Description
Filed with the SEC from June 28 to July 4:
Nabi Biopharmaceuticals (NABI)
Hedge fund Mangrove Partners disclosed a new stake in Nabi and came out against a recently announced merger.
In its filing, Mangrove said that it has reviewed the proxy statement in connection with a proposed merger with Australian biotech Biota Holdings (ticker: BTA.Australia), announced April 23, and come to the conclusion that the proposed merger "is not in the best interest of shareholders and deeply undervalues" the company. Mangrove said it intends to engage in discussions with management about the merger and will vote against the transaction.
BUSINESS OVERVIEW
Overview
We are a biopharmaceutical company that has focused on the development of vaccines addressing unmet medical needs, including nicotine addiction. We have sought to leverage our experience and knowledge in powering the human immune system to target these serious unmet medical needs. We have been incorporated in Delaware since 1969 and our operations are located in Rockville, Maryland.
Our sole remaining product currently in development is NicVAX ® [ Nicotine Conjugate Vaccine ], an innovative and proprietary investigational vaccine for the treatment of nicotine addiction and prevention of smoking relapse based on patented technology. We suffered a significant setback in 2011 when NicVAX did not achieve the primary endpoint in two Phase III efficacy trials conducted in the U.S. As a result, in November of 2011, we retained Piper Jaffray & Co. (Piper Jaffray) to assist with the exploration of strategic alternatives available to the company. This includes, but is not limited to, the sale, license or merger of all or part of the company or its assets, joint ventures, strategic alliances, recapitalization, or liquidation, and the process is ongoing. As of December 31, 2011, our remaining assets include the following: (i) $96.4 million of cash, cash equivalents and marketable securities, (ii) the potential residual value of NicVAX as well as any next-generation nicotine vaccine which was licensed to GlaxoSmithKline Biologicals S.A. (GSK) in 2010, (iii) the potential royalty from Phoslyra which was sold to Fresenius USA Manufacturing, Inc. (Fresenius) in 2006, and (iv) the potential value of our net operating losses (NOLs).
In the first quarter of 2010 we granted to GSK (i) an option to exclusively license NicVAX on a worldwide basis and (ii) a license to develop follow-on next-generation nicotine vaccines using our intellectual property combined with GSK proprietary technology including GSK proprietary adjuvants. GSK has not indicated that it is stopping the development of the next-generation nicotine vaccine. If GSK continues to develop the next-generation nicotine vaccine, Nabi may be eligible to receive milestones and royalties from that program. We continue to support an investigator initiated Phase IIb trial in the Netherlands of NicVAX in combination with Pfizer’s varenicline or Chantix ® /Champix, the results of which are expected in the second half of 2012.
The smoking cessation market is estimated to exceed $4 billion annually and is currently considered to be a largely unmet medical need. Nicotine is a non-immunogenic small molecule that, upon inhalation into the lungs, quickly passes into the bloodstream and subsequently reaches the brain by crossing the blood-brain barrier. Once in the brain, the nicotine binds to specific nicotine receptors resulting in the release of substances, such as dopamine, a chemical which triggers the highly addictive pleasurable effects experienced by smokers and users of other nicotine products. NicVAX is designed to stimulate the immune system to produce highly specific antibodies that bind to nicotine in the bloodstream. A nicotine molecule attached to specific antibodies is too large to cross the blood-brain barrier and thus is unable to reach the receptors in the brain thereby reducing the pleasure experienced by the smoker making it easier to quit.
In March 2010, we closed an exclusive worldwide option and licensing agreement with GSK for NicVAX as well as for the development of follow-on nicotine addiction vaccines. Upon closing, we received a $40 million initial payment. Under the terms of the agreement, we granted to GSK (i) an option to obtain an exclusive worldwide license to develop, commercialize and manufacture NicVAX as it currently exists, as well as certain potential alternative forms of NicVAX together with an adjuvant other than a GSK proprietary adjuvant and/or with different presentation, dosage or administration (NicVAX Alternatives), and (ii) an exclusive worldwide license to develop, commercialize and manufacture certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives). In addition to the $40 million received at closing, we are eligible to receive under the agreement up to $290 million in potential regulatory, development and sales milestones for any next generation nicotine vaccines. We are also eligible to receive royalties on global sales of any next generation of nicotine vaccines. Notwithstanding the failure to achieve the primary endpoint in the two Phase III trials, if GSK was to exercise its option under the agreement for NicVAX and any NicVAX alternatives, it will pay us $58 million upon exercise plus certain potential milestones and royalties over time.
During 2011 we completed our obligations to continue to develop PentaStaph™ [ Pentavalent S.aureus Vaccine ] under contract for GSK. PentaStaph is a new pentavalent vaccine designed to prevent S.aureus infections including those infections caused by the most dangerous antibiotic-resistant strains of S.aureus. In August 2009, we entered into an Asset Purchase Agreement (APA) with GSK for the sale of PentaStaph for a total consideration of $46 million including a $20 million up-front payment upon closing and $26 million payable upon achievement of certain milestones. The PentaStaph sale closed in November 2009, and we received payment from GSK of $21.5 million representing the up-front payment of $20 million, an additional $1 million for the sale of our Staphylococcus epidermidis vaccine program and an additional $0.5 million for transfer of certain specified materials. We also agreed to a Transition Services Agreement (TSA) to help GSK advance the program while in parallel transferring the technology to GSK. In 2011 we completed all of the efforts required of us from GSK under contract for PentaStaph. As a result, we have received the full $26 million in potential milestone payments under the APA, $5 million in 2011 and $21 million in 2010.
In 2006, we sold certain assets related to our PhosLo operations. Under the sale agreement, we received $65 million in cash at closing and are entitled to additional contingent milestone payments and royalties. The royalties relate to sales of a new product formulation over a base amount for 10 years after the November 14, 2006 closing date. In August of 2011, we announced that Fresenius had successfully launched the new product formulation, PhosLyra, and accordingly we received a $5 million milestone payment. We received $18 million of milestones through December 31 2011, and can also receive up to $67.5 million in additional milestone payments and royalties.
NICOTINE ADDICTION
Background
Smoking is a global healthcare problem. The World Health Organization estimates that there are over 1.3 billion smokers worldwide today and nearly five million tobacco-related deaths each year. If current smoking patterns continue, smoking will cause an estimated 10 million deaths each year by 2030. According to the U.S. Centers for Disease Control and Prevention (CDC), tobacco use is the single leading preventable cause of death in the U.S., responsible for approximately 443,000 deaths each year. In addition, it is estimated that smoking results in an annual health-related economic cost in the U.S. of approximately $193 billion. The CDC estimates that, among the 43.4 million adult smokers in the U.S., 70% want to quit, but less than five percent of those who try to quit remain smoke-free after 12 months.
Nicotine addiction is difficult to treat. Most current therapies involve the use of nicotine replacement products delivered via patches, lozenges or chewing gum. These therapies have shown only limited efficacy, particularly over the long term. Most smokers who stop smoking using current therapies resume their addiction after they stop therapy. Chantix, which is a prescription therapy introduced by Pfizer Inc. in 2006, acts by binding the nicotinic receptors in the brain and competing with inhaled nicotine for these receptors, while simultaneously partially activating these receptors, thereby breaking the addiction cycle. Data from the efficacy trials have shown that the short-term cessation rates were superior to other therapies for smokers receiving Chantix, although most individuals relapsed to smoking over the longer term. Significant neuropsychiatric adverse events have been reported including suicides and suicide ideation that led the FDA to require a warning (boxed warning) label on the drug in July 2009.
Nicotine is a small molecule that, upon inhalation or absorption into the body, quickly passes into the bloodstream and subsequently reaches the brain by crossing the blood-brain barrier. Once in the brain, the nicotine binds to specific nicotine receptors, resulting in the release of stimulants, such as dopamine, which provide the smoker with a positive sensation, leading to addiction. Because of its small size, nicotine on its own normally does not elicit the production of antibodies in humans. NicVAX is based on our proprietary conjugate technology whereby nicotine is attached to a carrier protein which renders the molecule immunogenic. Upon injection, NicVAX is capable of stimulating the immune system to produce nicotine-specific antibodies in the bloodstream that bind to nicotine from cigarette smoking or the use of other nicotine products and prevent it from crossing the blood-brain barrier and entering the brain. As a result, the brain does not release the positive-sensation stimulant dopamine. We believe NicVAX has safety advantages over existing treatment therapies, in part, because it does not act on the central nervous system.
NicVAX is our investigational vaccine designed as an aid to smoking cessation, as well as an aid to prevent relapse.
Clinical and Regulatory History
In March 2006, we announced that NicVAX received Fast Track Designation from the FDA. This designation is intended to facilitate the development of products that treat serious diseases where a significant unmet medical need exists. During 2006, we initiated and completed enrollment of a Phase IIb “proof-of-concept” study of 301 smokers who smoked an average of 24 cigarettes a day and thus, were highly addicted to smoking and who were randomly allocated to receive one of four administrations of NicVAX (two different doses according to two different schedules) or a placebo. This study was funded in part by the National Institute on Drug Abuse (NIDA).
The Phase IIb study was a double blind, placebo-controlled and dose-ranging study designed to establish proof-of-concept and the optimal dose for a Phase III program. This study, designed in collaboration with the FDA and other global regulatory agencies, incorporated the current clinical trial standards and protocol design for smoking cessation clinical research studies. The trial’s primary endpoint was the rate of carbon monoxide (CO)-confirmed continuous abstinence from smoking during weeks 19-26. In May 2007, we announced the trial’s six-month data, which showed that a statistically significant number of subjects in the high anti-nicotine antibody responder-group met the trial’s primary endpoint of eight weeks of continuous abstinence during weeks 19-26.
In November 2007, we announced final results from this trial. The trial demonstrated that higher levels of anti-nicotine antibodies correlated to higher smoking cessation rates and long-term continuous abstinence rates, demonstrating proof-of-concept that antibodies to nicotine generated through NicVAX immunization were useful as an aid to smoking cessation. The high-antibody responder group of vaccinated subjects showed continuous abstinence rates that were almost three times higher than the placebo group at 12 months. Moreover, those subjects in the NicVAX group with a high antibody response who continued to smoke showed a statistically significant reduction in cigarettes smoked over the full 12 months compared to placebo (p<0.022).
Importantly, for the first time, a statistically significant treatment effect was observed for a single intent-to-treat dose group (not stratified by antibody-response) of nicotine vaccine compared to placebo. The observed treatment effect was continuous long-term smoking abstinence to one year compared with placebo for the group receiving 5 injections of 400 mcg of NicVAX. This data demonstrated that nearly three times the number of subjects treated with the most effective dose and schedule tested were able to quit smoking and remained abstinent to 12 months as compared with placebo (p<0.038).
NicVAX was well tolerated with a low prevalence of side effects and an adverse event profile comparable to that seen with placebo and other similar vaccines. Additionally, no statistically significant evidence of compensatory smoking or increase in withdrawal symptoms has been observed in NicVAX treated subjects as compared to placebo at any stage of the trial.
Based on the results of the Phase IIb study, we believed that NicVAX could help more smokers to stop smoking if they attempt to quit when higher levels of anti-nicotine antibodies are reached. Based on the profile of anti-nicotine antibodies achieved in the Phase IIb proof-of-concept trial, we reasoned that higher levels of antibodies could be achieved if an additional dose of NicVAX would be administered. Therefore, we initiated an immunogenicity study in January 2008, to further understand the potential of this improved dosing regimen. The results of this study confirmed our hypothesis that significantly higher antibodies could be achieved earlier, and in a higher percentage of volunteers, by including an additional dose of NicVAX. Those results were used to finalize the dosing schedule for the NicVAX Phase III program. The FDA agreed with our Phase III trial design and endpoints through a special protocol assessment (SPA), providing a clear, well-defined path for the approval of NicVAX. The SPA is an agreement with the FDA which is intended to reduce the regulatory risk of the program. In addition, we also sought and obtained Scientific Advice from the European Medicines Agency (EMA) which generally is well aligned with the SPA with the FDA regarding the trial design.
In November 2009 and March 2010, respectively, we announced the initiation of the first and second Phase III clinical trials of NicVAX that we are required to conduct in support of the NicVAX license, based on our SPA agreement with the FDA. Each of the two Phase III clinical trials recruited 1,000 subjects randomized equally between NicVAX and placebo. Results of both Phase III trials announced in 2011 indicated that NicVAX did not meet the primary endpoint. This was an unexpected and disappointing result. We do not know why NicVAX failed to achieve efficacy given that the Phase IIb results were encouraging. It may be that the anti-nicotine antibody response was not high enough and/or the target quit date was too late. It is possible that the anti-nicotine antibody response may be enhanced by including a better adjuvant. Such a second generation nicotine vaccine was licensed to and may be developed by our partner, GSK.
The remaining trial for NicVAX is an ongoing investigator-initiated combination clinical trial in the Netherlands with Pfizer’s varenicline (Chantix/Champix). The results of this trial are expected in the second half of 2012.
The NicVAX development program has been guided by a panel of outside experts providing input to the design and implementation of the Phase III clinical trials and the overall clinical development program.
STRATEGIC TRANSACTIONS
In November 2009, we sold PentaStaph to GSK for a total consideration of up to $46 million, including a $20 million up-front payment. In addition, GSK paid us $1.5 million, $1 million of which was for the purchase of the results of an early research program for a vaccine against S.epidermidis and $0.5 million was for certain clinical materials. We received the remaining $26 million upon our achievement of certain milestones.
As part of this transaction, we entered into a TSA with GSK that required us to successfully transfer the PentaStaph technology and certain materials to GSK, as well as to manage, on their behalf, the relationship with the U.S. military and the conduct of a Phase I/II trial for two of the PentaStaph antigens. GSK has reimbursed us the full cost of such activities.
In November 2009, we signed an exclusive worldwide option and licensing agreement with GSK for NicVAX as well as for the development of a second-generation nicotine vaccine; this transaction closed in March 2010. Under the terms of the agreement:
• We granted to GSK (i) an option to obtain an exclusive worldwide license to develop, commercialize and manufacture NicVAX and NicVAX Alternatives, and (ii) an exclusive worldwide license to develop, commercialize and manufacture certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives); and
• GSK made a non-refundable $40 million up-front payment and GSK agreed to make certain additional option, milestone and royalty payments. Due to the failure of NicVAX to achieve the primary endpoint in the two Phase III efficacy trials, we believe GSK may not exercise the NicVAX option and we may not realize the associated option exercise payment, milestones and royalties.
If GSK does not exercise the NicVAX option:
• We retain the right to commercialize and partner NicVAX and NicVAX Alternatives (but not certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives)); and
• We are eligible to receive development milestones for future generation candidates of (i) up to an aggregate of $47 million based on Phase II and Phase III clinical trial-related milestones, and (ii) up to an aggregate of $34 million based on obtaining regulatory approval in certain major market countries, for future generation candidates.
In addition, upon successful development of a future generation candidate, GSK may:
• Pay us certain tiered, sales-milestone payments up to an aggregate of $209 million based on aggregate annual sales of future generation candidates; and
• Pay us royalties beginning at 5% and potentially increasing on incremental sales to as high as 7%, with the increase depending on whether aggregate annual net sales of future generation candidates meet or exceed specified annual sales targets in any calendar year ranging from $300 million to $600 million, if a future generation candidate is successfully commercialized.
The economic terms of GSK’s license of NicVAX Alternatives and/or Complementary R&D (such as the combination trial in the Netherlands) are subject to mutual agreement between GSK and us. If the parties cannot mutually agree, then such economic terms will be determined through binding arbitration based on an agreed upon set of factors and principles relating to, among other things, the commercial potential of the NicVAX Alternatives and/or Complementary R&D subject to the option exercise and the relative contributions of us and GSK to the development of such NicVAX Alternatives.
During the fourth quarter of 2006, we sold certain assets related to our PhosLo operations. Under the sale agreement, we received $65 million in cash at closing and are entitled to additional contingent milestone payments and royalties. The royalties relate to sales of a new product formulation over a base amount through 2016. We have received $18 million of milestones through December 2011, and can also receive up to $67.5 million in additional milestone payments and royalties.
CONTRACT MANUFACTURING AND PRODUCT DEVELOPMENT RELATIONSHIPS
Contract Manufacturing
In September 2010, we entered into a manufacturing agreement with Diosynth Biotechnology for the manufacture of NicVAX drug substance which is a step in the production of the vaccine. The drug substance ultimately would have been combined with an adjuvant and filled in syringes at another contract manufacturing organization to produce NicVAX. As a result of the recent NicVAX Phase III clinical trials, we are considering whether or not this agreement remains necessary. If we terminate the agreement because we determine it is unnecessary, we would be subject to a termination penalty.
Product Development
In preparation for the commercialization of NicVAX and prior to the failure of the NicVAX Phase III trials, we entered into relationships for certain products in development. Currently, these activities are inactive.
National Institute for Drug Abuse
We have received grants from NIDA that in the past have supported clinical development of NicVAX. In addition, in September 2009, we were awarded a $10 million grant from NIDA in support of the first of two Phase III efficacy trials of NicVAX. This agreement was completed in 2011.
National Institutes of Health
Under a license agreement with NIH, we have a non-exclusive, worldwide right to use certain rEPA carrier protein technology to develop, manufacture and commercialize vaccines against nicotine addiction. Under the terms of this rEPA agreement, NicVAX is subject to a 0.5% royalty.
Brookhaven National Labs
Under a license agreement with Brookhaven National Labs (Brookhaven), we have a non-exclusive right, with the right to sublicense, to patented T7 polymerase technology for research, development, and commercialization of vaccines for preventing and treating nicotine addiction, and for prevention and treatment of Enterococcal infections. Under the terms of this T7 agreement, NicVAX is subject to a 0.1% royalty upon commercialization, and any Enterococcal vaccine is subject to a 0.2% royalty upon its commercialization. The T7 license remains in effect until the expiration of the last-to-expire licensed patent, which is December 2, 2014, and no further payments or royalties will be due to Brookhaven for use of the subject technology after that date.
CEO BACKGROUND
Jason M. Aryeh, age 42, has been a director of the Company since 2006. He is the founder and managing general partner of JALAA Equities, LP, a private hedge fund focused on the biotechnology and specialty pharmaceutical sector, and has served in such capacity since 1997. Mr. Aryeh also serves on the board of directors of Ligand Pharmaceuticals, a public biotechnology company, CorMatrix Cardiovascular, a medical device company, and the Cystic Fibrosis Foundation’s Therapeutics Board (CFFT). Mr. Aryeh’s experience in the biotechnology industry, including his investor-side knowledge of the industry, was among the factors considered by the Board of Directors in determining that Mr. Aryeh should be nominated for election as a director.
David L. Castaldi, age 71, has been a director of the Company since 1994. Since 1994 he has been an independent consultant to and an entrepreneur in the life science industry. Mr. Castaldi founded Cadent Medical Corp., a medical device company that was sold to Cardiac Science, Inc. While at Cadent, Mr. Castaldi served as Chairman of the Board from 1996 to 2001 and as Chief Executive Officer from 1998 to 1999. Previously, Mr. Castaldi was founder and Chief Executive Officer of BioSurface Technology, Inc., a Nasdaq-listed biotechnology company sold to Genzyme Corporation, and President of the worldwide protein-based pharmaceuticals division of Baxter International. He is a graduate of the University of Notre Dame and Harvard Business School. Mr. Castaldi serves on the boards of directors of three privately-held biopharmaceutical and medical device companies, and previously served on the board of directors of Embrex, Inc., an agricultural biotechnology company. Mr. Castaldi’s financial and business experience in the life sciences field, as well as his qualification as an audit committee financial expert, were among the factors considered by the Board of Directors in determining that Mr. Castaldi should be nominated for election as a director.
Geoffrey F. Cox, Ph.D., age 67, has been a director of the Company since 2000 and has served as non-executive Chairman of the Board of Directors of the Company since February 2007. Dr. Cox served as Chairman of the Board, President and Chief Executive Officer of GTC Biotherapeutics, Inc., a biopharmaceutical company, from 2001 to 2010. From 1997 to 2001, he was Chairman of the Board and Chief Executive Officer of Aronex Pharmaceuticals, Inc., a biotechnology company. From 1984 to 1997, he was employed by Genzyme Corporation, a biotechnology company, last serving as its Executive Vice President, Operations. Dr. Cox is Chairman of the Board of the Massachusetts Biotechnology Council (MassBio) and served for a number of years on the Board of the Biotechnology Industries Association (BIO), together with the Health Governing Sections and Emerging Companies Sections of BIO. Dr. Cox received a BS in biochemistry from the University of Birmingham, United Kingdom, and a Ph.D. in biochemistry from the University of East Anglia, United Kingdom. Dr. Cox’s extensive biotechnology industry expertise, including his many years of experience as an executive officer and board member at publicly-traded biotechnology companies, were among the factors considered by the Board of Directors in determining that Dr. Cox should be nominated for election as a director.
Peter B. Davis, age 64, has been a director of the Company since 2006. He is currently an independent consultant. He served as Vice President Finance and Chief Financial Officer of XOMA Ltd., a biotechnology company, from 1994 to his retirement in June 2005. From 1991 to 1994 he served as Vice President Financial Operations for the Ares Serono Group, a global pharmaceutical company. From 1988 to 1991, he was Vice President, Chief Financial Officer of Akzo America Inc., a subsidiary of a diversified Dutch chemical company. From 1985 to 1988, he was Controller-International Division of Stauffer Chemical Corporation, and from 1972 to 1985, he was employed by PepsiCo Inc., last serving as Division Finance Director of Pepsi-Cola International. Mr. Davis received a BA in mathematics from Northwestern University and an MBA from the University of Chicago Graduate School of Business. Mr. Davis’s business background and biotechnology and pharmaceutical industry experience, as well as his qualification as an audit committee financial expert, were among the factors considered by the Board of Directors in determining that Mr. Davis should be nominated for election as a director.
Raafat Fahim, Ph.D., age 57, has been President, Chief Executive Officer and a director of the Company since January 2008 and acting Chief Financial Officer of the Company since May 2008. From July 2007 to January 2008, Dr. Fahim served as Senior Vice President, Research, Technical and Production Operations of the Company and Chief Operating Officer and General Manager of its Biologics Strategic Business Unit. From March 2003 to July 2007, Dr. Fahim served as Senior Vice President, Research, Technical and Production Operations of the Company. Dr. Fahim is also non-executive Chairman of the Board of VM Farms, a Toronto, Canada-based private equity web hosting technology company. From 2002 to 2003, Dr. Fahim was an independent consultant, working with Aventis Pasteur, a pharmaceutical company, and other companies worldwide on projects that included manufacturing, process improvement, quality operations and regulatory issues. From 2001 to 2002, he served as President and Chief Operating Officer of Lorus Therapeutics, Inc., a biopharmaceutical company. From 1987 to 2001, Dr. Fahim was employed by Aventis Pasteur where he was instrumental in developing several vaccines from early research to marketed products. During his employment with Aventis Pasteur, Dr. Fahim held the positions of Vice President, Industrial Operations, Vice President, Development, Quality Operations and Manufacturing, Director of Product Development, and head of bacterial vaccines research/research scientist. Dr. Fahim’s background in the biopharmaceutical industry, position as President and Chief Executive Officer of the Company and right to be nominated to the Board under the terms of his employment agreement with the Company were among the factors considered by the Board of Directors in determining that Dr. Fahim should be nominated for election as a director.
Richard A. Harvey, Jr., age 61, has been a director of the Company since 1992. He has been President of Stonebridge Associates, LLC, an investment banking firm, since 1996. Mr. Harvey has 35 years of experience advising mid-cap and small-cap companies on matters involving corporate finance and strategic transactions. Mr. Harvey’s business and investment banking experience in life sciences and other industries were among the factors considered by the Board of Directors in determining that Mr. Harvey should be nominated for election as a director.
Timothy P. Lynch, age 41, has been a director of the Company since 2006. He has been Managing Member of Stonepine Capital LP, a life science-focused investment fund since July 2008. From October 2005 to June 2008, Mr. Lynch was President and Chief Executive Officer of NeuroStat Pharmaceuticals, Inc., a start-up specialty pharmaceuticals company. From June 2005 to September 2005, Mr. Lynch was President and Chief Executive Officer of Vivo Therapeutics, Inc., a venture-backed specialty pharmaceuticals start-up. From October 2002 to June 2005, Mr. Lynch served as Chief Financial Officer of Tercica, Inc., a biopharmaceutical company. From 1999 to June 2002, Mr. Lynch served as Chief Financial Officer of InterMune, Inc., a biopharmaceutical company. He was involved with the initial public offerings of both biopharmaceutical companies. Previously, Mr. Lynch served as Director of Strategic Planning and as a pharmaceutical sales representative at Elan Corporation, PLC, a pharmaceutical company. He started his career at Goldman, Sachs & Co. and Chase Securities, Inc. Mr. Lynch is currently a director of Allos Therapeutics and Insite Vision. Additionally, within the past six years, Mr. Lynch served as a director of BioForm Medical, Inc. and Aradigm Corp. Mr. Lynch received his B.A. in economics from Colgate University and his M.B.A. from Harvard Business School. Mr. Lynch’s experience in the pharmaceutical and biopharmaceutical industries, as well as his qualification as an audit committee financial expert, were among the factors considered by the Board of Directors in determining that Mr. Lynch should be nominated for election as a director.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a biopharmaceutical company that has focused on the development of vaccines addressing unmet medical needs, including nicotine addiction. We have sought to leverage our experience and knowledge in powering the human immune system to target these serious unmet medical needs. We have been incorporated in Delaware since 1969 and our operations are located in Rockville, Maryland.
Our sole remaining product currently in development is NicVAX ® [ Nicotine Conjugate Vaccine ], an innovative and proprietary investigational vaccine for the treatment of nicotine addiction and prevention of smoking relapse based on patented technology. We suffered a significant setback in 2011 when NicVAX did not achieve the primary endpoint in two Phase III efficacy trials conducted in the U.S. As a result, in November of 2011, we retained Piper Jaffray & Co. (Piper Jaffray) to assist with the exploration of strategic alternatives available to the company. This includes, but is not limited to, the sale, license or merger of all or part of the company or its assets, joint ventures, strategic alliances, recapitalization, or liquidation, and the process is ongoing. As of December 31, 2011, our remaining assets include the following: (i) $96.4 million of cash, cash equivalents and marketable securities, (ii) the potential residual value of NicVAX as well as next-generation nicotine vaccine which was licensed to GlaxoSmithKline Biologicals S.A. (GSK) in 2010, (iii) the potential royalty from Phoslyra which was sold to Fresenius USA Manufacturing, Inc. (Fresenius) in 2006, and (iv) the potential value of our net operating losses (NOLs).
In the first quarter of 2010 we granted to GSK (i) an option to exclusively license NicVAX on a worldwide basis and (ii) a license to develop follow-on next-generation nicotine vaccines using our intellectual property combined with GSK proprietary technology including GSK proprietary adjuvants. GSK has not indicated that it is stopping the development of the next generation nicotine vaccine. If GSK continues to develop the next generation nicotine vaccine, Nabi may be eligible to receive milestones and royalties from that program. We continue to support an investigator initiated Phase IIb trial in the Netherlands of NicVAX in combination with Pfizer’s varenicline or Chantix ® /Champix, the results of which are expected in the second half of 2012.
The smoking cessation market is estimated to exceed $4 billion annually and is currently considered to be a largely unmet medical need. Nicotine is a non-immunogenic small molecule that, upon inhalation into the lungs, quickly passes into the bloodstream and subsequently reaches the brain by crossing the blood-brain barrier. Once in the brain, the nicotine binds to specific nicotine receptors resulting in the release of substances, such as dopamine, a chemical which triggers the highly addictive pleasurable effects experienced by smokers and users of other nicotine products. NicVAX is designed to stimulate the immune system to produce highly specific antibodies that bind to nicotine in the bloodstream. A nicotine molecule attached to specific antibodies is too large to cross the blood-brain barrier and thus is unable to reach the receptors in the brain thereby reducing the pleasure experienced by the smoker making it easier to quit.
In March 2010, we closed an exclusive worldwide option and licensing agreement with GSK for NicVAX as well as for the development of follow-on nicotine addiction vaccines. Upon closing, we received a $40 million initial payment. Under the terms of the agreement, we granted to GSK (i) an option to obtain an exclusive worldwide license to develop, commercialize and manufacture NicVAX as it currently exists, as well as certain potential alternative forms of NicVAX together with an adjuvant other than a GSK proprietary adjuvant and/or with different presentation, dosage or administration (NicVAX Alternatives), and (ii) an exclusive worldwide license to develop, commercialize and manufacture certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives). In addition to the $40 million received at closing, we are eligible to receive under the agreement up to $290 million in potential regulatory, development and sales milestones on any next generation nicotine vaccines. We are also eligible to receive royalties on global sales of any next generation of nicotine vaccines. Notwithstanding the failure to achieve the primary endpoint in the two Phase III trials, if GSK was to exercise its option under the agreement for NicVAX and any NicVAX alternatives, it will pay us $58 million upon exercise plus certain potential milestones and royalties over time.
During 2011 we completed our obligations to continue to develop PentaStaph™ [ Pentavalent S.aureus Vaccine ] under contract for GSK. PentaStaph is a new pentavalent vaccine designed to prevent S.aureus infections including those infections caused by the most dangerous antibiotic-resistant strains of S.aureus. In August 2009, we entered into an Asset Purchase Agreement (APA) with GSK for the sale of PentaStaph for a total consideration of $46 million including a $20 million up-front payment upon closing and $26 million payable upon achievement of certain milestones. The PentaStaph sale closed in November 2009, and we received payment from GSK of $21.5 million representing the up-front payment of $20 million, an additional $1 million for the sale of our Staphylococcus epidermidis vaccine program and an additional $0.5 million for transfer of certain specified materials. We also agreed to a Transition Services Agreement (TSA) to help GSK advance the program while in parallel transferring the technology to GSK. In 2011 we completed all of the efforts required of us from GSK under contract for PentaStaph. As a result, we have received the full $26 million in potential milestone payments, $5 million in 2011 and $21 million in 2010.
Results of Operations
The following discussion and analysis of our financial condition and results of operations for each of the three years ended December 31, 2011, December 25, 2010 and December 26, 2009, should be read in conjunction with our Consolidated Financial Statements and Notes thereto and with the information contained under “Risk Factors” in Item 1A. All amounts are expressed in thousands, except for per share and percentage data.
2011 as Compared to 2010
Revenue. Revenue reflects (i) the amortization of up-front fees received under our PentaStaph and NicVAX agreements, (ii) the completion of substantive milestones included in those agreements, and (iii) services provided to GSK. The amortization of up-front fees received under our PentaStaph and NicVAX agreements are being recognized as revenue ratably over the period of our participation on joint steering committees created under these agreements. The joint steering committee related to the NicVAX agreement is currently expected to operate for 190 months from the date of the agreement (or through December 2025). Our efforts under the joint steering committee related to the PentaStaph agreement were expected to continue for 20 months from the date of the agreement (or through June 2011); accordingly, we have fully recognized the up-front payment related to the PentaStaph agreement.
Total revenue in 2011 of $14.8 million included $7.8 million of deferred revenue amortization from the PentaStaph and NicVAX agreements, $5.0 million for a completed PentaStaph milestone, and $2.0 million for services under the PentaStaph and NicVAX agreements. Total revenue in 2010 of $35.0 million included $15.3 million of deferred revenue amortization from the PentaStaph and NicVAX agreements, $16.0 million for the completion of two PentaStaph milestones, and $3.7 million for services under the PentaStaph and NicVAX agreements. We expect our revenue to significantly decrease in 2012 as a result of the completion of our obligations under the PentaStaph agreement with GSK.
Cost of services. Cost of services was $1.4 million for 2011 compared to $4.0 million for 2010. These costs include internal labor, external contractors and allocated indirect costs. We do not expect to have any material cost of services in 2012 as a result of completing the PentaStaph agreement with GSK.
Research and development expenses. Research and development expenses were $17.8 million for 2011 compared to $26.1 million for 2010. The decrease of $8.3 million is due to a reduction of NicVAX manufacturing and related clinical trial activities in 2011. Approximately $0.3 million of the 2011 costs for NicVAX trials have been offset by grant funding compared to $8.8 million of costs for NicVAX and PentaStaph trials offset by grant funding in 2010. Research and development expenses in 2012 are expected to be materially less than 2011 levels since we completed the two phase III NicVAX trials and are winding down our one remaining NicVAX trial in combination with Chantix.
General and administrative expenses. General and administrative expenses, after an allocation of a portion of these expenses to cost of services and research and development expenses, were $5.4 million for 2011 compared to $6.2 million for 2010. The decrease of $0.8 million reflects our continued efforts to reduce overall expenses including reduction in work force as a result of the completion of the NicVAX Phase III trials. Excluding potential costs related to any strategic transaction, general and administrative expenses in 2012 are expected to decrease from 2011 levels, reflecting reduced headcount and lower level of activity.
Interest expense. We recorded no interest expense during 2011. Interest expense was $0.2 million for 2010 and consisted largely of interest expense associated with our Convertible Senior Notes. As of December 25, 2010, we had repurchased all of our Convertible Senior Notes.
Income tax expense (benefit). Because of the intra-period income tax allocation requirements, we recognized a benefit for income taxes from continuing operations of $2.0 million during 2011, offset in total by an identical income tax provision from discontinued operations. The intra-period income tax allocation considers discontinued operations for purposes of determining the amount of tax benefits that result from our loss from continuing operations. For the year ending 2010, as a result of recent tax law changes, we recognized an income tax benefit of $1.8 million relating to a refund of prior year alternative minimum tax payments.
Discontinued operations. During 2011, we recognized $3.0 million of income, net of tax of $2.0 million, from discontinued operations relating to the milestone of the first commercial sale of a new liquid formulation of PhosLo under our agreement with Fresenius (none in 2010).
2010 as Compared to 2009
Revenue . Revenue was $35.0 million for 2010 compared to $10.5 million for 2009. The increase of $24.5 million reflects amounts recognized under the PentaStaph and NicVAX agreements with GSK. Revenue includes amortization of up-front fees received under our PentaStaph and NicVAX agreements; those fees are being recognized as revenue ratably over the period of our participation on joint steering committees created under these agreements. The joint steering committee related to the NicVAX agreement is currently expected to operate for 190 months from the date of the agreement (or through December 2025). Our efforts under the joint steering committee related to the PentaStaph agreement was expected to operate for 20 months from the date of the agreement (or through June 2011); accordingly, we have fully recognized the up-front payment related to the PentaStaph agreement. The amount recognized in 2010 includes $13.2 million from the initial $21.5 million payment received from GSK for PentaStaph and $2.1 million from the initial $40.0 million payment received from GSK for NicVAX compared to $3.1 million recognized for PentaStaph in 2009. We also recognized $16.0 million of revenue related to the successful achievement of two PentaStaph performance milestones in 2010 compared to $5.0 million for the achievement of one performance milestone in 2009. We also recognized $3.2 million and $0.5 million related to services provided to GSK under the PentaStaph and NicVAX agreements, respectively, in 2010 compared to $2.4 million for services under the PentaStaph agreement in 2009.
Cost of services. Cost of services was $4.0 million for 2010 compared to $2.0 million for 2009. The increase of $2.0 million represents the cost incurred by us to perform under the PentaStaph and NicVAX agreements with GSK with respect to the transitional services, including performance of the PentaStaph Phase I/II clinical trial and associated activities. These costs include internal labor, external contractors and allocated indirect costs.
Research and development expenses . Research and development expenses were $26.1 million for 2010 compared to $16.5 million for 2009. The increase of $9.6 million is primarily due to our two ongoing Phase III trials for NicVAX and NicVAX manufacturing-related activities. The costs related to the PentaStaph Phase I/II clinical trial were reimbursed to us by GSK as they are conducted by us under contract for GSK. GSK’s payments for these costs are recognized as revenue. Approximately $8.8 million of the 2010 costs for NicVAX and PentaStaph trials have been offset by grant funding compared to $1.6 million of costs offset by grant funding in 2009.
General and administrative expenses. General and administrative expenses, net of an allocation of a portion of these expenses to cost of services, was $6.2 million for 2010 compared to $10.0 million for 2009. The decrease of $3.8 million reflects our continued efforts to reduce overall expenses and lower legal and facility costs.
Interest expense. Interest expense was $0.2 million and $1.1 million for 2010 and 2009, respectively, and consisted largely of interest expense associated with our Convertible Senior Notes. The decrease of $0.9 million reflects the impact of the repurchase of the remaining balance of our Convertible Senior Notes in the second quarter of 2010.
Income tax expense (benefit). During the third quarter 2010, as a result of recent tax law changes, we recognized an income tax benefit of $1.8 million relating to a refund of prior year alternative minimum tax payments (none in 2009).
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities at December 31, 2011 totaled $96.4 million as compared to $110.7 million at December 25, 2010. The decrease of $14.2 million is primarily the result of our net cash used in operating activities of $20.2 million offset in part by net cash provided by investing activities and the $5.0 million milestone payment received through discontinued operations related to the first commercial sale on the new liquid PhosLo formulation under our agreement with Fresenius.
Cash provided by (used in) operating activities from continuing operations was ($19.6) million, $40.5 million and ($3.6) million in 2011, 2010 and 2009, respectively. Cash used in operating activities from continuing operations in 2011 included cash expenditures for research and development expenses and general and administrative expenses, offset in part by cash received from GSK associated with the PentaStaph and NicVAX agreements. Cash provided by operating activities from continuing operations in 2010 was primarily related to the $66.3 million received from GSK associated with the PentaStaph and NicVAX agreements offset in part by cash used for research and development expenses and general and administrative expenses. In 2009, cash used in operating activities from continuing operations included cash expenditures for research and development expenses and general and administrative expenses, partially offset by $21.5 million received in connection with the closing of the PentaStaph sale to GSK. Cash provided by (used in) operating activities from discontinued operations was $4.5 million, ($0.6) million and $9.8 million for 2011, 2010 and 2009, respectively.
Cash provided by (used in) investing activities from continuing operations was $60.2 million, $2.3 million and ($35.6) million for 2011, 2010 and 2009, respectively, which consists largely of net proceeds from the maturities (purchases) of marketable securities.
Since December 2007, our Board of Directors has approved the repurchase of up to $115 million of our common stock in the open market or in privately negotiated transactions. Since the inception of the program in December 2007 through December 31, 2011, we have repurchased a total of 19.9 million shares for a total cost of $87.2 million, at an average price of $4.39 per share, leaving a balance of $27.8 million available for share repurchases under the current program. No shares were repurchased in 2011. Repurchased shares have been accounted for as treasury stock using the cost method.
In 2005, we issued $112.4 million of our Convertible Senior Notes through a private offering to qualified institutional buyers. In 2010, we repurchased the remaining $6.1 million balance of our Convertible Senior Notes for a total of $6.1 million. In 2009, we repurchased $10.4 million of our Convertible Senior Notes for a total of $10.1 million.
Critical Accounting Policies and Estimates
We believe that the following policies and estimates are critical because they involve significant judgments, assumptions and estimates. We have discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates.
Accounting estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period, including such amounts related to discontinued operations. Actual results could differ from those estimates.
Revenue recognition: Our revenue generating arrangements may include multiple elements and deliverables, including licenses, options, research and development activities, participation on joint steering committees and contract manufacturing, among other elements.
For arrangements entered into or materially modified after December 25, 2010, when we determine that an element has stand-alone value to our customer, we allocate a portion of the total contract price to that element based on its relative selling price, determined pursuant to a selling price hierarchy, and recognize revenue for that element according to its characteristics.
Revenue consists of license fees, milestone payments, and payments for contractual services. License fees received are initially recorded as deferred revenue, and are subsequently recognized as revenue ratably over the period of our participation on joint steering committees. The joint steering committee related to the NicVAX agreement is currently expected to operate for 190 months from the date of the agreement (or through December 2025). Our efforts under the joint steering committee related to the PentaStaph agreement were completed in the second quarter of 2011; accordingly, we have fully recognized the up-front payment related to the PentaStaph agreement.
For milestones that are deemed substantive, we recognize the contingent revenue when: (i) the milestones have been achieved; (ii) no further performance obligations with respect to the milestones exist; and (iii) collection is reasonably assured. A milestone is considered substantive if all of the following conditions are met: (i) the milestone is nonrefundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone appears reasonable in relation to the effort expended with the other milestones in the arrangement and the related risk associated with achievement of the milestone. If a milestone is deemed not to be substantive, the Company would recognize the portion of the milestone payment as revenue that correlates to work already performed; the remaining portion of the milestone payment will be deferred and recognized as revenue as the Company completes its performance obligations.
Payments for contractual services are recognized as revenue when earned, typically when the services are rendered.
We analyze cost reimbursable grants and contracts to determine whether we should report such reimbursements as revenue or as an offset to research and development expenses incurred.
Collaborative arrangements: We are an active participant with exposure to significant risks and rewards of commercialization relating to the development of NicVAX and future generation nicotine vaccines based on NicVAX technology. For costs incurred and revenues generated from third parties where we are deemed to be the principal participant, we recognize revenues and costs using the gross basis of accounting; otherwise we use the net basis of accounting.
Research and development expenses: Research and development costs are expensed as incurred; advanced payments are deferred and subsequently expensed over the period of performance. Research and development expenses include direct labor costs as well as the costs of contractors and other direct and indirect expenses (including an allocation of the costs of facilities). We expense amounts payable to third parties under collaborative product development agreements at the earlier of the milestone achievement or as payments become contractually due. We recorded approximately $0.3 million, $8.8 million and $1.6 million for 2011, 2010 and 2009 respectively of cost reimbursements from government grants as an offset to research and development expenses.
Share-based compensation: We account for share-based compensation at fair value; accordingly we expense the estimated fair value of share-based awards made in exchange for employee services over the requisite employee service period. Share-based compensation cost for stock options is determined at the grant date using an option pricing model; share-based compensation cost for restricted stock is determined at the grant date based on the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee’s requisite service period.
New accounting pronouncements: In October 2009, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force,” or ASU 2009-13. ASU 2009-13 amends existing accounting guidance for separating consideration in multiple-deliverable arrangements. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific evidence is not available, or the estimated selling price if neither vendor-specific evidence nor third-party evidence are available. ASU 2009-13 eliminates the residual method of allocation and requires that consideration be allocated at the inception of the arrangement to all deliverables using the “relative selling price method.” The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. ASU 2009-13 requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
OVERVIEW
We are a biopharmaceutical company that has focused on the development of vaccines addressing unmet medical needs, including nicotine addiction. We have sought to leverage our experience and knowledge in powering the human immune system to target these serious unmet medical needs. We have been incorporated in Delaware since 1969 and our operations are located in Rockville, Maryland.
Our sole remaining product currently in development is NicVAX ® [Nicotine Conjugate Vaccine], an innovative and proprietary investigational vaccine for the treatment of nicotine addiction and prevention of smoking relapse based on patented technology. We suffered a significant setback in 2011 when NicVAX did not achieve the primary endpoint in two Phase III efficacy trials conducted in the U.S. As of March 31, 2012, our remaining assets include the following: (i) $94.9 million of cash and cash equivalents, (ii) the potential residual value of NicVAX as well as any next-generation nicotine vaccine which was licensed to GlaxoSmithKline Biologicals S.A. (GSK) in 2010, (iii) the potential royalty from Phoslyra which was sold to Fresenius USA Manufacturing, Inc. (Fresenius) in 2006, and (iv) the potential value of our net operating losses (NOLs).
Merger Agreement with Biota Holdings Limited . On April 22, 2012, we entered into a merger implementation agreement (Merger Agreement) with Biota Holdings Limited, a Melbourne, Australia company (Biota), pursuant to which, among other things, Nabi and Biota will undertake a business combination under Australian corporate law such that each ordinary share of Biota capital stock will be exchanged for newly issued shares of Nabi common stock, and Biota will become a wholly-owned subsidiary of Nabi (the Merger). In connection with the Merger, Nabi will change its name to “Biota Pharmaceuticals, Inc.” but will remain listed on the NASDAQ Stock Market as its sole stock exchange listing and be headquartered in the United States.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger:
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Each Biota share outstanding immediately prior to the effective time will be transferred to Nabi in exchange for 0.669212231 Nabi shares (as such amount may be adjusted pursuant to the terms of the Merger Agreement). Immediately after the closing of the Merger, the Nabi shares issued to former Biota stockholders will represent approximately 74% of Nabi’s outstanding common stock, and the shares of common stock held by current Nabi stockholders will represent approximately 26% of Nabi’s outstanding common stock;
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The board of directors of Nabi will consist of six Biota directors and two Nabi directors; and
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Biota’s current Chief Executive Officer and Chief Financial Officer are expected to serve as the Chief Executive Officer and Chief Financial Officer, respectively, of Nabi until the appointment of new U.S.- based management.
Prior to the closing of the Merger Agreement, subject to the terms and conditions of the Merger Agreement:
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Nabi intends to return to Nabi’s stockholders excess cash above $54 million (which is required to be delivered to the combined company), after satisfying and reserving for outstanding liabilities, through a dividend, return of capital or repurchase of outstanding Nabi shares, or a combination thereof. We currently estimate the amount to cash to be returned to Nabi stockholders to be in the range of $25 to 30 million; and Nabi plans to distribute to its stockholders contingent value rights providing certain payment rights arising from cash received by Nabi from a future sale, transfer, license or similar transaction involving our NicVAX program assets.
Consummation of the Merger is subject to customary conditions for a business combination of this type under Australian and Delaware corporate law, including, among others, (i) approval of the Merger by the stockholders of Biota in accordance with applicable Australian law, (ii) the affirmative vote of the holders of a majority of the issued and outstanding Nabi shares at a meeting of stockholders (the Nabi Shareholder Meeting) approving amendments to the certificate of incorporation of Nabi to (a) increase the number of authorized Nabi Shares to 200,000,000, principally to allow for the issuance of additional Nabi Shares to pay the Merger consideration, and (b) change the name of Nabi to “Biota Pharmaceuticals, Inc.” , and (iii) the affirmative vote of the holders of a majority of the votes cast at the Nabi Shareholder Meeting approving issuance of new Nabi shares to Biota stockholders in the Merger, as required by the rules of the NASDAQ Stock Market (collectively, the Shareholder Approval).
Each party’s obligation to consummate the Merger is subject to certain other conditions, including approval of the Merger by the Supreme Court of Victoria, Australia, the expiration or early termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain other competition laws, the absence of any injunction, restraint or governmental restriction making illegal or restraining the consummation of the transactions contemplated by the Merger Agreement, the accuracy of the other party’s representations and warranties contained in the Merger Agreement that are qualified as to materiality, the accuracy in all material respects of the other party’s representations and warranties contained in the Merger Agreement that are not qualified as to materiality, the other party’s performance in all material respects of all obligations to be performed by it under the Merger Agreement, and the absence of any effect, event, occurrence or matter that has had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the other party of the nature specified in the Merger Agreement. In addition, Biota’s obligation to consummate the Merger is subject to receiving a certificate from Nabi showing that Nabi has a closing net cash balance of no less than $54 million, calculated in accordance with the terms of the Merger Agreement, and the appointment of specified Biota directors to the Nabi board of directors effective as of the closing of the Merger. The parties expect to close the Merger in the third quarter of 2012 subject to satisfaction of these and other closing conditions.
NicVAX Agreement with GSK. In March 2010, we closed an exclusive worldwide option and licensing agreement with GSK for NicVAX as well as for the development of follow-on nicotine addiction vaccines. Upon closing, we received a $40 million initial payment. Under the terms of the agreement, we granted to GSK (i) an option to obtain an exclusive worldwide license to develop, commercialize and manufacture NicVAX as it currently exists, as well as certain potential alternative forms of NicVAX together with an adjuvant other than a GSK proprietary adjuvant and/or with different presentation, dosage or administration (NicVAX Alternatives), and (ii) an exclusive worldwide license to develop, commercialize and manufacture certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives). During the quarter, GSK informed us that it does not intend to exercise the NicVAX option due to the failure of the Phase III trials to achieve their primary end points. However, GSK has not indicated that it has terminated the development of the future generation nicotine vaccine.
Notwithstanding the failure to achieve the primary endpoint in our two Phase III trials, if the second generation nicotine vaccine being developed by GSK is successful, GSK will pay us up to a total of $290 million in contingent milestone payments as follows: (i) up to $47 million based on Phase II and Phase III clinical trial-related milestones, (ii) up to $34 million based on obtaining regulatory approval in certain major market countries, and (iii) up to a total of $209 million based on tiered annual sales of future generation candidates. GSK also will pay us royalty payments on annual net sales of future generation candidates, beginning at 5% and potentially increasing on incremental sales to as high as 7%, with the increase depending on whether annual net sales of future generation candidates meet or exceed specified annual sales targets in any calendar year ranging from $300 million to $600 million.
PentaStaph Sale to GSK. In November 2009, we sold our PentaStaph product candidate and related assets to GSK under an Asset Purchase Agreement for a total consideration of $46 million including a $20 million up-front payment and $26 million payable upon achievement of certain milestones, all of which we have received. During the second quarter of 2011 we completed our work to help develop PentaStaph under contract with GSK.
PhosLo . In 2006, we sold certain assets related to our PhosLo operations to Fresenius. Under the sale agreement, we are entitled to additional contingent milestone payments of $2.5 million upon approval of a new indication for PhosLo and royalties of up to $65.0 million on annual sales of Phoslyra, a new formulation of PhosLo, over a base amount of $32 million for 10 years after the November 14, 2006 closing date. To date, annual sales of Phoslyra have not exceeded the base amount, and we have not recognized any royalty revenue from those sales.
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND MARCH 26, 2011
Revenue. Revenue reflects (i) the amortization of the initial upfront payment received under our PentaStaph and NicVAX agreements, (ii) the completion of substantive milestones included in those agreements, and (iii) services provided to GSK. Total revenue in the first quarter of 2012 of $0.6 million related solely to amortization of the initial upfront payment under our NicVAX agreement. Total revenue in the first quarter of 2011 of $9.2 million included $3.3 million of deferred revenue amortization from the PentaStaph and NicVAX agreements, $5.0 million for a completed PentaStaph milestone, and $0.9 million for services under the PentaStaph and NicVAX agreements. The decrease in revenue from 2011 to 2012 reflects the completion of activity under the PentaStaph agreement as well as completion of services provided to GSK.
Cost of services. We had no cost of services in the first three months of 2012 compared to cost of services of $0.6 million for the first three months of 2011, all of which was related to services provided to GSK. All such services were completed in 2011.
Research and development expenses . Research and development expenses were $1.5 million and $5.3 million for the first quarters of 2012 and 2011, respectively. The decrease is due to a reduction in NicVAX-related clinical trials and manufacturing activities in 2012 as compared to 2011, as all but one trial was completed in 2011. Research and development expenses, prior to the completion of the proposed Merger, are expected to decrease as we complete our final NicVAX trial.
General and administrative expenses. General and administrative expenses, net of an allocation of a portion of these expenses to cost of services during the first quarter of 2011, were $1.3 million for the first quarters of 2012 and 2011.
Income from Discontinued Operations. We generated income from discontinued operations during the first quarter of 2012 of approximately $1.7 million ($1.0 million net of provision for income taxes) as a result of reducing our estimated liabilities related to our pricing programs under Medicare/Medicaid and other governmental pricing programs.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and marketable securities at March 31, 2012 totaled $94.9 million compared to $96.4 million on December 31, 2011. The decline is the result of our net cash used in operations during 2012.
Cash used in operating activities from continuing operations was $1.5 million and $8.6 million for the quarters ended March 31, 2012 and March 26, 2011, respectively. The decrease in cash used is primarily the result of non-cash revenue recognized in the first quarter of 2011 (collected in the second quarter of 2011) related to a PentaStaph milestone of $5.0 million and differences in the amount of revenue recognized related to the upfront fees from PentaStaph and NicVAX of $2.6 million.
We believe cash, cash equivalents and marketable securities on hand at March 31, 2012 will be sufficient to meet our anticipated cash requirements for operations for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 2 to our condensed consolidated financial statements includes a discussion of our significant accounting policies. A summary of the more significant policies follows:
Accounting estimates: The preparation of financial statements in conformity with U.S. GAAP 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 income and expenses during the reporting period, including such amounts related to discontinued operations. Actual results could differ from those estimates.
Revenue recognition: Our revenue generating arrangements may include multiple elements and deliverables, including licenses, options, research and development activities, participation on joint steering committees and contract manufacturing, among other elements. When we determine that an element has stand-alone value to our customer, we allocate a portion of the total contract price to that element based on its relative selling price, determined pursuant to a selling price hierarchy, and recognize revenue for that element according to its characteristics. Revenue consists of license fees, milestone payments, and payments for contractual services.
License fees received are initially recorded as deferred revenue, and are subsequently recognized as revenue ratably over the period of our participation on joint steering committees. The joint steering committee related to the NicVAX agreement is currently expected to operate for 190 months from the date of the agreement (or through December 2025). Our efforts under the joint steering committee related to the PentaStaph agreement were completed in the second quarter of 2011.
For milestones that are deemed substantive, we recognize the contingent revenue when: (i) the milestones have been achieved; (ii) no further performance obligations with respect to the milestones exist; and (iii) collection is reasonably assured. A milestone is considered substantive if all of the following conditions are met: (i) the milestone is nonrefundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone appears reasonable in relation to the effort expended with the other milestones in the arrangement and the related risk associated with achievement of the milestone. If a milestone is deemed not to be substantive, the Company would recognize the portion of the milestone payment as revenue that correlates to work already performed; the remaining portion of the milestone payment will be deferred and recognized as revenue as the Company completes its performance obligations.
Payments for contractual services are recognized as revenue when earned, typically when the services are rendered.
We analyze cost reimbursable grants and contracts to determine whether we should report such reimbursements as revenue or as an offset to research and development expenses incurred.
Research and development expenses: Research and development costs are expensed as incurred; advanced payments are deferred and subsequently expensed over the period of performance. Research and development expenses include direct labor costs as well as the costs of contractors and other direct and indirect expenses (including an allocation of the costs of facilities). We expense amounts payable to third parties under collaborative product development agreements at the earlier of the milestone achievement or as payments become contractually due. In the first quarter 2011 we recorded approximately $0.3 million of cost reimbursements from government grants as an offset to research and development expenses.
Share-based compensation : We expense the estimated fair value of share-based awards made in exchange for employee services over the requisite employee service period. Share-based compensation cost for stock options is determined at the grant date using an option pricing model; share-based compensation cost for restricted stock is determined at the grant date based on the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee’s requisite service period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk as described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 4. Controls and Procedures
Our Chief Executive Officer currently serves as acting Chief Financial Officer.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that these disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and therefore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We do not expect that our disclosure controls and procedures or our internal control over financial reporting are able to prevent with certainty all errors and all fraud.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are parties to legal proceedings that we believe to be ordinary, routine litigation incidental to the business of present or former operations. It is management’s opinion, based on the advice of counsel, that the ultimate resolution of such litigation will not have a material adverse effect on our financial condition, results of operations or cash flows.
CONF CALL
Gregory Fries
Thanks you, Alisha. Good afternoon and thank you for joining us today. As a reminder, the news release announcing our third quarter 2009 financial results is available on our website at www.nabi.com.
I would also like to remind you that today’s call may include forward-looking statements. These forward-looking statements and related risk factors are more fully disclosed in our annual report on Form 10-K for the fiscal year ended December 27, 2008 and in our quarterly reports on Form 10-Q for the quarters ended March 28, 2009 and June 27, 2009, both filed with the Securities and Exchange Commission. And more information is also available on our website at www.nabi.com.
Now, I will turn the call over to Dr. Raafat Fahim, President and Chief Executive Officer of Nabi. Raafat?
Raafat Fahim
Thank you, Greg, and thank you all for participating in the call. Joining me for today’s call is Dr. Paul Kessler, Senior Vice President, Clinical, Medical and Regulatory Affairs; Dr. Matthew Kalnik, Senior Vice President, Strategic Planning and Business Operations and Mr. Ron Kocak, Controller and Chief Accounting Officer.
We have made significant progress towards achieving our strategic corporate goals and I’d like to review this progress before discussing the quarterly financial results. Yesterday we announced a successful closing of the sale of PentaStaph and related assets to Glaxo SmithKline. This transaction also included the sale of a separate preclinical program for vaccine against Staph epidermidis.
We received a total cash payment of $21,500 million consisting of $20 million associated in the close of the PentaStaph transaction, $1 million for the Staph epidermidis program and 500,000 for reimbursement of license fees and clinical material previously manufactured for the use in the Phase I trial for the new toxoid antigens of PentaStaph.
We also have the opportunity to receive an additional $26 million for achieving four milestones associated with the PentaStaph deal. We expect to accomplish these milestones over the next year and half. In late September, we received two grants totaling approximately $10.5 million that will have fund clinical research for our pipeline products.
First, the National Institute on Drug Abuse or NIDA awarded Nabi $10 million to help fund the first pivotal NicVAX Phase III clinical trial. The second grant of $472,000 was awarded by the Department of Defense deployment related medical research program of the office of the congressionally directed medical research programs to help support clinical research on PentaStaph.
Late last year, we entered into our corporative research and development agreement with US Department of Defense and The Henry M. Jackson Foundation to advance the development of PentaStaph. This grant will offset some of the costs of the upcoming Phase I clinical trial for the two newest PentaStaph components PVL and alpha toxin. Initiation of this clinical trial represents one of the four PentaStaph milestones that I mentioned earlier.
On Monday, we announced an initiation of the first NicVAX Phase III clinical trial. This study is being funded in part by the $10 NIAID grant I mentioned earlier. As you may know, we are conducting this trial under a special protocol assessment or SPA agreement with the FDA, and in accordance with scientific advice that we receive from the European Medicines Agency that confirms and supports the trial protocol.
The SPA along with the scientific advice significantly reduces our regulatory risk for the NicVAX program. Separately our closest nicotine vaccine competitor ZYTO Bio-technology announced that interim analysis of the Phase II study showed that its vaccine did not achieve the primary end point.
All these developments solidified our leadership position in the race to market the world’s first vaccine for smoking cessation and relapse prevention. These events have significantly increased the interest in our program and we are in active discussions with potential strategic partners to further develop on commercialized NicVAX.
In May, we disclosed that Biotest Pharmaceuticals Corporation filed indemnification claims for alleged breaches of representation on warranties made by Nabi in the asset purchase agreement associated with the sale of our biologics business to Biotest in 2007. Biotest subsequently withdrew the $50.4 million claim in early June resulting in the release of $4.5 million of the escrowed Funds to Nabi. The remaining $5.7 million claim was withdrawn on Wednesday and the balance of the restricted cash has been released to us.
Now let’s review the third quarter financial results. For the third quarter the net loss from continuing operations were $7 million or $0.14 per share compared to a net loss of $4.6 million or $0.09 per share for the same period in 2008.
General and administrative expense was $2.4 million compared to $2.1 million in the second quarter of 2008. The increase was primarily due to legal cost associated with the PentaStaph sale transaction and our defense against the indemnification claims filed by the Biotest.
Research and development expense was $4.7 million compared to $3.4 million in 2008. The increase is related to efforts to prepare for the phase III NicVAX trials including manufacturing related activities.
Net cash used in continuing operations for the nine months ended September 26, 2009, was $18.1 million compared to $16 million for the 2008 period. The increase in cash utilization was driven by R&D expenses as we prepared for initiating the first NicVAX phase III trial.
We ended the quarter with cash, cash equivalents and marketable securities totaling $103.3 million and not included in this balance is the $5.7 million of restricted cash that was released to us after the close of the third quarter.
That concludes our prepared remarks. Operator let’s open the call for questions
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Fund Letters
