Item 1. DESCRIPTION OF BUSINESS.
Overview
We are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and license agreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase (which Auxilium has named XIAFLEX® (collagenase clostridium histolyticum)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis), and Auxilium has an option to acquire additional indications that we may pursue, including human and canine lipoma and cellulite. Auxilium has an agreement with Pfizer, Inc. (“Pfizer”) pursuant to which Pfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in 27 member countries of the European Union and 19 other European and Eurasian countries, and will do so under the registered trademark XIAPEX® (collagenase clostridium histolyticum).
Commercialization of XIAFLEX for Dupuytren’s Contracture in the United States
Auxilium announced on February 2, 2010 that it received marketing approval from the United States Food and Drug Administration (“FDA”) for XIAFLEX for the treatment of adult Dupuytren’s contracture patients with a palpable cord as further described in this Item 1 under the heading “Collagenase for Treatment of Dupuytren’s Contracture.” Auxilium launched XIAFLEX, the only drug approved by the FDA for the treatment of Dupuytren’s contracture, in March 2010.
Auxilium has announced that a new XIAFLEX-specific J-code (J0775) became available, beginning January 1, 2011, for use in the U.S. to identify XIAFLEX for obtaining reimbursement from Medicare, Medicaid and commercial health plans. Auxilium has reported in its Form 10-K filed with the SEC on March 1, 2011 (the “Auxilium 10-K”) that “the leadership of the American Society for Surgery of the Hands recommended a CPT code for XIAFLEX to the American Medical Association’s CPT Editorial Panel in February 2011”.
As discussed in more detail below under the section titled “Licensing and Marketing Agreements,” pursuant to our development and licensing agreement with Auxilium, we will be entitled to low double-digit royalties for net sales of XIAFLEX, subject to set-off for certain expenses we owe to Auxilium relating to certain development and patent costs.
Status of Regulatory Approval of XIAFLEX for Dupuytren’s Contracture in Europe
In a press release dated February 28, 2011, Auxilium and Pfizer announced that the European Commission granted XIAPEX marketing authorization for the treatment of Dupuytren’s contracture in adult patients with a palpable cord. The press release also noted that XIAPEX “is expected to be available for use in some European markets later this year”.
In the Auxilium 10-K, Auxilium stated that “a total of $60 million in milestone payments will be payable to [Auxilium] by Pfizer upon Pfizer’s achievement of [the] first commercial sale of XIAPEX for Dupuytren’s [contracture] within the major markets in Europe. Of this $60 million, $30 million will be payable upon [the] first commercial sale in the first country and a total of $30 million will be payable upon the respective first commercial sales in each of the remaining major markets.” We will receive 8.5% of any such milestone payments from Pfizer to Auxilium.
Qualifying Therapeutic Discovery Project Program
We have received $426,000 in grant funding under the Qualifying Therapeutic Discovery Project Program. The program, funded through the U.S. Patient Protection and Affordable Care Act of 2010, encourages therapeutic discovery programs. As we announced on November 3, 2010, the funding supports the clinical development of injectable collagenase in lipoma and the development of improved collagenases for tissue disassociation related to cellular therapy.
Research and Development of Injectable Collagenase for Multiple Indications
We entered into a development and license agreement with Auxilium on June 3, 2004, as amended on May 10, 2005 and December 15, 2005, respectively (the “Prior Auxilium Agreement”), pursuant to which we granted to Auxilium an exclusive worldwide license to develop, market and sell products containing our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie's disease and frozen shoulder, as well as an exclusive option to develop and license the technology for use in additional indications other than dermal formulations labeled for topical administration.
On December 11, 2008, the parties amended and restated, in its entirety, the Prior Auxilium Agreement (the “Auxilium Agreement”), which became effective on December 17, 2008 upon the execution and effectiveness of the Development, Commercialization and Supply Agreement, dated December 17, 2008 (the “Pfizer Agreement”) between Auxilium International Holdings, Inc., a wholly-owned subsidiary of Auxilium, and Pfizer. Under the Pfizer Agreement, Pfizer will market XIAPEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Europe and various other territories. In the Auxilium 10-K, Auxilium announced that it is seeking a partner or partners for development and commercialization in the rest of the world.
The Auxilium Agreement and other licensing agreements are discussed more fully in this Item 1, under the section titled “Licensing and Marketing Agreements.”
In the Auxilium 10-K, Auxilium stated that it plans to “prioritize [its] development of additional indications for XIAFLEX”. In the event that Auxilium does out-license XIAFLEX in other indications, we will be entitled to receive a certain percentage of sublicense income and milestone payments for such indications pursuant to the terms of the Auxilium Agreement.
Background on Collagenase
Collagenase is the only protease that can hydrolyze the triple helical region of collagen under physiological conditions. The specific substrate collagen comprises approximately one-third of the total protein in mammalian organisms, and it is the main constituent of skin, tendon, and cartilage, as well as the organic component of teeth and bone. The body relies on endogenous collagenase production to remove dead tissue and collagenase production is an essential biological mechanism, which regulates matrix remodeling and the normal turnover of tissue. The Clostridial collagenase produced by us has a broad specificity towards all types of collagen and is acknowledged as much more efficient than mammalian collagenases. Clostridial collagenase cleaves the collagen molecule at multiple sites along the triple helix whereas the mammalian collagenase is only able to cleave the molecule at a single site along the triple helix.
Collagenase is widely used for cell dispersion for tissue disassociation and cell culture because it does not damage the cell membrane. Since the main component of scar tissue is collagen, collagenase has been used in a variety of clinical investigations to remove scar tissue without surgery. Histological and biochemical studies have shown that the tissue responsible for the deformities associated with Dupuytren’s contracture and Peyronie’s disease is primarily composed of collagen. Surgical removal of scar tissue has the potential to result in complications including increased scar formation. Due to the highly specific nature of the Clostridial collagenase enzyme, we consider its use to be more desirable for the removal of unwanted tissue than the application of general proteolytic enzymes. Treatment with injectable collagenase for removal of excessive scar tissue represents a first in class non-invasive approach to this unmet medical need. The lead indications involving our injectable collagenase are Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. New clinical indications involving the therapeutic application of Clostridial collagenase to supplement the body’s own natural enzymes are continuously being proposed to us by specialists in the medical community.
Collagenase for Treatment of Dupuytren’s Contracture
Dupuytren’s contracture is a deforming condition of the hand in which one or more fingers contract toward the palm, often resulting in physical disability. The onset of Dupuytren’s contracture is characterized by the formation of nodules in the palm that are composed primarily of collagen. As the disease progresses, the collagen nodules begin to form a cord causing the patient’s finger(s) to contract, making it impossible to open the hand fully. Patients often complain about the inability to wash their hands, wear gloves, or grasp some objects. Dupuytren’s contracture has a genetic basis and it is most prevalent in individuals of northern European ancestry. Well-known individuals with Dupuytren’s contracture include President Ronald Reagan, President George Bush, and Prime Minister Margaret Thatcher.
Prior to FDA approval of XIAFLEX, the only proven treatment for Dupuytren’s contracture was surgery. Recurrence rates after surgery can be as high as 30% the first two years after surgery and 55% within ten years of surgery. The post surgical recovery is often associated with significant pain, delayed return to work, and extended periods of post-operative physical therapy. Because many of the individuals with Dupuytren’s contracture are older than 60, there is considerable resistance from patients to undergo the surgical procedure, which also involves the risk of general anesthesia. In addition, hand surgeons note that surgery for Dupuytren’s contracture is tedious, lengthy and poorly reimbursed in the U.S. Auxilium has also stated in its presentation materials for March 2011 that “[s]urgery has been reserved for advanced disease due to the nature of the disease, unpredictable results, complications, long recovery time and recurrence/additional surgeries.”
In the Auxilium 10-K, Auxilium cited the following reasons that “treatment with XIAFLEX offers benefits compared to surgery”. It:
“delivers improvement to 0 to 5 degrees of normal joint contracture without surgery for a majority of patients;
safeguards patients from the complications commonly associated with surgery;
simplifies treatment by offering a convenient in-office procedure alternative;
streamlines recovery for a rapid return to daily activities; and
significantly reduces costly and time-consuming physical therapy associated with surgery.”
We anticipate that many of the patients who had been willing to live with the disease at a time when the only proven treatment option was surgery would be receptive to the XIAFLEX treatment which involves a collagenase injection into the hand that is performed in a doctor’s office. As quoted in a February 28, 2011 joint press release of Auxilium and Pfizer, “‘Dupuytren’s contracture can significantly impact a patient’s quality of life, as the affected finger often interferes with daily activities such as driving, washing one’s face or shaking hands so a new alternative treatment for the condition is encouraging to those living with Dupuytren’s contracture across the EU,’ said Dr. Jörg Witthaut, consultant hand surgeon from Schön Klinik Vogtareuth Handchirurgie, Vogtareuth, Germany.”
Commercialization of XIAFLEX for Dupuytren’s Contracture in the United States
In a February 2, 2010 press release, Auxilium announced that it received marketing approval from the FDA for XIAFLEX for the treatment of adult Dupuytren's contracture patients with a palpable cord. XIAFLEX became available by prescription in March 2010. XIAFLEX is the only drug approved by the FDA for the treatment of Dupuytren’s contracture. The prescribing information for XIAFLEX made available by Auxilium lists “tendon rupture or other serious injury to the injected extremity,” as well as “pulley rupture, ligament injury, complex regional pain syndrome, and sensory abnormality of the hand,” as reported serious adverse reactions to XIAFLEX. The prescribing information for XIAFLEX also states that the most frequently reported adverse drug reactions in XIAFLEX clinical trials included swelling of the injected hand, contusion, injection site reaction, injection site hemorrhage, and pain in the treated extremity. The prescribing information notes that adverse reaction rates observed in clinical trials of a drug may not reflect those observed in practice because such trials “are conducted under widely varying conditions.”
Auxilium also stated in the Auxilium 10-K that: “As a condition of approval for XIAFLEX, [the] FDA has required a risk evaluation and mitigation strategy (“REMS”) program for XIAFLEX, which consists of a communication plan and a medication guide. This REMS program is designed (1) to evaluate and mitigate known and potential risks and serious adverse events; (2) to inform healthcare providers about how to properly inject XIAFLEX and perform finger extension procedures; and, (3) to inform patients about the serious risks associated with XIAFLEX. [Auxilium] market[s] XIAFLEX to physicians who are experienced in injection procedures of the hand and in the treatment of Dupuytren’s, and [Auxilium] require[s] that they attest to this experience and their completion of the REMS-required training program before they have access to XIAFLEX.”
As discussed in more detail below under the section titled “Licensing and Marketing Agreements,” we will be entitled to low double-digit royalties for net sales of XIAFLEX pursuant to the Auxilium Agreement, subject to set-off for certain expenses we owe to Auxilium under the Auxilium Agreement relating to certain development and patent costs.
In its March 2011 presentation, Auxilium highlighted the following as its strategy for establishing XIAFLEX as the standard of care for Dupuytren’s contracture: to “[d]isseminate excellent clinical efficacy and safety data; [f]acilitate peer to peer dialogue; [e]ducate patients on a non-invasive option; [s]mooth the reimbursement process; [and a]ctivate a critical mass of experienced prescribers”. In furtherance of this strategy, Auxilium has targeted 6,000 physicians including hand surgeons, plastic surgeons, orthopedic surgeons, general surgeons and rheumatologists, is utilizing 100 field based representatives compromised of sales representatives, sales managers and reimbursement specialists as part of the launch, and has medical science liaisons to help gain key opinion leader and regional opinion leader support.
In the Auxilium 10-K Auxilium noted that it plans to generate additional clinical data for Dupuytren’s contracture. Specifically, it “expect[s] to provide top-line three year recurrence data from [its] long term extension study in June 2011. In the first quarter of 2011, [it has] commenced dosing in a phase IV study expected to evaluate the ability to inject multiple cords in a single hand simultaneously. [Auxilium is] also planning to start a phase IV study on recurrent contractures previously successfully treated with XIAFLEX in 2011”.
Status of Regulatory Approval of XIAFLEX for Dupuytren’s Contracture in Europe
On December 16, 2010, Pfizer and Auxilium issued a joint press release to announce that Pfizer had received a positive opinion from the EMA’s CHMP recommending European Union approval for XIAPEX as treatment for Dupuytren’s contracture in adult patients with a palpable cord. The release stated that the CHMP’s positive recommendation will be reviewed by the European Commission, which has authority to approve medicines for the European Union. In addition, the release stated that Pfizer anticipates a final decision from the European Commission by the end of the first quarter of 2011. Pfizer is responsible for marketing XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in 27 member countries of the European Union and 19 other European and Eurasian countries, and will do so under the registered trademark XIAPEX.
Collagenase for Treatment of Peyronie’s Disease
Peyronie’s disease is characterized by the presence of a collagen plaque on the shaft of the penis, which can distort an erection and make intercourse difficult or impossible in advanced cases. In some mild cases, the plaque can resolve spontaneously without medical intervention. In severe cases, the penis can be bent at a 90-degree angle during erection. Significant psychological distress has been noted in patients with Peyronie’s disease who are sexually active. Frequent patient complaints include increased pain, painful erections, palpable plaque, penile deformity, and erectile dysfunction. Patients with Peyronie’s disease have been reported to have an increased likelihood of having Dupuytren’s contracture, frozen shoulder, plantar fibromatosis, knuckle pads, hypertension and diabetes. Peyronie’s disease typically affects males in the range of 40-70 years. The cause of Peyronie’s disease is unknown, although some investigators have proposed that it may be due to trauma or an autoimmune component. A number of researchers have suggested that the incidence of Peyronie’s disease has increased due to the use of erectile dysfunction drugs.
Surgery is the only proven treatment for Peyronie’s disease and the results are variable. Surgery often results in shortening of the penis. Auxilium has reported that 33% of Peyronie’s disease patients who undergo surgery are subsequently dissatisfied with the results and they frequently require a penile implant. Patients with Peyronie’s disease strongly desire therapeutic alternatives to surgery. Auxilium has reported that 90% of urologists would use collagenase injection to delay or avoid surgery. This finding is consistent with a survey of urologists conducted for us. In the Auxilium 10-K, Auxilium stated its belief that “there is a large unmet medical need for a non-surgical solution to Peyronie’s [disease]”.
Histological and biochemical studies indicate that the scarring on the penis due to Peyronie’s disease is composed primarily of collagen.
Development Status
On October 11, 2010, Auxilium announced that the first subject had been dosed in the global phase III program of XIAFLEX for the treatment of Peyronie’s disease. Auxilium also stated that it anticipates reporting top-line results in the first half of 2012. On March 9, 2011, Auxilium announced that it had reached target enrollment for the double-blind, placebo-controlled phase III program.
Phase IIb Trial
On December 16, 2009, Auxilium announced top-line efficacy and safety results from a phase IIb trial of XIAFLEX for the treatment of Peyronie’s disease. According to the Auxilium 10-K, the phase IIb trial was a “randomized, double-blind, placebo-controlled study designed to assess the safety and efficacy of XIAFLEX when administered two times a week every six weeks for up to three treatment cycles (2 x 3) in subjects with Peyronie’s. The study was conducted at 12 sites throughout the U.S., and patients were monitored for 36 weeks following the first injection. The trial was designed to validate a proprietary Peyronie’s Disease Questionnaire (“PDQ”) which measures several domains of patients’ sexual quality of life over a 36 week period. The four domains measured by the PDQ are penile pain, Peyronie’s bother, intercourse discomfort and intercourse constraint. Patients had to have a penile contracture between 30 and 90 degrees to be included in the study. Patients were stratified by the degree of penile curvature (i.e. 30 degrees to 60 degrees versus 60 to 90 degrees) and then randomized into four treatment groups to receive either XIAFLEX or placebo with or without modeling of the penile plaque. Modeling refers to massaging of the plaque after the second injection of a treatment series and is intended to maximize the enzymatic effect of the XIAFLEX injection in the plaque. Patients were randomized in a 3:1 ratio of XIAFLEX to placebo and a 1:1 ratio to receive penile plaque modeling or no modeling.”
In addition, the Auxilium 10-K stated that “Top-line data demonstrated that XIAFLEX improved penile curvature when compared to placebo with a mean improvement of 29.7% vs. 11%, respectively (P=0.001). In addition, the PDQ domain of Peyronie’s symptom bother was significantly improved in XIAFLEX treated subjects compared to placebo. The use of modeling also demonstrated significant improvement in XIAFLEX subjects compared to placebo, 32.4% improvement in curvature compared to a 2.5% worsening of curvature in placebo subjects (p<0.001). In the no-modeling group, XIAFLEX subjects experienced a 27.1% mean improvement in penile curvature, which was not statistically different from the 27.9% mean improvement for subjects receiving the placebo. The most common adverse events reported in the phase IIb trial were injection site bruising, injection site pain, injection site edema, contusion, penile edema and penile pain. There was a total of five (3.4%) subjects who experienced eight non-fatal serious adverse events, none of which were considered to be related to XIAFLEX. [Auxilium] sought to accomplish two goals with this study. First, [Auxilium] wanted to validate the PDQ as a tool for use in future pivotal studies. Second, [Auxilium] aimed to establish an acceptable primary endpoint related to the PDQ for use in pivotal phase III trials.”
Phase III
In the Auxilium 10-K, Auxilium stated that “[f]ollowing discussions with the FDA where [Auxilium] achieved agreement that the PDQ was a valid tool for use in a pivotal phase III trial and the appropriate endpoint for such trials, [Auxilium] commenced its phase III studies.” In its October 11, 2010 press release, Auxilium described these phase III studies as follows: the “late stage global development plan for XIAFLEX will consist of four clinical studies and will be known by the acronym IMPRESS - The Investigation for Maximal Peyronie’s Reduction Efficacy and Safety Studies. There will be two randomized, double-blind, placebo-controlled phase III studies, which are expected to enroll at least 600 patients at approximately 70 sites in the U.S. and Australia, with a 2:1 ratio of XIAFLEX to placebo. There also will be one open label study, which is expected to enroll at least 250 patients, at approximately 30 sites in the U.S., EU and New Zealand, and one pharmacokinetic study, which should enroll approximately 16 patients. XIAFLEX will be administered two times a week every six weeks for up to four treatment cycles (2 x 4). Each treatment cycle will be followed by a penile modeling procedure. Patients will be followed for 52 weeks post-first injection in the double-blind studies and for 36 weeks in the open label trial. The trials’ co-primary endpoints are the change from baseline in the Peyronie’s disease bother domain of the PDQ compared to placebo and percent improvement from baseline in penile curvature compared to placebo.” In addition, the Auxilium 10-K stated that “[t]he remaining domains of the PDQ will be considered secondary endpoints. Safety measurements will include adverse event monitoring, immunogenicity testing and clinical labs.” In addition, in its October 11, 2010 press release, Auxilium, quoting Dr. Jim Tursi, its Vice President of Clinical Research & Development, stated that it is “encouraged by the clinical profile of XIAFLEX, which emerged from [Auxilium’s] earlier phase IIb clinical trial in Peyronie’s disease. XIAFLEX was well-tolerated and produced clinically significant reductions in both penile curvature and disease bother,” and that “[o]ver the last six months, [Auxilium’s] team, in conjunction with the [FDA], outside experts and men with Peyronie’s disease, has spent a considerable amount of time and effort to refine the PDQ, which has now been accepted for use in the phase III clinical trials by the FDA’s Study Endpoint and Label Development (SEALD) Division.”
Collagenase For Treatment of Frozen Shoulder (Adhesive Capsulitis)
Frozen shoulder is a clinical syndrome of pain and decreased motion in the shoulder joint. It is estimated to affect 20 to 50 million people worldwide with a slightly higher incidence in women. It is estimated that 700,000 patients visit doctors annually in the U.S. in connection with frozen shoulder. It typically occurs between the ages of 40-70. Individuals with insulin dependent diabetes have been reported to have a 36% higher incidence rate and are more likely to have bilateral symptoms. One common therapy currently available to treat frozen shoulder is manipulation, which is painful and requires general anesthesia.
We initiated, monitored and supplied requisite study drug for a Phase II clinical trial using our injectable collagenase in the treatment of frozen shoulder. Three different doses of injectable collagenase were compared to placebo in this double-blind, randomized trial in 60 patients. Results of this Phase II clinical trial were presented at the annual meeting of the American Academy of Orthopaedic Surgeons in March 2006. Based on its prior review of the data contained in the oral presentation, Auxilium elected to exercise its option to develop and commercialize this additional indication for collagenase injection in December 2005. In a press release dated December 20, 2005 and issued concurrently with the exercise of its option, Auxilium stated its belief that “the addition of a third indication for this development program enhances the commercial potential of AA4500” (now known as XIAFLEX).
Additional Clinical Indications For Collagenase
Human Lipoma
Lipomas are benign fatty tumors that occur as bulges under the skin and affect humans and canines. It is estimated that lipomas are the primary diagnosis in 575,000 patients in the U.S. annually. Based on observations made during preclinical studies that a collagenase injection decreased the size of fat pads in animals, we initiated, monitored and supplied the requisite study drug for a Phase I open label clinical trial for the treatment of human lipomas with a single injection of collagenase. Favorable initial results (10 out of 12 patients had a 50-90% reduction in the size of the lipomas) from this trial for the treatment of lipomas were presented at a meeting of the American Society of Plastic Surgeons. We have been developing clinical protocols for the treatment of lipomas in humans, and this is an area that we are interested in exploring.
Canine Lipoma
Based on the encouraging results reported in the clinical investigations in human lipoma, we began clinical trials in canine lipoma. Lipomas are found in 2.3% of dogs, and there may be as many as 1.7 million dogs affected with skin lipomas in the U.S. Lipomas in older dogs are very common, and lipomas that restrict motion in older dogs are a serious problem. The only proven therapy for this condition is surgical excision of the lipoma, which necessarily involves the use of general anesthesia. It has been estimated that up to 2% of sick dogs die as a complication of general anesthesia (See Brodbelt Vet J 2009 Dec; 182 (3): 375-6). We surveyed 77 veterinarians which included participants from the academic field and others that are in private practice. The participants indicated that on average they perform 25 lipoma excision surgeries per year at an average cost of $530 for the surgical procedure. It is conservatively estimated that 47,000 veterinarians are in active practice in the U.S.
Chien-801 and Chien-802 Clinical Trials
Chien-801 was a pilot study conducted for the purpose of evaluating the use of purified collagenase for the non-surgical treatment of lipoma in six dogs. The study evaluated the appropriate dosage and frequency of injections necessary to significantly reduce the size of the lipoma. The dose administered ranged from 0.012 to 0.021 mg/ cm2 which was approximately ½ to ¾ of the dose used in previous human clinical trials. Based on this dose escalation study the Company selected the dose for Chien-802.
Chien-802 was designed to evaluate the efficacy of injectable collagenase in canine lipoma in four healthy dogs with subcutaneous lipomas. Inclusion criteria required the lipoma to be benign, superficial and easily measureable. All dogs had a second lipoma that was untreated and used as a control. At 90 days post injection, in the three evaluable dogs, the lipoma size was 0%, 0% or 7% of the original size as measured by a CT scan. By contrast, the untreated lipomas were 129%, 113% and 128% of the original size at day 90. Thus, the treated lipomas showed a 97% reduction in the size of the lipoma and an increase in the size of the untreated controls of 23%.
Chien-803
Based on the positive results from Chien-802, we announced on January 6, 2011 that we had begun enrollment in a randomized, double-blind, placebo-controlled study designed to evaluate the efficacy of purified collagenase for injection for the treatment of canine lipomas.
The trial would enroll 25 canines, each having two or more lipomas. To meet the primary endpoint an animal must achieve at least a 50% decrease in the drug-treated lipoma volume relative to baseline as measured by CT scan at 3 months post injection. As further described in this Report under “Item 3 - Legal Proceedings”, we have voluntarily agreed to suspend the trial pending a resolution of our dispute with Auxilium.
Cellulite
Cellulite is a condition characterized by dimpling of the skin and a mattress phenomenon typically affecting the thighs and buttocks. It is due to irregular and discontinuous subcutaneous connective tissue. An open label study has been completed to assess whether injectable collagenase can restore the cellulite-affected areas to a more cosmetically acceptable appearance. An abstract of an article titled “Collagenase Injection in the Treatment of Cellulite” by A. Dagum and M.Badalamente, describing the promising results of this study was published in Plastic and Reconstructive Surgery on September 15, 2006. BioSpecifics has not announced plans for any new studies in cellulite.
Other Clinical Indications
Other clinical indications for which our collagenase injection has been tested include keloids, hypertrophic scars, scarred tendons, glaucoma, herniated intervertebral discs, and as an adjunct to vitrectomy.
Total Patient Exposure to Injectable Collagenase
As discussed above, clinical investigations with our collagenase injection have been conducted in the treatment of Dupuytren’s contracture, Peyronie’s disease, frozen shoulder, lipomas, cellulite, keloids, hypertrophic scars, scarred tendons, glaucoma, herniated intervertebral discs, and as an adjunct to vitrectomy. We have treated over 1,200 patients in our own clinical studies. According to the prescribing information for XIAFLEX made available by Auxilium, 1,082 patients received in excess of 2,600 injections for the treatment of Dupuytren’s contracture in trials sponsored by Auxilium. Auxilium reported in a December 16, 2009 press release that its Phase IIb trial for Peyronie’s disease included 109 patients treated with XIAFLEX.
LICENSING AND MARKETING AGREEMENTS
Topical Collagenase Agreement
In connection with a March 2006 agreement (the “DFB Agreement”), pursuant to which we sold our topical collagenase business to DFB Biotech, Inc. and its affiliates (“DFB”), until March 2011, we received payments for certain technical assistance and certain transition services that we provided to DFB. Pursuant to the DFB Agreement, we continue to receive earn out payments based on the sales of certain products. Our right to receive earn out payments with respect to the marketed topical product sold to DFB expire in June 2013, but earn out payments for second generation collagenase products, if any, continue indefinitely.
In 2010, we received $200,000 of technical assistance related payments, and as of December 31, 2010, we have received a total of $1.4 million in consulting fees. In addition, we have recognized $1.6 million in earn out payments from DFB in connection with the net sales of topical collagenase in 2010.
Auxilium Agreement
Under the Auxilium Agreement, in 2010 we received $1.275 million of the $15 million paid to Auxilium by Pfizer. We also received $1 million related to milestone payments associated with FDA approval of XIAFLEX for Dupuytren’s contracture. We will receive 8.5% of the $395 million in potential additional milestone payments that may be made by Pfizer to Auxilium under the Pfizer Agreement. Of these additional milestones, $135 million are tied to regulatory milestones and $260 million are based on sales milestones. According to Auxilium in the Auxilium 2010 Earnings Call, of the $135 million tied to regulatory milestones “[a] total of $60 million in milestone payments will be payable to Auxilium by Pfizer upon Pfizer’s achievement of [the] first commercial sale of XIAPEX for Dupuytren’s contracture within the major markets in Europe. $30 million will be payable upon [the] first commercial sale in the first country and a total of $30 million will be payable upon the first commercial sales in the remaining major markets.”
Under the Auxilium Agreement, we granted to Auxilium exclusive worldwide rights to develop, market and sell certain products containing our injectable collagenase. Currently its licensed rights cover the indications of Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. Auxilium may further expand the Auxilium Agreement, at its exclusive option, to develop and license our injectable collagenase for use in additional indications. Under the Pfizer Agreement, Pfizer is responsible for marketing XIAFLEX for the treatment of both Dupuytren’s contracture and Peyronie's disease in 27 member countries of the European Union and 19 other European and Eurasian countries (the “Pfizer Territory”). In addition, Pfizer will be primarily responsible for regulatory activities for XIAFLEX in the Pfizer Territory.
The royalty obligations under the Auxilium Agreement extend, on a country-by-country and product-by-product basis, for the longer of the patent life (including pending patents), the expiration of any regulatory exclusivity period based on orphan drug designation or foreign equivalent thereof or June 3, 2016. Auxilium may terminate the Auxilium Agreement upon 90 days prior written notice. If Auxilium terminates the Auxilium Agreement other than because of an uncured, material breach by us, all rights revert to us. On October 12, 2010, Auxilium announced that the U.S. Patent & Trademark Office (the “USPTO”) issued a patent regarding the composition and manufacturing process for XIAFLEX, which Auxilium expects will expire in July 2028. We claim both co-inventorship and co-ownership of this patent, which Auxilium disputes.
Auxilium is generally responsible, at its own cost and expense (excluding the third party costs for the development of the lyophilization of the injection formulation, which are shared equally by Auxilium and us), for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. Auxilium is responsible for all clinical development and regulatory costs for Peyronie’s disease, Dupuytren’s contracture, frozen shoulder and all additional indications for which it exercises its options. The royalties payable by Auxilium to us are subject to set-off for certain development and patent costs. Auxilium has sent us an invoice for such costs; however, the amount of such costs is in dispute.
Under the Auxilium Agreement, we have the option, exercisable no later than six months after FDA approval of the Biologics License Application (“BLA”) with respect to XIAFLEX for an indication (in the case of Dupuytren’s contracture, by August 2, 2010), to assume the right and obligation to supply, or arrange for the supply from a third party other than a back-up supplier qualified by Auxilium of, a specified portion of Auxilium’s commercial product requirements in all countries and territories of the world excluding the Pfizer Territory (the “Auxilium Territory”). In June 2010, we informed Auxilium that we were not exercising this option with respect to XIAFLEX for Dupuytren’s contracture.
Auxilium must pay us on a country-by-country and product-by-product basis a low double digit royalty as a percentage of worldwide net sales for products covered by the Auxilium Agreement. The royalty rate is independent of sales volume, clinical indication, territory, and whether the product is sold by Auxilium or Pfizer, but is subject to set-off for certain expenses we owe to Auxilium relating to certain development and patent costs. In addition, the royalty percentage may be reduced if (i) market share of a competing product exceeds a specified threshold; or (ii) Auxilium is required to obtain a license from a third party in order to practice our patents without infringing such third party’s patent rights, although Auxilium has confirmed to us that no license from a third party is required. In addition, if Auxilium out-licenses to a third party, then we will receive a specified percentage of certain payments made to Auxilium in consideration of such out-licenses.
On top of the payments set forth above, Auxilium must pay to us an amount equal to a specified mark-up of the cost of goods sold for products sold by Auxilium or Pfizer that are not manufactured by or on behalf of us.
In addition to the payments already received by us with respect to the Dupuytren’s contracture indication, Auxilium will be obligated to make contingent milestone payments, with respect to each of the Peyronie’s disease and frozen shoulder indications, upon the acceptance of the regulatory filing and receipt by Auxilium, its affiliate or sublicensee of regulatory approval. Through December 31, 2010, Auxilium paid us up-front licensing and sublicensing fees and milestone payments under the Auxilium Agreement of $17.7 million. Auxilium could make in excess of $5 million of additional contingent milestone payments for exercised indications under the Auxilium Agreement if all existing conditions are met. Additional milestone obligations will be due if Auxilium exercises its option to develop and license XIAFLEX for additional medical indications.
In addition to the milestone payments from Auxilium, the Company is entitled to 8.5% of all sublicense income that Auxilium receives from Pfizer under the Pfizer Agreement, which payments are dependent on the achievement by Pfizer of certain regulatory and sales related milestones. To the extent Auxilium enters into an agreement or agreements related to other territories, the percentage of sublicense income that Auxilium would pay us will depend on the stage of development and approval of XIAFLEX for the particular indication at the time such other agreement or agreements are executed.
In its presentation materials for March 2011, Auxilium includes “advanc[ing] XIAFLEX [for] new indication(s)” as a strategic priority in 2011. In the event that Auxilium does out-license XIAFLEX in other indications, we will be entitled to receive a certain percentage of sublicense income and milestone payments for such indications pursuant to the terms of the Auxilium Agreement.
A copy of the Auxilium Agreement was filed on Form 8-K with the Securities and Exchange Commission (“SEC”) on December 19, 2008. The foregoing descriptions of the Auxilium Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Auxilium Agreement.
In-Licensing and Royalty Agreements
We have entered into several in-licensing and royalty agreements with various investigators, universities and other entities throughout the years.
Dupuytren’s Contracture
On November 21, 2006, we entered into a license agreement (the “Dupuytren’s License Agreement”) with the Research Foundation of the State University of New York at Stony Brook (the “Research Foundation”), pursuant to which the Research Foundation granted to us and our affiliates an exclusive worldwide license, with the right to sublicense to certain third parties, to know-how owned by the Research Foundation related to the development, manufacture, use or sale of (i) the collagenase enzyme obtained by a fermentation and purification process (the “Enzyme”), and (ii) all pharmaceutical products containing the Enzyme or injectable collagenase, in each case to the extent it pertains to the treatment and prevention of Dupuytren’s contracture.
In consideration of the license granted under the Dupuytren’s License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales (if any) of pharmaceutical products containing the Enzyme or injectable collagenase for the treatment and prevention of Dupuytren’s contracture (each a “Dupuytren’s Licensed Product”).
Our obligation to pay royalties to the Research Foundation with respect to sales by the Company, its affiliates or any sublicensee of any Dupuytren’s Licensed Product in any country (including the U.S.) arises only upon the first commercial sale of such Dupuytren’s Licensed Product on a country-by-country basis. The royalty rate is 0.5% of net sales. Our obligation to pay royalties to the Research Foundation will continue until the later of (i) the expiration of the last valid claim of a patent pertaining to the Dupuytren’s Licensed Product; (ii) the expiration of the regulatory exclusivity period conveyed by the FDA’s Office of Orphan Products Development (“OOPD”) with respect to the Dupuytren’s Licensed Product; or (iii) June 3, 2016.
Unless terminated earlier in accordance with its termination provisions, the Dupuytren’s License Agreement and the licenses granted under that agreement will continue in effect until the termination of our royalty obligations. After that, all licenses granted to us under the Dupuytren’s License Agreement will become fully paid, irrevocable exclusive licenses.
Peyronie’s Disease
On August 27, 2008, we entered into an agreement to improve the deal terms related to our future royalty obligations for Peyronie’s disease by buying down our future royalty obligations with a one-time cash payment. A copy of the agreement was filed on Form 8-K with the SEC on September 5, 2008.
Frozen Shoulder
On November 21, 2006, we entered into a license agreement (the “Frozen Shoulder License Agreement”) with the Research Foundation, pursuant to which the Research Foundation granted to us and our affiliates an exclusive worldwide license, with the right to sublicense to certain third parties, to know-how owned by the Research Foundation related to the development, manufacture, use or sale of (i) the Enzyme and (ii) all pharmaceutical products containing the Enzyme or injectable collagenase, in each case to the extent it pertains to the treatment and prevention of frozen shoulder. Additionally, the Research Foundation granted to us an exclusive license to the patent applications in respect of frozen shoulder. The license granted to us under the Frozen Shoulder License Agreement is subject to the non-exclusive license (with right to sublicense) granted to the U.S. government by the Research Foundation in connection with the U.S. government’s funding of the initial research.
In consideration of the license granted under the Frozen Shoulder License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales (if any) of pharmaceutical products containing the Enzyme or injectable collagenase for the treatment and prevention of frozen shoulder (each a “Frozen Shoulder Licensed Product”). In addition, we and the Research Foundation will share in any milestone payments and sublicense income received by us in respect of the rights licensed under the Frozen Shoulder License Agreement.
Our obligation to pay royalties to the Research Foundation with respect to sales by us, our affiliates or any sublicensee of any Frozen Shoulder Licensed Product in any country (including the U.S.) arises only upon the first commercial sale of a Frozen Shoulder Licensed Product. Our obligation to pay royalties to the Research Foundation will continue until, the later of (i) the expiration of the last valid claim of a patent pertaining to a Frozen Shoulder Licensed Product or (ii) June 3, 2016.
Unless terminated earlier in accordance with its termination provisions, the Frozen Shoulder License Agreement and licenses granted under that agreement will continue in effect until the termination of our royalty obligations. After that, all licenses granted to us under the Frozen Shoulder License Agreement will become fully paid, irrevocable exclusive licenses.
In connection with the execution of the Dupuytren’s License Agreement and the Frozen Shoulder License Agreement, we made certain up-front payments to the Research Foundation and the clinical investigators working on the Dupuytren’s contracture and frozen shoulder indications for the Enzyme.
Other Indications
We have entered into certain other license and royalty agreements with respect to other indications that we may elect to pursue.
COMPETITION
We and our licensees face worldwide competition from larger pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms, universities and other research institutions and government agencies that are developing and commercializing pharmaceutical products. Many of our competitors have substantially greater financial, technical and human resources than we have and may subsequently develop products that are more effective, safer or less costly than any products that we have developed, are developing or will develop, or that are generic products. Our success will depend on our ability to acquire, develop and commercialize products and our ability to establish and maintain markets for our products that receive marketing approval.
COST OF RESEARCH AND DEVELOPMENT ACTIVITIES
During fiscal years 2010 and 2009, the Company invested $1,223,931 and $488,646, respectively, in research and development activities.
GOVERNMENT REGULATION
Any product labeled for use in humans require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials to demonstrate safety and efficacy and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, labeling, distribution, storage and record-keeping related to such products and their promotion and marketing. The process of obtaining these approvals and the compliance with federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources. In addition, the current political environment and the current regulatory environment at the FDA could lead to increased testing and data requirements which could impact regulatory timelines and costs.
Clinical trials involve the administration of the investigational product candidate or approved products to human subjects under the supervision of qualified investigators. 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 effectiveness of the drug. Typically, clinical evaluation involves a time-consuming and costly three-phase sequential process, but the phases may overlap. Each trial must be reviewed, approved and conducted under the auspices of an independent institutional review board, and each trial must include the patient’s informed consent.
Clinical testing may not be completed successfully within any specified time period, if at all. The FDA monitors the progress of all clinical trials that are conducted in the U.S. and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA can also provide specific guidance on the acceptability of protocol design for clinical trials. The FDA, we or our partners 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 that additional clinical trials be conducted as a condition to product approval. During all clinical trials, physicians monitor the patients to determine effectiveness and/or to observe and report any reactions or other safety risks that may result from use of the drug candidate.
Assuming successful completion of the required clinical trials, drug developers submit the results of preclinical studies and clinical trials, together with other detailed information including information on the chemistry, manufacture and control of the product, to the FDA, in the form of an NDA or BLA, requesting approval to market the product for one or more indications. In most cases, the NDA/BLA must be accompanied by a substantial user fee. The FDA reviews an NDA/BLA to determine, among other things, whether a product is safe and effective for its intended use.
Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve the NDA or BLA unless cGMP compliance is satisfactory. The FDA will issue an approval letter if it determines that the NDA or BLA, manufacturing process and manufacturing facilities are acceptable. If the FDA determines that the NDA or BLA, 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 NDA or BLA does not satisfy the regulatory criteria for approval and refuse to approve the NDA or BLA by issuing a “not approvable” letter.
The testing and approval process requires substantial time, effort and financial resources, which may take several years to complete. The FDA may not grant approval on a timely basis, or at all. We or our partners may encounter difficulties or unanticipated costs in our or their efforts to secure necessary governmental approvals, which could delay or preclude us or them from marketing our products. Furthermore, the FDA may prevent a drug developer from marketing a product under a label for its desired indications or place other conditions, including restrictive labeling, on distribution as a condition of any approvals, which may impair commercialization of the product. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.
If the FDA approves the NDA or BLA, the drug can be marketed to physicians to prescribe in the U.S. After approval, the drug developer must comply with a number of post-approval requirements, including delivering periodic reports to the FDA (i.e., annual reports), submitting descriptions of any adverse reactions reported, biological product deviation reporting, and complying with drug sampling and distribution requirements and any other requirements set forth in the FDA’s approval (such as the REMS program, which the FDA has required for XIAFLEX and consists of a communication plan and a medication guide). The holder of an approved NDA/BLA is required to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling. 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 are subject to periodic unannounced inspections by the FDA to assess compliance with cGMP which impose procedural and documentation requirements relating to manufacturing, quality assurance and quality control. 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 regulatory requirements. The FDA may require post-market testing and surveillance to monitor the product’s safety or efficacy, including additional studies to evaluate long-term effects.
In addition to studies requested by the FDA after approval, a drug developer may conduct other trials and studies to explore use of the approved drug for treatment of new indications, which require submission of a supplemental or new NDA/BLA and FDA approval of the new labeling claims. The purpose of these trials and studies is to broaden the application and use of the drug and its acceptance in the medical community.
We use, and will continue to use, third party manufacturers to produce our products in clinical quantities. Future FDA inspections may identify compliance issues at our facilities, at the facilities of our contract manufacturers or at those of our partners that may disrupt production or distribution, or require substantial resources to correct. In addition, 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 NDA/BLA, 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 product’s approved labeling, including the addition of new warnings and contraindications. Also, new government requirements may be established that could delay or prevent regulatory approval of our products under development.
INTELLECTUAL PROPERTY AND RIGHTS
Our success will depend in part on our ability to protect our existing products and the products we acquire or in-license by obtaining and maintaining a strong proprietary position both in the U.S. and in other countries. To develop and maintain such a position, we intend to continue relying upon patent protection, trade secrets, know-how, continuing technological innovations and licensing opportunities. In addition, we intend to seek patent protection whenever available for any products or product candidates and related technology we develop or acquire in the future.
Patents
We are the assignee or licensee of five U.S. patents, which have received patent protection in various foreign countries. In addition, we have licenses to other pending patent applications. Although we believe these patent applications, if they issue as patents, will provide a competitive advantage, the scope of the patent positions of pharmaceutical firms involves complex legal, scientific and factual questions and, as such, is generally uncertain. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether any of our current patent applications, or the products or product candidates we develop, acquire or license will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection, will be of any value to us or will be challenged, circumvented or invalidated by our competitors or otherwise.
While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties’ patents and proprietary rights, competitors or other parties may assert that we infringe on their proprietary rights. Because patent applications in the U.S. and some other jurisdictions can proceed in secrecy until patents issue, third parties may obtain other patents without our knowledge prior to the issuance of patents relating to our product candidates, which they could attempt to assert against us. Also, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the USPTO or a foreign patent office to determine priority of invention, or in opposition proceedings in a foreign patent office, either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that the patents, if issued and challenged in a court of competent jurisdiction, would be found valid or enforceable. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology.
Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of third parties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we are infringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on acceptable terms or at all. Any infringement claim that results in litigation could result in substantial cost to us and the diversion of management’s attention from our core business. To enforce patents issued to us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the USPTO, which could result in substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be litigation in our industry regarding patent and other intellectual property rights.
We licensed to Auxilium our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie’s disease, and frozen shoulder. We have two use patents in the U.S. covering the enzyme underlying our injectable collagenase, one for the treatment of Dupuytren’s contracture, which issued from a reissue proceeding in December 2007, and one for the treatment of Peyronie’s disease. The Dupuytren’s patent expires in 2014, and the Peyronie’s patent expires in 2019. Both the Dupuytren’s and Peyronie’s patents are limited to the use of the enzyme for the treatment of Dupuytren’s contracture and Peyronie’s disease within certain dose ranges. An application to extend the term of the Dupytren’s patent to August 22, 2019 based upon regulatory delay in granting approval to sell XIAFLEX was filed in the USPTO on April 1, 2010. The USPTO has not taken any action on the request for extension, and we cannot be certain how much of an extension, if any, will be granted by the USPTO. In October 2010, Auxilium was granted a patent entitled “Compositions and Methods for Treating Collagen Mediated Diseases,” which will extend the royalty payments until July 12, 2028. We have filed an application in the USPTO asserting that the inventors named on that patent should also include inventors who have assigned their rights to us, and thus we should be co-owners of the patent. Auxilium has disputed that assertion. An interference might be necessary to resolve the issue. An interference has yet to be requested, and if requested, we cannot be certain whether the USPTO would declare an interference, and if declared, whether we would prevail.
Orphan Drug Designations
Two indications, Dupuytren’s contracture and Peyronie’s disease, have received orphan drug designation from the OOPD. These indications did not receive the European equivalent of orphan drug designation.
The OOPD administers the major provisions of the Orphan Drug Act, an innovative program that provides incentives for sponsors to develop products for rare diseases. The incentives for products that qualify under the Orphan Drug Act include seven-year exclusive marketing rights post FDA approval (which means, with respect to Dupuytren’s contracture, exclusivity until February 2, 2017), tax credits for expenses associated with clinical trials including a 20 year tax carry-forward, availability of FDA grants, and advice on design of the clinical development plan.
The orphan drug provisions of the Federal Food, Drug, and Cosmetic Act also provide incentives to drug and biologics suppliers to develop and supply drugs for the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the U.S. or, for a disease that affects more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for such disease or condition will be recovered from its sales in the U.S. Under these provisions, a supplier of a designated orphan product can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. It would not prevent other drugs from being approved for the same indication.
In the Auxilium 10-K, Auxilium stated that “[w]hile XIAFLEX does not have orphan drug status for any indication in Europe, foreign patents cover these products in certain countries, and on approval of XIAFLEX for a first indication in Europe, we expect the product will benefit from 10 years of market exclusivity and 8 years of data exclusivity. We may obtain an additional year of market exclusivity if the regulatory authorities approve an additional indication that they determine to represent a significant clinical benefit.” Our royalty term, however, is not extended by any period of marketing exclusivity as contrasted with any period of orphan drug status or foreign equivalent thereof.
Trade Secrets
We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our trade secrets.
It is our policy to require certain employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.
EMPLOYEES
The Company currently has five employees, who are all full-time employees.
CORPORATE INFORMATION
BioSpecifics Technologies Corp. was incorporated in Delaware in 1990. ABC-NY was incorporated in New York in 1957. Our telephone number is 516-593-7000. Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563, as further described in this Report under “Item 2 - Description of Property”.
Item 1A.
Item 1A. RISK FACTORS
In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position or results of operations. If one or more of these or other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we projected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business or financial position.
Risks Related to Our Limited Sources of Revenue
Our future revenue is primarily dependent upon option, milestone and contingent royalty payments from Auxilium and contingent earn out payments from DFB.
Our primary sources of revenues are from (i) option, milestone and contingent royalty payments from Auxilium under the Auxilium Agreement, (ii) contingent earn out payments from DFB and (iii) the sale of small amounts of collagenase for laboratory research.
As described in Item 1 above, under the Auxilium Agreement, in exchange for the right to receive royalties and other payments, we granted to Auxilium the right to develop, manufacture, market and sell worldwide products (other than dermal formulations for topical administration) that contain collagenase for the treatment of Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. However, we have no control over Auxilium’s ability to successfully manufacture, market and sell candidate products for the treatment of Dupuytren’s contracture, or, in the case of Peyronie’s disease and frozen shoulder, to pursue commercialization, and we may receive limited, if any, royalty payments from Auxilium. In the Auxilium 10-K, Auxilium included as a risk factor to its ability to successfully launch and commercialize XIAFLEX for Dupuytren’s contracture additional challenges with regard to reimbursement “including:
unless and until a XIAFLEX-specific CPT (procedure) code is announced, the variability of reimbursement rates likely to be caused by the use of miscellaneous procedure codes may discourage physicians from providing XIAFLEX to certain or all patients depending on their insurance coverage;
payor and physician confusion surrounding appropriate procedure codes to bill for the administration and follow up procedure related to XIAFLEX until such time as XIAFLEX-specific drug codes are approved could result in slow claims processing times and/or insufficient reimbursement to physicians and discourage physician use;
physicians may have, or may believe they have, an economic incentive to perform Dupuytren’s surgery and therefore discourage XIAFLEX use;
continued downward pressure on reimbursement rates for services and for products administered incident to a physician’s service may discourage uptake or continued usage;
physicians may decide that managing specialty biologics such as XIAFLEX in their practices, including all of the requirement of the . . . REMS, is too complex and cumbersome for them to undertake or continue;
an increase in insurance plans that place more of a cost share liability onto patients may limit patients willingness to pay for XIAFLEX and thereby discourage uptake;
unforeseen changes in federal health care policy guidelines may negatively impact a physician practice’s willingness to provide novel treatments; and
inability, difficulty or delay in obtaining XIAFLEX-specific procedure billing codes resulting in underutilization.”
In addition, there is no guarantee that a XIAFLEX-specific CPT code will meet the expectations of physicians or significantly or quickly increase sales of XIAFLEX. Moreover, royalty payments from Auxilium are subject to set-off for certain expenses we owe Auxilium under the Auxilium Agreement relating to certain development and patent costs. As a result of Auxilium’s set off of such costs, we did not receive any royalty payments from Auxilium in 2010. We have received in the past, and are entitled to receive in the future, certain milestone payments from Auxilium in respect of its efforts to commercialize such candidate products, but we have no control over Auxilium’s ability to achieve the milestones. Additionally, we have received in the past, and are entitled to receive in the future, 8.5% of all sublicense income that Auxilium receives from Pfizer under the Pfizer Agreement, which payments are dependent on the achievement by Pfizer of certain regulatory and sales related milestones, of which we have no control.
We have also granted to Auxilium an option to expand its license and development rights to one or more additional indications for injectable collagenase not currently licensed to Auxilium, including for the treatment of human and canine lipoma and cellulite. If Auxilium exercises its option with respect to an additional indication, we are entitled to receive a one-time license fee for the rights to, as well as potential milestone, royalty and other payments with respect to, such new indication. If Auxilium does not exercise its option as to any additional indication, we may offer to any third party such development rights with regard to products in the Auxilium Territory, provided that we first offer the same terms to Auxilium, or develop the product ourselves. Auxilium has no obligation to exercise its option with respect to any such additional indication, and its decision to do so is in its complete discretion. Clinical trials can be expensive and the results are subject to different interpretations, therefore, there is no assurance that after conducting Phase II clinical trials on any additional indication, and incurring the associated expenses, Auxilium will exercise its option or we will receive any revenue from it. Under the Auxilium Agreement, we may only offer to a third party development rights with regard to products in the Auxilium Territory and not in the Pfizer Territory. Auxilium’s ability to develop or commercialize additional indications in the Pfizer Territory are subject to negotiation with Pfizer under the terms of the Pfizer Agreement. Even if Auxilium exercises its option as to any additional indication, its obligations to develop the product for such indication are limited to initiating Stage II Development (as defined in the Auxilium Agreement) for such additional indication within one year of exercising the option as to such indication. In the case of frozen shoulder, for example, Auxilium exercised its option in 2005, but development has not progressed beyond Stage II Development.
As part of the sale of our topical collagenase business to DFB, we are entitled to receive earn out payments in respect of sales of certain products developed and manufactured by DFB that contain collagenase for topical administration. However, our right to receive earn out payments from DFB is dependent upon DFB’s decision to pursue the manufacture and commercialization of such products and its ability to achieve certain sales thresholds. We are aware that DFB has certain competitive products that may adversely affect the volume of sales of those topical collagenase products for which we are entitled to earn out payments.
We also agreed to provide technical assistance to DFB’s affiliate, DPT Lakewood, for a fixed period of time in consideration for certain payments and we are required to maintain certain scientific resources and records in order to provide such assistance and be entitled to receive such payments. These obligations expire during March 2011.
Our dependence upon revenue from Auxilium and DFB make us subject to the commercialization and other risk factors affecting those two companies over which we have limited or no control.
Auxilium has disclosed in its securities filings a number of risk factors to consider when evaluating its business and future prospects. Given our dependence upon revenue from Auxilium, Auxilium’s operating success or failure has a significant impact on our potential royalty stream and other payment rights. As such, we refer you to the full text of Auxilium’s disclosed risk factors in its securities filings, which were most recently included in the Auxilium 10-K.
DFB is not a publicly traded company and therefore we have little information about its business and future prospects. Although we cannot be certain, we presume that many of the risk factors affecting Auxilium’s business may have some bearing in evaluating DFB’s ability to generate sufficient sales of topical collagenase products to entitle us to receive any earn out payments.
If we are unable to obtain option, milestone, earn out and royalty payments from Auxilium or DFB or meet our needs for additional funding from other sources, we may be required to limit, scale back or cease our operations.
Our business strategy contains elements that we will not be able to implement if we do not receive the anticipated option, milestone, royalty or earn out payments from Auxilium or DFB, or secure additional funding from other sources. We believe that our existing cash resources and interest on these funds will be sufficient to meet our anticipated operating requirements until at least the second half of 2012. Our future funding requirements will depend on many factors, including:
DFB’s ability to meet its payment obligations and to manufacture and commercialize topical collagenase products for which we would receive earn out payments until June 2013, when DFB’s obligations to us terminate, absent the introduction of a second generation product as defined in the DFB Agreement;
Auxilium’s ability to manufacture and commercialize XIAFLEX for which we would receive milestone and royalty payments;
Pfizer’s ability to develop and commercialize the product in the Pfizer Territory and Auxilium’s receipt of milestone payments from Pfizer under the Pfizer Agreement for which we would receive a percentage of sublicense income and royalty payments (for more information regarding Auxilium’s financial risks associated with Pfizer under the Pfizer Agreement, we refer you to the full text of Auxilium’s disclosed risk factors in its securities filings, which were most recently included in the Auxilium 10-K);
the amount actually owed to Auxilium for certain development and patent costs;
the outcome of the litigation with Auxilium concerning our right to conduct clinical trials without the approval of the companies’ Joint Development Committee controlled by Auxilium;
the scope, rate of progress, cost and results of our clinical trials on additional indications, including human and canine lipoma and cellulite, for which Auxilium could exercise its option to acquire rights to them, and whether Auxilium exercises the option;
the terms and timing of any future collaborative, licensing, co-promotion and other arrangements that we may establish; and
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or defending against any other litigation.
These factors could result in variations from our currently projected operating requirements. If our existing resources are insufficient to satisfy our operating requirements, we may need to limit, scale back or cease operations or, in the alternative, borrow money. Given our operations and history, we may not be able to borrow money on commercially reasonable terms, if at all. If we issue any equity or debt securities, the terms of such issuance may not be acceptable to us and would likely result in substantial dilution of our stockholders’ investment. If we do not receive revenues from Auxilium or DFB, and are unable to secure additional financing, we may be required to cease operations.
In order to finance and to secure the rights to conduct clinical trials for products we have licensed to Auxilium, we have granted to third parties significant rights to share in royalty payments received by us.
To finance and secure the rights to conduct clinical trials for products we have licensed to Auxilium, we have granted to third parties certain rights to share in royalty payments received by us from Auxilium under the Auxilium Agreement. Consequently, we will be required to share a significant portion of the payments due from Auxilium under the Auxilium Agreement.
If we breach our agreements with third parties, our business could be materially harmed.
Our agreements with third parties impose on us various obligations, such as those related to intellectual property rights, non-competition, and development of products, as described throughout this Item 1A of this Report. If we fail to comply with such obligations, or a counterparty to our agreements believes that we have failed to comply with such obligations, we may be sued and the costs of the resulting litigation could materially harm our business.
Risks Related to Clinical Trials
Our ability to conduct clinical trials may be limited by the Auxilium Agreement.
We have voluntarily agreed to suspend Chien-803, our clinical trial testing the use of injectable collagenase in canine lipoma, and will not be initiating any new trials using injectable collagenase in animals or humans pending a resolution of our dispute with Auxilium concerning our right to conduct clinical trials without the prior approval of the companies’ Joint Development Committee. On February 15, 2011, Auxilium filed a complaint against us in the Court of Common Pleas in Chester County, Pennsylvania. The complaint seeks declaratory and injunctive relief, but not monetary damages. The dispute has been sealed pending further order of the court. The outcome of the dispute will have no effect on the amounts due to us from Auxilium for exercised indications (Dupuytren’s contracture, Peyronie’s disease and Frozen Shoulder). However, if the court rules in a manner that is detrimental to our interests or interprets our agreement with Auxilium in a way that limits the scope of our rights under that agreement, we may be precluded from pursuing additional indications and, if Auxilium does not pursue such additional indications, we may also be precluded from the opportunity to receive from Auxilium license fees for the rights to, as well as potential milestone, royalty and other payments with respect to, such additional indications.
We have a limited supply of our own clinical material, which may limit our ability to conduct other clinical trials and to obtain the associated option, milestone and contingent royalty payments under the Auxilium Agreement.
Although we currently have our own clinical material, if this clinical material is damaged or otherwise becomes unusable because of improper testing, storage or otherwise, then we may have insufficient clinical material to conduct other clinical trials unless we make new material, which would entail time and expense and delay the initiation of new clinical trials. Consequently, the lack of availability of our own clinical material may limit our ability to conduct other clinical trials and to obtain additional option, milestone and royalty payments under the Auxilium Agreement.
We may have limited access to XIAFLEX under the Auxilium Agreement, which may limit our ability to conduct other clinical trials and to obtain the associated option, milestone and contingent royalty payments under the Auxilium Agreement.
Under the Auxilium Agreement, Auxilium has agreed to sell us, at cost, XIAFLEX for pre-clinical and clinical trials approved by the joint development committee and such other non-preclinical and non-clinical purposes as are consistent with our rights under this Agreement. However, there is no guaranty that Auxilium will do so. If Auxilium does not supply XIAFLEX to us directly, we may have limited ability to acquire it through other means. Consequently, the lack of availability of XIAFLEX may limit our ability to conduct other clinical trials and to obtain additional option, milestone and royalty payments under the Auxilium Agreement.
If clinical trials in humans or veterinarian trials for our potential new indications are delayed, we may not be able to obtain option, milestone or royalty payments under the Auxilium Agreement for new indications.
Clinical trials that we or our investigators may conduct may not begin on time or may need to be restructured or temporarily suspended after they have begun. Clinical trials can be delayed or may need to be restructured for a variety of reasons, including delays or restructuring related to:
changes to the regulatory approval process for product candidates;
obtaining regulatory approval to commence a clinical trial;
timing of responses required from regulatory authorities;
negotiating acceptable clinical trial agreement terms with prospective investigators or trial sites;
obtaining institutional review board, or equivalent, approval to conduct a clinical trial at a prospective site;
recruiting subjects to participate in a clinical trial;
competition in recruiting clinical investigators;
shortage or lack of availability of clinical trial supplies from external and internal sources;
the need to repeat clinical trials as a result of inconclusive results or poorly executed testing;
failure to validate a patient-reported outcome questionnaire;
the placement of a clinical hold on a study;
the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely fashion; and
exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the trial.
The process of conducting clinical trials and developing product candidates involves a high degree of risk and may take several years, and may ultimately not be successful.
Product candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including:
clinical trials may show product candidates to be ineffective or not as effective as anticipated or to have harmful side effects or any unforeseen result;
product candidates may fail to receive regulatory approvals required to bring the products to market;
manufacturing costs, the inability to scale up to produce supplies for clinical trials or other factors may make our product candidates uneconomical; and
the proprietary rights of others and their competing products and technologies may prevent product candidates from being effectively commercialized or from obtaining exclusivity.
Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Any changes to the U.S. regulatory approval process could significantly increase the timing or cost of regulatory approval for product candidates making further development uneconomical or impossible. In addition, once Auxilium exercises its option with respect to any additional indications, further clinical trials, development, manufacturing, marketing and selling of such product is out of our control. Our interest is limited to receiving option, milestone and royalty payments, and the option in certain circumstances to manufacture according to particular specifications set by Auxilium.
Risks Related to Our Agreements with Auxilium and DFB
Our ability to conduct clinical trials and develop products for injectable administration of collagenase is limited by the Auxilium Agreement.
Under the Auxilium Agreement, we have licensed or granted options to certain of our rights to conduct clinical trials and develop products for injectable administration of collagenase. We agreed, for example, to certain non-competition provisions, which may limit our clinical development activities.
Our ability to conduct clinical trials and develop products for topical administration of collagenase is limited by the agreement we have signed with DFB.
Under the DFB Agreement, we have sold, licensed, or granted options to certain of our rights to conduct clinical trials and develop products for topical administration of collagenase. Under the terms of the DFB Agreement, we have agreed to certain non-competition provisions, which may limit our clinical development activities.
Risks Related to Regulatory Requirements
We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.
Conducting clinical trials for human drugs and, in certain circumstances, veterinarian trials for animal drugs, and the testing, development and manufacturing and distribution of product candidates are subject to regulation by numerous governmental authorities in the U.S. and other jurisdictions, if we desire to export the resulting products to such other jurisdictions. These regulations govern or affect the testing, manufacture, safety, labeling, storage, record-keeping, approval, distribution, advertising and promotion of product candidates, as well as safe working conditions. Noncompliance with any applicable regulatory requirements can result in suspension or termination of any ongoing clinical trials of a product candidate or refusal of the government to approve a product candidate for commercialization, criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts. The FDA and comparable governmental authorities have the authority to suspend or terminate any ongoing clinical trials of a product candidate or withdraw product approvals that have been previously granted. Even after a product candidate has been approved, the FDA and comparable governmental authorities subject such product to continuing review and regulatory requirements including, for example, requiring the conducting and reporting of the results of certain clinical studies or trials and commitments to voluntarily conduct additional clinical trials. In addition, regulatory approval could impose limitations on the indicated or intended uses for which product candidates may be marketed. With respect to its approval of XIAFLEX for the treatment of adult Dupuytren’s contracture patients with a palpable cord, for example, the FDA has required a REMS program consisting of a communication plan and a medication guide. Currently, there is a substantial amount of congressional and administrative review of the FDA and the regulatory approval process for drug candidates in the U.S. As a result, there may be significant changes made to the regulatory approval process in the U.S. In addition, the regulatory requirements relating to the development, manufacturing, testing, promotion, marketing and distribution of product candidates may change in the U.S. Such changes may increase our costs and adversely affect our operations.
Additionally, failure to comply with, or changes to applicable regulatory requirements may result in a variety of consequences, including the following:
restrictions on our products or manufacturing processes;
warning letters;
withdrawal of a product from the market;
voluntary or mandatory recall of a product;
fines;
suspension or withdrawal of regulatory approvals for a product;
refusal to permit the import or export of our products;
refusal to approve pending applications or supplements to approved applications that we submit;
denial of permission to file an application or supplement in a jurisdiction;
product seizure; and
injunctions or the imposition of civil or criminal penalties against us.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable laws and regulations and we have incurred and will continue to incur costs relating to compliance with applicable laws and regulations.
We are a small company and we rely heavily on third parties and outside consultants to conduct many important functions. As a biopharmaceutical company, we are subject to a large body of legal and regulatory requirements. In addition, as a publicly traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002 (“SOX”), some of which have only recently been revised or adopted. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Failure to comply with all potentially applicable laws and regulations could lead to the imposition of fines, cause the value of our common stock to decline, impede our ability to raise capital or list our securities on certain securities exchanges. New rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executive officers. We cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with these rules and regulations.
We may fail to maintain effective internal controls over external financial reporting or such controls may fail or be circumvented.
SOX requires us to report annually on our internal controls over financial reporting, and our business and financial results could be adversely effected if we, or our independent registered public accounting firm, determine that these controls are not effective. In addition, any failure or circumvention of our internal controls and procedures or failure to comply with regulations concerning controls and procedures could have a material effect on our business, results of operation and financial condition. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executive officers.
Risks Related to Growth and Employees
Adverse events or lack of efficacy in clinical trials may force us and/or our partners upon whom we are wholly dependent to stop development of our product candidates or prevent regulatory approval of our product candidates or significant safety issues could arise after regulatory approval of our products, any of which could materially harm our business.
The prescribing information for XIAFLEX for Dupuytren’s contracture made available by Auxilium lists “tendon ruptures or other serious injury to the injected extremity” as a reported serious adverse reaction to XIAFLEX and states that the most frequently reported adverse drug reactions in XIAFLEX clinical trials included swelling of the injected hand, contusion, injection site reaction, injection site hemorrhage, and pain in the treated extremity. The prescribing information notes that adverse reaction rates observed in clinical trials of a drug may not reflect those observed in practice because such trials “are conducted under widely varying conditions.”
Auxilium reported in the Auxilium 10-K that the most common adverse events in the Peyronie’s phase IIb clinical trial were “injection site bruising, injection site pain, injection site edema, contusion, penile edema and penile pain.”
Adverse events or lack of efficacy may force us to stop development of our product candidates or prevent regulatory approval of our product candidates, which could materially harm our business. In addition, any adverse events or lack of efficacy may force Auxilium to stop development of the products we have licensed to it or prevent regulatory approval of such products, which could materially impair all or a material part of the future revenue we hope to receive from Auxilium. Even if our product candidates receive regulatory approval, new safety issues may be reported and we or our partners may be required to amend the conditions of use for a product.
We and our licensees face competition in our product development efforts from pharmaceutical and biotechnology companies, universities and other not-for-profit institutions.
We and our licensees face competition in our product development from entities that have substantially greater research and product development capabilities and greater financial, scientific, marketing and human resources. These entities include pharmaceutical and biotechnology companies, as well as universities and not-for-profit institutions. Our and our licensees’ competitors may succeed in developing products or intellectual property earlier than we or our licensees do, entering into successful collaborations before us or our licensees, obtaining approvals from the FDA or other regulatory agencies for such products before us or our licensees, or developing products that are more effective than those we or our licensees could develop. The success of any one competitor in these or other respects will have a material adverse effect on our business, our ability to receive option payments from Auxilium or ability to generate revenues from third party arrangements with respect to additional indications for which Auxilium does not exercise its option.
Because of the specialized nature of our business, the termination of relationships with key management, consulting and scientific personnel or the inability to recruit and retain additional personnel could prevent us from developing our technologies, conducting clinical trials and obtaining financing.
The competition for qualified personnel in the biotechnology field is intense, and we rely heavily on our ability to attract and contract with qualified independent scientific and medical investigators, and technical and managerial personnel. We face intense competition for qualified individuals from numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are unable to attract and retain any of these individuals on favorable terms our business may be adversely affected.
If product liability lawsuits are brought against us, we may incur substantial liabilities.
We continue to have product liability exposure for topical product sold by us prior to the sale of our topical business to DFB. In addition, under the Auxilium Agreement, we are obligated to indemnify Auxilium and its affiliates for any harm or losses they suffered relating to any personal injury and other product liability resulting from our development, manufacture or commercialization of any injectable collagenase product. In addition, the clinical testing and, if approved, commercialization of our product candidates involves significant exposure to product liability claims. We have clinical trial and product liability insurance in the aggregate amount of $5 million dollars that we believe is adequate in both scope and amount and has been placed with what we believe are reputable insurers. We may not be able to maintain our clinical trial and product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses. If losses from product liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources, and our business and results of operations may be harmed. Whether or not we are ultimately successful in product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which could impair our business.
If we are unable to negotiate a new lease for our corporate headquarters or relocate, our existing operations and our operating results could be adversely affected.
As described in this Report under “Item 2
Item 2. DESCRIPTION OF PROPERTY.
Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563. As previously reported, our previous lease for our headquarters terminated on June 30, 2010. Since June 30, 2010, we have been leasing the space from Wilbur St. Corp. on a month-to-month basis. On February 28, 2011, we notified Wilbur St. Corp. of our termination of the lease effective March 31, 2011. We intend to negotiate a new lease for our current space at a reduced rental or seek alternative space at a reduced rental.
Item 3.
Item 3. LEGAL PROCEEDINGS.
On February 15, 2011, Auxilium filed a complaint against us in the Court of Common Pleas in Chester County, Pennsylvania. We have voluntarily agreed to suspend Chien-803, our clinical trial testing the use of injectable collagenase in canine lipoma, and will not be initiating any new trials using injectable collagenase in animals or humans pending a resolution of our dispute with Auxilium concerning our right to conduct clinical trials without the prior approval of the companies’ Joint Development Committee. The complaint seeks declaratory and injunctive relief and does not seek monetary damages. The dispute has been sealed pending further order of the court. The outcome of the dispute will have no effect on the amounts due to us from Auxilium for exercised indications (Dupuytren’s contracture, Peyronie’s disease and Frozen Shoulder). However, if the court rules in a manner that is detrimental to our interests or interprets our agreement with Auxilium in a way that limits the scope of our rights under that agreement, we may be precluded from pursuing additional indications and, if Auxilium does not pursue such additional indications, we may also be precluded from the opportunity to receive from Auxilium license fees for the rights to, as well as potential milestone, royalty and other payments with respect to, such additional indications.
Item 4.
Item 4. (REMOVED AND RESERVED).
PART II
Item 5.
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS.
Market Information
Our common stock currently trades under the symbol BSTC on the Nasdaq Global Market (“Nasdaq”). We were listed and commenced trading on Nasdaq on January 9, 2009. From January 29, 2008 through market close on January 8, 2009, our common stock was quoted and traded on the Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol BSTC.OB. Prior to January 29, 2008, our common stock was quoted on the Pink Sheets.
The table below sets forth the high and low closing sale prices for our common stock for each of the quarterly periods in 2010 and 2009 as reported by and as quoted in the OTCBB or Nasdaq, as applicable:
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders of Record
As of March 8, 2011, there were approximately 80 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
It has been our policy to retain potential earnings to finance the growth and development of our business and not pay dividends, and we have no current plans to pay dividends. Any payment of cash dividends in the future will depend upon our financial condition, capital requirements and earnings as well as such other factors as our board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2010 with respect to the shares of our common stock that may be issued under our existing equity compensation plans:
(1) Please see Note 9, “Stockholders’ Equity,” of the notes to the consolidated financial statements for a description of the material features of each of our plans.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2010, we did not issue any unregistered shares of securities.
Issuer Purchases of Equity Securities (1)
(1)
On June 4, 2010, we announced that our board of directors authorized a stock repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, of up to $2.0 million of our outstanding common stock over a period of 12 months. The above table provides information regarding our stock repurchases in the quarter ended December 31, 2010. This program expires on June 4, 2011 and may be suspended or discontinued at any time. We have no obligation to repurchase stock under this program.
(2)
The purchases were made in open-market transactions.
(3)
Includes commissions paid, if any, related to the stock repurchase transactions.
(4)
Represents the difference between the $2,000,000 of stock repurchases authorized by our board of directors and the value of the stock repurchased from June 4, 2010 through the indicated month.
Performance Graph
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total stockholder return of (i) the NASDAQ Biotechnology Index, and (ii) the NASDAQ Composite Index, assuming an investment of $100 on December 31, 2005, in each of our common stock; the stocks comprising the NASDAQ Composite Index; and the stocks comprising the NASDAQ Biotechnology Index.
Comparison of Cumulative Total Return* Among BioSpecifics Technologies Corp., the NASDAQ Biotechnology Index and the NASDAQ Composite Index
*Total return assumes $100 invested on December 31, 2005 in our common stock, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index and reinvestment of dividends through fiscal year ended December 31, 2010.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Report. The consolidated statements of operations data for the years ended December 31, 2010, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2010 and 2009 have been derived from our audited consolidated financial statements and related notes, which are included elsewhere in this Report. The consolidated statement of operations data for the years ended December 31, 2007 and 2006 and the consolidated balance sheet data as of December 31, 2008, 2007 and 2006 have been derived from audited financial statements which do not appear in this Report. The historical results presented are not necessarily indicative of results to be expected in any future period.
(1) In March 2006, we sold our topical collagenase business to DFB, including all rights to the exclusive license agreement and we were released of any obligations thereunder. For the year-ended December 31, 2006 operating results of ABC-Curacao and certain operations of ABC-NY were classified as discontinued operations in our 2006 consolidated financial statements and are excluded in the table above.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth in Item 1A above, and for the reasons described elsewhere in this Report. All forward-looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
We are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and license agreement with Auxilium for injectable collagenase (which Auxilium has named XIAFLEX (collagenase clostridium histolyticum)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis), and Auxilium has an option to acquire additional indications that we may pursue, including human and canine lipoma and cellulite. Auxilium has an agreement with Pfizer pursuant to which Pfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in 27 member countries of the European Union and 19 other European and Eurasian countries, and will do so under the registered trademark XIAPEX (collagenase clostridium histolyticum).
In connection with the DFB Agreement, until March 2011, we received payments for certain technical assistance and certain transition services that we provided to DFB. Under the DFB Agreement, we continue to receive earn out payments based on the sales of certain products. Our right to receive earn out payments with respect to the marketed topical product sold to DFB expire in June 2013, but earn out payments for second generation collagenase products, if any, continue indefinitely.
Operational Highlights
On February 28, 2011, Auxilium and Pfizer announced that the European Commission granted XIAPEX marketing authorization for the treatment of Dupuytren’s contracture in adult patients with a palpable cord. Auxilium and Pfizer also announced that XIAPEX “is expected to be available for use in some European markets later this year”.
On January 6, 2011, we announced promising results from our study Chien-802 showing reductions in canine lipoma following injections with purified injectable collagenase. These results build upon an earlier dose escalation study from which the Company selected the dose for Chien-802.
Chien-802 was designed to evaluate the efficacy of injectable collagenase in canine lipoma in four healthy dogs with subcutaneous lipomas. Inclusion criteria required the lipomas to be benign, superficial and easily measureable. All dogs had a second lipoma that was untreated and used as a control. At 90 days post injection, in the three evaluable dogs, the lipoma size was 0%, 0% or 7% of the original size as measured by a computed tomography (“CT”) scan. By contrast, the untreated lipomas were 129%, 113% and 128% of the original size at day 90. Thus, the treated lipomas showed a 97% reduction in the size of the lipoma and an increase in the size of the untreated controls of 23%. Based on the positive results from Chien-802, we announced on January 6, 2011 the initiation of a larger clinical trial, Chien-803, for the same indication. We have voluntarily agreed to suspend this trial and will not be initiating any new trials using injectable collagenase in animals or humans pending a resolution of our dispute with Auxilium concerning our right to conduct clinical trials without the prior approval of the companies’ Joint Development Committee. This dispute is described in this Report in “Item 3 - Legal Proceedings”.
On November 3, 2010, we announced that we had been awarded $426,000 in grant funding under the Qualifying Therapeutic Discovery Project Program. The program, funded through the U.S. Patient Protection and Affordable Care Act of 2010, encourages therapeutic discovery programs. The grant funding supports the clinical development of injectable collagenase in human lipoma and the development of improved collagenases for tissue disassociation related to cellular therapy.
On October 11, 2010, Auxilium announced that the first subject had been dosed in the global Phase III program of XIAFLEX for the treatment of Peyronie's disease. In its announcement, Auxilium described that the “late stage global development plan for XIAFLEX will consist of four clinical studies and will be known by the acronym IMPRESS - The Investigation for Maximal Peyronie's Reduction Efficacy and Safety Studies. There will be two randomized, double-blind, placebo-controlled phase III studies, which are expected to enroll at least 600 patients at approximately 70 sites in the U.S. and Australia, with a 2:1 ratio of XIAFLEX to placebo. There also will be one open label study, which should enroll at least 250 patients, at approximately 30 sites in the U.S., EU and New Zealand, and one pharmacokinetic study, which it expected to enroll approximately 16 patients.”
On June 4, 2010, we announced that our board of directors authorized the repurchase of up to $2 million of our outstanding common stock, reflecting our continued commitment to increasing value for our stockholders and our confidence that we will achieve our goals.
On February 2, 2010, Auxilium announced that it received marketing approval from the FDA for XIAFLEX for the treatment of adult Dupuytren’s contracture patients with a palpable cord. XIAFLEX, the only drug approved by the FDA for the treatment of Dupuytren’s contracture, became available by prescription for such treatment in March 2010.
The Auxilium Agreement and other licensing agreements are discussed more fully in Item 1 of this Report under the section titled “Licensing and Marketing Agreements.”
Outlook
Currently, we generate revenue from two primary sources: in connection with the DFB Agreement and in connection with the Auxilium Agreement. Under the DFB Agreement, until March 2011, we received revenue related to certain technical assistance and certain transition services that we provided to DFB. Under the DFB Agreement, we continue to receive earn-out payments from DFB based on the sales of certain products. Under the Auxilium Agreement, we receive royalties, milestones and mark-up on cost of goods sold payments related to the sale and approval of XIAFLEX. We will receive 8.5% of the $395 million in potential additional milestone payments that may be made by Pfizer to Auxilium under the Pfizer Agreement. In addition to the payments already received by us with respect to the Dupuytren’s contracture indication, Auxilium will be obligated to make contingent milestone payments, with respect to each of the Peyronie’s disease and frozen shoulder indications, upon the acceptance of the regulatory filing and receipt by Auxilium, its affiliate or sublicensee of regulatory approval.
Based on our current business model, we expect to have adequate cash reserves until at least the second half of 2012. As a significant portion of our revenues is tied directly to the success of Auxilium in commercializing XIAFLEX, we cannot reasonably forecast our financial condition beyond this time.
Significant Risks
In recent history we have had operating losses and may not achieve sustained profitability. As of December 31, 2010, we had an accumulated deficit from continuing operations of approximately $9.9 million.
We are dependent to a significant extent on third parties, and our principal licensee, Auxilium, may not be able to successfully commercialize XIAFLEX for Dupuytren’s contracture, successfully develop XIAFLEX for additional indications, obtain required regulatory approvals, manufacture XIAFLEX at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for products sold, and as a result we may not achieve sustained profitable operations.
Critical Accounting Policies, Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. We recognize revenues from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and determinable, and payment is reasonably assured. We currently recognize revenues resulting from the licensing, sublicensing and use of our technology and from services we sometimes perform in connection with the licensed technology.
We enter into product development licenses, and collaboration agreements that may contain multiple elements, such as upfront license and sublicense fees, milestones related to the achievement of particular stages in product development and royalties. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the aggregate contract value should be allocated among the deliverable elements and when to recognize revenue for each element.
We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete and, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we have met the requirements under the terms of the agreement, and when payment is reasonably assured. Changes in the allocation of the contract value between various deliverable elements might impact the timing of revenue recognition, but in any event, would not change the total revenue recognized on the contract. For example, nonrefundable upfront product license fees, for product candidates for which we are providing continuing services related to product development, are deferred and recognized as revenue over the development period.
Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in a contract, such as completion of specified clinical development activities and/or regulatory submissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and payment is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront product license fee.
Royalty/ Mark-up on Cost of Goods Sold / Earn-Out Revenue
For those arrangements for which royalty, mark-up on cost of goods sold or earn-out payment information becomes available and collectability is reasonably assured, we recognize revenue during the applicable period earned. For interim quarterly reporting purposes, when collectability is reasonably assured but a reasonable estimate of royalty, mark-up on cost of goods sold or earn-out payment revenues cannot be made, the royalty, mark-up on cost of goods sold or earn-out payment revenues are generally recognized in the quarter that the applicable licensee provides the written report and related information to us.
Under the Auxilium Agreement, we do not participate in the selling, marketing or manufacturing of products for which we receive royalties and a mark-up of the cost of goods sold revenues, The royalty, mark-up on cost of goods sold revenues will generally be recognized in the quarter that Auxilium provides the written reports and related information to us, that is, royalty and mark up on cost of goods sold revenues are generally recognized one quarter following the quarter in which sales by Auxilium occurred. The royalties payable by Auxilium to us are subject to set-off for certain third party development and patent costs.
Under the DFB Agreement, pursuant to which we sold our topical collagenase business to DFB, we have the right to receive earn-out payments in the future based on sales of certain products. Generally, under the DFB Agreement we would receive payments and a report within ninety (90) days from the end of each calendar year after DFB has sold the royalty-bearing product. Currently, DFB is providing us earn-out reports on a quarterly basis.
Consulting and Technical Assistance Services. We recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement. Consulting revenues are recognized ratably over the term of the contract. The consulting and technical assistance obligations to DFB expire during March 2011.
Reimbursable Third Party Development Costs. We accrue expenses for research and development and capitalize certain patent costs related to estimated third party development costs that are reimbursable under the Auxilium Agreement. Estimates are based on contractual terms, historical development costs, reviewing third party data and expectations regarding future development for certain products. Further, we monitor the activities and clinical trials of our development partners.
If conditions or other circumstances change, we may take actions to revise our reimbursable third party development cost estimates. These revisions could result in an incremental increase or decrease in research and development costs. For example, the Auxilium Agreement provides that we will share equally with Auxilium in third party costs for the development of the lyophilization of the injection formulation and certain patent expenses which are creditable against future royalty revenues.
In January 2011, we received a credit memo from Auxilium reducing by $227,000 the amount Auxilium claims we owe for our portion of the lyophilization expenses through December 31, 2010. Any amount ultimately agreed as being owed by us to Auxilium for lyophilization expenses and patent expenses are creditable against future royalties payable by Auxilium on net sales of XIAFLEX. In 2010, we recognized approximately $0.7 million related to royalty revenue from the sale of XIAFLEX. Based upon the updated information and the royalty revenue reported to us, we reduced our estimates for reimbursable third party development and certain patent costs to approximately $2.6 million.
Based on our preliminary review, we believe that only a portion of the amounts invoiced actually relates to the development of the lyophilization of the injection formulation and certain patent expenses may increase based upon a resolution of certain patent matters, and therefore, we reserve all rights related to this matter, including but not limited
to our right to contest the amount charged by Auxilium. We have classified accrued third party development costs as current liabilities on our balance sheet as of December 31, 2010.
Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period during which an adjustment is made.
Receivables and Deferred Revenue. Under the DFB Agreement, we agreed to provide certain technical assistance and transitional services in consideration of fees and costs totaling over $1.4 million. At the closing of the DFB Agreement, DFB made a partial payment to us of $400,000 in respect of the technical assistance to be provided by us. To date, we have received a total of $1.4 million in payments from DFB. The consulting and technical assistance obligations expire during March 2011.
Royalty Buy-Down. In August 2008, we signed an agreement to significantly improve the deal terms related to our future royalty obligations for Peyronie’s disease by buying down our future royalty obligations with a one-time cash payment. We modified our agreement to lower future royalties payable on net sales of injectable collagenase, XIAFLEX, for Peyronie’s disease. In addition, we agreed to pay certain development milestones, if achieved.
As of December 31, 2010, we capitalized $1,250,000 which will be amortized over approximately five years beginning on the date of the first commercial sale of XIAFLEX, for Peyronie’s disease, which represents the period estimated to be benefited, using the straight-line method. In accordance with Accounting Standards Codification 350, Intangibles, Goodwill and Other, the Company amortizes intangible assets with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the assets are amortized using the straight-line method.
Stock Based Compensation. Under ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an award. Expected volatility is based on the historical volatility of our common stock. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures) and the expected volatility. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value future employee stock-based awards granted, to the extent any such awards are granted.
Further, ASC 718 requires that employee stock-based compensation costs to be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2010 COMPARED WITH YEAR ENDED DECEMBER 31, 2009
Net revenues
Net revenues for the two years ended December 31, 2010 and 2009 comprise the following:
Product Revenues, net
Product revenues include the sales of the collagenase for laboratory use recognized at the time it is shipped to customers. We had a small amount of revenue from the sale of collagenase for laboratory use. For the calendar years ended 2010 and 2009 product revenues were $34,508 and $39,035, respectively. This decrease of $4,527 or 12% was primarily related to the amount of material required to perform testing and additional research by our customers.
Royalties
Royalties consist of royalties and the mark-up on cost of goods sold under our agreement with Auxilium and earn-out revenues associated with the DFB Agreement. Total royalty and earn-out revenues for year ended December 31, 2010 were $2,320,729 as compared to $1,271,597 in the 2009 period, an increase of $1,049,132 or 83%. We receive royalty revenues from DFB under the earn-out payment provision of the DFB Agreement, after certain net sales levels are achieved. Royalty revenues recognized under the DFB Agreement for the year ended December 31, 2010 were $1,610,548 and $1,271,597 for the same period in 2009. This increase of $338,950 or 27% is mainly related to the increase in net sales during the 2010 period reported to us by DFB.
In 2010, we began to recognize royalties and the mark-up on cost of goods sold due to us under the terms of the Auxilium Agreement. Under the Auxilium Agreement, royalties to which we are entitled are subject to set-off for certain expenses we owe to Auxilium relating to certain development and patent costs. Royalty and cost of goods sold revenues recognized under the Auxilium Agreement for the 2010 period were $682,160 and zero in the comparable period of 2009. The increase was due to the net sales of XIAFLEX during 2010 reported to us by Auxilium. Auxilium launched XIAFLEX in March 2010.
Licensing Revenue
Licensing revenue consist of licensing fees, sublicensing fees and milestones. For the year ended December 31, 2010 and 2009, we recognized total licensing and milestone revenue of $3,026,111 and $1,565,125, an increase of $1,490,986 or 93%, respectively. Licensing revenues recognized are related to the cash payments received under the Auxilium Agreement in prior years and amortized over the expected development period. Licensing revenue recognized for the year ended December 31, 2010 and 2009 were $751,111 and $1,065,125, respectively. The decrease of $314,014, or 29%, was mainly due to the completed recognition of licensing revenue associated with the Dupuytren’s contracture indication during the first quarter of 2010.
Milestone revenue recognized for the year ended December 31, 2010 and 2009 was $2.275 million and $0.5 million, respectively. In the 2010 period, we received and recognized $1.275 million of the $15 million paid to Auxilium by Pfizer for the scientific/technical review procedure of the Marketing Authorization Application for XIAFLEX for Dupuytren’s contracture in Europe. We also received and recognized a milestone of $1.0 million related to the FDA’s approval of XIAFLEX for Dupuytren’s contracture in February 2010 and in connection with our notification in June 2010 to Auxilium of our election not to commercially manufacture XIAFLEX. In the comparable 2009 period, we recognized $500,000 related to a milestone received under the Auxilium Agreement for the filing and acceptance of a new drug application for Dupuytren’s contracture.
Under current accounting guidance, nonrefundable upfront license fees for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period. The remaining balance will be recognized over the respective development periods or when we determine that we have no ongoing performance obligations.
Consulting Services
We recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement. We recognize consulting revenues ratably over the term of the contract. The consulting and technical assistance obligations under the DFB Agreement expire during March 2011. For calendar years 2010 and 2009 we recognized $280,000 in each period in consulting revenue.
Research and Development Activities
Our research and development expenses consist of salaries and expenses for our research personnel; supplies, payments to consultants, investigators clinical trials and overhead costs. Research and development expenses were $1,223,931 and $488,646, respectively, for calendar years 2010 and 2009, representing an increase in 2010 of $735,285, or 150%. This increase in research and development expenses was primarily due to third party development costs that are reimbursable under the Auxilium Agreement.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs for personnel, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses were $6,470,449 and $4,832,019 for calendar years 2010 and 2009, respectively, an increase of $1,638,430, or 34%, from 2009. The increase in general and administrative expenses was due to legal fees, stock based compensation and services related to investor relations partially offset by lower patent costs.
Other Income and expense
Other income for calendar year 2010 was $525,843 compared to $46,791 for calendar year 2009. Other income during 2010 was due to interest of $83,310 earned on our investments compared to $55,693 in the 2009 period. Other income during 2010 was due to a reversal of accrued tax penalties of $13,130 associated with our delinquent tax filings in previous years.
Qualifying Therapeutic Discovery Project Program
In November 2010, we were notified that we had been awarded a total cash grant of approximately $426,000 under the Qualifying Therapeutic Discovery Project program administered under section 48D of the Internal Revenue Code, of which approximately $102,000 relates to qualifying expenses we had previously incurred during the 2009 fiscal year which was received during the fourth quarter of fiscal 2010. The remainder of the grant of approximately $324,000 was received in February 2011 based on qualifying expenses that we incurred during the 2010 fiscal year. We recognized the full $426,000 of the grant as of the date of notification since we had already incurred all of the qualifying expenses. Since this program is non-recurring, we elected to classify this payment as other income in the Consolidated Statement of Operations for the year ended December 31, 2010.
Income Taxes
The income tax expense for 2010 was $1,351 as compared to an income tax benefit of $161,574 for 2009. The income tax expense for 2010 was the result of minimum New York State taxes. In 2009, the Company utilized its current federal NOL to carry-back to the 2008 tax year to claim a refund of taxes paid of $198,239 which were partially offset by 2009 state tax of $1,784 and a $34,881 tax adjustment related to prior years’ tax returns.
YEAR ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008
Net revenues
Net revenues for the two years ended December 31, 2009 and 2008 comprise the following:
Product Revenues, net
Product revenues include the sales of the collagenase for laboratory use recognized at the time it is shipped to customers. We had a small amount of revenue from the sale of collagenase for laboratory use. For the calendar years ended 2009 and 2008 product revenues were $39,035 and $37,343, respectively. This increase of $1,692 or 5% was primarily related to the amount of material required to perform testing and additional research by our customers.
Royalties
All of the royalty revenues we received in 2009 are from DFB under the earn-out payment provision of the DFB Agreement. Total royalty revenues recognized under that agreement were $1,271,597 and $510,126 for calendar years 2009 and 2008, respectively. The increase of $761,470, or 149%, from calendar year 2008 to 2009 was due to certain sales levels achieved by DFB in connection with the sale of topical collagenase.
Licensing Revenue
Licensing revenue consist of licensing fees, sublicensing fees and milestones. We recognized as licensing, sublicensing and milestone revenue $1,565,125 and $7,440,125 in calendar years 2009 and 2008, respectively. The decrease of $5,875,000, or 79%, from 2008 to 2009 was due to a sublicense fee of $6,375,000 recognized in 2008 partially offset by a $500,000 milestone received in 2009 in connection with the Auxilium Agreement.
Consulting Services
We recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement and a consulting agreement signed in October 2007 with Auxilium. We recognize consulting revenues ratably over the term of the contract. The consulting and technical obligations under the DFB Agreement expire during March 2011. For calendar years 2009 and 2008 we recognized $280,000 and $424,185, respectively, in consulting revenue. The decrease of $144,185 or 34% from 2008 to 2009 was primarily due to the recognition in 2008 of revenues earned in connection with the October 2007 consulting agreement with Auxilium.
Research and Development Activities
Research and development expenses were $488,646 and $439,919 respectively, for calendar years 2009 and 2008, representing an increase from 2008 to 2009 of $48,727, or 11%. This increase was primarily due to certain employee costs which were reimbursable under the DFB Agreement until October 2008 and stock-based compensation expense partially offset by decreases in external study development costs.
General and Administrative Expenses
General and administrative expenses were $4,832,019 and $4,191,052 for calendar years 2009 and 2008, respectively, an increase of $640,967, or 15%, from 2008 to 2009. This increase was primarily due to outside consulting services, certain facility costs which were reimbursable under the DFB Agreement until October 2008, employee costs, legal fees and board member service partially offset by a decrease in patent related fees and stock-based compensation expense.
Other Income and expense
Other income for calendar year 2009 was $46,791 compared to $262,811 for calendar year 2008. Other income during 2009 was due to interest of $55,693 earned on our investments and other consisting of tax penalties of $9,463 which was partially offset by a $600 gain related to an asset sale. Other income during 2008 was due to interest earned of $107,552 on our investments, a reversal of interest expense penalty of $80,409 associated with our delinquent tax filings partially offset by an interest expense tax payment of $33,880 after finalizing our delinquent tax returns, a reversal of accrued tax penalties of $103,203 and a small gain from the sale of an asset of $5,527.
Income Taxes
The income tax benefit for 2009 was $161,574 as compared to an income tax expense of $299,212 for 2008. In 2009 the Company utilized its current federal NOL to carryback to the 2008 tax year to claim a refund of taxes paid of $198,239 which were partially offset by 2009 state tax of $1,784 and a $34,881 tax adjustment related to prior years’ tax returns. In 2008, we accrued approximately $494,234 associated with federal and state taxes based on our net income in 2008 which was partially offset by a tax benefit related to the exercise of stock options of $314,648 and we recognized a $195,022 tax benefit in connection with our 2007 net operating loss.
Liquidity and Capital Resources
To date, we have financed our operations primarily through product sales, debt instruments, licensing revenues and royalties under agreements with third parties and sales of our common stock. At December 31, 2010, 2009 and 2008, we had cash and cash equivalents and short-term investments in the aggregate of approximately $7.8 million, $8.5 million and $4.4 million, respectively.
Sources and Uses of Cash
Net Cash provided by (Used In) Operating Activities
Net cash provided by (used in) operating activities was $(0.9) million, $3.7 million and $(3.1) million for 2010, 2009 and 2008. Cash used in operations for 2010 resulted primarily from operating losses, net of stock compensation expenses and other non-cash charges. At December 31, 2010, accounts receivable increased by $0.4 million, compared to December 31, 2009 primarily due to a higher receivable balance related to the DFB Agreement. Our deferred revenue at December 31, 2010 decreased by $0.8 million compared to December 31, 2009 primarily due to the amortization of previously received license payments under the Auxilium Agreement.
At December 31, 2009, accounts receivable decreased by $5.2 million, compared to December 31, 2008, primarily due to a receipt of a $6.375 million sublicense payment under the Auxilium Agreement which was earned in 2008 partially offset by an increase in earn-out royalties under the DFB Agreement. Our deferred revenue at December 31, 2009 decreased by $1.1 million compared to December 31, 2008 primarily due to the amortization of previously received license payments under the Auxilium Agreement.
The majority of our cash expenditures in 2010, 2009, and 2008 were to fund research and development and our business activities.
Net Cash Used in Investing Activities
Net cash used in investing activities was $0.8 million in 2010, compared to $3.6 million in 2009 and $1.2 million in 2008. In 2010, purchases of marketable securities exceeded maturities by $0.8 million. In 2009, purchases of marketable securities exceeded maturities by $3.6 million. In 2008, maturities of marketable securities exceeded purchases by $75,000 and reflects a one-time cash payment related to the buy down of future royalty obligations for Peyronie's disease of $1,250,000.
Net Cash provided by Financing Activities
Net cash provided by financing activities was $0.2 million, $0.4 million and $7.7 million for 2010, 2009 and 2008, respectively. Net cash provided by financing activities in 2010 was from proceeds from stock option exercises partly offset by the repurchase of our common stock under our 2010 Stock Repurchase Program. Net cash provided by financing activities in 2009 was from proceeds received from stock option exercises. Net cash provided by financing activities for 2008 consisted of proceeds from the sale of our common stock of $6.0 million, repayment of an outstanding loan from our former Chairman and CEO of $1.1 million, $0.3 million related to excess tax benefits from share-based payment arrangements and proceeds received from stock option exercises of $0.3 million.
Contractual Commitments
We are involved with licensing of products which are generally associated with payments to third parties from whom we have licensed the product. Such payments may take the form of an up-front payment, milestone payments which are paid when certain parts of the overall development program are accomplished; payments upon certain regulatory events, such as the filing of an IND, an NDA or BLA, approval of an NDA or BLA, or the equivalents in other countries and payments based on a percentage of sales.
We may also out-license products, for which we hold the rights, to other companies for commercialization in other territories, or at times, for other uses. When this happens, the payments to us would also take the same form as described above.
Operating Leases
Our operating leases are principally for facilities and equipment. We currently lease approximately 15,000 square feet of space at our headquarters in Lynbrook, New York on a month to month basis. Additionally, we lease certain vehicle and certain office equipment which generally expire in 2011 and 2014.
Future minimum annual payments required under non-cancelable operating leases are approximated as follows:
Year ending December 31,
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Future Impact of Recently Issued Accounting Standards
In March 2010, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on the milestone method of revenue recognition. The milestone method of revenue recognition has now been codified as an acceptable revenue recognition model when a milestone is deemed to be substantive. This guidance may be applied retrospectively to all arrangements or prospectively for milestones achieved after the adoption of the guidance. We will adopt this amended guidance for the fiscal year beginning January 1, 2011. We do not anticipate that the adoption of this guidance will have a material impact on our financial statements.
In February 2010, the FASB issued update No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This update provides amendments to Subtopic 855-10 for an entity that is an SEC filer and is required to evaluate subsequent events through the date that the financial statements are issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. The adoption of this update on February 24, 2010 did not have any impact on the consolidated financial statements.
In January 2010, the FASB issued update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update amends subtopic 820-10 to require 1) a reporting entity to disclose separately the amounts of significant transfers in and out of level 1 and 2 fair value measurements and to describe the reasons for the transfers, and 2) in the reconciliation for fair value measurements using significant unobservable inputs (level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis rather than as one net number. This update also provides clarification about existing disclosures about the level of disaggregation and inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 2009. The adoption of this update did not have a material impact on the consolidated financial statements. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity on Level 3 fair value measurements is effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not use derivative financial instruments or derivative commodity instruments for trading purposes. Our financial instruments consist of cash, cash equivalents, short-term investments, trade accounts receivable, accounts payable and long-term obligations. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents.
Our investment portfolio is subject to interest rate risk, although limited given the nature of the investments, and will fall in value in the event market interest rates increase. All our cash and cash equivalents at December 31, 2010, amounting to approximately $2.5 million, were maintained in bank demand accounts and money market accounts. Our short-term investments of $5.4 million were maintained in certificates of deposit. We do not hedge our interest rate risks, as we believe reasonably possible near-term changes in interest rates would not materially affect our results of operations, financial position or cash flows.
Item 8.
Item 8. FINANCIAL STATEMENTS.
For the discussion of Item 8, “Financial Statements” please see the Consolidated Financial Statements, beginning on page of this Report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A.
Item 9A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company, under the supervision and with the participation of Thomas L. Wegman, the Company’s President, Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer, evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, management has concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control, and misstatements due to error or fraud may occur and not be detected on a timely basis.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements and the reliability of financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. We believe that, as of December 31, 2010, the Company’s internal control over financial reporting was effective based on this criteria.
Tabriztchi & Co, the independent registered public accounting firm that audited our Consolidated Financial Statements included in this Report, audited the effectiveness of our internal control over financial reporting as of December 31, 2010, as stated in their report which is included in Part IV, Item 15 of this Report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
Not applicable.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated herein by reference to the sections captioned “Directors and Executive Officers,” “Committees of the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to the section captioned “Executive Compensation” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated herein by reference to the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item is incorporated herein by reference to the section captioned “Certain Relationships and Related Transactions” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated herein by reference to the section captioned “Ratification of Selection of Independent Registered Public Accounting Firm” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
The following documents are filed as part of this Report:
(1)
Consolidated Financial Statements (See Index to Consolidated Financial Statements on page)
(2)
Financial Statement Schedules
All schedules to the consolidated financial statements are omitted as the required information is either inapplicable or presented in the consolidated financial statements.
(3)
Exhibits
The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.
(b)
Exhibits
The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.
BIOSPECIFICS TECHNOLOGIES CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
BioSpecifics Technologies Corp.
We have audited the accompanying consolidated balance sheets of BioSpecifics Technologies Corp. as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three-years in the period ended December 31, 2010. BioSpecifics Technologies Corp.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BioSpecifics Technologies Corp. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BioSpecifics Technologies Corp.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2011 expressed an unqualified opinion.
/s/ Tabriztchi & Co., CPA, P.C.
Garden City, NY
March 14, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
BioSpecifics Technologies Corp.
We have audited BioSpecifics Technologies Corp.'s internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). BioSpecifics Technologies Corp's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's 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 generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
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.
In our opinion, BioSpecifics Technologies Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as of December 31, 2010 and 2009 and the related statements of income, stockholders' equity and comprehensive income, and cash flows of BioSpecifics Technologies Corp. for each of the three years ended December 31, 2010, and our report dated March 14, 2011 expressed an unqualified opinion.
/s/ Tabriztchi & Co., CPA, P.C.
Garden City, NY
March 14, 2011
BioSpecifics Technologies Corp.
Consolidated Balance Sheet
December 31,
BioSpecifics Technologies Corp.
Consolidated Statements of Operations
Years Ended December 31,
BioSpecifics Technologies Corp.
Consolidated Statements of Cash Flows
Years Ended December 31,
Supplemental disclosures of non-cash transactions:
Under our agreement with Auxilium certain patent costs paid by Auxilium on behalf of the Company are creditable against future royalties. As of December 31, 2010 we accrued $250,621 related to this issue of which $36,041, $33,983 and $24,856 was amortized in the 2010, 2009 and 2008 periods, respectively. The net patent amortization expense for 2010 was $18,339 due to a reduction of reimbursable patents fees under our agreement with Auxilium from prior periods.
See accompanying notes to consolidated financial statements
BioSpecifics Technologies Corp. Consolidated Statement of Stockholders' Equity (Deficit)
BIOSPECIFICS TECHNOLOGIES CORP.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
We are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and license agreement (the “Auxilium Agreement”) with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase (which Auxilium has named XIAFLEX® (collagenase clostridium histolyticum)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis), and Auxilium has an option to acquire additional indications that we may pursue, including human and canine lipoma and cellulite. Auxilium has an agreement with Pfizer, Inc. (“Pfizer”) pursuant to which Pfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in 27 member countries of the European Union and 19 other European and Eurasian countries, and will do so under the registered trademark XIAPEX® (collagenase clostridium histolyticum).
DISCONTINUED OPERATIONS
Prior to March 2006, we were a party to an exclusive license agreement with Abbott Laboratories, Inc. and its subsidiaries, for the production of the active pharmaceutical ingredient for topical collagenase. In March 2006 we sold our topical collagenase business to DFB Biotech, Inc. and its affiliates (“DFB”), including all rights to the exclusive license agreement and we were released of any obligations thereunder (the “DFB Agreement”).
As consideration for the purchased assets we received $8 million in cash, DFB’s assumption of certain liabilities, and the right to receive earn out payments in the future based on sales of certain products. In connection with the closing of the DFB Agreement, we agreed to provide certain technical assistance and certain transition services to DFB in consideration of fees and costs totaling over $1.4 million. At the closing, DFB paid to us a partial payment of $400,000 in respect of the technical assistance to be provided by us. As of December 31, 2010, we have received a total of $1.4 million in payments from DFB. The consulting and technical assistance obligations expire during March 2011.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The audited consolidated financial statements include the accounts of the Company and its subsidiary, Advance Biofactures Corp. (“ABC-NY”).
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the use of management’s estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
Cash, cash equivalents and short-term investments are stated at market value. Cash equivalents include only securities having a maturity of three months or less at the time of purchase. The Company limits its credit risk associated with cash, cash equivalents and short-term investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, U.S. government securities, or short-term commercial paper.
Fair Value Measurements
Management believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments.
Revenue Recognition
We currently recognize revenues resulting from product sales, the licensing and sublicensing of the use of our technology and from services we sometimes perform in connection with the licensed technology under the guidance of Accounting Standards Codification 605, Revenue Recognition (“ASC 605”).
If we determine that separate elements exist in a revenue arrangement under ASC 605, we recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete, when payment is reasonably assured and, to the extent the milestone amount relates to our performance obligation, when our customer confirms that we have met the requirements under the terms of the agreement.
Revenues, and their respective treatment for financial reporting purposes, are as follows:
Product Sales
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed or determinable and collectability is reasonably assured. No right of return exists for our products except in the case of damaged goods. To date, we have not experienced any significant returns of our products.
Net sales include the sales of the collagenase for laboratory use that are recognized at the time the product is shipped to customers for laboratory use.
Royalty/Earn-Out Revenue
Under the Auxilium Agreement, we do not participate in the selling, marketing or manufacturing of products for which we receive royalties and a mark-up of the cost of goods sold revenues, The royalty, mark-up on cost of goods sold revenues will generally be recognized in the quarter that Auxilium provides the written reports and related information to us, that is, royalty and mark up on cost of goods sold revenues are generally recognized one quarter following the quarter in which sales by Auxilium occurred. The royalties payable by Auxilium to us are subject to set-off for certain third party development and patent costs.
Under the DFB Agreement, pursuant to which we sold our topical collagenase business to DFB, we have the right to receive earn-out payments in the future based on sales of certain products. Generally, under the DFB Agreement we would receive payments and a report within ninety (90) days from the end of each calendar year after DFB has sold the royalty-bearing product. Currently, DFB is providing us earn-out reports on a quarterly basis.
Licensing Revenue
We include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Revenues” in our consolidated statements of operations in this Report.
Upfront License and Sublicensing Fees
We generally recognize revenue from upfront licensing and sublicensing fees when the agreement is signed, we have completed the earnings process and we have no ongoing performance obligation with respect to the arrangement. Nonrefundable upfront technology license for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period.
Milestones
Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in the contract, such as completion of specified development activities and/or regulatory submissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and collection is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront license fee.
The timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we are providing continuing services related to product development, is primarily dependent upon our estimates of the development period. We define the development period as the point from which research activities commence up to regulatory approval of either our, or our partners’ submission assuming no further research is necessary. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of our control. Should the FDA or other regulatory agencies require additional data or information, we would adjust our development period estimates accordingly. The impact on revenue of changes in our estimates and the timing thereof is recognized prospectively over the remaining estimated product development period.
Consulting and Technical Assistance Services
We recognize revenues from consulting and technical assistance contracts primarily as a result of our DFB Agreement and Auxilium Agreement. Consulting revenues are recognized ratably over the term of the contract. The consulting and technical assistance obligations to DFB expire during March 2011.
Accounts receivable and Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which when realized have been within the range of management’s expectations. Our policy is to write off bad debts as uncollectible when it is determined that they cannot be collected.
As of December 31, 2010, accounts receivables include approximately $1.6 million due from DFB in accordance with the terms of the DFB Agreement. Under the DFB Agreement, we receive royalty payments and a report within ninety (90) days from the end of each calendar year after the licensee has sold the royalty-bearing product.
Reimbursable Third Party Development Costs
We accrue expenses for research and development and capitalize certain patent costs related to estimated third party development costs that are reimbursable under the Auxilium Agreement. Estimates are based on contractual terms, historical development costs, reviewing third party data and expectations regarding future development for certain products. Further, we monitor the activities and clinical trials of our development partners.
If conditions or other circumstances change, we may take actions to revise our reimbursable third party development cost estimates. These revisions could result in an incremental increase or decrease in research and development costs. For example, the Auxilium Agreement provides that Auxilium and BioSpecifics will share equally in third party costs for the development of the lyophilization of the injection formulation and certain patent expenses which are creditable against future royalty revenues.
In January 2011, we received a credit memo from Auxilium reducing the amount we owed for lyophilization expenses by $227,000 to the total amount due that Auxilium believes is owed by us through December 31, 2010 under this provision. Any amount ultimately agreed as being owed by us to Auxilium for lyophilization expenses and patent expenses are creditable against future royalties payable by Auxilium on net sales of XIAFLEX. In 2010, we recognized approximately $0.7 million related to royalty revenue from the sale of XIAFLEX. Based upon the updated information and the royalty revenue reported to us, we reduced our estimates for reimbursable third party development and certain patent costs to approximately $2.6 million.
Based on our preliminary review, we believe that only a portion of the amounts invoiced actually relates to the development of the lyophilization of the injection formulation and certain patent expenses may increase based upon a resolution of certain patent matters, and therefore, we reserve all rights related to this matter, including but not limited to our right to contest the amount charged by Auxilium. We have classified accrued third party development costs as current liabilities on our balance sheet as of December 31, 2010.
Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period during which an adjustment is made.
Research and Development Expenses
Our research and development (“R&D”) costs are expensed as incurred. R&D includes, but is not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costs and overhead. R&D also consists of third party costs, such as medical professional fees, contract manufacturing costs for material used in clinical trials, consulting fees and costs associated with clinical study R&D arrangements. We fund R&D at medical research institutions under agreements that are generally cancelable. All of these costs are charged to R&D as incurred, which may be measured by percentage of completion, contract milestones, patient enrollment, or the passage of time.
Clinical Trial Expenses
Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with various clinical trial centers and clinical research organizations. In the normal course of business we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, the completion of portions of the clinical trial, or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual cost of services received and efforts expended. As such, expenses related to each patient enrolled in a clinical trial are recognized ratably beginning upon entry into the trial and over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, we accrue an amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.
Income Taxes
Deferred tax assets and liabilities are recognized based on the expected future tax consequences, using current tax rates, of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We use the asset and liability method of accounting for income taxes, as set forth in Accounting Standards Codification 740-10-25-2. Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities at the statutory rates enacted for future periods. In accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification of Interest and Penalties, we classify interest associated with income taxes under interest expense and tax penalties under other.
Stock Based Compensation
The Company has two stock-based compensation plans in effect which are described more fully in Note 9. Accounting Standards Codification 718, Compensation - Stock Compensation (“ASC 718”) requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based awards including stock options and common stock issued to our employees and directors under our stock plans. It requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our Consolidated Statements of Operations.
Under the ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an award. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures) and the expected volatility. When there is uncertainty in the factors used to determine the expected term of an award, we use the simplified method. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, our valuation assumptions used to value employee stock-based awards granted in future periods may change. The company did not grant stock options during the 2010 year. The ranges of valuation assumptions used were as follows for 2009 and 2008:
Further, ASC 718 requires that employee stock-based compensation costs to be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.
Stock-based compensation expense recognized under ASC 718 was as follows:
We account for stock options granted to persons other than employees or directors at fair value using the Black-Scholes option-pricing model in accordance with Accounting Standards Codification 505-50, Equity Based Payments to Non-Employees (“ASC 505-50”). Stock options granted to such persons and stock options that are modified and continue to vest when an employee has a change in employment status are subject to periodic revaluation over their vesting terms. We recognize the resulting stock-based compensation expense during the service period over which the non-employee provides services to us. The stock-based compensation expense related to non-employees for the years ended December 31, 2010, 2009 and 2008 was $685,096, zero and $572,424, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autos are depreciated on the straight-line basis over their estimated useful lives of 5 to 10 years.
Patent Costs
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 3 to 11 years, and review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
As of December 31, 2010, the Company’s capitalized costs related to certain patents paid by Auxilium on behalf of the Company and are reimbursable to Auxilium under our agreement. These patent costs are creditable against future royalty revenues. At December 31, net patent costs consisted of:
The amortization expense for patents was $36,041, $33,983 and $24,856, for the years ended December 31, 2010, 2009 and 2008. The net patent amortization expense for 2010 was $18,339 due to a reduction of reimbursable patents fees under our agreement with Auxilium from prior periods. The estimated aggregate amortization expense for each of the next five years is as follows:
Income Taxes
In accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification of Interest and Penalties (“ASC 740-10-45-25”) we classify interest associated with income taxes under interest expense and tax penalties under other.
Qualifying Therapeutic Discovery Project Program
In November 2010, we were notified that we had been awarded a total cash grant of approximately $426,000 under the Qualifying Therapeutic Discovery Project program administered under section 48D of the Internal Revenue Code, of which approximately $102,000 relates to qualifying expenses we had previously incurred during the 2009 fiscal year which was received during the fourth quarter of fiscal 2010. The remainder of the grant of approximately $324,000 was received in February 2011 based on qualifying expenses that we incurred during the 2010 fiscal year. We recognized the full $426,000 of the grant as of the date of notification since we had already incurred all of the qualifying expenses. Since this program is non-recurring, we elected to classify this payment as other income in the Consolidated Statement of Operations for the year ended December 31, 2010.
Future Impact of Recently Issued Accounting Standards
In March 2010, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on the milestone method of revenue recognition. The milestone method of revenue recognition has now been codified as an acceptable revenue recognition model when a milestone is deemed to be substantive. This guidance may be applied retrospectively to all arrangements or prospectively for milestones achieved after the adoption of the guidance. We will adopt this amended guidance for the fiscal year beginning January 1, 2011. We do not anticipate that the adoption of this guidance will have a material impact on our financial statements.
In February 2010, the FASB issued update No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This update provides amendments to Subtopic 855-10 for an entity that is an SEC filer and is required to evaluate subsequent events through the date that the financial statements are issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. The adoption of this update on February 24, 2010 did not have any impact on the consolidated financial statements.
In January 2010, the FASB issued update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update amends subtopic 820-10 to require 1) a reporting entity to disclose separately the amounts of significant transfers in and out of level 1 and 2 fair value measurements and to describe the reasons for the transfers, and 2) in the reconciliation for fair value measurements using significant unobservable inputs (level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis rather than as one net number. This update also provides clarification about existing disclosures about the level of disaggregation and inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 2009. The adoption of this update did not have a material impact on the consolidated financial statements. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity on Level 3 fair value measurements is effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.
3. FAIR VALUE MEASUREMENTS
The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.
As of December 31, 2010, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of December 31, 2010, 2009 and 2008:
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period increased to include all additional common shares that would have been outstanding assuming potentially dilutive common shares, resulting from option exercises, had been issued and any proceeds thereof used to repurchase common stock at the average market price during the period. In periods in which there is a net loss, potentially dilutive common shares are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.
For the years ended December 31, 2010 and 2009, 912,001 and 923,900 of potential common shares were excluded from the diluted loss per share calculation because their effect was anti-dilutive as a result of the Company’s net loss.
5. INVENTORIES, NET
None.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment from continuing operations consist of:
Total depreciation expense amounted to $610, $1,687 and $30,919 for calendar years 2010, 2009 and 2008, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
8. INCOME TAXES
The provision for income taxes consist of the following:
Year ended December 31,
The effective income tax rate of the Company differs from the federal statutory tax rate of 34% due to the following items:
Year ended December 31,
The effective rate reconciliation includes the permanent differences and changes in valuation allowance for deferred revenues, stock-based compensation and net operating loss.
Year ended December 31,
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Based on the Company's uncertainty of anticipated future taxable income, the Company is keeping a full valuation allowance for all its deferred tax assets. The Company’s valuation allowance increased by $0.8 million primarily due to the recognition of change a in estimate related to incentive stock options and the net operating loss carryforward.
At December 31, 2010, we had federal tax return net operating loss carry forwards of approximately $2.7 million of which $1.9 million will expire in 2029 and $0.8 million 2030, if not utilized. In addition, we had state tax return net operating loss carry forwards of approximately $4.9 million related to New York State, which will expire in 2027 through 2030 if not utilized. The recorded deferred tax asset amount of $0.9 million for net operating losses shown in the above table is net of windfall stock compensation deductions due to the disqualification of certain stock option that were exercised and sold in 2009, which when realized, will be recorded directly to additional paid-in capital in accordance with ASC 718-25-09.
At December 31, 2010, we had orphan drug tax credits of approximately $1.0 million that can be carried forward and will generally expire in 2023 through 2029, if not utilized.
As of December 31, 2010, the Company believes that there are no significant uncertain tax positions, and no amounts have been recorded for interest and penalties. The Company does not anticipate any events that would require it to record a liability related to any uncertain tax position.
9. STOCKHOLDERS’ EQUITY
Stock Option Plans
In July 1997, the Company's stockholders approved a stock option plan (the “1997 Plan”) for eligible key employees, directors, independent agents, and consultants who make a significant contribution toward the Company's success and development and to attract and retain qualified employees which expired in July 2007. Under the 1997 Plan, qualified incentive stock options and non-qualified stock options may be granted to purchase up to an aggregate of 500,000 shares of the Company's common stock, subject to certain anti-dilution provisions. The exercise price per share of common stock may not be less than 100% (110% for qualified incentive stock options granted to stockholders owning at least 10% of common shares) of the fair market value of the Company's common stock on the date of grant. In general, the options vest and become exercisable in four equal annual installments following the date of grant, although the Company’s board of directors, at its discretion, may provide for different vesting schedules. The options expire ten years (five years for qualified incentive stock options granted to stockholders owning at least 10% of common shares) after such date. In accordance with terms of the 1997 Plan, no options were granted ten years after the effective date of the 1997 Plan, or July 2007. In July 2007, approximately 231,000 stock options expired unissued, and there are no shares available for grant remaining under the 1997 Plan. As of December 31, 2010 there were 9,000 options outstanding under the 1997 Plan.
In August 2001, the Company's stockholders approved a stock option plan (the “2001 Plan”), with terms similar to the 1997 Plan. The 2001 Plan authorizes the granting of awards of up to an aggregate of 750,000 shares of the Company's common stock, subject to certain anti-dilution provisions. On December 16, 2003, stockholders approved an amendment to the 2001 Plan, which increased the number of shares authorized for grant from 750,000 shares to 1,750,000 shares, an increase of 1,000,000 shares. On June 17, 2009, our stockholders approved an amendment to the 2001 Plan to extend the term of the 2001 Plan from April 6, 2011 to April 23, 2019 and to authorize an additional 300,000 shares of our common stock for issuance under the 2001 Plan. A total of 2,050,000 shares of common stock are now authorized for issuance under the amended 2001 Plan. The Company filed a Registration Statement on Form S-8 for the 2001 Plan with the Commission on October 5, 2007 and on July 15, 2009 as amended to register these securities. As of December 31, 2010 options to purchase 1,337,425 shares of common stock were outstanding under the 1997 Plan and 2001 Plan, and a total of 269,098 shares available for grant remaining under the 2001 Plan.
The summary of the stock options activity is as follows for year ended:
The Company did not grant any stock options during 2010.
The following table summarizes information relating to stock options by exercise price at December 31, 2010:
We did not grant any stock options during 2010. The weighted-average grant-date fair value for options granted during 2009 was $24.43 per share and $16.00 per share in 2008. During the 2010, 2009 and 2008, $673,375, $380,029 and $255,388 were received from stock options exercised by employees, respectively. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2010 was approximately $23.2 million. Aggregate intrinsic value represents the total pre-tax intrinsic value, based on the closing price of our common stock of $25.60 on December 31, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. Total unrecognized compensation cost related to non-vested stock options outstanding as of December 31, 2009 was approximately $0.7 million which we expect to recognize over a weighted-average period of 1.3 years.
10. COMMITMENTS AND CONTINGENCIES
Lease Agreements
Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563. As previously reported, our previous lease for our headquarters terminated on June 30, 2010. Since June 30, 2010, we have been leasing the space from Wilbur St. Corp. on a month-to-month basis. On February 28, 2011, we notified Wilbur St. Corp. of our termination of the lease effective March 31, 2011. We intend to negotiate a new lease for our current space or seek alternative space in the surrounding area.
The Company's operations are principally conducted on leased premises. Future minimum annual rental payments required under non-cancelable operating leases are zero.
Rent expense under all operating leases amounted to approximately $136,500, $136,250 and $150,000 for calendar year 2010, 2009 and 2008.
11. RELATED PARTY TRANSACTIONS
On February 1, 2008, the Estate of Edwin H. Wegman (the “Estate”) sold an aggregate of 344,114 shares of the Company's common stock, par value $0.001, at a purchase price of $12.00 per share to certain private investors. The Estate used certain of the proceeds of the transaction to repay the loan owed to the Company by Edwin H. Wegman, our former Chairman and CEO. The total loan repayment amount was $1,116,558, which represents the principal amount of $625,774 owed to the Company and accrued interest through January 31, 2008 of $490,784.
As previously reported, ABC-NY (together with the Company, the “Tenant”) and Wilbur St. Corp. (the “Landlord”) were parties to a lease agreement initially dated as of January 30, 1998 and modified as of June 24, 2009 (the “Lease Agreement”), pursuant to which the Landlord leased to the Tenant the premises located at 35 Wilbur Street, Lynbrook, NY 11563 (the “Premises”) until June 30, 2010 and for an annual rental price of $135,000. Following the expiration of the Lease Agreement, the Tenant has continued to lease the Premises from the Landlord on a month-to-month basis. As described above in Note 10, we have notified the Landlord of our termination of the Lease Agreement effective March 31, 2011.
12. EMPLOYEE BENEFIT PLANS
ABC-NY has a 401(k) Profit Sharing Plan for employees who meet minimum age and service requirements. Contributions to the plan by ABC-NY are discretionary and subject to certain vesting provisions. The Company made no contributions to this plan for calendar years 2010, 2009 or 2008.
13. SUBSEQUENT EVENTS
On February 28, 2011, Auxilium and Pfizer announced that the European Commission granted XIAPEX marketing authorization for the treatment of Dupuytren’s contracture in adult patients with a palpable cord. Auxilium and Pfizer also announced that XIAPEX “is expected to be available for use in some European markets later this year”.
In January 2011, we announced promising results from our study Chien-802, showing dramatic reductions in canine lipoma following injections with purified injectable collagenase. These results build upon an earlier dose escalation study from which we selected the dose for Chien-802.
In January 2011, we also announced the initiation of a larger clinical trial, Chien-803, for the same indication. We have voluntarily agreed to suspend this trial and will not be initiating any new trials using injectable collagenase in animals or humans pending a resolution of our dispute with Auxilium concerning our right to conduct clinical trials without the prior approval of the companies’ Joint Development Committee. On February 15, 2011, Auxilium filed a complaint against us in the Court of Common Pleas in Chester County, Pennsylvania. The complaint seeks declaratory and injunctive relief, but not monetary damages. The dispute has been sealed pending further order of the court. The outcome of the dispute will have no effect on the amounts due to us from Auxilium for exercised indications (Dupuytren’s contracture, Peyronie’s disease and Frozen Shoulder). However, if the court rules in a manner that is detrimental to our interests or interprets our agreement with Auxilium in a way that limits the scope of our rights under that agreement, we may be precluded from pursuing additional indications and, if Auxilium does not pursue such additional indications, we may also be precluded from the opportunity to receive from Auxilium license fees for the rights to, as well as potential milestone, royalty and other payments with respect to, such additional indications.
14. SELECTED QUARTERLY DATA (Unaudited)
The following table sets forth certain unaudited quarterly data for each of the four quarters in the years ended December 31, 2010 and 2009. The data has been derived from the Company's unaudited consolidated financial statements that, in management's opinion, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notes thereto. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
(1) Quarterly income (loss) per share may not equal the annual reported amounts due to rounding
EXHIBIT INDEX
The documents listed below are being filed or have previously been filed on behalf of the Company and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:
* filed herewith
SIGNATURES
In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereto duly authorized individual.
Date: March 14, 2011
BIOSPECIFICS TECHNOLOGIES CORP.
By: /s/ Thomas L. Wegman
Name: Thomas L. Wegman
Title: President
In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE
/s/ Thomas L. Wegman President, Director, and Principal Executive, Financial
Name: Thomas L. Wegman and Accounting Officer
Date: March 14, 2011
/s/ Dr. Matthew Geller Director
Name: Dr. Matthew Geller
Date: March 14, 2011
/s/ Dr. Paul Gitman Director
Name: Dr. Paul Gitman
Date: March 14, 2011
/s/ Henry G. Morgan Director
Name: Henry G. Morgan
Date: March 14, 2011
/s/ Michael Schamroth Director
Name: Michael Schamroth
Date: March 14, 2011
/s/ Dr. Mark Wegman Director
Name: Dr. Mark Wegman
Date: March 14, 2011
/s/ Toby Wegman Director
Name: Toby Wegman
Date: March 14, 2011