Item 1. BUSINESS
Overview
BioMimetic Therapeutics, Inc. develops and commercializes innovative products to help stimulate the body’s natural tissue regenerative process. We believe our protein therapeutic-device combination products have the potential to significantly improve the treatment of musculoskeletal injuries and conditions affecting bones, tendons, ligaments and cartilage. Our platform regenerative technology, which incorporates a potent version of one of the body’s natural key stimulators of tissue repair, may offer physicians advanced biological solutions to actively stimulate tissue healing and regeneration.
We have already demonstrated that this technology is safe and effective in stimulating bone and periodontal regeneration in the jaws with the U.S. and Canadian regulatory approvals of our first product, GEM 21S ® Growth-factor Enhanced Matrix. With the divestiture of GEM 21S in January 2008, we are now focused on developing this technology to stimulate tissue healing in orthopedic applications (such as distal radius, or wrist, fractures and fusions of the bones in the foot and ankle to eliminate chronic pain from trauma or arthritis), and potentially spine and sports injury applications. Our current product candidates use the same key stimulator as GEM 21S, and are designed to target a broad range of clinical indications in bone, cartilage, ligament and tendon repair.
We currently have seven orthopedic clinical studies that are completed or are under way which seek to demonstrate the safety, clinical utility and/or efficacy of our product candidates in the pipeline, including our lead orthopedic product candidate Augment™ Bone Graft (“Augment”), formerly GEM OS1 bone graft, in treating bone defects and injuries. In addition, we have pre-clinical programs focused on the development of treatments for bone defects in the spine and various sports injury applications, including those requiring cartilage, ligament and tendon repair.
We have reported the results of a number of these studies, and those studies suggest that our platform technology will be effective in our target applications. If successful, we expect these clinical studies should lead to regulatory approval of our regenerative product candidates in the United States, Canada and Europe. If approved by the appropriate regulatory authorities, we believe that our product candidates will offer new, effective and less invasive treatment options in orthopedics, spine and sports related injuries to improve the quality of life for millions of patients suffering injuries or deterioration of bones, ligaments, tendons and cartilage.
However, according to the National Bureau of Economic Research, the U.S. economy has been in a recession since December 2007. This economic downturn and the ensuing instability of markets have impacted us by making it difficult to resolve the liquidity issues on our auction rate securities (“ARS”) investments. Since the collapse of the ARS market in February 2008, we have been unable to liquidate the $60.0 million par value in ARS investments that we hold as of December 31, 2008.
Furthermore, our general business strategy may be further adversely affected if the current economic conditions deteriorate further, or do not improve. For example, the economy may impact the demand for elective medical procedures that we are targeting with our product candidates, or may impact the pricing that we may set for our products. However, since our anticipated product launch for our lead product candidate remains over a year away, the impact of the current recession on commercial markets for that product remains uncertain.
We have responded to the current economic crisis by investing our cash and cash equivalents and our short-term investments conservatively, securing a short-term credit facility to provide some liquidity for our ARS investments, and initiating cost reduction measures such as scaling back growth in staff to conserve cash and manage expenses. In addition, to the extent possible given contractual commitments, in order to postpone major expenses we have postponed certain major equipment purchases, delivery and validation efforts for manufacturing equipment intended for a new manufacturing facility that is being built in the same complex as our headquarters in Franklin, Tennessee. We have leased a portion of this new facility and we intend to move certain of our manufacturing operations to it once completed. Also, we have filed an arbitration claim against Deutsche Bank Securities, Inc. (“DBSI”) seeking to force them to repurchase the
illiquid ARS investments that they purchased on our behalf in managing our discretionary cash management account.
Product Candidates
Currently, there are limited biological therapies to stimulate the healing and regeneration of tissues, such as bone, cartilage, ligaments and tendons. As a result, many of these injuries may result in permanent impairment and chronic pain. As baby boomers age, the incidence of musculoskeletal injuries and ailments will be far more prevalent. We believe that our technology is well positioned to address many of these issues. We also believe that the fundamental mode of action of our platform technology in promoting tissue regeneration suggests that it may be effective in a broad array of musculoskeletal applications. Consequently, our technology may prove to address unmet medical needs in bone fractures and fusions, spinal fractures and fusions, and sports injuries.
Our product candidates, including our lead product candidate Augment, use recombinant human Platelet-Derived Growth Factor (“rhPDGF-BB”), which is one of the principal naturally occurring wound healing stimulators, to kick start the tissue regeneration process in the body. We believe that rhPDGF-BB is well suited for various applications due to its stimulation of a broad spectrum of cellular events critical for the initiation and progression of healing. rhPDGF-BB acts like a magnet to attract cells necessary for tissue healing through a process known as chemotaxis, while also stimulating an increased number of healing cells through a process known as mitogenesis, thereby expanding the population of cells involved in the repair process. Additionally, data suggests rhPDGF-BB enhances new blood vessel formation, in a process called “angiogenesis,” which is also critical for healing.
We believe the combination of the growth factor rhPDGF-BB and a synthetic matrix is key to the overall effectiveness of our product candidates. In the case of our Augment product candidate, the synthetic matrix is beta-tricalcium phosphate (“ß-TCP”), which is a bone matrix. The growth factor rhPDGF-BB jump starts the healing process by providing the biological stimulus for tissue repair, while the ß-TCP synthetic bone matrix provides the framework or scaffold for tissue regeneration, or new bone growth, to occur. Moreover, these two components, which are included in Augment and our other product candidates, have been authorized by the FDA for use in other applications and are being marketed to treat other diseases and injuries. The ß-TCP is used in orthopedic applications as resorbable bone void filler and rhPDGF is used for stimulating healing of chronic ulcers in the lower extremities of diabetic patients and treating periodontally-related bone defects and gingival recession. By combining already marketed components to make a novel and proprietary product, we believe that we will be able to streamline the development process and accelerate the ultimate commercialization of our product candidates.
We believe that our product candidates are unique and novel, and that our product development strategy, which uses regenerative protein therapeutic-device combination products, has demonstrated success. Other companies have applied a similar strategy in the development of such combination products for the treatment of cardiovascular disease. Such “convergent devices” have revolutionized the way that cardiovascular disease is treated and have proven to be both a clinical and commercial success. We believe the orthopedic industry is in the early stages of a similar transformation from the use of traditional, passive, highly invasive metallic devices to more advanced, bio-active devices. With several product candidates in the pipeline that are based upon similar technology to our previously approved periodontal product, GEM 21S, we are optimistic that we are well positioned to capitalize on this transformation.
This proven strategy was very effective in the development of our first product, GEM 21S, which was approved by the U.S. Food and Drug Administration (“FDA”) in November 2005 for the treatment of periodontal bone defects and gum tissue recession associated with periodontal disease. This strategy was effective in that we were able to obtain product approval in less than five years. GEM 21S was approved for marketing in the United States and Canada based on data from a 180 patient randomized controlled pivotal clinical trial which demonstrated that it significantly and safely improved bone regeneration in the jaws. It is the first totally synthetic product combining a purified recombinant growth factor with a synthetic bone matrix to be approved by the FDA for human application.
Building on the successful approval of GEM 21S, we are applying a similar strategy in the development of our pipeline of regenerative protein therapeutic-device combination product candidates for a broad range of orthopedic indications. Our most advanced product candidates, which also incorporate rhPDGF-BB in
combination with a bone matrix, are targeted to be used in the open surgical treatment of fractures and fusions (using Augment) and the closed non-surgical treatment of fractures (using Augment™ Injectable Bone Graft (“Augment Injectable”)).
We have established strong clinical contacts, manufacturing facilities and a regulatory pathway to product development. These, coupled with the well characterized biology and history of safe use of rhPDGF-BB and the clinically proven efficacy of our platform technology, all position us to become a leader in the development and commercialization of biologically-active devices that will capitalize on the growing market for these products in orthopedic, spine and sports injury applications. While the results of our studies have been positive to date, we cannot provide any assurance that we will be successful in developing, obtaining regulatory approval for, or commercializing our current pipeline of product candidates or that we will do so in a timely fashion.
The following clinical studies regarding our orthopedic product candidates have recently been completed or are currently ongoing:
Type
Product
Location
Clinical Indication
Status
Pilot
Augment
United States
Foot and Ankle Fusions
Completed
Pivotal
Augment
United States and Canada
Foot and Ankle Fusions
Enrollment Completed
Registration
Augment
Canada
Foot and Ankle Fusions
Enrollment Completed
Registration
Augment
Europe
Foot and Ankle Fusions
Enrollment Completed
Pilot
Augment
Europe
Wrist Fractures
Completed
Pilot
Augment Injectable
Canada
Foot and Ankle Fusions
Completed
Pilot
Augment Injectable
Europe
Wrist Fractures
Completed
We believe that rhPDGF is well suited for use in multiple product candidates due to its stimulation of a broad spectrum of cellular events critical for the initiation and progression of orthopedic tissue repair and regeneration. The diversity and importance of the biological activities stimulated by rhPDGF were key elements in our selection of this growth factor as the primary biological ingredient in our initial product and product candidates. Although human studies to demonstrate rhPDGF’s cellular stimulatory property in our product candidates have not been performed, many kinds of cells important to orthopedic tissue repair have been reported in published animal and in vitro studies to respond to rhPDGF, including bone forming cells, cartilage forming cells, bone and cartilage-lineage forming cells and tendon and ligament forming cells. The observation that rhPDGF is naturally contained in platelets and released specifically at sites of injury during blood clotting to initiate events critical to healing has led to rhPDGF being termed nature’s “wound healing protein.” The rhPDGF used in our product candidates is a synthetic version of this naturally occurring substance produced using recombinant DNA techniques.
Based on the efficacy demonstrated by GEM 21S in a pivotal clinical study, the results from our pilot clinical studies for Augment and our other product candidates, and the demonstrated ability of rhPDGF to stimulate tissue healing, we believe that our pipeline of orthopedic product candidates has the potential to positively impact patient care and to influence a new generation of orthopedic therapies. We believe our management expertise in the development of regenerative protein therapeutic-device combination products, combined with our intellectual property position, and the proven biology and safety of rhPDGF, all position us to become a leader in the development and commercialization of novel therapeutics for the treatment of orthopedic injuries.
BioMimetic Therapeutics Highlights
Large market opportunities
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Targeting orthopedic, spine and sports injury markets. We believe that orthobiologic opportunities represent a multi-billion dollar market driven by an aging population and demand for better therapies.
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Relatively few current therapies with potent bio-stimulatory activity are on the market.
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Relatively low market penetration will generate substantial revenues.
Proven rhPDGF technology
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FDA approval of GEM 21S for periodontal bone regeneration suggests potential for efficacy in other bone and musculoskeletal applications.
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FDA approval of Regranex® (formerly a product of Johnson & Johnson, currently a product of Systagenix Wound Management, Inc.) for healing of diabetic ulcers suggests potential for broad wound healing applications of rhPDGF.
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Clinical and pre-clinical data for Augment and Augment Injectable suggest potential for improved fracture healing and fusions.
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Pre-clinical data for rhPDGF suggests potential for bone augmentation to treat osteoporosis.
Multiple applications
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rhPDGF represents a platform technology that may have multiple applications in musculoskeletal repair.
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rhPDGF is a key stimulator of the body’s natural wound healing process. It has a well-established mechanism of action that leads to stimulation of certain cell types, including those important to bone, cartilage, tendon and ligament healing.
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Potential applications include fracture and fusion procedures in the axial (spine) and appendicular (long bone) skeleton as well as the extremities (hand and foot).
Familiar regulatory path
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FDA is regulating our regenerative protein therapeutic-device combination product candidate Augment as a medical device.
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We believe data supporting GEM 21S FDA approval should provide support for the approval of future rhPDGF products.
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Commercial manufacturing and production previously accomplished for GEM 21S. Good Manufacturing Practices compliance found acceptable and International Organization for Standardization (“ISO”) certification obtained.
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Safety profile and bioactivity of rhPDGF clearly established.
Industry trend towards
regenerative protein
therapeutic-device combination
products
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rhPDGF provides bio-active drug component to stimulate healing and the device component (matrix) provides tissue specific guide for regeneration.
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Strategy follows successful precedent in regenerative protein therapeutic-device combination products in cardiovascular (drug coated stents) and periodontal (GEM 21S) therapies.
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Strategy addresses clinical preference for bio-active implants.
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Market potential for orthobiologics already indicated by sales of INFUSE® Bone Graft (Medtronic, Inc.).
Market Trends
According to industry data, the worldwide orthopedic market was estimated at $25 billion in 2007. This includes joint replacement, fracture repair, sports injury and spinal procedures. Strong growth in the worldwide orthopedic market is expected, driven by aging baby boomers, the desire for active lifestyles well into retirement and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other diseases that cause injury to orthopedic tissues and/or impair the ability of the body to heal injuries.
In addition to its growth, the orthopedic markets are undergoing a transition. The orthopedic and sports injury markets have recently experienced increased demand for the adoption of biologically active treatments, which seek to stimulate the body’s own capabilities for regeneration of tissue at injury sites. We believe the orthopedic and sports injury industry is in the early stages of a transition from the use of traditional, passive, highly invasive metallic devices to more advanced, bio-active devices. Evidence of this trend is the fact that osteobiologics, in particular bone grafting related products, is one of the fastest growing segments with the orthopedics market. According to 2008 market research reports, the global orthobiologics market was estimated to be worth $4.2 billion in 2007, and with a growth rate of 17%, it is projected to almost double by 2012.
The impressive market performance of the Medtronic, Inc. (“Medtronic”) product INFUSE® Bone Graft for treatment of certain spinal fusions and bone fractures demonstrates market receptivity and acceptance for protein osteobiologics. Industry data indicate that sales of INFUSE were approximately $800 million in 2008. Sales reported for INFUSE for Medtronic’s second and third fiscal quarters of 2009 were flat as compared to the same periods in 2008. We believe sales for INFUSE have slowed as a result of reported complications associated with off-label use of the product in cervical spinal fusions, as well as ongoing governmental investigations into possible promotion of off-label use of INFUSE by Medtronic.
The advancement of medical technology in the treatment of orthopedic injuries also is driving an increase in the number of procedures performed annually. Treatments that are minimally invasive and offer pain relief and a return to the activities of daily living have attracted more people to see their doctors to resolve long standing orthopedic problems.
Current Therapies for Bone Disorders and Injuries
Physicians who treat orthopedic injuries first determine whether conservative, non-surgical treatment or more aggressive surgical treatment is required. This choice is generally dictated by the seriousness of the injury, the degree of tissue disruption or loss and the patient’s general health. For closed, non-surgical treatment, the primary therapies available that are designed to assist the natural healing process of the injured bone and adjacent soft tissue are electrical and ultrasonic bone stimulation. When surgical treatment is indicated, physicians will often use bone or soft tissue grafts in addition to fixation with internal and/or external mechanical devices that stabilize the injury site. Currently available therapies or procedures to stimulate the healing process in the presence of these devices include autograft, allograft or xenograft, synthetic bone or tissue graft products, platelet-rich plasma systems and bone morphogenic proteins.
Autograft, a graft using a patient’s own tissues, is the leading procedure for replacing or supplementing lost bone. Using bone tissue may stimulate bone growth and provides a scaffold or matrix onto which new bone tissue can grow. However, procurement of autograft most often requires an additional surgical procedure beyond that required to treat the injury in order to harvest bone from another site in the patient, often from the hip. This additional surgical procedure may be more painful than the patient’s primary surgical procedure to treat the injury and may lead to complications, including increased blood loss, and chronic pain or infection, which may result in an extended hospital stay. Also, there is a limited supply of available donor bone per patient. Furthermore, autograft may not be a suitable treatment for elderly patients or patients with osteoporosis, since the additional surgical procedure to harvest bone may further weaken already frail bones and the quality of the harvested bone may not be sufficient to enhance the bone healing process.
In order to eliminate the need for additional painful surgery, physicians also use allograft or xenograft. Allograft and xenograft use bone tissue harvested from a human cadaver or animal, respectively. These materials come in various forms, including chips, blocks and particulate, which allows physicians flexibility in using them to treat injured or defective bone. Allograft and xenograft bone is of varying quality depending on the donor, the process and techniques used to prepare the bone tissue and the facility at which it is processed. Using cadaver or animal bone may pose some risk of transmitting infectious diseases to the patient and although this risk is currently thought to be very low, it remains a concern among some patients. Finally, the bio-activity level of allograft bone can vary substantially and may be insufficient to assist the healing process.
Given the limitations associated with autografts, allografts and xenografts, synthetic bone grafts have become popular in recent years. Physicians use synthetic bone or tissue graft products, like calcium sulfate and tricalcium phosphate, as filler or scaffold material that can be packed into voids or gaps resulting from defects or fractures. Like allografts, synthetic bone grafts also are available in various forms. Synthetic bone grafts provide a physical mesh-work or scaffold that helps guide tissue repair, but do not contain bio-active molecules that stimulate the healing process. These materials therefore provide only a passive, physical matrix or template for tissue growth without providing any direct biological stimulus to accelerate healing.
Recent studies have demonstrated the benefits of using orthobiologicals to treat orthopedic injuries and defects. Clinicians have focused on therapies that are osteostimulatory, meaning that they lead to or induce bone regeneration. For example, platelet-rich plasma systems (“PRPs”) involve taking blood from a patient, concentrating the platelet cells from the blood and activating the cells to release growth factors, including PDGF. Because PRPs contain growth factors, they stimulate tissue regeneration. While PRPs do not involve the painful graft harvesting associated with autografts, the process to produce the platelet/blood concentrate is time-consuming and requires specialized equipment. Furthermore, the results are unpredictable because the concentrations of growth factors present in the platelet preparations vary from patient to patient.
A recent advance in the therapy for spine and orthopedic repair is the use of bone morphogenic proteins (“BMPs”). BMPs have the ability to stimulate new bone formation by causing the differentiation of stem cells into osteoblasts, which initiate bone formation. The use of BMPs does not involve the painful graft harvesting associated with autograft. BMPs have provided tremendous value to the spinal repair industry as they help speed recovery time and improve medical outcomes. Surgeons have proven to be fast adopters of these technologies, generating sales of BMPs estimated to exceed $800 million in 2008 according to analysts’ reports. Despite these benefits, BMPs have a number of disadvantages, including their high cost (approximately $4,500 per spine fusion level), their limited approved indications for use and their potential for inappropriate bone formation. In particular, unwanted bone growth near nerves or in other areas outside the targeted sites has been observed. Theses adverse reactions have led to additional corrective surgeries. In addition, complications were associated with swelling of neck and throat tissue, which resulted in compression of the airway and/or neurological structures of the neck. In addition, in some cases these complications resulted in difficulty swallowing, breathing or speaking. Because the mechanism of action of PDGF is very different from that of BMP, we do not believe that these types of complications will occur with our product candidates, and none of these types of complications have been observed during any of our clinical studies or with GEM 21S. There is only one BMP available in the United States which has been granted FDA pre-market approval for use, but in limited indications including spinal fusions, tibial fractures, sinus augmentations and localized jaw augmentations for defects associated with tooth extraction. A second BMP has been allowed in the U.S. market by the FDA under a humanitarian device exemption while it awaits pre-market approval.
While some current therapies for bone defects, such as BMPs, have yielded good results in specific indications, most have exhibited only modest success. Many of the currently available therapies do not stimulate the healing process and therefore do not address the needs of patients with impaired or delayed healing such as smokers, people with osteoporosis or diabetes and the elderly. Because of these limitations, clinicians continue to seek more cost-effective and predictable regenerative therapies that are easy to use and lead to faster tissue regeneration in a greater number of indications.
The following table summarizes some of the advantages and disadvantages of current therapies for bone disorders and injuries, including our product candidates discussed above in “- Product Candidates.”
Therapy
Advantages
Disadvantages
Autograft
Provides scaffold.
Stimulates bone growth.
High chance of incorporation.
Additional surgery required.
Pain at harvest site.
Risk of infection.
Longer recovery time.
Limited supply per patient.
Potentially lower potency material in elderly
or compromised patients.
Allograft/Xenograft
Provides scaffold.
Does not require painful graft harvesting.
May stimulate bone growth.
Available in various forms.
Inconsistent quality and sourcing leading to
variable growth stimulation.
Potential contamination / disease transmission.
Potential for immune response.
Synthetics
Abundant supply.
Provides scaffold.
Does not require painful graft harvesting.
Available in various forms.
Longer healing time versus autograft.
Limited growth stimulation.
Lacks bio-active proteins.
PRP systems
Stimulates bone growth.
Concentrates natural bio-active proteins.
Does not require painful graft harvesting.
Increased procedure time.
Requires specialized equipment.
Variable quality.
Requires scaffold.
Technique dependent.
BMPs
Stimulates bone growth.
Bio-active osteoinductive proteins.
Does not require painful graft harvesting.
Limited indications approved.
High cost.
Limited or no effect on soft tissue healing.
Potential for inappropriate bone formation and
other serious complications.
Augment and other BMTI product candidates
Stimulates bone growth.
Bio-active osteo-stimulatory protein.
Broad wound healing activity.
Does not require painful graft harvesting.
Provides scaffold.
No inappropriate bone formation.
Higher cost than currently available synthetics.
Limited early data in orthopedic clinical trials.
Limited initial indications for GEM 21S.
Current Therapies for Cartilage, Ligament and Tendon Injuries
Cartilage is the soft tissue in the joints of the body that acts as a shock absorber and lubricant during motion of the joint. In the knee there are two types of cartilage, the meniscus and the articular cartilage. Unlike other tissues in the body, cartilage cannot naturally repair itself. In 2003, over 3.4 million patients were diagnosed with injuries to the cartilage and meniscus in the knee, many of which were procedures on patients who had previously had surgery for the same or a related condition, demonstrating the need for more reliable and predictive treatments.
Newer techniques, such as autologous chondrocyte implantation (“ACI”) that attempt to repair small defects to cartilage have shown promise in small studies. ACI requires two surgeries over a period of eight weeks and requires the cultivation of the patient’s own cartilage cells in a laboratory, which results in a very high treatment cost. Procedures such as viscosupplementation, the injection of a hyaluronan (a molecule in the matrix of many connective tissues) based liquid into the knee joint, provide temporary pain relief but have limited ability to heal the tissue.
Ligaments and tendons are soft tissue structures that connect bone to bone and muscle to bone, respectively. Injuries to these structures can be treated conservatively, relying on the structures to scar down sufficiently to be stable, or with more aggressive surgical repair. Ligaments and tendons that do not heal adequately can lead to more serious arthritic changes in the joint. The treatment of these soft tissue injuries is limited to reattachment/mechanical fixation of the structures, with or without autograft or allograft tissues.
The BioMimetic Advantage
We believe that we are positioned to improve upon a variety of existing therapies through the addition of a biologically active growth factor that will stimulate tissue regeneration and repair, thereby providing faster and more predictable healing. Further, we believe that we will be in a position to open new orthopedic product segments that address underserved or unmet clinical needs, particularly in advancing the treatment of injuries to bone, cartilage, ligaments and tendons.
We believe that our pipeline of product candidates will achieve widespread market acceptance and strong market penetration by providing significant advantages compared to existing therapies. Our lead product candidate (Augment) and our other product candidates are based on the FDA-approved component rhPDGF that is combined with synthetic or natural scaffold materials, such as ß-TCP, which have a history of demonstrated safety and efficacy in previous uses. We believe that our lead product candidates provide the following advantages:
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Applications across multiple musculoskeletal indications. We believe that our product candidates have applications to treat multiple orthopedic and musculoskeletal injuries and defects, including those of bone, cartilage, ligaments and tendons. This broad spectrum of activity is due to our use of rhPDGF, which has been shown to stimulate multiple cellular and biochemical processes important for the repair of these tissues.
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Key stimulator of wound healing. Our product candidates all incorporate rhPDGF, a bio-active protein that is a key mediator of wound healing and tissue regeneration. Naturally occurring PDGF, released by platelets at sites of tissue injury, stimulates a series of cellular and biochemical events that are critical for tissue repair to occur. Bio-active proteins, such as rhPDGF, are absent from synthetic bone void fillers and are present in only limited amounts in allografts and xenografts.
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Combined benefits of both the medical device and drug components. Our product candidates are regenerative protein therapeutic-device combination products, which combine the benefits of existing devices, such as ß-TCP, that provide a physical framework or scaffold that facilitates and guides tissue growth, with the stimulatory action of the bio-active protein, rhPDGF.
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Lower potential for adverse side effects than allograft and less pain and shorter surgical procedure time than autograft. Because Augment does not rely on human tissue, the perceived risk of transmitting infectious disease from the human source, which is present for allograft, is eliminated. Additionally, unlike the procurement of autograft from the patient, which requires an additional surgical procedure in order to harvest the tissue graft, and thus increases post-operative pain, procedure time and the risk of infection for the patient, Augment does not require painful graft harvesting.
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Proven safety profile. ß-TCP and rhPDGF, components of our product candidates, are both FDA cleared and approved for marketing in other applications and have extensive safety histories. Both ß-TCP and rhPDGF are the primary components of our previously developed product, GEM 21S, which has been approved and marketed in the United States and Canada for use in periodontal indications since November 2005 and June 2006, respectively. ß-TCP is a purified, porous form of calcium phosphate similar to natural bone mineral and has been used in orthopedics for over 20 years.
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Reliable, scalable manufacturing process. We have a manufacturing supply agreement covering the active ingredient rhPDGF of our product candidates. We source rhPDGF from a division of the Novartis Group known as Novartis Vaccines and Diagnostics (“Novartis”). Novartis is also the sole supplier of the rhPDGF used in Regranex®. Novartis manufactures rhPDGF in yeast cells, thereby providing an increased safety profile over competing products derived from human or animal tissues. This manufacturing process provides a consistent product and scalable production, unlike the variability in quality of allografts, xenografts and platelet rich plasmas (“PRP”). Additionally, we have multiple business relationships that cover the different matrices that we combine with rhPDGF as part of our regenerative protein therapeutic-device combination products.
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Potential to address substantial unmet clinical needs. We are focused on the development of products that treat unmet clinical needs in large market opportunities. To date there are limited therapeutic treatments that directly and reproducibly stimulate healing processes in the areas in which we are focusing. This is particularly true for repair of certain types of bone fractures and in the treatment of sports injuries.
Strategy
Our objective is to be a leader in the development and commercialization of novel, biologically active regenerative protein therapeutic-device combination products to treat musculoskeletal injuries and conditions affecting bones, tendons, ligaments and cartilage in the orthopedic, spine and sports injury markets.
The key elements of our strategy are to:
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Develop and commercialize regenerative protein therapeutic-device combination products that are superior to current medical devices for the treatment of injuries and defects of the musculoskeletal system. We intend to use our proprietary technologies and know-how in both recombinant protein therapeutics and orthopedic devices to address unmet medical needs in orthopedics and sports injury indications.
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Focus on products with a rapid and cost-effective time to market that utilize well characterized components. We were able to develop GEM 21S from inception to U.S. marketing approval in less than five years. We have a track record of efficient product development that relies upon components used in products previously authorized for marketing by the FDA, and accessing those components through existing manufacturers. For GEM 21S, we referenced existing safety histories on the component products in our own regulatory filings and thus believe we were able to further shorten the product development cycle. We will seek to repeat this process of using FDA-cleared or approved components in our subsequent product candidates. We cannot be certain, however, that this strategy will accelerate the regulatory approval process for our product candidates, or that we will obtain such approval.
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Mitigate risks by leveraging our GEM 21S data and experience to accelerate development of our orthopedic product candidates. We believe the ability of GEM 21S to safely stimulate bone healing in chronically inflamed bone defects in the jaw resulting from periodontal diseases indicates the potential of Augment and our other product candidates, which, like GEM 21S, are based on rhPDGF and ß-TCP to stimulate bone growth in orthopedic indications. We believe that much of the data and experience generated as part of the GEM 21S clinical development will be useful in gaining the approval of our product candidates, including product manufacturing procedures and records, stability test results, analytical test methodology, pre-clinical and human safety test results and, potentially, efficacy information.
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Maximize the value of our orthopedic and sports injury product candidates through control of distribution channels. We have retained all marketing and commercialization rights to our orthopedic and sports injury product candidates. In the United States, we plan to build a sales force utilizing independent representatives managed by an in-house sales management team and supported by employee product specialists. This will allow us to have an immediate impact in the market by leveraging existing surgeon relationships. Over time, we will transition through a hybrid independent-direct structure, ultimately evolving to a direct sales model. Outside the United States, we will utilize distributor relationships to enable product introduction and adoption in local markets.
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Monetization of our orofacial therapeutic business to obtain additional funding for the development of our orthopedic and sports medicine product candidates. In January 2008, we completed a transaction with Luitpold Pharmaceuticals, Inc. (“Luitpold”) to sell them our remaining orofacial therapeutic business, including the rights to the downstream formulation, fill, finish, manufacturing and kitting of GEM 21S. As a result of this transaction, we have now further monetized our orofacial therapeutic business and received $30.0 million in cash, plus approximately $3.4 million in cash from the sale of existing GEM 21S inventory during 2008. We also expect to receive an additional $10.0 million in time-based milestone payments during 2009, as well as additional revenue from ongoing royalty payments based on net sales of GEM 21S and other products that Luitpold may develop that are based on adapting our technology to future
products in the orofacial therapeutic field. This transaction has enabled us to focus our expertise and future development efforts on our orthopedic and sports medicine product candidates, and has provided additional capital allowing us to aggressively advance our pipeline of orthopedic product candidates through clinical development and into commercialization.
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Capitalize on the broad healing activity of rhPDGF. GEM 21S and all our initial regenerative protein therapeutic-device combination product candidates utilize rhPDGF to enhance the activity of the device component, such as ß-TCP. rhPDGF stimulates cells responsible for the healing of bone, and also has been shown in animal and in vitro studies to stimulate cells responsible for the healing of cartilage, ligaments and tendons. By initially focusing our efforts on this single bio-active protein, we believe that we can efficiently leverage our expertise in this molecule to address multiple clinical indications with large market opportunities.
Product Candidates and Target Indications
The table below summarizes our current product candidates and the target indications for these product candidates that we are pursuing:
Product Candidate
Target Indication
Orthopedic
Augment Bone Graft
Augment Injectable Bone Graft
Open (surgical) fracture treatment
Closed (non-surgical) fracture treatment
Minimally invasive fracture treatment
Spine
TBD - under development
Spine fusion
Sports Injury
Augment C
Augment LT
Cartilage repair
Ligament and tendon repair
The following summary sets forth certain key market opportunities for us and the corresponding product candidates. As detailed in the product development section below, we have advanced product candidates to clinical development for certain of these opportunities, and for others we are in pre-clinical development.
Augment Bone Graft for Orthopedic and Spine Indications
Open (surgical) Treatment of Fractures / Fusions. In recent years, there have been more than one million procedures annually in the United States involving fusions and corrective surgeries of the foot and ankle. Many of these procedures utilize a bone graft material to stimulate the healing of the bone following surgery. Open, surgical treatment of fractures of the long bones (femur, tibia, fibula, humerus, radius, ulna) accounts for approximately 630,000 additional surgical procedures in the United States annually. Surgeons frequently use bone graft in these procedures to fill voids and stimulate the wound healing process.
Our goal is the achievement of approval of our product candidates for a broad range of bone grafting indications. To accomplish this goal, we are evaluating Augment in several clinical applications. Augment is similar to GEM 21S in that it combines a particulate ß-TCP with rhPDGF. We have received FDA clearance under the trade name OsteoMimetic for a proprietary ß-TCP, which is a component of our Augment product candidate, for orthopedic applications as a bone void filler when the void or gap is not intrinsic to the stability of the bone. Although we are currently not planning on marketing OsteoMimetic as a stand alone product, we believe the FDA clearance may support the regulatory review process for Augment.
Closed (non-surgical) Treatment of Fractures. Approximately 11 million fractures per year in the United States of the radius, humerus, tibia, fibula and femur occur where the treatment relies upon closed, non-surgical treatment. Of these fractures, an estimated five to 10% have impaired or delayed healing due to patient specific factors such as smoking, diabetes and osteoporosis.
We developed Augment Injectable for the minimally invasive surgical treatment of fractures as well as the treatment of fractures not requiring surgery. Augment Injectable combines rhPDGF with an injectable bone matrix. The product candidate can be injected through the skin into the fracture site, locally delivering rhPDGF to accelerate fracture repair. Closed fracture reduction procedures comprise the largest number of
orthopedic procedures today. According to hospital and outpatient procedural data, 2.8 million closed fracture procedures are performed per year. While a significant number of these fractures are treated with casts, we believe that a large number of patients who require longer healing times would benefit from our Augment Injectable product candidate. We have recently completed a pilot study in Sweden that further demonstrated the safety of the product for the treatment of distal radius fractures.
Spine Fusions. In the United States, there are more than 500,000 spine fusion procedures performed each year for the treatment of degenerative disc disease (“DDD”) and other debilitating conditions of the spine. Virtually all of these procedures utilize autograft or a bone graft substitute to assist in the achievement of the fusion. BMPs, predominantly INFUSE, have been widely used in this application and have proven to be effective in the treatment of thoraco-lumbar fusions. However, BMPs were the subject of a July 1, 2008, FDA Public Health Notification “Life-threatening Complications Associated with Recombinant Human Bone Morphogenetic Protein in Cervical Spine Fusion.” The FDA Notification states that the FDA has received “at least 38 reports of complications during the last four years with the use of rhBMP in cervical spine fusion. These complications were associated with swelling of neck and throat tissue, which resulted in compression of the airway and/or neurological structures of the neck.” Cervical spine is a segment which represents nearly half of all spine fusions performed. We believe that there is an opportunity for one of our product candidates to fill this clinical need.
Revision Total Joint Arthroplasty. Total joint arthroplasty is the definitive treatment for end stage arthritis in the hip and knee. In 2003, more than 800,000 joint replacement procedures were performed in the United States. Of these procedures, an estimated 70,000 were revision surgeries resulting from a failure or wearing out of the primary prosthesis. Revision hip and knee arthroplasty is often characterized by diminished bone and soft tissue structures supporting the implant. Surgeons will frequently use some type of bone graft as a void filler and a stimulus for the regeneration of bone. Even when the primary procedure used cement, the majority of revision procedures will be performed using a porous prosthesis, with the goal being to gain a biological interlock between the bone and the implant. We believe that a synthetic void filler that can help stimulate the biological interlock with the prosthesis could improve outcomes in these procedures.
Product Candidates for Sports Injuries
We use our platform technology to develop products which address unmet medical needs in sports injury applications, targeting cartilage, ligament and tendon repair and regeneration.
Cartilage, ligament and tendon repair and regeneration represent significant unmet clinical needs. Each year there are over 22 million sports-related injuries in the United States, most of which are treated conservatively with rehabilitation techniques. Because of the lack of therapies that can stimulate healing and regenerate these tissues, many of these injuries will result in a degree of permanent impairment and chronic pain.
Cartilage Injuries. Cartilage is the soft tissue in the joints of the body that acts as a shock absorber and lubricant during motion of the joint. Because damaged cartilage does not heal by itself and slowly breaks down over time, the result can lead to a complete wearing away of cartilage, leading to osteoarthritis. Currently, there are limited therapies to regenerate cartilage although a number of therapeutic and surgical methods are used to minimize the pain and disability from cartilage injuries. In 2007, an estimated 429,000 knee cartilage repair procedures were performed in the United States. In addition, in 2006, approximately 3.2 million injections of viscosupplementation were administered in the United States to treat cartilage defects. While these injections may reduce the pain associated with osteoarthritis for a limited time period, they do not stimulate the healing of the damaged cartilage.
Ligaments and Tendon Injuries. Ligaments, the tissue structures that connect bone to bone, and tendons, the tissue structures that connect muscles to bone, are crucial to the biomechanical functions of the body. Injuries to ligaments and tendons are very common, and while typically these injuries can be treated conservatively with rehabilitative techniques, these injuries are often slow to heal or do not heal completely. Currently, there are limited therapeutic products that stimulate the healing and regeneration of ligament and tendon tissues.
Tendon injuries are a frequent source of visits to the orthopedic surgeon. In 2009 it is estimated that over 400,000 rotator cuff tendon injuries will lead to surgical intervention in the United States. As many as 94% of these surgical repairs will be non-healing or develop
re-injury.
Ligament tears, specifically tears of the anterior cruciate ligament (“ACL”), are most commonly associated with traumatic sports injuries. Minor tears are eligible for conservative treatment, but each year more than 400,000 knee ligament reconstruction procedures are performed. The poor healing ability of the ACL contributes to the frequency of these surgeries which often require additional surgical sites for harvesting donor tissue, resulting in increased patient pain, morbidity and operating room procedure time.
Product Development Programs
In pursuing the indications discussed above for our product candidates, we have implemented a variety of pre-clinical and clinical development programs. We believe that these development programs will ultimately support the regulatory approval of our product candidates for certain of our target indications discussed above.
Product Development Programs for Orthopedic and Spine Indications
Orthopedic Clinical Development. We currently have seven clinical trials that have been completed or that are ongoing, which seek to establish the safety, clinical utility and/or effectiveness of Augment and our other product candidates in certain of our target indications discussed above. In particular, the following studies have been completed or are currently in progress:
(1) North American Augment Pilot Trial - Foot and Ankle Fusions. In February 2006, we initiated a feasibility clinical trial with Augment for the treatment of foot and ankle fusions. The protocol for this study included 20 patients at three centers with nine months follow-up. The study was designed to compare the use of Augment to the use of autograft, which is bone harvested from another location within the patient’s own body, to facilitate fusion in a foot and ankle procedure. We completed enrollment of the 20 patients in July 2006. In December 2006, we announced interim results for this study, and we updated those results in July 2007. The reported data indicated that the Augment treatment appears comparable to autograft for the stimulation of bone healing (fusion), without the pain and morbidity associated with the harvesting of the autograft.
(2) North American Augment Pivotal Study - Foot and Ankle Fusions. In June 2007, we received unconditional FDA approval for a North American pivotal clinical trial evaluating the safety and effectiveness of Augment to stimulate bone healing in foot and ankle fusions. On December 31, 2008, enrollment in this clinical trial was closed with a total of 436 patients enrolled. This clinical trial is a randomized, controlled, non-inferiority study comparing Augment to autograft, the current gold standard for bone grafting in this type of surgery. The trial was designed to enroll 396 patients; however, enrollment continued through December 31, 2008 to accommodate those additional patients who had already consented into the study and scheduled for surgery.
We plan to file a modular pre-market approval (“PMA”) application for Augment beginning in the spring of 2009. A modular submission breaks the PMA document into three sections or “modules” filed at different times that together become a complete application. The modular approach allows the applicant to potentially resolve any concerns noted by FDA earlier in the review process than would occur with a traditional PMA application, and may ultimately shorten the review and approval timeline. The pre-clinical section of the modular PMA is expected to be submitted in March 2009. The quality and manufacturing section is on schedule to be filed in the spring of 2009 allowing time for the FDA to review this data in advance of the clinical data. We expect to file the clinical data with the FDA in the fourth quarter of 2009 as the last element of our modular PMA application.
(3) Canadian Augment Pilot and Registration Trial - Foot and Ankle Fusions. In January 2006, we initiated a 20 patient open-label pilot study at three clinical centers to demonstrate the safety and clinical utility of Augment to stimulate bone regeneration in the treatment of foot and ankle fusions. The trial protocol called for a nine month patient follow-up. We successfully completed enrollment in this study in April 2006, and based on the preliminary data, in May 2006, we received authorization from Health Canada to expand the study from the original 20 patients up to 60 patients. We have also completed enrollment of the additional patients, and in September 2007, we completed a nine month follow-up of these patients. All
patients in the study received Augment in lieu of autograft to assist the fusion procedure. Study results were measured against previous fusion studies from the literature where autograft was used to augment fusion. In December 2007, we announced a summary of the results from this study. The data demonstrate a rate of fusion which appears to be comparable to autograft as measured by CT scans and radiographs, without the pain and morbidity associated with the harvesting of the autograft. Using these results, together with data on GEM 21S and pilot data on Augment in the United States and Sweden, in the second quarter of 2008, we filed a Device License Application (“DLA”) with Health Canada. The DLA submission is required in Canada for approval of the commercialization of Augment as a medical device for use in the treatment of foot and ankle fusions. We received some initial questions on the filing that we responded to in September 2008. We have now received a letter from Health Canada setting forth what we believe are all remaining open issues on the DLA. We believe that we can address these issues, and we anticipate a final decision on the DLA around the middle of 2009.
(4) EU Augment Registration Trial - Foot and Ankle Fusions. In May 2007, we initiated a clinical study in the European Union (“EU”), to evaluate Augment for the treatment of foot and ankle fusions. In November 2008, we completed enrollment with a total enrollment of 108 patients. This study is an open label trial and was designed to enroll up to 125 patients. The assumption when designing the study was that among a population of foot and ankle fusion patients, we would likely enroll 75 (60%) hindfoot/ankle fusion patients (the North American indication) and 50 (40%) midfoot fusion patients. However, when we reached 108 patients, we had exceeded the hindfoot/ankle target of 75 patients, and decided to cease enrollment. All other aspects of the original study protocol will continue unchanged. We expect that the data from the study will be released in the first quarter of 2010 and will support EU and other worldwide filings on Augment.
(5) EU Augment Pilot Trial - Distal Radius (Wrist) Fractures. We have completed patient enrollment in a pilot clinical trial in the EU (Sweden) for the evaluation of Augment for the treatment of distal radius fractures requiring surgical treatment. This pilot trial includes 19 patients at one center with six months follow-up, and is designed as a randomized controlled trial evaluating distal radius fractures treated with external fixation combined with Augment versus external fixation alone. In January 2007, we announced interim results for this study that suggest that Augment accelerated bone regeneration as measured by CT scans. The preliminary results demonstrate accelerated bone regeneration at earlier time points in patients treated with Augment combined with external fixation compared to patients treated with external fixation alone.
(6) Canadian Augment Injectable Pilot Trial - Foot and Ankle Fusions. We completed enrollment in a pilot study in December 2007 for the use of Augment Injectable for the treatment of foot and ankle fusions. Although Augment Injectable is designed as an injectable for use in closed treatment, this study utilizes essentially the same protocol as our Augment foot and ankle study in Canada, with Augment Injectable being used in an open procedure. The trial is an open-label study with seven of the 10 patients considered to be high risk for poor healing as a result of co-morbidities. The results of the study demonstrated that all 10 patients achieved complete clinical success by six months after surgery. In addition, analysis of CT scans at three to four months after surgery showed that 90 percent of the patients had achieved radiographic fusion.
(7) EU Augment Injectable Pilot Trial - Distal Radius Fractures. In January 2007, we initiated a pilot clinical study in Sweden to investigate the use of Augment Injectable in patients being treated for fractures of the distal radius (wrist). A total of 21 patients have been enrolled in the study, consisting of 11 patients treated with Augment Injectable combined with external fixation and 10 patients treated with external fixation alone. Enrollment in the study was completed in December 2007. The results of data analysis shows patients treated with Augment Injectable demonstrated earlier bone formation at three and six weeks as measured by CT scans. The six month evaluation of “complete bone fill,” defined as more than 75 percent fill of the fracture gap, was 100 percent for Augment Injectable patients, as compared to 82 percent for the patients treated with external fixation alone. The product candidate was demonstrated to be safe, with no reported adverse events related to the study devices.
With the studies outlined above, together with data from our clinical development program for GEM 21S, we now have clinical data for three anatomic sites (the foot and ankle, the distal radius, and the jaw) which suggest that our platform technology stimulates bone regeneration. In addition, to date there have been no product related Serious Adverse Events (“SAE”) attributed to Augment or Augment Injectable related to any of the clinical studies outlined above.
We believe that the results from our three studies for Augment and the ability of GEM 21S to stimulate bone formation in jaw bone defects suggest the potential for our product candidates to be effective in stimulating new bone growth in a variety of orthopedic applications, including our target indications that are outlined above.
Product Development Programs for Sports Medicine Indications
Based upon the demonstrated biology from both in vivo and in vitro studies which indicate that rhPDGF can stimulate the various structural cell types that make up cartilage, ligaments and tendons, we believe that rhPDGF has the potential to be an effective therapy for the repair of these tissue types. Cartilage, ligament and tendon tissues are composed of cells of mesenchymal origin. rhPDGF has been shown to stimulate the recruitment and proliferation of both the mature structural cell types of these tissues as well as the recruitment and proliferation of undifferentiated mesenchymal stem cells, causing a localized increase in the number of these cells at a site of injury. Once present, the stem cells can be differentiated into the appropriate cell type for the tissue undergoing repair. These can include differentiation into chondrocytes for cartilage repair, or tenocytes and fibroblasts for tendon and ligament repair.
Following on the demonstrated ability of rhPDGF to stimulate tissue repair in the periodontal space, where the regeneration of both bone and ligament tissues are required for the restoration of normal tissue structure, we believe that rhPDGF is a candidate for development in the sports medicine area where these types of tissues are similarly involved. We have started pre-clinical studies to evaluate matrix materials that can be combined with rhPDGF for tendon, ligament and cartilage repair applications. The matrix materials under evaluation are being selected to specifically target the tissue type to be treated. In light of the present phase of research and development, we cannot provide any assurance that we will be successful in developing, obtaining regulatory approval for or commercializing our sports medicine product candidates.
Scientific Background
PDGF Family of Growth Factors
Platelet-derived Growth Factor (“PDGF”) is a family of growth factors which contains five different members that are found naturally in the body. Our platform technology is based on a synthetic version of the BB form of PDGF (“PDGF-BB”) which is a homodimer of two separate B-chains that are covalently linked together through disulfide bonds. The PDGF-BB that is used in our product candidates is manufactured using recombinant DNA technology in a yeast expression system. The gene that codes for the human sequence of the PDGF B-chain is inserted into yeast cells. The gene is then activated to cause the production of the PDGF B-chain protein. The protein is secreted from the yeast cell into its culture media, and the protein purified from the media to homogeneity.
There are two PDGF receptors that are present on the surface of target cells. Depending upon the number and ratio of the receptors present on a cell, the cell will be more or less responsive to the different PDGF family members. Recombinant human Platelet-derived Growth Factor (“rhPDGF-BB”) has the ability to bind with high affinity to both receptors, providing it with unique properties within the PDGF family. Depending on the location of an injury, different cell types that respond to rhPDGF-BB are stimulated.
Role of PDGF in Tissue Repair
Tissue repair at injury sites occurs as a result of a complex series of events. For successful tissue repair to take place, the appropriate cell types must be recruited to the injured site in a coordinated fashion. One of the proteins that is critical for orchestrating this process is PDGF.
PDGF stimulates a wide spectrum of biological activities that places it at the top of the wound healing cascade. PDGF is responsible for stimulating a variety of cellular events critical for the initiation and progression of tissue repair. These include attracting cells into a wound site and stimulating their replication. Depending upon the location of the injury, different cell types respond to PDGF. Animal and in vitro studies have demonstrated that cell types that are stimulated include bone forming cells, cartilage forming cells, MSCs which are bone and cartilage-lineage forming cells, and fibroblasts which are tendon and ligament forming cells. Published animal and in vitro studies demonstrate that PDGF may also work together with other growth factors to enhance the formation of new blood vessels by stimulating vascular smooth muscle cells, a cell type critical for the formation of blood vessels. Additionally, PDGF promotes
the release of other growth factors and signaling molecules that accelerate the natural healing process. As a result of its ability to stimulate a multi-faceted set of activities, we believe PDGF plays an integral role in initiating the tissue repair process in the different clinical indications that we are pursuing.
To support the stimulatory properties of rhPDGF, as part of our platform technology we combine the protein with resorbable three-dimensional scaffolds that are specifically tailored for the tissue being treated. This approach provides both the matrix critical to support the in-growth of the appropriate cell types, while providing for the release of rhPDGF in a localized manner under controlled delivery conditions. It also combines the benefits of delivering a stimulatory growth factor with the structural requirements of a synthetic scaffold to support cell migration and tissue regeneration at the wound site.
GEM 21S Clinical Results Validate our Platform Technology
We have validated our platform technology, which combines rhPDGF with resorbable scaffold materials, through the successful development of GEM 21S for use in periodontal bone and tissue regeneration. We believe that the FDA and Health Canada approval of GEM 21S provides proof of concept and suggests that our platform technology promotes tissue regeneration and will apply to a broad array of musculoskeletal applications, such as orthopedic, spine and sports injury applications.
In initial human clinical studies, we tested the use of rhPDGF with allograft to stimulate tissue healing. Nine months after placing the test material around teeth in patients with severe periodontal disease, the teeth and adjacent jawbone were excised and we analyzed the teeth and accompanying tissue for new bone formation. The data demonstrated that rhPDGF treatment caused significant new bone formation adjacent to the tooth root.
Based on this data, we conducted a 180 patient double-blind, randomized controlled trial to evaluate the safety and efficacy of GEM 21S for the regeneration of bone and adjacent tissues in the treatment of periodontal defects. The study contained three groups: two groups were given different doses of rhPDGF used in combination with ß-TCP and the third group, the active control, was given ß-TCP plus a buffer (i.e., no rhPDGF). We included only subjects with advanced bone defects requiring surgical treatment in the study. The patients received standard periodontal surgery followed by the placement of the test compound.
The results of the clinical study demonstrate that GEM 21S treatment led to a significant increase in healing of the bone defect in the periodontal lesion. Additionally, GEM 21S treatment expedited soft tissue attachment gain at three months following surgery (CAL gain) and decreased gum tissue recession, further demonstrating the efficacy of GEM 21S.
The results of the clinical study further demonstrated that GEM 21S treatment led to statistically significant benefits in bone growth and healing of the periodontal bone defects compared to the active control group that received the ß-TCP, without the addition of rhPDGF. There were no serious adverse events during the study that were directly attributed to the use of GEM 21S and no statistically significant difference in the incidence of adverse events between the treatment and control groups. In summary, the results of the pivotal clinical study demonstrated that GEM 21S is a safe and effective treatment, leading to acceleration of healing and the stimulation of new bone formation.
Divestiture of Orofacial Therapeutic Business
In January 2008, we completed the sale of our orofacial therapeutic business to Luitpold. This sale was pursuant to a December 2007 asset purchase agreement with Luitpold. As part of this transaction, Luitpold acquired the rights to the downstream formulation, fill, finish, manufacturing and kitting of GEM 21S. We had previously outsourced all of these operations, and have facilitated the transfer of these operations to Luitpold. Luitpold also acquired all rights to the GEM trademark family, and certain rights to adapt our future orthopedic and sports medicine products to dental applications. Luitpold is responsible for all research and development costs related to all future products in the dental and cranio-maxillofacial field based upon rhPDGF-BB, including GEM ONJ, which was developed to treat osteonecrosis of the jaw (the degeneration of bone in the jaw), for which we had received orphan drug status. Luitpold was also granted certain rights to negotiate on other growth factors and product improvements that we license from third parties. Through our existing commercial supply agreement with Novartis, we will remain the sole source supplier of bulk rhPDGF-BB to Luitpold. In addition, the U.S. and Canadian regulatory approvals, including the GEM 21S PMA, have been or will be transferred to Luitpold, and Luitpold now has
responsibility for all future filings. The rights to the GEM 21S EU regulatory approval will be transferred once approval is obtained. We have agreed not to compete with Luitpold in the orofacial therapeutic business for a specified period of time. We were obligated under the asset purchase agreement to provide certain transitional services to facilitate the transfer of technology and regulatory approvals. With the exception of our continued efforts to obtain regulatory approval of GEM 21S in Europe, we have now satisfied those obligations. We may continue to provide additional transitional services to Luitpold for a fee. The asset purchase agreement also includes indemnification provisions under which each party indemnifies the other party for certain losses.
In addition to the 2007 asset purchase agreement, at the transaction’s closing in January 2008, we entered into the following ancillary agreements with Luitpold:
1.
Amended and Restated Exclusive Sublicense Agreement - This agreement supersedes the December 2003 exclusive sublicense agreement between the parties and grants Luitpold exclusive rights to utilize intellectual property we license from ZymoGenetics and Harvard in periodontal, oral, and cranio-maxillofacial indications, as well as veterinary indications. The term of this agreement extends until 2026.
2.
Exclusive License Agreement - This agreement sets forth Luitpold’s exclusive rights to utilize intellectual property we currently own or which we may develop or license in the future in applications above the neck in humans and in veterinary applications. This agreement and Luitpold’s royalty obligations will expire upon the later of the date when the licensed patents have all expired or December 31, 2026. The exclusive license agreement also includes sale restrictions under which we are only permitted to sell products containing the licensed technology, directly or indirectly, to entities who do not have a valid dental or veterinary license, or equivalent outside of the United States. Luitpold is only permitted to sell products containing the licensed technology, directly or indirectly, to any individual who has a valid dental or veterinary license, or equivalent qualification outside of the United States. Luitpold is permitted, however, certain limited exceptions to this sales restriction in the United States and Canada for any product for which it obtains regulatory approval for a craniofacial indication. In addition, we have agreed to a non-compete provision that provides that until six months following the expiration of Luitpold’s royalty obligation, we will not directly or indirectly, sell or distribute any licensed products for applications above the neck in humans or in any veterinary application. If we are acquired by a third party, this non-compete provision will only prevent the acquirer from selling rhPDGF-BB containing products. Under the exclusive license agreement, we also grant Luitpold a nontransferable right of first negotiation to apply certain new technology to applications above the neck in humans or veterinary applications. This new technology includes new growth factor products and new matrix materials that we develop that are subject to third party license agreements we enter into prior to a certain date.
3.
Agreement Terminating the Manufacturing and Supply Agreement - This agreement terminates our 2003 manufacturing and supply agreement with Luitpold, which obligated Luitpold to purchase all of its requirements for GEM 21S from us and we were obligated to meet these requirements to the extent they were consistent with Luitpold’s forecasts.
4.
Agreement Terminating the Research, Development and Marketing Agreement - This agreement terminates our 2003 research, development and marketing agreement, which outlined our obligations to Luitpold to support its marketing of products subject to the 2003 manufacturing and supply agreement and the 2003 exclusive sublicense agreement. However, under this agreement we continue to seek EU regulatory approval for GEM 21S, and are obligated to transfer ownership of that approval to Luitpold once it is obtained. In addition, Luitpold remains obligated to pay us a $10.0 million milestone payment following the approval. The payment must be made within thirty days of our executing the necessary documents to transfer the approval to Luitpold.
5.
Trademark License and Concurrent Use Agreement - This agreement granted us the royalty-free right to continue to use GEM family trademarks during a transition period that expired on January 4, 2009, and granted us a royalty-free perpetual license to use the GEM family trademarks on our website and in investor and public relations materials referencing Luitpold’s products and our historical development work.
6.
Supply Agreement - This agreement sets forth the terms under which we will supply Luitpold with bulk supply of rhPDGF for use in manufacturing commercial products within the dental and cranio-maxillofacial fields, which Luitpold is obligated to purchase exclusively from us until the end of 2018. There are no minimum purchase requirements, and the annual product prices vary depending on our average price that we pay to Novartis. Luitpold is also obligated to pay a handling charge. The agreement will expire upon the expiration of the 2008 exclusive license agreement and may be terminated under certain circumstances. Unless earlier terminated, the agreement automatically renews at the end of the initial term for consecutive one year periods unless either party terminates the agreement by written notice at least two years prior to the renewal date.
Orthopedic Scientific Advisory Board
We have established an orthopedic scientific advisory board that brings expertise in orthopedics, as well as FDA experience. During 2008, there were two meetings of the orthopedic scientific advisory board. We consult individual members of our scientific advisory board separately approximately once each quarter on clinical and pre-clinical study design, product and product candidate formulation, clinical indications and on all applications of tissue engineering, focusing on orthopedic indications.
We pay consulting fees, including stock option grants, to members of our scientific advisory board for the services they provide to us, in addition to reimbursing them for incurred expenses. The amounts vary depending on the nature of the services. We paid to or on behalf of the current members of our scientific advisory boards aggregate consulting fees and reimbursements of $52,664, $424,290 and $297,137 in 2008, 2007 and 2006, respectively. In addition, we granted options to purchase an aggregate of 5,000, 12,500 and 34,050 shares of our common stock to current members of our scientific advisory boards in 2008, 2007 and 2006, respectively.
The current members of our orthopedic scientific advisory board are:
Name
Professional affiliation
Gary Friedlaender, M.D.
Director of BioMimetic; Chairman of BioMimetic’s Orthopedic Scientific Advisory Board; Wayne O. Southwick Professor of Orthopaedics and Professor of Pathology, Chair of Orthopedics and Rehabilitation, Department of Orthopaedics and Rehabilitation, Yale University School of Medicine
Edward Akelman, M.D.
Professor and Vice Chairman, Warren Alpert Medical School of Brown University, Department of Orthopedics; Chief, Division of Hand, Upper Extremity and Microvascular Surgery, Rhode Island Hospital
Arnold Caplan, Ph.D.
Director of Skeletal Research Center and Professor of Biology, Case Western Reserve University
Michael Ehrlich, M.D.
Vincent Zecchino Professor and Chairman, Department of Orthopedics, the Warren Alpert Medical School of Brown University; Surgeon-in-Chief, Rhode Island and Miriam Hospital
Jeffrey Hollinger, D.D.S., Ph.D.
Professor of Biological Sciences and Biomedical Engineering and Director, Bone Tissue Engineering Center, Carnegie Mellon University
Joseph Lane, M.D.
Professor of Orthopedic Surgery, Assistant Dean, Medical Students, Weill Cornell Medical College; Chief, Metabolic Bone Disease Service, Hospital for Special Surgery; Attending, Orthopedics, New York-Presbyterian Hospital
John Mathis, M.D., M.Sc.
Medical Director, The Centers for Advanced Imaging, Roanoke, Virginia
Sales, Marketing and Distribution
In order to sell our orthopedic products in the United States, we intend to establish a network of independent agents who will represent our products with orthopedic surgeon customers. These representatives will be selected based on their experience in selling orthopedic products used in the operating room, along with their familiarity with foot and ankle and bone grafting surgeries. The agency network will be managed by a company sales management team and will be supported by company employed product specialists, who will train the sales force and provide product education for the surgeon customers. We expect that by the end of the first year of sales in the United States, we will have a 100 person sales force representing our initial orthopedic product in the market.
Outside the United States, we intend to employ distributors to represent our products with orthopedic surgeons. These distributors will be selected on the basis of their existing business relationships in the orthopedic field, along with the sales force and distribution capabilities to effectively penetrate the market with the Augment product line. Furthermore, we will rely on these distributors to manage physical distribution, customer service and billing services for our international customers.
Manufacturing
We have developed a network of suppliers, manufacturers, and contract service providers to provide sufficient quantity of our product candidates through the development and clinical testing phases.
We have signed a manufacturing supply agreement with Novartis covering the bioactive component of our product candidates, rhPDGF. Novartis’s rhPDGF is used as a component in two FDA approved or cleared products (GEM 21S and Regranex) and is, therefore, manufactured in accordance with all applicable regulatory quality standards. We also have signed an agreement with Kensey Nash for development and supply of specific scaffolds for use in orthopedic and sports medicine applications. These agreements provide us with the key constituents of our lead product candidates.
Following a similar supply chain strategy we used successfully for the GEM 21S product, we use contract facilities to complete the manufacturing, packaging and final product testing for our clinical orthopedic product candidate kits. Pyramid Laboratories, Inc. performs the aseptic vial filling of the rhPDGF component. Penn Pharmaceutical Services, Ltd. produces the filled ß-TCP cup and produces the final kit assembly. Isotron plc sterilizes the cups. We and AAI Development, Inc. perform the final product testing.
Our current facility in Franklin, Tennessee, consisting of approximately 32,000 square feet, provides office, research and development and quality control space. That facility is currently leased from Noblegene Development, LLC (“Noblegene”) under a lease agreement that was effective as of January 1, 2007, which replaced in its entirety our previous lease with Noblegene dated April 2004, as amended in July 2005.
In August 2007, we entered into another lease agreement with Noblegene on a second building. This August 2007 lease is for approximately 30,000 square feet of space in a new building to be built in the same complex as our headquarters in Franklin, Tennessee. We intend to utilize the new space as a good manufacturing practices (“GMP”) manufacturing facility and will move certain of our manufacturing operations to the new space once it is completed. This new facility will provide space to meet our current and projected needs for certain aspects of our manufacturing and product release testing for our orthopedic and sports medicine product candidates. In addition, it will provide for future expansion of office, lab, or manufacturing space and capabilities for other product candidates that we are developing. Once the facility is operational we may continue to utilize third party suppliers for certain aspects of our manufacturing operation, including bulk ß-TCP and rhPDGF production, ß-TCP cup filling, component and final kit sterilization and distribution. We anticipate that the building shell will be complete in late 2009, and the build out will begin shortly thereafter. In order to qualify the facility as a GMP manufacturing facility, the build out must be complete, the utility systems, process and testing equipment must be installed and qualified, regulatory filings must be assembled and filed, and regulatory agency inspections must be passed prior to receiving approval. We anticipate that this process will take up to 24 months, and we expect the facility will be approved for commercial operations in 2011.
Our Company’s President and Chief Executive Officer (“CEO”) is a former partner in Noblegene but maintained an ownership interest at the time we entered into both lease agreements. In March 2008, our CEO sold his ownership interest back to Noblegene. Since the owner of Noblegene is a brother-in-law of our CEO’s wife, Noblegene continues to be a related party.
Supply Agreements
Novartis/Chiron
In July 2004, we entered into a commercial supply agreement with Chiron Corporation (now Novartis) that will permit us to obtain bulk supply of rhPDGF for use in manufacturing products for commercial sale. Under the terms of the agreement, Novartis will exclusively supply us with rhPDGF for use in certain periodontal and orthopedic applications. We are obligated to purchase minimum specified quantities of rhPDGF. Under the agreement, the annual product prices we are obligated to pay vary depending on the quantity of rhPDGF we order. The agreement covers a seven-year term and is cancelable under certain circumstances. Unless earlier terminated, the agreement automatically renews at the end of the initial term for consecutive one year periods unless either party terminates the agreement by written notice at least two years prior to the renewal date. If Novartis terminates the agreement, it is required to provide us with a minimum supply of rhPDGF during a transition period and to transfer to us the necessary manufacturing technology enabling us to set up an alternative source of rhPDGF.
Kensey Nash
In June 2005, we entered into a Development, Manufacturing and Supply Agreement with Kensey Nash to develop commercial products using specific scaffolds manufactured and supplied by Kensey Nash for use in orthopedic and sports medicine applications. Under the agreement, Kensey Nash will exclusively manufacture and supply the scaffold materials for us and we will be responsible for final formulation, fill and finish activities. We are responsible for obtaining U.S. and foreign regulatory approvals for any resulting products. We are required to commercialize any resulting products in the United States within 12 months of receipt of FDA approval. We have the exclusive right to distribute and sell the resulting products worldwide. In addition, we agreed to pay royalties to Kensey Nash based on net sales of commercial products worldwide for the term of the agreement.
The agreement covers a 10-year term following the commercialization of a product, with two automatic two-year extensions, unless either party provides notice not to extend. If Kensey Nash elects not to extend the agreement, it is obligated to continue to supply us with predefined amounts of products for a limited time beyond the agreement’s expiration. The agreement terminates if we do not make our first commercial sale of a product developed under the agreement within seven years. We paid Kensey Nash an initial payment on the effective date of the agreement. We made a second payment after we agreed to continue the agreement beyond a feasibility period.
In December 2006, we amended the agreement with Kensey Nash to accelerate certain milestone payments associated with the development of a matrix for sports medicine applications. In particular, we made a payment to Kensey Nash upon executing the amendment as compensation for development that had been completed relating to a matrix for sports medicine applications, and we agreed to make certain quarterly payments to Kensey Nash during 2007 and 2008. To offset these payments, the milestone payments in the original agreement relating to the first commercial sale of product were reduced by an amount equal to the quarterly payments and the payment made upon signing the amendment.
In August 2008, however, we terminated the then current development project relating to a product for tendon and ligament injury treatment. This termination was effective in September 2008, at which time we stopped making the quarterly payments to Kensey Nash. We are still required to make subsequent payments to Kensey Nash based on the achievement of certain regulatory and commercial milestones of the orthopedic products developed under the agreement.
In April 2008, we amended the agreement with Kensey Nash to provide for new payments from us to Kensey Nash for the accomplishment of development milestones for potential new products.
Each of our suppliers has the ability to curtail manufacturing of the products at their discretion with the only requirements being that each must provide a minimum level of future product prior to ending production and each must transfer the technology to another manufacturer.
Milestone, Asset Purchase and Royalty Payments
As discussed above, under our agreements with Luitpold, ZymoGenetics, Harvard, Kensey Nash and Novartis, various milestone and asset purchase payments are required. Luitpold is required to make certain milestone and asset purchase payments to us, and we are required to make certain milestone payments to ZymoGenetics, Harvard, Kensey Nash and Novartis, based on the occurrence of certain events. These milestones and asset purchase payments relate to the achievement of certain transfers of assets, clinical developments, regulatory filings and approvals and sales levels for GEM 21S and our product candidates. Under our 2003 agreements with Luitpold, upon receipt of FDA approval of GEM 21S, we received a $15.0 million milestone payment from Luitpold and an additional $5.0 million milestone payment from Luitpold on the second anniversary of our FDA approval. Under our 2007 asset purchase agreement with Luitpold, we received $15.0 million from Luitpold upon closing the transaction in January 2008, and an additional $15 million sixty days following the closing. We were required to make milestone payments to ZymoGenetics in connection with the initiation of pivotal clinical trials of GEM 21S, certain regulatory filings and approvals for GEM 21S, the receipt of FDA approval of GEM 21S, the filing of the Augment IDE, and the initiation of the Augment Canadian registration study. We were required to make milestone payments to Harvard in connection with the receipt of FDA approval of GEM 21S, the initiation of pivotal clinical trials of GEM 21S, our execution of a manufacturing and supply agreement with Novartis and our acquisition of certain patents from the Institute of Molecular Biology. We are required to make milestone payments to Kensey Nash in connection with certain time frames, the initiation of clinical trials, certain regulatory filings, product approvals, and/or commercial launch of Augment Injectable.
Many of the events triggering a milestone or asset purchase payment requirement remain contingent and have not yet occurred. Assuming that all future contingencies are met and all payments are made, the milestone and asset purchase payments that we are required to make will be partially offset by the milestone and asset purchase payments that we receive. Although we cannot know when milestones will be achieved, the milestones and asset purchase fees that we have received or paid, or which we currently anticipate will be paid to us or paid by us in the near term, during 2009 to 2010, will result in a net payment to us of $17.9 million. We anticipate that milestone and asset purchase payments to us or by us from 2011 to 2014 will result in a net payment by us of $8.4 million, resulting in an overall net payment to us of $9.5 million
through 2013.
We are required to make minimum royalty payments to ZymoGenetics. For periodontal products, the minimum royalty payments to ZymoGenetics consist of $2.0 million in 2008. For orthopedic products, the minimum royalty payments to ZymoGenetics consist of $1.0 million in the first full year following the first commercial sale, and $1.5 million and $2.5 million in the second and third years, respectively.
The milestone payments that may be material that we expect to receive during 2009 to 2010 would result in payments to us from Luitpold totaling $20.0 million. This total consists of the following:
Other than the $20.0 in milestones from Luitpold listed above, we believe that a substantial portion of future milestone payments are not material to our business or prospects because we anticipate that they will occur well in the future, or they are conditioned upon achieving product sales targets which also are well in the future or represent sales targets which are substantially in excess of the current or foreseeable sales targets, the achievement of which, if attained, would be in the future.
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for our products, product candidates, technology and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing upon our proprietary rights. We seek to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.
We derive our patent rights from four sources: (1) ownership rights derived from technology we developed; (2) ownership rights purchased from the Institute of Molecular Biology; (3) licensing rights acquired from Harvard; and (4) licensing rights acquired from ZymoGenetics. We believe that our owned and licensed patents provide freedom to operate under patents that cover the composition and use of tissue growth factors.
Currently, the most important among these patent rights are three U.S. patents, each of which covers our current orthopedic product candidates (Augment and Augment Injectable) and GEM 21S. In addition, these patents may provide protection for additional product candidates under development depending on the final formulations for those products. One of these patents was recently issued in January 2009. This patent is based on technology that we developed internally, and covers product formulations that include a defined PDGF dosage range combined with a TCP or a TCP/collagen matrix having certain defined particle size and porosity characteristics. This patent will provide protection until at least June 2025. The second of these patents is a method patent that we co-own and exclusively license from Harvard. This patent covering the use of PDGF to promote the growth of damaged bone, periodontium or ligament, and it will expire in June 2009. The U.S. Patent Office, however, has granted us a patent term extension for this patent as a result of the FDA’s regulatory review of GEM 21S. Under the term extension, this patent will now expire in March 2012 with respect to products covered by the patent that are used in the same indications for which GEM 21S has been approved. The third of these patents is exclusively licensed from ZymoGenetics in the dental and orthopedic fields. This patent is a composition patent that covers the isolated form of rhPDGF included in our current orthopedic product candidates and GEM 21S, and as a result of a term extension will expire in October 2010.
Outside of the United States, Augment, Augment Injectable and GEM 21S are protected in the EU and Canada by licensed patents that are counterparts to the ZymoGenetics U.S. patent noted above. The EU patent expires in 2010, and Canadian patent expires in 2015. Foreign counterparts to the U.S. patent that issued to us in January 2009 are currently pending in Europe (designating 31 European countries) and in 14 other countries around the world, including all major orthopedic markets. Although the U.S. patent was granted, we cannot be certain that these pending counterpart foreign patent applications will ultimately be granted, or if granted that the scope of the claims would be broad enough to provide protection for Augment, Augment Injectable, GEM 21S or our other product candidates.
In total we now own or co-own 12 U.S. patents, about 80 foreign patents, and 48 pending U.S. and foreign patent applications. Furthermore, we have exclusively licensed 19 U.S. patents and over 50 foreign patents. The following is a summary of all our patent rights.
Rights Owned Based on Internally Developed Technology
We made a number of patent filings during 2008 and early 2009, which included converting international patent applications into individual national patent applications in various foreign countries, converting U.S. provisional patent applications into U.S. utility patent applications and international patent applications, and filing new U.S. provisional patent applications. As a result of these filings and the issuance of one of our pending applications, with regard to technology that we developed internally we now own one issued U.S. patent, six pending U.S. utility patent applications, eight pending U.S. provisional patent applications, four pending international utility patent applications, and 36 pending national phase foreign applications. The 54 pending patent applications seek to cover specific dosages of PDGF or specific medical applications of PDGF that we have developed. Our patent applications are pending review by the U.S. Patent and Trademark Office and by various foreign patent offices. We are unable to predict what protection will be afforded by these applications or if any protection will be ultimately granted.
Rights Purchased from IMB, including rights Co-Owned and Exclusively Licensed From Harvard
We own an additional 11 U.S. patents and numerous foreign counterpart patents, which were purchased from the Institute of Molecular Biology (“IMB”). Nine of the patents purchased from IMB are co-owned with Harvard. As discussed further below, Harvard has exclusively licensed its rights in these patents to us. Several of these patents cover compositions of various growth factors, including PDGF, either alone or in combination with one another. Others of these patents cover methods of using such compositions to heal wounds or to promote the growth of bone, ligaments, or nerves. Of these 11 owned U.S. patents, five remain unexpired. The next of these patents to expire will occur in September 2009, and the last of these patents will expire in June 2025. The six patents that have expired did not cover our current orthopedic product candidates or GEM 21S.
We entered into a license agreement with Harvard that provides us with an exclusive worldwide license to the patents we co-own with Harvard, and which are directed towards the use of rhPDGF and other growth factors for the healing and restoration of bone and other tissue defects. The agreement term extends to the date of the last to expire licensed patent. Under the agreement we are obligated to make certain royalty and milestone payments to Harvard. Harvard may terminate the agreement if we fail to make such payments, maintain certain insurance requirements, or fail to pursue commercialization of the licensed technology. In addition, Harvard may terminate the agreement if we are convicted of certain criminal acts, become insolvent, or breach an obligation under the agreement and fail to cure the breach within 120 days of notice. We may terminate the agreement by giving Harvard 120 day’s written notice of our intent to do so.
Rights Licensed From ZymoGenetics
We have licensed 19 U.S. patents and their foreign counterparts from ZymoGenetics covering various formulations of PDGF or manufacturing processes for PDGF. Of the seven of these licensed U.S. patents that remain unexpired under their original patent terms, the first patent will expire in February 2010 and the last of these patents will expire in May 2016. An additional ZymoGenetics licensed patent remains in force as a result of a patent term extension. The term extension will expire in October 2010.
We entered into two license agreements with ZymoGenetics that give us the exclusive rights within certain fields of use under the ZymoGenetics patents. The first agreement, entered into in March 2001, provides us with rights to develop rhPDGF in the periodontal and cranio-maxillofacial applications. Under this agreement, we acquired a license under patent rights and know-how controlled by ZymoGenetics, to develop, make, import, sell and commercialize products for the treatment of periodontal disease and bone defects of the head and face. We paid ZymoGenetics an initial license fee and agreed to meet certain due diligence milestones, including working to register one or more of the licensed products for commercial sale. In addition, we agreed to pay royalties to ZymoGenetics based on net sales of licensed products on a country-by-country basis for the term of the agreement. We also are responsible for payments based upon the achievement of certain milestones as well as a sales bonus payment if total sales by us, our affiliates and sublicensees exceed an agreed upon threshold. In addition, we are required to pay ZymoGenetics a sublicense fee as a result of the sublicense to the ZymoGenetics’ patents that we granted to Luitpold. Virtually all of our rights under this agreement have been sublicensed to Luitpold, initially in a December 2003 exclusive sublicense agreement and later in a 2008 amended and restated sublicense agreement as part of our sale of our dental business to Luitpold.
The second agreement, entered into in January 2003, expands the field of use for the development of rhPDGF to include bone, cartilage, tendon and ligament applications. We paid ZymoGenetics an initial license fee in shares of our common stock, and agreed to meet certain similar due diligence milestones as under the 2001 license described above. We also agreed to pay royalties to ZymoGenetics based on net sales of licensed products on a country-by-country basis for the term of the agreement. In addition, we are responsible for payments based upon the achievement of certain milestones as well as a sales bonus payment if total sales by us, our affiliates and sublicensees exceed an agreed upon threshold.
Both ZymoGenetics agreements expire on a country-by-country basis upon the expiration of the last to expire patent in each country. Either party may terminate these agreements upon the insolvency of the other party, or if the other party breaches a material provision and fails to cure such breach within 60 days of notice.
Potential Intellectual Property Issues
Some of our competitors and others manufacture and sell products containing some of the components of GEM 21S and Augment, namely rhPDGF-BB and ß-TCP. Certain intellectual property covering our use of rhPDGF-BB is owned and licensed to us by ZymoGenetics. ZymoGenetics has licensed rhPDGF-BB to other third parties for technical uses and indications that differ from ours. ß-TCP has been used in various products for over 20 years, and we are not aware of any intellectual property covering ß-TCP that our products would infringe.
Although we believe that the patents and patent applications, including those that we license, provide a competitive advantage, the patent positions of biopharmaceutical and device companies are highly complex and uncertain. The combination product and medical device industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Furthermore, as the number of entrants into our market increases, the possibility of a patent infringement claim against us grows. Although we have not received notice of any claims, and are not aware that our product candidates infringe other parties’ patents and proprietary rights, our product candidates and methods may be covered by U.S. patents held by our competitors. Any claim relating to infringement of patents that is asserted against us may be costly and time-consuming to defend, would divert the attention of our management and key personnel, and may require us to pay substantial damages. If a successful infringement claims is asserted against us, we may be unable to commercialize some of our product candidates unless we able to obtain a license, or may have to cease some of our business operations, which could severely harm our business. Consequently, our success will depend in part on our not infringing patents issued to others, including our competitors and potential competitors, as well as our ability to enforce our patent rights.
We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us, where appropriate. We also require our employees, consultants and advisors who we expect to work on our product and product candidates to agree to disclose and assign to us all inventions conceived during the work day, developed using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our product and product candidates or to obtain and use information that we regard as proprietary.
In the future, we may collaborate with other entities on research, development and commercialization activities. Disputes may arise about inventorship and corresponding rights in know-how and inventions resulting from the joint creation or use of intellectual property by us and our collaborators, licensors and consultants. In addition, other parties may circumvent any proprietary protection that we do have. As a result, we may not be able to maintain our proprietary position.
Trademarks
Augment™ and OsteoMimetic™ are our only trademarks. GEM 21S®, GEM 21A™, and GEM® were transferred to Luitpold in connection with our divestiture of our orofacial therapeutic business. As part of that transaction, we abandoned applications for registration of GEM OS, GEM C, and GEM LT in the United States and abroad.
Competition
Developing and commercializing new orthobiologic products is highly competitive. The market is characterized by extensive research efforts and rapid technological change. We face intense competition worldwide from medical device, biomedical technology and medical products and combination products companies, including major pharmaceutical companies. We may be unable to respond to technological advances through the development and introduction of new products. Many of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources than us. These competitors also may be in the process of seeking FDA or other regulatory approvals, or patent protection, for new products. Our competitors may commercialize new products in advance of our products. Our products also face competition from numerous products and procedures, which currently are considered part of the standard of care. In order to compete effectively, our products will have to achieve widespread market acceptance.
Augment
Our Augment product candidates will compete with an array of synthetic bone graft materials, ranging from resorbable pure phase ß-TCP granules to calcium sulfate pre-formed pellets. In addition, more than 20 allograft base tissue and demineralized bone matrix options are available to orthopedic surgeons. If we elect to pursue spinal fusion, tibial factures or non-union fractures, we will also compete with bone morphogenic proteins, including INFUSE (Medtronic) and BMP-7 (OP-1, Stryker Corporation). INFUSE and OP-1 may be under review for additional indications which could compete with our products.
Some of the largest orthopedic companies in the United States include Stryker, DePuy Orthopaedics, Inc. (a subsidiary of Johnson & Johnson), Zimmer Holdings, Inc., Medtronic, Synthes, Inc., Biomet, Inc., Smith & Nephew Group plc and Wright Medical Group, Inc. These companies distribute allograft and synthetic bone graft materials. In addition, some of the nation’s largest tissue processors and procurement agencies (including Osteotech, Inc., the Musculoskeletal Transplant Foundation (“MTF”) Regeneration Technologies, Inc., LifeCell Corporation and CryoLife, Inc.) and numerous tissue banks also distribute allograft tissue. Osteotech distributes its products directly and through agreements with DePuy, Smith & Nephew, MTF and the American Red Cross. MTF also processes allograft into a proprietary demineralized bone matrix, which is distributed by Synthes, while Regeneration Technologies’ allograft tissue is used in a variety of graft materials distributed by Exactech, Inc., Medtronic and Stryker.
Biomet, DePuy and Medtronic also sell PRP systems, while Wright Medical’s Ignite system and Orthovita’s Imbibe syringe cater to surgeons who prefer to use bone marrow aspirate (“BMA”).
Cartilage, Ligament and Tendon
We expect our cartilage, ligament and tendon product candidates to compete against currently approved therapies, including: viscosupplementation, the ACI product, Carticel®, distributed by Genzyme Tissue Repair, and commercially available PRP and BMA systems.
Regulatory Matters
FDA Regulation
Each of our products must be cleared or approved by the FDA before it is marketed in the United States. Both before and after approval or clearance in the United States, our product candidates are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act and/or the Public Health Service Act, as well as by other regulatory bodies. FDA regulations govern, among other things, the following activities in which we and our contract manufacturers, contract testing laboratories and suppliers are involved:
Failure to comply with the law could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product candidate, product recall, product seizure, interruption of production, operating restrictions, suspension on withdrawal of product approval, injunctions, or criminal prosecution.
The FDA has determined that Augment and Augment Injectable are combination products because they consist of a combination of a device (ß-TCP) and a biologic drug (rhPDGF). For a combination product, the FDA determines what center or centers within the FDA will review the product and its indication for use, and also determines under what legal authority the product will be reviewed. For the current indications, Augment and Augment Injectable are being reviewed by the Center for Devices and Radiological Health, with participation by the Center for Drug Evaluation and Research, under the medical device regulations. We expect that the FDA will review our other regenerative protein therapeutic-device combination product candidates in the same manner. We cannot be sure, however, that the FDA will not select a different center and/or legal authority for one or more of our other product candidates, in which case the governmental review requirements would vary in some respects. If a product candidate were reviewed under the drug or biologic regulations by a different FDA Center (for example, the Center for Drug Evaluation and Research), then the regulatory requirements could change and additional data may be required (for example, multiple clinical studies).
FDA Approval or Clearance of Medical Devices
In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy:
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Class I: general controls, such as labeling and adherence to quality system regulations;
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Class II: general controls, pre-market notification (510(k)), and specific controls such as performance standards, patient registries, and postmarket surveillance; and
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Class III: general controls and approval of a pre-market approval (“PMA”) application.
Each of our product candidates are in Class II or Class III, and require FDA authorization prior to marketing, by means of either a 510(k) clearance or a PMA approval. The FDA has determined that Augment and Augment Injectable are class III devices requiring a PMA. Our product candidates containing a grafting material alone should be eligible for clearance via the 510(k) route. For example, we obtained clearance for a 510(k) application for clearance of ß-TCP grafting material as a “bone void filler.”
To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to another legally marketed medical device; that is, it has the same intended use, and is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness than does a legally marketed device. 510(k) submissions generally include, among other things, a description of the device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information, and the results of performance testing. In some cases, a 510(k) submission must include data from human clinical studies. Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence. After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or that would constitute a significant change in intended use, requires a new 510(k) clearance or, if the device would no longer be substantially equivalent, would require a PMA. If the FDA determines that the product does not qualify for 510(k) clearance, then the company must submit and the FDA must approve a PMA before marketing can begin.
A PMA application must provide a demonstration of safety and effectiveness, which generally requires extensive pre-clinical and clinical trial data. Information about the device and its components, device design, manufacturing and labeling, among other information, must also be included in the PMA. As part of the PMA review, the FDA will inspect the manufacturer’s facilities for compliance with Quality System Regulation, or QSR, requirements, which govern testing, control, documentation and other aspects of quality assurance with respect to manufacturing. If the FDA determines the application or manufacturing facilities are not acceptable, the FDA may outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. During the review period, an FDA advisory committee, typically a panel of clinicians and statisticians, is likely to be convened to review the application and recommend to the FDA whether, or upon what
conditions, the device should be approved. The FDA is not bound by the advisory panel decision, but the FDA often follows the panel’s recommendation. If the FDA finds the information satisfactory, it will approve the PMA. The PMA approval can include post-approval conditions including, among other things, restrictions on labeling, promotion, sale and distribution, or requirements to do additional clinical studies post-approval. Even after approval of a PMA, a new PMA or PMA supplement is required to authorize certain modifications to the device, its labeling or its manufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA. During the review of either a 510(k) or PMA, the FDA may request more information or additional studies and may decide that the indications for which we seek approval or clearance should be limited. We cannot be sure that our product candidates will be cleared or approved in a timely fashion or at all. The review of combination products is often more complex and more time consuming than the review of a product under the jurisdiction of only one center within the FDA. In addition, laws and regulations and the interpretation of those laws and regulations by the FDA may change in the future. We cannot foresee what effect, if any, such changes may have on us.
Clinical Trials of Medical Devices
One or more clinical trials are almost always required to support a PMA application and is sometimes required to support a 510(k) submission. Clinical studies of unapproved or uncleared medical devices or devices being studied for uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements. If an investigational device could pose a significant risk to patients, the sponsor company must submit an IDE application to the FDA prior to initiation of the clinical study. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. Clinical studies of investigational devices may not begin until an institutional review board, or IRB, has approved the study.
During the study, the sponsor must comply with the FDA’s IDE requirements. These requirements include investigator selection, trial monitoring, adverse event reporting, and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with reporting and record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical trial is being conducted may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk. During the approval or clearance process, the FDA typically inspects the records relating to the conduct of one or more investigational sites participating in the study supporting the application.
Post-market Regulation of Medical Devices
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
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the QSR regulation, which governs, among other things, how manufacturers design, test, manufacture, exercise quality control over, and document manufacturing of their products;
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labeling and claims regulations, which prohibit the promotion of products for unapproved or ''off-label’’ uses and impose other restrictions on labeling; and
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the Medical Device Reporting regulation, which requires reporting to the FDA certain adverse experiences associated with use of the product.
We continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements, as do our suppliers, contract manufacturers, and contract testing laboratories.
International sales of medical devices manufactured in the United States that are not approved or cleared by the FDA are subject to FDA export requirements. Exported devices are subject to the regulatory requirements of each country to which the device is exported.
International Regulation
We are subject to regulations and product registration requirements in many foreign countries in which we may sell our products, including in the areas of:
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product standards;
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packaging requirements;
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labeling requirements;
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import and export restrictions; and
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tariff regulations, duties and tax requirements.
The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.
The primary regulatory body in Canada is Health Canada. In addition to needing appropriate data to obtain market licensing in Canada, we must have ISO 13485:2003 certification. We currently have this certification and will need to maintain it in order to have the potential to gain approval of a product candidate in Canada.
The primary regulatory environment in Europe is that of the EU, which consists of 25 member states and 42 competent authorities encompassing most of the major countries in Europe. In the EU, the European Medicines Agency (“EMEA”) and the EU Commission have determined that GEM 21S will be regulated as a medicinal product.
We formed a wholly owned subsidiary in the United Kingdom, BioMimetic Therapeutics Limited, in October 2005 to facilitate our EU regulatory filings. We cannot be sure that additional clinical trials will not be required, that EU regulatory approval for GEM 21S will be granted in a timely fashion, or at all, or that there will be no delays in transferring the device dossier into a drug dossier in the EU.
U.S. Anti-kickback and False Claims Laws
In the United States, there are federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in federal healthcare programs. These laws are potentially applicable to manufacturers of combination products regulated by the FDA as medical devices, such as us, and hospitals, physicians and other potential purchasers of such products. Other provisions of state and federal law provide civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. Although we plan to structure our future business relationships with purchasers of our products to comply with these and other applicable laws, it is possible that some of our business practices in the future could be subject to scrutiny and challenge by federal or state enforcement officials under these laws. This type of challenge could have a material adverse effect on our business, financial condition and results of operations.
Third-party Reimbursement
We anticipate that sales volumes and prices of Augment and any other products we commercialize will depend in large part on the availability of reimbursement from third party payers. Third party payers include governmental programs such as Medicare and Medicaid, private insurance plans, and workers’
compensation plans. These third party payers may deny reimbursement for a product or therapy if they determine that the product or therapy was not medically appropriate or necessary. The third party payers also may place limitations on the types of physicians that can perform specific types of procedures. Also, third party payers are increasingly challenging the prices charged for medical products and services. Some third party payers must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use the products or therapies. Even though a new product may have been cleared for commercial distribution, we may find limited demand for the device until reimbursement approval has been obtained from governmental and private third party payers.
In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific product lines and procedures. There can be no assurance that procedures using our products will be considered medically reasonable and necessary for a specific indication, that our products will be considered cost-effective by third party payers, that an adequate level of reimbursement will be available or that the third party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably.
A key component in the reimbursement decision by most private insurers and the Centers for Medicare & Medicaid Services, which administers Medicare, is the assignment of an ICD-9 code, covering inpatient surgical procedures or a Current Procedural Terminology (“CPT”) code, which covers outpatient, ambulatory surgical center procedures. These codes are used in the submission of claims to insurers for reimbursement for medical services. While there are no specific ICD-9 or CPT codes for our product candidates, the target procedures such as ankle fusions and open fracture treatment do have specific procedure codes which provide a global payment for all products and services related to the surgical procedure. Consequently, we are confident that procedural coding will not be an issue. The challenge that we will face in the reimbursement arena is convincing third party payers to cover the use of our products, when reported under the existing surgical codes. We intend to provide clinical evidence and economic arguments to payers to detail how the use of our products provide equivalent clinical outcomes to autologous bone graft, but avoid the additional time, patient discomfort and potential morbidity related to the harvesting of the autologous bone graft. For certain other indications of our orthopedic product candidates (e.g., closed fractures), a new reimbursement code will likely be required, and we will seek a new code prior to commercializing such product candidates.
In the United States, some insured individuals are receiving their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. Some managed care programs are paying their providers on a per capita basis, which puts the providers at financial risk for the services provided to their patients by paying these providers a predetermined payment per member per month, and consequently, may limit the willingness of these providers to use our products.
We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. There can be no assurance that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation, or reimbursement policies of third party payers will not adversely affect the demand for our products or our ability to sell these products on a profitable basis. The unavailability or inadequacy of third party payer coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition.
Subsidiaries
In October 2005, we formed a wholly owned subsidiary in the United Kingdom, BioMimetic Therapeutics Limited, for the purpose of effecting our EU regulatory filings. In October 2006, we formed a wholly owned subsidiary, BioMimetic Therapeutics Pty Ltd., for the purpose of effecting our Australian regulatory filings.
Employees
As of February 28, 2009, we employed 88 people, of which 37 were employed in research and development, 21 in regulatory and quality assurance, seven in operations and 23 in general and administrative. One employee holds both D.M.D and D.M.Sc. degrees, one employee holds both D.D.S. and D.M.Sc. degrees, one employee holds a Danish M.Sc., and nine additional employees hold Ph.D.
degrees. None of our employees are represented by a labor union, and we believe our employee relations are good.
Segment Information
We have determined that we are principally engaged in one operating segment. Our product development efforts are primarily in the treatment of musculoskeletal injuries and diseases, such as orthopedic, spine and sports injury applications for the repair and regeneration of orthopedic tissues, including bone, cartilage, ligaments and tendons.
Financial Information About Geographic Areas
For the three years ended December 31, 2008, our product sales of GEM 21S were made to Luitpold through an exclusive agreement with Luitpold, which is responsible for the worldwide marketing, sales, distribution and development of GEM 21S. Such product sales to Luitpold were made exclusively in the United States, our country of domicile. Refer to our consolidated financial statements disclosed in Item 8 within this Annual Report.
Corporate and Investor Information
Our company was incorporated in Tennessee in April 1999 under the name BioMimetic Pharmaceuticals, Inc. In June 2001, we reincorporated in Delaware, and in July 2005, we changed our corporate name to BioMimetic Therapeutics, Inc. We make available on our website (www.biomimetics.com), free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or otherwise furnish it to, the Securities Exchange Commission (“SEC”).
Item 1A.
Item 1A. RISK FACTORS
Risks Relating to Our Business
Current economic conditions could adversely affect our operations.
According to the National Bureau of Economic Research, the U.S. economy has been in a recession since December 2007. This economic downturn and the instability of markets have made the business climate more volatile and more costly. Consequently, our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe our existing cash and investments, in addition to expected milestone receipts, will be sufficient to meet our anticipated cash requirements at least through the first quarter of 2010, a more radical economic downturn or increase in our expenses could require us to seek additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price, and could require us to delay or abandon product development plans or plans to acquire additional technology.
There is a risk that one or more of our suppliers, clinical investigators, consultants and other partners may encounter difficulties during these challenging economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.
The current conditions may also adversely affect our potential customers, including patients, medical professionals and their practices, hospitals and other health care providers. These conditions may also impact the overall amount spent on healthcare generally. This could result in a decrease in the demand for our products, longer sales cycles, slower adoption of our new technology and increased price competition.
Our product candidates are in various stages of development and may not be developed or commercialized successfully.
Our product candidates are based on technologies that often times have not been used previously in the manner and combination we propose and must compete with more established treatments currently accepted as the standards of care. Market acceptance of our products will largely depend on our ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use.
We are subject to the risk that:
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the FDA or a foreign regulatory authority finds some or all of our product candidates ineffective or unsafe;
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we do not receive necessary regulatory approvals;
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we are unable to get some or all of our product candidates to market in a timely manner;
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we are not able to produce our product candidates in commercial quantities at reasonable costs; and
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the patient and physician community does not accept our product candidates.
In addition, our product development programs may be curtailed, redirected, eliminated or delayed at any time for many reasons, including:
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adverse or ambiguous results;
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undesirable side effects that delay or extend the trials;
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inability to locate, recruit, qualify and retain a sufficient number of clinical investigators or patients for our trials;
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regulatory delays or other regulatory actions;
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failure to satisfy one or more requirements or restrictions imposed by the FDA as a basis for approving the initiation of a clinical study;
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difficulties in obtaining sufficient quantities of the particular product candidate or any other components needed for our pre-clinical testing or clinical trials;
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difficulties in obtaining the necessary regulatory support from our raw materials suppliers to enable us to obtain or maintain regulatory approval to market our product or product candidates; or
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re-evaluation of our clinical development strategy.
We cannot predict whether we will develop and commercialize successfully any of our product candidates. If we fail to do so, we will not be able to generate substantial revenue.
Our current product candidates are all based on the same protein, rhPDGF-BB. If one of our product candidates, or one of another company’s products or product candidates containing rhPDGF-BB or a similar growth factor, reveals safety or fundamental efficacy issues in clinical use or in clinical trials, then the development path for all our other current product candidates may be impacted.
The development of each of our product candidates is based on our understanding of how the protein rhPDGF-BB contributes to the repair of bone and soft tissue. Soft tissue includes muscles, tendons and ligaments that connect, support or surround the bones and organs of the body. While there are important differences in each of our product candidates in terms of its purpose, each product candidate focuses on accelerating the repair of musculoskeletal tissue and relies on the ability of rhPDGF-BB to stimulate the body’s natural healing processes.
Since we are developing our product candidates in parallel, if one product candidate has negative clinical trial results or is shown to be ineffective, it may impact the development path or future development of the other product candidates. If we find that one product candidate is unsafe, it may impact the development of our other product candidates.
If a product or product candidate developed by another company contains the same protein rhPDGF-BB, or a similar growth factor, as our product candidates, and if their product or product candidate reveals safety or fundamental efficacy issues, then the development of our product candidates may be impacted as well. Likewise, investor perception concerning a potentially negative impact on our product candidates may cause our stock price to decline or may result in stock price volatility.
For example, in March 2008, the FDA issued an “Early Communication” regarding a potential safety issue related to patients who had received repeated treatments with Regranex ®, which is a product of Systagenix Wound Management, Inc. Systagenix acquired the product from Johnson & Johnson in December 2008. Regranex is composed of rhPDGF-BB in a non-sterile ointment, and had been marketed by Johnson & Johnson since 1997 for the chronic treatment of non-healing diabetic foot ulcers. Regranex is approved for up to 140 daily applications, in contrast to our product candidates which are used as a single application and for different indications and different patient populations. In June 2008, the FDA added a warning to the labeling of Regranex that stated that “An increased rate of mortality secondary to malignancy was observed in patients treated with three or more tubes of Regranex Gel in a post-marketing retrospective cohort study. Regranex Gel should only be used when the benefits can be expected to outweigh the risks. Regranex gel should be used with caution in patients with known malignancy.”
The FDA Early Communication specifically addressed Regranex use and did not address other rhPDGF-BB containing products, including our product candidates. Following the FDA’s issuance of the Early Communication, our stock price declined, and other similar announcements may impact our stock price in the future. In April 2008, the FDA issued a letter to us confirming that our North American Augment pivotal study for the treatment of foot and ankle fusions should continue as designed and that the FDA has taken no action to change the study status, confirming that our IDE study of Augment remains approved by the FDA.
If we fail to meet our obligations under our existing license agreements or fail to enter into new license agreements, our business may be materially adversely impacted.
Our rights to the development, use and marketing of our product candidates are governed by a series of licensing agreements, including those with Harvard and ZymoGenetics. These license agreements provide us with rights to certain intellectual property created by the licensor, which allow us to develop and commercialize our product and product candidates.
As part of these agreements, we are required to make payments to the licensors and comply with other obligations as we progress through product development and commercialization. If we fail to make these payments or satisfy other obligations for any reason, these licenses could be terminated by the licensors, thereby limiting our ability to market our product or limiting our ability to maintain exclusivity with respect to our product or product candidates. Furthermore, if a dispute arises regarding our obligations under these agreements, our business may be materially adversely impacted.
Our licensors or others may dispute the scope of our rights under any of these licenses. Additionally, the licensors under these licenses might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating results.
We may need additional licenses to intellectual property owned by third parties in order to commercialize new products. If we cannot obtain these additional licenses, we may not be able to develop or commercialize these future products.
Our rights to use technologies licensed to us by third parties are not entirely within our control, and we may not be able to produce our product and product candidates without these technologies.
We depend upon a limited number of specialty suppliers of raw materials.
Our ability to manufacture our product candidates depends on a limited number of specialty suppliers of raw materials. In particular, we depend upon Novartis to supply us with sufficient quantities of rhPDGF for clinical development activities. We are obligated to purchase minimum specified quantities of rhPDGF. Our agreement with Novartis is cancelable under certain circumstances.
We have established certain relationships with ß-TCP suppliers and are continuing to evaluate ß-TCP products and other matrices from these potential suppliers for use in orthopedic applications. There is a risk that we will not be able to secure adequate sources of rhPDGF or
ß-TCP to meet our clinical needs for our orthopedic applications.
The failure of a supplier to continue to provide us with these materials at a price or quality acceptable to us, or at all, would impede our ability to manufacture our product candidates. Moreover, our failure to maintain strategic reserve supplies of each significant single-sourced material used to manufacture product candidates that we develop may negatively impact our development and commercialization activities. If our specialty suppliers cannot perform as agreed, we may not be able to replace them in a timely manner or on terms that are acceptable to us and the production of our product candidates would be interrupted, resulting in delays in clinical trials and additional costs. We will be required to obtain regulatory clearance from the FDA or foreign regulatory authorities before we can use different suppliers or components. If we have to switch to replacement suppliers, we may face additional regulatory delays and the manufacture and delivery of our product candidates could be interrupted for an extended period of time, which may delay completion of our clinical trials, regulatory approval of our product candidates or commercialization of any approved products.
We and our suppliers are subject to numerous federal, state and local laws relating to matters, including safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. In addition, advertising and promotional materials relating to medical devices are subject to regulation by the Federal Trade Commission in specific instances. We and our suppliers may be required to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing regulatory requirements, our failure or the failure of our manufacturers to comply with these requirements, or the adoption of new requirements could
delay the development of our product candidates or regulatory approval of our product candidates or successful commercialization of any approved products, resulting in additional losses to us.
We may be unable to establish or enter into the necessary business relationships and agreements with other companies who provide a component critical to the development and commercialization of our product candidates, including intellectual property, raw materials, manufacturing assistance, regulatory assistance and other assistance necessary to develop and market our product candidates successfully.
Our product development programs and potential commercialization of our product candidates will require substantial additional cash to fund expenses. We rely heavily upon arrangements with third-parties for the raw materials and intellectual property used in the development of our product candidates. These third parties also provide us with assistance in manufacturing our product candidates and seeking regulatory approvals. Our strategy includes continuing to develop business relationships with other biotechnology companies to assist us in potentially commercializing our product candidates. We face significant competition in seeking appropriate business relationships, which may be complex and time-consuming to negotiate, document and implement. We may not be able to enter into any such business relationships or agreements on terms that are acceptable to us, or at all. If that were to happen, we may have to curtail the development or delay the commercialization of our product candidates.
At this point in time, we do not have an alternative source of rhPDGF. If we are not able to obtain rhPDGF from Novartis, we will not be able to meet our supply obligations to Luitpold for rhPDGF after our current inventory is depleted. Based on Luitpold’s current forecasts for its rhPDGF needs and our planned clinical study programs for our product candidates and our anticipated pre-clinical studies, the rhPDGF in our inventory should meet our needs for approximately the next 15 months. Under the terms of our supply agreement, Novartis is required to support our efforts to establish our production of rhPDGF should it terminate the agreement; however, establishing a manufacturing process to replace Novartis’ will take multiple years and a significant financial investment to complete, if at all, and there is no assurance we would be successful in that effort. We also may not be able to manufacture any product candidates that contain rhPDGF, including our lead product candidate, Augment, after our current inventory is depleted.
We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing facilities are unable to provide an adequate supply of products, our growth could be limited and our business could be harmed.
We are moving forward with plans to occupy a new manufacturing facility in the same complex as our headquarters in Franklin, Tennessee. We intend to move certain steps of the later stages of the manufacturing process of our orthopedic and sports medicine product candidates into that facility, including final formulation, filling the vials that will be packaged in the finished kits, and assembling the kits. We anticipate that the building shell will be complete in late 2009, and the build out will begin shortly thereafter. In order to qualify the facility as a GMP manufacturing facility, the build out must be complete, the utility systems, process and testing equipment must be installed and qualified, regulatory filings must be assembled and filed, and regulatory agency inspections must be passed prior to receiving approval. We anticipate that this process will take up to 24 months, and we expect the facility will be approved for commercial operations in 2011.
Currently we are utilizing at least four contract facilities to complete the manufacturing, packaging and final product testing for our Augment clinical study kits, and we are using at least three contract facilities to complete the manufacturing, packaging and final product testing for our Augment Injectable clinical study kits. If there were a disruption to the new manufacturing facility or those of our contract manufacturers, we would have no other means of manufacturing our product candidates until we were able to restore the manufacturing capability at the new facility or develop alternative manufacturing facilities. If we were unable to produce sufficient quantities of our product candidates for use in our current and planned clinical trials, or if our manufacturing process yields substandard products, our development and commercialization efforts could be delayed.
We have limited resources, facilities and experience to commercially manufacture our product candidates. In order to produce our product candidates in the quantities that we anticipate will be required
to meet future market demand we will need to complete qualification of the commercial scale production process at our contract facilities and at our in-house facility. There are technical challenges to developing and qualifying commercial-scale manufacturing operations. Further, building a new facility will require the investment of substantial additional funds as well as hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. We may not successfully complete the process qualification activities in a timely manner. This could strain our existing managerial, operational, financial and other resources. Furthermore, if we fail to manage our growth effectively we may not be able to produce our product candidates in sufficient quantities to meet the future requirements for the product. If we are unable to manufacture a sufficient supply of any product candidate, our revenues, business and financial prospects would be adversely affected. In addition, if the in-house production process is not efficient or produces products that do not meet quality and other standards, our future gross margins may decline.
If we are unable to establish adequate sales and marketing capabilities, we may not be able to generate significant revenue and may not become profitable.
We do not have a dedicated sales force and have limited experience in the sales, marketing and distribution of regenerative protein therapeutic-device combination products or drug products. In order to commercialize our product candidates, we must develop our sales, marketing and distribution capabilities or make arrangements with a third party to perform these functions. If we are unable to establish adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate significant revenue and may not become profitable.
As a result of any arrangements we may enter into with third parties to perform sales, marketing and distribution services, our product revenues could be lower than if we directly marketed and sold any product candidate that we may develop. Furthermore, as a result of any marketing and sales arrangements we may enter into with other companies, any revenues received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. Some of our future distributors may have products or product candidates that compete with ours, and they may have an incentive not to devote sufficient efforts to marketing our products. If our relationships with future distributors do not progress as anticipated, or if their sales and marketing strategies fail to generate sales of our products in the future, our business, financial condition and results of operations would be harmed.
The orthopedic product industries are highly competitive and subject to rapid technological change. If our competitors are better able to develop and market products that are safer and more effective than any products that we may develop, our commercial opportunity will be reduced or eliminated.
Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products in the field of biologics. We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions in the United States and abroad. Many of our principal competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with, or mergers with or acquisitions by, large and established companies or through the development of novel products and technologies.
Our competitors may:
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develop and patent processes or products earlier than us;
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obtain regulatory approvals for competing products more rapidly than us; or
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develop more effective or less expensive products or technologies that render our technology or product and product candidates obsolete or non-competitive.
The industry in which we operate has undergone, and we expect it to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technological advances are made. Our competitors may develop and commercialize medical devices, regenerative protein therapeutic-device combination products, biologic products or pharmaceutical products that are safer or more effective,
have fewer side effects or are less expensive than any products that we may develop. For example, we are aware of companies that are developing various other technologies for treating orthopedic injuries and disease, which could make our product candidates obsolete. We also compete with our competitors in recruiting and retaining qualified scientific and management personnel, in establishing clinical trial sites and patient registration for clinical trials, and in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.
If our product and product candidates do not gain market acceptance among physicians, patients and the medical community, we may be unable to generate significant revenue, if any.
Even if we obtain regulatory approval for our product candidates, they may not gain market acceptance among physicians, healthcare payers, patients and the medical community. Market acceptance will depend on our ability to demonstrate the benefits of our approved products in terms of safety, efficacy, convenience, ease of administration and cost effectiveness. In addition, we believe market acceptance depends on the effectiveness of our marketing strategy, the pricing of our approved products and the reimbursement policies of government and third party payers. Physicians may not prescribe our approved products for a variety of reasons and patients may determine for any reason that our product is not useful to them. If any of our approved products fail to achieve market acceptance, our ability to generate revenue will be limited.
The loss of our key management and scientific personnel may hinder our ability to execute our business plan.
As a small company with 88 employees as of February 28, 2009, our success depends on the continuing contributions of our management team and scientific personnel and on maintaining relationships with the network of medical and academic centers in the United States that conduct our clinical trials. We depend on the services of our key scientific employees and the principal members of our management staff. Our success depends in large part upon our ability to attract and retain highly qualified personnel. We face intense competition in our hiring efforts from other pharmaceutical and biotechnology companies, as well as from universities and nonprofit research organizations, and we may have to pay higher salaries to attract and retain qualified personnel. The loss of one or more of these individuals, or our inability to attract additional qualified personnel, could substantially impair our ability to implement our business plan.
We face an inherent risk of liability in the event that the use or misuse of our product candidates results in personal injury or death.
The use of our product candidates in clinical trials and the sale of any approved products may expose us to product liability claims which could result in financial losses. Our clinical and commercial product liability insurance coverage may not be sufficient to cover claims that may be made against us. In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely impact or eliminate the prospects for commercialization of the product candidate, or sale of the product, which is the subject of any such claim. Off-label use of our product may occur. While we do not promote any off-label use, off-label uses of products are common and the FDA does not regulate a physician’s choice of treatment. Off-label use or misuse of any product for which we obtain approval may subject us to additional liability.
If we are sued in a product liability action, we could be forced to pay substantial damages and the attention of our management team may be diverted from operating our business.
We currently manufacture investigational regenerative protein therapeutic-device combination product candidates that are implanted in patients during surgery or injected into patients at the treatment site. In addition, we are developing additional similar products for additional surgical indications. As a result, we may be subject to a product liability lawsuit. In particular, the market for spine products has a history of product liability litigation. Under past agreements with our former distributor for GEM 21S and agreements with certain suppliers, we indemnify these parties from certain product liability claims. Any product liability claim brought against us and/or a part that we have indemnified, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, we would have to pay any amount awarded by a court in excess of policy limits. We maintain
product liability insurance in the annual aggregate amount of up to $20 million, although our insurance policies have various exclusions. Thus, we may be subject to a product liability claim for which we have no insurance coverage, in which case we may have to pay the entire amount of any award. Even in the absence of a claim, our insurance rates may rise in the future to a point where we may decide not to carry this insurance. A meritless or unsuccessful product liability claim would be time-consuming and expensive to defend and could result in the diversion of management’s attention from our core business. A successful product liability claim or series of claims brought against us in excess of our coverage could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Intellectual Property
If we cannot protect our intellectual property, our ability to develop and commercialize our product candidates may be severely limited.
Our success will depend in part on our ability and on the ability of Harvard and ZymoGenetics to maintain and enforce patent protection for the therapeutic uses of rhPDGF. Without patent protection, other companies could offer substantially identical products for sale without incurring the sizable discovery, development and licensing costs that we have incurred. Our ability to recover these expenditures and realize profits upon the sale of approved products would then be diminished.
We rely on our intellectual property, as well as the intellectual property of ZymoGenetics and the intellectual property we co-own with Harvard to provide freedom to operate and to exclude others from developing rhPDGF for the treatment of general bone defects and bone defects associated with advanced periodontal disease, fractures and other indications. We currently own or exclusively license three unexpired U.S. patents covering certain unique aspects of our product candidates. Other patents that covered our product candidates have expired. We do not believe, however that such patent expirations have significantly affected our intellectual property position.
Our license agreements with Harvard and ZymoGenetics provide exclusivity to certain designated patents. The exclusivity under our ZymoGenetics licenses is limited to the periodontal, orthopedic and sports medicine fields. However, if any patent or other rights which we own or exclusively license from ZymoGenetics or Harvard is challenged, a court may determine that the patents are invalid or unenforceable. Even if the validity or enforceability of a patent is upheld by a court, a court may not prevent alleged infringement on the grounds that the activity is not covered by the patent claims. Any litigation, whether to enforce our rights to use our or our licensors’ patents or to defend against allegations that we infringe third-party rights, would be costly and time consuming, and may distract management from other important tasks.
Neither we nor our licensors may be able to obtain additional issued patents relating to our technology. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. In addition, our patent applications, patents and our licensors’ patents may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions typically are not published until 18 months after filing, or in some cases ever, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.
We also rely on trade secrets, know-how and other proprietary information. We seek to protect this information, in part, through the use of non-disclosure and confidentiality agreements with employees, consultants, advisors and others. These agreements may be breached and we may not have adequate remedies for a breach. In addition, we cannot ensure that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information and prevent their unauthorized use or disclosure. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our proposed products, disputes may arise as to the proprietary rights to the information, which may not be resolved in our favor. The risk that other
parties may breach confidentiality agreements, or that our trade secrets become known or independently discovered by competitors, could adversely affect us by enabling our competitors, who may have greater experience and financial resources, to copy or use our trade secrets and other proprietary information in the advancement of their products, methods or technologies.
Our success also depends on our ability to operate and commercialize our product candidates without infringing the patents or proprietary rights of others.
Third parties may claim that we or our licensors or suppliers are infringing their patents or are misappropriating their proprietary information. In the event of a successful claim against us or our licensors or suppliers for infringement of the patents or proprietary rights of others, we may be required to, among other things:
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pay substantial damages;
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stop using our technologies;
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stop certain research and development efforts;
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develop non-infringing products or methods; or
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obtain one or more licenses from third parties.
A license required under any such patents or proprietary rights may not be available to us, or may not be available on acceptable terms. If we or our licensors or suppliers are sued for infringement, we could encounter substantial delays in, or be prohibited from, developing, manufacturing and commercializing our product candidates.
We employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. To the extent our employees are involved in research areas that are similar to those areas in which they were involved at their former employers, we may be subject to claims that these employees may have used or disclosed the alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against these claims, which could result in substantial costs and be a distraction to management and may have a material adverse effect on us, even if we are successful in defending these claims.
Delays encountered during the FDA approval process could shorten the patent protection period during which we have the exclusive right to commercialize technologies or could allow others to come to market with similar technologies before us.
Regulatory Risks
We are subject to extensive governmental regulation including the requirement of FDA approval or clearance before our product candidates may be marketed.
Both before and after approval or clearance of our product candidates, we, our product candidates, our suppliers, our contract manufacturers and our contract testing laboratories are subject to extensive regulation by governmental authorities in the United States and other countries. Failure to comply with applicable requirements could result in, among other things, any of the following actions:
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warning letters;
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fines and other monetary penalties;
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unanticipated expenditures;
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delays in the FDA’s approving or clearing or the FDA’s refusing to approve or clear a product candidate;
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions;
Our product candidates require FDA authorization by means of an approval or clearance prior to marketing. Some of our product candidates, including Augment and Augment Injectable, are regulated as combination products. For a combination product, the FDA must determine which center or centers within the FDA will review the product candidate and under what legal authority the product candidate will be reviewed. For the current indications, Augment is being reviewed by medical device authorities at the Center for Devices and Radiological Health, with participation by the Center for Drug Evaluation and Research. Augment requires an approved PMA before it can be marketed. The process of obtaining FDA approval of a PMA is lengthy, expensive, and uncertain, and we cannot be sure that our regenerative protein therapeutic-device combination product candidates regulated by the FDA as medical devices, or any other product candidates, will be approved in a timely fashion, or at all. If the FDA does not approve or clear our product candidates in a timely fashion, or at all, our business and financial condition may be adversely affected. We cannot be sure that the FDA will not select a different center and/or different legal authority for our other product candidates, in which case the path to regulatory approval would be different and could be more lengthy and costly. The review of combination products is often more complex and more time consuming than the review of a product candidate under the jurisdiction of only one center within the FDA.
In addition to the approval and clearance requirements, other numerous and pervasive regulatory requirements apply, both before and after approval or clearance, to us, our product and product candidates, and our suppliers, contract manufacturers, and contract laboratories. These include requirements related to:
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testing;
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manufacturing;
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quality control;
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labeling;
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advertising;
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promotion;
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distribution;
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export;
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reporting to the FDA certain adverse experiences associated with use of the product; and
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obtaining additional approvals or clearances for certain modifications to the products or their labeling or claims.
In November 2005, we received approval from the FDA to commence a feasibility trial with Augment for the treatment of foot and ankle fusions and we completed patient enrollment of 20 patients in July 2006. In May 2007, we received approval from the FDA to initiate patient enrollment in a pivotal clinical trial of Augment for the treatment of foot and ankle fusions. Under this approval, in December 2008, we completed enrollment of 436 patients in the study at 37 sites.
We also are subject to inspection by the FDA to determine our compliance with regulatory requirements, as are our suppliers, contract manufacturers, and contract testing laboratories, and we cannot be sure that the FDA will not identify compliance issues that may disrupt production or distribution, or require substantial resources to correct.
The FDA’s requirements may change and additional government regulations may be promulgated that could affect us, our product candidates, and our suppliers, contract manufacturers and contract laboratories. We cannot predict the likelihood, nature, or extent of government regulation that may arise from future legislation or administrative action. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.
International sales of our product and any of our product candidates that we commercialize are subject to the regulatory requirements of each country in which the products are sold. Accordingly, the introduction of our product candidates in markets outside the United States will be subject to regulatory approvals in those jurisdictions. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements and import restrictions on medical devices. In addition, each country has its own tariff regulations, duties and tax requirements. The approval by foreign government authorities is unpredictable and uncertain and can be expensive. Our ability to market our approved products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances.
Prior to marketing our products in any country outside of the United States, we must obtain marketing approval in that country. Approval and other regulatory requirements vary by jurisdiction and differ from the U.S. requirements. We may be required to perform additional pre-clinical or clinical studies even if FDA approval has been obtained.
In Canada, the manufacture, distribution and use of medical devices, drugs and equipment is regulated by a variety of industry-specific statutes and regulations. Medical products sold in Canada are regulated by the Canadian Food and Drugs Act. Even though a drug or device may be approved for use in another jurisdiction, it may not be sold in Canada until approved by the national regulatory agency, Health Canada. Although in May 2006 we received marketing approval from Health Canada to market GEM 21S in Canada, we will need to present data from clinical trials to obtain approval for our other product candidates. We ultimately may not obtain the approvals necessary to market our product candidates in Canada.
Under EU regulatory systems, our lead product candidate will be reviewed as a medicinal product. Marketing authorization for medicinal products can be submitted under the centralized European Agency for the Evaluation of Medicinal Products (“EMEA”) or the decentralized mutual recognition process. The centralized procedure is mandatory for biotechnology derived products. If a product is approved under the centralized procedure, it receives a single marketing authorization that is valid in all EU member states. The decentralized process provides for mutual recognition of national approved decisions which allows the holder of an approval from one EU member state to submit an application in other member states requesting that they recognize the approval already granted.
The results of our clinical trials may be insufficient to obtain regulatory approval for our product candidates.
We will only receive regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA or the applicable foreign regulatory agency, in well designed and conducted clinical trials, that the product candidate is safe and effective. If we are unable to demonstrate that a product candidate will be safe and effective in advanced clinical trials involving larger numbers of patients, we will be unable to submit the PMA, NDA or other application necessary to receive regulatory approval to commercialize the product candidate. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. We face risks that:
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the product candidate may not prove to be safe or effective;
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the product candidate’s benefits may not outweigh its risks;
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the results from more advanced clinical trials may not confirm the positive results from pre-clinical studies and early clinical trials;
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the FDA or comparable foreign regulatory authorities may interpret data from pre-clinical and clinical testing in different ways than we interpret them; and
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the FDA or other regulatory agencies may require additional or expanded trials.
We have only limited experience in regulatory affairs, and some of our products may be based on new technologies. These factors may affect our ability or the time we require to obtain necessary regulatory approvals.
We have only limited experience in filing and prosecuting the applications necessary to gain regulatory approvals. Moreover, some of the products that are likely to result from our product development, licensing and acquisition programs may be based on new technologies that have not been extensively tested in humans. The regulatory requirements governing these types of product candidates may be less well defined or more rigorous than for conventional products. As a result, we may experience a longer regulatory process in connection with obtaining regulatory approvals of any products that we develop, license or acquire.
If we fail to obtain an adequate level of reimbursement for our approved products by third party payers, there may be no commercially viable markets for our approved products or the markets may be much smaller than expected.
The availability and levels of reimbursement by governmental and other third party payers affect the market for our approved products. The efficacy, safety, performance and cost-effectiveness of our product and product candidates and of any competing products will determine the availability and level of reimbursement. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government sponsored healthcare and private insurance. To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our approved products to other available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if at all. Our failure to receive international reimbursement or pricing approvals would negatively impact market acceptance of our approved products in the international markets in which those approvals are sought.
We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Future legislation, regulation or reimbursement policies of third party payers may adversely affect the demand for our future approved products currently under development and limit our ability to sell our approved products on a profitable basis. In addition, third party payers continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. If reimbursement for our approved products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, market acceptance of our approved products would be impaired and our future revenues, if any, would be adversely affected.
If we fail to comply with the U.S. Federal Anti-Kickback Statute and similar state laws, we could be subject to criminal and civil penalties and exclusion from the Medicare and Medicaid programs, which could have a material adverse effect on our business and results of operations.
A provision of the Social Security Act, commonly referred to as the Federal Anti-Kickback Statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid or any other federal health care program. The Federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states in which our approved products may be sold have adopted laws similar to the Federal Anti-Kickback Statute, and some of these laws are even broader than the Federal Anti-Kickback Statute in that their prohibitions are not limited to items or services paid for by Federal health care program but, instead, apply regardless of the source of payment. Violations of the Federal Anti-Kickback Statute may result in substantial civil or criminal penalties and exclusion from participation in federal health care programs.
All of our financial relationships with health care providers and others who provide products or services to federal health care program beneficiaries are potentially governed by the Federal Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the Federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the Federal Anti-Kickback Statute or similar state laws, it could have a material adverse effect on our business and results of operations.
Patients may discontinue their participation in our clinical studies, which may negatively impact the results of these studies and extend the timeline for completion of our development programs.
Clinical trials for our product candidates require sufficient patient enrollment. We may not be able to enroll a sufficient number of patients in a timely or cost-effective manner. Patients enrolled in our clinical studies may discontinue their participation at any time during the study as a result of a number of factors, including withdrawing their consent or experiencing adverse clinical events, which may or may not be judged related to our product candidates under evaluation. If a large number of patients in any one of our studies discontinue their participation in the study, the results from that study may not be positive or may not support a filing for regulatory approval of our product candidates.
In addition, the time required to complete clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including:
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the size of the patient population;
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the nature of the clinical protocol requirements;
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the availability of other treatments or marketed therapies (whether approved or experimental);
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our ability to recruit and manage clinical centers and associated trials;
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the proximity of patients to clinical sites; and
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the patient eligibility criteria for the study.
Product quality or performance issues may be discovered through ongoing regulation by the FDA and by comparable international agencies, as well as through our internal standard quality process.
The medical device industry is subject to substantial regulation by the FDA and by comparable international agencies. In addition to requiring clearance or approval to market new or improved devices, we are subject to ongoing regulation as a device manufacturer. Governmental regulations cover many aspects of our operations, including quality systems, marketing and device reporting. As a result, we continually collect and analyze information about product quality and product performance through field observations, customer feedback and other quality metrics.
The use of hazardous materials in our operations may subject us to environmental claims or liability.
We intend to conduct research and development and some future manufacturing operations in our Franklin, Tennessee facility. Our research and development processes will involve the controlled use of hazardous materials, chemicals and radioactive compounds. We will conduct experiments that are common in the biotechnology industry, in which we may use small quantities of chemical hazards, including those that are corrosive, toxic and flammable, and trace amounts of radioactive materials. The risk of accidental injury or contamination from these materials cannot be eliminated. We do not maintain a separate insurance policy for these types of risks. In the event of an accident or environmental discharge or contamination, we may be held liable for any resulting damages, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.
Risks Relating to Our Financial Results and Need for Financing
We have a history of losses and we expect to continue to incur losses and may not achieve or maintain profitability.
We have invested and continue to invest a significant portion of our time and resources in developing and testing our product candidates. As a result of our significant research and development, clinical development, regulatory compliance and general and administrative expenses, we expect to incur losses for at least the next few years as we continue to incur significant expenses for clinical trials. As of December 31, 2008, we had an accumulated deficit of $72.4 million. We have ongoing pivotal clinical studies for the use of Augment for the treatment of foot and ankle fusions in the United States, Canada and the EU.
In January 2008, we sold to Luitpold our remaining orofacial therapeutic business, whereas Luitpold was granted the rights to the downstream formulation, fill, finish, manufacturing and kitting of GEM 21S. This transaction has enabled us to focus our expertise and our future development efforts on our orthopedic, spine and sports medicine product candidates. This transaction leaves us without an FDA approved product currently in commercialization.
Even if we succeed in developing and commercializing one or more of our product candidates, we may not be able to generate sufficient revenue and we may never achieve or maintain profitability.
Our ability to use our net operating loss carryforwards could be limited.
Our ability to use our net operating loss carryforwards could be limited. At December 31, 2008, we had federal net operating loss carryforwards totaling $42.2 million available to reduce our future federal income tax liabilities. Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations. In connection with any future offering, we may realize a “more than fifty percent change in ownership” which could further limit our ability to use our net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because U.S. tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss for federal income tax purposes.
Liquidation of our investments could be delayed.
As of December 31, 2008, we had investments in student loan backed auction rate securities (“ARS”) with a combined par value of $60.0 million. Fair value measures have been estimated using cash flow discounting with a Monte Carlo simulation and other information. The valuation model reflects various assumptions that market participants would use in pricing these ARS investments, including among others, the collateralization underlying the ARS investments, the creditworthiness of the counterparty, the expected future cash flows, and the risks associated with uncertainties in the current market. There is a risk that the assumptions used in the model and our consideration of other information could be wrong.
We have recorded a total fair value of $46.6 million for the ARS investments as of December 31, 2008, of which $40.5 million consist of bonds with a credit rating of AAA and $6.1 million consist of bonds with a credit rating of AA or A2. Auctions for these ARS investments have failed since February 2008, and we have not been able to sell them. Consequently, an other-than-temporary impairment in fair value of our ARS investments has resulted and an impairment loss of $13.4 million has been recorded on our consolidated statement of operations at December 31, 2008.
There can be no guarantee that the market will reform or that our ARS investments will be liquidated, or even if liquidated, that they will be sold in the timeframe necessary to meet our operational and financial liquidity needs. In addition, even if liquidated, we may be forced to sell these ARS investments at a value that is significantly less than their par value or less than the fair value as reported herein.
If we default on our Deutsche Bank Time Promissory Note, it could have a material adverse effect on the Company.
In October 2008, we executed a Time Promissory Note (“Note”) credit facility with Deutsche Bank AG (“Deutsche Bank”) enabling us to borrow up to $39.1 million, and we have now drawn down $39.1 million under the credit facility. The Note is secured by certain ARS investments that we own having a total par value of $55.9 million. Under the terms of the Note, we are required to make monthly interest payments during the two-year term of the Note. All outstanding principal amounts are due and payable in full on the maturity date in October 2010. Because of the variable interest rates on the collateral ARS investments, the interest payments that we earn on the collateral ARS investments may be insufficient to cover the interest payments due on outstanding loans under the Note, which may result in significant costs to us. If we fail to make the required interest payments or otherwise default on certain obligations under the Note, all outstanding principal borrowed under the Note may become immediately due and payable. Upon such default, Deutsche Bank is permitted to sell the collateral ARS investments, and may do so at a price that is significantly less than their par value. As a result, the proceeds from the sale of the collateral ARS investments may be insufficient to cover our outstanding loan balance, and Deutsche Bank may pursue
other assets that we own to recover any remaining balance under the Note, which may have a material adverse effect on the Company.
Change in control restrictions under our Deutsche Bank Note could hinder efforts to acquire a controlling interest in us or affect the share price at which a potential acquirer would be willing to pay.
Under the terms of the Deutsche Bank Note, we are not permitted to take any action that could result in a change in control without first either paying off all outstanding principal and interest under the Note or obtaining Deutsche Bank’s consent to such action, which consent shall not be unreasonably withheld, conditioned or delayed. If Deutsche Bank refuses to consent to a merger or acquisition, then we or the potential acquirer would be required to pay off all outstanding principal and interest owed under the Note, which could hinder efforts to acquire a controlling interest in us, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, if a potential acquirer is required to pay off all outstanding loans owed under the Note in order to consummate a transaction, it could impact the share price or any premium that such an acquirer would be willing to pay.
We may need to raise additional capital in the future. If we are unable to successfully raise additional capital in the future, our product development could be limited and our long term viability may be threatened; however, if we do raise additional capital, your percentage ownership as a stockholder could decrease and constraints could be placed on the operation of our business.
We have experienced negative operating cash flows since our inception and have funded our operations primarily from proceeds received from sales of our stock and the licensing and sale of our orofacial therapeutic business. We believe our existing cash and investments, including the net proceeds of our February 2007 secondary public offering, the January 2008 sale of our orofacial therapeutic business to Luitpold, and funds borrowed in October 2008 from our Deutsche Bank credit facility, as well as time-based milestone payments expected to be received in 2009, will be sufficient to meet our anticipated cash requirements at least through the first quarter of 2010. We may seek to obtain additional funds at any time in the future through equity or debt financings, or strategic alliances with third parties, either alone or in combination with equity financings. These financings could result in substantial dilution to the holders of our common stock or require contractual or other restrictions on our operations or on alternatives that may be available to us in considering strategic transactions, dividends or liquidation preferences, debt service and/or revenue sharing arrangements. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations. Any such required financing may not be available in amounts or on terms acceptable to us and the failure to procure such required financing could have a material adverse effect on our business, financial condition and results of operations.
A variety of factors could impact our need to raise additional capital, the timing of any required financings and the amount of such financings.
Factors that may cause our future capital requirements to be greater than anticipated or could accelerate our need for funds include, without limitation:
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unforeseen developments during our pre-clinical activities and clinical trials;
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delays in the timing of receipt of required regulatory approvals;
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unanticipated expenditures in research and development or manufacturing activities;
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delayed market acceptance of our approved product;
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unanticipated expenditures in the acquisition and defense of intellectual property rights;
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the failure to develop strategic alliances for the marketing of some of our product candidates;
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additional inventory builds to adequately support the launch of new products;
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unforeseen changes in healthcare reimbursement for procedures using our approved product;
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inability to train a sufficient number of surgeons to create demand for our approved product;
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lack of financial resources to adequately support our operations;
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difficulties in maintaining commercial scale manufacturing capacity and capability;
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unforeseen problems with our third-party manufacturers and service providers or with our specialty suppliers of certain raw materials;
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unanticipated difficulties in operating in international markets;
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unanticipated financial resources needed to respond to technological changes and increased competition;
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unforeseen problems in attracting and retaining qualified personnel to market our approved product;
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enactment of new legislation or administrative regulations;
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the application to our business of new court decisions and regulatory interpretations;
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claims that might be brought in excess of our insurance coverage;
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the failure to comply with regulatory guidelines;
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unforeseen cost overruns associated with completion of our new manufacturing facility; and
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the uncertainty in industry demand and patient wellness behavior as businesses and individuals suffer from the current economic downturn.
In addition, although we have no present commitments or understandings to do so, we may seek to expand our operations and product line through acquisitions or joint ventures. Any acquisition or joint venture would likely increase our capital requirements.
If adequate financing is not available, we may be required to delay, scale back or eliminate our operations. Consequently, our long-term viability would be threatened.
If we fail to maintain effective internal controls over financial reporting, our business, operating results and stock price could be materially adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a report by our management on our internal controls over financial reporting. This report, which is included in our annual report for our fiscal year ended December 31, 2008, contains an assessment by management of the effectiveness of our internal controls over financial reporting as of the end of our fiscal year and a statement as to whether or not our internal controls are effective. Our annual report for fiscal year ended 2008 contains a statement that our independent auditors have issued an attestation report on the effectiveness of internal controls over financial reporting.
We began in 2007 the process to document and evaluate our internal controls over financial reporting. Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operational resources and the diversion of management’s attention. If our management identifies one or more material weaknesses in our internal controls over financial reporting, we will be unable to assert that our internal controls over financial reporting are effective. If we are unable to assert that our internal controls over financial reporting are effective, or if our independent auditors are unable to express an unqualified opinion on the effectiveness of our internal controls over financial reporting, then the market perception of our financial condition and the trading price of our stock may be adversely affected and customer perception of our business may suffer.
Risks Relating to the Ownership of Our Common Stock
We expect that the price of our common stock will be highly volatile.
Prior to our initial public offering (“IPO”) in May 2006, there was no public market for our common stock. An active and liquid trading market for our common stock may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that
you consider reasonable. Moreover, we cannot assure you that any securities analysts will initiate or maintain research coverage of our company and our common stock.
The trading prices of the securities of medical technology and biotechnology companies have been highly volatile. Accordingly, the trading price of our common stock is likely to be subject to wide fluctuations. Factors that could affect the trading price of our common stock include, among other things:
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whether we receive FDA approval to market any of our product candidates in the United States or similar regulatory approval in foreign jurisdictions;
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whether we successfully commercialize any approved product in the future;
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developments relating to patents, proprietary rights and potential infringement;
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announcements by us or our competitors of technological innovations or new commercial products;
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reimbursement policies of various governmental and third party payers;
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public concern over the safety and efficacy of GEM 21S or any of our product candidates;
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changes in estimates of our revenue and operating results;
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variances in our revenue or operating results from forecasts or projections;
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recommendations of securities analysts regarding investment in our stock;
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our ability to maintain and/or raise sufficient capital to fund our operations until we are able to commercialize a product candidate and become profitable; and
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market conditions in our industry and the current economic downturn as a whole.
If our future quarterly or annual operating results are below the expectations of securities analysts or investors, the price of our common stock will likely decline. In addition, share price fluctuations may be exaggerated if the trading volume of our common stock is low.
From time to time, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals or milestones. These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we expect that we will publicly announce the anticipated timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, our stock price may decline and the commercialization of our product and product candidates may be delayed.
Future sales of our common stock by existing stockholders could cause our stock price to decline.
The market price of our common stock could drop significantly if our existing stockholders sell a large number of shares of our common stock or are perceived by the market as intending to sell them. All of the shares sold in our IPO and in our February 2007 secondary offering were freely tradable without restriction or further registration under the federal securities laws, unless purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. We expect that we also will be required to register any securities sold in future private financings. In addition, all of our common stock issued prior to our IPO is freely tradable without restriction or further registration under the federal securities laws, unless owned by our affiliates. Furthermore, as of November 23, 2006, holders of approximately 9,330,495 shares of common stock had piggyback registration rights with respect to their shares in connection with future offerings. Those registration rights expire upon the earlier of (i) the transfer of those shares by the holder of the rights, (ii) if the holder is not an affiliate of our Company, when such holder’s ownership in our Company falls below one percent of the outstanding stock of our Company or (iii) the fifth anniversary of our IPO which will occur in May 2011. Sales by stockholders of substantial amounts of our shares, or the perception that these sales may occur in the future, could affect materially and adversely the market price of our common stock.
At December 31, 2008, there were options issued and outstanding to purchase 2,117,392 shares of our common stock with a weighted average exercise price of $9.41. Also at December 31, 2008, there were 1,166,258 options remaining available for future for issuance of options under our stock option plans.
Our executive officers, directors and their affiliates maintain the ability to substantially influence all matters submitted to stockholders for approval.
As of December 31, 2008, our executive officers, directors and their affiliates beneficially own shares representing approximately 15.2% of our capital stock. Accordingly, our current executive officers, directors and their affiliates have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions, as well as management and affairs. This concentration of ownership may delay or prevent a change of control of us at a premium price if these stockholders oppose it, even if it would benefit our other stockholders.
Provisions in our charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.
Provisions of our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
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a classified board of directors;
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limitations on the removal of directors;
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advance notice requirements for stockholder proposals and nominations;
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the inability of stockholders to act by written consent or to call special meetings; and
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the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company. For example, in January 2007, Novo A/S (“Novo”) made a purchase of shares of our company’s common stock, which placed Novo over the 15% ownership threshold set forth in Section 203. Since this transaction was not pre-approved by our board of directors, we cannot engage in a business combination with Novo prior to January 2010 without first obtaining approval by two-thirds of the disinterested stockholders.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
Our operations are headquartered in a leased facility in Franklin, Tennessee, consisting of approximately 32,000 square feet under a lease that expires on December 31, 2016, with an option to extend the lease.
In 2007, we entered into a new lease agreement for approximately 30,000 square feet of space in a new manufacturing facility to be built in the same complex as our headquarters in Franklin, Tennessee. The initial term of this new lease continues 10 years from the commencement date, which is expected to be approximately December 2016, with an option to extend the lease. We are moving forward with plans to occupy the new manufacturing facility. We intend to move certain steps of the later stages of the manufacturing process of our orthopedic and sports medicine product candidates into that facility, including final formulation, filling the vials that will be packaged in the finished kits, and assembling the kits. We
anticipate that the building shell will be complete in late 2009, and the build out will begin shortly thereafter. In order to qualify the facility as a GMP manufacturing facility, the build out must be complete, the utility systems, process and testing equipment must be installed and qualified, regulatory filings must be assembled and filed, and regulatory agency inspections must be passed prior to receiving approval. We anticipate that this process will take up to 24 months, and we expect the facility will be approved for commercial operations in 2011.
Item 3.
Item 3. LEGAL PROCEEDINGS
In February 2009, we filed an arbitration claim with the Financial Industry Regulatory Authority (“FINRA”) against Deutsche Bank Securities, Inc. (“DBSI”) asserting various claims relating to investments in auction rate securities made on our behalf including, among others, claims for violation of federal and state securities laws, breach of contract, fraud, and breach of fiduciary and other duties. DBSI has not yet responded to the filing, but their answer to the claim is scheduled to be filed by April 15, 2009. The date for the arbitration hearing has not been set and arbitrators have yet to be selected. We believe the arbitration hearing will be held in Nashville, Tennessee during 2009.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on The NASDAQ Global Market on May 15, 2006 under the symbol “BMTI.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported on the NASDAQ Global Market, since our common stock commenced public trading:
Stockholders
As of March 6, 2009, there were 30 registered holders of record of shares of our common stock.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, covenants in our debt instruments (if any), and such other factors as our board of directors deems relevant.
Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information about the securities issuable under our 2001 Long-Term Stock Incentive Plan and 2005 Employee Stock Purchase Plan at December 31, 2008. We have no equity compensation plans that were not approved by our security holders.
During 2001, our board of directors approved the adoption of the 2001 Long-Term Stock Incentive Plan (the “option plan”). The option plan provides that stock options, other equity interests or equity-based incentives in our company may be granted to key personnel and consultants at an exercise price determined by a committee, comprised of elected board members, at the date of grant, taking into account the fair value of the common stock at the date of grant. The maximum term of any option granted pursuant to the option plan is ten years from the date of grant.
Under the option plan, a total of 4,019,723 shares of common stock have been authorized by the board of directors for issuance, which reflects an addition of 900,000 shares to the authorized aggregate pool after ratification by the Company’s stockholders in June 2008. As of December 31, 2008, a total of 2,117,392 options for shares of common stock were issued and outstanding and a total of 736,073 shares of common stock have been issued upon option exercise. The options vest over a period of not greater than five years and remain exercisable for five or ten years from the date of grant. A total of 1,166,258 shares of common stock remained available for future issuance pursuant to the option plan as of December 31, 2008.
During 2005, our board of directors approved the adoption of the 2005 Employee Stock Purchase Plan (the “purchase plan”). The purchase plan incorporates the provisions of Section 423 of the Internal Revenue Code of 1986, as amended. Under the purchase plan, 200,000 shares of common stock have been reserved for purchase by employees, subject to adjustment. The purchase plan provides for offer periods of approximately three months to eligible employees. Under the purchase plan, eligible employees can purchase through payroll deductions, not more than 15% of their eligible base compensation, at a price equivalent to 85% of the fair market value of a share of our common stock on the first trading day or the exercise date of the current offering period, whichever is lower. Employees became eligible to participate in the purchase plan beginning July 1, 2006. As of December 31, 2008, there were 158,546 shares remaining available for issuance under the purchase plan. In accordance with the provisions of SFAS No. 123(R), we recognized $33,380, $23,742 and $23,248 of stock-based compensation expense for the purchase plan during the years ended December 31, 2008, 2007 and 2006, respectively.
Initial Public Offering, Secondary Public Offering and Use of Proceeds from Sales of Registered Securities
In May 2006, we sold 4,600,000 shares of our common stock in an IPO at a price to the public of $8.00 per share. As part of the offering, we granted the underwriters an over-allotment option to purchase up to an additional 690,000 shares of our common stock from us, which was not exercised. The offer and sale of all of the shares in the offering were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File No. 333-131718), which was declared effective by the SEC on May 12, 2006. After deducting the underwriting discounts and commissions of $2.6 million and other offering expenses of approximately $2.7 million payable by us in connection with the offering, our net proceeds from the offering were approximately $31.6 million. We have deposited the net proceeds of the offering in a highly rated financial institution in the United States, as well as investments in student loan back auction rate securities with credit ratings of AAA, AA and A2. There has been no material change in our planned use of proceeds from our IPO as described in our final prospectus, dated May 12, 2006, filed with the SEC pursuant to Rule 424(b).
In February 2007, we completed a secondary public offering of 3,253,350 shares of our common stock, which included 424,350 shares sold upon full exercise of the underwriters’ over-allotment option. Of the shares of common stock being offered, we sold 2,517,111 shares and the remaining 736,239 shares of common stock were sold by certain selling stockholders. All of the shares were sold at a price of $17.15 per share. After deducting the underwriting discounts and commissions of $3.6 million ($2.8 million paid by us and $0.8 million paid by the selling stockholders) and other offering expenses of approximately $0.6 million paid by us in connection with the offering, the net proceeds from the offering were approximately $39.7 million to us and $11.8 million to the selling stockholders. We did not receive any proceeds from the sale of stock by the selling stockholders. We have deposited the net proceeds of the offering in highly rated financial institutions in the United States, as well as investments in student loan backed auction rate securities with credit ratings of AAA, AA and A2.
As of December 31, 2008, of the net proceeds received from the May 2006 IPO and the February 2007 secondary public offerings, we had used $32.9 million primarily on salaries, clinical trials, research and
development activities and general corporate operations. Such activities have also been funded from existing cash balances and the revenues collected. During the year ended December 31, 2008, our research and development expenses comprised 62% of our operating expenses.
Performance Graph
The following graph compares the cumulative total stockholder return data for our common stock since May 15, 2006 (the first full day of trading after the initial public offering on May 12, 2006) to the cumulative return over such time period of (i) The Nasdaq Stock Market Composite Index, and (ii) The Nasdaq Biotechnology Index. The graph assumes that, on the date on which we completed the initial public offering of our common stock, $100 was invested in each of our common stock, the stocks comprising the Nasdaq Composite Index and the stocks comprising the Nasdaq Biotechnology Index, including dividend reinvestment.
Our Company has not declared or paid any cash dividends on our capital stock, and has not repurchased any shares of our capital stock. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
COMPARISON OF 31 MONTH CUMULATIVE TOTAL RETURN *
Among BioMimetic Therapeutics, Inc, The NASDAQ Composite Index
And The NASDAQ Biotechnology Index
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data that is qualified in its entirety by and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this Annual Report.
The selected consolidated balance sheet data as of December 31, 2008 and 2007 and the selected consolidated statements of operations data for each of the three years in the period ended December 31, 2008 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated balance sheet data as of December 31, 2006, 2005 and 2004 and the selected consolidated statement of operations data for the each of the two years ended December 31, 2005 and 2004 have been derived from our audited consolidated financial statements which are not included in this Annual Report.
(1)
Prior to January 1, 2006, we primarily had been engaged in researching and developing our principal product, we were a development stage enterprise and we were recognizing collaborative research and development revenue pursuant to our research, development and marketing agreement with Luitpold. Effective January 1, 2006, we no longer consider ourselves to be a development stage enterprise because we believe that we have achieved our planned principal operations and have generated revenue from product sales.
(2)
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). In accordance with the provisions of SFAS No. 123(R), we elected to adopt the standard using the modified prospective method of transition.
(3)
Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies whenever other accounting pronouncements require (or permit) assets or liabilities to be measured at fair value.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We develop and commercialize innovative products to help stimulate the body’s natural tissue regenerative process. We believe our protein therapeutic-device combination product candidates have the potential to significantly improve the treatment of musculoskeletal injuries and conditions affecting bones, tendons, ligaments and cartilage. Our platform regenerative technology, which incorporates a potent version of one of the body’s natural key stimulators of tissue repair, may offer physicians advanced biological solutions to actively stimulate tissue healing and regeneration.
We have already demonstrated that this technology is safe and effective in stimulating bone and periodontal regeneration in the jaws with the U.S. and Canadian regulatory approvals and commercialization of our first product, GEM 21S ® Growth-factor Enhanced Matrix. With the divestiture of GEM 21S in January 2008, we are now focused on developing this technology to stimulate tissue healing in orthopedic, and potentially spine and sports injury, applications. Our current product candidates use the same key stimulator as GEM 21S, and are designed to target a broad range of clinical indications in bone, cartilage, ligament and tendon repair.
We currently have seven orthopedic clinical studies that are completed or are under way which seek to demonstrate the safety, clinical utility and/or efficacy of our product candidates in the pipeline, including our lead orthopedic product candidate Augment™ Bone Graft (“Augment”), formerly GEM OS1 bone graft, in treating bone defects and injuries. In addition, we have pre-clinical programs focused on the development of treatments for bone defects in the spine and various sports injury applications, including those requiring cartilage, ligament and tendon repair.
We have reported the results of a number of these studies, and those studies suggest that our platform technology will be effective in our target applications. If successful, we expect these clinical studies should lead to regulatory approval of our regenerative product candidates in the United States, Canada and Europe. If approved by the appropriate regulatory authorities, we believe that our product candidates will offer new, effective and less invasive treatment options in orthopedics, spine and sports related injuries to improve the quality of life for millions of patients suffering injuries or deterioration of bones, ligaments, tendons and cartilage.
However, according to the National Bureau of Economic Research, the U.S. economy has been in a recession since December 2007. This economic downturn and the ensuing instability of markets have impacted us by making it difficult to resolve the liquidity issues on our auction rate securities (“ARS”) investments. Since the collapse of the ARS market in February 2008, we have been unable to liquidate the $60.0 million par value in ARS investments that we hold as of December 31, 2008.
Furthermore, our general business strategy may be further adversely affected if the current economic conditions deteriorate further, or do not improve. For example, the economy may impact the demand for elective medical procedures that we are targeting with our product candidates, or may impact the pricing that we may set for our products. However, since our anticipated product launch for our lead product candidate remains over a year away, the impact of the current recession on commercial markets for that product remains uncertain.
We have responded to the current economic crisis by investing our cash and cash equivalents and our short-term investments conservatively, securing a short-term credit facility to provide some liquidity for our ARS investments, and initiating cost reduction measures such as scaling back growth in staff to conserve cash and manage expenses. In addition, to the extent possible given contractual commitments, in order to postpone major expenses we have postponed certain major equipment purchases, delivery and validation efforts for manufacturing equipment intended for a new manufacturing facility that is being built in the same complex as our headquarters in Franklin, Tennessee. We have leased a portion of this new facility and we intend to move certain of our manufacturing operations to it once completed. Also, we have filed an arbitration claim against Deutsche Bank Securities, Inc. (“DBSI”) seeking to force them to repurchase the illiquid ARS investments that they purchased on our behalf in managing our discretionary cash management account.
Recent Developments
Clinical Trial Updates - Augment™ Bone Graft
North American Augment Pivotal Study - Foot and Ankle Fusions - On December 31, 2008, enrollment in the North American Augment pivotal clinical trial was closed with a total of 436 patients enrolled. This clinical trial seeks to evaluate the safety and effectiveness of Augment to stimulate bone healing in foot and ankle fusions, and is a randomized, controlled, non-inferiority study comparing Augment to autograft, the current gold standard for bone grafting in this type of surgery. The trial was designed to enroll 396 patients; however, enrollment continued through December 31, 2008 to accommodate those additional patients who had already consented into the study and scheduled for surgery.
We plan to file a modular pre-market approval (“PMA”) application for Augment beginning in the spring of 2009. A modular submission breaks the PMA document into three sections or “modules” filed at different times that together become a complete application. The modular approach allows the applicant to potentially resolve any concerns noted by FDA earlier in the review process than would occur with a traditional PMA application, and may ultimately shorten the review and approval timeline. The pre-clinical section of the modular PMA is expected to be submitted in March 2009. The quality and manufacturing section is on schedule to be filed in the spring of 2009 allowing time for the FDA to review this data in advance of the clinical data. We expect to file the clinical data with the FDA in the fourth quarter of 2009 as the last element of our modular PMA application.
EU Augment Trial - Foot and Ankle Fusions - In November 2008, we completed enrollment in the EU clinical study with Augment for the treatment of foot and ankle fusions with a total enrollment of 108 patients. This study is an open label trial and was designed to enroll up to 125 patients. The assumption when designing the study was that among a population of foot and ankle fusion patients, we would likely enroll 75 (60%) hindfoot/ankle fusion patients (the North American indication) and 50 (40%) midfoot fusion patients. However, when we reached 108 patients, we had exceeded the hindfoot/ankle target of 75 patients, and decided to cease enrollment. All other aspects of the original study protocol will continue unchanged. We expect that the data from the study will be released in the first quarter of 2010 and will support EU and other worldwide filings on Augment.
Clinical Trial Updates - Augment™ Injectable Bone Graft
Canadian Augment Injectable Pilot Trial - Foot and Ankle Fusions - This trial is a Canadian study investigating the use of Augment™ Injectable Bone Graft (“Augment Injectable”) in patients being treated for foot and ankle fusions. The trial is an open-label study with seven of the 10 patients considered to be high risk for poor healing as a result of co-morbidities. The results of the study demonstrated that all 10 patients achieved complete clinical success by six months after surgery. In addition, analysis of CT scans at three to four months after surgery showed that 90 percent of the patients had achieved radiographic fusion. Consistent with our previous studies, there were no Serious Adverse Events (“SAE”) related to the device.
EU Augment Injectable Pilot Trial - Distal Radius Fractures - This trial is a Swedish study investigating the use of Augment Injectable in patients being treated for fractures of the distal radius (wrist). A total of 21 patients have been enrolled in the study, consisting of 11 patients treated with Augment Injectable combined with external fixation and 10 patients treated with external fixation alone. Enrollment in the study was completed in December 2007. The results of data analysis shows patients treated with Augment Injectable demonstrated earlier bone formation at three and six weeks as measured by CT scans. The six month evaluation of “complete bone fill,” defined as more than 75 percent fill of the fracture gap, was 100 percent for Augment Injectable patients, as compared to 82 percent for the patients treated with external fixation alone. The product candidate was demonstrated to be safe, with no reported adverse events related to the study devices.
Regulatory Filings
Augment Canadian Filing - In the second quarter of 2008, we filed a Device License Application (“DLA”) with Health Canada for Augment Bone Graft. The DLA submission is required in Canada for approval of the commercialization of Augment as a medical device for use in the treatment of foot and ankle fusions. We received some initial questions on the filing that we responded to in September 2008. We have now received a letter from Health Canada setting forth what we believe are the remaining open questions on the DLA. We believe that we can address these questions, and we anticipate a final decision on the DLA around the middle of 2009.
GEM 21S European Union Filing - We previously announced that the Marketing Authorization Application (“MAA”) for GEM 21S was validated and was under review by the European Medicines Agency (“EMEA”). We have received a preliminary report from the EMEA wherein they raise a number of issues that we must address before the MAA will be approved. In the report, the EMEA questions the sufficiency of the data that we submitted to establish efficacy of GEM 21S, and in particular questions the sufficiency of our six month 180 patient pivotal study to prove efficacy of a medicinal product. In addition, the EMEA raised questions regarding the specifications for the PDGF drug substance. Approval of the MAA submission is required for distribution and commercialization of GEM 21S as a medicinal combination product in the European Union (“EU”). We expect to receive the final report on the MAA submission by the middle of 2009. The approval of GEM 21S in the EU will trigger a $10.0 million milestone payment to us from Luitpold Pharmaceuticals, Inc. (“Luitpold”), a U.S. subsidiary of Daiichi Sankyo Co., Ltd, who owns and markets GEM 21S through its Osteohealth Company. Based on the issues raised in the EMEA’s preliminary report, the timing of our receipt of the $10.0 million milestone payment is uncertain, and therefore our financial guidance for 2009 excludes this payment.
Patent Updates
In November 2008, we announced the United States Patent Office has allowed the Company’s U.S. patent application No. 11/159,533 titled “Platelet-Derived Growth Factor Compositions and Methods of Use Thereof.” The allowed claims within this patent application cover compositions of platelet derived growth factor (“PDGF”) combined with matrix materials having defined characteristics, which cover our regenerative protein therapeutic-device combination products candidates Augment and Augment Injectable. During the time in which the patent is in force, it will prohibit the marketing by potential competitors of similar or generic versions of Augment, Augment Injectable, GEM 21S and potentially other products we have in development.
The new patent was originally to remain in force until 2024; however, in January 2009, we also announced that the United States Patent Office issued patent number 7,473,678, which granted a term extension that will provide us with protection for our Augment product line, as well as certain other PDGF product formulations, until at least June 2025.
Financial Overview
Since inception in 1999, we have funded our operations from the sale of capital stock (including redeemable preferred stock, our initial public offering (“IPO”) in May 2006 and our secondary public offering in February 2007), from the licensing and sale of our orofacial therapeutic business in January 2008, from a credit facility with Deutsche Bank AG (“Deutsche Bank”) and from research and development agreements, grants and product sales. The proceeds of these activities are reflected in the balance of cash and investments totaling $97.4 million as of December 31, 2008, which includes $46.6 million in long-term marketable securities. These long-term marketable securities consist of student loan backed auction rate securities (“ARS”) that are classified as available-for-sale and recorded at fair value and have a credit rating of AAA or A2.
There is currently no viable market for these ARS investments, and we cannot be sure if the market will reform or if our ARS investments will be liquidated in a timely manner. Auctions for these ARS investments have failed since February 2008, and we have not been able to sell them. Consequently, an other-than-temporary impairment in fair value of our ARS investments has resulted and an impairment loss of $13.4 million is recorded on our consolidated statements of operations as of December 31, 2008.
To address the liquidity issues associated with these ARS investments in the short-term, in October 2008 we entered into a Time Promissory Note (“Note”) credit facility with Deutsche Bank enabling us to borrow up to $39.1 million with certain of our ARS investments serving as collateral. As of December 31, 2008, we have borrowed $39.1 million, and as such these funds are reflected in the balance of cash and investments, as well as the related note payable liability, on our consolidated balance sheets.
We continue to incur research and development expenses due to the substantial expansion of our internal research capabilities and due to the numbers of patients we have enrolled and expect to enroll in the clinical trials of Augment and our other product candidates. We will make determinations as to which product candidates to advance and how much funding to direct to each on an ongoing basis in response to their scientific and clinical success. We expect that research and development expenses will continue to increase as a result of new and ongoing clinical trials and pre-clinical studies of Augment in the United States, Canada and the EU, as well as continuing expenses associated with regulatory filings, including the EU regulatory filing for GEM 21S .
The following table summarizes our research and development expenses for the five years ended December 31, 2008. Direct external costs represent significant expenses paid to third parties that
specifically relate to the clinical development of Augment, such as payments to contract research organizations, clinical investigators, manufacture of clinical material, consultants, contract manufacturing start-up costs, manufacturing scale-up costs, milestone payments and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees of the manufacturing, regulatory affairs, clinical affairs, quality assurance, quality control and research and development are classified as research and development costs. Research and development spending for past periods is not indicative of spending in future periods.
We anticipate that our general and administrative expenses will continue to increase as we expand our operations, facilities and other administrative activities related to our efforts to bring our product candidates into commercialization.
Since inception, we have incurred losses from operations each year. As of December 31, 2008, we had an accumulated deficit of $72.4 million, which includes a $13.4 million impairment loss on auction rate securities and a $39.3 million net gain on the January 2008 sale of our orofacial therapeutic business. Although the size and timing of our future operating losses are subject to significant uncertainty, we expect that operating losses, excluding the impairment loss on marketable securities and the gain on sale of our orofacial therapeutic business, may continue over the next few years as we continue to fund our research and development activities and clinical trials and as we prepare for a future sales network to represent our products. Also, given the sale of our remaining orofacial therapeutic business, we do not have an FDA approved product in commercialization.
Even with the cost reduction measures discussed in “- Overview,” the successful development of Augment or any of our other product candidates is highly uncertain. We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to commence from, any of our product candidates due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
•
the scope, rate of progress and cost of our clinical trials;
•
future clinical trial results;
•
the cost and timing of regulatory approvals;
•
the establishment of marketing, sales and distribution;
•
the cost and timing associated with licensing, business relationships and similar arrangements;
•
the cost and timing of establishing clinical and commercial supplies of Augment and our other product candidates;
•
the timing and results of our pre-clinical research programs; and
•
the effects of competing technologies and market developments; and
•
the industry demand and patient wellness behavior as businesses and individuals suffer from the current economic downturn.
Any failure to complete the development of Augment or any of our other product candidates in a timely manner, or any failure to successfully market and commercialize Augment or any of our other product candidates, could have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with completing our projects on schedule, or at all, and some of the consequences of failing to do so, are set forth under “Item 1A - Risk Factors.”
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses, fair valuation of inventory, valuation of any losses on purchase commitments, fair valuation of stock related to stock-based compensation and income taxes. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The results of our operations for any historical period are not necessarily indicative of the results of our operations for any other future period.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing at the end of this Annual Report, we believe that the following accounting policies relating to revenue recognition, research and development expense, inventory valuation, valuation of purchase commitments, accrued expenses and deferred liabilities, stock-based compensation, income taxes and investments in marketable securities are significant and, therefore, important to aid you in fully understanding and evaluating our reported financial results.
Revenue Recognition
We follow the revenue recognition criteria outlined in Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements (“SAB 101”), as amended by SAB 104, Revenue Recognition, Emerging Issues Task Force (“EITF”) Issue 00-21, Revenue Arrangements with Multiple Deliverables (“EITF Issue 00-21”), and Statement of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists (“SFAS No. 48”). Product sales revenue is recognized upon delivery of the product to the customer. Accordingly, up-front, non-refundable license fees under agreements where we have an ongoing research and development commitment are amortized, on a straight-line basis, over the performance period. Revenues from milestones are only recognized upon achievement of the milestone criteria. Milestone payments received for sublicense fees are deferred and recognized as revenue on a straight-line basis over the remaining term of the sublicense. Revenues received for ongoing research and development activities under collaborative agreements are recognized as these activities are performed pursuant to the terms of the related agreements. Royalty revenues are received from our sublicensor in arrears based on sales by the sublicensor. We recognize royalty income when we receive the sales information from Luitpold. Any amounts received in advance of performance are recorded as deferred revenue until earned.
Revenue related to grant awards is deferred and recognized as related research and development performance occurs.
Research and Development Costs
We expense costs associated with research and development activities as incurred. We evaluate payments made to suppliers and other vendors in accordance with SFAS No. 2, Accounting for Research and Development Costs, and determine the appropriate accounting treatment based on the nature of the services provided, the contractual terms, and the timing of the obligation. Research and development costs include payments to third parties that specifically relate to Augment and our other product candidates in clinical development, such as payments to contract research organizations, clinical investigators, manufacture of clinical material, product related consultants, contract manufacturer start-up costs, manufacturing scale-up costs, milestone payments and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees of the manufacturing, regulatory affairs, clinical affairs, quality assurance, quality control, and research and development departments are classified as research and development costs. We adopted Emerging Issues Task Force Issue 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF Issue 07-03”), on January 1, 2008 and the adoption did not have a material impact on our financial position or results of operations as of and for the year ended December 31, 2008.
Inventory Valuation
We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review existing inventory quantities, expiration dates of existing inventory, and inventory purchase commitments with suppliers to evaluate a provision for excess, expired, obsolete and scrapped inventory based primarily on our historical usage and anticipated future usage. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Inventory is carried at the lower of cost (first-in, first-out) or net realizable value and consists primarily of the purchase of raw materials, shipping costs associated with the transportation of raw materials to the contract manufacturer, fees paid to contract manufacturers in connection with the production of filled periodontal cups and syringes, kit packing fees, and quality control testing fees, less reserves for obsolescence, shrinkage, expired inventory and potential scrapping of product batches that may not be released for sale.
Valuation of Purchase Commitments
We have substantial firm purchase commitments with our suppliers related to our future inventory needs. As part of the process of preparing our consolidated financial statements, we assess the need for any provision for future losses associated with these future purchase commitments in accordance with Accounting Research Bulletin (“ARB”) No. 43, Restatement and Revision of Accounting Research Bulletins. As of December 31, 2008, no reserves have been recorded associated with these future purchase commitments.
Accrued Expenses and Deferred Liabilities
As part of the process of preparing our consolidated financial statements, management is required to estimate expenses that we have incurred for which we have not been invoiced. This process involves identifying services that have been performed on our behalf and estimating the level of services performed by third parties and the associated cost incurred for such services where we have not been invoiced or otherwise notified of actual costs. Examples of expenses for which we accrue based on estimates include milestones payable, salaries and wages, unpaid vacation and sick pay, fees for services, such as those provided by clinical research and data management organizations, investigators and fees owed to contract manufacturers in conjunction with the manufacture of clinical trial materials. In connection with such service fees, these estimates are most affected by management’s projections of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under-estimate or over-estimate the level of services performed or the costs of such services, our actual expenses could differ from such estimates. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often subjective determinations. Management makes these estimates based upon
the facts and circumstances known to it at the time and in accordance with U.S. generally accepted accounting principles.
Stock-based Compensation
During 2001, our board of directors approved the adoption of the 2001 Long-Term Stock Incentive Plan (the “option plan”). The option plan provides that stock options, other equity interests or equity-based incentives in our Company may be granted to key personnel at an exercise price determined by our Compensation Committee, at the time the option is granted, taking into account the fair value of the common stock at the date of grant. The maximum term of any option granted pursuant to the option plan is ten years from the date of grant.
The stock options we granted to our employees are structured to qualify as incentive stock options (“ISOs”). Under current tax regulations, we do not receive a tax deduction for the issuance, exercise or disposition of ISOs if the employee meets specific holding requirements. If the employee does not meet the holding requirements, a disqualifying disposition occurs, at which time we will receive a tax deduction. We do not record tax benefits related to ISOs unless and until a disqualifying disposition occurs. In the event of a disqualifying disposition, the entire tax benefit is recorded as a reduction of income tax expense. We have not recognized any income tax benefit for share-based compensation arrangements due to the fact that we do not believe that we will recognize any deferred tax assets from such compensation cost recognized in the current period.
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified prospective method of transition. Under that transition method, compensation costs recognized in the years ended December 31, 2008, 2007 and 2006 include the costs for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
In accordance with SFAS No. 123(R), the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions amortized to expense over the options’ vesting periods for the year ended December 31, 2008: risk-free interest rate of 2.85%, expected dividend yield of 0%, volatility factor of the expected market price of our common stock of 79%, forfeiture rate of 6.2% and weighted average expected life of the option of 8.0 years. Since the trading market for our common stock has a limited history, the expected volatility rates are based on historical data from three companies similar in size and value to our Company. The expected terms of options granted represent the period of time that options granted are estimated to be outstanding and are derived from the contractual terms of the options granted. We amortize the fair value of each option over each option’s vesting period.
The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
Our net loss for the years ended December 31, 2008, 2007 and 2006 includes compensation costs of $3.4 million, $1.7 million and $0.8 million, respectively, related to our stock-based compensation arrangements. No income tax benefit related to our stock-based compensation arrangement is included in our net losses.
Income Taxes
We account for income taxes utilizing the asset and liability method prescribed by the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets related to future years, including loss carryforwards, if there is not sufficient evidence to indicate that the results of operations will generate sufficient taxable income to realize the net deferred tax asset in future years.
Effective January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), to account for uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation prescribes that we should use a “more likely than not” recognition threshold
based on the technical merits of the tax position taken. Tax positions that meet the “more likely than not” recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
As a result of adopting FIN 48, we did not have any unrecognized tax benefits or liabilities, or any associated amounts for interest and penalties. As a result, there was no effect on our financial condition or results of operations as of and for the years ended December 31, 2008, 2007 and 2006.
Investments
Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
We have short-term investments consisting of U.S. government sponsored enterprise (“GSE”) securities and a U.S. Treasury Note that are classified as available for sale, which total $33.2 million as of December 31, 2008. The GSE securities have maturity dates from March 2009 through November 2009. The U.S. Treasury Note has a maturity of April 30, 2009.
We have long-term investments in student loan backed auction rate securities (“ARS”) that are classified as available-for-sale and recorded at fair value, which total $46.6 million as of December 31, 2008. A total of $40.5 million of our ARS investments are bonds with a credit rating of AAA and $6.1 million are bonds with a credit rating of AA or A2. Generally, the ARS investments held by us are bonds sold by state guarantee agencies backed by student loans under the Federal Family Education Loan Program (“FFELP”). The majority of the student loans are guaranteed by the U.S. Department of Education at amounts representing a substantial portion of the loans.
Our ARS investments include interest rates which reset regularly at pre-determined intervals, typically 28 days, through an auction process. However, auctions for these ARS investments have failed since February 2008, and we have not been able to sell them. Consequently, fair value measures have been estimated using cash flow discounting with a Monte Carlo simulation. The valuation model considers factors reflecting assumptions that market participants would use in pricing, including among others, the collateralization underlying the ARS investments, the creditworthiness of the counterparty, the expected future cash flows, and the risks associated with uncertainties in the current market.
The ARS investments are stated at fair market value, with any unrealized gains and losses, net of tax, reported in the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judged to be other-than-temporary on investments in marketable securities are included in investment (loss) income, net in the accompanying consolidated statements of operations. The cost of ARS investments sold is based on the specific identification method. Interest and dividends on ARS investments are included in investment (loss) income, net in the accompanying consolidated statements of operations.
The ARS investments are classified as long-term because we do not anticipate liquidating them over the next twelve months. See additional discussion regarding the liquidity of the ARS investments in “- Liquidity and Capital Resources.”
Our consolidated statement of operations for the year ended December 31, 2008 reflects a loss on our investment portfolio (including realized gains and losses) of $10.8 million, which includes an other-than-temporary impairment loss of $13.4 million on ARS investments classified as available-for-sale. At December 31, 2008, we had accrued interest receivable of $0.3 million related to our ARS investments.
Results of Operations
Years Ended December 31, 2008 and 2007
Disposal of Orofacial Therapeutic Business
Revenue and Cost of Sales
Research and Development Expenses
General and Administrative Expenses
Depreciation and Capital Lease Amortization
Depreciation and capital lease amortization for the year ended December 31, 2008 was $1.4 million, compared to $1.1 million for the same period in 2007. For the year ended December 31, 2008, we purchased lab, manufacturing and office equipment, made leasehold improvements and incurred equipment engineering design and planning costs totaling $2.9 million. The increase in depreciation and capital lease amortization is attributable to these new purchases, excluding $2.3 million in equipment not yet placed in service.
Patent License Fee Amortization
Patent license fee amortization for the year ended December 31, 2008 was $2.7 million, compared to $2.2 million for the same period in 2007. Ongoing amortization expense is attributable to the capitalization of patent license fees amounting to a cumulative $13.2 million as of December 31, 2008.
Interest and Investment Income
The balances of cash and cash equivalents, short-term investments and long-term investments have increased due to the proceeds of these transactions, resulting in $2.6 million in investment income during the year ended December 31, 2008, excluding the impact of the impairment loss on our ARS investments. Our cash accounts earned $1.2 million less interest income in 2008 compared to the same period in 2007 partially as a result of reduced interest rates (which ranged from 1.60% to 4.10% during the year ended December 31, 2008, compared to a range of 4.10% to 5.27% for 2007), but also offset by $0.3 million interest expense in 2008 related to our credit facility with Deutsche Bank.
Provision for Income Taxes
At December 31, 2008, we had federal net operating loss carryforwards of $42.2 million that will begin to expire in 2022. State net operating loss carryforwards at December 31, 2008 totaled $30.3 million and will expire between 2017 and 2023.
Our ability to use our net operating loss carryforwards could be limited. Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations. Additionally, because U.S. tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss for federal income tax purposes.
Years Ended December 31, 2007 and 2006
Revenue
Cost of Sales
Cost of sales for the year ended December 31, 2007 was $4.0 million, compared to $2.2 million for the same period in 2006. Cost of sales is comprised of the following costs: raw materials used in the production of and the manufacturing costs for syringes and cups, testing fees for the syringes and cups, packaging materials for inclusion in the finished kit, kit packing costs and scrap incurred during the production process. The costs of sales will vary in direct correlation to the volume of product sales activity of GEM 21S kits.
Research and Development Expenses
General and Administrative Expenses
1.
an increase in legal fees of $0.2 million related to existing patents, patent applications, and regulatory approval procedures,
2.
an increase in accounting fees of $0.3 million for Sarbanes-Oxley compliance and SEC reporting, and
3.
an increase in corporate communication fees of $0.1 million for communications with our shareholders.
•
A net increase of six new employees in administrative and operations functions resulted in an increase of $0.5 million of salaries and related benefits.
•
To accommodate our growth, a new lease agreement was signed in 2007 for additional office space. As a result of the new space and annual rent increases for the existing space, our rent and utilities costs increased $0.4 million for the year ended December 31, 2007.
•
Royalty expense increased $0.6 million to $1.2 million for the year ended December 31, 2007, from $0.6 million for the year ended December 31, 2006. The increase is a result of minimum royalty payment requirements set forth in our patent licensing agreements.
•
Corporate administration expenses increased by $0.2 million as a result of additional costs associated with our growing company, including insurance, board of directors’ fees and travel costs, office supplies, small equipment, dues, subscriptions and conferences.
Depreciation and Capital Lease Amortization
Depreciation and capital lease amortization for the year ended December 31, 2007 was $1.1 million, compared to $0.8 million for the same period in 2006. For the year ended December 31, 2007, we purchased lab and manufacturing equipment, office equipment, furniture and fixtures and made leasehold improvements totaling $0.6 million, compared to $1.1 million for the year ended December 31, 2006. The increase in depreciation and capital lease amortization is attributable to these new purchases.
Patent License Fee Amortization
Patent license fee amortization for the year ended December 31, 2007 was $2.2 million, compared to $2.1 million for the same period in 2006. Ongoing amortization expense is attributable to the capitalization of patent license fees amounting to a cumulative $11.5 million as of December 31, 2007.
Interest and Investment Income
Total net interest and investment income for the year ended December 31, 2007 was $3.7 million, compared to $2.2 million for the same period in 2006. The increase in interest and investment income is attributable to higher cash and investment balances as a result of our February 2007 secondary public offering of common stock, which resulted in net proceeds of $39.7 million after deducting underwriters’ commissions and related expenses.
Provision for Income Taxes
We incurred net operating losses for the years ended December 31, 2007 and 2006. We recorded a tax benefit of $0.1 million for the year ended December 31, 2007 relating to a tax refund received during 2007. At December 31, 2007, we had federal net operating loss carryforwards of $42.3 million that will begin to expire in 2022. State net operating loss carryforwards at December 31, 2007 totaled $29.0 million and will expire between 2017 and 2022.
Liquidity and Capital Resources
In February 2007, we completed a secondary public offering of 3,253,350 shares of our common stock, which included 424,350 shares sold upon full exercise of the underwriters’ over-allotment option. Of the shares of common stock that were offered, we sold 2,517,111 shares of common stock and the remaining
736,239 shares of common stock were sold by certain selling stockholders. All of the shares of common stock were sold at a price of $17.15 per share. After deducting the underwriting discounts and commissions of $3.6 million ($2.8 million paid by us and $0.8 million paid by the selling stockholders) and other offering expenses of approximately $0.7 million paid by us in connection with the offering, the net proceeds from the offering were approximately $39.7 million to us and $11.8 million to the selling stockholders. We did not receive any proceeds from the sale of shares of our common stock by the selling stockholders. We have invested our net proceeds from the offering in student loan backed auction rate securities (“ARS”) with AAA, AA and A2 credit ratings.
In January 2008, we completed the sale to Luitpold of our remaining orofacial therapeutic business, including the downstream formulation, fill, finish, manufacturing and kitting of GEM 21S. As of December 31, 2008, we have received $30.0 million in cash as a result of the transaction, plus $3.4 million in cash from the sale of existing inventory. Under the terms of the sale agreement, we expect to receive an additional $10.0 million time-based payment due in cash by the end of 2009 as well as ongoing royalty payments based on net sales of GEM 21S and other products that are based on adapting our technology to future products in the orofacial therapeuctic field.
We further expect to receive a $10.0 million milestone payment based upon the future anticipated EU regulatory approval of GEM 21S as pre-established in a prior agreement between us and Luitpold.
At December 31, 2008, we had $17.6 million in cash and cash equivalents held in three financial institutions. Our excess cash reserves are invested in overnight sweep accounts, operating accounts and money market accounts.
In addition to the balance of cash and cash equivalents as of December 31, 2008, we had $33.2 million in short-term investments consisting of GSE securities totaling $31.7 million and a U.S. Treasury Note totaling $1.5 million that are classified as available for sale. The GSE securities have maturity dates from March 2009 through November 2009. The U.S. Treasury Note has a maturity of April 30, 2009.
Also as of December 31, 2008, we had long-term investments of $46.6 million in student loan backed ARS investments that are classified as available-for-sale and recorded at fair value. A total of $40.5 million of our ARS investments are bonds with a credit rating of AAA and $6.1 million are bonds with a credit rating of AA or A2. Generally, the ARS investments are sold by state guarantee agencies backed by student loans under the FFELP. The majority of the student loans are guaranteed by the U.S. Department of Education at amounts representing a substantial portion of the loans. We intend to hold these ARS investments for at least the next twelve months. Accordingly, these ARS investments have been classified as long-term.
Auctions for these ARS investments have failed since February 2008, and we have not been able to sell them. The current economic downturn and the related uncertainty in the markets have negatively impacted our ability to resolve the liquidity issues of these ARS investments, providing us with no guarantee that the market will reform or that our ARS investments will be liquidated in a timely manner. Consequently, fair value measures have been estimated using cash flow discounting with a Monte Carlo simulation and other information. The valuation model reflects various assumptions that market participants would use in pricing, including among others, the collateralization underlying the investments, the creditworthiness of the counterparty, the expected future cash flows, and the risks associated with uncertainties in the current market. As a result of the other-than-temporary impairment in fair value of our ARS investments, we recorded a loss on investments of $13.4 million, which is reflected on our consolidated statement of operations at December 31, 2008.
To address the liquidity issues associated with these ARS investments in the short-term, in October 2008 we entered into a Time Promissory Note (“Note”) credit facility with Deutsche Bank enabling us to borrow up to $39.1 million with certain of our ARS investments serving as collateral. We granted Deutsche Bank a first priority security interest in certain of our ARS investments having a total combined par value of $55.9 million as collateral. Under the terms of the Note, we are required to make monthly interest payments during the two-year term of the Note. All outstanding principal amounts are due and payable in full on the maturity date in October 2010. We may elect to pay back the full principal amount prior to the maturity date with no penalty. Absent a BioMimetic default or a sale of part of the collateral ARS investments, Deutsche Bank has no ability to withdraw, reduce or change the terms of the Note. Under the terms of the Note, and at our option, the interest rate will be based on either LIBOR plus 0.50% or Deutsche Bank’s
Prime Rate minus 1.50%. The Note also provides that in the event that Deutsche Bank later offers an ARS lending program or settlement loan program to institutional clients that includes either a lower interest rate or permits borrowing of more than 70% of the par value of the collateral securities, then the terms of our Note and any existing loans issued under the Note will be modified to include the lower interest rate or higher borrowing base.
We believe that the December 31, 2008 balance of our cash and investments, the funds borrowed from our $39.1 million credit facility, and the expected $10.0 million in time-based payments to be received in 2009 from Luitpold will be sufficient to fund our business operations through at least the first quarter of 2010.
We expect to devote substantial resources to continue our research and development efforts, including clinical trials. Clinical study costs are comprised of payments for work performed by contract research organizations, universities and hospitals.
Because of the significant time it will take for Augment or our other product candidates to complete the clinical trial process, obtain approval from regulatory authorities and successfully commercialize our products, we may require substantial additional capital resources. We may raise additional capital through public or private equity offerings, debt financings, corporate collaborations or other means. We may attempt to raise additional capital due to favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuance of equity securities, our stockholders will experience dilution, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones may harm our future capital position. Additional financing may not be available on acceptable terms, if at all. Capital may become difficult or impossible to obtain due to poor market or other conditions outside of our control. If at any time sufficient capital is not available, either through existing capital resources or through raising additional funds, we may be required to delay, reduce the scope of, eliminate or divest one or more of our research, pre-clinical or clinical programs.
For the year ended December 31, 2008, net cash used in operating activities was $25.7 million, primarily consisting of salaries, clinical trials, research and development activities and general corporate operations. Net cash used in investing activities was $22.4 million for the year ended December 31, 2008 and included the net proceeds from the disposal of our orofacial therapeutic business and the related assets held for sale, offset by the net purchases of investments, capitalized patent costs, and engineering design and planning costs for the new manufacturing facility at our corporate headquarters. Net cash provided by financing activities for the year ended December 31, 2008 consisted primarily of $1.1 million in net proceeds from issuance of common stock under our stock-compensation plans and $39.1 million in funds borrowed under the Deutsche Bank credit facility.
Seasonality
In January 2008, we completed a transaction to sell our remaining orofacial therapeutic business to Luitpold, including the downstream formulation, fill, finish manufacturing and kitting rights to GEM 21S. As a result of the sale, we do not expect product sales revenues from GEM 21S in 2008 and going forward; however, we expect to continue to receive ongoing royalty payments based on net sales of GEM 21S and other products that are based on adapting our technology to future products in the orofacial therapeutic field.
Prior to the January 2008 sale, the manufacturing and supply agreement with Luitpold obligated Luitpold to purchase all of its requirements for GEM 21S from us and we were obligated to meet such requirements to the extent they were consistent with Luitpold’s forecasts. The cyclical nature of these purchase commitments triggered product sales of GEM 21S for us primarily in the third and fourth quarters, with a lower portion of product sales recognized in the first and second quarters.
Segment Information
We have determined that we are principally engaged in one operating segment. Our product development efforts are primarily in the treatment of musculoskeletal injuries and diseases, including
orthopedic, spine and sports injury applications for the repair and regeneration of orthopedic tissues, including bone, cartilage, ligaments and tendons.
Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income (“SFAS No. 130”), establishes standards for reporting and display of comprehensive income (losses) and its components in the consolidated financial statements. Our comprehensive loss as defined by SFAS No. 130 is the total of net loss and all other changes in equity resulting from non-owner sources including unrealized gains/losses on marketable securities. The components of our comprehensive losses for the years ended December 31, 2008, 2007 and 2006 are as follows (in millions):
Milestone Payments
Under our agreements with Luitpold, ZymoGenetics, Harvard, Kensey Nash Corporation (“Kensey Nash”) and Novartis Vaccines and Diagnostics (“Novartis”), various milestone payments are required. Luitpold is required to make certain milestone payments to us, and we were required to make certain milestone payments to ZymoGenetics, Harvard, Kensey Nash and Novartis, based on the occurrence of certain events.
Our first product, GEM 21S, received approval from the FDA in November 2005. As a result of the FDA approval, we received a $15.0 million milestone payment from Luitpold in December 2005. In December 2007, we received a $5.0 million milestone payment from Luitpold upon the second anniversary of the FDA approval. Also as a result of the FDA approval, we were required to make milestone payments of $5.0 million to Novartis and a total of $7.1 million to patent licensors. The patent license fees were paid to our licensors as a result of FDA approval and receipt of the milestone payments from Luitpold upon FDA approval, and were capitalized and amortized over the remaining life of the patents.
In addition, we expect to receive a $10.0 million milestone payment based upon the future anticipated EU regulatory approval of GEM 21S as pre-established in a prior agreement between us and Luitpold. Also, under the terms of a sale agreement between us and Luitpold for the sale of our orofacial therapeutic business, we expect to receive an additional $10.0 million time based payment in cash as well as ongoing royalty payments based on net sales of GEM 21S and other products that are based on adapting our technology to future products in the orofacial therapeuctic field.
Contractual Obligations
Our major outstanding contractual obligations relate to our capital leases for office equipment, operating leases for our facilities, purchase and supplier obligations for raw materials and equipment, and our note payable.
In May 2007, we entered into a lease agreement effective January 1, 2007 with Noblegene Development LLC (“Noblegene”), replacing in its entirety our previous lease with Noblegene dated April 2004, as amended in July 2005. This lease agreement extends the lease term and includes additional office space of approximately 9,000 square feet, bringing the total space to approximately 32,000 square feet at our headquarters in Franklin, Tennessee. Under the terms of the lease, we pay Noblegene monthly rent of $50,017, as adjusted, plus additional proportionate operating and insurance costs associated with the building and the business campus. The lease agreement also contains annual scheduled rate increases equivalent to a minimum of three percent. Under the original lease terms, we had been provided with a rent credit of $106,831 to be used toward improvements. In connection with the lease agreement and related to the additional space, we were provided with an additional rent credit resulting in a total rent credit of $5 per usable square foot (or $160,000 total). This rent credit was used toward leasehold improvements in the fourth quarter of 2007. The initial term of the lease continues until December 31, 2016, and we have the
option to extend the lease for two additional five-year terms. The office space lease agreement contains annual rate increases equivalent to a minimum of three percent.
In August 2007, we entered into a lease agreement with Noblegene for approximately 30,000 square feet of space in a new building to be built in the same complex as our headquarters in Franklin, Tennessee. We intend to move certain of our manufacturing operations to the new space once it is completed. Under the terms of the lease, upon the completion of the building we will initially pay Noblegene monthly rent of $62,500, as adjusted for inflation, plus additional proportionate operating and insurance costs. In addition, our lease rate will be reduced at various intervals if the building’s occupancy increases. The lease also provides for a tenant improvement allowance of $2.5 million to reimburse us for construction costs associated with building out the leased space. We expect to receive the tenant improvement allowance within 30 days of the earlier of: (a) two years after the date we obtain a Certificate of Occupancy for the new space; or (b) upon Noblegene obtaining a permanent mortgage on the new building. The initial term of the lease continues 10 years from the commencement date, which is expected to be approximately November 2009. We have the option to extend the term of the lease for two additional five-year terms. Under the terms of the lease, we agree to indemnify Noblegene under specific circumstances.
In January 2008, we entered into an amendment to our two existing lease agreements described above with Noblegene. The amendment added certain additional exclusions to the definition of “operating costs” in both of the lease agreements. The amendment also provided for us to pay $56,686 to Noblegene as a final payment of 2007 operating costs under one of the lease agreements.
In January 2009, we amended our August 2007 lease agreement with Noblegene. The amendment increased the base rent by $1.00 to $26.00 per rentable square foot and provided for a one-time payment of $200,000 from us to Noblegene. In all other respects, the lease agreement remains the same. We agreed to the increase in rent, and the one-time payment, to compensate Noblegene for increased construction costs due to the Company’s requested changes in the building design.
Our Company’s President and Chief Executive Officer (“CEO”) is a former partner in Noblegene but maintained an ownership interest at the time we entered into our lease agreements with Noblegene. In March 2008, our CEO sold his ownership interest back to Noblegene. However, since the owner of Noblegene is a brother-in-law of our CEO’s wife, Noblegene continues to be a related party.
Our ability to manufacture our product candidates depends on a limited number of specialty suppliers of raw materials. We have manufacturing and supply agreements with our specialty suppliers. As part of these agreements, we are required to make payments to the licensors and comply with other obligations as we progress through product development and commercialization. We have developed a network of suppliers, manufacturers, and contract service providers to provide sufficient quantity of raw materials for our product candidates through the development, clinical testing and commercialization phases. We have contractual obligations for supply agreements with Novartis Vaccines and Diagnostics (“Novartis”) and Kensey Nash Corporation (“Kensey Nash”), as follows:
Novartis. In July 2004, we entered into a commercial supply agreement with Chiron Corporation (now known as Novartis) pursuant to which we are obligated to purchase minimum quantities of rhPDGF. Under the agreement, the prices we are obligated to pay will vary depending on the quantity of rhPDGF we order. In the table above, we assume pricing based on purchasing the contractual minimum quantity with pricing as adjusted for an estimated inflation factor, and we have included these payments in the table above under the caption “Purchase and supplier obligations - raw materials.” In addition, we were obligated to pay Novartis a $5.0 million development milestone for its investment in rhPDGF manufacturing. This milestone was payable in equal installments over four years, with the last payment occurring in November 2008.
Kensey Nash. In June 2005, we entered into an agreement with Kensey Nash, to develop commercial products using specific scaffolds manufactured and supplied by Kensey Nash for use in orthopedic and sports medicine applications. We have agreed to make additional payments to Kensey Nash based on the achievement of specific regulatory and commercial milestones of the products developed under the agreement. In December 2006, we amended our agreement with Kensey Nash to accelerate certain milestone payments associated with the development of a matrix for sports medicine applications. In April 2008, we amended the agreement with Kensey Nash to provide for new payments from us to Kensey Nash for the accomplishment of development milestones for potential new products. The table below does not
include any contractual obligations for Kensey Nash since we cannot be certain when milestones will be achieved, if at all.
We have executed agreements with various equipment suppliers for the manufacture of equipment that will be used in the new manufacturing facility described above. As of December 31, 2008, we have paid a total of $4.2 million for the equipment. A total of $2.3 million that we paid is for equipment which has been finished but not yet placed in service. The title of the equipment not placed in service remains with the supplier until delivery to us. A total of $1.9 million that we paid is classified as deposits representing costs paid to date for equipment not yet finished by the vendor. In addition, under these agreements, we have estimated remaining purchase commitments of $1.0 million remaining to be paid through the year 2010.
In October 2008, we entered into a Time Promissory Note (the “Note”) credit facility with Deutsche Bank AG (“Deutsche Bank”) enabling us to borrow up to $39.1 million. The Note is secured by certain auction rate securities (“ARS”) investments that we own having a total par value of $55.9 million. Under the terms of the Note, we are required to make monthly interest payments during the two-year term of the Note. All outstanding principal amounts are due and payable in full on the maturity date in October 2010. Interest payments on the Note were at a rate equal to the prime rate less 1.5% during 2008. Interest is payable monthly on the last business day of each calendar month. We have recognized interest expense of $0.2 million for the year ended December 31, 2008, at an effective interest rate of 2.27%. The Agreement contains customary representations and warranties of our Company and events of default. As of December 31, 2008, we had an outstanding note payable balance of $39.1 million.
We have summarized in the table below our fixed contractual obligations as of December 31, 2008:
Recent Accounting Pronouncements
SFAS No. 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies whenever other accounting pronouncements require (or permit) assets or liabilities to be measured at fair value. We adopted SFAS No. 157 on January 1, 2008.
SFAS No. 159. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115 (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. We adopted SFAS No. 159 on January 1, 2008 and the adoption did not have a material impact on our financial position or results of operations as of and for the year ended December 31, 2008.
EITF Issue 07-03. In June 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on Emerging Issues Task Force Issue 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF Issue 07-03”). The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. If a
company’s expectations change, such that it does not expect the goods will be delivered or the services rendered, the capitalized nonrefundable advance payments should be charged to expense. We adopted EITF Issue 07-03 on January 1, 2008 and the adoption did not have a material impact on our financial position or results of operations as of and for the year ended December 31, 2008.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.
Effects of Inflation
Because our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations in certain businesses.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense. Due to the short-term nature of our cash and cash equivalents, we do not believe that we have any material exposure to interest rate risk arising from our cash and cash equivalents. Our cash accounts earned interest rates ranging from 1.60% to 4.10% during the twelve months ended December 31, 2008. We have not used derivative financial instruments for speculation or trading purposes.
As of December 31, 2008, we had $33.2 million in short-term investments consisting of U.S. government sponsored enterprise (“GSE”) securities totaling $31.7 million and a U.S. Treasury Note totaling $1.5 million that are classified as available for sale. The GSE securities have maturity dates from March 2009 through November 2009. The U.S. Treasury Note has a maturity of April 30, 2009.
Also as of December 31, 2008, we had long-term investments of $46.6 million in student loan backed auction rate securities (“ARS”) that are classified as available-for-sale and recorded at fair value. A total of $40.5 million of our ARS investments are bonds with a credit rating of AAA and $6.1 million are bonds with a credit rating of AA or A2. Generally, these ARS investments are sold by state guarantee agencies backed by student loans under the Federal Family Education Loan Program (“FFELP”). The majority of the student loans are guaranteed by the U.S. Department of Education at amounts representing a substantial portion of the loans. Auctions for these ARS investments have failed since February 2008, and we have not been able to sell them. Consequently, an other-than-temporary impairment in fair value of our ARS investments has resulted. As a result, an impairment loss of $13.4 million has been recorded on our consolidated statement of operations at December 31, 2008.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required for each of the three years ended December 31, 2008 and the Report of Independent Registered Public Accounting Firm are indexed on page and are incorporated herein.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to provide reasonable assurance
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These controls and procedures are designed to ensure that the required information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2008. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2008.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The 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 U.S. generally accepted accounting principles.
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 of achieving their control objectives.
Management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this evaluation, management, with the participation of the Chief Executive Officer and the Chief Financial Officer, concluded that, as of December 31, 2008, the Company’s internal control over financial reporting was effective.
Report of Independent Registered Public Accounting Firm
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Form 10-K, has issued a report on the Company’s internal control over financial reporting, which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BioMimetic Therapeutics, Inc.
We have audited BioMimetic Therapeutics, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’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 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 included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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, BioMimetic Therapeutics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BioMimetic Therapeutics, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 of BioMimetic Therapeutics, Inc., and our report dated March 9, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 9, 2009
Item 9B.
Item 9B. OTHER INFORMATION
We filed a Current Report on Form 8-K on February 13, 2009, reporting:
On January 9, 2009, BioMimetic Therapeutics, Inc. (“Company”) amended its August 17, 2007 lease agreement with Noblegene Development, LLC (“Lease”) for the Company’s new manufacturing facility currently under construction in the same complex as the Company’s headquarters in Franklin, Tennessee. The Lease was amended to increase the base rent by $1.00 to $26.00 per rentable square foot and to provide for a one-time payment of $200,000 from the Company to Noblegene. In all other respects, the Lease remains the same. The Company agreed to the increase in rent, and the one-time payment, to compensate Noblegene for increased construction costs due to BioMimetic’s requested changes in the building design. Company will not begin making lease payments until Noblegene completes construction of the shell of the building.
The wife of Dr. Samuel Lynch, the Company’s President and Chief Executive Officer, is the sister-in-law of John N. Weckesser, Noblegene’s sole owner. The initial lease agreement and this lease amendment were approved by the Company’s Audit Committee as a related party transaction.
The preceding summary of the lease amendment is not intended to be complete, and is qualified in its entirety by reference to the full text of the Second Amendment to Lease Agreement, which is filed as an exhibit to this Annual Report on Form 10-K.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference from the definitive proxy statement for our 2009 annual meeting of stockholders, which will be filed no later than 120 days after December 31, 2008.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference from the definitive proxy statement for our 2009 annual meeting of stockholders, which will be filed no later than 120 days after December 31, 2008.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference from the definitive proxy statement for our 2009 annual meeting of stockholders, which will be filed no later than 120 days after December 31, 2008.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this item is incorporated herein by reference from the definitive proxy statement for our 2009 annual meeting of stockholders, which will be filed no later than 120 days after December 31, 2008.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated herein by reference from the definitive proxy statement for our 2009 annual meeting of stockholders, which will be filed no later than 120 days after December 31, 2008.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. All financial statements
Consolidated financial statements filed as part of this report are listed under Item 8. “Financial Statements and Supplementary Data.”
2. Financial statement schedules
No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
BIOMIMETIC THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BioMimetic Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of BioMimetic Therapeutics, Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BioMimetic Therapeutics, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BioMimetic Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 9, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 9, 2009
BIOMIMETIC THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
BIOMIMETIC THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
BIOMIMETIC THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2008, 2007 and 2006
See accompanying notes.
BIOMIMETIC THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business, Background and Basis of Presentation
Nature of the Business
BioMimetic Therapeutics, Inc. (the “Company” and formerly BioMimetic Pharmaceuticals, Inc.) develops and commercializes regenerative protein therapeutic-device combination products primarily used for bone and tissue regeneration for the repair and healing of musculoskeletal injuries and conditions affecting bones, tendons, ligaments and cartilage within orthopedic, spine and sports injury applications.
The Company’s first product, GEM 21S® Growth-factor Enhanced Matrix, is a periodontal product and received approval from the U.S. Food and Drug Administration (“FDA”) on November 18, 2005. Product sales of GEM 21S began late in the fourth quarter of 2005 and were achieved through an exclusive business relationship with Luitpold Pharmaceuticals, Inc. (“Luitpold”), under which Luitpold was responsible for the worldwide marketing, sales and distribution of GEM 21S for periodontal and cranio-maxillofacial (orofacial therapeutic) applications. In January 2008, the Company sold to Luitpold the Company’s orofacial therapeutic business. Under the sale agreement, Luitpold was granted the rights to the downstream formulation, fill, finish, manufacturing and kitting of GEM 21S. The sale transaction has enabled the Company to focus its expertise and development efforts on its orthopedic, spine and sports medicine product candidates, including its lead product candidate Augment™ Bone Graft (“Augment”), formerly GEM OS1 bone graft, and other product candidates in the pipeline, and has provided additional capital allowing the Company to aggressively advance its pipeline of product candidates through clinical development and into commercialization.
Management plans to derive revenue from the sale or licensing of its products which are at various stages of product development. If and when the Company’s product candidates are introduced to market, additional time may be necessary before significant revenues are realized. Since inception, the Company has experienced operating losses each year. Although the size and timing of the Company’s future operating losses are subject to significant uncertainty, the Company expects that operating losses may continue over the next few years as it continues to fund its research and development activities and clinical trials and as it prepares for a future sales network to represent its products. The success of the Company’s future operations is primarily dependent on its ability to complete clinical trials, obtain regulatory approval for its product candidates, obtain necessary licenses, gain market acceptance of its products once approved and obtain additional capital and financing on acceptable terms. Inability to obtain adequate funding, delays and unanticipated costs in obtaining the required licenses and approvals, unforeseen problems with clinical trials or losses of key personnel could affect the Company’s results of operations.
Background
The Company was incorporated on April 14, 1999 in the state of Tennessee as BioMimetic Pharmaceuticals, Inc. Effective June 1, 2001, BioMimetic Pharmaceuticals, Inc., merged with and into BioMimetic Merger Corp., a Delaware corporation. As part of the merger agreement, BioMimetic Merger Corp. designated the surviving corporate name to be BioMimetic Pharmaceuticals, Inc., a Delaware corporation. The transactions described above have been accounted for as common control reorganizations. In July 2005, the Company changed its corporate name to BioMimetic Therapeutics, Inc.
Since inception, the Company has expended significant funds on business planning, obtaining financing, obtaining skilled employees, and developing its product and product candidates through pre-clinical studies and clinical trials in the United States, Canada and the European Union (“EU”).
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries, BioMimetic Therapeutics Limited in the United Kingdom (formed in October 2005) and BioMimetic Therapeutics Pty Ltd. in Australia (formed in October 2006). Inter-company balances and transactions are eliminated in consolidation. As of December 31, 2008, the subsidiaries have no employees and have no operating activities other than making and maintaining regulatory submissions for the Company’s products in the EU and Australia.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Nature of the Business, Background and Basis of Presentation (continued)
The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles and with the instructions to Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Operating results for the year ended December 31, 2008 are not necessarily indicative of the results that may be expected for any other future period.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, certificates of deposit, money market funds and U.S. government sponsored enterprise (“GSE”) securities with original maturities of less than 90 days to be cash and cash equivalents.
Investments
The Company invests in marketable securities, which are classified as available-for-sale. These investments are stated at fair market value, with any unrealized gains and losses, net of tax, reported in the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judged to be other-than-temporary on investments in marketable securities are included in investment income (loss) in the accompanying consolidated statements of operations. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income (loss) in the accompanying consolidated statements of operations.
Receivables - Trade
Trade receivables are recorded at the invoiced amount and do not bear interest. The trade receivables balance represents the amounts due from Luitpold for research and development studies and represents a legal and enforceable receivable under the Company’s agreements with Luitpold. No allowance for doubtful accounts was deemed necessary as of year-end.
Receivables - Other
Receivables from others represent: (1) the discounted balance of the $10,000,000 due from Luitpold in future periods related to the Company’s sale of its orofacial therapeutic business, and (2) royalty income amounts and other receivables in the normal course of business transactions.
Inventory
Inventories are carried at the lower of cost (first-in, first-out) or net realizable value.
Valuation of Purchase Commitments
The Company has substantial firm purchase commitments with certain of its suppliers related to future inventory requirements. At each period end, the Company assesses the need for any provision for future losses associated with these future purchase commitments in accordance with Accounting Research Bulletin (“ARB”) No. 43, Restatement and Revision of Accounting Research Bulletins. As of December 31, 2008, no reserves have been recorded associated with these future purchase commitments.
Prepaid Expenses
Prepaid expenses consist of supplies, rent, insurance premiums and other expenditures in the normal course of business that the Company has paid in advance.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment range from three to seven years.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and the resulting gain or loss is reflected in the accompanying consolidated statements of operations.
Capitalized Patent License Fees
The Company has capitalized certain costs including milestone and sub-license fees, related to obtaining patent licenses from non-related party institutions. The Company’s policy is to capitalize and amortize these costs over the estimated life of the patents. Of the licensed patents that remain unexpired, the expirations, and thus the estimated useful lives, range from 2009 to 2010.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Measurement of an impairment loss is required when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The amount of a recognized impairment loss is the excess of an asset’s carrying value over its fair value. The Company has not recognized any impairment losses for the years ended December 31, 2008, 2007 and 2006.
Accrued Expenses and Deferred Liabilities
As part of the process of preparing its consolidated financial statements, management is required to estimate expenses that the Company has incurred for which it has not been invoiced. This process involves identifying services that have been performed on the Company’s behalf and estimating the level of services performed by third parties and the associated cost incurred for such services where the Company has not been invoiced or otherwise notified of actual costs. Examples of expenses for which the Company accrues based on estimates include milestone payments, salaries and wages, unpaid vacation and sick pay, fees for services, such as those provided by clinical research and data management organizations, investigators and fees owed to contract manufacturers in conjunction with the manufacture of clinical trial materials. In connection with such service fees, these estimates are most affected by management’s understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of the Company’s service providers invoice the Company monthly in arrears for services performed. In the event that the Company does not identify certain costs that have begun to be incurred or the Company under- or over-estimates the level of services performed or the costs of such services, the actual expenses could differ from such estimates. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often subjective determinations. Management makes these estimates based upon the facts and circumstances known to it at the time and in accordance with U.S. generally accepted accounting principles. Milestone payments due within 12 months are considered short-term liabilities and those due in over 12 months are considered long-term liabilities.
Revenue Recognition
The Company follows the revenue recognition criteria outlined in Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements (“SAB 101”) as amended by SAB 104, Revenue Recognition, Emerging Issues Task Force (“EITF”) Issue 00-21, Revenue Arrangements with Multiple Deliverables (“EITF Issue 00-21”), and Statement of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists (“SFAS No. 48”).
Product sales
The Company generated its first revenues in December 2005 from the sale of GEM 21S to Luitpold after receiving FDA approval in November 2005. Product sales revenue was recognized upon delivery of the product to the customer, Luitpold.
During late 2005 and the first quarter of 2006, the Company agreed to ship certain identified product to Luitpold that had an expiration date of less than one year (“short-dated”) and provided Luitpold with the right of exchange for any short-dated product that reached six months or less of its expiration date. Product
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
sales revenue during late 2005 and the first quarter of 2006 for the identified short-dated product was recognized upon the completion of the final sale by Luitpold. In 2006, the Company received permission from the FDA to extend the expiration date of the product. By year-end 2006, all product held by Luitpold was no longer considered to be short-dated, as no right of return still existed for the product. As such, product sales revenue for the previously identified short-dated product had been fully recognized by year-end 2006.
In January 2008, the Company sold to Luitpold its remaining orofacial therapeutic business. As such, no product sales revenue was recorded for the year ended December 31, 2008. See Note 4.
Royalty income
In exchange for the rights to the exclusive worldwide marketing, distribution and sales of GEM 21S, Luitpold is obligated to pay royalties to the Company based on net sales by Luitpold. The December 2007 agreement to sell the Company’s remaining orofacial therapeutic business to Luitpold requires a continuation of royalty payments to the Company. Luitpold is required to report its sales and remit royalties to the Company on a quarterly basis. The Company’s policy is to recognize royalty income when the information is received from Luitpold.
Sublicense fee income
The Company has an amended and restated exclusive sublicense agreement and an exclusive license agreement with Luitpold. Sublicense fees are due to the Company upon achievement of the milestone criteria. In December 2005, the Company received $15,000,000 from Luitpold upon receiving approval from the FDA for the Company’s first product, GEM 21S. In December 2007, the Company received $5,000,000 from Luitpold upon the second anniversary of FDA approval of GEM 21S. Revenues from the sublicense agreement are recognized pursuant to the term of the agreement and are being amortized over the remaining life of the agreement, which expires December 31, 2026. Payments received in advance of revenue recognized are recorded as deferred revenue. The timing of cash received from the Company’s agreement differs from revenue recognized. The Company follows the revenue recognition criteria outlined in SAB 101, as amended by SAB 104, and
EITF Issue 00-21.
Collaborative research and development
The Company has collaborative research and development agreements with Luitpold. The Company follows the revenue recognition criteria outlined in SAB 101, as amended by SAB 104, and EITF Issue 00-21. Revenues received for ongoing research and development activities under collaborative agreements are recognized as these activities are performed pursuant to the terms of the related agreements. Any amounts received in advance of performance are recorded as deferred revenue until earned. Accordingly, up-front, non-refundable license fees under agreements where the Company has an ongoing research and development commitment are amortized, on a straight-line basis, over the term of such commitment.
Luitpold made a $10,000,000 one-time payment to the Company upon execution of the research, development and marketing agreement in December 2003. The Company amortized the proceeds of the payment over the term of the research and development activities up to the Company’s estimated approval date for GEM 21S, which was estimated at the time to be October 2005. Further, Luitpold agreed to make a milestone payment to the Company upon EU regulatory approval of GEM 21S.
Other revenue
The Company subleased portions of its office headquarters in Franklin, Tennessee to two independent companies through August 2008. The resulting rental income related to subleased rental property, as well as other revenue items in the normal course of business, are recognized monthly as related payments are due and/or invoiced.
Research and Development
The Company expenses costs associated with research and development activities as incurred. The Company evaluates payments made to suppliers and other vendors in accordance with SFAS No. 2,
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Accounting for Research and Development Costs, and determines the appropriate accounting treatment based on the nature of the services provided, the contractual terms, and the timing of the obligation. Research and development costs include payments to third parties that specifically relate to the Company’s product candidates in clinical development, such as payments to contract research organizations, clinical investigators, manufacture of clinical material, product related consultants, contract manufacturing start-up costs, manufacturing scale-up costs, milestone payments and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees of the manufacturing, regulatory affairs, clinical affairs, quality assurance, quality control and research and development are classified as research and development costs. Research and development spending for past periods is not indicative of spending in future periods.
Income Taxes
The Company accounts for income taxes utilizing the asset and liability method prescribed by the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets related to future years, including loss and credit carryforwards, if there is not sufficient evidence to indicate that the results of operations will generate sufficient taxable income to realize the net deferred tax asset in future years.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), to account for uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation prescribes that the Company should use a “more likely than not” recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more likely than not” recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Stock-Based Compensation
During 2001, the Company’s board of directors approved the adoption of the 2001 Long-Term Stock Incentive Plan (the “option plan”). The option plan provides that stock options, other equity interests or equity-based incentives in the Company may be granted to key personnel at an exercise price determined by the Company’s Compensation Committee, at the time the option is granted, taking into account the fair value of the common stock at the date of grant. The maximum term of any option granted pursuant to the option plan is ten years from the date of grant.
The employee stock options granted by the Company are structured to qualify as “incentive stock options” (“ISOs”). Under current tax regulations, the Company does not receive a tax deduction for the issuance, exercise or disposition of ISOs if the employee meets specific holding requirements. If the employee does not meet the holding requirements, a disqualifying disposition occurs, at which time the Company will receive a tax deduction. The Company does not record tax benefits related to ISOs unless and until a disqualifying disposition occurs. In the event of a disqualifying disposition, the entire tax benefit is recorded as a reduction of income tax expense. The Company has not recognized any income tax benefit for the three years ended December 31, 2008 for share-based compensation arrangements due to the fact that it does not believe that it will recognize any deferred tax assets from such compensation cost recognized in the current period.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified prospective method of transition. Under that transition method, compensation cost recognized in the three years ended December 31, 2008 includes: (a) compensation costs for all share-based payments granted prior to January 1, 2006 are based on the intrinsic value method proscribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
No. 25”), and (b) compensation costs for all share-based payments granted subsequent to January 1, 2006 are based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
In accordance with SFAS No. 123(R), the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using weighted average assumptions amortized to expense over the options’ vesting periods. These assumptions include the risk free interest rate, expected dividend yield, volatility factor of the expected market price, forfeiture rate and weighted average expected life of the option. Since the trading market for the Company’s common stock has a limited history, the expected volatility rates are based on historical data from three companies similar in size and value to the Company. The expected terms of options granted represents the period of time that options granted are expected to be outstanding and is derived from the contractual terms of the options granted. The Company amortizes the fair value of each option over each option’s vesting period. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
Prior to the adoption of SFAS No. 123(R), the Company had adopted SFAS No. 123, Accounting for Stock Based Compensation (“SFAS No. 123”), as amended. But in accordance with SFAS No. 123, the Company had elected not to apply fair value-based accounting for its awards under the employee stock incentive plan through December 31, 2005. Instead, the Company measured compensation expense for its stock plans using the intrinsic value method prescribed in APB Opinion No. 25, and related interpretations. The Company recorded deferred stock-based compensation to the extent the deemed fair value of its shares of common stock for financial accounting purposes exceeded the exercise price of stock options granted to employees on the date of grant, and amortized these amounts to expense over the vesting schedule of the options, generally four years.
At each grant date during 2005 and through the first quarter of 2006, prior to the Company’s IPO, its board of directors determined the deemed fair value of the Company’s common stock and the associated exercise price of each award. Following each financing and the achievement by the Company of significant milestones, the board of directors reviewed the fair value of the Company’s common stock. Because there was no public market for the Company’s common stock at the time of such determinations and there had been no sale of common stock to a third-party since inception, these determinations were necessarily subjective.
In connection with preparing the financial statements for the Company’s IPO, the board of directors reassessed the fair value of the Company’s common stock for the year ended December 31, 2005 and the first quarter of 2006. The board of directors performed its analysis and retrospective review in accordance with the practice aid issued by the American Institute of Certified Public Accountants titled Valuation of Privately Held Company Equity Securities Issued as Compensation.
Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income (“SFAS No. 130”), establishes standards for reporting and display of comprehensive income (losses) and its components in the consolidated financial statements. The Company’s comprehensive loss as defined by SFAS No. 130 is the total of net loss and all other changes in equity resulting from non-owner sources including unrealized gains/losses on marketable securities. The components of the Company’s comprehensive losses for the years ended December 31, 2008, 2007 and 2006 are as follows (in millions):
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”), requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Due to their short-term nature, the carrying amounts reported in the consolidated financial statements approximate the fair value for cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and capital lease obligations.
The Company’s Time Promissory Note (the “Note”) credit facility with Deutsche Bank AG (“Deutsche Bank”), upon which the Company borrowed $39,100,000 in October 2008, had a carrying amount that approximated the fair value as of December 31, 2008.
For information on the fair value of the Company’s long-term investments, see Note 11.
Concentration of Credit Risk and Limited Suppliers
Cash and cash equivalents and short-term investments consist of financial instruments that potentially subject the Company to concentrations of credit risk to the extent recorded on the consolidated balance sheets. The Company maintains cash in financial institutions in excess of Federal Deposit Insurance Corporation limitations. The Company believes that it has established guidelines for investment of its excess cash with the intent to maintain principal and liquidity through its policies on diversification and investment maturity.
As of December 31, 2008, the Company had long-term investments of $46,624,040 in auction rate securities (“ARS”) that are classified as available-for-sale, recorded at fair value and have a credit rating of AAA, AA or A2. Generally, these ARS investments are sold by state guarantee agencies backed by student loans under the Federal Family Education Loan Program (“FFELP”). The majority of the student loans are guaranteed by the U.S. Department of Education at amounts representing a substantial portion of the loans. Auctions for these ARS investments have failed since February 2008, and the Company has not been able to sell them. Consequently, an other-than-temporary impairment in fair value of our ARS investments has resulted. As a result, an impairment loss of $13,375,960 has been recorded on the Company’s consolidated statement of operations at December 31, 2008.
The Company relies on certain materials used in its development process that are procured from a single source supplier as well as certain third-party contract manufacturers that make its product candidates. The failure of its supplier or contract manufacturers to deliver on schedule, or at all, could delay or interrupt the development process and adversely affect the Company’s clinical trials, and ultimately, operating results.
Segment Information
The Company has determined that it is principally engaged in one operating segment. The Company’s product development efforts are primarily in the treatment of musculoskeletal injuries and diseases, including orthopedic, spine and sports injury applications for the repair and regeneration of orthopedic tissues, including bone, cartilage, ligaments or tendons.
Recent Accounting Pronouncements
SFAS No. 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
statement applies whenever other accounting pronouncements require (or permit) assets or liabilities to be measured at fair value. The Company adopted SFAS No. 157 on January 1, 2008. See Note 11 for further discussion on the impact of the adoption of SFAS No. 157.
SFAS No. 159. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115 (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted SFAS No. 159 on January 1, 2008 and the adoption did not have a material impact on its financial position or results of operations as of and for the year ended December 31, 2008.
EITF Issue 07-03. In June 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on Emerging Issues Task Force Issue 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF Issue 07-03”). The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. If a company’s expectations change, such that it does not expect the goods will be delivered or the services rendered, the capitalized nonrefundable advance payments should be charged to expense. The Company adopted EITF Issue 07-03 on January 1, 2008 and the adoption did not have a material impact on its financial position or results of operations as of and for the year ended December 31, 2008.
3. Net Loss Per Share
The Company calculates net loss per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS No. 128”) and Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding. Common stock equivalents consist of shares of common stock issuable upon the exercise of stock options.
The Company had potentially dilutive common stock equivalents outstanding of 2,117,392, 1,946,902 and 1,509,839 shares as of December 31, 2008, 2007 and 2006, respectively. These common stock equivalents consist of issued and outstanding common stock options, and are not included in the above diluted net loss per common share historical calculations as the effect of their inclusion was anti-dilutive. Therefore, diluted earnings per share is the same as basic earnings per share.
Net loss per share for the years ended December 31, 2008, 2007 and 2006 is summarized as follows:
4. Luitpold Pharmaceuticals, Inc.
The Company has agreements with Luitpold that cover an exclusive worldwide sublicense and license, trademark license, concurrent use, supply and royalty income relationship.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Luitpold Pharmaceuticals, Inc. (continued)
Sale of Orofacial Therapeutic Business
In January 2008, the Company sold to Luitpold the Company’s orofacial therapeutic business, including GEM 21S. That transaction has enabled the Company to focus its expertise and development efforts on its orthopedic and sports medicine product candidates, including its lead product candidate, Augment, and other product candidates in the pipeline. Further, it has provided the Company with additional capital allowing the Company to aggressively advance its pipeline of product candidates through clinical development and into commercialization.
As of December 31, 2008, the Company had recorded a $39,291,413 net gain on the disposal of its orofacial therapeutic business. The Company had received $30,000,000 in cash from the sale transaction and $3,389,832 in cash from the sale of existing inventory in 2008.
Under the terms of the sale agreement, the Company expects to receive an additional $10,000,000 time-based payment due in cash by the end of 2009. At December 31, 2008, the Company had recorded a receivable for $9,782,315, which represents the discounted balance of the $10,000,000 due from Luitpold. The Company recorded $272,279 of interest income from the accretion of the receivable during the year ended December 31, 2008. Furthermore, the Company expects to receive ongoing royalty payments based on net sales of GEM 21S and other products that are based on adapting the Company’s technology to future products in the orofacial therapeutic field.
In addition, as established in a prior agreement between the Company and Luitpold, the Company anticipates receiving a $10,000,000 milestone payment based upon the future anticipated European Union (“EU”) regulatory approval of GEM 21S .
Agreements with Luitpold Pharmaceuticals, Inc.
In December 2003, the Company entered into three agreements with Luitpold that covered an exclusive worldwide sublicense, research and development, marketing and distribution relationship. The resulting December 2003 exclusive sublicense agreement granted to Luitpold the worldwide marketing, sales and distribution rights for GEM 21S, the Company’s first commercial product.
In January 2008, as noted above, the Company completed the sale of its orofacial therapeutic business to Luitpold. This sale was pursuant to a December 2007 asset purchase agreement with Luitpold. As part of this transaction, Luitpold acquired the rights to the downstream formulation, fill, finish, manufacturing and kitting of GEM 21S.
In addition to the 2007 asset purchase agreement, at the transaction’s closing in January 2008, the Company entered into the following ancillary agreements with Luitpold:
1.
Amended and Restated Exclusive Sublicense Agreement - This agreement supersedes the December 2003 exclusive sublicense agreement between the parties and grants Luitpold exclusive rights to utilize intellectual property the Company licenses from ZymoGenetics and Harvard in periodontal, oral, and cranio-maxillofacial indications, as well as veterinary indications. The term of this agreement extends until 2026.
2.
Exclusive License Agreement - This agreement sets forth Luitpold’s exclusive rights to utilize intellectual property the Company currently owns or which it may develop or license in the future in the applications above the neck in humans and in veterinary applications. This agreement and Luitpold’s royalty obligations will expire upon the later of the date when the licensed patents have all expired or December 31, 2026.
3.
Agreement Terminating the Manufacturing and Supply Agreement - This agreement terminates the Company’s 2003 manufacturing and supply agreement with Luitpold, which obligated Luitpold to purchase all of its requirements for GEM 21S from the Company and the Company was obligated to meet these requirements to the extent they were consistent with Luitpold’s forecasts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Luitpold Pharmaceuticals, Inc. (continued)
4.
Agreement Terminating the Research, Development and Marketing Agreement - This agreement terminates the Company’s 2003 research, development and marketing agreement, which outlined the Company’s obligations to Luitpold to support its marketing of products subject to the 2003 manufacturing and supply agreement and the 2003 exclusive sublicense agreement. However, under this agreement the Company continues to seek EU regulatory approval for GEM 21S, and is obligated to transfer ownership of that approval to Luitpold once it is obtained. In addition, Luitpold remains obligated to pay to the Company a $10,000,000 milestone payment following the approval. The payment must be made within thirty days of executing the necessary documents to transfer the approval to Luitpold.
5.
Trademark License and Concurrent Use Agreement - This agreement granted to the Company the royalty-free right to continue to use GEM family trademarks during a transition period that expired on January 4, 2009, and granted to the Company a royalty-free perpetual license to use the GEM family trademarks on its website and in investor and public relations materials referencing Luitpold’s products and the Company’s historical development work.
6.
Supply Agreement - This agreement sets forth the terms under which the Company will supply Luitpold with bulk supply of rhPDGF for use in manufacturing commercial products within the dental and cranio-maxillofacial fields, which Luitpold is obligated to purchase exclusively from the Company until the end of 2018.
As a result of the agreements with Luitpold, the Company had recognized product sales revenue, royalty income and sublicense fee income. Subsequent to the January 2008 sale of the Company’s remaining orofacial therapeutic business to Luitpold, no product sales revenue for net sales of GEM 21S was recorded for the year ended December 31, 2008. Product sales revenue of $5,039,608 and $2,592,228 had been recognized for the years ended December 31, 2007 and 2006, respectively.
Under the 2003 exclusive sublicense agreement with Luitpold, in exchange for the rights to the exclusive worldwide marketing, distribution and sales of GEM 21S, Luitpold was obligated to pay royalties on its net sales to the Company. Luitpold was required to report its sales and remit royalties to the Company on a quarterly basis. As part of the agreement to sell the Company’s orofacial therapeutic business to Luitpold, the Company expects to receive ongoing royalty payments based on net sales of GEM 21S and other products that are based on adapting the Company’s technology to future products in the orofacial therapeutic field. Royalty income of $2,144,234, $1,213,481 and $569,065 has been recognized for the years ended December 31, 2008, 2007 and 2006, respectively.
The Company’s first product, GEM 21S, received approval from the FDA on November 18, 2005. As a result, the Company received an initial milestone payment related to the 2003 exclusive sublicense agreement in the amount of $15,000,000 from Luitpold. In December 2007, the Company received an additional $5,000,000 from Luitpold for the second anniversary of GEM 21S approval. In accordance with the provisions of EITF 00-21 and the specific accounting guidance regarding biotech license, research and development and contract manufacturing agreements, the Company is amortizing the $15,000,000 and $5,000,000 proceeds over the term of the amended and restated sublicense agreement with Luitpold, which expires on December 31, 2026. At December 31, 2008, the Company’s deferred revenue balance was $17,492,054. Sublicense fee revenues of $973,849, $740,630 and $709,841 for the years ended December 31, 2008, 2007 and 2006, respectively, represent the amortization of the $20,000,000 proceeds.
5. Inventory
Inventory at December 31 is summarized as follows:
As of December 31, 2008 and 2007, the Company’s inventory is comprised of raw materials that will be used in the vial manufacturing process in anticipation of orthopedic product sales. The Company has
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Inventory (continued)
classified its inventory as non-current. No allowance for has been recorded for excess, obsolete, expired or scrapped inventory as of December 31, 2008 and 2007.
6. Assets Held for Sale
Assets held for sale are reflected on the Company’s consolidated balance sheet as of December 31, 2007 and consist of GEM 21S inventory of $3,389,684 and equipment of $47,227, net. These assets were subsequently sold to Luitpold on January 4, 2008. See Note 4.
7. Property and Equipment
Property and equipment at December 31 is summarized as follows:
The Company has purchased equipment which has not yet been placed into service. As of December 31, 2008, this equipment consists of $19,943 for computer and lab equipment, as well as $2,282,573 for equipment that will be used in a new manufacturing facility to be built in the same complex as the Company’s headquarters in Franklin, Tennessee. The Company intends to move certain of its manufacturing operations to the new facility once it is completed. Prior to completion by the vendor of the manufacture of other equipment, the amount paid by the Company is classified as “Deposits” on the Company’s consolidated balance sheets. See Note 8.
In addition, under agreements with various equipment suppliers for the manufacture of the equipment for the new manufacturing facility, the Company has estimated purchase commitments of $1,007,198 remaining to be paid through the year 2010. See Note 15.
In May 2007, the Company entered into a new lease agreement for approximately 9,000 square feet of additional office space at its current headquarters in Franklin, Tennessee, bringing the total space to approximately 32,000 square feet. Office equipment, computers, furniture and fixtures and leasehold improvements totaling $1,233,069 encompassing the additional space have been capitalized as of December 31, 2008 and are being amortized over the lesser of the useful life or the term of the lease.
In August 2007, the Company entered into a new lease for approximately 30,000 square feet of space in a new building intended to house certain of its manufacturing operations once completed. Equipment engineering design and planning costs totaling $724,760 have been incurred as of December 31, 2008 and are included in construction in process.
8. Deposits
The Company paid a refundable deposit of $10,000 related to its lease of office space at its headquarters in Franklin, Tennessee. In addition, the Company paid a refundable deposit of $375,000 upon signing a lease agreement in August 2007 for approximately 30,000 square feet of space in a new building intended to house certain of its manufacturing operations once completed.
The Company has paid deposits for equipment that will be used in a new manufacturing facility to be built in the same complex as the Company’s headquarters in Franklin, Tennessee. The Company intends to move certain of its manufacturing operations to the new facility once it is completed. As the manufacture of this equipment is completed by the vendor, the deposits previously paid are reclassified to “Property and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Deposits (continued)
equipment” on the Company’s consolidated balance sheets. The Company’s outstanding balance of deposits paid for this new equipment was $1,899,608 and $2,093,823 as of December 31, 2008 and 2007, respectively. See Note 7.
9. Capitalized Patent License Fees
The Company has incurred, and continues to incur, costs related to patent license fees and patent applications for its product candidates and GEM 21S. These payments have been capitalized as patent license fees and are being amortized over their remaining patent life.
In June 2005, the Company filed an Investigational New Drug Application (“IND”) with the FDA for its orthopedic product. The IND filing triggered a milestone payment of $500,000 to ZymoGenetics under the Company’s January 2003 patent license agreement with ZymoGenetics.
In November 2005, the Company acquired patent licenses from the Institute of Molecular Biology (“IMB”), incurring costs of $327,820. The acquisition of IMB patent licenses triggered a $20,000 milestone payment to Harvard under the Company’s license agreement.
The November 2005 FDA approval of the Company’s first product, GEM 21S, triggered a $50,000 milestone payment to Harvard under the Company’s license agreement with Harvard. In addition, the Company was required to pay $4,000,000 to ZymoGenetics within ten days of the FDA’s approval of GEM 21S and an additional $1,000,000 within thirty days of the approval.
The November 2005 milestone receipt of $15,000,000 from Luitpold and the December 2007 milestone receipt of $5,000,000 from Luitpold (see Note 4) triggered sublicense patent fee payments of $1,500,000 and $500,000, respectively, to Harvard under the Company’s patent license agreement.
In June 2006, the Company initiated a registration trial for its orthopedic product GEM OS1. The trial triggered a milestone payment of $500,000 to ZymoGenetics under the Company’s January 2003 patent license agreement with ZymoGenetics. The payment has been capitalized as patent license fees and will be amortized over the remaining patent life.
In October 2008, the Company paid a $1,250,000 milestone payment to ZymoGenetics, Inc. (“ZymoGenetics”) as required upon filing the Device License Application (“DLA”) with Health Canada. The DLA is required in Canada for approval of the commercialization of Augment as a medical device for use in the treatment of foot and ankle fusions.
Each of these milestone transactions has been capitalized as a patent license fee and is being amortized over the life of the patent licenses. The Company has capitalized costs totaling $12,378,492, $11,128,492 and $10,752,465 as of December 31, 2008, 2007 and 2006, respectively, related to the acquisition of its patent licenses. The Company has recorded $2,663,299, $2,233,698 and $2,115,987 of patent license fee amortization for the years ended December 31, 2008, 2007 and 2006, respectively.
Based on agreements in place and payments made as of December 31, 2008, amortization of capitalized patent license fees is expected to be $2,560,880 for the year ended December 31, 2009, $1,640,687 for the year ended December 31, 2010, and $0 for each of the three years ended December 31, 2011, 2012 and 2013.
10. Investments
As of December 31, 2008, the Company had short-term investments of $33,218,233, consisting of U.S. government sponsored enterprise (“GSE”) securities totaling $31,697,023 and a U.S. Treasury Note totaling $1,521,210 that are classified as available for sale. The GSE securities have maturity dates from March 2009 through November 2009. The U.S. Treasury Note has a maturity of April 30, 2009.
Also as of December 31, 2008, the Company had long-term investments of $46,624,040, consisting of student loan backed ARS that are classified as available-for-sale and recorded at fair value. A total of $40,466,410 of the Company’s ARS investments are bonds with a credit rating of AAA and $6,157,630 are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Investments (continued)
bonds with a credit rating of AA or A2. Generally, the ARS investments held by the Company are bonds sold by state guarantee agencies backed by student loans under the Federal Family Education Loan Program (“FFELP”). The student loans are guaranteed by the U.S. Department of Education at amounts representing a substantial portion of the loans. The Company intends to hold these ARS investments for at least the next twelve months. Accordingly, these ARS investments have been classified as long-term on the consolidated balance sheets at December 31, 2008 and 2007.
During the year ended December 31, 2008, the Company recorded an other-than-temporary impairment loss of $13,375,960 on its ARS investments. Including the recorded impairment loss on its ARS investments, the Company recorded aggregate net investment losses (including realized gains and losses) of $10,796,893 for the year ended December 31, 2008 on its short-term and long-term investment portfolio. By contrast, the Company recorded investment income (including realized gains and losses) of $1,951,545 for the year ended December 31, 2007. At December 31, 2008, the Company had accrued interest receivables of $272,279 related to its ARS investments.
11. Fair Value Measurements
As of January 1, 2008, the Company adopted SFAS No. 157, which defines fair value, establishes a framework for measuring fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements. The SFAS No. 157 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
Level 1 - quoted prices in active markets for identical assets and liabilities;
Level 2 - inputs other than Level 1 quoted prices that are directly or indirectly observable; and
Level 3 - unobservable inputs that are not corroborated by market data.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company.
As of December 31, 2008, financial assets and liabilities subject to fair value measurements were as follows:
Fair value estimate
The Company’s cash and cash equivalents includes cash on hand, deposits in banks, certificates of deposit, money market funds and U.S. government sponsored enterprise (“GSE”) securities with original maturities of less than 90 days. Due to their short-term nature, the carrying amounts reported in the consolidated balance sheets approximate the fair value of cash and cash equivalents.
The Company’s short-term investments in GSE securities and a U.S. Treasury Note are classified as available-for sale and have a credit rating of AAA. As of December 31, 2008, the Company recorded a net unrealized gain of $135,542 on its short-term investments, which is reflected in accumulated other comprehensive income on the Company’s consolidated balance sheet.
The Company’s long-term investments consist of ARS, which are debt securities for which interest rates reset regularly at pre-determined intervals, typically 28 days, through an auction process. However,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Fair Value Measurements (continued)
auctions for these ARS investments have failed since February 2008, and the Company has not been able to sell them. Although the auctions for the ARS investments have failed, the Company continues to earn and receive interest on these investments.
Fair value measures for the Company’s long-term investments in ARS have been estimated using cash flow discounting with a Monte Carlo simulation and other information. The valuation model reflects various assumptions that market participants would use in pricing these ARS investments, including among others, the collateralization underlying the ARS investments, the creditworthiness of the counterparty, the expected future cash flows, and the risks associated with uncertainties in the current market.
The following table provides the provisions of the ARS investments as of December 31, 2008:
(1)
Securities have a maximum interest rate which is a function of one rate, the minimum of two rates, or the minimum of three rates. Interest rates change upon each reset period.
Assumptions and methodology
The following assumptions and methodology were made when preparing the cash flow discounting model for the Company’s ARS investments:
•
The Company determined that the ARS investments were impaired using cash flow discounting with a Monte Carlo simulation model. The cash flows were calculated using each individual ARS Maximum Interest Rate formula. The Maximum Interest Rate is paid when an auction fails.
•
A discount spread over the expected life of each bond was used to compute cash flow.
•
Since the majority of the student loans backing the bonds are government guaranteed, the Company assumed that all required cash would be available to pay the bond interest and principal.
•
The Monte Carlo simulation randomly generated LIBOR, U.S. Treasury Bill and Commercial Paper rates for each month out to a bond’s expected life. In each month, a coupon level was calculated using the Maximum Interest Rate formula, and applied to the bond’s notional to obtain
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Fair Value Measurements (continued)
a cash flow. The cash flow was then discounted using the realized (random) LIBOR rates, plus a spread.
•
The simulated rates were assumed to have a mean based on the yield curve for each type of rate. For one month LIBOR, 91 day U.S. Treasury Bills and 3 month Commercial Paper, the relevant rates were calculated as forward rates for each month. A historical study of the three time series over the past five years was run to determine the standard deviation and correlation of each series, which were then used to drive the simulation.
•
Commercial paper rates beyond December 31, 2008 are not available, so the commercial paper rates were estimated based on the equivalent LIBOR forward rate.
Based on the cash flow discounting model and other information, the Company’s ARS investments have a fair market value of $46,624,040 as of December 31, 2008.
The following table summarizes the activity related to the Company’s ARS investments which have fair value measurements based on significant unobservable inputs (Level 3) during the year ended December 31, 2008:
(1)
Based on the deteriorated market conditions of the Company’s ARS investments that are classified as available-for-sale, the Company changed its fair value measurement methodology from quoted prices in active markets to internal calculations effective March 31, 2008. Accordingly, these ARS investments were reclassified from Level 1 to Level 3.
Other-than-temporary impairment analysis
In determining whether there was an other-than-temporary impairment of the ARS investments, the Company relied upon guidance provided in FSP 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”), and also considered the guidance included in SAB 59, Noncurrent Marketable Equity Securities (“SAB 59”), and SAB Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities (“SAB Topic 5M”). Under the FSP 115-1 model used to determine other-than-temporary impairments, the Company determined that the ARS investments were impaired using cash flow discounting with a Monte Carlo simulation model.
As required by FSP 115-1, the Company considered whether the impairment should be deemed other-than-temporary. The Company believes its ARS investments are not currently at risk of default since substantially all FFELP and student loan-backed investments held by the Company maintain credit ratings of AAA, AA or A2 and there have been continued interest payments by the issuer. However, due to the unprecedented events in the ARS market and extended lack of liquidity, as well as the current economic downturn and the related uncertainty in the financial markets, the Company cannot predict when liquidity will return to the ARS market. As a result, the Company has concluded that its ARS investments have experienced an other-than-temporary impairment in fair value. Accordingly, the Company recorded an impairment loss of $13,375,960 for the year ended December 31, 2008. The Company will continue to evaluate the value of its ARS investments and may record future additional losses through earnings if the Company determines that the fair value has declined further.
12. Notes Payable
In October 2008, the Company executed a Time Promissory Note (the “Note”) credit facility with Deutsche Bank AG (“Deutsche Bank”) enabling the Company to borrow up to $39,130,000. The Company granted Deutsche Bank a first priority security interest in certain of its ARS investments having a total combined par value of $55,900,000 as collateral. Under the terms of the Note, the Company is required to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Notes Payable (continued)
make monthly interest payments during the two-year term of the Note. All outstanding principal amounts are due and payable in full on the maturity date in October 2010. The Company may elect to pay back the full principal amount prior to the maturity date with no penalty. Absent a Company default or a sale of part of the collateral ARS investments, Deutsche Bank has no ability to withdraw, reduce or change the terms of the Note. Under the terms of the Note, and at the Company’s option, the interest rate will be based on either the London Interbank Offered Rate (“LIBOR”) plus 0.50% or Deutsche Bank’s Prime Rate minus 1.50%. The Note also provides that in the event that Deutsche Bank later offers an ARS lending program or settlement loan program to institutional clients that includes either a lower interest rate or permits borrowing of more than 70% of the par value of the collateral securities, then the terms of the Company’s Note and any existing loans issued under the Note will be modified to include the lower interest rate or higher borrowing base. As of December 31, 2008, the Company has borrowed $39,100,000 against the Note.
13. Deferred Liability
The Company’s first product, GEM 21S, received approval from the FDA on November 18, 2005. As a result of the FDA approval, the Company was required to pay milestone payments totaling $10,050,000 to suppliers or patent licensors.
Under the Company’s July 2004 commercial supply agreement with Chiron Corporation (now Novartis Vaccines and Diagnostics (“Novartis”)), the Company purchases from Novartis its supply of recombinant human Platelet-Derived Growth Factor (“rhPDGF”), a key ingredient in the Company’s product candidates. Also, the Company was obligated as of the date of FDA approval to pay Novartis a total of $5,000,000 as a milestone payment. Based on the guidance in SFAS No. 2, Accounting for Research and Development Costs (“SFAS No. 2”), the Company accrued and expensed the $5,000,000 obligation as research and development during 2005. Under this agreement, the Company was obligated to pay $1,250,000 to Novartis within thirty days of the FDA’s approval of GEM 21S. The Company was required to pay Novartis the remaining $3,750,000 in annual installments of $1,250,000 each November for the three years 2006 to 2008. The last installment was made in November 2008.
14. Other Accrued Expenses
Other accrued expenses at December 31 are summarized as follows:
15. Commitments and Contingencies
Operating Leases
The Company maintains operating leases for the use of office space at the Company’s headquarters in Franklin, Tennessee, as well as for the use of certain business equipment.
In May 2007, the Company entered into a lease agreement effective January 1, 2007 with Noblegene Development LLC (“Noblegene”), replacing in its entirety the Company’s previous lease with Noblegene dated April 2004, as amended in July 2005. This lease extends the lease term and includes additional office space of approximately 9,000 square feet, bringing the total space to approximately 32,000 square feet at the Company’s headquarters in Franklin, Tennessee. Under the terms of the lease, in 2008 the Company paid Noblegene monthly rent of $50,017, as adjusted, plus additional proportionate operating and insurance costs associated with the building and the business campus. The lease agreement contains annual scheduled rate increases equivalent to a minimum of three percent. The Company has recognized rent expense on a straight line basis over the life of the lease, beginning with the date the Company gained access to the premises. The initial term of the lease continues until December 31, 2016, and the Company has the option
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15. Commitments and Contingencies (continued)
to extend the lease for two additional five-year terms. Under the terms of the lease, the Company agrees to indemnify Noblegene under specific circumstances.
Under the original lease terms, the Company had been provided a rent credit of $106,831 to be used towards improvements. In connection with the new lease agreement and related to the additional space, the Company was provided with an additional rent credit resulting in a total rent credit of $5 per usable square foot (or $160,000). This rent credit was used toward leasehold improvements in the fourth quarter of 2007. Pursuant to SFAS No. 13, Accounting for Leases, and FASB Technical Bulletin 88-1, Issues Relating to Accounting for Leases, the Company had recorded these tenant-funded improvements and the related deferred rent in its consolidated balance sheets. The deferred rent is being amortized as a reduction to lease expense over the life of the lease. The Company recognized rent and other related operating expenses associated with the office space of $1,044,856, $1,045,109 and $594,682 for the years ended December 31, 2008, 2007 and 2006, respectively.
In August 2007, the Company entered into a lease agreement with Noblegene for approximately 30,000 square feet of space in a new building to be built in the same complex as the Company’s headquarters in Franklin, Tennessee. The Company intends to move certain of its manufacturing operations to the new space once it is completed. Under the terms of the lease, upon the completion of the building the Company will initially pay Noblegene monthly rent of $62,500, as adjusted for inflation, plus additional proportionate operating and insurance costs. In addition, the Company’s lease rate will be reduced at various intervals if the building’s occupancy increases. The lease also provides for a tenant improvement allowance of $2,500,000 to reimburse the Company for construction costs associated with building out the leased space. The Company will receive the tenant improvement allowance within 30 days of the earlier of: (a) two years after the date the Company obtains a Certificate of Occupancy for the new space; or (b) upon Noblegene obtaining a permanent mortgage on the new building. The initial term of the lease continues 10 years from the commencement date, which is expected to be approximately November 2009, the anticipated date to complete construction of the shell of the building. The Company has the option to extend the term of the lease for two additional five-year terms. Under the terms of the lease, the Company agrees to indemnify Noblegene under specific circumstances. Upon initiation of the lease, the Company paid a deposit of $375,000 to Noblegene for the new building. The Company has recorded this deposit in its consolidated balance sheet.
In January 2008, the Company entered into an amendment to its two existing lease agreements described above with Noblegene. The amendment added certain additional exclusions to the definition of “operating costs” in both of the lease agreements. The amendment also provided for the Company to pay $56,686 to Noblegene as a final payment of 2007 operating costs under the May 2007 lease agreement.
In January 2009, the Company amended its August 2007 lease agreement with Noblegene. The amendment increased the base rent by $1.00 to $26.00 per rentable square foot and provided for a one-time payment of $200,000 from the Company to Noblegene. In all other respects, the lease agreement remains the same. The Company agreed to the increase in rent, and the one-time payment, to compensate Noblegene for increased construction costs due to the Company’s requested changes in the building design.
The future commitments as of December 31, 2008 under these operating lease agreements are as follows:
Rental expense for all operating leases was $884,996, $869,105 and $511,001 for the years ended December 31, 2008, 2007 and 2006, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Commitments and Contingencies (continued)
The Company subleased a portion of its space to two organizations from 2005 until August 2008, at which time the sublease agreements had terminated. Rental income was $19,614, $36,565 and $38,659 for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in other revenue in the accompanying consolidated statements of operations.
Capital Leases
The Company leases certain computer equipment and copiers under agreements classified as capital leases. The leased assets serve as security for these liabilities. The net book value of such equipment at December 31, 2008 and 2007 totaled $50,104 and $68,133, respectively.
The future commitments as of December 31, 2008 under these capital lease agreements are as follows:
Note Payable
In October 2008, the Company borrowed $39,100,000 under a Note with Deutsche Bank. Under the terms of the Note, the Company is required to make monthly interest payments during the two-year term of the Note. All outstanding principal amounts are due and payable in full on the maturity date in October 2010. Interest payments on the Note were at a rate equal to the prime rate less 1.5% during 2008. Interest is payable monthly on the last business day of each calendar month. The Company has recorded interest expense of $158,029 for the year ended December 31, 2008, at an effective interest rate of 2.27%.
Manufacturing Equipment
The Company has executed agreements with various equipment suppliers for the manufacture of equipment that will be used in the new manufacturing facility described above in “- Operating Leases.” As of December 31, 2008, the Company has paid a total of $4,182,181 for the equipment, consisting of $2,282,573 classified as equipment not placed in service (see Note 7) and $1,899,608 classified as deposits (see Note 8) in that the title of the equipment remains with the supplier until delivery to the Company. In addition, under these agreements, the Company has estimated remaining purchase commitments of $46,760 for 2009 and $960,438 for 2010.
Litigation
In the ordinary course of business, the Company is subject to legal claims and assessments. However, in February 2009, the Company filed an arbitration claim with the Financial Industry Regulatory Authority (“FINRA”) against Deutsche Bank Securities, Inc. (“DBSI”) asserting various claims relating to investments in auction rate securities made on the Company’s behalf including, among others, claims for violation of federal and state securities laws, breach of contract, fraud, and breach of fiduciary and other duties. DBSI has not yet responded to the filing, but their answer to the claim is scheduled to be filed by April 15, 2009. The date for the arbitration hearing has not been set and arbitrators have yet to be selected. The Company believes the arbitration hearing will be held in Nashville, Tennessee during 2009.
Employment Agreements
The Company has employment contracts with several individuals, which provide for annual base salaries and potential bonuses. These contracts contain certain change of control, termination and severance clauses that require the Company to make payments to these employees if certain events occur as defined in their respective contracts.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Commitments and Contingencies (continued)
Supply Agreements
The Company has executed supply agreements with Novartis and with Kensey Nash Corporation (“Kensey Nash”). Under these agreements, the Company has minimum purchase commitments totaling $4,097,860 for 2009 and estimated at $2,938,466 for 2010 and $3,085,389 for 2011.
Novartis/Chiron
In July 2004, the Company entered into a commercial supply agreement with Chiron Corporation (now Novartis) that will permit it to obtain bulk supply of rhPDGF for commercial sale. Under the terms of the agreement, Novartis will exclusively supply the Company with rhPDGF for use in certain periodontal and orthopedic applications. The Company is obligated to purchase minimum specified quantities of rhPDGF. Under the agreement, the annual product prices the Company is obligated to pay vary depending on the quantity of rhPDGF ordered. Additionally, the price that the Company is obligated to pay is subject to annual adjustment based on the Producer Price Index for Pharmaceutical Preparations. The Company is also obligated to make certain milestone payments to Novartis.
The agreement covers a seven-year term and is cancelable under certain circumstances. Unless earlier terminated, the agreement automatically renews at the end of the initial term for consecutive one year periods unless either party terminates the agreement by written notice at least two years prior to the renewal date. If Novartis terminates the agreement, it is required to provide the Company with a minimum supply of rhPDGF during a transition period and required to transfer to the Company the necessary manufacturing technology enabling the Company to set up an alternative source of rhPDGF.
Kensey Nash
In June 2005, the Company entered into an agreement with Kensey Nash to develop commercial products using specific scaffolds manufactured and supplied by Kensey Nash for use in orthopedic and sports medicine applications. Under the agreement, Kensey Nash will exclusively manufacture and supply the scaffold materials for the Company and the Company will be responsible for final formulation, fill and finish activities. The Company is responsible for obtaining U.S. and foreign regulatory approvals for any resulting products, and is required to commercialize any resulting products in the United States within 12 months of receipt of FDA approval. The Company has the exclusive right to distribute and sell the resulting products worldwide. In addition, the Company agreed to pay royalties to Kensey Nash based on net sales of commercial products worldwide for the term of the agreement.
The agreement covers a 10-year term following the commercialization of a product, with two automatic two-year extensions, unless either party provides notice not to extend. If Kensey Nash elects not to extend the agreement, it is obligated to continue to supply the Company with predefined amounts of products for a limited time beyond the agreement’s expiration. The agreement terminates if the Company does not make its first commercial sale of a product developed under the agreement within seven years. The Company paid Kensey Nash an initial payment on the effective date of the agreement, and has made a second payment after agreeing to continue the agreement beyond a feasibility period.
In December 2006, the Company amended the agreement with Kensey Nash to accelerate certain milestone payments associated with the development of a matrix for sports medicine applications. In particular, the Company made a payment to Kensey Nash upon executing the amendment as compensation for development that had been completed relating to a matrix for sports medicine applications, and the Company agreed to make certain quarterly payments to Kensey Nash during 2007 and 2008. To offset these payments, the milestone payments in the original agreement relating to the first commercial sale of product were reduced by an amount equal to the quarterly payments and the payment made upon signing the amendment.
In August 2008, however, the Company terminated the then current development project relating to a product for tendon and ligament injury treatment. This termination was effective in September 2008, at which time the Company stopped making the quarterly payments to Kensey Nash. The Company is still required to make subsequent payments to Kensey Nash based on the achievement of certain regulatory and commercial milestones of the orthopedic products developed under the agreement.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Commitments and Contingencies (continued)
In April 2008, the Company amended the agreement with Kensey Nash to provide for new payments from the Company to Kensey Nash for the accomplishment of development milestones for potential new products.
Each of the Company’s suppliers has the ability to curtail manufacturing of the products at their discretion with the only requirements being that each must provide a minimum level of future product prior to ending production and each must transfer the technology to another manufacturer.
16. Capital Shares
Prior to May 2006, the Company had funded its operations through the issuance of redeemable, convertible preferred stock. The Company evaluated each class of redeemable, convertible preferred stock in accordance with the guidance contained in EITF Topic D-98, Classification and Measurement of Redeemable Securities (“EITF Topic D-98”), SAB Topic 3(C), Redeemable Preferred Stock (“SAB Topic 3(C)”), and SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). Although the terms of each series of preferred stock did not result in any series of the Company’s preferred stock being considered mandatorily redeemable as defined in SFAS No. 150, the terms of each series of preferred stock did allow the holders of each series of preferred stock to redeem the respective series of preferred stock under certain circumstances outside of the control of the Company. As such, prior to May 2006, the Company classified each series of redeemable, convertible preferred stock outside of permanent equity on the accompanying consolidated balance sheets. In addition, since each series of redeemable, convertible preferred stock was initially recorded at the original issuance price less the issuance costs, the Company accreted the carrying value of each series of redeemable, convertible preferred stock to its redemption value using the effective interest method in accordance with EITF Topic D-98.
In May 2006, the Company’s board of directors approved a 1.5 to one stock split for all capital stock as previously approved by the Company’s stockholders. All common and preferred stock share and per share amounts in the consolidated financial statements have been adjusted retroactively to reflect this stock split.
On May 12, 2006, the Company amended and restated its Certificate of Incorporation, approved a total of 52,500,000 shares of authorized capital stock, and designated 37,500,000 shares as common stock, $0.001 par value per share, and 15,000,000 shares as preferred stock, $0.001 par value per share.
Also in May 2006, the Company completed an initial public offering (“IPO”) of 4,600,000 shares of its common stock at an initial offering price to the public of $8.00 per share, resulting in net proceeds of $31.6 million after deducting underwriters’ commissions and related expenses. Upon the closing of the IPO, all outstanding shares of redeemable, convertible preferred stock were converted into an aggregate of 9,221,340 shares of common stock.
In February 2007, the Company completed a secondary public offering of 3,253,350 shares of its common stock, which includes 424,350 shares sold upon full exercise of the underwriters’ over-allotment option. Of the shares of common stock being offered, 2,517,111 shares of common stock were sold by the Company and the remaining 736,239 shares of common stock were sold by certain selling stockholders. All of the shares of common stock were sold at a price of $17.15 per share. After deducting the underwriting discounts and commissions of $3.6 million ($2.8 million paid by the Company and $0.8 million paid by the selling stockholders) and other offering expenses of approximately $0.7 million paid by the Company in connection with the offering, the net proceeds from the offering were approximately $39.7 million to the Company and $11.8 million to the selling stockholders. The Company did not receive any of the $11.8 million proceeds from the sale of stock by the selling stockholders.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Stock-Based Compensation
2001 Long-Term Stock Incentive Plan
During 2001, the Company’s board of directors approved the adoption of the 2001 Long-Term Stock Incentive Plan (the “option plan”). The option plan provides that stock options, other equity interests or equity-based incentives in the Company may be granted to key personnel of the Company at an exercise price determined at the time the option is granted, taking into consideration the fair value of the common stock at the date of grant. The maximum term of any option granted pursuant to the option plan is ten years from the date of grant.
Prior to the Company’s IPO in May 2006, the exercise price was reviewed and modified as significant events occurred. In making its determinations regarding fair value of common stock, the Company’s board of directors considered a number of company and industry specific factors, including sales of preferred stock, the liquidation preference attributable to the preferred stock, achievement of milestones relating to the Company’s product candidates, and the Company’s expectation to continue incurring operating losses for the next few years as it continues to fund its pre-clinical studies, clinical trials and other research and development programs. In addition to considering all of the factors described above, the board of directors used an income approach with a discounted cash flow methodology. The board of directors’ significant assumptions included its estimates of future cash flows and the discount rate.
In contemplation of the IPO, the board of directors reassessed the fair value of the Company’s common stock for 2005 and for the first quarter of 2006. Based on this retrospective analysis, the Company determined that certain options issued during 2005 and the first quarter of 2006 had exercise prices that were below the reassessed fair value of the common stock for such periods, so the Company recorded additional compensation expense to the extent the reassessed fair value exceeded the exercise price of the options. This expense will be amortized through the first quarter of 2010.
Subsequent to the Company’s IPO, the exercise price was determined based on the closing price of the Company’s common stock on the Nasdaq Global Market on the day of the grant.
In general, stock option awards granted under the option plan vest 25% per year for four years. In March 2008, the Company’s board of directors amended the option plan to provide that upon a change in control all outstanding ISO awards held by a qualified employee may under certain circumstances be accelerated and exercisable immediately. Upon a change in control, the vesting percentage of the employee’s ISO award depends upon the number of years of employment at the time of the change in control as follows: 25% vested if employed less than one year, 50% vested if employed more than one year but less than two years, 75% vested if employed more than two years but less than three years and 100% vested if employed three or more years.
Under the option plan, a total of 4,019,723 shares of common stock have been authorized by the board of directors for issuance, which reflects an addition of 900,000 shares to the authorized aggregate pool after ratification by the Company’s stockholders in June 2008. As of December 31, 2008, a total of 2,117,392 options for shares of common stock were issued and outstanding and a total of 736,073 shares of common stock have been issued upon option exercise. The options vest over a period of not greater than five years and remain exercisable for five or ten years from the date of grant. A total of 1,166,258 shares of common stock remained available for future issuance pursuant to the option plan as of December 31, 2008.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified prospective method of transition. Under that transition method, compensation cost recognized in the three years ended December 31, 2008 includes: (a) compensation costs for all share-based payments granted prior to January 1, 2006 are based on the intrinsic value method proscribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”), and (b) compensation costs for all share-based payments granted subsequent to January 1, 2006 are based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Stock-Based Compensation (continued)
In accordance with SFAS No. 123(R), the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using weighted average assumptions amortized to expense over the options’ vesting periods for the three years ended December 31, 2008 as follows:
Roll-forward information relating to the Company’s stock option plan is as follows:
Based on the Company’s stock option grants outstanding at December 31, 2008, the Company has estimated the remaining unrecognized stock-based compensation expense to be $6,852,396 with a weighted average remaining amortization period of 2.7 years.
The Company’s net loss includes compensation costs related to its stock-based compensation arrangements for the option plan of $3,409,915, $1,692,187 and $839,181 for the years ended December 31, 2008, 2007 and 2006, respectively. No income tax benefit related to the Company’s stock-based compensation arrangement is included in its net losses.
To employees, the Company granted options for 594,028, 583,150 and 299,750 shares of common stock in 2008, 2007 and 2006, respectively. The Company recorded compensation expense of $3,138,847, $1,573,392 and $707,463 related to the issuance of the options to employees for the years ended December 31, 2008, 2007 and 2006, respectively.
To non-employee members of the board of directors, the Company granted options for 53,040, 47,251 and 15,406 shares of common stock in 2008, 2007 and 2006, respectively. The Company recorded compensation expense of $152,484, $77,738 and $5,132 related to the issuance of the options to non-employee members of the board of directors for the years ended December 31, 2008, 2007 and 2006, respectively.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Stock-Based Compensation (continued)
To non-employee consultants, the Company granted options for 6,113, 22,500 and 34,050 shares of common stock in 2008, 2007 and 2006, respectively. The Company recorded compensation expense of $118,584, $41,057 and $126,586 related to the issuance of the options to non-employee consultants for the years ended December 31, 2008, 2007 and 2006, respectively.
2005 Employee Stock Purchase Plan
During 2005, the Company’s board of directors approved the adoption of the 2005 Employee Stock Purchase Plan (the “purchase plan”). The Company’s purchase plan incorporates the provisions of Section 423 of the Internal Revenue Code of 1986, as amended. Under the purchase plan, 200,000 shares of common stock have been reserved for purchase by employees. The purchase plan provides for offer periods of three months to eligible employees. Under the purchase plan, eligible employees can purchase through payroll deductions up to 15% of their eligible base compensation, at a price equivalent to 85% of the lower of the beginning or ending quarterly market price.
Employees became eligible to participate in the purchase plan beginning July 1, 2006. As of December 31, 2008, there were 158,546 shares remaining available for issuance under the purchase plan. In accordance with the provisions of SFAS No. 123(R), the Company recognized stock-based compensation expense for the purchase plan of $33,380, $23,742 and $23,248 during the years ended December 31, 2008, 2007 and 2006, respectively.
18. Income Taxes
At December 31, 2008, the Company had federal net operating loss (“NOL”) carryforwards of $42,178,701 that will begin to expire in 2022. State NOL carryforwards at December 31, 2008 totaled $30,266,583 and will expire between 2017 and 2023. The use of deferred tax assets, including federal net operating losses, is limited to future taxable earnings. Based on the required analysis of future taxable income under the provisions of SFAS No. 109, management believes that there is not sufficient evidence at December 31, 2008 indicating that the results of operations will generate sufficient taxable income to realize the net deferred tax asset in years beyond 2008. As a result, a valuation allowance was provided for the entire net deferred tax asset related to future years, including loss carryforwards.
The Company’s ability to use its NOL carryforwards could be limited and subject to annual limitations. In connection with future offerings, the Company may realize a “more than fifty percent change in ownership” which could further limit its ability to use its NOL carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because U.S. tax laws limit the time during which NOL carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of its NOL for federal income tax purposes.
In 2003, the Company paid alternative minimum taxes of $69,862. The tax payment was reflected as a federal income tax expense in the 2003 financial statements. In 2007, the IRS refunded the payment. The refund amounted to $74,291, including accrued interest, and is reflected on the Company’s consolidated statement of operations as a federal income tax benefit for the year ended December 31, 2007.
The Company incurred net operating losses for the three years ended December 31, 2008. As of December 31, 2008, the Company has recorded $105,000 related to the tax-deferred installment obligation on the January 2008 sale of its orofacial therapeutic business and has recognized the amount as interest expense in the consolidated statement of operations for the year ended December 31, 2008.
Effective January 1, 2007, the Company adopted FIN 48 to account for uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation prescribes that the Company should use a “more likely than not” recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more likely than not” recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Income Taxes (continued)
As a result of implementing FIN 48, the Company did not have any unrecognized tax benefits or liabilities, or any associated amounts for interest and penalties. As a result, there was no effect on its financial position or results of operations as of and for the year ended December 31, 2008 and 2007.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal examinations or state and local income tax examinations by tax authorities for years before 2003.
The provision (benefit) for income taxes consists of the following amounts:
The net deferred income taxes as of December 31 include the following amounts of deferred income tax assets and liabilities:
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before the provision for income taxes.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Income Taxes (continued)
The sources and tax effects of the differences are as follows:
19. Employee Benefits
401(k) Plan
Effective January 1, 2004, the Company began sponsoring a defined contribution plan covering substantially all its employees fulfilling minimum age and service requirements. Participation in the plan is optional. The expenses associated with this plan were $3,461, $3,186 and $2,960 in the years ended December 31, 2008, 2007 and 2006, respectively. For the year ended December 31, 2007, the Company provided matching contributions of up to 4% of eligible employee compensation, and as a result, $133,753 of compensation expense was recorded for 2007. No matching contributions were made by the Company for the years ended December 31, 2008 and December 31, 2006.
Section 125 Cafeteria Plan
Effective May 10, 2004, the Company began offering employees the benefit of participating in a Section 125 Cafeteria Plan, which covers employee benefit coverage such as health, dental, life and disability insurance. Participation in the plan is optional. The expenses associated with this plan were $3,316, $2,349 and $2,001 in the years ended December 31, 2008, 2007 and 2006, respectively. The Company made contributions of $74,882, $200,625 and $397,471 for years ended December 31, 2008, 2007 and 2006, respectively.
20. Related Party Transactions
Intellectual Property
Dr. Samuel E. Lynch, the Company’s President and Chief Executive Officer, was a faculty member at Harvard University (“Harvard”) and in such position was the co-inventor of certain intellectual property. As part of his employment arrangement with Harvard, he assigned all of his rights to the intellectual property to Harvard. The Company currently has a license agreement with Harvard with respect to some of this intellectual property. As is customary, Harvard often shares some of the royalties it receives from successful intellectual property licenses with the faculty members that invented such intellectual property. As of February 15, 2009, Harvard has paid to Dr. Lynch a total of $892,133 with respect to the Company’s payment of milestones and royalties to Harvard and the intellectual property licensed to the Company as compensation to Dr. Lynch as the co-inventor of the intellectual property that the Company licenses from Harvard. Additional payments may be due in the future.
Lease Agreement
The Company maintains operating lease agreements with Noblegene for the use of office space at the Company’s headquarters in Franklin, Tennessee. Dr. Lynch, the Company’s President and Chief Executive Officer, is a former partner in Noblegene but maintained an ownership interest at the time the Company entered into the lease agreements. In March 2008, Dr. Lynch sold his ownership interest back to Noblegene. Since the owner of Noblegene is the brother-in-law of Dr. Lynch’s wife, Noblegene continues to be a related party. Other than the consideration to buy Dr. Lynch’s interest in Noblegene, Dr. Lynch has not received any amounts from Noblegene for the lease because Noblegene had operated at a loss and did not make any distributions of profits to its members prior to Dr. Lynch’s divestiture of his interest in Noblegene. Dr. Lynch will not receive any future amounts from Noblegene for the lease.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Related Party Transactions (continued)
Membership on the Board of Directors of a Third Party Company
Dr. Lynch, the Company’s President and Chief Executive Officer, is currently a member of the board of directors of GreenBankshares, Inc., which serves as the bank holding company for GreenBank, a Tennessee chartered commercial bank. He was re-elected as a director at GreenBankshares, Inc.’s 2008 annual meeting, which was held on April 29, 2008, to serve a three-year term expiring at the 2011 annual meeting. As of December 31, 2008, the Company maintained accounts at GreenBank, including a portion of its cash and cash equivalents.
Consulting Agreement with a member of the Board of Directors
In August 2007, the Company entered into a two-year consulting agreement with Gary E. Friedlaender, M.D. for consulting services relating to the use of biological products to treat orthopedic injuries and conditions. The 2007 agreement extends the consulting relationship that the Company had with Dr. Friedlaender pursuant to an August 2006 consulting agreement, which had replaced the July 2001 consulting agreement.
In September 2006, the Company appointed Dr. Friedlaender as a member of its board of directors. Prior to the August 2006 agreement and the September 2006 appointment, the Company compensated Dr. Friedlaender for his consulting through stock option grants. As part of his consulting compensation, Dr. Friedlaender received option awards on July 15, 2001 to purchase 7,500 shares at an exercise price of $0.67, and on February 26, 2006 to purchase 20,250 shares at an exercise price of $3.63. The option awards were 100% vested upon issuance. For the year ended December 31, 2008, 2007 and 2006, the Company paid Dr. Friedlaender $5,000, $50,938 and $11,375, respectively, for consulting services performed pursuant to the August 2007 and August 2006 agreements.
Consulting Agreement with Former Member of the Board of Directors
In August 2007, the Company entered into a one-year consulting agreement with a former member of its board of directors, under which the former board member provides consulting services to the Company relating to the non-clinical development of its products and interactions and filings with the FDA. The 2007 agreement extends the consulting relationship that the Company had with the former board member pursuant to an August 2006 consulting agreement, which had replaced the February 2002 agreement.
The consultant was a member of the Company’s board of directors until resigning on September 22, 2006. The Company paid the former board member $15,375 in 2006 (through September 22, 2006) for consulting services performed.
21. Unaudited Information
The following table presents unaudited quarterly financial data of the Company. The Company’s quarterly results of operations for these periods are not necessarily indicative of future results.
BIOMIMETIC THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. Unaudited Information (continued)
22. Seasonality
In January 2008, the Company completed a transaction to sell its remaining orofacial therapeutic business to Luitpold, including the downstream formulation, fill, finish manufacturing and kitting rights to GEM 21S. As a result of the sale, the Company does not expect product sales revenues from GEM 21S in 2008 and going forward; however, the Company expects to continue to receive ongoing royalty payments based on net sales of GEM 21S and other products that are based on adapting the Company’s technology to future products in the orofacial therapeutic field.
Prior to the January 2008 sale, the manufacturing and supply agreement with Luitpold obligated Luitpold to purchase all of its requirements for GEM 21S from the Company and the Company was obligated to meet such requirements to the extent they were consistent with Luitpold’s forecasts. The cyclical nature of these purchase commitments triggered product sales of GEM 21S for the Company primarily in the third and fourth quarters, with a lower portion of product sales recognized in the first and second quarters.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 12, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
EXHIBIT INDEX
*
Indicates management contract or compensatory plan or arrangement
**
Confidential treatment has been requested for portions of this exhibit