less current portion
|
|
|
(1,211
|
)
|
|
|
(1,518
|
)
|
Less discount related to warrants
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
6,000
|
|
|
$
|
7,207
|
|
|
|
|
|
|
|
|
|
|
Maryland
Industrial Development Financing Authority (MIDFA) Taxable
Variable Rate Demand Revenue Bond
In April 2003, the Company entered into a series of agreements
with MIDFA and M&T Bank in order to finance the build out
of its corporate headquarters and research facility located in
Germantown, Maryland. The Company entered into a loan agreement
with MIDFA and a letter of credit with M&T Bank that
contain, among other terms, extensive restrictions on
operations, requires the Company to comply with certain
affirmative covenants and requires the Company to maintain or
satisfy specified financial ratios and tests, including among
51
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
other things, as of December 31, 2007, a $7.7 million
minimum level of tangible net worth, a $4.9 million minimum
restricted cash balance, and a minimum ratio of current assets
to current liabilities of 1.5:1. Any breach or failure to comply
with these restrictions, covenants, financial tests or financial
ratios could result in an event of default under these
agreements.
In accordance with the terms of the loan agreement, MIDFA sold
bonds in the amount of $12.0 million. The proceeds of the
bond sale were put in trust to reimburse the Company for the
costs it incurred for the build out of the facility. The Company
is required to repay the trust $1.2 million annually for
these borrowings. The borrowing bears interest at a variable
rate and matures on April 8, 2013. The weighted-average
interest rate during 2007 and 2006 was 5.32% and 5.18%,
respectively.
M&T Bank issued the trustee an irrevocable letter of credit
to provide payment of the principal and interest of the bonds.
The amount of the letter of credit changes annually, as
principal payments are made. At December 31, 2007 and 2006,
the letter of credit amount was $7,318,356 (consisting of
$7.2 million of principal and $118,356 in interest) and
$8,538,082 (consisting of $8.4 million of principal and
$138,082 in interest), respectively. For purposes of the letter
of credit, interest is computed at 50 days at an assumed
maximum rate of interest of 12% per annum. The letter of credit
was scheduled to expire the earlier of April 8, 2008, or
the date the bonds would have been paid in full, but has been
extended until April 8, 2013. The Company granted the bank
a security interest in certain facility improvements, the
equipment financed, and the collateral described in Note 3.
The Company will pay the bank an annual fee of 1.50% of the
outstanding stated amount of the letter of credit. The annual
fee approximated $113,000, $131,000 and $189,000 for the years
ended December 31, 2007, 2006 and 2005, respectively. The
Company is also required to pay the bank $1,200 for each year
until the letter of credit expires. The principal portion of the
letter of credit shall be reduced $1.2 million on each
anniversary of the closing date.
In February 2008, the Company entered into an amendment to the
letter of credit with M&T Bank and MIDFA to extend the
expiry of the letter of credit agreement to April 8, 2013.
In addition, the amendment removes the Companys financial
covenant obligations under the letter of credit regarding the
maintenance of (i) a minimum ratio of current assets to
current liabilities and (ii) a minimum tangible net worth.
Equipment
Financing
The Company had a line of credit agreement that provided for
borrowings up to $2.0 million. Each draw was treated as a
separate promissory note, bearing interest between 9.51% and
12.44% over a
36-month
term. The applicable equipment, fixtures, and personal property
financed provide collateral for the borrowings. The Company
repaid all borrowings under this arrangement in 2004.
In 2001, the Company issued the lender warrants to purchase
20,000 shares of the Companys Series B
Redeemable Convertible Preferred Stock (the Series B
Preferred Stock). The warrants were initially exercisable for
$3.53 per share and expire on May 14, 2011. The fair value
of the warrants issued was estimated at the date of grant using
the Black-Scholes option-pricing model. The fair value of the
warrants of $48,000 was recorded as deferred financing costs and
was amortized into interest expense over the term of the line of
credit. On October 4, 2005, upon the close of the
Companys initial public offering, these warrants converted
into warrants to purchase 4,410 shares of the
Companys common stock for $28.24 per share.
The Company entered into a second line of credit agreement that
provided for borrowings up to $7.0 million. No draws were
made. The availability of the credit line elapsed in 2004. Each
draw was to be treated as a separate promissory note. These
notes were to bear interest between 7.09% and 8.68% over terms
of 36 to 48 months. The applicable equipment, fixtures, and
personal property financed provide collateral for the borrowings.
In conjunction with the second line of credit, the Company
issued the lender warrants to purchase 39,306 shares of the
Companys Series B Preferred Stock with an initial per
share exercise price of $3.53. The fair value of the warrants
was estimated at the date of grant using the Black-Scholes
option-pricing model. The fair value of the warrants was
recorded as a debt discount to the applicable draw and is
amortized into interest expense
52
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
over the term of the applicable draw. On October 4, 2005,
upon the close of the Companys initial public offering of
common stock, these warrants converted into warrants to purchase
8,666 shares of the Companys common stock for $28.24
per share.
Future minimum principal payments on all debt are as follows at
December 31 (in thousands):
|
|
|
|
|
2008
|
|
$
|
1,211
|
|
2009
|
|
|
1,200
|
|
2010
|
|
|
1,200
|
|
2011
|
|
|
1,200
|
|
2012
|
|
|
1,200
|
|
Thereafter
|
|
|
1,200
|
|
|
|
|
|
|
|
|
$
|
7,211
|
|
|
|
|
|
|
|
|
6.
|
Redeemable
Convertible Preferred Stock
|
Series A
Redeemable Convertible Preferred Stock
From December 1999 through July 2000, the Company issued
5,577,500 shares of Series A Redeemable Convertible
Preferred Stock (the Series A Preferred Stock) for net
proceeds of $11,155,000. In conjunction with the sale of the
Series B Preferred Stock, the holders of Series A
Preferred Stock retroactively revoked their right to receive
cumulative dividends.
In August and September 2005, the Company received commitments
from certain existing investors under a line of credit facility
to provide up to $6.5 million in subordinated debt
financing to support operations. As an incentive for investors
to participate in the facility, the Company amended its
certificate of incorporation to convert shares of Series A
and B Preferred Stock into common stock if the investor declined
to participate in the facility. As a result,
1,000,000 shares of Series A Preferred Stock, held by
3 investors who did not participate in the facility, converted
into a total of 125,000 shares of common stock on
September 22, 2005.
In October 2005, upon the close of the Companys initial
public offering of common stock, all remaining outstanding
shares of Series A Preferred Stock were converted into
572,188 shares of common stock.
Series B
Redeemable Convertible Preferred Stock
From October 2001 to February 2002, the Company issued
19,843,519 shares of Series B Preferred Stock at $3.53
for $65.8 million, net of issuance costs, consisting of
cash of approximately $59.7 million and conversion of the
principal and related accrued interest on approximately
$6.1 million of notes payable.
In September and August 2005, the Company received commitments
from certain existing investors under a line of credit facility
to provide up to $6.5 million in subordinated debt
financing to support operations. As an incentive for investors
to participate in the facility, the Company amended its
certificate of incorporation to convert shares of Series A
and B Preferred Stock into common stock if the investor declined
to participate in the facility. As a result,
1,190,611 shares of Series B Preferred Stock, held by
4 investors who did not participate in the facility, converted
into a total of 148,826 shares of common stock on
September 22, 2005.
In October 2005, upon the close of the Companys initial
public offering of common stock, all remaining outstanding
shares of Series B Preferred Stock were converted into
4,175,000 shares of common stock.
During 2002, the Company issued warrants for the purchase of
1,543,795 shares of Series B Preferred Stock to the
placement agent in the Companys Series B Preferred
Stock offering. The warrants had a per-share exercise price of
$3.53 and an expiration date of February 6, 2007, if
unexercised. The fair value of the warrants of $2,732,517 was
estimated at the date of grant using the Black-Scholes
option-pricing model. The fair value of the
53
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
warrants was netted against the proceeds from the offering of
the Series B Preferred Stock. In October 2005, upon the
close of the Companys initial public offering of common
stock, these warrants were converted into warrants to purchase
340,368 shares of the Companys common stock at a
price of $28.24 per share. These warrants expired, unexercised
on February 6, 2007.
In April 2007, the Company entered into a Rights Agreement (the
Rights Agreement) between the Company and American
Stock Transfer & Trust Company, as Rights Agent.
In connection with the adoption of the Rights Agreement, the
Board of Directors of the Company declared a dividend
distribution of one right (Right) for each
outstanding share of common stock, par value $0.01 per share of
the Company, payable to stockholders of record on May 10,
2007. Each Right, when exercisable, entitles the registered
holder to purchase from the Company one one-thousandth of one
share of Series C Junior Participating Preferred Stock at a
price of $60.00 per one one-thousandth share, subject to
adjustment. The description and terms of the Rights are set
forth in the Rights Agreement.
Initially, the Rights will be attached to all certificates
representing shares of common stock then outstanding, and no
separate certificates evidencing the Rights will be distributed.
The Rights will separate from the common stock and a
distribution of Rights Certificates will occur upon the earlier
to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated
persons has acquired beneficial ownership of 20% or more of the
outstanding shares of common stock or (ii) 10 business days
following the commencement of, or the first public announcement
of the intention to commence, a tender offer or exchange offer
the consummation of which would result in the beneficial
ownership by a person of 20% or more of the outstanding shares
of common stock. (the earlier of such dates being called the
Distribution Date).
Until the Distribution Date, (i) the Rights will be
evidenced by the common stock certificates, and will be
transferred with and only with the common stock certificates,
(ii) new common stock certificates issued after
May 10, 2007 upon transfer or new issuance of the common
stock will contain a notation incorporating the Rights Agreement
by reference, and (iii) the surrender for transfer of any
certificates for common stock outstanding will also constitute
the transfer of the Rights associated with the common stock
represented by such certificate.
The Rights are not exercisable until the Distribution Date and
will expire at the close of business on May 10, 2017,
unless such date is extended, the Rights Agreement is
terminated, or the Rights are earlier redeemed or exchanged by
the Company as described below. The Rights will not be
exercisable by a holder in any jurisdiction where the requisite
qualification to the issuance to such holder, or the exercise by
such holder, of the Rights has not been obtained or is not
obtainable.
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights will be mailed to holders of
record of the common stock as of the close of business on the
Distribution Date and, thereafter, the separate Rights
Certificates alone will evidence the Rights. Except as otherwise
determined by the Board of Directors of the Company, only shares
of common stock issued prior to the Distribution Date will be
issued with Rights.
In the event that a person becomes the beneficial owner of 20%
or more of the then outstanding shares of common stock, except
pursuant to an offer for all outstanding shares of common stock
which the Directors determine to be fair to and otherwise in the
best interests of the Company and its stockholders, each holder
of a Right will have the right to exercise the Right by
purchasing, for an amount equal to the Purchase Price, common
stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value equal to two times
such amount. Notwithstanding any of the foregoing, following the
occurrence of the events set forth in this paragraph, all Rights
that are beneficially owned by any acquiring person will be null
and void.
54
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
8.
|
Stockholders
Equity (Deficit)
|
Reverse
Stock Split
All share and per share amounts have been retroactively adjusted
to give effect to a
1-for-5
reverse stock split effected on August 15, 2005 and a
subsequent
1-for-1.6
reverse stock split effected on August 30, 2005.
Common
Stock
Holders of common stock are entitled to one vote per share in
all matters voted upon by the stockholders and have no right to
accumulate votes in the election of directors. Holders of common
stock are entitled to receive ratably such dividends, when and
if declared by the Board of Directors out of funds legally
available therefore. Holders of common stock have no preemptive,
subscription, redemption, or conversion rights, nor are there
sinking fund provisions applicable to the common stock.
In February 2005, the Company completed a financing pursuant to
which the Company issued $4.8 million of unsecured
convertible notes. Under the original terms of notes, the notes
converted into equity upon the earliest to occur of the closing
of certain qualified financing events (including an initial
public offering) or at maturity in February 2006. In addition,
the original terms of the notes provided that in the event of an
initial public offering, the outstanding convertible notes
automatically converted into such number of shares of common
stock as was determined by dividing the outstanding principal
amount of the convertible note, plus interest accrued through
the date of closing of the initial public offering, by the per
share public offering price of the initial public offering. In
all other circumstances, the outstanding principal amount of the
convertible notes, plus interest accrued, converted into either
shares of a newly created class of preferred stock or shares of
the class of security being issued in a subsequent qualified
financing based on the fair market value of securities then
being issued as determined in good faith by the Companys
Board of Directors. Pursuant to the February 2005 financing,
investors also were entitled to receive warrants equal to 50% of
the number of shares of new preferred stock or other securities
issuable upon conversion of the convertible notes. No estimate
of the fair value of the Companys equity was made in
connection with this transaction since the financing provided
that any valuation determination was to be deferred until the
time of conversion. All participants were current preferred
stock investors in the Company.
In April 2005, the Company revised the terms of its convertible
notes issued in February 2005 and issued an additional $260,000
of convertible notes. Under the revised terms of the notes, all
of the notes converted into equity upon the earliest to occur of
an initial public offering, the sale of the Company, or
January 1, 2006. Upon the closing of an initial public
offering prior to January 1, 2006, any outstanding
convertible notes automatically converted into such number of
shares of common stock as was determined by dividing the
outstanding principal amount of the convertible note, plus
interest accrued through the date of closing of the initial
public offering, by the per share public offering price of the
initial public offering. In all other circumstances, the
outstanding principal amount of the convertible note, plus
interest accrued, converted into shares of a new preferred
security based on the fair market value of the new preferred as
determined in good faith by the Companys Board of
Directors. Under the revised terms of the notes, the warrants
were terminated. No estimate of the fair value of the
Companys equity was made in connection with this
transaction since the financing provided that any valuation
determination was to be deferred until the time of conversion.
All additional participants were current preferred stock
investors in the Company. During 2005, the Company incurred
interest expense of $267,140 related to these notes.
Upon the closing of the Companys initial public offering
in October 2005, all of the Companys outstanding
convertible notes, representing principal and interest of
$5,293,600, automatically converted into 504,152 shares of
common stock.
In October 2005, the Company sold 2,750,000 shares of its
common stock at $10.50 per share in its initial public offering.
Gross proceeds from the offering were $28.9 million. Net
proceeds from the offering were approximately $26.9 million
after deducting underwriting discounts. After deduction of other
initial public offering costs, the Company received net proceeds
of $25.2 million.
55
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
In February 2006, the Company raised $7.2 million through a
private placement of 1,666,666 shares of its common stock
to nine institutional investors. Offering expenses of
approximately $37,000 were netted against gross proceeds and
recorded to additional capital.
In January 2007, the Company raised $10.0 million through a
private placement of 3,000,000 shares of its common stock
to seventeen institutional investors. Offering expenses of
approximately $499,000 were netted against gross proceeds and
recorded to additional capital.
In May 2007, the Company raised $20.0 million in gross
proceeds through a private placement of 3,838,772 shares of
its common stock to twenty institutional investors. The
investors also received warrants to purchase up to
959,693 shares of common stock at an exercise price of
$6.00 per share. Offering expenses of $1.3 million were
netted against gross proceeds and recorded to additional capital.
Stock
Options
The Company adopted the Avalon Pharmaceuticals, Inc. 1999 Stock
Incentive Plan (the 1999 Plan) to provide for the granting of
stock awards, such as stock options, restricted common stock,
and stock appreciation rights to employees, directors, and other
individuals as determined by the Board of Directors. The Company
has reserved 451,117 shares of common stock to accommodate
the exercise of options granted under the 1999 Plan.
The Company terminated the 1999 Plan as to future awards
effective upon the closing of the Companys initial public
offering in October 2005.
Effective upon the closing of the Companys initial public
offering in October 2005, the Company adopted the Avalon
Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive Plan, or
2005 Plan. The Company reserved 989,738 shares of common
stock to accommodate the stock and option awards granted under
the 2005 Plan.
In June 2007 and 2006 the Company reserved an additional 800,000
and 591,844 shares of common stock, respectively, to
accommodate the stock and option awards granted under the 2005
Plan. Option awards are generally granted with an exercise price
equal to the market price of the Companys common stock at
the grant date. These option awards generally vest ratably over
four years and have 10 year contractual terms.
For the years ended December 31, 2007 and 2006, we recorded
stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Research and development
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
General and administrative
|
|
|
1.3
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
1.5
|
|
|
$
|
1.7
|
|
56
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Additional information with respect to stock option activity is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2006
|
|
|
1,989,474
|
|
|
|
4.11
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
191,955
|
|
|
|
4.53
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(27,140
|
)
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(71,619
|
)
|
|
|
5.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,082,670
|
|
|
|
4.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
2,082,670
|
|
|
$
|
4.12
|
|
|
|
7.4960
|
|
|
$
|
335
|
|
Vested and expected to vest at December 31, 2007
|
|
|
1,995,198
|
|
|
$
|
4.12
|
|
|
|
7.4960
|
|
|
$
|
335
|
|
Exercisable at December 31, 2007
|
|
|
1,495,341
|
|
|
$
|
4.24
|
|
|
|
6.9930
|
|
|
$
|
220
|
|
The following disclosure provides a description of the
significant assumptions used during 2007, 2006 and 2005 to
estimate the fair value of the Companys employee stock
option awards. The fair value of employee stock options were
estimated using the Black-Scholes option-pricing fair value
model using the weighted-average assumptions shown in the table
below. A discussion of our methodology for developing each of
the assumptions used in the valuation model follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Option pricing model
|
|
|
Black-Scholes
|
|
|
|
Black-Scholes
|
|
|
|
Black-Scholes
|
|
Expected stock price volatility
|
|
|
69.81
|
%
|
|
|
69.26
|
%
|
|
|
66.2
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
4.95
|
%
|
|
|
4.60
|
%
|
|
|
4.00
|
%
|
Expected life of option (years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
4.7
|
|
Expected Stock Price Volatility
Volatility is
a measure of the amount by which a financial variable such as a
share price has fluctuated (historical volatility) or is
expected to fluctuate (expected volatility) during a period. Due
to the Companys limited trading history, there had been
inadequate data to calculate historical volatility of our stock.
Prior to June 30, 2007, the Company used an average
volatility of similar companies in the pharmaceutical industry.
Beginning with the three months ended September 30, 2007,
the Company uses an average of the volatility of its own stock
and the average volatility of similar companies in the
pharmaceutical industry.
Dividend Yield
The Company has never declared
or paid dividends and has no plans to do so in the foreseeable
future.
Risk-Free Interest Rate
This is the
U.S. Treasury rate for the week of each option grant having
a term that most closely resembles the term of the option.
Expected Life of the Option Term
This is the
period of time that the options granted are expected to remain
unexercised. Granted options have a maximum term of ten years.
The Company has adopted SAB 107s simplified method
for estimating the expected term of stock options.
The Black-Scholes option pricing model requires the input of
highly subjective assumptions. Because our employee stock
options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models may not provide a
reliable single measure of the fair value of our employee stock.
In addition,
57
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and
additional data may become available over time, which result in
changes to these assumptions and methodologies, and which could
materially impact our fair value determination.
The weighted-average grant date fair value of options granted
during the years ended December 31, 2007, 2006 and 2005 was
$3.00, $2.24, and $3.48, respectively.
The total intrinsic value of options exercised during 2007, 2006
and 2005 was approximately $59,000, $47,000 and $12,000,
respectively. The total intrinsic value of options outstanding
and options exercisable at December 31, 2007 was
approximately $335,000 and $220,000, respectively. The weighted
average remaining contractual life of options exercisable at
December 31, 2007 was 7.0 years.
As of December 31, 2007, unamortized stock-based
compensation expenses of approximately $737,000 remains to be
recognized over a weighted-average period of approximately
2.35 years. We amortize stock-based compensation expenses
on an accelerated basis over the vesting period. The total fair
value of shares vested during the years ended December 31,
2007, 2006 and 2005 was $1.5 million, $1.7 million and
$0.7 million, respectively.
Stock
Warrants
In August 2000, the Company issued warrants to its landlord to
purchase 1,875 shares of common stock at $16 per share. The
warrants expire in August 2010. The exercise price of these
warrants is subject to adjustment for certain dilutive events,
as defined in the terms of the warrants.
In March 2001, the Company issued warrants to a vendor to
purchase 31,250 shares of its common stock at $27.92 per
share. The warrants expire on the earlier of the closing of the
sale of all of the Companys outstanding equity capital or
the third anniversary of the initial public offering. The
exercise price of these warrants is subject to adjustment for
certain dilutive events, as defined in the terms of the warrants.
In connection with the May 2007 common stock offering discussed
above, the Company issued warrants to twenty institutional
investors, in conjunction with a private placement of common
stock, to purchase 959,693 shares of its common stock at
$6.00 per share, subject to adjustment in the event of stock
splits, stock dividends, combinations, recapitalizations and
similar events affecting the Companys outstanding common
stock. The exercise price of the warrants is also subject to a
weighted-average antidilution adjustment in the event of certain
dilutive stock issuances by the Company, subject to a maximum
reduction of the exercise price to no less than $5.17 per share.
The warrants expire on May 25, 2012 if unexercised.
For the years ended December 31, 2007, 2006, and 2005,
there is no current provision for income taxes and the deferred
tax benefit has been entirely offset by valuation allowances.
The difference between the amounts of income tax benefit that
would result from applying domestic federal statutory income tax
rates to the net loss and the net deferred tax assets is related
to certain nondeductible expenses, state income taxes, and the
change in the valuation allowance.
58
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
36,246
|
|
|
$
|
27,051
|
|
Capitalized research and development expenses
|
|
|
7,383
|
|
|
|
7,135
|
|
Start-up
costs
|
|
|
1,096
|
|
|
|
2,146
|
|
Deferred revenue
|
|
|
365
|
|
|
|
399
|
|
Deferred rent expense
|
|
|
177
|
|
|
|
181
|
|
Accrued payroll
|
|
|
101
|
|
|
|
119
|
|
Depreciation
|
|
|
1,140
|
|
|
|
738
|
|
R&D credit
|
|
|
2,382
|
|
|
|
1,616
|
|
Stock options
|
|
|
|
|
|
|
389
|
|
Other
|
|
|
805
|
|
|
|
31
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(49,695
|
)
|
|
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which the net operating loss carryforwards are available.
Management considers projected future taxable income, the
scheduled reversal of deferred tax liabilities, and available
tax planning strategies that can be implemented by the Company
in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over
the periods in which the net operating loss carryforwards are
available to reduce income taxes payable, management has
established a full valuation allowance.
The net operating loss carryforwards of approximately
$91.9 million will begin to expire in various years
beginning in 2020. The use of the Companys net operating
loss carryforwards may be restricted due to changes in Company
ownership. Additionally, despite the net operating loss
carryforwards, the Company may have a future tax liability due
to an alternative minimum tax or state tax requirements. The
Company paid no income taxes in 2007, 2006, or 2005.
The provision for income taxes differs from the amount of taxes
determined by applying the U.S. federal statutory rate to
loss before provision for income taxes as a result of the
following for the year ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal tax at statutory rates
|
|
$
|
(7,369
|
)
|
|
$
|
(5,815
|
)
|
|
$
|
(6,559
|
)
|
State taxes, net of federal benefit
|
|
|
(970
|
)
|
|
|
(758
|
)
|
|
|
(876
|
)
|
Change in valuation allowance
|
|
|
8,111
|
|
|
|
6,339
|
|
|
|
7,322
|
|
Permanent differences
|
|
|
228
|
|
|
|
234
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
10.
|
Related
Party Transactions
|
For the year ended December 31, 2007, the Company paid one
member of the board of directors consulting fees totaling
$93,000. In 2006 and 2005 the Company paid two members of the
board of directors consulting fees totaling $122,100 and
$132,300, respectively. During 2007, the Company received income
of $22,000 from Neodiagnostix for the rental of equipment.
Bradley Lorimier, a Director and Chairman of the Companys
Board of Directors and Kenneth C. Carter, Ph.D., the
Companys President, Chief Executive Officer and Director,
are directors and minority shareholders in NeoDiagnostix, a
privately held company focused on providing oncology diagnostic
testing on a fee-for-service basis.
|
|
11.
|
Commitments
and Contingencies
|
In July 2002, the Company entered into a
10-year
noncancelable operating lease agreement for office and
laboratory space. The lease expires on February 1, 2013.
This agreement contains an option to renew for two periods of 5
consecutive years. The lease contains a 3% annual escalation.
Total rent payments, exclusive of the monthly maintenance
charges, for the years ended December 31, 2007, 2006 and
2005 was $718,000, $697,000 and $677,000, respectively. Total
sublease income recorded for the years ended December 31,
2007, 2006 and 2005 was $48,000, $246,000 and $185,000,
respectively. As of December 31, 2007, future minimum
rental payments under non-cancelable leases, exclusive of
maintenance charges, are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
2008
|
|
$
|
740
|
|
2009
|
|
|
762
|
|
2010
|
|
|
785
|
|
2011
|
|
|
808
|
|
2012
|
|
|
832
|
|
Thereafter
|
|
|
70
|
|
|
|
|
|
|
Total
|
|
$
|
3,997
|
|
|
|
|
|
|
The company entered into a Registration Rights Agreement with
the investors that participated in the private placement of the
Companys sale of common stock and warrants in May 2007.
The Company subsequently filed a registration statement on
Form S-3
with the Securities and Exchange Commission to register the
shares sold. This registration statement was declared effective.
The Registration Rights Agreement requires the Company to make
pro-rata payments to each investor, as liquidated damages, in an
amount equal to 1.5% of the aggregate amount invested for each
30-day
period or pro rata for any portion thereof during which an
investor is unable to sell their shares for any reason under the
registration statement other than as a result of market
conditions (subject to certain rights of the Company to suspend
the use of the registration statement by investors). Damages may
not exceed a maximum of 9% of the amount invested or an
aggregate of $1.8 million.
|
|
12.
|
Collaborations
and Licenses
|
In October 2003, the Company entered into a collaboration with
Medarex, Inc. to jointly research, develop and commercialize
human antibodies against cancer targets. Under the agreement,
each party is obligated to use commercially reasonable efforts
to conduct their respective research activities in accordance
with jointly developed project plans and budgets for the
research, development, manufacture and commercialization of
human antibodies resulting from this collaboration. The
agreement generally provides that all costs associated with the
research, development, manufacturing and commercialization of
any such antibodies are to be shared equally between the two
parties and that any operating profits or losses with respect to
commercial products derived from the collaboration are to be
similarly shared equally between the two parties. In addition,
the agreement provides
60
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
that each of parties shall own an equal, undivided interest in
any intellectual property and technology derived from the
collaboration. The agreement further provides that either party
may voluntarily opt-out of its research, development and
commercialization obligations. Upon the exercise of such opt-out
right, the non-terminating party has the option to unilaterally
continue research, development, manufacture and
commercialization activities with respect to these antibodies,
subject to the payment to the terminating party of specified
royalties based on the phase of development during which such
opt-out right is exercised and of up to between
$6.5 million to $8.5 million per unilateral product in
additional payments based on the achievement of various
development and commercialization milestones, with the
terminating party continuing to be responsible for all of its
budgeted costs and expenses associated with completing the
particular research and development phase applicable to such
antibody. To date, no such royalty or milestone payments have
been made by or paid to either party.
In February 2005, the Company entered into a licensing agreement
with Vertex Pharmaceuticals, Inc. for the development of the
investigational agent AVN944 in oncology indications. Under the
terms of the agreement, Avalon holds exclusive rights to develop
and commercialize AVN944 worldwide for the treatment of various
cancers. The Company is obligated to pay up to $73 million
in license fees and milestone payments to Vertex over the term
of the agreement, based on the successful development and
commercialization of AVN944 in oncology. In 2005, the Company
made licensing payments to Vertex in the amount of
$5 million. Upon commercialization, Vertex will receive
royalties on product sales.
In June 2005, the Company entered into a collaboration and
license agreement with MedImmune, Inc. (acquired by AstraZeneca
PLC) for the discovery of small molecule therapeutic compounds
in the area of inflammatory disease. Under the terms of the
agreement, AstraZeneca is responsible for preclinical and
clinical testing of any resulting product candidates, as well as
all future development, sales and marketing activities.
The Company received an upfront technology access fee payment
and AstraZeneca is funding all research and development
activities at the Company and AstraZeneca for the purpose of the
collaboration. The Company may receive up to $16 million in
milestone payments from AstraZeneca related to the discovery,
development and commercialization of compounds resulting from
this collaboration. The Company may also receive royalties on
net sales of any products discovered in the collaboration.
Additionally, AstraZeneca has the option to initiate two
additional small molecule drug discovery collaborations with us
under similar terms.
The term of the agreement expires on the earlier of
(i) fifty years from the date of the agreement or,
(ii) such time as AstraZenecas obligation to pay
royalties expires. The agreement also expires if, after the
research is completed, AstraZeneca does not select a clinical
candidate. The license agreement may be terminated sooner by
either the Company or AstraZeneca upon, among other events, a
material, uncured breach by the other party or by AstraZeneca
for reason other than our material breach, upon 90 days
notice. The agreement requires an annual reconciliation to
determine if payments made by AstraZeneca, in accordance with
contractual provision, are in excess of the work completed by
Avalon.
The Company has not recorded revenue from this collaboration
agreement during 2007 and, in December 2007, MedImmune paused
work under this program at the time of their merger with
AstraZeneca. AstraZeneca has informed us of their intent to
continue work under this contract for small molecule therapeutic
programs other than the original MedImmune program. As of
December 31, 2007, there remained a balance of
approximately $893,000 of deferred revenue and customer advances
related to this agreement.
In September 2005, the Company entered into an agreement with
Novartis Institutes for Biomedical Research, Inc. for the
discovery of small molecule therapeutic compounds targeted
against a pathway selected by Novartis. Under the terms of the
agreement the Company is using
AvalonRx
®
to identify and characterize compounds from Novartis
chemical library. Novartis is responsible for lead optimization,
preclinical and clinical testing of any resulting product
candidates, as well as all future development and sales and
marketing activities.
61
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
The Company received an upfront technology access fee and
Novartis is funding all research activities at the Company for
the purpose of the collaboration. The Company may receive
milestone payments from Novartis based on the achievement of the
following milestones: (1) identification of a validated hit
compound and (2) identification of a lead compound.
In January 2007 the initial agreement term was amended from
18 months to 30 months from the date of inception. In
February 2008, the agreement term was amended from
30 months to 36 months from the date of inception. The
agreement may be terminated sooner by either the Company or
Novartis upon a material, uncured breach by the other party upon
60 days notice. The Company is recognizing revenue from the
upfront technology access fee over the estimated period of
performance.
In July 2006, the Company entered into a collaboration agreement
with ChemDiv, Inc. for the discovery and development of small
molecule oncology therapeutics. The Company and ChemDiv share in
the costs of development and will share in the value of any lead
candidate resulting from their joint research efforts.
Additional terms of the agreement provided the Company with the
right to select 200,000 compounds from the ChemDiv library for
use in all of the Companys discovery programs. The Company
is using its proprietary
AvalonRx
®
platform to discover new active compounds in screens against
selected targets and target pathways. ChemDiv is providing the
Company with access to its Discovery
outSource
tm
services platform, as well as medicinal and synthetic chemistry
for the discovery and development of new active compounds.
In March 2007, the Company entered into a drug discovery,
development and commercialization agreement with
Merck & Co., Inc., to identify and develop inhibitors
against a selected target in the area of oncology.
Under the terms of the agreement, the Company is using its
AvalonRx
®
platform to screen a select set of compounds from Mercks
proprietary compound library and to identify hits against this
target, which is generally regarded as intractable
based on the difficulty in identifying inhibitors of this
target. The Company is responsible for the selection of compound
families and optimization of those compounds to a preclinical
candidate selection stage. Merck is responsible for the clinical
development, regulatory approval and commercialization of any
resulting product candidates. Under the agreement, the Company
will receive milestone payments based on meeting a number of
discovery, development and commercial milestones relating to
proof of concept, expansion of research term, selection of
license compound and filing of INDs for a first cancer
indication and subsequent cancer indications, initiations of
different levels of clinical trials for those indications and
the filing, and approval, of NDAs for those indications, and
achievement of a specified level of net sales. If the Company
achieves all of the milestones under the agreement, the Company
will receive in excess of $200 million in milestone
payments. The Company will also receive royalties on net sales
of products developed in the collaboration. The agreement does
not provide for any minimum guaranteed payments to the Company
by Merck.
The term of the agreement expires upon the expiration of all
royalty obligations under the agreement. The agreement may be
terminated earlier by Merck upon 60 days advanced written
notice during the preliminary stages of the research program and
thereafter during the research program if certain levels of
research support are not provided by the Company. Merck may
terminate if certain research milestones are not met, subject to
the payment of specified fees by Merck to us and our right to
obtain reversion licenses from Merck to continue the development
and commercialization of potential product candidates derived
from the research program. The agreement may be further
terminated by Merck if it determines that development of a
compound is not commercially viable and again the Company has
the right to obtain a reversion license to the compound to
continue the development and commercialization of potential
product candidates. Additionally, the agreement may be
terminated either by the Company or by Merck upon a material,
uncured breach by the other party of the terms of the agreement,
following the expiration of a 90 day cure period.
The term of the agreement expires 60 years from the
effective date. The collaboration may be terminated sooner upon
mutual written agreement of both parties.
62
AVALON
PHARMACEUTICALS, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
13.
|
Employee
Benefit Plan
|
The Company has a defined contribution plan (the Plan) under
Internal Revenue Code Section 401(k). All employees who
have completed three months of service and are over age 21
are eligible for participation in the Plan. Participants may
elect to contribute up to 25% of their annual pretax earnings,
up to federally allowed maximum limits. The Company makes
matching contributions at its discretion. Participant and
Company contributions vest immediately. For the year ended
December 31, 2007, the Company incurred a 401(k) match
expense of approximately $135,000. The Company did not make any
matching contributions prior to January 1, 2007.
|
|
14.
|
Quarterly
Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(In thousands, except per share data)
|
|
2007 Summary statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
731
|
|
|
$
|
78
|
|
|
$
|
|
|
|
$
|
|
|
Loss from operations
|
|
|
(5,608
|
)
|
|
|
(6,031
|
)
|
|
|
(5,728
|
)
|
|
|
(5,386
|
)
|
Net loss attributable to Common Stockholders
|
|
|
(5,345
|
)
|
|
|
(5,809
|
)
|
|
|
(5,405
|
)
|
|
|
(5,114
|
)
|
Net loss attributable to Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders per common share basic and diluted
|
|
|
(0.43
|
)
|
|
|
(0.40
|
)
|
|
|
(0.32
|
)
|
|
|
(0.30
|
)
|
2006 Summary statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
539
|
|
|
$
|
417
|
|
|
$
|
1,115
|
|
|
$
|
653
|
|
Loss from operations
|
|
|
(4,863
|
)
|
|
|
(4,716
|
)
|
|
|
(3,992
|
)
|
|
|
(4,635
|
)
|
Net loss attributable to Common Stockholders
|
|
|
(4,558
|
)
|
|
|
(4,429
|
)
|
|
|
(3,723
|
)
|
|
|
(4,391
|
)
|
Net loss attributable to Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders per common share basic and diluted
|
|
|
(0.51
|
)
|
|
|
(0.44
|
)
|
|
|
(0.37
|
)
|
|
|
(0.43
|
)
|
In February 2008, the Company entered into an amendment of its
letter of credit agreement with M&T Bank and MIDFA to
extend the expiry of the letter of credit agreement to
April 8, 2013. In addition, the amendment removes the
Companys financial covenant obligations under the letter
of credit regarding the maintenance of (i) a minimum ratio
of current assets to current liabilities and (ii) a minimum
tangible net worth.
63
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness as of December 31, 2007 of our disclosure
controls and procedures, as such term is defined under
Rule 13(a)-15(e)
under the Exchange Act. Based on this evaluation, our principal
executive officer and our principal financial officer concluded
that the design and operation of our disclosure controls and
procedures were effective as of the end of the period covered by
this Annual Report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the most recently completed
fiscal quarter 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
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in
rule 13a-15(f)
under the Securities and Exchange Act of 1934, as amended. Under
the supervision and with the participation of our management,
including our principal executive officer and principal
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States of America. Because of
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in
Internal
Control Integrated Framework
, management
concluded that our internal control over financial reporting was
effective as of December 31, 2007.
This Annual Report on
Form 10-K
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 Securities
and Exchange Commission that permit the Company to provide only
managements report in this Annual Report on
Form 10-K.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item regarding our directors
and executive officers is incorporated by reference to our
Definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection
64
with our Annual Meeting of Stockholders to be held in 2008 (the
2008 Proxy Statement) under the captions Election of
Directors and Management of the Company
Executive Officers.
The information required by this item regarding Compliance
with Section 16(a) of the Exchange Act is
incorporated by reference to the 2008 Proxy Statement under the
caption Other Matters Section 16(a)
Beneficial Ownership Reporting Compliance.
We have adopted our Code of Ethics for Senior Financial
Officers, a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer and Corporate Controller. This
code of ethics may be accessed and reviewed through our
website:
http://www.avalonrx.com
.
We intend to satisfy any disclosure requirement under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of the
Code of Ethics for our Chief Executive Officer, Chief Financial
Officer and Corporate Controller, by posting such information on
our web site at the address above.
The information required by this item regarding any material
changes to the procedures by which security holders may
recommend nominees to our Board of Directors is incorporated by
reference to the 2008 Proxy Statement under the caption
Management of the Company Board
Committees Nominating and Corporate Governance
Committee.
The information required by this item regarding our Audit
Committee is incorporated by reference to the 2008 Proxy
Statement under the caption Management of the
Company Board Committees Audit
Committee.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference to the 2008 Proxy Statement under the captions
Management of the Company Compensation of
Directors and Executive Compensation.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information regarding the security ownership of certain
beneficial owners and management is incorporated by reference to
the 2008 Proxy Statement under the caption Security
Ownership of Certain Beneficial Owners and Management.
The information regarding Securities Authorized for
Issuance under Equity Compensation Plans is incorporated
by reference to our 2008 Proxy Statement under the caption
Executive Compensation Equity Compensation
Plan Information.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item is incorporated by
reference to the 2008 Proxy Statement under the caption
Certain Relationships and Related Transactions, and
Management of the Company.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this item is incorporated by
reference to the 2008 Proxy Statement under the caption
Appointment of Independent Registered Public Accounting
Firm.
65
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)(1) Financial Statements See Item 8.
(a)(2) Financial Statement Schedules All financial
statement schedules are omitted because they are not applicable,
not required under the instructions or all the information
required is set forth in the financial statements or notes
thereto.
(a)(3) and (b) Exhibits See accompanying Index
to Exhibits.
(c) Financial Statement Schedules and Other Financial
Statements.
Not applicable.
66
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.
AVALON PHARMACEUTICALS, INC
|
|
|
|
By:
|
/s/
Kenneth
C. Carter, Ph.D.
|
Kenneth C. Carter, Ph.D.
President and Chief Executive Officer
Dated: March 31, 2008
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth C.
Carter, Ph.D., C. Eric Winzer and Thomas G. David, and each
of them individually, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution,
for him and his name, place and stead in any and all capacities,
to sign the report and any and all amendments to this report,
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to perform each and every act
and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
Kenneth
C. Carter, Ph.D.
Kenneth
C. Carter, Ph.D.
|
|
President, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
March 31, 2008
|
|
|
|
|
|
/s/
C.
Eric Winzer
C.
Eric Winzer
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
March 31, 2008
|
|
|
|
|
|
/s/
Glen
A. Farmer
Glen
A. Farmer
|
|
Controller
(Principal Accounting Officer)
|
|
March 31, 2008
|
|
|
|
|
|
/s/
Bradley
G. Lorimier
Bradley
G. Lorimier
|
|
Chairman of the Board of Directors
|
|
March 31, 2008
|
|
|
|
|
|
Philip
Frost, M.D., Ph.D.
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/
David
S. Kabakoff, Ph.D.
David
S. Kabakoff, Ph.D.
|
|
Director
|
|
March 31, 2008
|
67
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
Michael
R. Kurman, M.D.
Michael
R. Kurman
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/
Ivor
Royston, M.D.
Ivor
Royston, M.D.
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/
William
A. Scott, Ph.D.
William
A. Scott, Ph.D.
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/
William
H. Washecka
William
H. Washecka
|
|
Director
|
|
March 31, 2008
|
68
INDEX TO
EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
3.1A(1)
|
|
Amended and Restated Certificate of Incorporation of Avalon
Pharmaceuticals, Inc., as amended
|
3.1B(10)
|
|
Certificate of Designation, Preferences and Rights of Series C
Junior Participating Preferred Stock
|
3.1C(10)
|
|
Certificate of Elimination of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock
|
3.2(1)
|
|
Amended and Restated Bylaws
|
4.1(1)
|
|
Specimen Common Stock Certificate
|
4.2(10)
|
|
Rights Agreement, dated as of April 26, 2007, between the
Company and American Stock Transfer & Trust Company, as
Rights Agent
|
10.1*(1)
|
|
License Development and Commercialization Agreement, dated
February 14, 2005, between Avalon Pharmaceuticals, Inc. and
Vertex Pharmaceuticals Incorporated
|
10.2*(1)
|
|
Collaboration Agreement, effective as of October 15, 2003,
between Avalon Pharmaceuticals, Inc. and Medarex, Inc. on behalf
of itself and its wholly-owned subsidiary, GenPharm
International, Inc.
|
10.3*(1)
|
|
Collaboration and License Agreement, dated June 17, 2005,
between Avalon Pharmaceuticals, Inc. and MedImmune, Inc.
|
10.4*(1)
|
|
Pilot Study Agreement, dated September 9, 2005, between Avalon
Pharmaceuticals, Inc. and Novartis Institutes for Biomedical
Research, Inc.
|
10.5A*(8)
|
|
Collaboration Agreement between Avalon Pharmaceuticals, Inc. and
ChemDiv, Inc., dated July 25, 2006
|
10.5B*(8)
|
|
First Amendment, dated September 21, 2006, to Collaboration
Agreement between Avalon Pharmaceuticals, Inc. and ChemDiv, Inc.
|
10.6*(12)
|
|
Exclusive License and Research Collaboration Agreement, dated
March 5, 2007 by and between Merck & Co., Inc., and
Avalon Pharmaceuticals, Inc.
|
10.7A(1)
|
|
Amended and Restated Employment Agreement, dated April 21, 2005
by and between Avalon Pharmaceuticals, Inc. and Kenneth C.
Carter, Ph.D.
|
10.7B(9)
|
|
Amendment No. 1, dated December 26, 2006, to Amended and
Restated Employment Agreement, dated April 21, 2005 by and
between Avalon Pharmaceuticals, Inc. and Kenneth C.
Carter, Ph.D.
|
10.8A(1)
|
|
Amended and Restated Employment Agreement, dated April 21, 2005
by and between Avalon Pharmaceuticals, Inc. and Thomas G. David
|
10.8B(9)
|
|
Amendment No. 1, dated December 26, 2006, to Amended and
Restated Employment Agreement, dated April 21, 2005 by and
between Avalon Pharmaceuticals, Inc. and Thomas G. David
|
10.9A(1)
|
|
Amended and Restated Employment Agreement, dated April 21, 2005
by and between Avalon Pharmaceuticals, Inc. and Gary Lessing
|
10.9B(9)
|
|
Amendment No. 1, dated December 26, 2006, to Amended and
Restated Employment Agreement, dated April 21, 2005 by and
between Avalon Pharmaceuticals, Inc. and Gary Lessing
|
10.10A(1)
|
|
Amended and Restated Employment Agreement, dated April 21, 2005
by and between Avalon Pharmaceuticals, Inc. and David
Bol, Ph.D.
|
10.10B(9)
|
|
Amendment No. 1, dated December 26, 2006, Amended and Restated
Employment Agreement, dated April 21, 2005 by and between Avalon
Pharmaceuticals, Inc. and David Bol, Ph.D
|
10.11(A)(6)
|
|
Employment letter between Avalon Pharmaceuticals, Inc. and J.
Michael Hamilton, dated April 20, 2006.
|
10.11(B)(9)
|
|
Amendment No. 1, dated December 26, 2006, to Employment
Agreement between Avalon Pharmaceuticals, Inc. and J. Michael
Hamilton, dated April 20, 2006
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.12(A)(7)
|
|
Employment letter between Avalon Pharmaceuticals, Inc. and David
D. Muth, dated September 12, 2006.
|
10.12(B)(9)
|
|
Amendment No. 1, dated December 26, 2006, to Employment
Agreement between Avalon Pharmaceuticals, Inc. and David D.
Muth, dated September 12, 2006
|
10.13(11)
|
|
Employment Letter, dated May 2, 2007, between Avalon
Pharmaceuticals, Inc. and C. Eric Winzer
|
10.14A(1)
|
|
Consulting Agreement, dated February 1, 2000, by and between
Avalon Pharmaceuticals, Inc. and Bradley G. Lorimier
|
10.14B(1)
|
|
Addendum to Consulting Agreement
|
10.14C(1)
|
|
Second Addendum to Consulting Agreement, dated March 30, 2003
|
10.14D(1)
|
|
Third Addendum to Consulting Agreement, dated October 25, 2004
|
10.14E
|
|
Fourth Addendum to Consulting Agreement, dated January 6, 2006
(filed herewith)
|
10.14F
|
|
Fifth Addendum to Consulting Agreement, dated January 5, 2007
(filed herewith)
|
10.14G
|
|
Sixth Addendum to Consulting Agreement, dated August 1, 2007
(filed herewith)
|
10.15(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan, as of October 15, 2001, as amended
|
10.16(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan Form of Non-qualified Stock Option
Agreement $.20 per share
|
10.17(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan Form of Non-qualified Stock Option
Agreement $.40 per share
|
10.18(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan Form of Incentive Stock Option
Agreement $.20 per share
|
10.19(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan Form of Incentive Stock Option
Agreement $.40 per share
|
10.20A(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan First Amendment to Form of Incentive Stock
Option Agreement
|
10.20B(1)
|
|
Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
Plan Second Amendment to Form of Incentive Stock
Option Agreement
|
10.21(14)
|
|
Avalon Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive
Plan, as amended
|
10.22(2)
|
|
Avalon Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive
Plan Form of Incentive Stock Option Agreement
|
10.23(2)
|
|
Avalon Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive
Plan Form of Nonqualified Stock Option Agreement
|
10.24(9)
|
|
Stock Option Agreement Amendment, dated December 26, 2006,
between Avalon Pharmaceuticals, Inc. and Gary Lessing
|
10.25(11)
|
|
Letter Agreement, dated May 2, 2007, between Avalon
Pharmaceuticals, Inc. and Gary Lessing
|
10.26(3)
|
|
Stock Election Policy for Non-Employee Director Fees
|
10.27(1)
|
|
Form of Avalon Pharmaceuticals, Inc. Director and Officer
Indemnification Agreement
|
10.28(13)
|
|
Purchase Agreement, dated May 24, 2007
|
10.29(13)
|
|
Registration Rights Agreement, dated May 24, 2007
|
10.30(13)
|
|
Form of Common Stock Purchase Warrant, dated May 25, 2007
|
10.31(12)
|
|
Purchase Agreement, dated January 19, 2007
|
10.32(12)
|
|
Registration Rights Agreement, dated January 19, 2007
|
10.33*(4)
|
|
Purchase Agreement, dated February 27, 2006
|
10.34(4)
|
|
Registration Rights Agreement, dated February 27, 2006
|
10.35(1)
|
|
Registration Rights Agreement, dated October 26, 2001, by and
between Avalon Pharmaceuticals, Inc. and the Investors listed on
Schedule I thereto
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.36(1)
|
|
Common Stock Warrant Agreement, dated August 11, 2000, by and
between Avalon Pharmaceuticals, Inc. and Alexandria Real Estate
Equities, L.P.
|
10.37(1)
|
|
Common Stock Warrant Agreement, dated March 23, 2001, by and
between Avalon Pharmaceuticals, Inc. and Compugen, Ltd.
|
10.38(1)
|
|
Series B Convertible Preferred Stock Warrant, dated February 6,
2002, granted to Array Capital LLC
|
10.39A(1)
|
|
Series B Convertible Preferred Stock Warrant, dated May 14,
2001, granted to GATX Ventures, Inc.
|
10.39B(1)
|
|
Letter Amendment to Series B Convertible Preferred Stock
Warrant, dated October 11, 2001, by and between Avalon
Pharmaceuticals, Inc. and GATX Ventures, Inc.
|
10.40(1)
|
|
Series B Convertible Preferred Stock Warrant Agreement, dated
August 20, 2002, by and between Avalon Pharmaceuticals, Inc.
and General Electric Capital Corporation
|
10.41(1)
|
|
Series B Convertible Preferred Stock Warrant Agreement, dated
December 23, 2002, by and between Avalon Pharmaceuticals, Inc.
and General Electric Capital Corporation
|
10.42(1)
|
|
Series B Convertible Preferred Stock Warrant Agreement, dated
June 18, 2003, by and between Avalon Pharmaceuticals, Inc. and
General Electric Capital Corporation
|
10.43(1)
|
|
Series B Convertible Preferred Stock Warrant Agreement, dated
December 23, 2003, by and between Avalon Pharmaceuticals, Inc.
and General Electric Capital Corporation
|
10.44A(1)
|
|
Master Security Agreement, dated as of June 25, 2002, by and
between General Electric Capital Corporation and Avalon
Pharmaceuticals, Inc.
|
10.44B(1)
|
|
Amendment to Master Security Agreement dated as of June 25, 2002
|
10.45(1)
|
|
Lease Agreement, dated July 15, 2002, by and between Westphalia
Center II Limited Partnership and Avalon Pharmaceuticals,
Inc.
|
10.46(1)
|
|
Trust Indenture, dated April 1, 2003, by and between the
Maryland Industrial Development Financing Authority and Allfirst
Trust Company National Association, as trustee (including form
of Maryland Industrial Development Financing Authority Taxable
Variable Rate Demand Revenue Bond (Avalon Pharmaceuticals, Inc.
Facility) Series 2003)
|
10.47(1)
|
|
Loan Agreement, dated April 1, 2003, by and between Maryland
Industrial Development Financing Authority and Avalon
Pharmaceuticals, Inc.
|
10.48A(1)
|
|
Letter of Credit Agreement, dated April 1, 2003, by and between
Avalon Pharmaceuticals, Inc. and Manufacturers and Traders Trust
Company
|
10.48B(1)
|
|
Amendment to Irrevocable Letter of Credit, dated April 1, 2004
|
10.48C(1)
|
|
Amended and Restored Modification and Consent Agreement by and
between Manufactures and Traders Trust Company, Maryland
Industrial Development Financing Authority and Avalon
Pharmaceuticals, Inc., dated February 15, 2005
|
10.48D(1)
|
|
Second Modification Agreement by and between Manufacturers and
Traders Trust Company, Maryland Industrial Development Financing
Authority and Avalon Pharmaceuticals, Inc., dated August 9, 2005
|
10.48E
|
|
Third Modification Agreement by and between Manufacturers and
Traders Trust Company, Maryland Industrial Development Financing
Authority and Avalon Pharmaceuticals, Inc., dated December 14,
2006 (filed herewith)
|
10.49(1)
|
|
Security Agreement, dated April 1, 2003, by and between Avalon
Pharmaceuticals, Inc. and Manufacturers and Traders Trust Company
|
10.50(1)
|
|
Collateral Pledge and Security Agreement and Control Agreement,
dated April 1, 2003, by and between Avalon Pharmaceuticals, Inc.
and Manufacturers, Traders Trust Company and Allfirst Trust
Company National Association
|
10.51(1)
|
|
Insurance Agreement, dated April 1, 2003, by and between
Maryland Industrial Development Financing Authority,
Manufacturers and Traders Trust Company and Avalon
Pharmaceuticals, Inc.
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.52(1)
|
|
Placement and Remarketing Agreement, dated April 1, 2003, by and
between Maryland Industrial Development Financing Authority,
Avalon Pharmaceuticals, Inc. and Manufacturers and Traders Trust
Company
|
10.53(1)
|
|
Pledge and Security Agreement, dated April 1, 2003, by and
between Avalon Pharmaceuticals, Inc. and Manufacturers and
Traders Trust Company
|
21.1
|
|
List of Subsidiaries (filed herewith)
|
23.1
|
|
Consent of Ernst & Young LLP (filed herewith)
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
|
*
|
|
Confidential treatment has been granted for portions of this
exhibit. These confidential portions have been omitted and were
filed separately with the SEC.
|
|
|
|
|
|
|
|
Denotes management contract or compensatory plan or arrangement.
|
|
|
|
|
|
(1)
|
|
Incorporated by reference to our Registration Statement on
Form S-1
(File
No. 333-124565).
|
|
|
|
|
|
(2)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on November 1, 2005.
|
|
|
|
|
|
(3)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on December 5, 2006.
|
|
|
|
|
|
(4)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on March 3, 2006.
|
|
|
|
|
|
(5)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on June 13, 2006.
|
|
|
|
|
|
(6)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on August 2, 2006.
|
|
|
|
|
|
(7)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on September 27, 2006.
|
|
|
|
|
|
(8)
|
|
Incorporated by reference to our Quarterly Report on
Form 10-Q
filed on November 8, 2006.
|
|
(9)
|
|
Incorporated by reference to our Annual Report on
Form 10-K
filed on March 30, 2007.
|
|
(10)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on April 30, 2007.
|
|
(11)
|
|
Incorporated by reference to our Current Report on
Form 8-K
filed on May 4, 2007.
|
|
(12)
|
|
Incorporated by reference to our Quarterly Report on
Form 10-Q
filed on May 14, 2007.
|
|
(13)
|
|
Incorporated by reference to our Current Report on
form 8-K
filed on May 29, 2007.
|
|
(14)
|
|
Incorporated by reference to our Current Report on
form 8-K
filed on June 7, 2007.
|
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