ViaCell, Inc. Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission file number 0-51110
VIACELL, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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04-3244816 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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245 First Street, Cambridge,
Massachusetts
(Address of principal executive offices) |
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02142
(Zip Code) |
(617) 914-3400
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the
Exchange Act:
None
Securities registered under Section 12(g) of the
Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Securities Act of
1933. Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant as of June 30, 2004: not
applicable because trading of the registrants Common Stock
on the Nasdaq National Market did not commence until
January 20, 2005.
The number of shares of the registrants Common Stock
outstanding as of March 28, 2005 was 37,750,701.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement to
be filed with the Commission pursuant to Regulation 14A in
connection with the Registrants Annual Meeting of
Shareholders to be held on June 9, 2005 are incorporated
herein by reference into Part III of this report.
ViaCell, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2004
TABLE OF CONTENTS
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PART I
Unless the context requires otherwise, references in this report
to we, our, us and
ViaCell refer to ViaCell, Inc. and its subsidiaries.
Preliminary Note Regarding Forward-Looking Statements
The information set forth in this report in Item 1
Description of Business and in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations includes
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and is subject to the
safe harbor created by that section. Such statements may
include, but are not limited to, projections of revenues, income
or loss, capital expenditures, plans for product development and
cooperative arrangements, future operations, financing needs or
plans of the Company, as well as assumptions relating to the
foregoing. The words believe, expect,
will, anticipate, estimate,
target, project, plan, and
similar expressions identify forward-looking statements, which
speak only as of the date the statement was made. Certain
factors that realistically could cause actual results to differ
materially from those projected in the forward-looking
statements are set forth in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors That May Affect
Results.
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ITEM 1. |
DESCRIPTION OF BUSINESS |
Overview
We are a biotechnology company dedicated to enabling the
widespread application of human cells as medicine. We were
incorporated in the State of Delaware on September 2, 1994.
To date, the widespread application of human cells as medicine
has not been proven to be possible. We are in an early stage of
development for our cellular therapeutic candidates, and we are
developing a pipeline of proprietary product candidates intended
to address cancer, cardiac diseases, diabetes and infertility.
If and when we have successfully developed our product
candidates, we intend to manufacture, market and sell these
products ourselves or through commercial partners. Cellular
therapy already has a significant role in the treatment of human
disease. For example, according to the International Bone Marrow
Transplant Registry, over 45,000 bone marrow and other
hematopoietic (blood) stem cell transplant procedures were
performed worldwide in 2002. Although it has not been proven in
clinical trials that cellular therapy will be an effective
treatment for diseases other than those currently addressed by
hematopoietic stem cell transplants, cellular therapies are
generally believed to have far-reaching potential beyond these
current applications, with the possibility of treating and
curing many serious diseases. However, the potential of cellular
therapy has been largely unrealized due, in part, to the fact
that current sources of stem cells are difficult to harvest and
compatible donors are often not found.
We have assembled an organization with research, cell sourcing,
clinical development and manufacturing, cell processing and
marketing capabilities, which together with strategic
partnerships and our proprietary technologies, if proven to be
effective, we believe could enable us to overcome current
limitations on the development of cellular therapeutics. We have
proprietary technologies, including our Selective Amplification
technology, that we believe will enable the isolation,
purification and significant expansion of stem cell populations.
Although we have not yet shown the safety or efficacy of stem
cells manufactured using our Selective Amplification technology
or completed clinical trials for any product candidates, we
believe these technologies will allow the production of well
defined cellular products in therapeutically useful quantities.
In addition, we have significant experience in the preservation
of cells and are currently a leader in the area of private
preservation of umbilical cord blood, an abundant and
non-controversial source of stem cells.
We are using these assets to develop a cord blood-derived stem
cell therapeutic, CB001, our lead stem cell therapy product
candidate, which is currently in a Phase I clinical trial.
This product candidate is a highly concentrated and purified
population of stem cells that we are initially developing for the
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treatment of patients with cancers and other serious diseases.
We are developing CB001 to be used as a replacement for bone
marrow and other crude cell mixtures used in stem cell
transplants as a current standard of care. Although the safety
and efficacy of CB001 has not been, and may never be,
demonstrated in humans, based on pre-clinical studies, we
believe that CB001 may provide a more effective treatment with
fewer side effects and faster recovery than other cell sources.
We are also developing additional product candidates, alone or
with corporate partners, to address other diseases, including
cardiac disease and diabetes.
In December 2003, we entered into a license and collaboration
agreement with Amgen under which we received a non-exclusive,
royalty-free, worldwide license to certain Amgen stem cell
growth factors for use in developing and manufacturing cell
therapy products, and Amgen received an option to collaborate
with us on any product, including CB001, that incorporates an
Amgen growth factor or technology. We also have additional
collaborations, licenses and strategic relationships with other
companies and academic institutions.
We have built our initial commercial organization in the area of
reproductive health. We market our Viacord umbilical cord blood
preservation product, which is used primarily for pediatric bone
marrow transplants, through Viacord Reproductive Health. Our
Viacord customers are expectant parents who have entrusted us
with their childs umbilical cord blood, which we process
into a cellular therapeutic and cryopreserve for potential
future use by that child or a sibling. We believe that we are
one of the leaders in the emerging private cord blood
preservation industry. We offer our customers, who have
preserved their childs own cord blood, a higher
probability of obtaining suitable stem cells for transplant if
the need arises. In addition, we are developing a second product
in the area of reproductive health intended to offer women the
choice to have their fertility protected or extended, and to
obtain donor oocytes for in vitro fertilization. We have
exclusively licensed proprietary technology that allows the
cryopreservation of oocytes by developing a cryopreservation
media. A study of the application of this media published in
Human Reproduction, a peer-reviewed journal, documented four
pregnancies and five live births following 11 embryo transfers.
To support our launch of the product, we are working with
in vitro fertilization centers to seek to demonstrate
additional births using this technology. Subject to our media
supplier obtaining FDA 510(k) clearance for our media, we intend
to commercialize Viacyte. Our media supplier has been recently
advised by the FDA that it will need to conduct a clinical study
to support clearance. Our media supplier has submitted existing,
published third party clinical data to the FDA. While we believe
this data may be sufficient to support 510(k) clearance of the
media, it is likely that the FDA will require a new clinical
trial to support 510(k) clearance. If the FDA requires that new
clinical trials be conducted to support the submission for
510(k) clearance, subject to obtaining FDA clearance, we would
expect to launch Viacyte no earlier than sometime in 2007; if
new clinical trials will not be required, then, subject to
obtaining FDA clearance, we would expect to be able to launch in
2005.
Opportunities in Cellular Therapy
The human body is comprised of both cells that have
differentiated into specific tissues (such as skin, liver or
blood) and stem cells that are not fully differentiated. There
are many types of stem cells in the human body. As stem cells
grow and proliferate, they are capable of producing both
additional stem cells as well as cells that have differentiated
to perform a specific function. Stem cells are found in
different concentrations and in different locations in the body
during a persons lifetime. Current scientific findings
suggest that each organ and tissue in the body is formed,
maintained and possibly rejuvenated to different degrees, on a
more or less continual basis under normal conditions, by
specific and relatively rare stem cell populations naturally
present in the body.
Stem cell therapy represents an increasingly important modality
in treating and curing human disease. Stem cell therapy involves
the use of living cells to replace and initiate the production
of other cells that are missing or damaged due to disease or
injury. Today, stem cell therapy is limited to the use of
hematopoietic (blood) stem cells to regenerate healthy,
functioning bone marrow to establish and maintain the blood and
immune system. Additional types of stem cells which may have
therapeutic use include neural (capable of differentiating into
nerve and brain tissue), mesenchymal (capable of differentiating
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into bone, cartilage and fat) and pancreatic islet stem cells
(capable of differentiating into cells secreting insulin).
Hematopoietic stem cell therapy is a medical procedure in which
bone marrow, umbilical cord blood or processed circulating blood
(all of which contain hematopoietic stem cells) are infused into
the patients circulatory system, where they find their way
to the bone cavity. Once established in the bone, they begin to
grow, or engraft, and produce cells of the blood and immune
systems. Cells for this procedure are typically obtained from a
donor, though, in some cases, the patients own cells may
be used.
Hematopoietic stem cell therapy can be used to:
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replace diseased bone marrow with healthy, functioning bone
marrow for patients with blood diseases such as aplastic anemia; |
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replace bone marrow damaged by high-dose chemotherapy or
radiation therapy used to treat patients with a variety of
cancers such as leukemia and lymphoma; and |
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provide genetically healthy and functioning bone marrow to treat
patients with genetic diseases such as sickle cell anemia. |
Hematopoietic stem cell therapy has been successfully employed
in the treatment of a variety of cancers and other serious
diseases, beginning with bone marrow transplants that were first
pioneered in the 1960s. According to the International Bone
Marrow Transplant Registry, 45,000 hematopoietic stem cell
transplants were performed worldwide in 2002. We estimate that
this correlates to a market size of roughly $900 million,
using an average cost of cellular material per treatment of
$20,000 based on data from the International Bone Marrow
Transplant Registry. Many more patients needed transplants, but
suitably compatible cells could not be found. Although the
safety and efficacy of CB001 has not yet been, and may never be,
demonstrated in humans, we believe that CB001 may provide a more
effective treatment with fewer side effects and faster recovery
than current therapies and will enable this therapy to reach
more patients in need.
Current scientific and clinical research indicates that stem
cells have tremendous promise in the treatment of diseases in
addition to those currently addressed with hematopoietic stem
cell therapy. Researchers have reported progress in the
development of new therapies utilizing stem cells for the
treatment of cancer, cardiac, neurological, neuromuscular,
immunological, genetic, pancreatic, liver and degenerative
diseases.
The success of current and emerging stem cell therapies is
dependent on the presence of a rich and abundant source of stem
cells. Umbilical cord blood has emerged as an excellent source
for these cells. As information about the potential therapeutic
value of stem cells has entered the mainstream, and following
the first successful cord blood transplant performed in 1988,
cord blood collection has grown rapidly. Based on a survey of
private cord blood banks conducted for us in 2000 by the Boston
Healthcare Associates consulting firm, there were approximately
24,000 units stored by private cord blood banks as of June
1999. That number had increased to 178,000 units as of
September 2003, according to a survey by the independent
organization Parents Guide to Cord Blood Banks,
representing an increase of over seven-fold over the past four
years. We believe, based on the demographic profile of our
average Viacord customer, that the total available target market
could grow to 25% of US births driven by:
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increased awareness about the availability and benefits of
preserving cord blood; |
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growing endorsement by the medical community; |
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new applications for cell therapy; and |
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potential for expanding the number of stem cells in a single
unit of cord blood, making it possible to treat larger, adult
patients or multiple patients within a family. |
Another opportunity in the use of cells for therapy relates to
oocytes, which are female egg cells essential to reproduction.
The ability to preserve these cells outside the body could be a
significant breakthrough in the field of reproductive health
with multiple applications in infertility (extending fertility
and preventing infertility).
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Women choosing to extend their fertility represent a large
segment of our potential market opportunity. In the United
States and elsewhere in the world, more women are choosing to
have children later in life: the average age for a woman having
her first child is almost 25, increasing from age 21
in 1970, according to the Center for Disease Control and
Prevention. This trend is driven in part by rising birth rates
for women in their 30s and 40s. Despite this trend,
female fertility actually begins to decline at around
age 26, and declines more rapidly after age 35.
Declining oocyte viability due to the natural aging process is
one of the major factors contributing to compromised fertility
in women. Cryopreservation stops the aging of cells, and,
although the long-term safety of cryopreserved oocytes has not
been, and may never be, demonstrated, we believe this product
candidate could allow a woman to have a child later in life,
using one of her own younger and potentially healthier oocytes.
According to the 2000 US Census, there are approximately
4.3 million women in the United States between the ages of
27 and 36 with household income exceeding $65,000, who we
believe would be potential users of this product.
Our oocyte product candidate, Viacyte, may address currently
unmet needs of female cancer patients who, as a result of
chemotherapy and radiation treatment, may be at risk of
compromised fertility. Women diagnosed with cancer could
preserve their oocytes prior to undergoing or immediately
following chemotherapy or radiation in order to preserve their
ability to have a child in the future.
Other significant market opportunities for oocyte
cryopreservation include using our product candidate to aid
women (or couples) who require IVF, but who have ethical
concerns about embryo cryopreservation and those individuals
seeking donor oocytes, but for whom the logistics of
coordinating a donor-recipient cycle present a challenge. We do
not intend to use our oocyte product in connection with the use
or harvesting of stem cells from embryos.
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Current Limitations of Cellular Therapy |
Despite the proven clinical utility of hematopoietic stem cell
therapy and the potential to use other types of cellular
therapies to treat and cure disease, widespread application of
cellular therapy is presently hindered by the following factors:
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Lack of Compatible Stem Cells |
Stem cell therapy is dependent on the recipients body
accepting the newly transplanted stem cells, thus facilitating
the production of the targeted cells. This acceptance is
contingent on the transplanted cells looking
similar, at a molecular level, to the patients own cells.
Cellular similarity is measured by the presence of certain cell
surface molecules known as human leukocyte antigens, or HLA.
Host cells recognize the HLA pattern of the transplanted stem
cells and will either accept the cells if the HLA match is
close, or reject the cells if the HLA profile is not close
enough. In hematopoietic stem cell transplantation, HLA
mismatching can also give rise to a very serious condition
called graft-versus-host disease, or GVHD. GVHD is an attack by
the transplanted immune cells on tissues of the host resulting
in severe disease, significant disability and often death. As a
result, time consuming and expensive searches of a donor
registry are often required to locate compatible donors for bone
marrow or cord blood stem cell transplants. Due to these
difficulties, and others, many patients seeking transplants of
hematopoietic stem cells from non-related individuals actually
do not receive stem cells.
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Difficulties Collecting Stem Cells |
In general, harvesting sufficient quantities of stem cells from
a donor or a patient is extremely difficult. All current methods
of obtaining hematopoietic stem cells for therapy have
significant limitations. Stem cells can be collected from bone
marrow through a painful, costly and invasive surgical
procedure. There are not enough donors registered and, when
called upon, a large number of donors fail to follow through
with the procedure.
Stem cells can also be collected from blood of the circulatory
system through a procedure in which drugs are injected into the
donor to stimulate the movement of stem cells from the bone
marrow into the blood stream, where they can be harvested and
then separated from the whole blood. This procedure is
time-consuming and uncomfortable for the donor.
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Umbilical cord blood is also rich in stem cells, but the volume
of blood collected is limited. Although there are banks of cord
blood available for transplant, units are often too small to be
suitable to treat adult patients.
Stem cells can also be derived from human embryonic tissue.
However, their utility is presently technically limited and is
hampered by ethical and regulatory issues that restrict their
use.
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Insufficient Number of Stem Cells |
The number of stem cells collected from any particular tissue
source is typically low compared to the quantity required for
therapeutic benefit. The likelihood and speed of successful stem
cell engraftment are directly related to the number of stem
cells transplanted. Consequently, the ideal approach to a
successful transplant is to use a large number of stem cells.
Researchers have been working for decades on methods for
expanding populations of donated stem cells, but their efforts
have been largely unsuccessful.
Most attempts to increase the number of stem cells involve
methods of growing or culturing stem cells in batches. Batch
production of stem cells is not effective because differentiated
cell populations outgrow stem cells and create by-products that
hinder the growth and maintenance of stem cells. Few stem cells,
if any, are produced using this process. Mixed populations of
cells that result are also difficult to characterize, creating
the possibility of clinical side effects as compared with a pure
stem cell population. Furthermore, batch production of cells is
expensive; large amounts of materials and production capacity
are required to accommodate large cultures necessitated by the
low concentration of stem cells.
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Variability in Quality and Composition of Stem Cell
Products |
Bone marrow, processed circulating blood and umbilical cord
blood are crude mixtures of largely differentiated cells with
small numbers of stem cells, contributing to unpredictability in
clinical responses. Cord blood samples, for example, vary in
stem cell count as well as composition. Because stem cells
harvested from bone marrow are collected from individuals of
different ages in various states of health, the stem cell
quality and consistency is affected. Additional variability
arises from inconsistencies in handling and processing in
different transplant centers.
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Difficulties in Preserving Oocytes |
While methods for preserving sperm and embryos are
well-established and have been utilized in in vitro
fertilization procedures for the past three decades, methods
for preserving oocytes have not been widely employed due to
difficulties encountered in freezing this cell. The oocyte is
the largest cell in the body and, due to its large liquid
volume, tends to form ice crystals during the freezing process.
Formation of ice crystals can damage this cell, making it
unsuitable to develop into a healthy embryo. These obstacles
represent a significant barrier to the preservation of oocytes
for treatment of chemotherapy-treated, donor-recipient, IVF and
age-related infertility patients.
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Our Solutions in Cellular Therapy |
We have developed proprietary technologies that we believe will
overcome the barriers to the widespread use of cellular
therapies. Although the safety and efficacy of stem cell
populations expanded using our Selective Amplification
technology has not been, and may never be, demonstrated in
humans, in pre-clinical studies we have significantly expanded
populations of stem cells using this technology to produce
highly purified, highly defined stem cells in clinically useful
quantities. We believe that this breakthrough has the potential
to enable important new treatments for a broad range of cancers
and other serious diseases.
Our Selective Amplification technology involves the expansion of
stem cell populations using growth stimulating factors together
with cycles of purification to remove differentiated cells using
antibodies that target proteins on their surface. By repeating
growth and purification cycles, we are able to greatly expand
highly defined populations of stem cells in what we expect to be
a commercially feasible system.
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We are focusing our initial clinical efforts on developing
CB001, a hematopoietic stem cell therapeutic comprised of
expanded cord blood stem cell populations. We are developing
CB001 as a replacement for bone marrow and other crude cell
mixtures currently used in hematopoietic stem cell transplants
under the current standard of care and are currently evaluating
CB001 in a Phase I clinical trial. We believe that
expanding hematopoietic stem cells through Selective
Amplification can overcome the current limitations of
hematopoietic stem cell therapy by:
Increasing the Likelihood of Locating Compatible Stem
Cells. Most cord blood units collected, preserved and stored
do not contain sufficient stem cells to treat an adult patient.
Through Selective Amplification, we believe we will be able to
expand the number of stem cells contained in each unit so that
every unit is potentially suitable to treat a patient,
regardless of size. In addition to size limitations, HLA
matching limitations exist particularly for racial minorities
that are proportionally under represented in current
inventories. If every cord blood unit that is collected,
preserved and stored can be expanded, the likelihood of locating
compatible stem cells is increased.
Obtaining Stem Cells From an Abundant Source. Umbilical
cord blood contains a rich supply of stem cells. With
approximately 4 million births per year in the United
States, cord blood represents a large, natural resource provided
it can be efficiently and cost-effectively converted into
standardized medicine. With the use of Selective Amplification,
we believe that this source will be more than adequate for
patients of all sizes and all racial and genetic backgrounds and
for treating a large variety of disease indications.
Increasing the Number of Stem Cells. We have increased
hematopoietic stem cell populations by up to 150-fold, with an
average of 35-fold expansion within a 14-day period. The potency
of a cord blood unit has been correlated with the number of
hematopoietic stem cells in the graft. The number of stem cells
in an average cord blood unit are generally considered to be
insufficient to engraft an adult by a factor of 2 to 10. The
increase in stem cell populations that we have achieved may
therefore be highly significant in producing therapeutic effects.
Producing Stem Cell Products of a Consistent Quality.
Although we have not yet scaled up our Selective Amplification
manufacturing process to commercial levels, we believe that
Selective Amplification can be incorporated into a robust
manufacturing process that provides a consistent, highly defined
stem cell product. As hematopoietic stem cell populations grow,
they produce differentiated cells that dilute the therapeutic
population of stem cells. Using selection techniques that
eliminate differentiated cells from the cell population, we are
able to maintain high purities in our candidate cell products.
In addition to our Selective Amplification technology, we are
developing other technologies, especially those based on the
propagation of Unrestricted Somatic Stem Cells (USSCs), that we
expect to have therapeutic potential in cardiac repair, and
other indications, although we have not yet demonstrated the
safety and efficacy of USSCs for any indication in humans and
may not be able to do so.
Additionally, we believe that the current limitations associated
with cellular therapy for the treatment of infertility can be
overcome by effectively preserving and storing oocytes.
Preserving and Storing Oocytes. Slow freezing techniques
using high choline media have improved oocyte survival rates and
have produced live births. We believe that our procedures for
preserving and storing umbilical cord blood can be leveraged to
launch our proprietary oocyte cryopreservation product candidate
Viacyte. Results to date using these procedures have indicated
an ability to predictably cryopreserve oocytes and produce live
births. Subject to obtaining FDA 510(k) clearance for our
proprietary media, we believe that we will be in a position to
leverage our sales and marketing experience in the field of
reproductive health to provide women with the choice of
preserving their fertility.
Our Business Strategy
We believe that we have the infrastructure in place, combined
with proprietary technologies and strategic partnerships, to be
a leader in cellular therapy and reproductive health.
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We intend to use our existing assets to implement a business
strategy having the following principal elements:
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Demonstrate the Clinical Benefit of and Obtain Approval
for our Lead Stem Cell Product Candidate, CB001 |
We are seeking to establish the clinical and therapeutic
validity of our Selective Amplification technology by initially
developing CB001 for hematopoietic cell transplantation,
currently the most widely used form of stem cell therapy. We
believe that seeking approval for a product candidate which
addresses an established market and is a highly purified and
characterized version of an existing therapy represents the most
rapid and low risk route to commercialization of our technology.
Focusing on the hematopoietic market also allows us to
demonstrate the potential of our lead stem cell product
candidate, CB001, to significantly improve patient health while
addressing a large, unmet need in the marketplace.
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Leverage our Technology to Commercialize Additional
Products to Effectively Treat and Potentially Cure Patients with
Unmet Clinical Needs |
We intend to follow the advancement of CB001 with the
development of product candidates for indications historically
not treated with stem cell therapy. While research has
demonstrated the potential for applying stem cell technology to
a number of indications, such as diabetes and heart disease,
advancement in these areas has been slow. We believe our
Selective Amplification and other technologies can overcome the
limitations which have to date prevented the successful
application of stem cell therapies in these areas. We have
active programs for the development of cell therapies for
cardiac disease and diabetes.
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Leverage ViaCell Reproductive Health to Provide Financial
Stability and Create Additional Value |
We intend to leverage the cash flow and assets generated from
our reproductive health activities to provide financial
stability. Viacords processing and storage revenue has
grown rapidly, with an increase in revenues of 19% in 2004 over
2003, while direct costs of revenues increased 3% over the same
period. We intend to continue to invest in the reproductive
health area and expand our obstetrician and consumer-directed
education and marketing program. In addition, we plan to further
leverage our investments in these areas with the launch of our
oocyte cryopreservation product candidate Viacyte.
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Continue to Develop and Grow Areas of Our Business that
are Complementary to Each Other |
Our stem cell therapy product candidates are expected to make
use of the readily available source of stem cells present in
umbilical cord blood. We offer cord blood preservation to
customers who want to preserve this blood to take advantage of
these therapeutic products in the future. The storage of cord
blood from related individuals greatly increases the probability
of an HLA match and, when combined with our expansion
technologies, potentially allows whole families to benefit from
banked stem cells. In addition, our cord blood preservation
product has established our presence in the reproductive health
field. Leveraging our presence in this field and our
cryopreservation expertise, we have in-licensed technology which
allows the preservation of human oocytes in a frozen state. We
intend to develop and commercialize this technology within our
existing commercial infrastructure by leveraging the assets
invested in this business, and we may seek to expand our
business in other complementary areas in the future.
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Continue to Build Strategic Business Relationships |
We believe that our Selective Amplification and other
technologies have extremely broad potential applications. While
we are focused on the development of our own proprietary
therapeutic product portfolio using these technologies, we will
seek to partner with third parties to develop other applications
of these technologies. These could include applications that
fall outside our core areas of interest, or applications where
the involvement of a strategic partner may significantly improve
the chances of commercial success. An example of the latter is
our recent collaboration with Amgen. Where strategically
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advantageous, we will continue to look to structure high value
collaborative relationships with industry leaders. We intend to
pursue collaborations with companies that possess the resources
and expertise to develop and commercialize products for
indications outside the scope of our internal development
programs.
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Strategically In-License or Acquire Complementary
Products, Technologies and Businesses |
We intend to supplement our product development efforts through
the acquisition of products and technologies that support our
business strategy. An example of this is our acquisition of
Kourion Therapeutics AG completed in September 2003, pursuant to
which we gained access to USSCs. Also in 2004, we exclusively
in-licensed an oocyte preservation technology that is highly
complementary to our presence in cord blood preservation. This
technology is expected to allow women to better preserve their
fertility. In the future, we may pursue additional strategic
acquisitions of technologies, product candidates and businesses
to further strengthen or expand our current programs.
Our Technology
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Selective Amplification Our Method to Expand
Stem Cell Populations |
We have developed a proprietary technology called Selective
Amplification that we use to isolate stem cells from mixtures of
cells and selectively expand them in a controlled manner.
Selective Amplification combines principles of engineering and
biology. Our process uses growth factors to promote the growth
of stem cells and a mixture of antibodies to purify them by
removing unwanted differentiated cells that are produced
naturally as a by-product of stem cell growth. Differentiated
cells cause feedback inhibition that results in loss of stem
cells when using conventional methodologies involving batch
cultures. Selective Amplification uses growth and purification
techniques concurrently and iteratively to control and optimize
growth of the stem cell population. Different stem cells can be
grown and purified by using different combinations and
concentrations of growth factors and antibodies, and by
selecting at different time points creating a range of potential
cellular products.
The Selective Amplification process is described below:
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Purification. We initially purify a population of cells
containing targeted stem cells using a specially formulated
mixture of antibodies. These antibodies bind to the surface of
unwanted, differentiated cells but not to targeted stem cells.
We then mix magnetic particles, which link to the antibodies on
the surface of the differentiated cells, with the cell
preparation. We then expose the cell preparation to a specially
designed magnet, which removes the magnetic particles along with
the antibodies and differentiated cells to which they are
connected. This method of purification is referred to as
negative immuno-magnetic selection because the target stem cells
remain in the culture, unaffected by the antibodies or magnetic
particles, while the unwanted differentiated cells are removed. |
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Growth. Following the initial purification of the target
stem cell population, we place the cells into a liquid culture
containing appropriate growth media. We then allow the culture
to grow. During this time, the stem cells divide, producing both
additional undifferentiated stem cells as well as differentiated
cells. |
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Re-purification. After a specified growth period we
re-purify target cells using negative immuno-magnetic selection.
Re-purification both removes the differentiated cells and
eliminates their deleterious impact on the target stem cell
population. |
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Repeated Cycles of Growth and Purification. We repeat the
growth and purification cycles at specified time points to
optimize and control the expansion of the stem cell population
and largely eliminate differentiated cells. This technique
minimizes culture size and consumption of antibodies, growth
factors and media, making it more cost effective than
conventional cell culture techniques. |
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Harvest, Characterize and Package. After a final step of
reselection and growth, the amplified target cells will be
harvested, characterized and packaged for use. |
10
The Selective Amplification process results in a highly
characterized population of stem cells. Systems for the
selection of cells and techniques to culture cells to expand
populations have existed for decades. Our patented Selective
Amplification technology employs the combination of selection
with growth. We believe that the proprietary methods we have
developed may potentially limit the ability of others from
selecting cells that are being or have been expanded.
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Unrestricted Somatic Stem Cells (USSCs) Our
Proprietary Type of Stem Cell |
To date researchers have identified many different types of stem
cells from many sources. These include, for example, embryonic
stem cells from embryos, neural stem cells from the brain,
hematopoietic stem cells from bone marrow and pancreatic islet
stem cells from the pancreas. Each type of stem cell appears to
have unique properties, and the overall properties of different
stem cells can be quite diverse. For instance, some propagate
well but are difficult to differentiate efficiently, some
differentiate efficiently but are difficult to propagate; some
appear to be unipotential in that they can only make one class
of tissue, while others appear to be pluripotential in that they
can make a variety of tissue types.
We are developing applications of a proprietary type of stem
cell called Unrestricted Somatic Stem Cells (USSCs) derived from
umbilical cord blood. Our pre-clinical research indicates that
USSCs are a pluripotent class of stem cells that have the
ability to differentiate into many cell types, including fat,
bone, cartilage and precursor neuronal cells under specified
in vitro culture conditions. Furthermore, our
evidence in animal models suggests that this cell type is
capable of differentiating in many tissue types as shown by
distribution and function of human cells in the liver, bone,
bone marrow, brain and heart of transplanted animals. Although
USSCs have not been tested in humans and their safety and
efficacy has not been, and may never be, established, based on
our preclinical results, we believe that USSCs may be a suitable
starting population to produce a variety of stem cell therapies.
Patents are pending on therapeutic uses and compositions of
matter for this previously undiscovered cell type. The discovery
that such cells exist in cord blood may solve major concerns
about matching non-hematopoietic cell products into diverse
patient populations without graft rejection or the use of
immune-suppression, as large reserves of banked cord blood units
provide suitably matched source material. We are currently
developing this technology for use in the treatment of cardiac
disease.
The addition of the USSC technology into our portfolio is
complementary to both the cell therapy and reproductive health
aspects of our business. With USSCs, we believe we will have the
raw material to develop products for additional critical
indications involving diseases of the liver, muscle, bone
marrow, pancreas, brain and heart. We believe that the
controlled in vitro production of specific cell
products from USSCs may benefit from the use of our patented
Selective Amplification technology. We also believe that further
development of USSCs may, if successful, benefit our cord blood
preservation customers who may need to access such cells from
their stored cord blood for future medical applications.
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Cryopreservation of Oocytes |
We have exclusively in-licensed technology that we believe will
allow the successful cryopreservation of human oocytes using a
cryopreserving media. We are currently engaged in pre-commercial
development of this technology. Our current efforts are focused
on optimizing and standardizing this procedure. In addition, we
are continuing to evaluate other technologies for the
cryopreservation of human oocytes in order to provide the best
solution for our customers.
Our Product and Product Candidates
The following table summarizes our product and pipeline of
programs:
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Product/Program |
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Intended Use | |
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Status | |
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Viacord
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Pediatric hematopoietic stem cell transplantation for the donor and siblings |
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Marketed |
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Viacyte
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Preservation of fertility |
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Pre-Commercial Stage |
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Hematopoietic (CB001)
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Hematopoietic stem cell transplantation for a variety of cancers and other serious diseases |
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Phase I |
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Cardiac Disease
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Congestive heart failure; Myocardial infarction |
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Preclinical |
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Other
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Diabetes |
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Research |
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12
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Hematopoietic Program (CB001) |
Background/ Target Market. Hematopoietic stem cell
therapy is an accepted medical procedure that provides for
regeneration of blood and immune systems in patients for the
treatment of cancer and other serious genetic and acquired
diseases. Patients requiring this type of therapy are typically
very sick. The treatment is usually undertaken when there are
few, if any, alternatives, and consequently patients needing
therapy who do not obtain it often die. According to the
International Bone Marrow Transplant Registry, in 2002,
clinicians performed approximately 45,000 hematopoietic stem
cell transplants worldwide using cells obtained from bone
marrow, peripheral blood and, to a lesser extent, umbilical cord
blood.
CB001 consists of a highly concentrated and purified population
of hematopoietic stem cells which are selectively amplified from
umbilical cord blood that we currently obtain from public cord
blood banks. Although the safety and efficacy of CB001 has not
yet been, and may never be demonstrated, because of its high
stem cell concentration and purity relative to transplant
mixtures obtained from other sources, we believe that CB001 may
provide a more effective treatment with fewer side effects and
faster recovery. In particular, we believe that the
administration of CB001 will result in less GVHD, often a severe
complication of transplant therapy, and accelerate hematopoietic
reconstitution which drives the generation of early neutrophil
recovery. Neutrophils are the bodys first defense against
infections. Early neutrophil recovery is associated with fewer
opportunistic infections and a reduced length of hospital stay.
Our belief that treatment with CB001 may result in lower
incidence of GVHD and enhance early neutrophil recovery is based
on the historically low incidence of GVHD when using cord blood
as a transplantation source, in combination with the expectation
that more stem cells will increase the rate of engraftment, an
assumption based on extensive clinical data reported in the
literature to that effect. Furthermore, although the efficacy of
CB001 for other indications has not been demonstrated, because
of its attributes, we believe CB001 has the potential to
significantly expand the market for stem cell therapy to new
indications.
Program Status. In preclinical studies, CB001 exhibited
no acute toxic effects when injected into mice at doses
comparable to and higher than that planned in the clinical trial
program. When tested in a variety of laboratory tests and
standard animal models, the components used to manufacture CB001
similarly exhibited no toxicity. In addition, when CB001 was
injected into a special immunocompromised mouse breed, CB001
went to the bone marrow of the mice, and human hematopoietic and
immune cells grew and appeared in the blood of the mice,
indicating that CB001 contains functional stem cells. We cannot
guarantee that the results we have observed for CB001 in
animals, including lack of toxicity, will be duplicated in
humans.
We submitted an Investigational New Drug application
(IND) with the US Food and Drug Administration
(FDA) in October 2001. We instituted certain manufacturing
improvements and design changes to our clinical protocol and
submitted a redesigned clinical protocol and other supportive
information in November 2003. We are currently enrolling
patients in a Phase I clinical trial to assess the safety
and preliminary clinical efficacy activity of CB001. Our
Phase I study will initially be limited to
10 patients. The patient population eligible for
participation in this trial includes children and adult patients
(ages 2-60) with acute lymphocytic leukemia, acute
myelogenous leukemia, chronic myelogenous leukemia,
myelodysplastic syndrome, and non-Hodgkin lymphoma. The patients
will receive CB001 plus a standard cord blood transplant
(derived from different donors) following high dose chemotherapy
and radiation therapy. The patients will be closely monitored to
ensure their safety, and all adverse events will be reported to
the FDA and institutional review boards following standard
procedures and regulations for a Phase I clinical trial.
When new hematopoietic cells begin to grow (engraft) in the
patients, we will be able to differentiate between cells coming
from CB001 and cells coming from the standard cord blood due to
genetic differences in the two types of donor cells. We estimate
that we will enroll and treat 10 patients and complete
patient follow-up by the end of 2005. We intend for the data
generated from this trial to be used to support Phase II
clinical trials. To date, CB001 has been administered to six
patients in this clinical trial and more patients are being
screened for enrollment. We are currently optimizing the CB001
manufacturing process to increase the levels of stem cell
amplification, and we may add up to six additional patients to
the Phase I study to evaluate the safety and efficacy of
the optimized process. We anticipate that adding patients would
potentially lengthen the study by approximately six months.
13
If there are no significant safety issues related to CB001 and
there is evidence of CB001 engraftment in the Phase I
clinical trial, then we plan to initiate Phase II clinical
trials. If evidence of engraftment with CB001 is shown in the
Phase I clinical trials, we plan to conduct Phase II
clinical trials designed to demonstrate that CB001 can serve as
a sole source of hematopoietic stem cells in patients requiring
hematopoietic stem cell transplantation who are unable to find
suitable stem cell donors. However, the Phase I clinical
trial may not provide evidence of CB001 engraftment due to
competition between CB001 and the standard cord blood
transplant. If there are no significant safety issues in the
Phase I clinical trial but CB001 engraftment is not shown,
then we may need to perform additional pre-clinical and/or
clinical studies prior to commencing the Phase II clinical
trials. If Phase II clinical trials show strong evidence of
efficacy and a favorable safety profile in patients unable to
find suitable donors, we will consider filing an application
with the FDA based on the Phase II data and seek priority
review. We expect that any Phase III clinical trials will
be designed to demonstrate superiority of CB001 compared to
standard transplantation methods. We intend to select the
Phase III clinical trial outcome measures to establish that
CB001 is superior to standard stem cell sources based on
clinically meaningful endpoints. In addition, if approved by the
FDA, we intend to subsequently seek regulatory approval for
CB001 in other countries.
Our Viacord product involves the collection, testing, processing
and preserving of umbilical cord blood. Our customers are
expectant parents who choose to collect and store umbilical cord
blood at the birth of their child for potential use in a
pediatric hematopoietic stem cell transplantation for the donor
and family members. We have established a leading position in
this emerging field of private umbilical cord blood
preservation, with an estimated market share of approximately
21% total units stored and 25% of revenue generated in the
United States, based on estimates by the independent
organization Parents Guide to Cord Blood Banks of total
units stored in family cord blood banks (178,000 as of September
2003) and by an independent market researcher of industry
revenue ($128 million in 2003). Based on our phone surveys
of, and public statements by, private cord blood banks regarding
their number of units stored, we estimate that in 2003, 70,000,
or 1.7%, of the 4 million birthing families chose to
preserve their childs umbilical cord blood for potential
future use in the family. Over the past three years, the number
of customers in this industry has grown significantly. We
believe, based on the demographic profile of our average Viacord
customer, that the total available target market could grow to
25% of US births. Our current list price for collecting, testing
and cryopreservation of a childs umbilical cord blood is
$1,800, and our current list price for annual storage of the
cryopreserved blood is $125. Our list prices vary from time to
time, and we offer discounts from our list prices under certain
circumstances from time to time.
Family cord preservation has been growing in acceptance by the
medical community and has become increasingly popular with
families. To date, we have performed facilitated collections at
over 2,000 hospitals in the United States. We currently store
over 64,000 cord blood units for customers. We provide the
following services to each customer:
Collection. We provide a kit that contains all of the
materials necessary for collecting the newborns umbilical
cord blood at birth and packaging the unit for transportation.
The kit also provides for collecting a maternal blood sample for
later testing.
Comprehensive Testing. At the laboratory, we conduct
several tests on the cord blood unit which are essential in the
event the unit is ever needed for transplant. These tests
include volume collected, number and viability of nucleated
cells, sterility, blood typing and the percent of stem cells.
The maternal blood sample is tested for infectious diseases.
Processing. At our state-of-the-art laboratory, we
process the cord blood using a process designed to maximize the
number of stem cells preserved.
Cryopreservation. After processing and testing, we freeze
the cord blood unit in a controlled manner and store it using
liquid nitrogen. Published data indicates that cord blood
retains viability and function for 15 years, and
potentially longer, when stored in this manner.
14
We believe that our Viacord product complements our ability to
deliver cellular medicines by providing:
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experience in providing banked umbilical cord blood for stem
cell transplantation, with sixteen of our customers
umbilical cord blood units used in transplantations to date; |
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strong relationships in the cell therapy community, including
leading transplant centers; |
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expertise in cord blood collection, testing and
preservation; and |
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overall financial stability. |
Moreover, we believe that the advancement of hematopoietic stem
cell therapy, and the introduction of new stem cell therapies,
will further drive demand for cord blood products.
All of our processing and storage of cord blood products is
handled at our own cord blood processing and storage facility
located in Hebron, Kentucky.
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Oocyte Cryopreservation Program |
Background/ Target Market. Our cryopreserved oocyte
product candidate, Viacyte, may provide women the opportunity to
extend or protect their fertility, or obtain donor oocytes for
IVF. However, to date, oocyte cryopreservation has not been
widely practiced because these cells become damaged by the
freezing or thawing process using current methods. According to
our estimates based in part on the 2000 US Census, there are
approximately 4.3 million women in the United States
between the ages of 27 and 36, with household income exceeding
$65,000, who we believe would be potential users of this product
for the purpose of extending their fertility. We have licensed
proprietary technology that allows the cryopreservation of
oocytes by developing a cryopreservation media that helps
protect the cells from damage. A study of the application of
this media published in Human Reproduction, a
peer-reviewed journal, documented four pregnancies and five live
births following 11 embryo transfers.
We believe that Viacyte will complement our existing Viacord
product by:
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using our existing operational infrastructure and facilities,
including our cell processing and storage facility in Hebron,
Kentucky where long-term storage of oocytes would be
maintained; and |
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utilizing our sales, marketing and clinical support staff and
our current marketing channels to educate consumers and
healthcare professionals, including obstetricians,
gynecologists, and oncologists. |
We believe that oocyte preservation represents an attractive
opportunity for us to expand on our commitment to offer
innovative options to patients and physicians related to
reproductive health.
Program Status. We are currently engaged in
pre-commercial development of Viacyte. Our efforts are focused
on optimizing and standardizing this patented procedure for
freezing oocytes and maintaining maximum cell viability
following cryopreservation. Prior to marketing Viacyte, 510(k)
clearance must be obtained from the FDA for our proprietary
oocyte cryopreserving media. Our media supplier submitted a
510(k) on November 12, 2004. The 510(k) clearance process
typically takes three to twelve months from the time of
submission to being able to market a product, but can take
significantly longer. Our media supplier was recently advised by
the FDA that it will need to conduct a clinical study to support
clearance. Our media supplier has submitted existing, published
third party clinical data to the FDA. While we believe this data
may be sufficient to support 510(k) clearance of the media, it
is likely that the FDA will require a new clinical trial to
support 510(k) clearance. If the FDA requires that new clinical
trials be conducted to support the submission for 510(k)
clearance, subject to obtaining FDA clearance, we would expect
to launch Viacyte no earlier than sometime in 2007; if new
clinical trials will not be required, then, subject to obtaining
FDA clearance, we would expect to be able to launch in 2005.
In any event, in 2005, we intend to commence a human clinical
study to seek to demonstrate additional healthy live births from
previously frozen oocytes using this technology. We are also
evaluating
15
other technologies in order to develop the best product
candidate, including the possibility of in-licensing or
otherwise acquiring other oocyte technologies.
We anticipate that our first sales and marketing efforts will be
directed at women seeking to extend their own fertility. This
product will be marketed and sold by ViaCell Reproductive
Health, leveraging our Viacord field sales personnel (clinical
specialists) and marketing infrastructure.
Background/ Target Market. Acute myocardial infarction,
or heart attack, occurs when the blood supply to part of the
heart muscle is severely reduced or stopped. This occurs when
one of the hearts arteries is blocked by an obstruction,
such as a blood clot that has formed on a plaque formed by
arteriosclerosis. If the blood supply is cut off drastically or
for a long time, heart muscle cells suffer irreversible injury
and die. According to a study by the National Heart, Lung and
Blood Institute, there are approximately 1.2 million cases
of myocardial infarction each year in the United States, with a
fatal outcome in about 42% of cases. Many patients who survive
develop a chronic form of heart disease called congestive heart
failure (CHF) which is associated with a progressive
deterioration of the heart muscle. According to the National
Heart, Lung and Blood Institute, about 2.4 million patients
suffer from CHF in the United States.
Although patient survival rates have been improved by using
catheters or drugs to remove thrombotic occlusions (blood vessel
blockages), there is no proven therapy for repairing or
regenerating damaged heart tissue. Recent clinical data obtained
with crude preparations of stem cells isolated from the
patients own bone marrow, however, indicate that cardiac
function may be able to be improved by the application of stem
cells. Based on these clinical studies and our preclinical
investigations, we believe that USSCs may regenerate damaged
heart tissue and may be an effective, standardized product for
heart repair.
Program Status. We are currently evaluating USSCs in
mouse and pig models of CHF and myocardial infarction in
collaboration with researchers at the Toronto University
Hospital, Canada and at the Wolfgang Goethe University,
Frankfurt, Germany and at the American Cardiovascular Research
Institute, Atlanta, Georgia. These experiments are intended to
allow us to evaluate the ability of USSCs to repair damaged
heart tissue in these animals and determine the dose and route
of administration to be used in our initial human clinical
studies. In December 2004, we entered into a Material Transfer
Agreement with Advanced Cardiovascular Systems, Inc. (ACS), a
subsidiary of Guidant Corporation, under which ACS will provide
intracoronary catheters to us for our evaluation of USSCs in our
animal studies, as well as partial funding for this study. If we
successfully complete pre-clinical development, we expect to
complete an IND and initiate a Phase I clinical trial in
2006.
Research Stage Programs. In addition to our programs
described above, we also have a research-stage program in
collaboration with Genzyme targeting applications in diabetes.
Our diabetes program uses a novel population of stem cells
isolated from the pancreas that can be significantly expanded in
culture. To date, we have successfully expanded these pancreatic
stem cells and they have shown the ability to produce insulin in
mouse models of diabetes. Our diabetes program is based on
technology that has been licensed to us by Massachusetts General
Hospital.
Other Potential Applications. In addition to the
applications we are pursuing, we believe that our Selective
Amplification and USSC technologies may be applied potentially
to treat a wide variety of other diseases, including autoimmune
and other immune system disorders, and other degenerative
disorders, as well as genetic diseases such as sickle cell
anemia and various metabolic diseases.
Sales and Marketing
Viacord. Our ViaCell Reproductive Health sales and
marketing organization consists of 65 sales and marketing
professionals supporting our Viacord product. Our staff of 30
internal sales personnel interact
16
with over 20,000 potential customers per month and enroll those
customers who decide to purchase our Viacord product. We have an
expanding field sales organization, with representatives in
territories which cover 800 of the 1,000 largest birthing
centers in the United States and who educate obstetricians,
child birth educators, hospitals and insurers on the benefits of
cord blood preservation. In addition, our marketing staff
targets two primary segments: high-birthing obstetrics practices
and expectant families. We target expectant families through
many mediums, including targeted advertising, direct mail and
web-based marketing activities that collectively generate more
than 20,000 new inquiries to ViaCell Reproductive Health each
month. Historically, we have been able to convert approximately
8% of these inquiries into customers for our Viacord product.
Oocyte Preservation. We plan to market and sell Viacyte
using our ViaCell Reproductive Health sales personnel and
marketing infrastructure where possible. In addition, we plan to
develop a specialty sales force to educate reproductive
endocrinologists and other medical professionals at IVF centers
throughout the United States about the benefits of Viacyte. We
plan to use our internal clinical consultants in our call-center
to answer questions and provide support to customers purchasing
or considering to purchase our products. We may also consider
potential strategic partnerings in marketing these product
candidates, if successfully developed.
Cell Therapy Products. We plan to sell our cell therapy
product candidates, if successfully developed, principally
through our own sales force, leveraging our ViaCell Reproductive
Health sales and marketing infrastructure where possible. On any
product candidates which Amgen has elected to collaborate (which
may include CB001 or any other of our products incorporating
Amgen technology), Amgen will be responsible for regulatory
matters, marketing and selling activities. We may also enter
into co-marketing, licensing or other arrangements with other
third parties in order to gain access to their marketing
resources and distribution network in specific markets.
Manufacturing and Cell Processing
We believe that commercial manufacturing of stem cell products
will be strategically important to us. In order for us to ensure
strict quality control, identify and leverage cost-efficiencies,
and build deep expertise in expansion and processing of cells,
we intend to own and control all aspects of the cell production
process. We believe that manufacturing capabilities will
contribute significantly to our ability to achieve leadership in
our industry.
We currently produce cells for our initial clinical trials in
our cell manufacturing facility in Worcester. This facility,
which we constructed in 2000, was designed to conform to FDA
cGMP regulations and standards for Phase I trials, and
includes approximately 3,000 square feet of space. Within
the next 12 months, we intend to construct a larger scale,
validated and cGMP-compliant production facility at our new
headquarters in Cambridge, Massachusetts to replace our facility
in Worcester. We intend to use the new facility to produce cells
for our Phase II and pivotal Phase III trials and
initial commercialization.
Additionally, we currently process, test and preserve umbilical
cord blood at our facility in Hebron, Kentucky. This facility,
which we constructed in 2002, is designed to operate following
Good Tissue Practice (GTP) regulations and guidelines, and
includes approximately 12,000 square feet of processing and
storage space. We anticipate that this facility will meet all
our needs for Viacord and, potentially, for storage of oocytes
for the foreseeable future. The managers of this facility have
extensive experience in operations management, blood banking,
biologics and medical device manufacturing, and maintain active
programs to achieve continuous improvement in cost and process
quality.
We believe that the cell processing and operational capabilities
that we have developed in cord blood preservation will
strengthen our ability to achieve leadership in the commercial
manufacture of stem cell products.
17
Collaborations, Licenses and Strategic Relationships
Our most significant collaboration, licensing and strategic
relationships are described below:
In December 2003, we entered into a license and collaboration
agreement with Amgen under which we received a royalty-free,
worldwide, non-exclusive license to certain Amgen stem cell
growth factors for use as reagents in producing stem cell
therapy products, and Amgen received an option to collaborate
with us on any product or products that incorporate an Amgen
growth factor or technology. Amgen can exercise its option for
an unlimited number of products, on a product-by-product basis.
Each time Amgen exercises a collaboration option, it must
partially reimburse our past development costs based on a
predetermined formula on the optioned product, share in the
future development costs, and take primary responsibility for
clinical development, regulatory matters, marketing and
commercialization of the product. For each collaboration product
that receives regulatory approval, Amgen will pay us a cash
milestone payment for the first regulatory approval for the
first indication of the product in the United States. The
parties would share in profits and losses resulting from the
collaboration products worldwide sales. Either we or Amgen
may later opt-out of any product collaboration upon advance
notice; however, we will retain our license to the Amgen growth
factors if either we or Amgen opts out of any product
collaboration. Under this agreement, we can purchase cGMP grade
growth factors manufactured by Amgen at a specified price. Upon
the mutual agreement of both parties, we also may receive a
license to additional Amgen growth factors or technologies that
may be useful in stem cell therapy. The agreement may be
terminated by either party following an uncured material breach
by the other party, by mutual consent or by Amgen in certain
events involving our bankruptcy or insolvency. Unless earlier
terminated, the agreement terminates on the later of the
expiration of the licensed Amgen patents or when no products are
being co-developed or jointly commercialized between us and
Amgen. The expiration of the issued licensed Amgen patents will
occur no earlier than 2018, subject to extension upon the
issuance of a patent based on a pending application or a
renewal, reissuance, reexamination or other continuation or
extension of a covered patent.
In conjunction with this license and collaboration agreement,
Amgen made a $20 million investment in our preferred stock.
As part of this agreement, we may offer Amgen the right to make
an additional investment of up to $15 million in connection
with a future strategic transaction by us that would further our
collaboration with Amgen. Amgen also holds a warrant to
purchase 560,000 shares of our common stock at
$12.00 per share as consideration for a previous license
agreement that was superceded by this license and collaboration
agreement.
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GlaxoSmithKline and Glaxo Group |
In January 2003, we obtained a worldwide, non-exclusive license
from GlaxoSmithKline and Glaxo Group to four forms of
TPO-mimetic for use as a reagent in producing stem cell therapy
products, including CB001. We paid an initial fee of $115,000
and issued to the licensors 12,500 shares of our
Series I preferred stock valued at $8.00 per share
(equaling $0.1 million worth of preferred stock), and
agreed to pay annual license maintenance fees over the next ten
years totaling $1.6 million and milestone payments
potentially totaling $2.1 million. Additionally, we will
pay royalties on sales of any products using the licensed
technology, creditable against any remaining maintenance fees.
We are responsible for all manufacturing and related costs
associated with our use of TPO-mimetic. Unless earlier
terminated, the license extends on a country-by-country basis
until the expiration of the underlying technology patents. The
expiration of the issued patents will occur, no earlier than
2022, subject to extension upon the issuance of a patent based
on a pending application provided that such issuance occurs
within seven years of the filing date of the application. The
agreement may be terminated by either party following an uncured
material breach by the other party or in certain events
involving the others bankruptcy or insolvency. In
addition, we can terminate the license at any time upon
30 days advanced notice. We did not incur any
royalties and recognized $165,000 of expenses in connection with
the annual license
18
maintenance fees. Costs associated with Series I preferred
stock were charged to in-process technology for the year ended
December 31, 2003.
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Tyho Galileo Research Laboratory |
On September 1, 2004, we entered into a License Agreement
with Tyho Galileo Research Laboratory for exclusive rights to
U.S. Patent No. 5,985,538 in the field of oocyte
cryopreservation. As part of this agreement, we also entered
into a research collaboration with Galileo, which will focus on
the development of technologies in the field of oocyte and
embryo cryopreservation. This project includes research funding
by us totaling $207,000 in the first year and $225,000 in second
year as well as a license fee of $50,000, milestones totaling
$24,000 and a royalty on revenues generated from the sale of
Viacyte, our oocyte cryopreservation product candidate. We are
also obligated to pay Galileo an annual minimum payment of
$30,000 creditable against royalty payments due under the
agreement. The agreement may be terminated by either party
following an uncured breach by the other party. The license
expires on a product-by- product, media-by-media and
country-by-country basis as the underlying patents in such
country expire (if the product or media is covered by a patent
claim under the license), or ten years from the date of the
first commercial sale in such country (if the product or media
is not covered by a patent claim under the license). The patent
licensed under this agreement will expire no earlier than 2017.
In December 2004, we entered into a Research Agreement with
Genzyme. Under the Research Agreement, we provide islet stem
cells to Genzyme, and Genzyme is obligated to conduct specified
research using the islet stem cells. We have granted Genzyme a
right of first negotiation to enter into an agreement with us in
the field of diseases and disorders of glucose metabolism or
insulin insufficiency, including diabetes, using the results of
the research conducted by Genzyme. If we do not reach an
agreement in such negotiations, we cannot, for a period of
12 months following such negotiations, enter into an
agreement with another party on terms more favorable than those
we last offered to Genzyme without first offering such terms to
Genzyme. We and Genzyme are also required to obtain the consent
of the other party to enter into an agreement using the
intellectual property arising out of the research conducted
under the Research Agreement for a period of 30 months
following the disclosure of such intellectual property. After
such 30-month period, both parties must, for an additional
12 months, offer the other any such agreement that it
proposes to enter with a third party before entering into such
transaction with such third party. The agreement may be
terminated by either party following an uncured breach by the
other party or by Genzyme if it holds a good faith belief that
further research efforts are not commercially practicable. In
addition, Genzyme has made several equity investments in our
company, purchasing $2.0 million worth of our Series I
preferred stock in 2001, an additional $1.5 million in 2002
and $1.5 million worth of our Series J preferred
shares in 2003. Also, Jan van Heek, former Executive Vice
President of Genzyme and currently an adviser to that company,
is a member of our board of directors.
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Massachusetts General Hospital |
In March 2002, the Company entered into a license agreement with
Massachusetts General Hospital under which the Company received
exclusive, worldwide rights to make, have made, use, sell, offer
for sale, and import products based on patents (currently
pending) covering inventions of Dr. Joel Habener pertaining
to pancreatic stem cells for treatment of diabetes. In exchange
for these rights, as part of this agreement, the Company
committed to spend up to $2.0 million in the first eighteen
months of the agreement to achieve a defined set of research
objectives which support pre-clinical development of a
pancreatic stem cell product for the treatment of diabetes. As
of December 31, 2003, the Company had spent approximately
$1.4 million on this project, and no further financial
obligation relating to this commitment is remaining. Under this
agreement, the Company was also obligated to reimburse MGH for
$53,300 in patent costs incurred to date, of which $26,650 was
paid in April 2002 and the remaining balance of $26,650 was paid
in April 2003. In addition, the Company is required to pay
certain amounts to
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MGH, contingent upon the achievement of certain milestones as
defined in the agreement, totaling a minimum of
$0.9 million and is required to pay royalties to MGH upon
commercial sale of products covered under the license. We are
also obligated to pay MGH an annual minimum payment of $30,000,
creditable against milestone and royalty payments due under the
agreement. We have not paid any royalties in connection with
this agreement. The agreement may be terminated by either party
following an uncured breach by the other party, and we can
terminate the agreement at any time upon notice to MGH. Unless
earlier terminated, the license expires on a country-by-country
basis as the underlying patents in such country expire or, if
earlier, one year after the last date of sale by us, our
affiliates or our sublicensees of a covered product in such
country. The Company expects that any patents that may be issued
on pending patent applications will expire no earlier than 2020,
subject to extension upon the issuance of a patent based on a
pending application or a reissuance, reexamination, extension or
other continuation of a covered patent. In addition, MGH has the
right to terminate the license on a country-by-country basis if
no covered product is sold in such country for a continuous
twelve month period following the first commercial sale of such
product, subject to our right to remedy this problem.
Acquisition of Kourion Therapeutics
In September 2003, we acquired Kourion Therapeutics, a
pre-clinical stage biotechnology company located in Langenfeld,
Germany. Kourion Therapeutics identified USSCs, a stem cell type
that can be isolated from umbilical cord blood and which we
believe may be significantly expanded in vitro. In
preclinical studies, USSCs have demonstrated the potential to
differentiate into multiple other cell types, including bone,
cartilage, muscle, heart and neural cells. We are currently
studying USSCs in mouse and pig models of CHF and myocardial
infarction. If we successfully complete pre-clinical
development, we expect to complete an IND and initiate a
phase I clinical trial. By acquiring Kourion Therapeutics,
we acquired key intellectual property rights to USSCs (covered
by one US patent application, one international application and
eighteen foreign applications) and other patent applications
covering technology in the field of stem cell transplantation.
In the acquisition, we issued to the former shareholders of
Kourion Therapeutics 549,854 shares of our Series I
convertible preferred stock, valued at approximately
$4.4 million. As potential additional consideration, we
issued 241,481 additional shares of Series I convertible
preferred stock, valued at approximately $1.9 million, to
an escrow account (escrow shares) and reserved
289,256 shares of Series I convertible preferred
stock, valued at approximately $2.3 million (contingent
shares) for possible issuance in the future. At the end of
September 2006, the escrowed shares will be returned to
us and the 289,256 contingent shares will never be
issued if a change in control of the company has not
occurred by that date. Upon the closing of our initial public
offering, the escrow shares automatically converted, along with
all other outstanding shares of Series I preferred stock,
into shares of our common stock. In the transaction, we also
gave promissory notes totaling $14.0 million to funds
affiliated with MPM Asset Management LLC, who were the holders
of all outstanding preferred shares of Kourion Therapeutics,
which notes were repaid by us upon the closing of our initial
public offering.
If the contingent shares issue upon a change in control, the
recipients of these shares will be issued an additional number
of shares equal to 8% of the initial number of contingent shares
issued compounded annually from the Kourion acquisition closing
date to the date of issuance. Under the Kourion acquisition
agreement, we are also obligated to make payments to Kourion
Therapeutics former shareholders if and when the cardiac
repair program we have assumed in the acquisition achieves
certain milestones. Should all these milestones be achieved,
including final FDA approval of the developed products, we would
have to pay a total of $12.0 million, either in stock or
cash at the shareholders option. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Kourion
Acquisition.
In December 2004, our board of directors approved a plan to
transfer the operations of Kourion Therapeutics to the United
States and to close the laboratory in Langenfeld, Germany. We
expect to complete this transfer by the end of the second
quarter 2005. We recorded a restructuring charge of
approximately $1.2 million in the fourth quarter of 2004.
20
Intellectual Property
The protection of our intellectual property is a strategic part
of our business. We currently own or have exclusively
in-licensed the six US patents identified below.
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Patent Number |
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Title |
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Expiration Date | |
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US Patent No. 5,674,750
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Continuous Selective Clonogenic Expansion of Relatively
Undifferentiated Cells |
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10/7/2014 |
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US Patent No. 5,925,567
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Selective Expansion of Target Cell Populations |
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10/7/2014 |
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US Patent No. 6,338,942
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Selective Expansion of Target Cell Populations |
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10/7/2014 |
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US Patent No. 6,429,012
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Cell Population Containing Non-Fetal Hemangioblasts and
Method for Producing Same |
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10/6/2017 |
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US Patent No. 5,985,538
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Cryopreservation and cell culture medium comprising less
than 50 mM sodium ions and greater than 100 mM choline salt |
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8/1/2017 |
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US Patent No. 6,886,843
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Method of Transplanting in a Mammal and Treating Diabetes
Mellitus by Administering Pseudo-Islet Like Aggregate
Differentiated from a Nestin-Positive Pancreatic Stem Cell |
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12/5/2020 |
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Three of our owned and issued US patents are directed to methods
of manufacturing target populations of primary cells for use as
cellular medicines. These patents broadly cover the use of
selection elements to select a target population of cells
continuously, intermittently during, or after a culture phase.
The Selective Amplification technology covered by these patents
is core to the manufacture of our lead stem cell product
candidate, CB001. These patents expire in 2014 if not extended.
Corresponding international applications are pending.
One of our owned and issued US patents is directed to the method
of making hemangioblast cells from a neonatal source. This
patent broadly covers the derivation and growth of human
hemangioblasts from a non-fetal source. This patent expires in
2017 if not extended. Corresponding international applications
are pending.
One of our exclusively in-licensed and issued US patents is
directed to a method of cryopreserving human oocytes. This
patent is broadly directed at cryopreservation of a human
oocyte, using proprietary media so that the oocyte enters into a
dormant state and is then stored for future use. This patent
expires in 2017 if not extended.
One our exclusively in-licensed and issued US patents,
broadly covers methods for the treatment of type I
insulin-dependent diabetes mellitus and other conditions using
nestin-positive islet derived progenitor cells (NIPs), which can
be expanded and differentiated into pancreatic islet cells,
i.e., insulin-producing beta cells. This patent will expire in
2020 if not extended.
We own two pending US patent applications directed to
compositions and methods of using USSCs to treat a broad class
of diseases.
Furthermore, we own outright or have exclusively in-licensed 52
international patent applications. In addition, we have
non-exclusive licenses to 30 US patents and patent applications
and 86 foreign patents and patent applications, including
patents covering growth factors used in our Selective
Amplification process.
Patent rights and other proprietary rights are important in our
business and for the development of our product candidates. We
have sought, and intend to continue to seek patent protection
for our inventions and rely upon patents, trade secrets,
know-how, continuing technological innovations and in-licensing
opportunities to develop and maintain a competitive advantage.
In order to protect these rights, know-how and trade secrets, we
typically require employees, consultants, collaborators, and
advisors to enter into confidentiality agreements with us,
generally stating that they will not disclose any confidential
21
information about us to third parties for a certain period of
time, and will otherwise not use confidential information for
anyones benefit but ours.
The patent positions of companies like ours involve complex
legal and factual questions and, therefore, their enforceability
cannot be predicted with any certainty. Our issued patents,
those licensed to us, and those that may issue to us in the
future may be challenged, invalidated or circumvented, and the
rights granted thereunder may not provide us with proprietary
protection or competitive advantages against competitors with
similar technology. Furthermore, our competitors may
independently develop similar technologies or duplicate any
technology developed by us. Because of the extensive time
required for development, testing and regulatory review of a
potential product, it is possible that, before any of our
product candidates can be approved for sale and commercialized,
our relevant patent rights may expire or remain in force for
only a short period following commercialization. Expiration of
patents we own or license could adversely affect our ability to
protect future product development and, consequently, our
operating results and financial position.
Competition
We are aware of products manufactured or under development by
competitors that are used for the prevention or treatment of
diseases and health conditions which we have targeted for
product development. Stem cell therapy competitors with products
that could potentially compete with CB001 include commercial and
development-stage companies offering or intending to offer stem
cell products derived from bone marrow, cord blood or mobilized
peripheral blood, or devices or services for processing and
producing cells derived from these tissues, for use in stem cell
transplants. Specific competitors include Aastrom Biosciences,
Celgene, Cellerant, Gamida-Cell and Osiris Therapeutics.
Companies with the most advanced products potentially
competitive with CB001 include Gamida-Cell and Osiris
Therapeutics.
Gamida-Cell, a private company based in Israel, has a
hematopoetic stem cell product candidate made from umbilical
cord blood that is intended for use in hematopoietic stem cell
transplants, similar to CB001. Gamida-Cells product
candidate has been evaluated in a Phase I clinical trial.
Osiris Therapeutics, a private company based in the US, has a
mesenchymal stem cell product candidate isolated from bone
marrow that is intended for use in conjunction with
transplantation of conventional bone marrow or cord blood cells.
Osiris product candidate has already completed
Phase I testing.
In addition to these cell therapy products, competition for
CB001 may be in the form of new and better drugs to treat
leukemias, lymphomas, myelomas and certain genetic diseases. At
this time, we cannot evaluate how our products would compare
technologically, clinically or commercially to any of these or
other potential products being developed by competitors because
we cannot predict the cost, efficacy and safety of those
products nor when any such products would be available for sale.
However, our Selective Amplification technology is designed to
produce cellular products that are both highly amplified and
highly characterized. Because of these intended attributes, we
believe that CB001 may result in better efficacy and safety than
potential alternative products. We believe that CB001, if
successfully developed, will compete with these products
principally on the basis of efficacy and safety, cost and
intellectual property positions. However, we have only recently
begun our Phase I clinical study with CB001 and it is
uncertain whether we will be successful in demonstrating these
attributes.
We are aware of several competitors developing stem cell
therapies for the treatment of cardiac disease, including
GenVec, Genzyme, Bioheart, Osiris Therapeutics, and potentially
others. GenVec, Genzyme, and Bioheart are all developing
products consisting of skeletal myoblasts isolated from muscle,
expanded in culture, and injected into a patients heart to
repair dead tissue. All three companies products are
currently in clinical studies: Bioheart completed a Phase I
study in 2002; GenVec is currently conducting its Phase I
study; and Genzyme is currently recruiting patients for its
Phase II study. Osiriss product candidate consists of
mesenchymal stem cells isolated from donor bone marrow, expanded
in culture, and is intended to be injected into a patients
heart to prevent scar tissue. In March 2005 it was announced
that a Phase I study is being conducted at Johns Hopkins
(Baltimore) using adult mesenchymal stem cells to repair muscle
damaged by a heart attack. This study, supported by Osiris
Therapeutics, is designed to test the safety of injecting adult
stem cells at varying doses in patients who
22
have recently suffered a heart attack. Other companies,
including Hydra Biosciences, have pre-clinical development
efforts using growth factors to stimulate repair of endogenous
heart tissue. At this time, we cannot evaluate how our product
candidate for cardiac disease would compare technologically,
clinically or commercially to these other stem cell therapies or
other drugs being developed and not yet commercialized. However,
our USSC technology is designed to produce cellular products
that are both highly amplified and highly pure, without the need
for a muscle biopsy and, in some cases, without the delay due to
the biopsy and three to four week culture process. Because of
these intended attributes, we believe that our cardiac repair
product may result in better efficacy, more rapid treatment and
less discomfort to the patient than potential alternative
products. However, we have not begun any clinical studies with
any product candidates for cardiac disease and it is uncertain
that we will be successful in demonstrating any of these
attributes.
Our competitors in the cord blood preservation industry include
the approximately 20 other national private family cord blood
banks in the United States, including California Cryobank, Cbr
Systems (Cord Blood Registry), Cryo-Cell International, CorCell,
LifeBankUSA, and New England Cord Blood Bank. Some of our
competitors, including Cryo-Cell, CorCell, and LifeBankUSA,
charge a lower price for their products than we do. Other
competitors such as LifeBankUSA, a division of Celgene, a
publicly traded corporation, may have greater financial
resources than we do. There are also more than fifty public cord
blood banks throughout the world, including the New York Blood
Center (National Cord Blood Program), University of Colorado
Cord Blood Bank, Milan Cord Blood Bank, Düsseldorf Cord
Blood Bank, and others. Our ability to compete with other
private family and public cord blood banks will depend on our
ability to distinguish ourselves as a leading provider of
comprehensive, quality cord blood preservation products with
clinical stem cell transplant experience and a research and
development organization focused on the development and
commercialization of cell therapies derived from cord blood. Our
ability to compete with public cord blood banks will also depend
on the extent to which related cord blood transplants show
better efficacy and safety than unrelated cord blood transplants.
Our competitors in oocyte preservation are expected to include
IVF centers and individual companies that offer oocyte
preservation. We are aware of approximately 20 IVF centers
already offering oocyte preservation, which may make it more
difficult for us to establish our product or achieve a
significant market share. IVF centers currently offering this
service include Florida Institute for Reproductive Medicine,
Stanford University, The Jones Institute for Reproductive
Medicine, and Egg Bank USA (through Advanced Fertility Clinic).
Companies offering oocyte preservation include Extend Fertility.
Our ability to compete with these entities will depend on our
ability to demonstrate the success of our oocyte preservation
method with healthy births from previously cryopreserved
oocytes, as well as our ability to distinguish ourselves as a
leading provider of a high quality oocyte preservation product
and our ability to prevent others from using our proprietary
method. We anticipate that we will face increased competition in
the future from new companies and individual IVF centers that
offer oocyte cryopreservation using alternative methods.
Cord Blood Stem Cell Act. The Cord Blood Stem Cell Act of
2003, or the CBSCA, is currently being considered by the
U.S. Congress. If enacted, it would provide federal funding
for a national system of public cord blood banks in order to
increase the number of available cord blood units to at least
150,000 units. It also contains provisions designed to
encourage cord blood donations from an ethnically diverse
population. Under the CBSCA, a public cord blood bank could
obtain federal funding from this program if the bank meets
eligibility requirements established by the CBSCA. The CBSCA is
not applicable to family cord blood banks such as Viacord, and
Viacord would not be eligible for federal funding under the
CBSCA.
ViaCell plans to obtain cord blood units to manufacture CB001
from public cord blood banks. An increase in the number and
availability of public cord blood units could increase the
available units for use in manufacturing CB001. Alternatively,
an increase in the number of available cord blood units in
public banks could have an adverse effect on the market for
CB001 or other of our potential cell therapy products. If public
cord blood banks are able to increase their inventories and
obtain more units with a higher volume of stem cells, then
public cord blood banks may be able to better compete with our
potential cell therapy products.
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Government Regulation
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Regulations Relating to ViaCell |
Virtually all of the products we develop will require regulatory
approval, or licensure, by governmental agencies prior to
commercialization, including the FDA. We must obtain similar
approvals from comparable agencies in most foreign countries.
Regulatory agencies have established mandatory procedures and
safety standards that apply to preclinical testing and clinical
trials, as well as to the manufacture and marketing of
pharmaceutical products. State, local and other authorities may
also regulate pharmaceutical manufacturing facilities. This
regulatory process can take many years and requires the
expenditure of substantial resources.
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FDA Regulation of Biologics, Drugs, and Medical
Devices |
The FDA regulates human therapeutic products in one of three
broad categories: biologics, drugs, or medical devices.
Premarket Approval of Biologics and Drugs. The FDA
generally requires the following steps for premarket approval or
licensure of a new biological product or new drug product:
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preclinical laboratory and animal tests to assess a drugs
biological activity and to identify potential safety problems; |
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submission to the FDA of an investigational new drug or IND
application, which must receive FDA clearance before clinical
trials may begin; |
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adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product for its intended
indication; |
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compliance with cGMP regulations and standards; |
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submission to the FDA of a biologics license application
(BLA) or new drug application (NDA) for marketing that
includes adequate results of preclinical testing and clinical
trials; and |
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FDA review of the marketing application in order to determine,
among other things, whether the product is safe, effective and
potent for its intended uses. |
Typically, clinical testing involves a three-phase process
although the phases may overlap. Phase I clinical trials
typically involve a small number of healthy volunteers or
patients (10-30) and are designed to provide information about
both product safety and the expected dose of the drug.
Phase II clinical trials generally provide additional
information on dosing and safety in a limited patient population
(40-100). Phase III clinical trials are generally
large-scale, well-controlled studies of 80-200 or more patients.
The goal of Phase III clinical trials generally is to
provide statistically valid proof of efficacy, as well as safety
and potency. During all phases of clinical development,
regulatory agencies require extensive monitoring and auditing of
all clinical activities, clinical data and clinical trial
investigators.
Preparing marketing applications involves considerable data
collection, verification, analysis and expense. In responding to
the submission of a BLA or NDA, the FDA must first grant filing
and review of the BLA or NDA for a specific indication.
Following review of the BLA or NDA, the FDA may request
additional clinical data or deny approval or licensure of the
application if it determines that the application does not
satisfy its approval criteria. In addition, the manufacturing
facilities must be inspected and found to be in full compliance
with cGMP standards before approval for marketing. Further
clinical trials may be required to gain approval to promote the
use of the product for any additional indications. Such
additional indications are obtained through the approval of a
supplemental BLA or NDA.
Premarket Clearance or Approval of Medical Devices.
Medical devices are also subject to extensive regulation by the
FDA, including 510(k) clearance or PMA approval prior to
commercial distribution in the United States. Depending on the
risk posed by the medical device, there are two pathways for FDA
marketing clearance of medical devices. For devices deemed by
FDA to pose relatively less risk (Class I or Class II
devices), manufacturers must submit a premarket notification
requesting permission for commercial distribution; this is known
as 510(k) clearance. To obtain 510(k) clearance, the premarket
notification must demonstrate that the proposed device is
substantially equivalent in intended use and in
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safety and effectiveness to a previously 510(k) cleared device
or a device that was commercially distributed before
May 28, 1976 and for which FDA has not yet called for
submission of a PMA. Some low risk devices are exempt from
510(k) clearance requirements.
The other pathway, PMA approval, is required for devices deemed
to pose the greatest risk (e.g., life-sustaining,
life-supporting, or implantable devices) or devices deemed not
substantially equivalent to a previously 510(k) cleared device
or to a class III device for which PMA applications have
not been called. The PMA approval pathway is much more costly,
lengthy, and uncertain than the 510(k) clearance pathway. A PMA
applicant must provide extensive preclinical and clinical trial
data as well as information about the device and its components
regarding, among other things, device design, manufacturing, and
labeling. As with BLA and NDA submissions, FDA must first grant
filing and review of the PMA for a specific indication. FDA
review of the PMA typically takes one to three years, but may
last longer, especially if the FDA asks for more information or
clarification of information already provided. As part of the
PMA review, the FDA will typically inspect the
manufacturers facilities for compliance with the Quality
System Regulation, or QSR, requirements, which impose elaborate
testing, control, documentation and other quality assurance
procedures.
The FDA generally requires manufacturers of medical device kits
to obtain 510(k) clearance or PMA approval of the kits before
marketing them in interstate commerce. Some kits are exempt from
these requirements. Devices and media for cryopreservation of
oocytes are generally subject to 510(k) clearance.
Medical device manufacturers are required to comply with
numerous regulatory requirements, including:
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QSRs, which require manufacturers to follow elaborate design,
testing, control, documentation, and other quality assurance
procedures during the manufacturing process; |
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labeling regulations; |
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FDAs general prohibition against promoting products for
unapproved or off-label uses; |
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Medical Device Reporting regulation, which requires
manufacturers to report to the FDA if their device may have
caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to
a death or serious injury if it were to recur; and |
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special controls, such as performance standards, post-market
surveillance, patient registries, and FDA guidelines that apply
to Class II devices. |
Compliance Requirements after BLA Licensure, NDA Approval,
510(k) Clearance, or PMA Approval. Manufacturers of BLA
licensed, NDA approved, 510(k) cleared, or PMA approved products
must comply with FDA requirements for labeling, advertising,
promotion, record keeping, reporting of adverse experiences and
other reporting requirements. Violations of FDA or other
governmental regulatory requirements during either the pre- or
post-marketing stages may result in various adverse
consequences, including:
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issuance of warning letters; |
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fines, injunctions, and civil penalties; |
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recall or seizure of products; |
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cessation of clinical studies; |
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operating restrictions, partial suspension or total shutdown of
production; |
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the FDAs delay in granting BLA licensure, NDA approval,
510(k) clearance, or PMA approval or refusal to grant BLA
licensure, NDA approval, 510(k) clearance, or PMA approval of
new products; |
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withdrawal of the BLA licensed, NDA approved, 510(k) cleared, or
PMA approved product from the market; or |
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the imposition of civil or criminal penalties against the
manufacturer, responsible persons within the company and/or
holder of the BLA license, NDA approval, 510(k) clearance, or
PMA approval. |
Products developed using our Selective Amplification technology
will be regulated as biological products. If we receive
marketing approval or licensure, we must comply with the above
FDA requirements. Discovery of previously unknown problems with
a marketed product may result in either FDA compliance action or
voluntary withdrawal of the product from the market, which could
reduce our revenue sources and hurt our financial results.
Additionally, we will most likely have to obtain approval for
manufacturing and marketing of each product from regulatory
authorities in foreign countries prior to the commencement of
marketing of the product in those countries. The approval
procedure varies among countries, may involve additional
preclinical testing and clinical trials, and the time required
may differ from that required for FDA approval or licensure.
Although there is now a centralized European Union approval
mechanism in place, each European country may nonetheless impose
its own procedures and requirements, many of which could be
time-consuming and expensive. Additionally, European approval
standards for cellular therapy are still under development and
consequently approval of cell therapy products in Europe may
require additional data that we may not be able to satisfy.
Privacy Law. Federal and state laws govern our ability to
obtain and, in some cases, to use and disclose data we need to
conduct research activities. Through the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, Congress
required the Department of Health and Human Services to issue a
series of regulations establishing standards for the electronic
transmission of certain health information. Among these
regulations were standards for the privacy of individually
identifiable health information. Most health care providers were
required to comply with the Privacy Rule as of April 14,
2003.
Because ViaCell does not engage in certain electronic
transactions related to reimbursement for health care, ViaCell
is not a covered health care provider subject to the Privacy
Rule. Many of the health care providers and research
institutions with whom we collaborate, however, are subject to
the Privacy Rule. These entities may share identifiable patient
information with ViaCell for our research purposes only as
permitted by the Privacy Rule (for example, with written patient
authorizations which comply with certain detailed requirements).
Although ViaCell is not directly subject to the Privacy Rule, we
could face substantial criminal penalties if we knowingly
receive individually identifiable health information from a
research collaborator who has not satisfied the Privacy
Rules disclosure requirements.
HIPAA does not preempt, or override, state privacy laws that
provide even more protection for individuals health
information. These laws requirements could further
complicate our ability to obtain necessary research data from
our collaborators. In addition, certain state privacy and
genetic testing laws may directly regulate our research
activities, affecting the manner in which we use and disclose
individuals health information, potentially increasing our
cost of doing business, and exposing us to liability claims. In
addition, patients and research collaborators may have
contractual rights that further limit our ability to use and
disclose individually identifiable health information. Claims
that we have violated individuals privacy rights or
breached our contractual obligations, even if we are not found
liable, could be expensive and time-consuming to defend and
could result in adverse publicity that could harm our business.
Other Regulations. In addition to privacy law
requirements and regulations enforced by the FDA, we also are
subject to various local, state and federal laws and regulations
relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the
use and disposal of hazardous or potentially hazardous
substances, including chemicals, micro-organisms and various
radioactive compounds used in connection with our research and
development activities. These laws include the Occupational
Safety and Health Act, the Toxic Test Substances Control Act and
the Resource Conservation and Recovery Act. Although we believe
that our safety procedures for handling and disposing of these
materials comply with the standards prescribed by state and
federal regulations, we cannot assure you that accidental
contamination or injury to employees and third parties from
these materials will not occur. We may not have adequate
insurance to cover claims arising from our use and disposal of
these hazardous substances.
26
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Regulations Relating To Viacord |
FDA Regulations. The Viacord cord blood preservation
product is subject to FDA regulations requiring infectious
disease testing. We have registered Viacord with the FDA as a
cord blood preservation service, listed our products with the
FDA, and are subject to FDA inspection. In addition, the FDA has
recently adopted good tissue practice (GTP) regulations
that establish a comprehensive regulatory program for human
cellular and tissue-based products and finalized rules for donor
eligibility and that will become effective in May of 2005. We
believe that we comply with existing regulatory requirements and
will be in compliance with the new GTP regulations as recently
adopted. Furthermore, the FDA may develop standards for these
products.
Consistent with industry practice, the Viacord cord blood
collection kits have not been cleared as a medical device. The
FDA could at any time require us to obtain 510(k) clearance or
PMA approval for the collection kits. Securing any necessary
medical device clearance or approval for the cord blood
collection kits may involve the submission of a substantial
volume of data and may require a lengthy substantive review. The
FDA also could require that we cease distributing the collection
kits and require us to obtain 510(k) clearance or PMA approval
prior to further distribution of the kits.
Privacy Law. Federal and state privacy laws govern our
ability to obtain and, in some instances, to use and disclose
identifiable patient information. Because blood and tissue
procurement and banking activities are expressly exempted from
the scope of the Privacy Rule, we are not a covered health care
provider subject to the Privacy Rule. The Privacy Rule
indirectly impacts us to the extent that hospitals,
obstetricians, and other health care providers who enroll our
customers and transfer to us umbilical cord blood (and, in the
future, human oocytes) are subject to HIPAA. These providers may
share with us identifiable information about individuals only as
permitted by the Privacy Rule. Although we are not directly
subject to the Privacy Rule, we could still face substantial
criminal penalties if we knowingly receive individually
identifiable health information from a health care provider who
has not satisfied the Privacy Rules disclosure
requirements. In addition, certain state privacy laws may apply
directly to us, restricting how we may use and disclose
individually identifiable health information.
Moreover, patients and participating health care providers may
have contractual rights that further limit our ability to use
and disclose individually identifiable health information.
Claims that we have violated individuals privacy rights or
breached our contractual obligations, even if we are not found
liable, could be expensive and time-consuming to defend and
could result in adverse publicity that could harm our business.
Other Regulations. Regulation of cord blood preservation
in foreign jurisdictions is still evolving. Of the states in
which we provide cord blood preservation services, only New
Jersey, New York, Maryland, Kentucky, Illinois and Pennsylvania
currently require that cord blood banks be licensed or
registered. We are currently licensed or registered to operate
in New Jersey, New York, Kentucky and Illinois and we believe
that we will be able to comply with the license and registration
requirements in Maryland and Pennsylvania, which we recently
identified. If we identify other states with requirements or if
other states adopt requirements for licensing or registration of
cord blood services, we would have to obtain licenses or
registration to continue providing services in those states.
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Regulations Relating To Oocyte Cryopreservation |
There are no established precedents related to the US and
international regulation of oocyte cryopreservation. In the
United States, we anticipate that the cryopreservation of
oocytes may be regulated similarly to Viacords family
umbilical cord blood cryopreservation service (Public Health
Service Act, Section 361). This means that clinical trials
to establish safety and efficacy will not be required to
commercialize the service, however, under this regulatory
mechanism, we will not be able to make safety and efficacy
claims related to the service in advertising and promotional
materials.
The FDA will require some of the components used in the process
to be regulated as medical devices and cleared through the
agencys 510(k) process. Prior to marketing Viacyte, 510(k)
clearance must be
27
obtained from the FDA for our proprietary oocyte cryopreserving
media. Our media supplier submitted a 510(k) on
November 12, 2004. The 510(k) clearance process typically
takes three to twelve months from the time of submission to
being able to market a product, but can take significantly
longer. In November of 2004, our media supplier submitted a
510(k) to the FDA for clearance of the oocyte cryopreservation
media. In January of 2005, our media supplier informed us that
they had received a letter from the FDA that included the
following information:
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a statement that our media supplier will need to conduct a
clinical study that produces pregnancy and birth rates data to
support the application; and |
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a request that various additional information be submitted,
including stability, toxicity testing, biocompatibility and
labeling information. |
Clinical data were not included in the original 510(k)
application. Our media supplier has responded to the FDA letter
and submitted existing, published third party clinical data and
additional information to the pending 510(k) application. We
believe that the existing, published clinical data may be
sufficient to support 510(k) clearance of the media; however, it
is likely that a new clinical trial will be required which could
substantially delay 510(k) clearance and our launch of Viacyte
until at least 2007.
In addition, although the letter from the FDA did not suggest
that any other approval process would be required other than the
510(k) process, the FDA could at any time determine that some of
the components used to cryopreserve the oocytes require PMA
approvals, which would increase the planned developmental
timeline for commercialization of this service. Clinical trials
required to support either a 510(k) or PMA submission for the
oocyte cryopreservation media would need to be conducted in
accordance with the FDA device regulations.
We anticipate that we may be required to register any long-term
cryopreservation facility with the FDA as a tissue banking
service, list our products with the FDA, and will be subject to
FDA inspection. Our facility would also be subject to the
recently adopted GTP regulations that establish a comprehensive
regulatory program for human cellular and tissue-based products
as well as just finalizing rules for donor eligibility. There
may also be state specific license requirements that may also be
required for the operation of a long-term cryopreservation
facility.
Regulations for the cryopreservation of oocytes in foreign
jurisdictions have not yet been investigated, however we
anticipate that we will encounter similar regulatory mechanisms
as those planned by the FDA, and that these mechanisms will vary
on a country-by-country basis.
Employees
As of December 31, 2004, we employed 181 individuals, of
which 17 hold an M.D. or Ph.D. degree. 96 of our employees are
engaged in cord blood commercial operations, 49 are engaged in
research and development activities, and 36 are engaged in
senior management and administrative functions. Of our 181
employees, 165 are based in the United States, 9 are in Germany
and 7 are in Singapore. All of our employees are at-will
employees, other than Marc Beer, Chris Adams, Stephen Dance,
Kurt Gunter, Morey Kraus and Stephan Wnendt, who have employment
agreements, and our employees in Germany who have local
employment agreements. None of our employees is represented by a
labor union or is covered by collective bargaining agreements.
We have not experienced any work stoppages, and believe we
maintain satisfactory relations with our employees.
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ITEM 2. |
DESCRIPTION OF PROPERTY |
We currently lease and occupy two facilities in Massachusetts,
with development and clinical trial-scale manufacturing
operations in Worcester and our corporate headquarters in
Cambridge, Massachusetts. Our operations in Worcester total
approximately 11,000 square feet of space. Our corporate
headquarters, which also house our cord blood preservation
sales, customer support, marketing and administrative personnel,
comprise approximately 18,000 square feet of office space.
We have also leased approximately 25,000 square feet of
laboratory space in the same facility for a term of ten years,
expiring in 2014. We are
28
currently building out the laboratory space and expect to move
our operations currently in Worcester into this location in the
second half of 2005. The majority of the build-out costs will be
covered by a tenant improvement allowance from the landlord. We
have negotiated early termination of the Worcester lease
coincident with the planned completion of that move, without
incurring any penalty. The annual rent for this new leased
facility is approximately $1.4 million in the first year,
increasing to $1.7 million by the end of the term,
inclusive of maintenance expenses.
We operate our cord blood processing and storage facility in
Hebron, Kentucky, with over 12,000 square feet of
laboratory and administrative office space, under a lease
extending to 2012, with two successive five-year extension
options and a right of first offer to re-lease the
space from the landlord at the end of the lease term. We also
lease approximately 3,800 square feet of laboratory space
to house our research operations in Singapore, and, as a result
of our acquisition of Kourion Therapeutics, we lease
approximately 17,000 square feet of laboratory and
administrative space in Langenfeld, Germany; the leases expire
in 2007 and 2008, respectively, although we can extend the
German lease for up to an additional five years. We intend to
transfer our German operations to the United States in 2005 and
close our operations there and in January, 2005 we entered into
an agreement with a third party to sub-lease our German facility
for the next two years, with options to extend the sub-lease
through the end of our lease term.
In the future, we may require additional facilities to expand
our research and development and cord blood processing
activities or to assume commercial manufacturing operations.
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ITEM 3. |
LEGAL PROCEEDINGS |
We were sued by PharmaStem Therapeutics, Inc. for allegedly
infringing two patents relating to our Viacord umbilical cord
stem cell cryopreservation business after we rejected
PharmaStems initial requests seeking a license arrangement
because we believe that we do not infringe these patents and
that they are invalid. PharmaStem filed a complaint on
February 22, 2002 and an amended complaint on
March 25, 2002, against us and several other defendants in
the United States District Court for the District of Delaware,
alleging infringement of US Patents No. 5,004,681 and
No. 5,192,553, which relate to certain aspects of the
collection, cryopreservation and storage of hematopoietic stem
cells and progenitor cells from umbilical cord blood. We
counterclaimed that the patents are invalid and unenforceable,
and for violation of the antitrust laws resulting from an
improper use of PharmaStems patents, and sought a
declaration of non-infringement. Following an October 2003
trial, the jury ruled against us and the other defendants, Cbr
Systems, CorCell and Cryo-Cell, who represent a majority of the
family cord blood preservation industry, and a judgment was
entered against us for approximately $2.9 million, based on
6.125% royalties on our revenue from the processing and storage
of umbilical cord blood since April 2000. The jury also found
that our infringement was willful. Following the trial, we
placed the amount of the award in an escrow account pending
final disposition of this case.
On September 15, 2004, the Delaware Court overturned the
earlier judgment against ViaCell. The Court ruled that we did
not infringe the 553 method patent as a matter of law, and
ordered a new trial on infringement and damages, if any, related
to the 681 composition patent. PharmaStems motions
for an injunction against us and the other defendants and for
prejudgment and postjudgment interest, as well as enhanced
damages and attorneys fees based upon the jurys
finding of willful infringement, were denied. The judge also
denied our motion challenging the validity and enforceability of
the patents. On September 24, 2004, our $2.9 million
escrow payment was released to the Company. On December 14,
2004, the Delaware Court reversed its post-trial ruling granting
a new trial on the issues of infringement and damages (if any)
of the 681 composition patent and overturned the
jurys verdict of infringement of that patent. In its
September and December 2004 decisions, the judge found that
there was no legally sufficient basis for finding infringement
of either PharmaStem patent. With respect to the 681
patent for which a new trial was granted, PharmaStem filed a
motion on October 5, 2004 with the court for a preliminary
injunction. Also on October 5, 2004, we filed a complaint
with the Delaware court, alleging antitrust and trade violations
by PharmaStem concerning misuse of its patents and other
deceptive business practices. The court held a hearing on these
motions on November 3, 2004, and denied PharmaStems
29
motion for a preliminary injunction on December 14, 2004
when it overturned the jury verdict on that patent. On
January 6, 2005, PharmaStem filed a Notice of Appeal and a
Motion to Expedite the Appeal of the Courts decision. On
February 15, 2005, PharmaStems Motion to Expedite the
Appeal was denied. PharmaStems appeal brief was filed on
March 22, 2005.
In August 2004, the US Patent and Trademark Office (US PTO)
ordered the re-examination of both the 553 method patent
and the 681 composition patent based on the prior art. On
February 2, 2005, the PTO issued an Office Action rejecting
all claims of the 553 patent as invalid over prior art.
PharmaStem has until April 2, 2005 to respond to this
Office Action. We expect that the PTO will issue an Office
Action relating to the 681 composition patent shortly.
Should the US PTO find the claims of these patents to be
unpatentable, then the litigation proceedings between ViaCell
and PharmaStem with respect to the unpatentable claims would
cease. If the Courts judgment as to non-infringement of
the 553 or 681 patent is reversed on appeal and if
we are subsequently enjoined from further engaging in our
umbilical cord stem cell cryopreservation business, we will not
be able to conduct this business unless PharmaStem grants a
license to us, which PharmaStem previously informed us that it
would not do after October 15, 2004. While we do not
believe this outcome is likely, if, in the event of an
injunction, we are not able to obtain a license under the
disputed patents or operate under an equitable doctrine known as
intervening rights, we will be required to stop
preserving and storing cord blood and to cease using
cryopreserved umbilical cord blood as a source for stem cell
products.
PharmaStem also filed a complaint against us on July 29,
2004 in the United States District Court for the District of
Massachusetts, alleging infringement of US Patents
No. 6,461,645 and 6,569,427, which also relate to certain
aspects of the collection, cryopreservation and storage of
hematopoietic stem cells and progenitor cells from umbilical
cord blood. By agreement of the parties, ViaCell responded to
the complaint on December 16, 2004. We continue to believe
that the patents in this new Massachusetts action are invalid
and that we do not infringe them in any event. On
January 7, 2005, PharmaStem filed a Motion for Preliminary
Injunction in the Massachusetts litigation. That Motion is
currently stayed. If this Motion is granted, we could be
enjoined from collecting and storing cord blood that had not
been collected as of the date the injunction is issued while the
case is litigated and thereafter if we lose the case. We believe
that the issues presented in PharmaStems Motion are
substantially the same as the issues presented in the Delaware
litigation and, while no assurance can be given, we believe that
PharmaStems Motion will be denied. If we are ultimately
found to infringe, we could have a significant damages award
entered against us, and we could also face an injunction which
could prohibit us from further engaging in the umbilical cord
stem cell business absent a license from PharmaStem on the
disputed patents. We believe the issues presented in this case
are substantially the same as the issues presented in the
Delaware litigation. Accordingly, we filed a motion to
consolidate the Massachusetts case with six other actions
against other defendants in a single proceeding in the District
of Delaware. On January 21, 2005, the Massachusetts case
was stayed pending a ruling on this request. On
February 16, 2005, our request was granted. The cases have
thus been consolidated in Delaware.
The timing and order of the litigations involving ViaCell and
PharmaStem are not presently known. Decisions in the
re-examination proceedings, now pending before the US PTO, of
the 681 and 553 patents may also affect these
factors.
We may enter into settlement negotiations with PharmaStem
regarding our litigation with PharmaStem. We cannot predict
whether any such negotiations would lead to a settlement of
these lawsuits or what the terms or timing of any such
settlement might be, if it occurs at all.
On May 13, 2004, we received a First Amended Complaint
filed in the Superior Court of the State of California by
Kenneth D. Worth, by and for the People of the State of
California, and naming as defendants a number of private cord
blood banks, including us. The complaint alleges that the
defendants have made fraudulent claims in connection with the
marketing of their cord blood banking services and seeks
restitution for those affected by such marketing, injunctive
relief precluding the defendants from continuing to abusively
and fraudulently market their services and requiring them to
provide certain
30
information and refunds to their customers, unspecified punitive
and exemplary damages and attorneys fees and costs.
Subsequently, we received a Notice of Ex Parte Application for
Leave to Intervene filed on behalf of the Cord Blood Foundation
by the same individual and seeking similar relief. On
October 7, 2004, the Court orally granted a motion to
strike the complaint under the California anti-SLAPP statute and
dismissed the complaint as to all defendants without leave to
amend. Judgment has been entered, dismissing the complaint, and
plaintiff has filed a notice of appeal and a petition for a writ
of mandate. The petition has been dismissed and we believe that
the appeal will proceed. We are not yet able to conclude as to
the likelihood that the plaintiffs claims would be upheld
if the judgment of dismissal were reversed on appeal, nor can we
estimate the possible financial consequences should the
plaintiff prevail. However, we believe this suit to be without
merit and intend to continue to vigorously defend ourselves
until the judgment becomes final.
On February 24, 2005, Cbr Systems, Inc., a private cord
blood banking company, filed a complaint against us in the
United States District Court for the Northern District of
California alleging false and misleading advertising by us in
violation of the federal Lanham Act and various California
statutes and common law and seeking an injunction from
continuing such advertising and unspecified damages. We are
evaluating Cbrs allegations and intend to vigorously
defend ourselves in this action.
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ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
On December 30, 2004, our stockholders authorized by
written consent the following actions:
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the amendment of our corporate charter to adjust the minimum
initial public offering price required under the corporate
charter to implement the automatic conversion of our preferred
stock into common stock; |
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an increase in the number of shares of common stock available
for issuance under our Amended and Restated 1998 Equity
Incentive Plan by 1,200,000 shares to a total of
7,200,000 shares; |
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the further amendment and restatement of our Amended and
Restated 1998 Equity Incentive Plan with amended provisions
which became effective upon the closing of the initial public
offering of our common stock; |
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the approval and adoption of our 2004 Employee Stock Purchase
Plan, which became effective upon the closing of the initial
public offering of our common stock; and |
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the approval of a research agreement entered into with Genzyme
Corporation. |
All such actions were effected pursuant to an action by written
consent of our stockholders. The written consent was adopted by
holders of 18,395,535 shares of our stock out of
28,813,999 shares issued and outstanding as of
October 23, 2004, including 17,695,535 shares out of
26,052,413 shares of our Series A, Series B,
Series D, Series E, Series F, Series G,
Series H, Series I, Series J and Series K
preferred stock issued and outstanding.
PART II
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ITEM 5. |
MARKET FOR THE REGISTRANTS COMMON STOCK, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Market for Common Equity
Our common stock has been traded on the NASDAQ National Market
System under the symbol VIAC since January 21,
2005. Prior to that time there was no established public trading
market for our common stock. The closing share price for our
common stock on March 29, 2005, as reported by the NASDAQ
National Market System, was $8.35.
31
Holders
As of March 28, 2005, there were approximately 193
stockholders of record of our common stock.
Dividends
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all of our future earnings
to finance the growth and development of our business. We do not
intend to pay cash dividends to our stockholders in the
foreseeable future.
Sales of Unregistered Securities
During 2004, we issued 104,107 shares of common stock to
employees, former employees, consultants and directors upon
option exercises for compensation for services provided, for an
aggregate sale price of approximately $249,001. We also granted
options to employees, consultants and directors to purchase
903,500 shares of common stock at an exercise price of
$5.00 per share. There were no underwriters employed in
connection with any of these transactions. Each option grant and
stock issuance was deemed exempt from registration under the
Securities Act under Rule 701 promulgated thereunder,
because the security was offered and sold pursuant to either a
written compensatory plan or a written contract relating to
compensation.
Use of Proceeds from Registered Securities.
We registered shares of our common stock in connection with our
initial public offering under the Securities Act of 1933, as
amended. Our Registration Statement on Form S-1 (Reg.
No. 333-114209) in connection with our initial public
offering was declared effective by the SEC on January 19,
2005. The offering commenced as of January 20, 2005.
8,625,000 shares of our common stock registered were sold
in the offering. The offering did not terminate before any
securities were sold. We completed the offering on
January 26, 2005. Credit Suisse First Boston and UBS
Investment Bank were the managing underwriters.
All 8,625,000 shares of our common stock registered in the
offering were sold, with an initial public offering price per
share of $7.00. The aggregate purchase price of the offering was
$60,375,000, of a maximum potential registered aggregate
offering price of $92,000,000. The net offering proceeds to us
after deducting total related expenses will be approximately
$53,600,000.
No payments for the above expenses nor other payments of
proceeds were made directly or indirectly to (i) any of our
directors, officers or their associates, (ii) any person(s)
owning 10% or more of any class of our equity securities or
(iii) any of our affiliates.
There has been no material change in the planned use of proceeds
from our initial public offering as described in our final
prospectus filed with the SEC pursuant to Rule 424(b).
Pending the use of such proceeds, the proceeds were invested
into short-term, investment grade, interest bearing securities.
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ITEM 6. |
SELECTED CONSOLIDATED FINANCIAL DATA |
In the tables below, we provide you with our selected historical
financial data. We have prepared this information using the
consolidated financial statements for the five years ended
December 31, 2004. The financial statements for each of the
years ended December 31, 2004, 2003, 2002 and 2001 have
been audited by PricewaterhouseCoopers LLP, independent
registered public accounting firm. The financial statements for
the year ended December 31, 2000 have been audited by
Arthur Andersen LLP, independent public accountants.
When you read this summary historical financial data, it is
important that you read along with it the consolidated financial
statements and related notes to the financial statements
appearing elsewhere in this
32
report and Managements Discussion and Analysis of
Financial Condition and Results of Operations. Historical
results are not necessarily indicative of the results that may
be expected in the future.
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Years Ended December 31, | |
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2004 | |
|
2003(1) | |
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2002 | |
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2001 | |
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2000 | |
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(In thousands, except share and per share data) | |
Consolidated Statement of Operations Data:
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Revenues
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$ |
38,274 |
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$ |
31,880 |
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$ |
20,375 |
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$ |
7,298 |
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$ |
2,394 |
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Operating expenses:
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Cost of processing and storage revenues:(2)
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Direct costs
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7,364 |
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|
7,141 |
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|
5,877 |
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|
|
3,070 |
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|
|
991 |
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Royalty (recovery) expense
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(3,258 |
) |
|
|
3,258 |
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Total cost of revenues
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|
4,106 |
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|
|
10,399 |
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|
|
5,877 |
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|
|
3,070 |
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|
|
991 |
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Research and development
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15,134 |
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|
13,226 |
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|
11,429 |
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|
6,978 |
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|
3,854 |
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Sales and marketing
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19,322 |
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|
20,959 |
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|
16,578 |
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|
9,349 |
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|
|
2,177 |
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General and administrative
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|
13,468 |
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|
15,222 |
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10,920 |
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|
7,086 |
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|
3,879 |
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In-process technology(3)
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23,925 |
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|
5,889 |
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|
|
594 |
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Stock-based compensation(4)
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|
3,429 |
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|
3,232 |
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|
6,464 |
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|
|
4,490 |
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|
|
196 |
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Restructuring
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|
2,945 |
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Total operating expenses
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58,404 |
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|
|
86,963 |
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|
|
57,157 |
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|
|
31,567 |
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|
|
11,097 |
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Operating loss
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|
(20,130 |
) |
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|
(55,083 |
) |
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|
(36,782 |
) |
|
|
(24,269 |
) |
|
|
(8,703 |
) |
Interest (expense) income, net
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|
(967 |
) |
|
|
(385 |
) |
|
|
744 |
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|
|
2,136 |
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|
|
991 |
|
Income taxes
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Net loss
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$ |
(21,097 |
) |
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$ |
(55,468 |
) |
|
$ |
(36,038 |
) |
|
$ |
(22,133 |
) |
|
$ |
(7,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(34,168 |
) |
|
$ |
(64,884 |
) |
|
$ |
(44,182 |
) |
|
$ |
(28,753 |
) |
|
$ |
(10,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
$ |
(17.60 |
) |
|
$ |
(12.22 |
) |
|
$ |
(5.55 |
) |
Weighted average shares used in computing net loss per common
share, basic and diluted
|
|
|
2,707,219 |
|
|
|
2,634,096 |
|
|
|
2,510,632 |
|
|
|
2,352,468 |
|
|
|
1,849,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003(1) | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per share data) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short- and long-term investments
|
|
$ |
28,585 |
|
|
$ |
46,832 |
|
|
$ |
29,188 |
|
|
$ |
53,787 |
|
|
$ |
55,287 |
|
Working capital
|
|
|
14,437 |
|
|
|
22,857 |
|
|
|
25,407 |
|
|
|
46,062 |
|
|
|
53,144 |
|
Total assets
|
|
|
61,091 |
|
|
|
78,161 |
|
|
|
56,119 |
|
|
|
70,981 |
|
|
|
67,775 |
|
Long-term debt obligations, including current portion
|
|
|
18,737 |
|
|
|
19,238 |
|
|
|
5,173 |
|
|
|
1,586 |
|
|
|
656 |
|
Redeemable convertible preferred stock
|
|
|
175,173 |
|
|
|
162,141 |
|
|
|
110,912 |
|
|
|
101,268 |
|
|
|
79,727 |
|
Total stockholders deficit
|
|
|
(160,957 |
) |
|
|
(130,151 |
) |
|
|
(70,487 |
) |
|
|
(38,749 |
) |
|
|
(15,376 |
) |
33
|
|
(1) |
We acquired Kourion Therapeutics in September 2003, and our
financial results for the year ended December 31, 2003
include the results of Kourion Therapeutics operations for
the three months ended December 31, 2003. Had we included
the results of Kourion Therapeutics operations for the
full fiscal year 2003, we would have reported additional
revenues, operating expenses and net loss of $0.6 million,
$2.8 million and $2.1 million, respectively. |
|
(2) |
In October 2003, a jury awarded PharmaStem a royalty of
$2.9 million on our cord blood banking revenues through
October 29, 2003, based on a claim of patent infringement.
As a result we recorded an expense of $3.3 million,
included in cost of revenues, in the fourth quarter of 2003 to
cover our exposure for the jury award to PharmaStem plus 6.125%
of our revenues for the remainder of 2003. We also recorded an
expense of $0.5 million for the three months ended
March 31, 2004, also based on 6.125% of our revenues. In
September 2004, the federal district court overturned the jury
verdict on one of the two patents in litigation and vacated the
verdict and granted a new trial on the issues of infringement
and damages (if any) concerning the second patent. Based on the
judges ruling, we reversed the entire royalty accrual of
$3.8 million in the quarter ended June 30, 2004. On
December 14, 2004, the federal district court reversed its
post-trial ruling granting a new trial on the issues of
infringement and damages (if any) of the second patent and
overturned the jurys verdict of infringement of that
patent. In his September and December 2004 decisions, the judge
found that there was no legally sufficient basis for finding
infringement of either PharmaStem patent. |
|
(3) |
In-process technology expense for the year ended
December 31, 2003 included $22.1 million, being the
fair value of technology acquired in the purchase of Kourion
Therapeutics, and $1.8 million in respect of technology
acquired from Amgen and GlaxoSmithKline. The expense in the
years ended December 31, 2002 and 2001 represented the fair
value of warrants related to technology licensed from Amgen of
$5.9 million and stock options granted to Genzyme for a
research collaboration valued at $0.6 million, respectively. |
|
(4) |
Stock-based compensation expense represents the amortization of
the excess of the fair value on the date of grant of the stock
underlying the options granted to employees over the exercise
price and the expense related to options granted to
nonemployees. Total stock-based compensation for employees and
nonemployees for the periods reported, and the allocation of
these expenses to operating expenses, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cost of revenues
|
|
$ |
32 |
|
|
$ |
7 |
|
|
$ |
20 |
|
|
$ |
|
|
|
$ |
|
|
Research and development
|
|
|
896 |
|
|
|
1,073 |
|
|
|
2,489 |
|
|
|
2,249 |
|
|
|
98 |
|
Sales and marketing
|
|
|
175 |
|
|
|
414 |
|
|
|
670 |
|
|
|
222 |
|
|
|
30 |
|
General and administrative
|
|
|
2,082 |
|
|
|
1,738 |
|
|
|
3,285 |
|
|
|
2,019 |
|
|
|
68 |
|
Restructuring
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$ |
3,429 |
|
|
$ |
3,232 |
|
|
$ |
6,464 |
|
|
$ |
4,490 |
|
|
$ |
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis by our management of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements and the
accompanying notes appearing at the end of this report. This
discussion and other parts of this report contain
forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from
those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are
not limited to, those discussed in the Risk Factors That
May Affect Results section of this report.
34
Overview
We are a biotechnology company dedicated to enabling the
widespread application of human cells as medicine. To date, the
widespread application of human cells as medicine has not been
proven to be possible. We are in an early stage of development
for our cellular therapeutic products, and we are developing a
pipeline of proprietary product candidates intended to address
cancer, cardiac diseases, diabetes and infertility, and a
commercial business dedicated to the preservation of umbilical
cord blood. Our research and development efforts focus primarily
on developing cord blood-derived stem cell product candidates in
therapeutically useful quantities. We are also developing
Viacyte, a product candidate for cryopreserving and storing
human oocytes. Since our inception on September 2, 1994,
our principal activities have included:
|
|
|
|
|
developing our Selective Amplification and other stem cell
therapy technologies; |
|
|
|
expanding our ViaCell Reproductive Health franchise in the
United States; |
|
|
|
expanding our pipeline of novel stem cell and other product
candidates through internal development, and the acquisition of
third party technologies; |
|
|
|
expanding and strengthening our intellectual property position
through internal programs, third party licenses, and
acquisitions; |
|
|
|
recruiting management, research, clinical, and sales and
marketing personnel; and |
|
|
|
forming alliances with larger, more experienced biotechnology
and pharmaceutical companies, including Amgen. |
As of December 31, 2004, our accumulated deficit was
approximately $158.8 million. From inception through
December 31, 2004, we have raised $137.2 million in
common and preferred stock issuances. We have incurred net
losses since inception as a result of research and development,
sales and marketing and general and administrative expenses in
support of our operations. We anticipate incurring net losses
for at least the next several years due to:
|
|
|
|
|
the increasing costs of conducting clinical trials for our lead
hematopoietic stem cell product candidate, CB001; |
|
|
|
the working capital costs associated with anticipated growth of
our ViaCell Reproductive Health franchise within the United
States; |
|
|
|
the increasing costs associated with preclinical and clinical
studies for our other stem cell therapy product
candidates; and |
|
|
|
the increasing costs associated with the development of Viacyte,
our oocyte cryopreservation product candidate. |
Our financial success will depend on many factors, including our
ability to grow our umbilical cord blood preservation business,
establish the safety and efficacy of our therapeutic product
candidates, obtain necessary regulatory approvals and
successfully commercialize new products.
Our management currently uses consolidated financial information
in determining how to allocate resources and assess performance.
We may organize our business into more discrete business units
when and if we generate significant revenue from the sale of
stem cell therapies. For these reasons, we have determined that
we conduct operations in one business segment. Substantially all
of our revenue since inception has been generated in the United
States, and the majority of our long-lived assets are located in
the United States.
Our current revenue is derived primarily from fees charged to
families for the preservation and storage of a childs
umbilical cord blood collected at birth. These fees consist of
an initial fee for collection,
35
processing and freezing of the umbilical cord blood and an
annual fee for storage. The annual storage fee provides a
growing annuity of future revenue as the number of stored cords
increases. Our revenues are recorded net of discounts and
rebates that we offer our customers under certain circumstances
from time to time. Our revenues have increased substantially
over the last several years as the concept of cord blood banking
has gained popularity. We offer our customers the opportunity to
pay their fees directly to us or to finance them via G.E.
Capital, a third party credit provider. Since we finance some
receivables ourselves, we assume the risk of losses due to
unpaid accounts. We maintain a reserve for doubtful accounts to
allow for this exposure and consider the amount of this reserve
to be adequate at December 31, 2004. Following the
September and December 2004 rulings of the district court in the
ongoing patent litigation with PharmaStem Therapeutics, Inc.,
which overturned the jury verdict of infringement on both
PharmaStem patents at issue in such suit, we do not expect the
PharmaStem litigation to have a materially adverse impact on our
net sales, revenues or income from continuing operations.
However, should we ultimately lose this litigation, it could
have a material adverse effect on our net sales, revenue or
income from continuing operations.
In addition to the revenue generated by our ViaCell Reproductive
Health franchise, we record revenue from grant agreements with
the governments of Singapore and Germany, where we maintain
research facilities, and from contract research performed at our
research laboratories in the United States. We decided to close
our German facility in December 2004, and are transitioning
research activities that had been performed there to the United
States. Therefore, revenue from grants in Germany has ceased.
Cost of revenues reflects the cost of transporting, testing,
processing and storing umbilical cord blood at our cord blood
processing facility in Hebron, Kentucky, as well as a royalty to
PharmaStem relating to ongoing patent infringement litigation.
We recorded a royalty expense of approximately $3.3 million
in the fourth quarter of 2003 following an unfavorable jury
verdict in October 2003. This expense included a royalty of
approximately $2.9 million on revenues from cord blood
preservation through October 29, 2003, plus an accrual of a
royalty of 6.125% of subsequent revenues through
December 31, 2003. We recorded an additional royalty
expense of $0.5 million for the three months ended
March 31, 2004, also based on 6.125% of revenues. In
September 2004, the court overturned the jury verdict on one of
the two patents in litigation and vacated the verdict and
granted a new trial concerning infringement and damages, if any,
on the second patent. Based on the judges ruling, we
reversed the entire royalty accrual of $3.8 million in the
quarter ended June 30, 2004.
On December 14, 2004, the federal district court reversed
its post-trial ruling granting a new trial on the issues of
infringement and damages (if any) of the second patent and
overturned the jurys verdict of infringement of that
patent. In its September and December 2004 decisions, the judge
found that there was no legally sufficient basis for finding
infringement of either PharmaStem patent. Pending further action
by the courts, including the separate action recently filed in
Massachusetts, we do not intend to record a royalty expense in
future periods, since we believe PharmaStems claims are
without merit. It is possible that the final outcome of these
litigations could result in damages payable regarding
PharmaStems patents, at a higher or lower amount than
previously awarded by the jury in Delaware. Should this occur,
our financial position and results of operations could be
materially affected. In addition, we may enter into settlement
negotiations with PharmaStem regarding our litigation with
PharmaStem. If a settlement agreement were entered into, we do
not know whether it would provide for a payment by us of an
ongoing royalty or payment of other amounts by us to PharmaStem,
or what those amounts might be. Our cost of revenues also
include expenses incurred by third party vendors relating to the
transportation of cord blood to our processing facility and
certain assay testing performed on the cord blood before
preservation. Other variable costs include collection materials,
labor, and processing and storage supplies, while other fixed
costs include rent, utilities and other general facility
overhead expenses. Cost of revenues does not include costs
associated with our grant revenue. Such costs are included in
research and development expense.
Our research and development expenses consist primarily of costs
associated with our lead stem cell product candidate, CB001, and
the continued development of our technologies, including
Selective
36
Amplification, oocyte cryopreservation and other cellular
therapy product candidates. These expenses represent both
clinical development costs and costs associated with
non-clinical support activities such as toxicological testing,
manufacturing process development and regulatory services. The
cost of our research and development staff is the most
significant category of expense, however we also incur expenses
by external service providers, including license agreements and
consulting expenses. The major expenses relating to our CB001
clinical trial include external services provided for outside
quality control testing, clinical trial monitoring, data
management, and fees relating to the general administration of
the clinical trial. Other direct expenses relating to our CB001
clinical trial include site costs and the cost of the cord blood.
We expect that research and development expenses will continue
to increase in the foreseeable future as we add personnel,
expand our clinical trial activities and increase our discovery
research and regulatory capabilities. The amount of these
increases is difficult to predict due to the uncertainty
inherent in the timing and extent of clinical trial initiations,
the progress in our discovery research programs, the rate of
patient enrollment and the detailed design of future clinical
trials. In addition, the results from our clinical trials, as
well as the results of trials of similar therapeutics under
development by others, will influence the number, size and
duration of planned and unplanned trials. On an ongoing basis,
we evaluate the results of our product candidate programs, all
of which are currently in early stages. Based on these
assessments, for each program, we consider options including,
but not limited to, terminating the program, funding continuing
research and development with the eventual aim of
commercializing products, or licensing the program to third
parties.
We believe that it is not possible at this stage to provide a
meaningful estimate of the total cost to complete each project
and bring our product candidates to market. Cell therapy is an
emerging area of medicine, and it is not known what clinical
trials will be required by the FDA in order to gain marketing
approval. Costs to complete could vary substantially depending
on the number of clinical trials required and the number of
patients needed for each study. Over the next two years, we
anticipate spending approximately $25.0 million on clinical
studies and related development and manufacturing activities,
primarily related to our lead product candidate, CB001, in order
to complete the current Phase I clinical trial and evaluate
the commercial viability of proceeding with the next trial. We
also expect to spend approximately $3.0 million over the
next 12 to 18 months to complete existing pre-clinical
studies and related development activities in the cardiac
disease program, following which we will assess the commercial
viability of continuing this program. It is possible that the
completion of these studies could be delayed for a variety of
reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the trial
and difficulties evaluating the trial results. Any delay in
completion of a trial would increase the cost of that trial,
which would harm our result of operations. Due to these
uncertainties, we cannot reasonably estimate the size, nature
nor timing of the costs to complete, or the amount or timing of
the net cash inflows of the CB001, cardiac disease and other
product candidates. Until we obtain further relevant clinical
data, we will not be able to estimate our future expenses
related to these programs or when, if ever, and to what extent
we will ever receive cash inflows from them.
Our selling and marketing expenses relate primarily to our
ViaCell Reproductive Health franchise. The majority of these
costs relate to our sales force and support personnel, as well
as telecommunications expense related to our call center. We
also incur external costs associated with advertising, direct
mail, promotional and other marketing services. We expect that
selling and marketing expenses will increase in the foreseeable
future as we expand our sales and marketing efforts and launch
Viacyte.
Our general and administrative expenses include our costs
related to the finance, legal, human resources, information
technology, business development and corporate governance areas.
These costs consist primarily of expenses related to our staff,
as well as external fees paid to our legal and financial
advisers, business consultants and others. We expect that these
costs will increase in future years as we expand our business
activities and as we incur additional costs associated with
being a publicly-traded company.
37
In September 2004, we restructured our operations to reduce
operating expenses and concentrate our resources on four key
products and product candidates, and related business
initiatives. These products and product candidates consist of
Viacord, Viacyte, CB001 and the cardiac development program. As
a result, we recorded a $1.7 million restructuring charge
in the third quarter of 2004 related to employee severances,
contract termination costs and the write-down of excess
equipment. In December 2004 we restructured our German
operations. As a result we recorded a restructuring charge of
$1.2 million in the fourth quarter of 2004, including
facility related costs of $1.1 million and
$0.1 million related to a contract termination fee. The
majority of the facility related costs consisted of the write
off of the leasehold improvements and fixed assets in our German
facility. At December 31, 2004, restructuring charges of
$1.2 million were paid out, the net book value of fixed
assets was written down by $0.9 million and the accrued
liability relating to the restructurings was $0.9 million.
The majority of the contract termination costs relate to our
exercising the termination provision in our agreement with
Gamete Technologies, under which we were required to pay
$175,000 to Gamete Technologies.
The American Jobs Creation Act of 2004 (the Act) was
signed into law on October 22, 2004. The Act contains
numerous amendments and additions to the U.S. corporate
income tax rules. While we continue to analyze these new
provisions in order to determine their impact on our financial
statements, none of these changes, either individually or in the
aggregate, is expected to have a significant effect on our
income tax liability.
In September 2003, we acquired all outstanding shares of Kourion
Therapeutics AG in exchange for 549,854 shares of our
Series I convertible preferred stock, valued at
approximately $4.4 million, and a promissory note in the
principal amount of $14.0 million. As further potential
consideration, we issued 241,481 additional shares of
Series I convertible preferred stock to an escrow account
(escrow shares) and reserved 289,256 shares of
Series I convertible preferred stock (contingent shares)
for possible issuance in the future. Under the acquisition
agreement, we are also obligated to make payments to Kourion
Therapeutics former shareholders if certain USSC-related
product development milestones are achieved, namely:
|
|
|
|
|
$3 million if by December 31, 2006 we receive final
Phase II outcome data positive for a cardiac indication; |
|
|
|
$3 million if by June 30, 2007 we receive final
Phase II outcome data positive for a non-cardiac indication; |
|
|
|
$3 million if by December 31, 2011 we receive all
regulatory approvals to market a USSC product for cardiac
indications in the United States and the European Union; and |
|
|
|
$3 million if by December 31, 2012 we receive all
regulatory approvals to market a USSC product for non-cardiac
indications in the United States and the European Union. |
These milestones would be paid either in stock or cash at each
shareholders option. We agreed that the escrowed shares
would be released, and the contingent shares would be issued,
upon either a change in control of our company or an initial
public offering of our common stock at a price per share of at
least $9.70 resulting in net proceeds of at least
$50.0 million. Since our initial public offering in January
2005 did not trigger that issuance threshold, if a change in
control of our company does not occur prior to
September 30, 2006, the escrow shares will revert back to
us and the contingent shares will never be issued. If the
contingent shares are issued upon a change in control, the
recipients of these shares will be issued an additional number
of shares equal to 8% of the initial number of shares issued
compounded annually from the acquisition closing date to the
date of issuance. Upon the closing of our initial public
offering in January 2005, the escrow shares converted
automatically into shares of common stock along with all other
outstanding shares of Series I convertible preferred stock.
38
Results of Operations
|
|
|
Years Ended December 31, 2004, 2003 and 2002 (table
amounts in millions, year over year changes based on rounded
amounts in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Processing revenues
|
|
$ |
31.7 |
|
|
$ |
27.8 |
|
|
$ |
18.5 |
|
|
$ |
3.9 |
|
|
|
14 |
% |
|
$ |
9.3 |
|
|
|
50 |
% |
Storage revenues
|
|
|
5.1 |
|
|
|
3.1 |
|
|
|
1.6 |
|
|
|
2.0 |
|
|
|
65 |
% |
|
|
1.5 |
|
|
|
94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36.8 |
|
|
|
30.9 |
|
|
|
20.1 |
|
|
|
5.9 |
|
|
|
19 |
% |
|
|
10.8 |
|
|
|
54 |
% |
Grant and contract revenues
|
|
|
1.5 |
|
|
|
1.0 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
50 |
% |
|
|
0.7 |
|
|
|
233 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
38.3 |
|
|
$ |
31.9 |
|
|
$ |
20.4 |
|
|
$ |
6.4 |
|
|
|
20 |
% |
|
$ |
11.5 |
|
|
|
56 |
% |
The increase in processing and storage revenues of
$5.9 million or 19% from 2003 to 2004 and
$10.8 million or 54% from 2002 to 2003 was due primarily to
an increase in the number of cords processed for customers, as
well as an increase in the number of cords stored. The increase
in grant and contract revenues of $0.5 million or 50% from
2003 to 2004 and $0.7 million or 233% from 2002 to 2003 was
primarily due to the increase in grant revenue of
$0.6 million and $0.4 million in 2004 and 2003
respectively from Kourion Therapeutics, which was acquired on
September 30, 2003. From 2002 to 2003 an additional
$0.1 million in grant revenue was recorded from the
Government of Singapore and contract revenue derived from
research activities in the United States revenue decreased by
$0.2 million from 2003 to 2004 and increased by
$0.2 million from 2002 to 2003. As noted above, we will not
receive any additional German grant revenue as a result of
closing our German operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
$ |
7.4 |
|
|
$ |
7.1 |
|
|
$ |
5.9 |
|
|
$ |
0.3 |
|
|
|
4 |
% |
|
$ |
1.2 |
|
|
|
20 |
% |
|
Royalty expense
|
|
|
(3.3 |
) |
|
|
3.3 |
|
|
|
|
|
|
|
(6.6 |
) |
|
|
(200 |
)% |
|
|
3.3 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$ |
4.1 |
|
|
$ |
10.4 |
|
|
$ |
5.9 |
|
|
$ |
(6.3 |
) |
|
|
(61 |
)% |
|
$ |
4.5 |
|
|
|
76 |
% |
The increase in direct costs of $0.3 million or 4% from
2003 to 2004 and $1.2 million or 20% from 2002 to 2003 was
due primarily to increased variable expenses of
$0.2 million and $2.0 million in 2004 and 2003
relating to transportation of, materials for collecting, and
testing of the cord blood due to an increase in cords processed.
The increased costs in 2003 were offset by a decrease of
$0.8 million primarily relating to consulting costs
incurred in 2002.
The increase in royalty expense of $3.3 million or 100% in
2003 was due to our accrual of $3.3 million in connection
with the PharmaStem lawsuit, to cover our cumulative royalty
expense from August 2000 through December 31, 2003
following the jury verdict that was announced in October 2003.
The jury verdict of infringement was subsequently overturned by
the judge in September and December 2004.
The decrease in royalty expense of $6.6 million or 200% in
2004 was due to the reversal of the accrued liability in
connection with the PharmaStem lawsuit following the
judges ruling in September 2004 that overturned a prior
jury verdict, announced in October 2003, based on which we
recorded a royalty expense. On December 14, 2004, the
federal district court reversed its post-trial ruling granting a
new trial on the issues of infringement and damages (if any) of
the second patent and overturned the jurys verdict of
infringement of that patent. In its September and December 2004
decisions, the judge found that there was no legally sufficient
basis for finding infringement of either PharmaStem patent.
39
While PharmaStem has filed a Notice of Appeal, we believe that
the lawsuit is without merit and that, in light of the
judges ruling, no royalty accrual or expense is required.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Clinical development
|
|
$ |
7.9 |
|
|
$ |
7.3 |
|
|
$ |
6.8 |
|
|
$ |
0.6 |
|
|
|
8 |
% |
|
$ |
0.5 |
|
|
|
7 |
% |
Pre-clinical programs
|
|
|
3.5 |
|
|
|
2.1 |
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
67 |
% |
|
|
0.6 |
|
|
|
40 |
% |
Basic research
|
|
|
3.0 |
|
|
|
3.1 |
|
|
|
2.5 |
|
|
|
(0.1 |
) |
|
|
(3 |
)% |
|
|
0.6 |
|
|
|
24 |
% |
Other R&D
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$ |
15.1 |
|
|
$ |
13.2 |
|
|
$ |
11.4 |
|
|
$ |
1.9 |
|
|
|
14 |
% |
|
$ |
1.8 |
|
|
|
16 |
% |
Clinical development expense is related primarily to outside
services and clinical trial expenses for CB001, and the
increases in 2004 and 2003 reflected the cost of conducting the
human clinical trials that commenced in late 2003. Expenses for
our pre-clinical programs were primarily in connection with our
muscular dystrophy program in 2003 and 2002, which we are not
currently pursuing, and our cardiac repair program. The increase
in pre-clinical expenses was due to an increase of
$2.2 million and $0.7 million in 2004 and 2003 related
to Kourion Therapeutics, which was acquired in September 2003.
Kourion Therapeutics expenses related primarily to the cardiac
disease program, and were offset by a decrease of
$0.7 million in 2004 related to other pre-clinical
programs. Basic research expenses are primarily related to
activity at our Singapore research center. Other research and
development expense related primarily to our umbilical cord
blood processing and storage business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sales & marketing
|
|
$ |
19.3 |
|
|
$ |
21.0 |
|
|
$ |
16.6 |
|
|
$ |
(1.7 |
) |
|
|
(8 |
)% |
|
$ |
4.4 |
|
|
|
27 |
% |
In 2004 we reduced the number of call center employees following
the implementation of call center automation technology. The
decrease in sales and marketing expenses of $1.7 million or
8% from 2003 to 2004 was due primarily due to cost savings
attributed to the restructuring of our call center. The increase
in expenses of $4.4 million or 27% from 2002 to 2003 was
due primarily to direct to consumer marketing expenses of
$1.0 million, professional marketing expenses of
$0.9 million and employee related costs of
$2.2 million. The increase in employee related costs was
due primarily to the full year impact of salary and commission
expenses related to the expansion of our call center. We
increased the number of call center employees in the middle of
2002 and maintained the increased number of call center
employees throughout 2003. Additionally, the employee related
costs in 2003 increased over 2002 due to general payroll
increases for existing employees. Since we acquired Viacord in
April 2000 we have increased our sales and marketing spending
significantly to establish a strong market presence and achieve
sales growth.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
General & administrative
|
|
$ |
13.5 |
|
|
$ |
15.2 |
|
|
$ |
10.9 |
|
|
$ |
(1.7 |
) |
|
|
(11 |
)% |
|
$ |
4.3 |
|
|
|
39 |
% |
The decrease in general and administrative expenses of
$1.7 million or 11% from 2003 to 2004 was due primarily to
the decrease in litigation expenses of $2.3 million,
relating to the PharmaStem lawsuit, a decrease in transaction
costs of $0.7 million relating to the acquisition of
Kourion Therapeutics, our German subsidiary, in September 2003,
and a reduction in bad debt expense of $0.3 million due to
continued improvements in our collection efforts in 2004. These
decreases were offset by additional consulting costs related to
our oocyte program of $0.3 million, increase in general
legal costs of $0.3 million, an increase of
$0.3 million relating to additional accounting and audit
fees related to quarterly
40
reviews in preparation for our IPO and increased employee
related costs of $0.7 million, primarily due to employee
severance and payroll increases related to existing employees.
General and administrative expenses increased by
$4.3 million or 39% from 2002 to 2003. This increase was
due primarily to an increase of $2.1 million in legal fees
associated with the PharmaStem lawsuit, Viacord sales collection
related expenses of $0.6 million, professional fees of
$0.7 million, various license agreement expenses of
$0.4 million, expenses of $0.8 million related to
Kourion Therapeutics, and employee related costs of
approximately $1.0 million to support our growing business.
The increase in employee related costs was due primarily to an
executive hire and relocation in 2003 and an employee severance
as the company continued to build the senior management
infrastructure. Additionally, the employee related costs
increased due to payroll increases for existing employees. These
increases were offset by a $1.6 million charge in 2002
relating to our previous S-1 filing that did not recur in 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
In-process technology
|
|
|
|
|
|
$ |
23.9 |
|
|
$ |
5.9 |
|
|
$ |
(23.9 |
) |
|
|
(100 |
)% |
|
$ |
18.0 |
|
|
|
305 |
% |
No in-process technology expenses were incurred in 2004. The
expense for the year ended December 31, 2003 consisted
primarily of the portion of the Kourion Therapeutics purchase
price allocated to acquired in-process technology, representing
$22.1 million. In addition, $1.7 million represented
the stem cell growth factor technology licensed from Amgen, and
$0.1 million related to technology acquired from
GlaxoSmithKline. The expense for the year ended
December 31, 2002 resulted from the licensing of technology
from Amgen.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Stock-based compensation
|
|
$ |
3.4 |
|
|
$ |
3.2 |
|
|
$ |
6.5 |
|
|
$ |
0.2 |
|
|
|
6 |
% |
|
$ |
(3.3 |
) |
|
|
(51 |
)% |
The expense for 2004 amounted to $3.4 million, of which net
$0.2 million related to the modification of employee
options to extend the option exercise period for employees
terminated in our restructuring to exercise their vested options
offset by the reversal of the accelerated amortization expense
related to their unvested options. Stock-based compensation
expense decreased by $3.3 million, or 51% from 2002 to 2003
and was related to less options granted in the current year
below fair value. Stock-based compensation expense represents
the amortization of the excess of the fair value on the date of
the grant of the stock underlying the options granted to
employees, over the exercise price. The amortization is based on
the vesting period of the related options. The amount of
stock-based compensation actually recognized in future periods
could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Restructuring
|
|
$ |
2.9 |
|
|
|
|
|
|
|
|
|
|
$ |
2.9 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
In September 2004, we restructured our operations to reduce
operating expenses and concentrate our resources on four key
products and product candidates, and related business
initiatives. These products and product candidates consist of
Viacord, Viacyte, CB001 and the cardiac development program. As
a result, we recorded a $1.7 million restructuring charge
in the third quarter of 2004 related to employee severances,
contract termination costs and the write-down of excess
equipment. In December 2004 we restructured our German
operations and sub-leased our German facility to a third party.
As a result we recorded a restructuring charge of
$1.2 million in the fourth quarter of 2004, including
facility costs of $1.1 million and $0.1 million
related to a contract termination fee. The majority of the
facility related costs consist of the write off of the leasehold
improvements and fixed assets in our German facility, as well as
the future minimum lease payments related to the facility. The
amount of this write off was partially reduced by the minimum
future lease payments receivable from the sub-lessee. At
December 31, 2004, restructuring-related costs of
$1.2 million had been paid out, the net book value of fixed
assets was written down by $0.9 million and the accrued
liability remaining was $0.9 million. The majority of the
contract
41
termination costs relate to our exercising the termination
provision in our agreement with Gamete Technologies, under which
we were required to pay $175,000 to Gamete Technologies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
0.5 |
|
|
$ |
0.3 |
|
|
$ |
0.9 |
|
|
$ |
0.2 |
|
|
|
67 |
% |
|
$ |
(0.6 |
) |
|
|
(67 |
)% |
Interest expense
|
|
|
(1.5 |
) |
|
|
(0.7 |
) |
|
|
(0.2 |
) |
|
|
(0.8 |
) |
|
|
(114 |
)% |
|
|
(0.5 |
) |
|
|
(250 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net
|
|
$ |
(1.0 |
) |
|
$ |
(0.4 |
) |
|
$ |
0.7 |
|
|
$ |
(0.6 |
) |
|
|
(150 |
)% |
|
$ |
(1.1 |
) |
|
|
(157 |
)% |
Interest income is earned from the investment of our cash in
short and long term securities and money market funds. The
changes in the amount of interest income recorded in 2004, 2003
and 2002 are primarily due to the changes in our average cash
balance during those periods. Interest expense relates to
interest payable on our credit facility and, in 2004,
$1.1 million of interest was recorded in 2004 on the
$14.0 million note we issued in connection with the
acquisition of Kourion.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily
through private sales of preferred stock resulting in gross
proceeds of $137.2 million through December 31, 2004.
In January 2005, we completed our initial public offering
resulting in net proceeds to us of approximately
$53.6 million after underwriters discounts and
offering expenses. We used approximately $15.5 million of
these net proceeds to repay in full the related party note,
including accrued interest. As of December 31, 2004, we had
approximately $28.6 million in cash, cash equivalents and
investments, which, together with the remaining net proceeds
from our initial public offering, we believe is sufficient to
meet our anticipated liquidity needs for at least the next three
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
|
|
|
|
| |
|
$ Change | |
|
$ Change | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 to 2004 | |
|
2002 to 2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net cash used in operating activities
|
|
$ |
(15.1 |
) |
|
$ |
(22.5 |
) |
|
$ |
(21.1 |
) |
|
$ |
7.4 |
|
|
$ |
(1.4 |
) |
Net cash provided by (used in) investing activities
|
|
|
(15.9 |
) |
|
|
6.3 |
|
|
|
18.5 |
|
|
|
(22.2 |
) |
|
|
(12.2 |
) |
Net cash provided by (used in) financing activities
|
|
|
(1.0 |
) |
|
|
39.6 |
|
|
|
1.4 |
|
|
|
(40.6 |
) |
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents, end of period
|
|
$ |
6.7 |
|
|
$ |
39.0 |
|
|
$ |
15.2 |
|
|
$ |
(32.3 |
) |
|
$ |
23.8 |
|
Net cash used in operating activities was $15.1 million for
the year ended December 31, 2004, and increased to
$22.5 million in 2003 from $21.1 million in 2002. For
the year ended December 31, 2004, the $15.1 million
cash used by operations was due to our net loss of
$21.1 million and, a decrease in working capital of
$8.7 million, offset by $9.6 million in non-cash
expenses, $4.1 million deferred revenue and deferred rent
and $1.0 million in fixed asset additions reimbursed by
landlord. The decrease in the net cash used in 2004 was
primarily related to the increased revenue from our cord blood
preservation business, a reduction in operating expenses
primarily relating to legal litigation costs related to
PharmaStem and the refund of the $2.9 million royalty
escrow payment following the judges ruling in September
2004 that overturned the PharmaStem jury verdict of October
2003. The increases in net cash used in operating activities in
fiscal years 2002 and 2003 were due to the increasing costs
associated with the clinical development of CB001, the expansion
of our sales and marketing efforts, the legal fees and the
$2.9 million royalty escrow payment made in 2003 related to
the PharmaStem litigation and the preclinical efforts in the
muscular dystrophy, cardiac disease and other programs,
partially offset by increased revenues from our cord blood
preservation business and increases in accrued expenses.
Net cash used in investing activities for the year ended
December 31, 2004 was $15.9 million. Net cash provided
by investing activities was $6.3 million in 2003 as
compared to net cash provided of $18.5 million in 2002. In
2004, $22.7 million of US Government and high-rated
corporate securities matured and $36.7 million was
reinvested in similar securities. Of these investments,
$15.8 million
42
matured during 2003 and $9.7 million was reinvested in
similar securities. In addition, we acquired approximately
$2.4 million, $1.8 million and $4.8 million in
property and equipment in 2004, 2003 and 2002, respectively. In
2002 our investments included approximately $2.9 million to
construct and equip a cord blood processing laboratory and
storage facility in Hebron, Kentucky, which became fully
operational in July 2002. These costs consisted of laboratory
and blood processing equipment, cryogenic freezers and facility
improvements. We also invested approximately $1.1 million,
$1.9 million and $1.6 million in laboratory equipment
in the years ended December 31, 2004, 2003 and 2002,
respectively. The remaining investments in property and
equipment consisted of computer equipment, software and
furniture and fixtures. We expect to incur approximately
$2.5 million in capital expenditures during 2005 in order
to complete the build out of our laboratory in Cambridge, of
which approximately $2.5 million is reimbursable by our
landlord under the lease agreement. This facility, when
completed, will allow us to complete Phase II and
Phase III clinical trials and proceed to initial
commercialization of CB001, if successfully developed; however,
we will need to build or acquire a manufacturing facility in
order to fully commercialize CB001 and our other product
candidates. The timing and cost of such a facility is not known
at this time, however the cost is likely to be substantial.
Other assets decreased by approximately $0.5 million in the
year ended December 31, 2004 primarily related to the
reduction in the deposit required with the credit facility that
was entered into in October 2003 with General Electric Capital
Corporation.
Net cash used in financing activities in 2004 was
$1.0 million, excluding the effect of the change in
exchange rates of $0.2 million. Net cash provided by
financing activities amounted to $39.6 million in 2003 and
$1.4 million in 2002, excluding the effect of the change in
exchange rates. This includes the proceeds from the issuance of
redeemable convertible preferred stock of $36.9 million and
$1.5 million in the years ended December 31, 2003 and
2002, respectively. In 2003, we issued promissory notes totaling
$14.0 million to former stockholders of Kourion
Therapeutics in connection with our acquisition of that company
in September 2003. In 2002, certain property and equipment
additions were financed with the proceeds of a credit facility.
In 2003, we replaced that credit facility with the
$5.0 million credit facility from General Electric Capital
Corporation. As a result of replacing the original credit
facility, we were able to reduce the amount of cash required to
be held as collateral for the amount borrowed, with the result
that our restricted cash balance was reduced by
$3.2 million in 2003. In 2004 no additional financing
occurred, however we repaid $1.6 million on our credit
facility.
We anticipate that our current cash, cash equivalents and
investments, together with the net proceeds from our IPO in
2005, will be sufficient to fund our operations for at least the
next three years. However, our forecast for the period of time
during which our financial resources will be adequate to support
our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary
materially. If we are unable to raise additional capital when
required or on acceptable terms, we may have to significantly
delay, scale back or discontinue one or more clinical trials, or
other aspects of our operations.
$15.5 million of the net proceeds from our January 2005 IPO
was used to repay in January 2005 the $14.0 million note
(plus interest) issued to a related party as partial
consideration in our acquisition of Kourion. We currently
anticipate that we will use the remaining net proceeds to fund
our clinical trial activities, pre-clinical research and
development activities and other general corporate purposes
including capital expenditures and working capital to fund
anticipated operating losses. We expect to incur substantial
costs and losses as we continue to expand our research and
development activities, particularly as we move product
candidates into additional clinical trials, and we expect that
these expenditures will increase significantly over at least the
next several years.
43
Commitments and Contingencies
The table below summarizes our commitments and contingencies at
December 31, 2004 (in millions and does not include our
accounts payable and accrued expenses):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
One to Three | |
|
Four to Five | |
|
After Five | |
Contractual Obligations |
|
Total | |
|
One Year | |
|
Years | |
|
Years | |
|
Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating lease obligations
|
|
$ |
17.3 |
|
|
$ |
2.0 |
|
|
$ |
5.6 |
|
|
$ |
3.4 |
|
|
$ |
6.3 |
|
Capital lease obligations
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Short and long-term debt(1)
|
|
|
3.4 |
|
|
|
1.8 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
Notes payable(1)(2)
|
|
|
15.4 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting agreements
|
|
|
1.5 |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.1 |
|
License agreements(3)
|
|
|
2.9 |
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
40.7 |
|
|
$ |
20.4 |
|
|
$ |
8.7 |
|
|
$ |
4.1 |
|
|
$ |
7.5 |
|
|
|
(1) |
Includes interest and principal obligations. |
|
(2) |
These notes relate to our acquisition of Kourion Therapeutics in
September 2003 and are payable in full at the earliest to occur
of an initial public offering of our common stock (IPO), the
sale of the Company, or September 2007. Because our IPO closed
in January 2005 this note was paid in full at that time. |
|
(3) |
We have included several patent license agreements for
technologies that are in early stages of development. While we
are currently making license payments under some of these
agreements, we can cancel each of these agreements at any time
without further financial obligation. Of the $2.9 million
payable under license agreements, $2.0 million relates to
these cancelable agreements. |
We provide our Viacord customers with a product guarantee under
which we agree that we will pay $25,000 to defray the costs
associated with the original collection and storage and
identification and procurement of an alternative stem cell
source, if medically indicated, in the event that the
customers cord blood is used in a stem cell transplant and
fails to engraft. To date, we have not experienced any claims
under the guarantee program and we maintain reserves against
possible claims in amounts we believe are adequate to protect us
against potential liabilities arising under the program.
However, we do not maintain insurance to cover these potential
liabilities. If we were to become subject to significant claims
under this program in excess of the amount we have reserved, our
financial results and financial condition could be adversely
affected.
During September 2004, we launched an indemnification program
offering protection to physicians from patent litigation actions
taken against them by PharmaStem Therapeutics, Inc. Under this
program, we agree to pay reasonable defense costs resulting from
such litigation, providing that the physician allows us to
manage his or her defense. In addition, we agree to indemnify
the physician against all potential financial liability
resulting from such litigation, and we will pay additional
remuneration of $100,000 should PharmaStem prevail in any patent
infringement action against the physician. In order to qualify
for this indemnification, the physician is required to comply
with certain requirements, including returning a signed
acknowledgement form regarding the particulars of the
indemnification program. We recorded a reserve associated with
this program in our financial statements in the quarter ended
September 30, 2004. The reserve was equal to the estimated
fair value of the indemnifications in place as of
September 30, 2004 in accordance with FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, (FIN 45). We re-evaluated this
reserve at December 31, 2004 and concluded that no change
in the reserve was necessary. We may record additional charges
if more physicians participate in this program.
We did not have any off balance sheet obligations as of
December 31, 2004.
44
In October 2003, we entered into a $5.0 million loan
agreement with General Electric Capital Corporation. Borrowings
under this agreement bear interest at 6.9% percent per annum and
are collateralized by our fixed assets. Payments of principal
and interest are due monthly through October 2006, and
approximately $3.2 million remained outstanding under this
loan as of December 31, 2004. In accordance with the terms
of the loan, we are required to maintain a cash deposit of
approximately $1.4 million with the lender as additional
collateral. This deposit is classified as other assets in the
consolidated balance sheet.
We entered into a new operating lease commitment in December
2003 to consolidate our headquarters and US laboratory
facilities in one location in Cambridge, Massachusetts. Rent
expense on the office portion of this lease commenced in April
2004 and the rent on the laboratory facilities commenced in
November 2004, for a term of ten years. Our office rent under
this lease is $0.4 million per year for the first two years
of the lease, increasing to $0.5 million per year through
the remainder of the lease. Our laboratory rent under this lease
is $1.0 million per year for the first two years of the
lease, increasing to $1.1 million per year for the next
four years, and increasing to $1.2 million through the
remainder of the lease. We also expect to incur approximately
$2.5 million in capital expenditures for leasehold and
other improvements associated with our move to this new
laboratory facility. Our lease agreement provides for an
allowance from our landlord of approximately $2.5 million
to offset these capital improvements. In connection with this
operating lease commitment with a commercial bank, we entered
into a letter of credit in December 2003 for $1.4 million
collateralized by certificates of deposit that are classified as
restricted cash on our balance sheet.
In April 2002 we entered into a lease commitment for a facility
located in Hebron, Kentucky used for the processing and storage
of umbilical cord blood. This is a ten-year lease that commenced
in June 2002, with renewal rights and a right of first offer.
The annual rent is approximately $0.1 million per year.
As part of our acquisition of Kourion Therapeutics in September
2003, we assumed an operating lease in Langenfeld, Germany that
commenced in June 2003, consisting of has laboratory and office
space. This lease has a term of five years, with a right to
one-year extensions each year for an additional five years
ending in 2013, with an annual rent of approximately
$0.3 million per year. Effective January 1, 2005 we
entered into an agreement with a third party to sub-lease our
German facility, including our clean room and other laboratory
equipment, for the next two years, with options to extend the
sub-lease through the end of our lease term in 2013. The
sub-lease also includes an option under which the sub-lessee can
purchase the clean room and equipment for a pre-determined
price, in exchange for a reduction in rent. In addition, should
the sub-lessee choose not to extend the sub-lease beyond the
initial two year period, the sub-lessee must pay us a
termination penalty of approximately $270,000.
In February 2002, we entered into a lease commitment for our
research facility in Singapore. This lease has a five-year term
that commenced in May 2002 with an annual rent of approximately
$0.1 million per year.
|
|
|
Acquisition of Kourion Therapeutics |
Promissory Note. As part of our acquisition of Kourion
Therapeutics in September 2003, we issued promissory notes
totaling $14.0 million in aggregate principal amount to
entities affiliated with MPM Asset Management LLC, maturing
September 30, 2007 and bearing interest at a rate of
8% per annum payable in arrears in cash accruing on the
unpaid principal balance of the notes, compounded annually and
payable on the maturity date subject to their terms. The notes
were mandatorially repaid in January 2005 upon the initial
public offering of our common stock.
Milestones. In addition, there are potential future
payments totalling up to $12.0 million payable to former
shareholders of Kourion Therapeutics if certain USSC-related
product development milestones are
45
achieved. See Managements Discussion and Analysis of
Financial Condition and Results of Operation Kourion
Acquisition. The milestone payments are payable in cash or
stock valued at its fair market value at the time of issuance at
the election of each seller. Also, in our acquisition of Kourion
Therapeutics, we issued and deposited 241,481 shares of our
Series I preferred stock into an escrow account, which we
agreed would be released immediately following the sooner of the
closing of a qualified public offering, which is an
underwritten initial public offering of our common stock at a
price to the public of at least $9.70 that results in net
proceeds to us of $50.0 million or more, or a change in
control of the Company, should either event occur prior to
September 30, 2006. If either event occurred, we would also
issue to certain former shareholders of Kourion Therapeutics an
additional 289,256 shares of our Series I convertible
preferred stock (or of the common stock into which the preferred
stock, including the aforementioned escrowed shares,
automatically converted upon completion of our initial public
offering in January 2005). Since our initial public offering was
not a qualified public offering, the escrowed shares
will only be released and the 289,256 contingent shares will
only be issued, if a change in control of our company occurs
prior to September 30, 2006. If there is no change in
control prior to September 30, 2006, the escrowed shares
will be returned to us and the contingent shares will never
issue.
On September 1, 2004, we entered into a license agreement
with Tyho Galileo Research Laboratory for exclusive rights to US
Patent No. 5,985,538 in the field of oocyte
cryopreservation. As part of this agreement, we also entered
into a research collaboration with Galileo that will focus on
the development of technologies in the field of oocyte and
embryo cryopreservation. This project includes research funding
by us totaling $207,000 in the first year of the agreement and
$225,000 in the second year of the agreement as well as a
license fee of $50,000, milestones totaling $24,000 and a
royalty on revenues generated from the sale of Viacyte, our
oocyte cryopreservation product candidate.
Amgen Collaboration Agreement. In April 2002, we entered
into an agreement with Amgen Inc. under which we received a
royalty-free, worldwide, non-exclusive license to patent rights
covering Amgens Stem Cell Factor. In December 2003, we
entered into a new agreement with Amgen that superseded the 2002
Amgen agreement. Under the 2003 Agreement, we licensed on a
non-exclusive basis, certain stem cell growth factor technology
from Amgen and granted Amgen an option to collaborate with us on
any product or products that incorporate any of those growth
factors (Collaboration Product). There is no limit on the number
of such products for which Amgen can exercise its option. Each
time Amgen exercises its option, it must partially reimburse our
past development costs for that Collaboration Product, share in
the future development costs, pay us a milestone if and when the
first regulatory approval for the first indication of the
Collaboration Product in the United States is obtained, and take
primary responsibility for clinical development, regulatory
approval, marketing and commercialization of the Collaboration
Product. The parties would share in profits and losses resulting
from the Collaboration Products worldwide sales. Either we or
Amgen may later opt-out of any product collaboration upon
advance notice. The 2003 agreement terminates on the later of
the expiration of the licensed Amgen patents or when no products
are being co-developed or jointly commercialized between us and
Amgen. In conjunction with the 2003 agreement, Amgen made a
$20 million investment in our Series K preferred stock.
We are a party to various agreements in addition to those
previously discussed, including license, research collaboration,
consulting and employment agreements and expect to enter into
additional agreements in the future. We may require additional
funds for conducting clinical trials and for preclinical
research and development activities relating to our product
candidates, as well as for the expansion of our cord blood
preservation facility, construction of a cellular therapy
manufacturing facility, acquisitions of technologies or
businesses, the establishment of partnerships and collaborations
complementary to our business and the expansion of our sales and
marketing activities.
46
Net Operating Loss Carryforwards
At December 31, 2004, we had federal and state net
operating loss carryforwards of approximately $73.1 million
and $71.9 million, respectively. These carryforwards begin
expiring in 2009 and 2005, respectively. We also had federal and
state credit carryforwards of approximately $2.6 million
and $1.3 million, respectively, which begin expiring in
2009 and 2013, respectively. The Internal Revenue Code places
certain limitations on the annual amount of net operating loss
carryforwards that can be utilized if certain changes in our
ownership occur.
Legal Proceedings
We were sued by PharmaStem Therapeutics, Inc. for allegedly
infringing two patents relating to our Viacord umbilical cord
stem cell cryopreservation business after we rejected
PharmaStems initial requests seeking a license arrangement
because we believe that we do not infringe these patents and
that they are invalid. PharmaStem filed a complaint on
February 22, 2002 and an amended complaint on
March 25, 2002, against us and several other defendants in
the United States District Court for the District of Delaware,
alleging infringement of US Patents No. 5,004,681 and
No. 5,192,553, which relate to certain aspects of the
collection, cryopreservation and storage of hematopoietic stem
cells and progenitor cells from umbilical cord blood. We
counterclaimed that the patents are invalid and unenforceable,
and for violation of the antitrust laws resulting from an
improper use of PharmaStems patents, and sought a
declaration of non-infringement. Following an October 2003
trial, the jury ruled against us and the other defendants, Cbr
Systems, CorCell and Cryo-Cell, who represent a majority of the
family cord blood preservation industry, and a judgment was
entered against us for approximately $2.9 million, based on
6.125% royalties on our revenue from the processing and storage
of umbilical cord blood since April 2000. The jury also found
that our infringement was willful. Following the trial, we
placed the amount of the award in an escrow account pending
final disposition of this case.
On September 15, 2004, the Delaware Court overturned the
earlier judgment against ViaCell. The Court ruled that we did
not infringe the 553 method patent as a matter of law, and
ordered a new trial on infringement and damages, if any, related
to the 681 composition patent. PharmaStems motions
for an injunction against us and the other defendants and for
prejudgment and postjudgment interest, as well as enhanced
damages and attorneys fees based upon the jurys
finding of willful infringement, were denied. The judge also
denied our motion challenging the validity and enforceability of
the patents. On September 24, 2004, our $2.9 million
escrow payment was released to the Company. On December 14,
2004, the Delaware Court reversed its post-trial ruling granting
a new trial on the issues of infringement and damages (if any)
of the 681 composition patent and overturned the
jurys verdict of infringement of that patent. In its
September and December 2004 decisions, the judge found that
there was no legally sufficient basis for finding infringement
of either PharmaStem patent. With respect to the 681
patent for which a new trial was granted, PharmaStem filed a
motion on October 5, 2004 with the court for a preliminary
injunction. Also on October 5, 2004, we filed a complaint
with the Delaware court, alleging antitrust and trade violations
by PharmaStem concerning misuse of its patents and other
deceptive business practices. The court held a hearing on these
motions on November 3, 2004, and denied PharmaStems
motion for a preliminary injunction on December 14, 2004
when it overturned the jury verdict on that patent. On
January 6, 2005, PharmaStem filed a Notice of Appeal and a
Motion to Expedite the Appeal of the Courts decision. On
February 15, 2005, PharmaStems Motion to Expedite the
Appeal was denied. PharmaStems appeal brief was filed on
March 22, 2005.
In August 2004, the US Patent and Trademark Office (US PTO)
ordered the re-examination of both the 553 method patent
and the 681 composition patent based on the prior art. On
February 2, 2005, the PTO issued an Office Action rejecting
all claims of the 553 patent as invalid over prior art.
PharmaStem has until April 2, 2005 to respond to this
Office Action. We expect that the PTO will issue an Office
Action relating to the 681 composition patent shortly.
Should the US PTO find the claims of these patents to be
unpatentable, then the litigation proceedings between ViaCell
and PharmaStem with respect to the unpatentable claims would
cease. If the
47
Courts judgment as to non-infringement of the 553 or
681 patent is reversed on appeal and if we are
subsequently enjoined from further engaging in our umbilical
cord stem cell cryopreservation business, we will not be able to
conduct this business unless PharmaStem grants a license to us,
which PharmaStem previously informed us that it would not do
after October 15, 2004. While we do not believe this
outcome is likely, if, in the event of an injunction, we are not
able to obtain a license under the disputed patents or operate
under an equitable doctrine known as intervening
rights, we will be required to stop preserving and storing
cord blood and to cease using cryopreserved umbilical cord blood
as a source for stem cell products.
PharmaStem also filed a complaint against us on July 29,
2004 in the United States District Court for the District of
Massachusetts, alleging infringement of US Patents
No. 6,461,645 and 6,569,427, which also relate to certain
aspects of the collection, cryopreservation and storage of
hematopoietic stem cells and progenitor cells from umbilical
cord blood. By agreement of the parties, ViaCell responded to
the complaint on December 16, 2004. We continue to believe
that the patents in this new Massachusetts action are invalid
and that we do not infringe them in any event. On
January 7, 2005, PharmaStem filed a Motion for Preliminary
Injunction in the Massachusetts litigation. That Motion is
currently stayed. If this Motion is granted, we could be
enjoined from collecting and storing cord blood that had not
been collected as of the date the injunction is issued while the
case is litigated and thereafter if we lose the case. We believe
that the issues presented in PharmaStems Motion are
substantially the same as the issues presented in the Delaware
litigation and, while no assurance can be given, we believe that
PharmaStems Motion will be denied. If we are ultimately
found to infringe, we could have a significant damages award
entered against us, and we could also face an injunction which
could prohibit us from further engaging in the umbilical cord
stem cell business absent a license from PharmaStem on the
disputed patents. We believe the issues presented in this case
are substantially the same as the issues presented in the
Delaware litigation. Accordingly, we filed a motion to
consolidate the Massachusetts case with six other actions
against other defendants in a single proceeding in the District
of Delaware. On January 21, 2005, the Massachusetts case
was stayed pending a ruling on this request. On
February 16, 2005, our request was granted. The cases have
thus been consolidated in Delaware.
The timing and order of the litigations involving ViaCell and
PharmaStem are not presently known. Decisions in the
re-examination proceedings, now pending before the US PTO, of
the 681 and 553 patents may also affect these
factors.
We may enter into settlement negotiations with PharmaStem
regarding our litigation with PharmaStem. We cannot predict
whether any such negotiations would lead to a settlement of
these lawsuits or what the terms or timing of any such
settlement might be, if it occurs at all.
On May 13, 2004, we received a First Amended Complaint
filed in the Superior Court of the State of California by
Kenneth D. Worth, by and for the People of the State of
California, and naming as defendants a number of private cord
blood banks, including us. The complaint alleges that the
defendants have made fraudulent claims in connection with the
marketing of their cord blood banking services and seeks
restitution for those affected by such marketing, injunctive
relief precluding the defendants from continuing to abusively
and fraudulently market their services and requiring them to
provide certain information and refunds to their customers,
unspecified punitive and exemplary damages and attorneys
fees and costs. Subsequently, we received a Notice of Ex Parte
Application for Leave to Intervene filed on behalf of the Cord
Blood Foundation by the same individual and seeking similar
relief. On October 7, 2004, the Court orally granted a
motion to strike the complaint under the California anti-SLAPP
statute and dismissed the complaint as to all defendants without
leave to amend. Judgment has been entered, dismissing the
complaint, and plaintiff has filed a notice of appeal and a
petition for a writ of mandate. The petition has been dismissed
and we believe that the appeal will proceed. We are not yet able
to conclude as to the likelihood that the plaintiffs
claims would be upheld if the judgment of dismissal were
reversed on appeal, nor can we estimate the possible financial
consequences should the plaintiff prevail. However, we believe
this suit to be without merit and intend to continue to
vigorously defend ourselves until the judgment becomes final.
48
On February 24, 2005, Cbr Systems, Inc., a private cord
blood banking company, filed a complaint against us in the
United States District Court for the Northern District of
California alleging false and misleading advertising by us in
violation of the federal Lanham Act and various California
statutes and common law and seeking an injunction from
continuing such advertising and unspecified damages. We are
evaluating Cbrs allegations and intend to vigorously
defend ourselves in this action.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying values 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 critical accounting policies
include:
|
|
|
|
|
revenue recognition; |
|
|
|
accounting for royalty expense in connection with the PharmaStem
litigation; |
|
|
|
accounting for research and development expenses; |
|
|
|
accounting for the valuation of equity instruments; |
|
|
|
purchase accounting and in-process technology; |
|
|
|
accounting for our product guarantee program; and |
|
|
|
accounting for our physician indemnification program. |
Revenue Recognition. Our revenues are currently generated
principally through our umbilical cord blood preservation and
storage activities.
We recognize revenue in accordance with SEC Staff Accounting
Bulletin No. 101, (SAB 101) as amended by
SAB 104, and Emerging Issues Task Force (EITF) Issue
No. 00-21 for all revenue transactions entered into in
fiscal periods beginning after June 30, 2003.
We receive fees for collecting, testing, freezing and storing of
cord blood units and recognize revenue upon the successful
completion of these processes. Storage revenue is deferred and
recognized over the storage period.
We analyze our multiple element arrangements entered into after
June 30, 2003 to determine whether the elements can be
separated and accounted for individually as separate units of
accounting in accordance with EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables. We recognize fees
received from collecting, testing and freezing processes
(collectively known as processing) as revenue if it
has standalone value and the fair value of the undelivered
storage services can be determined. The Company has concluded
that the collection, testing and freezing service has standalone
value to the customer. The fair value of processing service
cannot be determined but the Company has objective evidence of
fair value of the undelivered storage. The fair
value of the storage is equal to the annual storage fee charged
to customers. We defer the fair value of the revenue related to
the future storage of the unit and recognize the remainder of
the revenue under the residual method.
Accounting for royalty expense in connection with the
PharmaStem litigation. Cost of revenues in 2003 includes a
royalty to PharmaStem relating to a claim for patent
infringement. We are currently in litigation with PharmaStem
regarding this claim. We recorded a royalty expense of
approximately $3.3 million in 2003 following a jury verdict
in October 2003 which found infringement. This expense included
a royalty of approximately $2.9 million on revenues from
cord blood preservation through October 29, 2003, plus an
accrual of 6.125% of subsequent revenues through
December 31, 2003. We also
49
recorded an expense of $0.5 million for the three months
ended March 31, 2004, also based on 6.125% of revenues. In
September 2004, the court overturned the jury verdict on one of
the two patents in litigation and vacated the verdict and
granted a new trial on the second patent. Based on the
judges ruling, we reversed the entire royalty accrual of
$3.8 million in the quarter ended June 30, 2004. On
December 14, 2004, the federal district court reversed its
post-trial ruling granting a new trial on the issues of
infringement and damages (if any) of the second patent and
overturned the jurys verdict of infringement of that
patent. In its September and December 2004 decisions, the judge
found that there was no legally sufficient basis for finding
infringement of either PharmaStem patent. Pending further action
by the courts, we do not intend to record a royalty expense in
future periods, since we believe the claim is without merit. It
is possible that the final outcome of this litigation, as well
as the final outcome of the patent litigation PharmaStem
recently brought against us in Massachusetts, could result in
damages payable at a higher or lower amount than previously
awarded by the Delaware jury. Should this occur, our financial
position and results of operations could be materially affected.
In addition, we may enter into settlement negotiations with
PharmaStem regarding our litigation with PharmaStem. If a
settlement agreement were entered into, we do not know whether
it would provide for a payment by us of an ongoing royalty or
payment of other amounts by us to PharmaStem, or what those
amounts might be.
Accounting for research and development expenses. Our
research and development expenses primarily consist of costs
associated with product development for CB001, the development
of Selective Amplification and our other stem cell therapy
technologies and our oocyte cryopreservation program. These
expenses represent both clinical development costs and the costs
associated with non-clinical support activities such as
toxicological testing, manufacturing process development and
regulatory consulting services. Clinical development costs
represent internal costs for personnel, external costs incurred
at clinical sites and contracted payments to third party
clinical research organizations to perform certain clinical
trials. We also report the costs of patent licenses in research
and development expense as they directly relate to our ongoing
research programs. Our product candidates do not currently have
regulatory approval; accordingly, we expense the license fees
and related milestone payments when we incur the liability. We
accrue research and development expenses for activities
occurring during the fiscal period prior to receiving invoices
from clinical sites and third party clinical research
organizations. We accrue external costs for clinical studies
based on the progress of the clinical trials, including patient
enrollment, progress by the enrolled patients through the trial,
and contracted costs with clinical sites. We record internal
costs primarily related to personnel in clinical development and
external costs related to non-clinical studies and basic
research when incurred. Significant judgments and estimates must
be made and used in determining the accrued balance in any
accounting period. Actual costs incurred may or may not match
the estimated costs for a given accounting period. We expect
that expenses in the research and development category will
increase for the foreseeable future as we add personnel, expand
our clinical trial activities and increase our discovery
research capabilities. The amount of the increase is difficult
to predict due to the uncertainty inherent in the timing of
clinical trial initiations, progress in our discovery research
program, the rate of patient enrollment and the detailed design
of future trials. In addition, the results from our trials, as
well as the results of trials of similar drugs under development
by others, will influence the number, size and duration of both
planned and unplanned trials.
Accounting for the valuation of equity instruments. We
record compensation expense related to options issued to
consultants and employees based on the deemed fair value of the
common stock underlying the options. Because there has been no
public market for our common stock, we have estimated the fair
value of these equity instruments using various valuation
methods. If future market conditions dictate significant changes
in the estimates of fair value, or if a public market
establishes a value for our common stock that is significantly
higher than our estimated value, our financial position and
results of operations could be materially affected.
Purchase accounting and in-process technology. We expense
costs associated with purchased licenses used in our on going
research and development activities, which have not yet reached
technical feasibility and have no alternative future use.
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Upon consummation of the Kourion acquisition, we immediately
expensed as in-process technology a portion of the fair value
allocated to in-process research and development (IPR&D).
We believe that this charge represents a reasonably reliable
estimate of the future benefits attributed to purchased
IPR&D. The value assigned to IPR&D was composed of the
projected value of the two Kourion preclinical drug development
projects. The valuation was determined using the income
approach. Potential revenue and drug development expenses were
projected through 2021 based on managements estimates.
Specifically, we estimated that the development of the Kourion
programs through clinical trials to commercial viability would
take approximately eight years and would cost in excess of
$31.0 million. The discounted cash flow method was applied
to the projected cash flows, adjusted for the probability of
success using a discount rate of 23%. The discount rate takes
into consideration the uncertainty surrounding the successful
development and commercialization of the IPR&D. Since the
acquisition, nothing has occurred that would lead us to believe
that the original estimates of the cost to develop these
therapies, or their revenue potential, is materially different
from the estimates used at the time of the acquisition for
purposes of purchase accounting.
Accounting for our product guarantee program. In November
2002, we began providing our customers a product guarantee under
which we agree to pay $25,000 to defray the costs associated
with the original collection, storage of cord blood, and
procurement of an alternative stem cell source, if medically
indicated, in the event the customers cord blood is used
in a stem cell transplant and fails to engraft. We have never
experienced any claims under the guarantee program nor have we
incurred costs related to these guarantees. We do not maintain
insurance for this guarantee program and therefore we maintain
reserves to cover our estimated potential liabilities. We
account for the guarantee as a warranty obligation and recognize
the obligation in accordance with SFAS No 5,
Accounting for Contingencies. Our reserve balance is
based on the $25,000 maximum payment, multiplied by the number
of units covered by the guarantee, multiplied by the expected
transplant rate, multiplied by the expected engraftment failure
rate. We determine the expected usage and engraftment failure
rate by analyzing data from our existing bank of cords, cords
stored in published private and public banks and the related
historical usage and failure rates in our bank and other private
and public cord banks. We determine the estimated expected usage
and engraftment failure rates based on an analysis of our
historical usage and failure rates and the historical usage and
failure rates in other private and public cord banks based on
published data. Our estimates of expected usage and engraftment
failure could change as a result of changes in actual usage
rates or failure rates and such changes would require an
adjustment to our established reserves. The historical usage and
failure rates have been very low and a small increase in the
number of transplants or engraftment failures could cause a
significant increase in the estimated rates used in determining
our reserve. In addition, the reserve will increase as
additional cord units are stored which are subject to the
product guarantee. We have reserves recorded under this program
in the amounts of $5,000, $43,000 and $73,000 as of
December 31, 2002, 2003, and 2004, respectively.
Accounting for our physician indemnification program.
During September 2004, we launched an indemnification program
protecting physicians from patent litigation actions taken
against them by PharmaStem Therapeutics, Inc. Under this program
we agree to pay reasonable defense costs resulting from such
litigation, providing that the physicians allow us to manage
their defense. In addition, we will pay all damages resulting
from such litigation, and we will pay an additional $100,000 to
the physicians if PharmaStem prevails in any patent infringement
litigation against the physician. In order to qualify for this
indemnification the physicians are required to comply with
certain requirements including returning a signed
acknowledgement form around the particulars of the
indemnification program. We have recorded a reserve associated
with this program of $51,000 in our December 31, 2004
financial statements in compliance with FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The reserve is equal
to the estimated fair value of the indemnification arrangements
entered into as of December 31, 2004. We have determined
the reserve through a probability model based on assumptions
related to the likelihood of legal ramifications, and the extent
of those ramifications, applicable under this program for the
potential professional fees, damages, and remunerations related
to the agreements executed as of December 31,
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2004. These assumptions involve judgment by management and are
subject to change as additional physicians enroll in the
program, if the actual amount of patent litigation and related
defense costs exceed our estimates or if Pharmastems
patents are overturned by the US Patent office. We believe
Pharmastem has no legal basis to pursue patent litigation
against physicians who assist in collecting cord blood on behalf
of our customers. However, our assumptions contemplate a wide
range of possible outcomes including the possibility of
Pharmastem pursuing and prevailing in such patent litigation,
although we believe the likelihood of this is remote.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting
for Certain Instruments with Characteristics of both Liabilities
and Equity (SFAS No. 150). This statement
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of these instruments were
previously classified as equity. This statement is effective for
new or existing contracts at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
statement did not have a material impact on our financial
statements.
In December 2003, the FASB issued FASB Interpretation
No. 46-R (FIN 46-R) a revised
interpretation of FASB Interpretation No. 46
(FIN 46). FIN 46-R requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties. The provisions of
FIN 46-R are effective immediately for all arrangements
entered into after January 31, 2003. For all arrangements
entered into after January 31, 2003, we are required to
continue to apply FIN 46-R through the end of the first
quarter of fiscal 2004. We do not have any equity interests that
would change its current reporting or require additional
disclosures outlined in FIN 46-R. For arrangements entered
into prior to February 1, 2003, we are required to adopt
the provisions of FIN 46-R in the first quarter of fiscal
2004. We do not have any equity interests that would change its
current reporting or require additional disclosures outlined in
FIN 46-R.
On December 16, 2004, the FASB released SFAS No. 123R.
This new accounting standard requires all forms of stock
compensation, including stock options, to be reflected as an
expense in our financial statements. Public companies must adopt
the standard by their first fiscal period beginning after
June 15, 2005. We intend to apply the revised standard
beginning with the quarter ending September 30, 2005.
Although we have not finalized our analysis, we expect that the
adoption of the revised standard will result in higher operating
expenses and lower earnings per share. Note 2 to the
consolidated financial statements shows the pro-forma impact on
net loss and net loss per common share as if we had historically
applied the fair value recognition provisions of SFAS
No. 123 to stock based employee awards.
In December 2004, the FASB issued Statement No. 153
(FAS 153), Exchanges of Nonmonetary Assets
Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions (APB 29). FAS 153 is based on
the principle that nonmonetary asset exchanges should be
recorded and measured at the fair value of the assets exchanged,
with certain exceptions. This standard requires exchanges of
productive assets to be accounted for at fair value, rather than
at carryover basis, unless (i) neither the asset received
nor the asset surrendered has a fair value that is determinable
within reasonable limits or (ii) the transactions lack
commercial substance (as defined). In addition, the FASB decided
to retain the guidance in APB 29 for assessing whether the
fair value of a nonmonetary asset is determinable within
reasonable limits. The new standard is the result of the
convergence project between the FASB and the International
Accounting Standards Board (IASB). We will adopt this standard
for nonmonetary asset exchanges in the event that these types of
transactions are entered into by us in future periods.
52
Risk Factors That May Affect Results
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Our cellular therapy product candidates are at an early
stage of development, and if we are not able to successfully
develop and commercialize them, we may not generate sufficient
revenues to continue our business operations. |
Our cellular therapy product candidates are in the early stages
of development. In particular, our lead stem cell product
candidate, CB001, has only recently entered Phase I
clinical trials. CB001 has not previously been studied in
humans, and we have no safety or efficacy data on this product
candidate yet. While stem cell therapy is an accepted medical
procedure for the regeneration of the blood and immune systems
for patients with cancer and other serious diseases
a procedure for which we are developing CB001 stem
cell populations expanded using our Selective Amplification
technology have not yet been shown to be safe or effective for
such treatments. Additionally, there has been only limited use
of stem cells in treating cardiac disease in clinical trial
settings, which is an additional indication we are targeting. As
a result, there is substantial uncertainty about the
effectiveness of CB001 for its target indication and about
whether our program targeting another indication will be
successful.
We expect that none of our cellular therapy product candidates
will be commercially available for at least three years, if at
all. We will need to devote significant additional research and
development, financial resources and personnel to develop
commercially viable products and obtain regulatory approvals.
We may discover that manipulation of stem cells using Selective
Amplification changes the biological characteristics of stem
cells. For this or other reasons, therapeutic products developed
with our stem cell expansion technology may fail to work as
intended, even in areas where stem cell therapy is already in
use. This may result from the failure of our products to:
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properly engraft into the recipients body in the desired
manner; |
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provide the intended therapeutic benefits; or |
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achieve benefits that are better or equal to existing therapies. |
While our Selective Amplification technology has shown
successful results in preclinical research, those results were
not obtained in humans and may not be indicative of results we
may encounter in future preclinical studies or clinical trials.
Since none of our product candidates have progressed past
Phase I clinical trials, we cannot determine whether our
preclinical testing methodologies are predictive of clinical
safety or efficacy. As we obtain results from further
preclinical or clinical trials, we may elect to discontinue or
delay preclinical studies or clinical trials for certain product
candidates in order to focus our resources on more promising
product candidates. We may also change the indication being
pursued for a particular product candidate or otherwise revise
the development plan for that candidate. Moreover, product
candidates in later stages of clinical trials may fail to show
the desired safety and efficacy traits despite having progressed
through preclinical or initial clinical testing.
If our product candidates do not prove to be safe and
efficacious in clinical trials, we will not obtain the required
regulatory approvals for our technologies or product candidates.
Even if we are successful in developing and gaining regulatory
approval for CB001, we do not expect to obtain approval before
2008.
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We may not be able to sustain our current level of
revenues or our recent growth rates. |
Revenues from our umbilical cord blood preservation and storage
products have grown significantly over the past several years,
from $7.1 million in fiscal 2001, to $20.1 million in
fiscal 2002, to $30.9 million in fiscal 2003 to
$36.8 million in fiscal 2004. We believe that this is a
result of our increased marketing efforts and from increased
awareness by the public generally of the concept of cord blood
banking. We may not be able in the future, however, to sustain
this growth rate nor the current level of Viacords
revenues. Principal factors that may adversely affect our
revenue, such as litigation, competition from other private cord
blood banks or risks of reputational damage, are described
elsewhere in this Risk Factor section in more
detail. If we are unable to sustain our revenues, we may need to
reduce our product candidate development activities or raise
additional funds earlier than anticipated or on unfavorable
terms.
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We expect to continue to incur operating losses and may
never become profitable. |
We have generated operating losses since our inception. As of
December 31, 2004, we had cumulative net losses of
approximately $158.8 million. These losses have resulted
principally from the costs of our research and development
activities, which have totaled approximately $88.3 million
since our inception. We expect our losses to increase for the
next several years as we make substantial expenditures to
further develop and commercialize our product candidates. In
particular, we expect that our rate of spending will accelerate
over the next several years as a result of increased costs and
expenses associated with clinical trials, including our current
Phase I trial for CB001, submissions for regulatory
approvals and potential commercialization of our products,
including the build out of commercial scale manufacturing
facilities. Furthermore, we expect to make additional
investments in the near term in our ViaCell Reproductive Health
franchise, as we seek to expand the market for our Viacord
product offering and develop our Viacyte product candidate. Our
ability to become profitable will depend on many factors,
including our ability to establish the safety and efficacy of
our product candidates, obtain necessary regulatory approvals
and successfully commercialize products. We cannot assure you
that we will ever become profitable.
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We and several other defendants, representing a majority
of the industry, are defendants in lawsuits alleging
infringement of patents relating to our Viacord umbilical cord
stem cell cryopreservation business. If we are not able to
resolve the suits favorably, we could be permanently enjoined
from further engaging in this business, which would result in
the loss of the current source of almost all of our revenues, or
we may be required to pay a royalty. |
We were sued for infringing two patents relating to our Viacord
umbilical cord stem cell cryopreservation business after we
rejected the initial requests of the plaintiff, PharmaStem
Therapeutics, Inc., seeking a license arrangement because we
believe that we do not infringe these patents and that they are
invalid. In October 2003, the jury in this case in the United
States District Court for the District of Delaware ruled that we
and the several other defendants, who represent a majority of
the family cord blood preservation industry, willfully infringed
the two patents, which relate to certain aspects of the
collection, cryopreservation and storage of hematopoietic stem
cells and progenitor cells from umbilical cord blood. In
September 2004, the federal district court overturned the jury
verdict on one of the two patents in litigation and vacated the
verdict and granted a new trial on the issues of infringement
and damages (if any) concerning the second patent. The Delaware
Court also denied PharmaStems motions seeking a permanent
injunction against all of the defendants in the suit to enjoin
our further conducting our business, as well as its motion
requesting that the damages against us be increased up to three
times the amount of the award for past infringement and to
include legal fees and interest. We had requested that the Court
find the PharmaStem patents invalid and unenforceable as a
matter of law, but the Court denied this request. On
December 14, 2004, the Delaware Court reversed its
post-trial ruling granting a new trial on the issues of
infringement and damages (if any) of the second patent and
overturned the jurys verdict of infringement of that
patent. With respect to the patent for which a new trial had
been granted, PharmaStem filed a motion on October 5, 2004
with the court for a preliminary injunction. The court denied
that motion on December 14, 2004 when it overturned the
jury verdict on that patent. On January 6, 2005, PharmaStem
filed a Notice of Appeal and a Motion to Expedite the Appeal of
the Courts decision. On February 15, 2005,
PharmaStems Motion to expedite the Appeal was denied.
PharmaStems appeal brief was filed on March 22, 2005.
In August 2004, the US Patent and Trademark Office (US
PTO) ordered the re-examination of both of these patents
based on the prior art submitted. On February 2, 2005, the
PTO issued an Office Action rejecting all claims of the
553 method patent as unpatentable over the prior art.
PharmaStem will now have an opportunity to respond to this
Office Action by arguing that its claims are patentable. If the
US PTO does not find the claims of the patents to be
unpatentable and if an appeal in the litigation is not resolved
favorably to us, we could be enjoined from further engaging in
our umbilical cord stem cell cryopreservation business. In such
case, we will not be able to conduct this business unless
PharmaStem grants a license to us. In such event, PharmaStem
would be under no legal obligation to grant us a license or to
do so on economically reasonable terms, and previously informed
us that it would not do so at all
54
after October 15, 2004. If it becomes necessary, but we are
unable, to obtain a license, or are unable to obtain a license
on economically reasonable terms, we will not be able to further
engage in our umbilical cord stem cell cryopreservation
business. If we cannot continue our cord blood preservation
business, that would have a material adverse effect on our
business, results of operations and financial condition, as we
would no longer have access to the current source of almost all
of our revenues. We had revenues of approximately
$36.8 million in 2004 from Viacord sales. The judgment in
the case, which was subsequently overturned, was entered against
us for approximately $2.9 million relating to past
infringement, based on 6.125% royalties on our revenue from the
storage of umbilical cord blood since April 2000. If it becomes
necessary, and we are able, to obtain a license from PharmaStem,
it may be at a royalty rate greater than 6.125% or on terms less
favorable than PharmaStem has granted to other cord blood banks.
For example, we understand PharmaStem has licensed other cord
blood banks under its patents for royalty rates of 15%. We have
also been sued again by PharmaStem in federal district court in
Massachusetts on two different but related patents, as have
several others in the family cord blood preservation industry,
albeit in separate actions in other courts, and many of the same
risks are present in that litigation as in the original Delaware
litigation. We filed and were subsequently
granted a motion to consolidate the Massachusetts
case with six other actions in a single proceeding in the
District of Delaware. On January 7, 2005, PharmaStem filed
a Motion for Preliminary Injunction in the Massachusetts
litigation. If this Motion is granted, we could be enjoined from
collecting and storing cord blood that had not been collected as
of the date the injunction is issued while the case is litigated
and thereafter if we lose the case. We believe that the issues
presented in PharmaStems Motion are substantially the same
as the issues presented in the Delaware litigation and, while no
assurance can be given, we believe that PharmaStems Motion
will be denied. We may enter into settlement negotiations with
PharmaStem regarding our litigation with PharmaStem. We cannot
predict whether any such negotiations would lead to a settlement
of these lawsuits or what the terms or timing of any such
settlement might be, if it occurs at all. For a fuller
discussion of the PharmaStem litigation, see the section
entitled Item 3 Legal Proceedings.
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We may not be able to raise additional funds necessary to
fund our operations. |
As of December 31, 2004, we had approximately
$28.6 million in cash, cash equivalents, short- and
long-term investments. Subsequently, in January 2005, we
received net proceeds of approximately $53.6 million from
our initial public offering. We used $15.5 million of these
net proceeds to repay a note and accrued interest. In order to
develop and bring our stem cell product candidates to market, we
must commit substantial resources to costly and time-consuming
research, preclinical testing and clinical trials. While we
anticipate that our existing cash, cash equivalents and
investments, will be sufficient to fund our current operations
for the next two to three years, we may need or want to raise
additional funding sooner, particularly if our business or
operations change in a manner that consume available resources
more rapidly than we anticipate. We expect to attempt to raise
additional funds well in advance of completely depleting our
available funds.
Our future capital requirements will depend on many factors,
including:
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the level of cash flows from our umbilical cord blood
preservation activities; |
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the scope and results of our research and development programs; |
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the scope and results of our clinical trials, particularly those
involving CB001, which is currently in a Phase I trial; |
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the timing of and the costs involved in obtaining regulatory
approvals, which could be more lengthy or complex than obtaining
approval for a new conventional drug, given the FDAs
relatively little experience with cellular-based therapeutics; |
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the costs of building and operating our manufacturing
facilities, both in the near term to support our clinical
activities, and also in anticipation of growing our
commercialization activities; |
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funds spent in connection with acquisitions of related
technologies or businesses, including contingent payments that
may be made in connection with our acquisition of Kourion
Therapeutics; |
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the costs of maintaining, expanding and protecting our
intellectual property portfolio, including litigation costs and
liabilities; and |
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our ability to establish and maintain collaborative arrangements
and obtain milestones, royalties and other payments from
collaborators. |
We may seek additional funding through collaborative
arrangements and public or private financings. Additional
funding may not be available to us on acceptable terms, or at
all. If we obtain additional capital through collaborative
arrangements, these arrangements may require us to relinquish
greater rights to our technologies or product candidates than we
might otherwise have done. If we raise additional capital
through the sale of equity, or securities convertible into
equity, further dilution to our then existing stockholders will
result. If we raise additional capital through the incurrence of
debt, our business may be affected by the amount of leverage we
incur. For instance, such borrowings could subject us to
covenants restricting our business activities, servicing
interest would divert funds that would otherwise be available to
support research and development, clinical or commercialization
activities, and holders of debt instruments would have rights
and privileges senior to those of our equity investors. If we
are unable to obtain adequate financing on a timely basis, we
may be required to delay, reduce the scope of or eliminate one
or more of our programs, any of which could have a material
adverse effect on our business.
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If the potential of stem cell therapy to treat serious
diseases is not realized, the value of our Selective
Amplification technology and our development programs could be
significantly reduced. |
The potential of stem cell therapy to treat serious diseases is
currently being explored by us and other companies. It has not
been proven in clinical trials that stem cell therapy will be an
effective treatment for diseases other than those currently
addressed by hematopoietic stem cell transplants. No stem cell
products have been successfully developed and commercialized to
date, and none has received regulatory approval in the United
States or internationally. Stem cell therapy may be susceptible
to various risks, including undesirable and unintended side
effects, unintended immune system responses, inadequate
therapeutic efficacy or other characteristics that may prevent
or limit their approval or commercial use. If the potential of
stem cell therapy to treat serious diseases is not realized, the
value of our Selective Amplification technology and our
development programs could be significantly reduced.
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We cannot market and sell CB001 or our other product
candidates in the United States or in other countries if we fail
to obtain the necessary regulatory approvals or
licensure. |
We cannot sell CB001, or other cellular product candidates,
until regulatory agencies grant marketing approval, or
licensure. The process of obtaining regulatory approval is
lengthy, expensive and uncertain. It is likely to take three to
five years or more to obtain the required regulatory approvals
for our lead stem cell product candidate, CB001, or we may never
gain necessary approvals. Any difficulties that we encounter in
obtaining regulatory approval may have a substantial adverse
impact on our operations and cause our stock price to decline
significantly.
To obtain regulatory approvals in the United States for CB001,
for instance, we must, among other requirements, complete
carefully controlled and well-designed clinical trials
sufficient to demonstrate to the US Food & Drug
Administration, or FDA, that CB001 is safe, effective and potent
for each disease for which we seek approval. Several factors
could prevent completion or cause significant delay of these
trials, including an inability to enroll the required number of
patients or failure to demonstrate adequately that CB001 is
safe, effective and potent for use in humans. Negative or
inconclusive results from or adverse medical events during a
clinical trial could cause the clinical trial to be repeated or
a program to be terminated, even if other studies or trials
relating to the program are successful. The FDA can place a
clinical trial on hold if, among other reasons, it finds that
patients enrolled in the trial are or would be exposed to an
unreasonable and significant risk of illness or injury. If
safety concerns develop, we or the FDA could stop our trials
before completion. Although we do not have particular reasons to
expect
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unusual delays or a need to terminate our clinical trials, to
date, some participants in our CB001 clinical trial have
experienced serious adverse events, two of which have been
determined to be possibly related to CB001. A serious adverse
event is an event that results in significant medical
consequences, such as hospitalization, disability or death and
must be reported to the FDA. While we believe that the serious
adverse event profiles we have observed are consistent with
those of the disease conditions of patients in the trial and
with those associated with stem cell and bone marrow transplants
generally, we cannot assure you that safety concerns regarding
CB001 will not develop.
We have only recently initiated our first clinical trial for
CB001, and thus have no clinical trial history for this product
candidate. Indeed, the FDA has relatively little experience with
therapeutics based on cellular medicine generally. As a result,
the pathway to regulatory approval for CB001 may be more complex
and lengthy than for approval of a new conventional drug.
Similarly, to obtain approval to market our stem cell products
outside of the United States, we will need to submit clinical
data concerning our products and receive regulatory approval
from governmental agencies, which in certain countries includes
approval of the price we intend to charge for our product. We
may encounter delays or rejections if changes occur in
regulatory agency policies during the period in which we develop
a product candidate or during the period required for review of
any application for regulatory agency approval. If we are not
able to obtain regulatory approvals for use of CB001 or other
products under development, we will not be able to commercialize
such products, and therefore may not be able to generate
sufficient revenues to support our business.
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Our cell preservation activities are subject to
regulations that may impose significant costs and restrictions
on us. |
Cord blood preservation. Our Viacord cord blood
preservation product is currently subject to FDA regulations
requiring infectious disease testing. We have registered with
the FDA as a cord blood preservation service, listed our
products with the FDA, and we are subject to FDA inspection. In
addition, the FDA has recently adopted new good tissue practice
(GTP) regulations that establish a comprehensive regulatory
program for human cellular and tissue-based products and
finalized rules for donor eligibility and that will become
effective in May of 2005. We believe that we comply with
existing regulatory requirements and will be in compliance with
the new GTP regulations as recently adopted. However, we may not
be able to maintain this compliance or comply with future
regulatory requirements that may be imposed on us, including
product standards that may be developed. Moreover, the cost of
compliance with government regulations may adversely affect our
revenue and profitability. Regulation of our cord blood
preservation services in foreign jurisdictions is still evolving.
Consistent with industry practice, the Viacord cord blood
collection kits have not been cleared as a medical device. The
FDA could at any time require us to obtain medical device
premarket application (PMA) approval or 510(k) clearance
for the collection kits, or new drug application supplement
(sNDA) approval for a drug component of the kits. Securing any
necessary medical device 510(k) clearance or PMA approval for
the cord blood collection kits, or sNDA approval for a drug
component of the kits, may involve the submission of a
substantial volume of data and may require a lengthy substantive
review. The FDA also could require that we cease distributing
the collection kits and require us to obtain medical device
510(k) clearance or PMA approval for the kits or sNDA approval
of a drug component of the kits prior to further distribution of
the kits.
Of the states in which we provide cord blood banking services,
only New Jersey, New York, Maryland, Kentucky, Illinois and
Pennsylvania currently require that cord blood banks be licensed
or registered. We are currently licensed or registered to
operate in New Jersey, New York, Kentucky, Illinois and
Pennsylvania, and we believe that we will be able to comply with
the license and registration requirements in Maryland which we
recently identified. If other states adopt requirements for the
licensing or registration of cord blood preservation services,
we would have to obtain licenses or register to continue
providing services in those states.
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Oocyte cryopreservation. There are no established
precedents for US and international regulation of oocyte
cryopreservation. We anticipate that in the Unites States
cryopreservation of oocytes will be regulated similarly to
Viacords family umbilical cord blood cryopreservation
product. We also anticipate that some of the components used in
this product will be regulated as medical devices under a 510(k)
clearance mechanism. For instance, prior to marketing this
product, our media supplier will be required to obtain 510(k)
clearance for the technology we have licensed for use in the
cryopreservation of oocytes. In November of 2004, our media
supplier submitted a 510(k) to the FDA for clearance of the
oocyte cryopreservation media. In January of 2005, our media
supplier informed us that they had received a letter from the
FDA that included the following information:
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a statement that our media supplier will need to conduct a
clinical study that produces pregnancy and birth rates data to
support the application; and |
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a request that various additional information be submitted,
including stability, toxicity testing, biocompatibility and
labeling information. |
Clinical data were not included in the original 510(k)
application. Our media supplier has responded to the FDA letter
and has submitted existing, published third party clinical data
and additional information to the pending 510(k) application. We
believe that the existing, published clinical data may be
sufficient to support 510(k) clearance of the media; however, it
is likely that a new clinical trial will be required which could
substantially delay 510(k) clearance and our launch of Viacyte.
In addition, although the letter from the FDA did not suggest
that any other approval process would be required other than the
510(k) process, the FDA could at any time determine, for
instance, that:
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cryopreservation of oocytes requires biologic marketing
approval, entailing an Investigational New Drug
(IND) application to conduct clinical trials and extensive
clinical and nonclinical data and a biologics license
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components used to cryopreserve the oocytes require PMAs. |
Either scenario would substantially lengthen our planned
developmental timeline for and substantially increase the costs
of commercializing this service. We have not investigated the
regulations for the cryopreservation of oocytes in foreign
jurisdictions.
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We depend on patents and other proprietary rights that may
fail to protect our business. |
Our success depends, in large part, on our ability to obtain and
maintain intellectual property protection for our product
candidates, technologies and trade secrets. We own or have
exclusive licenses to six US patents and two international
patents. We also own or have exclusive licenses to 12 pending
applications in the United States and 52 pending applications in
foreign countries. Our pending patent applications may not
issue, and we may not receive any additional patents. The patent
position of biotechnology companies is generally highly
uncertain, involves complex legal and factual questions and has
recently been the subject of much litigation. Neither the US
Patent and Trademark Office nor the courts have a consistent
policy regarding the breadth of claims allowed or the degree of
protection afforded under many biotechnology patents. The claims
of our existing US patents and those that may issue in the
future, or those licensed to us, may not offer significant
protection of our Selective Amplification and other
technologies. Our patents on Selective Amplification, in
particular, are quite broad in that they cover selection and
amplification of any targeted cell population. While Selective
Amplification is covered by issued patents and we are not aware
of any challenges, patents with broad claims tend to be more
vulnerable to challenge by other parties than patents with more
narrowly written claims. Our patent applications covering
Unrestricted Somatic Stem Cells (USSCs) claim these cells as
well as their use in the treatment of many diseases. It is
possible that these cells could be covered by other patents or
patent applications which identify, isolate or use the same
cells by other markers, although we are not aware of any. Third
parties may challenge, narrow, invalidate or circumvent any
patents we obtain based on these applications.
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Furthermore, our competitors may independently develop similar
technologies or duplicate any technology developed by us in a
manner that does not infringe our patents or other intellectual
property. Because of the extensive time required for
development, testing and regulatory review of a potential
product, it is possible that, before any of our products can be
commercialized, any related patent may expire or remain in force
for only a short period following commercialization, thereby
reducing any advantages of the patent. For instance, our patents
on Selective Amplification issued in 1997 and will expire in
2014. To the extent our product candidates based on that
technology are not commercialized significantly ahead of this
date, or to the extent we have no other patent protection on
such products, those products would not be protected by patents
beyond 2014. Without patent protection, those products might
have to compete with identical products by competitors.
In an effort to protect our unpatented proprietary technology,
processes and know-how as trade secrets, we require our
employees, consultants, collaborators and advisors to execute
confidentiality agreements. These agreements, however, may not
provide us with adequate protection against improper use or
disclosure of confidential information. These agreements may be
breached, and we may not have adequate remedies for any such
breach. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties
with whom our employees, consultants, collaborators or advisors
have previous employment or consulting relationships. Also,
others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access
to our trade secrets.
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CB001 and our other cellular product candidates represent
new forms of therapy or products that the marketplace may not
accept. |
Even if we successfully develop and obtain regulatory approval
for CB001 or other stem cell therapy products, the market may
not accept them. Other than hematopoietic stem cell transplants,
stem cell therapy is not currently a commonly used procedure.
Similarly, our oocyte cryopreservation product candidate, if
developed and cleared for commercial use, may not be accepted by
the market. Market demand for our products will depend primarily
on acceptance by patients, physicians, medical centers and third
party payers. Commercial acceptance will be dependent upon
several factors, including:
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the number and relative efficacy of products that compete with
our product; |
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our ability to supply a sufficient amount of our product to meet
demand; |
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our ability to build and maintain, or access through third
parties, a capable sales force; |
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our ability to successfully fund launch costs; and |
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our ability to obtain insurance coverage and reimbursement for
our cellular therapy products. |
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Our success will depend in part on establishing and
maintaining effective strategic partnerships and
collaborations. |
A key aspect of our business strategy is to establish strategic
relationships in order to gain access to technology and critical
raw materials, to expand or complement our research, development
or commercialization capabilities, or to reduce the cost of
developing or commercializing products on our own. We currently
have strategic relationships with Amgen, Genzyme and
Massachusetts General Hospital. While we are currently in
discussions with a number of companies, universities, research
institutions, public cord blood banks and others to establish
additional relationships and collaborations, we may not reach
definitive agreements with any of them. Even if we enter into
these arrangements, we may not be able to maintain these
relationships or establish new ones in the future on acceptable
terms. Furthermore, these arrangements may require us to grant
certain rights to third parties, including exclusive marketing
rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our
securities. Our partners may decide to develop alternative
technologies either on their own or in collaboration with
others. If any of our partners terminate their relationship with
us or
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fail to perform their obligations in a timely manner, the
development or commercialization of our technology and potential
products may be substantially delayed.
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Third parties may own or control patents or patent
applications that are infringed by our technologies or product
candidates. |
Our success depends in part on our not infringing other
parties patents and proprietary rights as well as not
breaching any licenses relating to our technologies and product
candidates. In the United States, patent applications filed in
recent years are confidential for 18 months, while older
applications are not published until the patent issues. As a
result, there may be patents of which we are unaware, and
avoiding patent infringement may be difficult. We may
inadvertently infringe third party patents or patent
applications. These third parties could bring claims against us,
our collaborators or our licensors that, even if resolved in our
favor, could cause us to incur substantial expenses and, if
resolved against us, could additionally cause us to pay
substantial damages. For instance, in defending the Delaware
claim of patent infringement brought against us by PharmaStem,
which, until recently, was the only infringement claim we had
faced, we have incurred total legal expenses as of
December 31, 2004 of $6.5 million. Depending upon the
extent of the appeals process concerning either or both patents
asserted in Delaware, and the extent we litigate the additional
patent infringement lawsuit originally brought by PharmaStem in
Massachusetts and any related appeals, we estimate that we could
incur at least an additional $1.0 million to
$2.0 million in litigation expenses. Further, if other
patent infringement suits were brought against us, our
collaborators or our licensors, we or they could be forced to
stop or delay research, development, manufacturing or sales of
any infringing product in the country or countries covered by
the patent we infringe, unless we can obtain a license from the
patent holder. Such a license may not be available on acceptable
terms, or at all, particularly if the third party is developing
or marketing a product competitive with the infringing product.
Even if we, our collaborators or our licensors were able to
obtain a license, the rights may be nonexclusive, which would
give our competitors access to the same intellectual property.
In addition, payments under such licenses would reduce the
earnings otherwise attributable to the related products.
We also may be required to pay substantial damages to the patent
holder in the event of an infringement. Under some circumstances
in the United States, these damages could be triple the actual
damages the patent holder incurred, and we could be ordered to
pay the costs and attorneys fees incurred by the patent
holder. If we have supplied infringing products to third parties
for marketing, or licensed third parties to manufacture, use or
market infringing products, we may be obligated to indemnify
these third parties for any damages they may be required to pay
to the patent holder and for any losses the third parties may
sustain themselves as the result of lost sales or damages paid
to the patent holder.
In addition to the two PharmaStem patent infringement lawsuits
we are contesting, we are aware that PharmaStem owns an
additional patent, U.S. Patent No. 6,605,275, in the
cord blood preservation field, which is the field in which we
currently do business regarding Viacord and, if approved and
commercialized, our CB001 product candidate. This patent expires
in 2010. We are also aware of two patents relating to
compositions of purified hematopoietic stem cells and their use
in hematopoietic stem cell transplantation, which could impact
our stem cell therapeutics business. We believe, based on advice
of our patent counsel, that we do not infringe any valid claims
of this additional PharmaStem patent or of these two other
patents. We cannot assure you, however, that if we are sued on
any of these patents we would prevail. Proving invalidity, in
particular, is difficult since it requires a showing of clear
and convincing evidence to overcome the presumption of validity
enjoyed by issued patents. If we are found to infringe these
patents and are not able to obtain a license, we may not be able
to operate our business.
Any successful infringement action brought against us may also
adversely affect marketing of the infringing product in other
markets not covered by the infringement action, as well as our
marketing of other products based on similar technology.
Furthermore, we may suffer adverse consequences from a
successful infringement action against us even if the action is
subsequently reversed on appeal, nullified through another
action or resolved by settlement with the patent holder. The
damages or other remedies awarded, if any, may be significant.
As a result, any infringement action against us would likely
delay the
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regulatory approval process, harm our competitive position, be
very costly and require significant time and attention of our
key management and technical personnel.
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We may be involved in lawsuits to protect or enforce our
patents or the patents of our collaborators or licensors, which
could be expensive and time consuming. |
Competitors may infringe our patents or the patents of our
collaborators or licensors. Although we have not needed to take
such action to date, we may be required to file infringement
claims to counter infringement or unauthorized use. This can be
expensive, particularly for a company of our size, and
time-consuming. In addition, in an infringement proceeding, a
court may decide that a patent of ours is not valid or is
unenforceable, or may refuse to stop the other party from using
the technology at issue on the grounds that our patents do not
cover its technology. An adverse determination of any litigation
or defense proceedings could put one or more of our patents at
risk of being invalidated or interpreted narrowly and could put
our patent applications at risk of not issuing.
Interference proceedings brought by the US Patent and Trademark
Office may be necessary to determine the priority of inventions
with respect to our patent applications or those of our
collaborators or licensors. Litigation or interference
proceedings may fail and, even if successful, may result in
substantial costs and distraction to our management. We may not
be able, alone or with our collaborators and licensors, to
prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully
as in the United States.
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation,
there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. In
addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings,
motions or other interim proceedings or developments. If
investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock.
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In order to commercialize CB001 or other product
candidates using our Selective Amplification technology, we may
need to obtain additional license rights to third party patents,
which may not be available to us on reasonable terms, or at
all. |
Some aspects of our Selective Amplification technology involve
the use of antibodies, growth factors and other reagents that
are, in certain cases, the subject of third party rights. We
have the rights to third party patents for use of all growth
factors employed in manufacturing our current product candidates
for preclinical and clinical testing, including licenses from
Amgen for SCF and Flt-3 and GlaxoSmithKline for Tpo mimetic. The
media in which we amplify the cells is available from several
commercial sources. Before we commercialize any product
utilizing this technology, including CB001, we may need to
obtain additional license rights to use reagents from third
parties not covered by these patents or licenses. If we are not
able to obtain these rights on reasonable terms or redesign our
Selective Amplification process to use other reagents, we may
not be able to commercialize any products, including CB001. If
we must redesign our Selective Amplification process to use
other reagents, we may need to demonstrate comparability in
subsequent clinical trials.
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The successful commercialization of CB001, or any of our
other potential cell therapy products, will depend on obtaining
reimbursement for use of this product from third party
payers. |
If we successfully develop and obtain necessary regulatory
approvals, we intend to sell our lead product CB001 initially in
the United States and the European Union. In the United States,
the market for many pharmaceutical products is affected by the
availability of reimbursement from third party payers such as
government health administration authorities, private health
insurers, health maintenance organizations and pharmacy benefit
management companies. CB001 and our other potential cellular
therapy products may be relatively expensive treatments due to
the higher cost of production and more complex logistics of
cellular products compared with standard pharmaceuticals; this,
in turn, may make it
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more difficult for us to obtain adequate reimbursement from
third party payers, particularly if we cannot demonstrate a
favorable cost-benefit relationship. Third-party payers may also
deny coverage or offer inadequate levels of reimbursement for
CB001 or any of our other potential products if they determine
that the product has not received appropriate clearances from
the FDA or other government regulators or is experimental,
unnecessary or inappropriate. In the countries of the European
Union and in some other countries, the pricing of prescription
pharmaceutical products and services and the level of government
reimbursement are subject to governmental control.
Managing and reducing health care costs has been a concern
generally of federal and state governments in the United States
and of foreign governments. Although we do not believe that any
recently enacted or presently proposed legislation should impact
our business, we cannot be sure that we will not be subject to
future regulations that may materially restrict the price we
receive for our products. Cost control initiatives could
decrease the price that we receive for any product we may
develop in the future. In addition, third-party payers are
increasingly challenging the price and cost-effectiveness of
medical products and services, and any of our potential products
may ultimately not be considered cost-effective by these payers.
Any of these initiatives or developments could materially harm
our business.
Although we are aware of a small fraction of Viacord customers
receiving reimbursement, we believe our Viacord cord blood
preservation product, like other private cord blood banking, is
not generally subject to reimbursement. However, if our
potential cell therapy products, like CB001, are not reimbursed
by the government or third party insurers, the market for those
products would be limited. We cannot be sure that third party
payers will reimburse sales of a product or enable us or our
partners to sell the product at prices that will provide a
sustainable and profitable revenue stream.
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We have only limited experience manufacturing cell therapy
product candidates in connection with our preclinical and
clinical work to date, and we may not be able to manufacture our
product candidates in quantities sufficient for later stage
clinical studies or for commercial scale. |
We currently produce limited quantities of stem cells using our
Selective Amplification and USSC technologies. We have not built
commercial scale manufacturing facilities, and have no
experience in manufacturing cellular products in the volumes
that will be required for later stage clinical studies or
commercialization. If we successfully obtain marketing approval
for any products, we may not be able to produce sufficient
quantities of our products at an acceptable cost.
Commercial-scale production of therapies made from live human
cells involves production in small batches and management of
complex logistics. Cellular therapies are inherently more
difficult to manufacture at commercial-scale than chemical
pharmaceuticals or biologics, which are manufactured using
standardized production technologies and operational methods. We
may encounter difficulties in production due to, among other
things, quality control, quality assurance and component supply.
These difficulties could reduce sales of our products, increase
our cost or cause production delays, all of which could damage
our reputation and hurt our profitability.
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We are dependent on our existing suppliers and
establishing relationships with certain other suppliers for
certain components of our product candidates. The loss of such
suppliers or our inability to establish such relationships may
delay development or limit our ability to manufacture our stem
cell therapy products. |
Certain antibodies, growth factors and other reagents are
critical components used in our stem cell production process.
Our Selective Amplification process currently uses components
sold to us by certain manufacturers, and we need to establish
relationships with other suppliers to manufacture cGMP grade
products for commercial sale. We are materially dependent on our
suppliers for such components. Some of these components are
supplied to us by Amgen, GlaxoSmithKline and Miltenyi Biotec,
with whom we have agreements to supply SCF, Flt-3 Tpo mimetic
and cGMP grade antibodies conjugated with magnetic particles and
who are our only single-source suppliers on whom we currently
materially rely. Other components, such as research grade
materials that are suitable for production of stem cells used
for research and in Phase I human clinical studies, are
purchased as catalog products from vendors, such as
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StemCell Technologies and R&D Systems, with which we do not
have relationships. In order to continue our clinical trials and
commercialize our Selective Amplification products, we will need
to establish relationships with some of these suppliers. In the
event that our suppliers are unable or unwilling to produce such
components on commercially reasonable terms, and we are unable
to find substitute suppliers for such components, we may not be
able to commercialize our stem cell products. We depend on our
suppliers to perform their obligations in a timely manner and in
accordance with applicable government regulations. In the event
that any of these suppliers becomes unwilling or unable to
continue to supply necessary components for the manufacture of
our stem cell products, we will need to repeat certain
development work to identify and demonstrate the equivalence of
alternative components purchased from other suppliers. If we are
unable to demonstrate the equivalence of alternative components
in a timely manner, or purchase these alternative components on
commercially reasonable terms, development of our products may
be delayed and we may not be able to complete development of or
market our stem cell products.
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Material for clinical studies and future cellular products
must be manufactured using components made to a certain
standard, and we may have difficulty finding sources of these
components made to this standard. |
In order to produce cells for use in clinical studies and
produce stem cell products for commercial sale, certain
biological components used in our production process will need
to be manufactured in compliance with current Good Manufacturing
Practices, or cGMP. To meet this requirement, we will need to
enter into supply agreements with firms who manufacture these
components to cGMP standards. We are currently in discussions
with multiple firms who we may engage as suppliers for these
components. Once we engage these third parties, we may be
materially dependent on them for supply of cGMP grade
components. If we are unable to obtain cGMP grade biological
components for our products, we may not be able to market our
stem cell products.
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If our cord blood processing and storage facility or our
clinical manufacturing facilities are damaged or destroyed, our
business and prospects would be negatively affected. |
We process and store our customers umbilical cord blood at
our facility in Hebron, Kentucky. If this facility or the
equipment in the facility were to be significantly damaged or
destroyed, we could suffer a loss of some or all of the stored
cord blood units. Depending on the extent of loss, such an event
could reduce our ability to provide cord blood stem cells when
requested, could expose us to significant liability to our cord
blood banking customers and could affect our ability to continue
to provide cord blood banking services.
We have a clinical manufacturing facility located in Worcester,
Massachusetts that is capable of producing stem cells for
Phase I and II clinical trials. We are building out a
facility in Cambridge, Massachusetts that we intend to replace
our Worcester facility and be capable of producing stem cells
for Phase II and III clinical trials and initial
commercialization. In January 2005, we closed our facility in
Langenfeld, Germany and transferred all manufacturing and
development activities that had been conducted in Germany to the
United States. For the next several years, we expect to
manufacture all of our stem cell product candidates in our new
Cambridge facility. If this facility or the equipment in it is
significantly damaged or destroyed, we may not be able to
quickly or inexpensively replace our manufacturing capacity. In
the event of a temporary or protracted loss of this facility or
equipment, we may be able to transfer manufacturing to a third
party, but the shift would likely be expensive, and the timing
would depend on availability of third party resources and the
speed with which we could have a new facility approved by the
FDA.
While we believe that we have insured against losses from damage
to or destruction of our facilities consistent with typical
industry practices, if we have underestimated our insurance
needs, we will not have sufficient insurance to cover losses
above and beyond the limits on our policies. Currently, we
maintain insurance coverage totaling $20.9 million against
damage to our property and equipment, and an additional
$18.0 million to cover incremental expenses and loss of
profits resulting from such damage.
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If we are not able to recruit and retain qualified
management and scientific personnel, we may fail in developing
our technologies and product candidates. |
Our success is highly dependent on the retention of the
principal members of our scientific, management and sales
personnel. Marc D. Beer, our President and Chief Executive
Officer, is critical to our ability to execute our overall
business strategy. Morey Kraus, our Chief Technology Officer and
co-founder, is a co-inventor of our Selective Amplification
technology and has significant and unique expertise in stem cell
expansion and related technologies. We maintain key man life
insurance on the lives of Marc D. Beer and Morey Kraus.
Additionally, we have several other scientific personnel that we
consider important to the successful development of our
technology. Although we are not aware that any of our key
employees are currently planning to retire or leave the company,
any key employee could terminate his or her relationship with us
at any time and, despite any non-competition agreement with us,
work for one of our competitors. Furthermore, our future growth
will require hiring a significant number of qualified technical,
commercial and administrative personnel. Accordingly, recruiting
and retaining such personnel in the future will be critical to
our success.
Although we have been successful recruiting and retaining key
personnel in the past, there is intense competition from other
companies, universities and other research institutions for
qualified personnel in the areas of our activities. If we are
not able to continue to attract and retain, on acceptable terms,
the qualified personnel necessary for the continued development
of our business, we may not be able to sustain our operations or
achieve our business objectives.
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We may face difficulties in managing and maintaining the
growth of our business. |
We expect to continue expanding our reproductive health services
in the United States. This expansion could put significant
strain on our management, operational and financial resources.
Currently, our only facilities abroad are offices and
laboratories in Singapore. To manage future growth, we would
need to hire, train and manage additional employees,
particularly a specially-trained sales force. We plan to begin
commercializing our oocyte cryopreservation technology if and
when the cryopreservation media obtains FDA 510(k) clearance,
which would not occur earlier than 2007, unless the FDA were to
no longer require a clinical trial to support the current
application for clearance, in which case we believe we may be
able to receive clearance and begin commercialization in 2005.
To commercialize this product, we would be required to institute
additional and distinct sales and marketing, manufacturing and
storage capacities in addition to leveraging our existing
capabilities in these areas. Concurrent with expanding our
reproductive health activities, we will also be increasing our
research and development activities, most significantly the
clinical development of our lead product candidate, CB001, with
the expectation of ultimately commercializing that product
candidate.
Prior to our recently completed initial public offering in
January, we maintained a small finance and accounting staff
because we were a private company. Our new reporting obligations
as a public company, as well as our need to comply with the
requirements of the Sarbanes-Oxley Act of 2002, the rules and
regulations of the Securities and Exchange Commission and the
Nasdaq National Market, will place significant additional
demands on our finance and accounting staff, on our financial,
accounting and information systems and on our internal controls.
We intend to add to our accounting and finance personnel and
have taken steps to proactively monitor our networks and to
improve our financial, accounting and information systems and
internal controls in order to fulfill our responsibilities as a
public company and to support growth in our business. We cannot
assure you that our current and planned personnel, systems
procedures and controls will be adequate to support our
anticipated growth or that management will be able to hire,
train, retain, motivate and manage required personnel. Our
failure to manage growth effectively could limit our ability to
achieve our research and development and commercialization goals
or to satisfy our reporting and other obligations as a public
company.
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If we acquire other businesses or technologies and are
unable to integrate them successfully with our business, our
financial performance could suffer. |
If we are presented with appropriate opportunities, we may
acquire other businesses. We have had limited experience in
acquiring and integrating other businesses; since our
incorporation in 1994, we have acquired three businesses:
Viacord in 2000, Cerebrotec, Inc. in 2001 and Kourion
Therapeutics AG in 2003. The integration process following any
future acquisitions may produce unforeseen operating
difficulties and expenditures and may absorb significant
management attention that would otherwise be available for the
ongoing development of our business. Also, in any future
acquisitions, we may issue shares of stock dilutive to existing
stockholders, incur debt, assume contingent liabilities, or
create additional expenses related to amortizing intangible
assets, any of which might harm our financial results and cause
our stock price to decline. Any financing we might need for
future acquisitions may be available to us only on terms that
restrict our business or impose costs that reduce our net income.
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Our competitors may have greater resources or capabilities
or better technologies than we have, or may succeed in
developing better products or develop products more quickly than
we do, and we may not be successful in competing with
them. |
The pharmaceutical and biotechnology businesses are highly
competitive. We compete with many organizations that are
developing cell therapies for the treatment of a variety of
human diseases, including companies such as Aastrom Biosciences,
Cellerant, Gamida-Cell, Geron, Genzyme, Neuronyx, Osiris
Therapeutics and Stem Cells. We also face competition in the
cell therapy field from academic institutions and governmental
agencies. Some of these competitors, and future competitors, may
have similar or better product candidates or technologies,
greater financial and human resources than we have, including
more experience in research and development and more established
sales, marketing and distribution capabilities. Specifically,
Gamida-Cell, a private company based in Israel, is developing a
hematopoetic stem cell therapy product candidate similar to
CB001. This product has been evaluated in a Phase I trial.
Another competitor, Osiris Therapeutics, a private company based
in the United States, has a mesenchymal stem cell product
candidate made from bone marrow that is intended for use in
conjunction with transplantation of conventional bone marrow or
cord blood cells. Osiriss product candidate has already
completed Phase I testing. Either of these product
candidates, and potentially others, could have equal or better
efficacy than CB001 or could potentially reach the market more
quickly than CB001. In addition, public cord blood banks may, as
a result of a recent legislative initiative, be able to better
compete with our potential cell therapy products, such as CB001.
The Cord Blood Stem Cell Act of 2003, which has not yet been
enacted into law, sought to authorize up to $15 million in
federal funding for a national system of public cord blood banks
and encourage cord blood donations in fiscal year 2004 and up to
$30 million in fiscal year 2005 from an ethnically diverse
population. The purpose of the legislation is to create a
national network of cord blood stem cell banks that contains at
least 150,000 units of human cord blood stem cells. An
increase in the number and diversity of publicly-available cord
blood units from public banks could diminish the necessity of
cord blood-derived therapeutics produced with our Selective
Amplification technology.
In private cord blood banking, we compete with companies such as
Cbr Systems, Cryo-Cell International, CorCell and LifeBank USA.
LifeBank USA is owned by Celgene Corporation, a public company,
and may have more resources to invest in sales, marketing,
research and product development than we have. In cord blood
banking, we also compete with public cord blood banks such as
the New York Blood Center (National Cord Blood Program),
University of Colorado Cord Blood Bank, Milan Cord Blood Bank,
Düsseldorf Cord Blood Bank, and approximately 50 other cord
blood banks around the world. Public cord blood banks provide
families with the option of donating their cord blood for public
use. There is no cost to donate and, as public banks grow in
size and increase in diversity, which is, for instance, the aim
of the Cord Blood Stem Cell Act of 2003, the probability of
finding suitably matched cells for a family member may increase,
which may result in a decrease in demand for private cord blood
banking. In addition, if the science of human leukocyte antigen
(HLA) typing advances, then unrelated
65
cord blood transplantation may become safer and more
efficacious, similarly reducing the clinical advantage of
related cord blood transplantation.
In oocyte preservation, we expect to compete with
in vitro fertilization (IVF) centers, including
Florida Institute for Reproductive Medicine, Stanford
University, the Jones Institute for Reproductive Medicine, and
Egg Bank USA (through Advanced Fertility Clinic) and individual
companies offering oocyte cryopreservation, including Extend
Fertility. Current and future competitors in this field, too,
may have greater financial and human resources than we have, and
may have similar or better product candidates or technologies,
or product candidates which are brought to the market more
quickly than ours. Specifically, several IVF centers (including
all of those mentioned here) are already performing oocyte
preservation on a limited basis, which may make it more
difficult for us to establish our product or achieve a
significant market share.
We anticipate this competition to increase in the future as new
companies enter the stem cell therapy, cord blood preservation
and oocyte preservation markets. In addition, the health care
industry is characterized by rapid technological change, and new
product introductions or other technological advancements could
make some or all of our products obsolete.
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|
|
Due to the nature of our cell preservation activities,
harm to our reputation could have a significant negative impact
on our financial condition, and damage to or loss of our
customers property held in our custody could potentially
result in significant legal liability. |
Our cord blood preservation and our potential oocyte
cryopreservation products are and will be activities in which
our reputation among clients and the medical and birthing
services community will be extremely important to our commercial
success. This is due in significant part to the nature of the
product and service we provide. For instance, as part of our
Viacord product, we are assuming custodial care of a
childs umbilical cord blood tissue entrusted to us by the
parents for potential future use as a therapeutic for the child
or its siblings. We believe that our reputation enables us to
market ourself as a premium provider of cord blood preservation
among our competitors. While we seek to maintain high standards
in all aspects of our provision of products and services, we
cannot guarantee that we will not experience mishaps. Like
family cord blood banks generally, we face the risk that a
customers cord blood unit could be lost or damaged while
in transit from the collection site to our storage facility,
including while the unit is in the possession of third party
commercial carriers used to transport the units. There is also
risk of loss or damage to the unit during the preservation or
storage process. Any such mishaps, particularly if publicized in
the media or otherwise, could negatively impact our reputation,
which could adversely affect our business and business prospects.
In addition to reputational damage, we face the risk of legal
liability for loss of or damage to cord blood units. We do not
own the cord blood units banked by our Viacord customers;
instead, we act as custodian on behalf of the child-donors
guardian. Thus loss or damage to the units would be loss or
damage to the customers property, a potentially unique,
and depending on the circumstances, perhaps irreplaceable
potential therapeutic. Therefore, we cannot be sure to what
extent we could be found liable, in any given scenario, for
damages suffered by an owner or donor as a result of harm or
loss of a cord blood unit. Since we began offering the Viacord
blood preservation product in 1994, two lawsuits have been filed
against us, one regarding damage to a customers cord blood
unit because of a delay in transport to our processing facility
and the other regarding the total loss of the unit while in
transit. Both cases were settled through mediation for amounts
not material to our financial results or financial condition and
were substantially covered by our insurance policies. However,
we cannot assure you that any future cases could be resolved by
payment of immaterial amounts for damages or that our insurance
coverage will be sufficient to cover such damages.
66
|
|
|
The manufacture and sale of stem cell products may expose
us to product liability claims for which we could have
substantial liability. |
We face an inherent business risk of exposure to product
liability claims if stem cell products produced using our
technology are alleged or found to have caused injury. While we
believe that our current liability insurance coverage is
adequate for our present commercial activities, we will need to
increase our insurance coverage if and when we begin
commercializing stem cell therapy products. We may not be able
to obtain insurance for potential liability arising from any
such potential products on acceptable terms with adequate
coverage or may be excluded from coverage under the terms of any
insurance policy that we obtain. We may not be able to maintain
insurance on acceptable terms or at all. If we are unable to
obtain insurance or any claims against us substantially exceed
our coverage, then our business could be adversely impacted.
|
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|
We face potential liability related to the privacy of
health information we obtain from research collaborators or from
providers who enroll patients and collect cord blood or human
oocytes. |
Our business relies on the acquisition, analysis, and storage of
potentially sensitive information about individuals
health, both in our research activities and in our reproductive
health product and service offerings. These data are protected
by numerous federal and state privacy laws.
Most health care providers, including research collaborators
from whom we obtain patient information, are subject to privacy
regulations promulgated under the Heath Insurance Portability
and Accountability Act of 1996, or HIPAA (Privacy
Rule). Although we ourselves are not directly regulated by
the HIPAA Privacy Rule, we could face substantial criminal
penalties if we knowingly receive individually identifiable
health information from a health care provider who has not
satisfied the HIPAA Privacy Rules disclosure standards. In
addition, certain state privacy laws and genetic testing laws
may apply directly to our operations and impose restrictions on
our use and dissemination of individuals health
information. Moreover, patients about whom we obtain
information, as well as the providers who share this information
with us, may have contractual rights that limit our ability to
use and disclose the information. Claims that we have violated
individuals privacy rights or breached our contractual
obligations, even if we are not found liable, could be expensive
and time-consuming to defend and could result in adverse
publicity that could harm our business.
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Ethical and other concerns surrounding the use of stem
cell therapy may negatively affect regulatory approval or public
perception of our products, thereby reducing demand for our
products. |
The use of embryonic stem cells for research and stem cell
therapy has been the subject of debate regarding related
ethical, legal and social issues. Although we do not currently
use embryonic stem cells as a source for our research programs,
the use of other types of human stem cells for therapy could
give rise to similar ethical, legal and social issues as those
associated with embryonic stem cells. The commercial success of
our product candidates will depend in part on public acceptance
of the use of stem cell therapy, in general, for the prevention
or treatment of human diseases. Public attitudes may be
influenced by claims that stem cell therapy is unsafe, and stem
cell therapy may not gain the acceptance of the public or the
medical community. Adverse events in the field of stem cell
therapy that may occur in the future also may result in greater
governmental regulation of our product candidates and potential
regulatory delays relating to the testing or approval of our
product candidates. In the event that our research becomes the
subject of adverse commentary or publicity, the market price for
our common stock could be significantly harmed.
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Our business involves the use of hazardous materials that
could expose us to environmental and other liability. |
We have facilities in Massachusetts, Kentucky, Singapore and
Germany that are subject to various local, state and federal
laws and regulations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or
67
potentially hazardous substances, including chemicals,
micro-organisms and various radioactive compounds used in
connection with our research and development activities. In the
United States, these laws include the Occupational Safety and
Health Act, the Toxic Test Substances Control Act and the
Resource Conservation and Recovery Act. Although we believe that
our safety procedures for handling and disposing of these
materials comply with the standards prescribed by these
regulations, we cannot assure you that accidental contamination
or injury to employees and third parties from these materials
will not occur. We do not have insurance to cover claims arising
from our use and disposal of these hazardous substances other
than limited clean-up expense coverage for environmental
contamination due to an otherwise insured peril, such as fire.
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ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Quantitative and Qualitative Disclosure About Market Risks
We own financial instruments that are sensitive to market risks
as part of our investment portfolio. We use this investment
portfolio to preserve our capital until it is required to fund
operations, including our research and development activities.
Our investment portfolio includes only marketable securities
with active secondary or resale markets to help ensure portfolio
liquidity, and we have implemented guidelines limiting the
duration of investments. We invest in highly-rated commercial
paper with maturities of less than two years and money market
funds. None of these market-risk sensitive instruments is held
for trading purposes. We do not own derivative financial
instruments in our investment portfolio.
Transactions by our German subsidiary Kourion Therapeutics are
recorded in euros. Exchange gains or losses resulting from the
translation of Kourions financial statements into US
dollars are included as a separate component of
stockholders deficit. We hold euro-based currency accounts
to mitigate foreign currency transaction risk. Since both the
revenues and expenses of this subsidiary are denominated in
euros, the fluctuations of exchange rates may adversely affect
our results of operations, financial position and cash flows.
We invest our cash in a variety of financial instruments,
principally securities issued by the US government and its
agencies, investment grade corporate and money market
instruments. These investments are denominated in US dollars.
These bonds are subject to interest rate risk, and could decline
in value if interest rates fluctuate. Due to the conservative
nature of these instruments, we do not believe that we have a
material exposure to interest rate risk.
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ITEM 8. |
CONSOLIDATED FINANCIAL STATEMENTS |
Our consolidated financial statements are annexed to this report
beginning on page F-1.
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ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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ITEM 9A. |
CONTROLS AND PROCEDURES |
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we have evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures as of December 31, 2004 and, based on their
evaluation, our principal executive officer and principal
financial officer have concluded that these controls and
procedures are effective. Disclosure controls and procedures are
our controls and other procedures that are designed to
68
ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and
reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by us in the reports that we file under the
Securities Exchange Act is accumulated and communicated to our
management, including our principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no changes in our internal controls over financial
reporting during the quarter ended December 31, 2004 that
have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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ITEM 9B. |
OTHER INFORMATION |
None.
PART III
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ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information required with respect to directors is
incorporated herein by reference to the information contained in
the definitive proxy statement for our 2005 Annual Meeting of
Stockholders (the Proxy Statement). The information
with respect to our audit committee financial expert is
incorporated herein by reference to the information contained in
the section captioned Audit Committee of the Proxy
Statement.
We have adopted a Code of Business Conduct and Ethics for our
directors, officers (including our principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions) and
employees. Our Code of Business Conduct and Ethics is available
in the Corporate Governance section of the Investor Information
section of our website at www.viacellinc.com. We intend to
disclose any amendments to, or waivers from, our Code of
Business Conduct and Ethics on our website. Stockholders may
request a free copy of the Code of Business Conduct and Ethics
by writing to us at ViaCell, Inc., 245 First Street, Cambridge,
Massachusetts 02142, Attention: Investor Relations.
Information about compliance with Section 16(a) of the
Exchange Act appears under Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement.
That portion of the Proxy Statement is incorporated by reference
into this report.
69
MANAGEMENT
Executive Officers and Key Employees
Set forth below is information regarding our executive officers
and key employees as of March 29, 2005.
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Name |
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Age | |
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Positions |
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Executive Officers:
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Marc D. Beer
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40 |
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President, Chief Executive Officer and Director |
Stephen G. Dance
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54 |
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Senior Vice President, Finance and Chief Financial Officer |
Christoph M. Adams, Ph.D
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48 |
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Senior Vice President, Business Development |
Kurt C. Gunter, M.D
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50 |
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Senior Vice President, Clinical and Regulatory Affairs and
Government Relations |
Mary T. Thistle
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45 |
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Senior Vice President, General Manager, ViaCell Reproductive
Health |
Stephan Wnendt, Ph.D
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42 |
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Senior Vice President, Research and Development |
Key Employees:
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Morey Kraus
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46 |
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Vice President and Chief Technical Officer |
Mary Larson-Marlowe
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39 |
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Vice President, Therapeutic Development Operations |
Marc D. Beer. Mr. Beer joined us as our President
and Chief Executive Officer and a member of the board in April
2000. Until January 2004, he also served as our Chairman of the
Board. Prior to this, from 1996 until April 2000, he was a
senior manager at Genzyme Corporation most recently serving in
the role of Vice President, Global Marketing for Genzyme
Therapeutics WorldWide, a division of Genzyme Corporation.
Mr. Beer has more than 15 years experience in
profit and loss management, sales and marketing management, and
research and development program management in therapeutic,
surgical, and in vitro diagnostic systems businesses.
Mr. Beer has served as a member of the board of directors
of Nephros Therapeutics, a private company, since 2001.
Mr. Beer has a B.S. from Miami University (Ohio).
Stephen G. Dance. Mr. Dance joined us as Senior Vice
President, Finance and Chief Financial Officer in January 2004.
Prior to this, he was Senior Vice President, Finance at SangStat
Medical Corporation, a biotechnology company, from April 1999
until December 2003, adding the additional title of Chief
Financial Officer in December 2002. Previously, Mr. Dance
spent one year with Plantronics, Inc., a telecommunications
company, where he was responsible for worldwide financial
accounting, reporting and planning activities. Prior to that, he
spent 15 years with Syntex Corporation, a pharmaceuticals
company (later part of the Roche group), in a variety of
increasingly responsible finance positions including controller
of US sales, marketing and manufacturing operations.
Mr. Dance holds a CPA (California) and FCA (United Kingdom)
qualification in accounting and spent seven years with
Deloitte & Touche in both the United Kingdom and the
United States. He received his B.A. degree in French at the
University of Leeds in England.
Christoph M. Adams, Ph.D. Dr. Adams has served
as our Senior Vice President, Business Development since joining
our company in July 2001. Prior to joining us, from March 1994
until February 2001, Dr. Adams was Vice President, Business
Development for Transkaryotic Therapies Inc., a publicly traded
biotechnology company, where he was responsible for strategic
planning, commercial product development and corporate
partnerships. Prior to that, Dr. Adams was Director of
Business Development for the Pharmaceutical Division of
Ciba-Geigy Limited, Basel, Switzerland, a publicly traded
biotechnology company. He has a diploma in organic chemistry and
biochemistry and a Ph.D. in organic
70
chemistry from the University of Zurich. Dr. Adams also
holds an M.B.A. from INSEAD of Fontainebleau, France.
Kurt C. Gunter, M.D. Dr. Gunter has served as
our Senior Vice President, Clinical and Regulatory Affairs and
Government Relations and our Medical Director since joining our
company in July 2001. From 1996 until 2001, Dr. Gunter was
Vice President, Clinical and Regulatory Affairs at Transkaryotic
Therapies Inc., where he was responsible for clinical
development activities and all regulatory affairs. Prior to
that, from 1995 until 1996, Dr. Gunter was the Director of
Stem Cell Processing, Hematology and the Blood Donor Center in
the Department of Laboratory Medicine at Childrens
National Medical Center in Washington, D.C. Dr. Gunter
has also held positions at the FDAs Center for Biologics
Evaluation and Research, including Acting Deputy Director for
the Division of Cellular and Gene Therapies and Chief of the
Cytokine and Cell Biology Branch. Dr. Gunter is
board-certified in Clinical and Anatomical Pathology and
Transfusion Medicine. Dr. Gunter has a B.S. from Stanford
University and an M.D. from the University of Kansas School of
Medicine.
Stephan Wnendt, Ph.D. Dr. Wnendt has served as
Senior Vice President, Research and Development since October
2004, and, prior to that, as our Senior Vice President, European
Operations since September 2003. He joined our company following
our acquisition of Kourion Therapeutics, where he was Executive
Officer and Chairman of the Management Board since March 2003.
Prior to his time at Kourion Therapeutics, from November 2000 to
February 2003, Dr. Wnendt was Vice President of
Biopharmaceutical Development and General Manager of JOMED GmbH,
now Abbott Vascular Instruments GmbH, managing a research and
manufacturing facility producing catheters and stents.
Previously, Dr. Wnendt worked for nine years in various
positions in research management with Grunenthal, an
international pharmaceutical company, finally as Head of
Preclinical Development. Dr. Wnendt is Assistant Professor
at the University of Technology in Aachen, Germany, received a
Diploma in Biochemistry from the Free University of Berlin and a
Ph.D. from the University of Technology, Berlin.
Mary T. Thistle. Ms. Thistle has served as a Senior
Vice President since February 2005, General Manager, ViaCell
Reproductive Health, since October 2004 and, prior to that, as
our Vice President, Viacord Operations since 2002. Prior to this
role, she served as our Vice President of Financial and
Corporate Planning and Treasurer since joining our company in
October 2000. Prior to joining us, Ms. Thistle provided
audit, tax and management consulting services to various
companies, including serving as consultant to Viacord while at
the accounting firm of Yoshita, Croyle & Sokolski from
January 1996 to October 2000. From October 1998 to October 1999,
she was responsible for all financial aspects, risk management,
information technology and human resources of S.R.T, a
subsidiary of Thermo Electron, a publicly traded materials
analysis solutions company. Prior to that, she served various
financial management positions at Nashua Corporation, a publicly
traded manufacturing company and Deloitte & Touche, a
global professional services organization delivering assurance,
tax and consulting services. Ms. Thistle has a B.S. in
accounting from the University of Massachusetts.
Morey Kraus. Mr. Kraus is the co-founder of ViaCell,
has served as our Vice President and Chief Technology Officer
since April 2000, and also serves on our medical and scientific
advisory board. Mr. Kraus served as our Chairman and Chief
Executive Officer from our inception in September 1994 until
March 2000. Prior to founding ViaCell, Mr. Kraus was a
Ph.D. candidate at Worcester Polytechnic Institute in an
interdisciplinary Bioprocess Engineering Program combining
chemical engineering and biology. Mr. Kraus has a B.A. in
religion from American University.
Mary Larson-Marlowe. Ms. Larson-Marlowe has been
Vice President of Therapeutic Development Operations since
December 2002. Prior to this role, she served as Director of
Program Management since joining the company in August 2000. Her
previous experience includes nine years at Genzyme Corporation,
serving in Marketing and Program Management roles in the
Therapeutic and Diagnostic business areas, during which time she
led several protein development projects from research through
71
clinical trials to FDA licensing. Ms. Larson-Marlowe has a
B.S. in Molecular Biology and Psychology from the University of
Wisconsin and an M.B.A. from Boston University.
Medical and Scientific Advisory Board
Our medical and scientific board provides specific expertise in
areas of research and development relevant to our business and
meets with our scientific and management personnel from time to
time to discuss our present and long-term research and
development activities. Our medical and scientific advisory
board members include:
C. Glenn Begley, M.D., Ph.D.
Dr. Begley is Vice President, Global Head of Hematology and
Oncology Research at Amgen. Previously he was Professor of
Medicine at the University of Melbourne in Australia. He has
published over 190 papers in scientific and medical journals.
His awards include the annual prizes of the Royal Australasian
College of Physicians and the Australian Society for Medical
Research. He was elected to the Royal College of Pathologists,
UK and was the first Foreign Member of the American Society for
Clinical Investigation. He trained at the Royal Melbourne
Hospital, specializing in hematology and medical oncology and
graduated in medicine from the University of Melbourne in 1978,
winning the Clinical Prize. He received his Ph.D. in molecular
biology at the Walter and Eliza Hall Institute of Medical
Research in 1986.
Barbara E. Bierer, M.D. Dr. Bierer is the
Senior Vice President for Research at Brigham and Womens
Hospital in Boston and Professor of Medicine and Pediatrics at
Harvard Medical School. Previously, she was the Chief of the
Laboratory of Lymphocyte Biology at the National Heart, Lung and
Blood Institute at the National Institutes of Health
(NIH) in Bethesda, MD. She also served as the Director of
Pediatric Stem Cell Transplantation at the Dana-Farber Cancer
Institute and The Childrens Hospital in Boston and was
Professor of Pediatrics at Harvard Medical School. A graduate of
Harvard Medical School, she specializes in immunology and stem
cell transplantation.
George Daley, M.D., Ph.D. Dr. Daley has
been one of our scientific consultants since 1998 and
Co-Chairman of our medical and scientific advisory board since
2000. He is currently an Associate Professor in the Division of
Pediatric Hematology/ Oncology, Childrens Hospital and
Dana Farber Cancer Institute, Boston and the Department of
Biological Chemistry and Molecular Pharmacology, Harvard Medical
School. Previously, Dr. Daley was a Whitehead Fellow at the
Whitehead Institute for Biomedical Research and an Assistant
Professor of Medicine and staff member in Hematology/ Oncology
at the Massachusetts General Hospital from 1995 to 2003. He is
board certified in Internal Medicine and Hematology.
Dr. Daley has a Bachelors degree magna cum laude from
Harvard University, a Ph.D. in biology from MIT and an M.D.
summa cum laude from Harvard University. Dr. Daley also
serves as a member of our board of directors.
Peter Wernet, Ph.D. Dr. Wernet has been the
co-chairman of our medical and scientific advisory board since
September 2003. He is the director and professor at the
Institute of Transplantation Immunology and Cell Therapeutics of
the Heinrich-Heine-University, Düsseldorf, Germany. In 1992
he established the José Carreras Cord Blood Bank
Düsseldorf. He has served as President of the International
NETCORD Foundation since 1998, which initiated a world
accreditation program jointly with the Federation for
Accreditation of Cell Therapy (FACT) in the United States.
In 1999, he founded Kourion Therapeutics of Germany, which we
acquired in September 2003. He studied Medicine in Cologne,
Geneva and London and received his doctorate from the Institute
of Physiology at the University of Göttingen. He was
postdoctoral fellow from 1971 to 1973 and assistant professor
for Immunology from 1973-1976 at Rockefeller University in New
York City. He obtained board certification in Transfusion
Medicine at the University of Tübingen, Germany.
Leonard I. Zon, M.D. Dr. Zon is an attending
physician in hematology at Childrens Hospital Boston and
in Oncology at Dana-Farber Cancer Institute. He is an Associate
in Medicine-Hematology/ Oncology, at Childrens Hospital
and Professor of Pediatric Medicine at Harvard Medical School.
He is also an Investigator for Howard Hughes Medical Institute.
Dr. Zon is board certified in Medical Oncology and
Hematology. He received a B.S. degree in chemistry and natural
sciences from Muhlenberg College and
72
an M.D. degree from Jefferson Medical College. He subsequently
did an internal medicine residency at New England Deaconess
Hospital and a fellowship in medical oncology at Dana-Farber
Cancer Institute. His postdoctoral research was in the
laboratory of Stuart Orkin.
Viacord Executive Medical Director
Robert Dracker, M.D., M.H.A. Dr. Dracker serves
as our Executive Medical Director for Viacord and is responsible
for all strategic medical clinical issues and policies related
to the operation of the Viacord cord blood bank.
Dr. Dracker is a pediatric hematologist with expertise in
blood banking and transfusion medicine. Dr. Dracker founded
Infusacare, Inc. of Syracuse, New York, where he practices.
Dr. Dracker is board certified by the American Association
of Pediatrics and by the American Board of Pathology in Blood
Banking/ Transfusion Medicine. Dr. Dracker is the Chair of
the Hematopoietic Cellular Therapy Advisory Board for the New
York State Department of Health and a member of the New York
Governors Council on Blood and Blood Transfusion.
Dr. Dracker was instrumental in drafting the New York State
regulations for cord blood banking.
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ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this item is incorporated by
reference to the Proxy Statement under the heading
Executive Compensation.
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|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT |
Information about security ownership of certain beneficial
owners and management appears under Stock Ownership of
Certain Beneficial Owners and Management in the Proxy
Statement, which portion of the Proxy Statement is incorporated
by reference into this report.
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ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information required by this item is incorporated by
reference to the Proxy Statement under the heading Certain
Relationships and Related Transactions.
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ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item is incorporated by
reference to the Proxy Statement under the heading
Independent Registered Public Accounting Firm.
PART IV
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ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K |
(a) The following documents are being filed as part of this
report:
(1) Consolidated Financial
Statements
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The following consolidated financial statements of ViaCell, Inc.
are filed as part of this report. |
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Page Number in |
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this Form 10-K |
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Report of Independent Registered Public Accounting Firm
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F-2 |
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Consolidated Balance Sheets
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F-3 |
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Consolidated Statements of Operations
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F-4 |
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Consolidated Statements of Comprehensive Income
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F-5 |
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Consolidated Statements of Changes in Stockholders Deficit
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F-6 |
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Consolidated Statements of Cash Flows
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F-7 |
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Notes to Consolidated Financial Statements
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F-8 |
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73
(2) Financial Statement Schedules
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All financial statement schedules have been omitted because they
are not applicable or not required or because the information is
included elsewhere in the Consolidated Financial Statements or
the Notes thereto. |
(b) Current Reports on Form 8-K
None filed in the quarter ended December 31, 2004.
(c) Exhibits
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Exhibit No. |
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Description of Document |
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3 |
.1(1) |
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Sixth Amended and Restated Certificate of Incorporation. |
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3 |
.2(1) |
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Amended and Restated By-laws. |
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4 |
.1(1) |
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Specimen Stock Certificate. |
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4 |
.2(7) |
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Form of Warrant to purchase Common Stock, together with a list
of holders. |
|
|
4 |
.3(1) |
|
Warrant issued to Amgen Inc. on April 9, 2002 to
purchase 560,000 shares Common Stock. |
|
|
4 |
.4 |
|
Form Warrant issued to former investors in the Companys
Series J convertible preferred stock on January 26,
2005 to purchase up to a total aggregate amount of
2,190,000 shares of common stock. Filed herewith. |
|
|
10 |
.1(6) |
|
Amended and Restated 1998 Equity Incentive Plan.** |
|
|
10 |
.1.2 |
|
Form of Nonstatutory Stock Option Certificate. Filed herewith** |
|
|
10 |
.1.3 |
|
Form of Incentive Stock Option Certificate. Filed herewith** |
|
|
10 |
.2(6) |
|
2004 Employee Stock Purchase Plan.** |
|
|
10 |
.3(1) |
|
Early Separation Agreement and Mutual General Release dated
January 2, 2004 between ViaCell and Jeffrey Sacher.** |
|
|
10 |
.4(1) |
|
Early Separation Agreement and Mutual General Release dated
February 18, 2004 between ViaCell and Grant Bogle.** |
|
|
10 |
.5(7) |
|
Letter Agreement dated June 7, 2001 between ViaCell and
Chris Adams.** |
|
|
10 |
.6.(7) |
|
Letter Agreement dated May 2, 2000 between ViaCell and Marc
Beer.** |
|
|
10 |
.7(7) |
|
Letter Agreement dated May 14, 2001 between ViaCell and
Kurt Gunter.** |
|
|
10 |
.8(7) |
|
Letter Agreement dated April 11, 2000 between ViaCell and
Morey Kraus.** |
|
|
10 |
.9(1) |
|
Letter Agreement dated September 12, 2003 between ViaCell
and Jan van Heek.** |
|
|
10 |
.10(1) |
|
Letter Agreement dated November 4, 2003 between ViaCell and
Vaughn M. Kailian.** |
|
|
10 |
.11(7) |
|
Letter Agreement dated December 15, 2002 between ViaCell
and Paul Hastings.** |
|
|
10 |
.12(1) |
|
Letter Agreement dated August 13, 2003 between ViaCell and
George Daley.** |
|
|
10 |
.13(1) |
|
Stock Purchase Agreement dated September 30, 2003 by and
among ViaCell, Kourion Therapeutics AG and the shareholders of
Kourion Therapeutics signatory thereto. |
|
|
10 |
.14(3) |
|
Amendment to Stock Purchase Agreement dated October 25,
2004 by and among ViaCell, Kourion Therapeutics AG and the
shareholders of Kourion Therapeutics signatory thereto. Filed
previously. |
|
|
10 |
.15.1(1) |
|
Form of Promissory Note issued by ViaCell to General Electric
Capital Corporation. |
|
|
10 |
.15.2(1) |
|
Master Security Agreement dated October 16, 2003 by and
between ViaCell and General Electric Capital Corporation, as
amended by an Amendment dated October 16, 2003. |
|
|
10 |
.15.3(1) |
|
Form of Security Deposit Pledge Agreement by and between ViaCell
and General Electric Capital Corporation. Filed previously. |
|
|
10 |
.16(1) |
|
Non-Exclusive License Agreement dated January 1, 2003
between ViaCell and SmithKline Beecham Corporation d/b/a
GlaxoSmithKline and Glaxo Group Limited. |
|
|
10 |
.17(1) |
|
Co-Development and License Agreement dated July 15, 2003
between ViaCell and Gamete Technology, Inc. |
74
|
|
|
|
|
Exhibit No. | |
|
Description of Document |
| |
|
|
|
|
10 |
.17.1(4) |
|
Letter Agreement dated October 18, 2004 between Gamete
Technology, Inc. and ViaCell. |
|
|
10 |
.18(1) |
|
Collaboration Agreement dated December 23, 2003 between
ViaCell and Amgen Inc. |
|
|
10 |
.19(1) |
|
License Agreement dated January 18, 2001 between
Cerebrotec, Inc., now ViaCell Neuroscience, Inc., and the
General Hospital Corporation, d/b/a Massachusetts General
Hospital. |
|
|
10 |
.20(1) |
|
License Agreement dated March 15, 2002 between ViaCell
Endocrine Science, Inc. and the General Hospital Corporation,
d/b/a Massachusetts General Hospital. |
|
|
10 |
.21(1) |
|
License Agreement dated August 1, 2002 between ViaCell and
Massachusetts Institute of Technology. |
|
|
10 |
.23(7) |
|
Sublease Agreement dated November 1, 2001 between ViaCell
and ARIAD Corporation. |
|
|
10 |
.24(7) |
|
Lease Agreement dated April 20, 1999 between Viacord, Inc.
and Molded Antennas for Telecommunications, Inc. |
|
|
10 |
.25(1) |
|
Lease Agreement dated April 12, 2002 between ViaCell and
Dugan Financing LLC. |
|
|
10 |
.26(1) |
|
Sublease Agreement dated April 11, 2002 between ViaCell and
Advanced Cell Technology, Inc. |
|
|
10 |
.26.1(3) |
|
The First Amendment to Sublease Agreement, dated
February 14, 2003, between ViaCell and ARIAD Corporation. |
|
|
10 |
.26.2(3) |
|
The Second Amendment to Sublease Agreement, dated
December 18, 2003, between ViaCell and ARIAD Corporation.
Filed previously. |
|
|
10 |
.27(1) |
|
Lease Agreement dated March 25, 2002 between ViaCell and
Singapore Science Park Limited. |
|
|
10 |
.28(7) |
|
Lease Agreement dated February 24, 2000, as amended
May 31, 2001, between ViaCell and ARE-One Innovation Drive,
LLC. |
|
|
10 |
.28.1(3) |
|
The Second Amendment to Lease Agreement, dated April 4,
2002, between ViaCell and ARE-One Innovation Drive, LLC. |
|
|
10 |
.28.2 |
|
The Third Amendment to Lease Agreement, dated December 17,
2004, between ViaCell and ARE-One Innovation Drive, LLC. Filed
herewith. |
|
|
10 |
.29(1) |
|
Lease Agreement dated December 22, 2003 between ViaCell and
MA-Riverview/245 First Street, LLC. |
|
|
10 |
.30(1) |
|
Summary of Lease Agreement dated October 1, 2002 between
Kourion Therapeutics AG and W.H.L. Grundstücksgemeinschaft
GbR |
|
|
10 |
.31(1) |
|
Letter Agreement dated March 11, 2004 between ViaCell and
Stephen Dance.** |
|
|
10 |
.32(3) |
|
License Agreement dated September 1, 2004 between Tyho
Galileo Research Laboratory, LLC and ViaCell, Inc. |
|
|
10 |
.33(5) |
|
Research Agreement dated December 13, 2004 between Genzyme
Corporation and ViaCell. |
|
|
10 |
.34(6) |
|
Letter Agreement dated December 29, 2004 from ViaCell to
Stephan Wnendt.** |
|
|
10 |
.35 |
|
Letter Agreement dated October 10, 2004 from ViaCell to
Mary Thistle. ** Filed herewith |
|
|
21 |
.1(1) |
|
Subsidiaries of ViaCell. |
|
|
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP. Filed herewith |
|
|
31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer. Filed herewith |
|
|
31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer. Filed herewith |
|
|
32 |
.1 |
|
Section 1350 Certification of Chief Executive Officer.
Filed herewith |
|
|
32 |
.2 |
|
Section 1350 Certification of Chief Financial Officer.
Filed herewith |
|
|
(1) |
Incorporated by reference to the Companys registration
statement on Form S-1 (No. 333-114209) filed with the
Securities and Exchange Commission (the SEC) on,
April 05, 2004. |
|
(2) |
Incorporated by reference to the Companys Amendment
No. 1 to the registration statement on Form S-1
(No. 333-114209) filed with the SEC on, May 25, 2004. |
75
|
|
(3) |
Incorporated by reference to the Companys Amendment
No. 3 to the registration statement on Form S-1
(No. 33-114209) filed with the SEC on October 26, 2004. |
|
(4) |
Incorporated by reference to the Companys Amendment
No. 4 to the registration statement on Form S-1
(No. 333-114209) filed with the SEC on, December 15,
2004. |
|
(5) |
Incorporated by reference to the Companys Amendment
No. 5 to the registration statement on Form S-1
(No. 333-114209) filed with the SEC) on, December 27,
2004. |
|
(6) |
Incorporated by reference to the Companys Amendment
No. 6 to the registration statement on Form S-1
(No. 33-114209) filed with the SEC on January 3, 2005. |
|
(7) |
Incorporated by reference to the Companys registration
statement on Form S-1 (No. 333-81650) filed with the
Securities and Exchange Commission (the SEC) on
January 30, 2002. |
|
|
|
|
|
This exhibit has been filed separately with the Commission
pursuant to an application for confidential treatment. The
confidential portions of this exhibit have been omitted and are
marked by an asterisk. |
|
|
|
|
** |
Indicates a management contract or compensatory plan. |
76
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.
|
|
|
|
|
Marc Beer |
|
Chief Executive Officer |
Date: March 31, 2005
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf
of the registrant and in the following capacities on
March 31, 2005.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Marc D. Beer
Marc
D. Beer |
|
Chief Executive Officer and Director (Principal Executive
Officer) |
|
March 31, 2005 |
|
/s/ Stephen G. Dance
Stephen
G. Dance |
|
Chief Financial Officer (Principal Financial Officer and
Principal Accounting |
|
March 31, 2005 |
|
/s/ Vaughn M. Kailian
Vaughn
M. Kailian |
|
Director |
|
March 31, 2005 |
|
/s/ George
Daley, M.D., Ph.D.
George
Daley, M.D., Ph.D. |
|
Director |
|
March 31, 2005 |
|
/s/ Ansbert
Gadicke, M.D.
Ansbert
Gadicke, M.D. |
|
Director |
|
March 31, 2005 |
|
/s/ Paul Hastings
Paul
Hastings |
|
Director |
|
March 31, 2005 |
|
/s/ Denise
Pollard-Knight
Denise
Pollard-Knight |
|
Director |
|
March 31, 2005 |
|
/s/ James Tullis
James
Tullis |
|
Director |
|
March 31, 2005 |
|
/s/ Jan van Heek
Jan
van Heek |
|
Director |
|
March 31, 2005 |
77
Index to Consolidated Financial Statements
ViaCell, Inc.
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ViaCell, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related statements of operations, comprehensive loss,
stockholders deficit and cash flows present fairly, in all
material respects, the financial position of ViaCell, Inc. and
its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements 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 of financial statements
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.
/s/ PricewaterhouseCoopers
LLP
Boston, Massachusetts
March 29, 2005
F-2
ViaCell, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
6,745,727 |
|
|
$ |
39,007,880 |
|
|
Short-term investments
|
|
|
21,339,471 |
|
|
|
7,823,852 |
|
|
Accounts receivable, net
|
|
|
10,807,837 |
|
|
|
7,676,439 |
|
|
Prepaid expenses and other current assets
|
|
|
4,765,967 |
|
|
|
4,106,358 |
|
|
Restricted cash
|
|
|
161,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
43,820,820 |
|
|
|
58,614,529 |
|
Property and equipment, net
|
|
|
6,738,211 |
|
|
|
7,892,116 |
|
Goodwill
|
|
|
3,620,750 |
|
|
|
3,620,750 |
|
Intangible assets, net
|
|
|
3,024,997 |
|
|
|
3,274,721 |
|
Long-term investments
|
|
|
499,797 |
|
|
|
|
|
Restricted cash
|
|
|
1,952,889 |
|
|
|
2,834,109 |
|
Other assets
|
|
|
1,433,218 |
|
|
|
1,924,870 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
61,090,682 |
|
|
$ |
78,161,095 |
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS DEFICIT |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt obligations
|
|
$ |
1,742,447 |
|
|
$ |
1,611,604 |
|
|
Accounts payable
|
|
|
1,271,130 |
|
|
|
3,363,875 |
|
|
Accrued expenses
|
|
|
7,489,795 |
|
|
|
10,011,022 |
|
|
Note payable to related party
|
|
|
15,422,400 |
|
|
|
14,280,000 |
|
|
Contingent purchase price
|
|
|
|
|
|
|
4,245,896 |
|
|
Deferred revenue
|
|
|
3,458,443 |
|
|
|
2,244,972 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,384,215 |
|
|
|
35,757,369 |
|
Deferred revenue
|
|
|
6,728,393 |
|
|
|
3,157,884 |
|
Deferred rent
|
|
|
1,035,062 |
|
|
|
|
|
Contingent purchase price
|
|
|
8,155,000 |
|
|
|
3,909,104 |
|
Long-term debt obligations, net of current portion
|
|
|
1,572,040 |
|
|
|
3,346,672 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
46,874,710 |
|
|
|
46,171,029 |
|
Redeemable convertible preferred stock (at redemption value)
authorized 30,396,809 shares in 2003 and 2004, issued and
outstanding 25,628,075 in 2003 and 2004
|
|
|
175,172,875 |
|
|
|
162,141,437 |
|
Commitments and contingencies (Notes 8 and 9)
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.01 par value; authorized
|
|
|
1,829 |
|
|
|
1,829 |
|
|
428,191 shares; issued and outstanding 182,857 shares
(liquidation preference of $245,000) in 2003 and 2004.
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; authorized 35,000,000 and
80,000,000 shares in 2003 and 2004 respectively; issued and
outstanding 2,659,854 and 2,763,961 shares in 2003 and
2004, respectively
|
|
|
27,640 |
|
|
|
26,599 |
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,437,260 |
|
|
Deferred compensation
|
|
|
(2,529,830 |
) |
|
|
(3,422,375 |
) |
|
Accumulated deficit
|
|
|
(158,765,668 |
) |
|
|
(128,678,779 |
) |
|
Accumulated other comprehensive income
|
|
|
309,126 |
|
|
|
484,095 |
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(160,956,903 |
) |
|
|
(130,151,371 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders deficit
|
|
$ |
61,090,682 |
|
|
$ |
78,161,095 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ViaCell, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Processing and storage revenues
|
|
$ |
36,804,554 |
|
|
$ |
30,884,201 |
|
|
$ |
20,087,773 |
|
Grant and contract revenues
|
|
|
1,469,085 |
|
|
|
995,494 |
|
|
|
286,862 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
38,273,639 |
|
|
|
31,879,695 |
|
|
|
20,374,635 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of processing and storage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
7,364,053 |
|
|
|
7,141,581 |
|
|
|
5,877,402 |
|
|
|
Royalty expense
|
|
|
(3,257,639 |
) |
|
|
3,257,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and storage revenues
|
|
|
4,106,414 |
|
|
|
10,399,220 |
|
|
|
5,877,402 |
|
|
Research and development
|
|
|
15,133,646 |
|
|
|
13,225,957 |
|
|
|
11,429,043 |
|
|
Sales and marketing
|
|
|
19,322,331 |
|
|
|
20,959,187 |
|
|
|
16,578,500 |
|
|
General and administrative
|
|
|
13,467,847 |
|
|
|
15,221,356 |
|
|
|
10,919,794 |
|
|
In-process technology
|
|
|
|
|
|
|
23,925,023 |
|
|
|
5,888,713 |
|
|
Stock-based compensation(1)
|
|
|
3,428,930 |
|
|
|
3,232,179 |
|
|
|
6,463,519 |
|
|
Restructuring
|
|
|
2,945,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
58,404,428 |
|
|
|
86,962,922 |
|
|
|
57,156,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(20,130,789 |
) |
|
|
(55,083,227 |
) |
|
|
(36,782,336 |
) |
Interest income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
529,435 |
|
|
|
348,476 |
|
|
|
891,772 |
|
|
Interest expense
|
|
|
(1,495,942 |
) |
|
|
(733,499 |
) |
|
|
(147,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net
|
|
|
(966,507 |
) |
|
|
(385,023 |
) |
|
|
744,308 |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,097,296 |
) |
|
|
(55,468,250 |
) |
|
|
(36,038,028 |
) |
Accretion on redeemable convertible preferred stock
|
|
|
(13,070,414 |
) |
|
|
(9,416,114 |
) |
|
|
(8,143,606 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(34,167,710 |
) |
|
$ |
(64,884,364 |
) |
|
$ |
(44,181,634 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
$ |
(17.60 |
) |
Weighted average shares used in basic and diluted net loss per
share computation
|
|
|
2,707,219 |
|
|
|
2,634,096 |
|
|
|
2,510,632 |
|
|
|
(1) |
Allocation of stock-based compensation expense is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cost of processing and storage revenues
|
|
$ |
32,035 |
|
|
$ |
7,282 |
|
|
$ |
19,792 |
|
Research and development
|
|
|
895,706 |
|
|
|
1,073,325 |
|
|
|
2,488,801 |
|
Sales and marketing
|
|
|
174,889 |
|
|
|
413,571 |
|
|
|
670,412 |
|
General and administrative
|
|
|
2,082,683 |
|
|
|
1,738,001 |
|
|
|
3,284,514 |
|
Restructuring
|
|
|
243,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$ |
3,428,930 |
|
|
$ |
3,232,179 |
|
|
$ |
6,463,519 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ViaCell, Inc.
Consolidated Statements Of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss
|
|
$ |
(21,097,296 |
) |
|
$ |
(55,468,250 |
) |
|
$ |
(36,038,028 |
) |
|
Foreign currency translation adjustment
|
|
|
(174,969 |
) |
|
|
484,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(21,272,265 |
) |
|
$ |
(54,984,155 |
) |
|
$ |
(36,038,028 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ViaCell, Inc.
Consolidated Statement of Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Additional | |
|
|
|
|
|
Other | |
|
Total | |
|
|
|
|
Par | |
|
|
|
Par | |
|
Paid-in | |
|
Deferred | |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders | |
|
|
Shares | |
|
Value | |
|
Shares | |
|
Value | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Income | |
|
Deficit | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2001
|
|
|
182,857 |
|
|
$ |
1,829 |
|
|
|
2,427,879 |
|
|
$ |
24,279 |
|
|
|
7,321,178 |
|
|
$ |
(8,923,891 |
) |
|
$ |
(37,172,501 |
) |
|
$ |
|
|
|
$ |
(38,749,106 |
) |
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
102,362 |
|
|
|
1,024 |
|
|
|
30,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,343 |
|
Stock warrant exercises
|
|
|
|
|
|
|
|
|
|
|
13,333 |
|
|
|
133 |
|
|
|
39,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,999 |
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
150 |
|
|
|
19,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,050 |
|
Stock warrants issued to collaborator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888,713 |
|
Non-employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449,012 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,216,296 |
|
|
|
(3,216,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,014,507 |
|
|
|
|
|
|
|
|
|
|
|
6,014,507 |
|
Accretion of redeemable preferred stock to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,143,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,143,606 |
) |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,038,028 |
) |
|
|
|
|
|
|
(36,038,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
182,857 |
|
|
|
1,829 |
|
|
|
2,558,574 |
|
|
|
25,586 |
|
|
|
8,821,678 |
|
|
|
(6,125,680 |
) |
|
|
(73,210,529 |
) |
|
|
|
|
|
|
(70,487,116 |
) |
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
101,280 |
|
|
|
1,013 |
|
|
|
52,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,009 |
|
Issuance of stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,449,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,449,826 |
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,416,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,416,114 |
) |
Non-employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,480 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804,323 |
|
|
|
(804,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(526,929 |
) |
|
|
3,507,628 |
|
|
|
|
|
|
|
|
|
|
|
2,980,699 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,468,250 |
) |
|
|
|
|
|
|
(55,468,250 |
) |
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484,095 |
|
|
|
484,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
182,857 |
|
|
|
1,829 |
|
|
|
2,659,854 |
|
|
|
26,599 |
|
|
|
1,437,260 |
|
|
|
(3,422,375 |
) |
|
|
(128,678,779 |
) |
|
|
484,095 |
|
|
|
(130,151,371 |
) |
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
89,915 |
|
|
|
899 |
|
|
|
107,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,193 |
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,080,821 |
) |
|
|
|
|
|
|
(8,989,593 |
) |
|
|
|
|
|
|
(13,070,414 |
) |
Non-employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
14,192 |
|
|
|
142 |
|
|
|
414,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,893 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882,201 |
|
|
|
(2,882,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(413,601 |
) |
|
|
413,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,294 |
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,121,378 |
) |
|
|
3,361,145 |
|
|
|
|
|
|
|
|
|
|
|
2,239,767 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,097,296 |
) |
|
|
|
|
|
|
(21,097,296 |
) |
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174,969 |
) |
|
|
(174,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
182,857 |
|
|
$ |
1,829 |
|
|
|
2,763,961 |
|
|
$ |
27,640 |
|
|
$ |
|
|
|
$ |
(2,529,830 |
) |
|
$ |
(158,765,668 |
) |
|
$ |
309,126 |
|
|
$ |
(160,956,903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ViaCell, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(21,097,296 |
) |
|
$ |
(55,468,250 |
) |
|
$ |
(36,038,028 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,577,151 |
|
|
|
2,517,646 |
|
|
|
1,987,743 |
|
|
Stock-based compensation
|
|
|
3,428,930 |
|
|
|
3,232,179 |
|
|
|
6,463,519 |
|
|
Reserve for bad debt
|
|
|
248,465 |
|
|
|
776,687 |
|
|
|
158,277 |
|
|
Non-cash charge for acquired in-process research and development
|
|
|
|
|
|
|
23,925,023 |
|
|
|
5,888,713 |
|
|
Non-cash interest expense on related party note payable
|
|
|
1,142,400 |
|
|
|
280,000 |
|
|
|
|
|
|
Loss on write-down of fixed assets
|
|
|
2,154,450 |
|
|
|
|
|
|
|
|
|
|
Fixed asset additions reimbursed by Landlord
|
|
|
1,004,000 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
29,153 |
|
|
|
4,359 |
|
|
|
|
|
Changes in assets and liabilities, excluding the effect of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,376,176 |
) |
|
|
(2,033,456 |
) |
|
|
(3,212,616 |
) |
|
Prepaid expenses and other current assets
|
|
|
(615,472 |
) |
|
|
(2,266,483 |
) |
|
|
10,465 |
|
|
Accounts payable
|
|
|
(2,191,575 |
) |
|
|
414,683 |
|
|
|
757,354 |
|
|
Accrued expenses
|
|
|
(2,542,108 |
) |
|
|
4,629,771 |
|
|
|
1,308,179 |
|
|
Deferred revenue
|
|
|
4,091,719 |
|
|
|
1,497,998 |
|
|
|
1,580,282 |
|
|
Deferred rent
|
|
|
31,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(15,115,297 |
) |
|
|
(22,489,843 |
) |
|
|
(21,096,112 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,392,354 |
) |
|
|
(1,825,870 |
) |
|
|
(4,816,312 |
) |
|
Proceeds from maturities of investments
|
|
|
22,681,759 |
|
|
|
15,812,672 |
|
|
|
38,973,455 |
|
|
Purchase of investments
|
|
|
(36,697,176 |
) |
|
|
(9,687,260 |
) |
|
|
(15,579,979 |
) |
|
(Increase) decrease in other assets
|
|
|
488,269 |
|
|
|
(1,751,350 |
) |
|
|
(71,631 |
) |
|
Cash acquired in acquisition, net of acqusition costs
|
|
|
|
|
|
|
3,737,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(15,919,502 |
) |
|
|
6,286,121 |
|
|
|
18,505,533 |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of redeemable convertible preferred
stock, net
|
|
|
|
|
|
|
36,887,171 |
|
|
|
1,500,000 |
|
|
Proceeds from exercise of stock options and warrants
|
|
|
108,193 |
|
|
|
42,599 |
|
|
|
71,342 |
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
20,050 |
|
|
(Increase) decrease in restricted cash
|
|
|
731,966 |
|
|
|
3,210,105 |
|
|
|
(3,792,909 |
) |
|
Proceeds from credit facilities
|
|
|
|
|
|
|
5,000,000 |
|
|
|
4,900,000 |
|
|
Repayments on credit facilities
|
|
|
(1,562,331 |
) |
|
|
(5,451,556 |
) |
|
|
(1,087,050 |
) |
|
Repayment of note payable to related party
|
|
|
|
|
|
|
|
|
|
|
(215,247 |
) |
|
Payments on capital lease principal
|
|
|
(267,203 |
) |
|
|
(49,375 |
) |
|
|
(11,074 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(989,375 |
) |
|
|
39,638,944 |
|
|
|
1,385,112 |
|
Effect of change in exchange rates on cash
|
|
|
(237,979 |
) |
|
|
333,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(32,262,153 |
) |
|
|
23,768,791 |
|
|
|
(1,205,467 |
) |
Cash and cash equivalents, beginning of period
|
|
|
39,007,880 |
|
|
|
15,239,089 |
|
|
|
16,444,556 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
6,745,727 |
|
|
$ |
39,007,880 |
|
|
$ |
15,239,089 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information and non
cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
325,338 |
|
|
$ |
260,117 |
|
|
$ |
183,452 |
|
Acquisitions (Note 3)
|
|
|
|
|
|
|
28,705,000 |
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
13,070,414 |
|
|
|
9,416,114 |
|
|
|
8,143,606 |
|
Equipment purchased under capital lease (Note 2)
|
|
|
139,593 |
|
|
|
154,855 |
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
ViaCell, Inc.
Notes to Consolidated Financial Statements
|
|
1. |
Organization and Nature of Business |
ViaCell, Inc. (the Company) was incorporated in the
State of Delaware on September 2, 1994 as t.Breeders Inc.
The Company was in the development stage until April 11,
2000 at which time the Company completed a merger with Viacord,
Inc. (Viacord), an umbilical cord blood collection,
processing and preservation company, and changed its name to
ViaCell, Inc.
The Company is a biotechnology company engaged in sourcing,
developing and commercializing cellular therapies to address
cancer, infertility and cardiac diseases. ViaCells mission
is to enable the widespread application of human cells as
medical therapy. ViaCells lead stem cell product
candidate, CB001, is manufactured using one of the
Companys proprietary technologies which allows the
isolation, purification and significant expansion of populations
of stem cells, and enables the production of well defined
cellular products in therapeutically useful quantities. The
Company is developing CB001 for use in bone marrow and other
hematopoietic stem cell transplants. The Companys current
commercialized service is Viacord, a leading brand in the
cryopreservation of umbilical cord stem cells, primarily for
pediatric bone marrow transplantations. In addition, the Company
is developing a product expected to offer women the ability to
preserve or extend their fertility through the cryopreservation
of oocytes.
On September 30, 2003, ViaCell acquired the outstanding
shares of Kourion Therapeutics AG (Kourion) in a
purchase business combination. Under the terms of the agreement,
shareholders of Kourion exchanged all of their outstanding
shares for a $14 million note and 549,854 shares of
ViaCells Series I convertible preferred stock. As
potential additional consideration, the Company issued 241,481
additional shares of Series I convertible preferred stock
to an escrow account and reserved 289,256 shares of
Series I convertible preferred stock for possible issuance
in the future (Note 3).
The Company restructured its operations in September and
December 2004 to reduce operating expenses and concentrate its
resources on four key products and product candidates, and
related business initiatives (Note 14).
On January 26, 2005 the Company completed its initial
public offering (IPO). The Company issued 8,625,000 shares
at $7.00 per share resulting in net proceeds to the Company
of approximately $53,600,000 after underwriters discounts and
offering expenses. As a result of the IPO, all shares of the
Companys preferred stock immediately converted into
25,810,932 shares of common stock. On January 26,
2005, the Company paid in full the related party note of
$15,509,760, which included all outstanding principal and
interest owed at that date.
|
|
2. |
Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Certain reclassifications of prior year amounts have been made
to conform with current year presentation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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
F-8
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments purchased
with an original maturity of 90 days or less to be cash
equivalents. Investments with remaining maturities of
12 months or less are classified as short-term investments.
Investments with maturities greater than 12 months are
classified as long-term investments. Investments in debt
securities are classified as either held-to-maturity or
available-for-sale based on facts and circumstances at the time
of purchase. Investments for which the Company has the positive
intent and ability to hold to maturity are classified as
held-to-maturity investments and are reported at amortized cost
plus accrued interest. As of each balance sheet date presented
all investments are classified as cash and cash equivalents or
held-to-maturity. To date, the Company has not recorded any
realized gains or losses on the sale of investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Amortized | |
|
|
|
Unrealized | |
|
Amortized | |
|
|
|
Unrealized | |
|
|
Cost | |
|
Fair Value | |
|
(Loss) | |
|
Cost | |
|
Fair Value | |
|
(Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$ |
3,612,939 |
|
|
$ |
3,612,939 |
|
|
$ |
|
|
|
$ |
30,393,707 |
|
|
$ |
30,393,707 |
|
|
$ |
|
|
|
Government securities
|
|
|
1,485,208 |
|
|
|
1,485,208 |
|
|
|
|
|
|
|
1,725,006 |
|
|
|
1,725,006 |
|
|
|
|
|
|
Cash
|
|
|
1,647,580 |
|
|
|
1,647,580 |
|
|
|
|
|
|
|
6,889,167 |
|
|
|
6,889,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
6,745,727 |
|
|
|
6,745,727 |
|
|
|
|
|
|
|
39,007,880 |
|
|
|
39,007,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
21,339,471 |
|
|
|
21,261,698 |
|
|
|
(77,773 |
) |
|
|
7,823,852 |
|
|
|
7,815,775 |
|
|
|
(8,077 |
) |
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
499,797 |
|
|
|
498,394 |
|
|
|
(1,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
21,839,268 |
|
|
|
21,760,092 |
|
|
|
(79,176 |
) |
|
|
7,823,852 |
|
|
|
7,815,775 |
|
|
|
(8,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, short- and long-term investments
|
|
$ |
28,584,995 |
|
|
$ |
28,505,819 |
|
|
$ |
(79,176 |
) |
|
$ |
46,831,732 |
|
|
$ |
46,823,655 |
|
|
$ |
(8,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with Companys commitments under various
agreements (Notes 8 and 9) and one of the
Companys operating bank accounts, the Company issued
letters of credit totaling $2.1 million collateralized by
certificates of deposit totaling $2.1 million that are
classified as restricted cash on the accompanying consolidated
balance sheet.
Revenue Recognition
The Company recognizes revenue from cord blood processing and
storage fees in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements. The Company receives fees for collecting,
testing, freezing and storing of cord blood units. Once the cord
blood units are collected, tested, screened and successfully
meet all of the required attributes, the Company freezes the
units and stores them in a cryogenic freezer. Upon successful
completion of collection, testing, screening and freezing
services, the Company recognizes revenue from the processing
fees.
When evaluating multiple element arrangements subsequent to
July 1, 2003, the Company considers whether the components
of the arrangement represent separate units of accounting as
defined in Emerging
F-9
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables
(EITF 00-21). EITF 00-21 requires the
following criteria to be met for an element to represent a
separate unit of accounting:
|
|
|
a) The delivered items have value to a customer on a
standalone basis; |
|
|
b) There is objective and reliable evidence of the fair
value of the undelivered items; and |
|
|
c) Delivery or performance is probable and within the
control of the vendor for any delivered items that have a right
of return. |
The Company has concluded that the collection, testing and
freezing service has stand-alone value to the customer and that
the Company has objective evidence of fair value of the
undelivered storage services. The fair value of the
storage services is based on the annual storage fee charged to
customers on a stand-alone basis.
The Company charges an initial fee which covers collection,
testing, freezing and, typically, one year of storage. The
Company defers the fair value of the revenue related to the
future storage and recognizes the remainder of the revenue under
the residual method. The adoption of EITF 00-21 did not
impact the Companys revenue recognition model.
Revenue recognized from the collection, testing and freezing of
cord blood units was $31,737,000, $27,768,000, and $18,473,000
for the years ended December 31, 2004, 2003, and 2002,
respectively.
Revenue from storage fees is recognized over the contractual
period on a straight-line basis and amounted to approximately
$5,068,000, $3,116,000, and $1,614,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Deferred revenue of $10,187,000 and $5,403,000 at
December 31, 2004 and 2003, respectively, consist primarily
of the unearned portions of annual storage fees and deposits
paid by customers prior to completion of our processing service.
Deferred revenue at December 31, 2004 also included
approximately $154,000 of unearned revenue related to the
Companys economic development grant with Singapore.
The Company recognizes shipping costs billed to customers as
revenues and records a corresponding amount as cost of revenues.
In February 2002, the EITF released EITF Issue No. 01-09
(EITF 01-09), Accounting for Consideration Given by a
Vendor, to a customer (including a reseller of the
vendors products). EITF 01-09 states that cash
consideration (including a sales incentive) given by a vendor to
a customer is presumed to be a reduction of the selling prices
of the vendors products or services and, therefore, should
be characterized as a reduction of revenue when recognized in
the vendors income statement, rather than a sales and
marketing expense. The Company conducts rebate programs for its
customers and the total amount of these rebates was $334,000,
$783,000, and $75,600 for the years ended December 31,
2004, 2003, and 2002, respectively. The rebates have been
recorded as a reduction in processing revenue.
Revenues from short-term research contracts are recognized over
the contract period as services are provided. Revenue from
research contracts amounted to $192,000, $363,000, and $157,000
for the years ended December 31, 2004, 2003, and 2002,
respectively.
The Company recognized approximately $1,277,000, $633,000, and
$130,000 in grant revenue in the years ended December 31,
2004, 2003, and 2002, respectively, under grants from the
Economic Development Boards of Singapore and Germany. Under
these grant agreements, the Company is reimbursed for certain
defined expenses.
F-10
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Cost of Revenues
Cost of revenues reflects the cost of transporting, testing,
processing and storing cord blood at the Companys cord
blood processing facility in Hebron, Kentucky, as well as a
royalty to PharmaStem Therapeutics, Inc. relating to ongoing
patent infringement litigation. The Company recorded a royalty
expense of approximately $3.3 million in the fourth quarter
of 2003 following an unfavorable jury verdict in October 2003
which found infringement. This expense included a royalty of
approximately $2.9 million on revenues from cord blood
preservation through October 29, 2003, plus an accrual of
6.125% of subsequent revenues through December 31, 2003.
The Company recorded an additional royalty expense of
$0.5 million for the three months ended March 31,
2004, also based on 6.125% of revenues. In September 2004, the
court overturned the jury verdict on one of the two patents in
litigation and ordered a new trial on the second patent. Due to
the judges ruling, the Company reversed the entire royalty
accrual of $3.8 million in the quarter ended June 30,
2004. On December 14, 2004, the federal district court
reversed its post-trial ruling granting a new trial on the
issues of infringement and damages (if any) of the second patent
and overturned the jurys verdict of infringement of that
patent. In his September and December 2004 decisions, the judge
found that there was no legally sufficient basis for finding
infringement of either PharmaStem patent. Pending further action
by the courts, the Company does not intend to record a royalty
expense in future periods, since it believes the claim is
without merit.
Costs incurred related to grant and contract revenues are
included in research and development expense.
Advertising Costs
Costs of media advertising are expensed at the time the
advertising takes place and are classified as sales and
marketing expense. Advertising expense totaled approximately
$2,515,000, $1,815,000, and $1,782,000 for the years ended
December 31, 2004, 2003, and 2002, respectively.
Research and Development Expenses
Research and development costs, which are comprised of costs
incurred in performing research and development activities
including wages and related employee benefits, clinical trial
costs, contract services, supplies, facilities and overhead
costs, are expensed as incurred.
In-process Technology
The Company expenses costs of purchased technology used in its
ongoing research and development activities in the period of
purchase if management believes the technology has not yet
reached technical feasibility and has no alternative future use.
Foreign Currency Translation
The financial statements of the Companys German
subsidiary, Kourion, are translated in accordance with Statement
of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency Translation. The functional currency of
Kourion is the local currency (euro), and accordingly, all
assets and liabilities of the foreign subsidiary are translated
using the exchange rate at the balance sheet date except for
capital accounts which are translated at historical rates.
Revenues and expenses are translated at average rates during the
period. Adjustments resulting from the translation from the
financial statements of Kourion into US dollars are excluded
from the determination of net loss and are accumulated in
accumulated other comprehensive income within stockholders
equity. Foreign currency translation gains and losses are
reported in the accompanying consolidated statements of
operations and are immaterial to the results of operations.
F-11
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Income Taxes
The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases
of assets and liabilities, as well as net operating loss
carryforwards, and are measured using enacted tax rates in
effect for the year in which the differences are expected to
reverse. Deferred tax assets may be reduced by a valuation
allowance to reduce deferred tax assets to the amounts expected
to be realized.
Property and Equipment
Property and equipment are initially recorded at cost and
depreciated over the estimated useful lives on a straight-line
basis. Leasehold improvements are amortized on a straight-line
basis over the estimated useful life of the asset or the lease
term, if shorter. The Company accounts for internal-use software
and web-site development costs in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use and classifies such
costs as software within property and equipment.
Useful lives are as follows:
|
|
|
|
|
Estimated |
Asset Classification |
|
Useful Life |
|
|
|
Software
|
|
2-3 years |
Laboratory equipment
|
|
5-10 years |
Office and computer equipment
|
|
3-5 years |
Leasehold improvements
|
|
Life of lease |
Furniture and fixtures
|
|
5-7 years |
Maintenance and repairs are charged to expense as incurred. When
assets are impaired or otherwise disposed of, the cost of these
assets and the related accumulated depreciation and amortization
are eliminated from the balance sheet and any resulting gains or
losses are included in operations in the period of disposal.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable,
capital lease obligations, equipment loans and notes payable to
related party. The carrying value of the short-term financial
instruments approximates their fair value due to their short
maturities and the carrying value of the long-term financial
instruments approximate their fair value based on current rates
offered to the Company for debt with similar maturities.
Goodwill and Other Intangible Assets
The Companys intangible assets consist of:
|
|
|
|
|
goodwill; |
|
|
|
employment contracts; |
|
|
|
purchased technology rights; |
|
|
|
customer lists; and |
|
|
|
trademarks. |
F-12
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Effective January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets, which requires that amortization of goodwill and
certain intangibles be replaced with periodic tests of
goodwills impairment and that other intangibles be
amortized over their useful lives unless these lives are
determined to be indefinite. SFAS No. 142 requires
that goodwill be tested annually for impairment under a two-step
impairment process or whenever events or changes in
circumstances suggest that the carrying value of an asset may
not be recoverable.
The Company amortizes other intangible assets using the
straight-line method over useful lives of 3 years for
employment agreements and 20 years for trademarks.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates its long-lived assets for
potential impairment under SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The
Company performs these evaluations whenever events or changes in
circumstances suggest that the carrying amount of an asset or
group of assets is not recoverable. Indicators of potential
impairment include but are not limited to:
|
|
|
|
|
a significant change in the manner in which an asset is used; |
|
|
|
a significant decrease in the market value of an asset; |
|
|
|
a significant adverse change in its business or the industry in
which it is sold; and |
|
|
|
a current period operating cash flow loss combined with a
history of operating or cash flow losses or a projection or
forecast that demonstrates continuing losses associated with the
asset. |
If management believes an indicator of potential impairment
exists, we test to determine whether impairment recognition
criteria in SFAS No. 144 have been met. The Company
charges impairments of the long-lived assets to operations if
its evaluations indicate that the carrying values of these
assets are not recoverable.
Concentration of Credit Risk and Other Risks and
Uncertainties
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, restricted cash and
accounts receivable. At December 31, 2004 and 2003,
substantially all of the Companys cash, cash equivalents
and short-term investments were invested in highly rated
financial institutions and consisted of money market funds and
highly-rated commercial paper.
At December 31, 2004 and 2003, the Company had cash
balances at certain financial institutions in excess of
federally insured limits. However, the Company does not believe
that it is subject to unusual credit risk beyond the normal
credit risk associated with commercial banking relationships.
The Company provides most of its services to consumers.
Concentration of credit risk with respect to trade receivables
balances are limited due to the diverse number of customers
comprising the Companys customer base.
F-13
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company performs ongoing evaluations of its receivable
balances and maintains reserves for potential credit loss. At
December 31, the Companys allowance for doubtful
accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Additions to | |
|
|
|
Balance at | |
|
|
Beginning of | |
|
Costs and | |
|
|
|
End of | |
Description |
|
Period | |
|
Expenses | |
|
Deductions | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
Allowance for doubtful accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
1,043,568 |
|
|
|
248,465 |
|
|
|
(95,175 |
) |
|
$ |
1,196,858 |
|
|
Year ended December 31, 2003
|
|
$ |
268,981 |
|
|
|
776,667 |
|
|
|
(2,080 |
) |
|
$ |
1,043,568 |
|
|
Year ended December 31, 2002
|
|
$ |
150,200 |
|
|
|
158,277 |
|
|
|
(39,496 |
) |
|
$ |
268,981 |
|
The Company is subject to risks common to companies in the
biotechnology industry including, but not limited to, the
successful development and commercialization of products,
clinical trial uncertainty, fluctuations in operating results
and financial risks, potential need for additional funding,
protection of proprietary technology and patent risks,
compliance with government regulations, dependence on key
personnel and collaborative partners, competition, technological
and medical risks, customer demand, supply risk, management of
growth and effectiveness of marketing by the Company and by
third parties.
The Companys cord blood collection, testing and processing
activities are currently subject to Food and Drug Administration
(FDA) regulations requiring infectious disease testing. In
the future, the Company may have to list its cord blood
preservation products with the FDA. The Company also may be
subject to inspection by the FDA.
Redeemable Convertible Preferred Stock
The carrying value of redeemable convertible preferred stock is
increased by periodic accretions, including cumulative
dividends, so that the carrying amount will equal the redemption
amount at the earliest redemption date. These increases are
effected through charges to additional paid-in capital to the
extent there are any, and, thereafter, to accumulated deficit.
Stock-Based Compensation
The Company uses the intrinsic value method of Accounting
Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to
Employees, and related interpretations in accounting for its
employee stock options, and presents disclosure of pro forma
information required under SFAS No. 123, and
SFAS No. 148, Accounting for Stock-Based
Compensation.
The Company accounts for equity instruments issued to
nonemployees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services, which require that such
equity instruments are recorded at their fair value on the
measurement date. The measurement of stock-based compensation
may be subject to periodic adjustment as the underlying equity
instruments vest.
During the years ended December 31, 2004, 2003, and 2002,
the Company issued, 903,500, 713,436 and 1,383,468 options,
respectively, with an exercise price below deemed fair market
value as subsequently determined. In 2004, 2003, and 2002, in
connection with the grant of employee stock options, the Company
recorded deferred stock compensation of approximately
$2,900,000, $800,000, and $3,200,000, respectively, representing
the difference between the exercise price and the deemed fair
value for financial reporting purposes of the Companys
common stock on the date these stock options were granted.
Deferred compensation is included as a reduction of
stockholders deficit and is amortized over the vesting
period of the individual award, generally four years, consistent
with the method described in FASB Interpretation
F-14
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
No. 28. During the years ended December 31, 2004,
2003, and 2002, the Company recorded amortization of deferred
stock compensation of approximately $3,000,000, $3,000,000, and
$6,000,000, respectively. When stock options are forfeited prior
to vesting, any previously recognized stock-based compensation
is reversed and any remaining deferred compensation is
eliminated. At December 31, 2004, approximately $2,500,000
of deferred stock compensation related to stock options remained
unamortized.
During the years ended December 31, 2004, 2003 and 2002,
the Company recorded stock-based compensation expense of
approximately, $415,000, $251,000, and $449,000, respectively,
related to options granted to nonemployees. The Company recorded
approximately $5,900,000 of expense in 2002 in connection with
issuance of warrants in exchange for a technology license.
Had all employee stock-based compensation expense been
determined using the fair value method and amortized on a
straight-line basis over the vesting period of the related
options consistent with SFAS No. 123 (see Note 12
for additional disclosure), the pro forma net loss per share
would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss attributable to common stockholders as reported
|
|
$ |
(34,167,710 |
) |
|
$ |
(64,884,364 |
) |
|
$ |
(44,181,634 |
) |
Add: employee stock-based compensation expense included in
reported net loss
|
|
|
3,014,179 |
|
|
|
2,980,699 |
|
|
|
6,014,507 |
|
Deduct: total employee stock-based compensation expense
determined under fair value based method for all awards
|
|
|
(5,175,664 |
) |
|
|
(4,256,829 |
) |
|
|
(4,017,251 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$ |
36,329,195 |
|
|
$ |
(66,160,494 |
) |
|
$ |
(42,184,378 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
$ |
(17.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
(13.42 |
) |
|
$ |
(25.12 |
) |
|
$ |
(16.80 |
) |
|
|
|
|
|
|
|
|
|
|
The Company has computed the pro forma disclosures required
under SFAS No. 123 for all stock options granted to
employees and directors of the Company as of December 31,
2004, 2003 and 2002 using the Black-Scholes option pricing model
prescribed by SFAS No. 123.
The weighted average assumptions used for the years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
2.86 |
% |
|
|
2.00 |
% |
|
|
3.82 |
% |
Expected life
|
|
|
5 years |
|
|
|
5 years |
|
|
|
5 years |
|
Expected volatility
|
|
|
100 |
% |
|
|
100 |
% |
|
|
110 |
% |
Dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Per share grant date fair value
|
|
|
$8.00 |
|
|
|
$8.15 |
|
|
|
$5.00 |
|
During 2004, all options were granted to employees at an
exercise price of $5.00 per share. This was lower than the
fair market value used for purposes of recording cheap stock
charges during 2004 in anticipation of the Companys
initial public offering, which occurred in January 2005.
F-15
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Segment Information
The Companys management currently uses consolidated
financial information in determining how to allocate resources
and assess performance. The Company may organize its business
into more discrete business units when and if it generates
significant revenue from the sale of stem cell therapies. For
these reasons, the Company has determined that it conducts
operations in one business segment.
The following table presents total long-lived tangible assets by
geographic areas as of December 31, 2004 and 2003,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Long-lived assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
6,310,040 |
|
|
$ |
6,161,717 |
|
|
Germany
|
|
|
87,892 |
|
|
|
1,408,991 |
|
|
Singapore
|
|
|
340,279 |
|
|
|
321,408 |
|
|
|
|
|
|
|
|
|
Total long-lived tangible assets
|
|
$ |
6,738,211 |
|
|
$ |
7,892,116 |
|
|
|
|
|
|
|
|
The following table presents revenues by geographic area for the
period ended December 31, 2004 and 2003, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
United States
|
|
$ |
36,996,639 |
|
|
$ |
31,246,807 |
|
Germany
|
|
|
990,057 |
|
|
|
381,372 |
|
Singapore
|
|
|
286,943 |
|
|
|
251,516 |
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
38,273,639 |
|
|
$ |
31,879,695 |
|
|
|
|
|
|
|
|
Comprehensive Loss
Comprehensive loss is comprised of net loss and certain changes
in stockholders equity that are excluded from net loss.
The Company includes foreign currency translation adjustments
for Kourion in other comprehensive loss.
Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period.
Diluted net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the
weighted average number of common and potentially dilutive
common shares outstanding during the period. Potentially
dilutive common shares consist of the common shares issuable
upon the exercise of stock options and warrants and the
conversion of convertible preferred stock (using the
if-converted method). Potentially dilutive common shares are
excluded from the calculation if their effect is anti-dilutive.
F-16
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following sets forth the computation of basic and diluted
net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(34,167,710 |
) |
|
$ |
(64,884,364 |
) |
|
$ |
(44,181,634 |
) |
|
Weighted average number of common shares outstanding
|
|
|
2,707,219 |
|
|
|
2,634,096 |
|
|
|
2,510,632 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
$ |
(17.60 |
) |
|
|
|
|
|
|
|
|
|
|
The following potentially dilutive securities were excluded
because their effect was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Options
|
|
|
4,222,211 |
|
|
|
4,374,160 |
|
|
|
3,824,199 |
|
Warrants
|
|
|
1,428,750 |
|
|
|
1,413,906 |
|
|
|
1,246,666 |
|
Convertible preferred stock
|
|
|
25,810,932 |
|
|
|
25,810,932 |
|
|
|
20,544,516 |
|
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Instruments with Characteristics of
both Liabilities and Equity
(SFAS No. 150). This statement
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of these instruments were
previously classified as equity. This statement is effective for
new or existing contracts at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
statement did not have a material impact on the Companys
financial statements.
In December 2003, the FASB issued FASB Interpretation
No. 46-R (FIN 46-R) a revised
interpretation of FASB Interpretation No. 46
(FIN 46). FIN 46-R requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties. The provisions of
FIN 46-R are effective for all arrangements entered into
after January 31, 2003. For all arrangements entered into
after January 31, 2003, the Company is required to continue
to apply FIN 46-R through the end of the first quarter of
fiscal 2004. The Company does not have any equity interests that
would change its current reporting or require additional
disclosures outlined in FIN 46-R. For arrangements entered
into prior to February 1, 2003, the Company is required to
adopt the provisions of FIN 46-R in the first quarter of
fiscal 2004. The Company does not have any equity interests that
would change its current reporting or require additional
disclosures outlined in FIN 46-R.
On December 16, 2004, the FASB released
SFAS No. 123R. This new accounting standard requires
all forms of stock compensation, including stock options, to be
reflected as an expense in the Companys financial
statements. Public companies must adopt the standard by their
first fiscal period beginning after June 15, 2005. The
Company intends to apply the revised standard beginning with the
quarter ending September 30, 2005. Although the Company has
not finalized its analysis, it expects that the adoption of the
revised standard will result in higher operating expenses and
loss per share. Note 2 to the consolidated financial
statements shows the pro-forma impact on net loss and net loss
per common share as if the Company had historically applied the
fair value recognition provisions of SFAS No. 123 to
stock based employee awards.
F-17
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
In December 2004, the FASB issued Statement No. 153
(FAS 153), Exchanges of Nonmonetary Assets
Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions (APB 29). FAS 153 is based on
the principle that nonmonetary asset exchanges should be
recorded and measured at the fair value of the assets exchanged,
with certain exceptions. This standard requires exchanges of
productive assets to be accounted for at fair value, rather than
at carryover basis, unless (i) neither the asset received
nor the asset surrendered has a fair value that is determinable
within reasonable limits or (ii) the transactions lack
commercial substance (as defined). In addition, the FASB decided
to retain the guidance in APB 29 for assessing whether the
fair value of a nonmonetary asset is determinable within
reasonable limits. The new standard is the result of the
convergence project between the FASB and the International
Accounting Standards Board (IASB). The Company will adopt this
standard for nonmonetary asset exchanges in the event that these
types of transactions are entered into by the Company in future
periods.
Acquisition of Kourion Therapeutics AG
In September 2003, the Company acquired all the outstanding
common shares of Kourion Therapeutics AG (Kourion),
in a taxable exchange for 549,854 shares of Series I
convertible preferred stock, valued at approximately
$4.4 million. The Company also issued promissory notes to a
related party totaling $14.0 million in principal amount to
funds affiliated with the former holders of all outstanding
preferred shares of Kourion and incurred acquisition-related
costs totaling $2.1 million.
As potential additional consideration, the Company issued
241,481 additional shares of Series I convertible preferred
stock to an escrow account (escrow shares) and reserved
289,256 shares of Series I convertible preferred stock
(contingent shares) for possible issuance in the future. The
escrowed shares will be released, and the contingent shares will
issue, upon a change in control if that event occurs prior to
September 30, 2006, otherwise the escrow shares will revert
back to the Company and the contingent shares will never issue.
If the contingent shares issue upon a change in control, the
recipients of these shares will be issued an additional number
of shares equal to 8% of the initial number of contingent shares
issued compounded annually from the acquisition closing date to
the date of issuance.
Under the acquisition agreement, the Company is also obligated
to make payments to Kourions former shareholders if
certain Unrestricted Somatic Stem Cells (USSCs)-related programs
assumed in the acquisition achieve certain milestones. Should
all these milestones be achieved, including final FDA approval
of the developed products, the Company would have to pay a total
of $12.0 million, either in stock or cash at each
shareholder option.
The fair value of the net assets acquired from Kourion exceeded
the total consideration paid by ViaCell, resulting in negative
goodwill of approximately $8.2 million. Because the
acquisition involves contingent consideration, the Company is
required to recognize additional purchase consideration equal to
the lesser of the negative goodwill of $8.2 million or the
maximum amount of contingent consideration of
$16.2 million. Accordingly, contingent purchase price
totaling $8.2 million has been included in the
Companys determination of the total purchase price. The
total contingent consideration consists of the
$12.0 million of potential milestone payments to the
Kourion shareholders, the 241,481 escrow shares with a face
value of $2.0 million and the 289,256 contingent shares
with a face value of $2.3 million. The entire contingent
consideration of $8.2 million included in purchase price
has been included as a non-current liability since the escrowed
and contingent shares will only be issued if there is a change
of control of the Company prior to September 30, 2006, and
the milestone payments are less likely to be paid.
F-18
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The acquisition has been accounted for as a purchase and,
accordingly, the results of operations of Kourion subsequent to
September 2003 are included in the Companys consolidated
statement of operations.
|
|
|
|
|
|
The aggregate purchase price of $28,705,000 consists of the
following:
|
|
|
|
|
Series I convertible preferred stock
|
|
$ |
4,400,000 |
|
Note payable to related party
|
|
|
14,000,000 |
|
Acquisition costs
|
|
|
2,150,000 |
|
Contingent consideration
|
|
|
8,155,000 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
28,705,000 |
|
|
|
|
|
The aggregate purchase price was allocated as follows:
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
4,563,000 |
|
Other current assets, net
|
|
|
1,125,000 |
|
Property and equipment
|
|
|
1,432,000 |
|
Other assets
|
|
|
139,000 |
|
Current liabilities
|
|
|
(513,000 |
) |
Capital lease obligation
|
|
|
(141,000 |
) |
In-process technology
|
|
|
22,100,000 |
|
|
|
|
|
|
|
$ |
28,705,000 |
|
|
|
|
|
Upon consummation of the Kourion acquisition, the Company
immediately expensed to in-process technology
$22.1 million, representing a portion of the fair value
allocated to in-process research and development (IPR&D).
The Company believes that this charge represents a reasonably
reliable estimate of the future benefits attributed to purchased
IPR&D. The value assigned to IPR&D was composed of the
projected value of the two Kourion preclinical drug development
projects. The valuation was determined using the income
approach. Potential revenue and drug development expenses were
projected through 2021 based on managements estimates.
Specifically, management estimated that the development of the
Kourion programs through clinical trials to commercial viability
will take approximately eight years and cost in excess of
$31.0 million. The discounted cash flow method was applied
to the projected cash flows, adjusted for the probability of
success using a discount rate of 23%. The discount rate takes
into consideration the uncertainty surrounding successful
development and commercialization of the IPR&D. The
technology that the Company acquired in the transaction with
Kourion is at an early stage and will require several more years
of development before a therapeutic product can be developed and
commercialized. Given the risks inherent in the clinical
development and regulatory approval process, it is possible that
no commercial product will ever result from this technology.
Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma combined results of operations
for the Company assume that the Kourion acquisition was
completed as of January 1, 2002.
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2002 | |
|
|
| |
|
| |
Total revenue
|
|
$ |
32,505,000 |
|
|
$ |
21,441,000 |
|
Net loss
|
|
$ |
(36,277,000 |
) |
|
$ |
(39,654,000 |
) |
F-19
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
These pro forma amounts represent the historical operating
results of Kourion prior to the date of acquisition, combined
with those of the Company as adjusted to eliminate the write off
of the in-process technology of $22.1 million and include
two years interest expense related to the note payable to a
related party for pro forma periods ended December 31, 2003
and 2002, respectively. These pro forma results are not
necessarily indicative of operating results that would have
occurred if Kourion had been operated by current management
during the periods presented.
|
|
4. |
Property and Equipment |
Property and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Software
|
|
$ |
2,700,096 |
|
|
$ |
2,714,477 |
|
Laboratory equipment
|
|
|
4,674,531 |
|
|
|
5,647,104 |
|
Office and computer equipment
|
|
|
1,867,498 |
|
|
|
2,147,608 |
|
Leasehold improvements
|
|
|
3,129,401 |
|
|
|
2,310,729 |
|
Furniture and fixtures
|
|
|
717,195 |
|
|
|
358,172 |
|
Construction in progress
|
|
|
379,575 |
|
|
|
274,030 |
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
13,468,296 |
|
|
|
13,452,120 |
|
Less: accumulated depreciation and amortization
|
|
|
(6,730,085 |
) |
|
|
(5,560,004 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
6,738,211 |
|
|
$ |
7,892,116 |
|
|
|
|
|
|
|
|
At December 31, 2004 and 2003 the net book value of
property and equipment serving as collateral under loan
agreements amounted to $3,159,000 and $4,721,000, respectively.
At December 31, 2004 and 2003, equipment held under capital
leases totaled $474,776 and $584,374, and accumulated
depreciation related to this leased equipment totaled
approximately $250,909 and $224,430, respectively.
Depreciation and amortization expense on property and equipment
totaled approximately $2,413,000, $2,256,000, and $1,616,000 in
the years ended December 31, 2004, 2003, and 2002.
|
|
5. |
Long-Lived Assets and Goodwill |
Intangible assets consist of trade names, customer base,
assembled workforce and goodwill. Goodwill, which represents the
excess of purchase price over the fair value of net assets
acquired, was amortized on a straight-line basis over its useful
life of ten years prior to January 1, 2002.
Effective January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets. This Statement requires, among other things, that
goodwill and certain other intangibles no longer be amortized,
but instead tested for impairment at least annually. The Company
has completed the transitional and annual impairment tests as
required by SFAS No. 142 upon adoption at
January 1, 2002 and again on December 31, 2004, 2003
and 2002. Based on the results of these analyses, no impairment
of goodwill was identified.
Amortization of intangible assets was approximately $250,000,
$261,000, and $372,000 for the years ended December 31,
2004, 2003, and 2002, respectively.
F-20
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
At December 31, 2004 and 2003, ViaCells goodwill and
intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Goodwill
|
|
$ |
3,620,750 |
|
|
$ |
3,620,750 |
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Trademark
|
|
$ |
4,400,000 |
|
|
$ |
4,400,000 |
|
Employment agreements
|
|
|
288,338 |
|
|
|
288,338 |
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(1,663,341 |
) |
|
|
(1,413,617 |
) |
|
|
|
|
|
|
|
Intangible assets, net
|
|
$ |
3,024,997 |
|
|
$ |
3,274,721 |
|
|
|
|
|
|
|
|
The Company expects amortization of these intangible assets to
be approximately $202,000 annually through 2019, at which point
they will be fully amortized.
At December 31, 2004 and 2003, accrued expenses consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Accrued patent royalties
|
|
$ |
|
|
|
$ |
3,257,639 |
|
Payroll and payroll related
|
|
|
1,016,375 |
|
|
|
1,487,932 |
|
Management incentive
|
|
|
722,915 |
|
|
|
481,209 |
|
Professional fees
|
|
|
2,026,540 |
|
|
|
2,766,042 |
|
Accrued marketing
|
|
|
911,843 |
|
|
|
865,455 |
|
Accrued restructuring
|
|
|
907,296 |
|
|
|
|
|
Other
|
|
|
1,904,826 |
|
|
|
1,152,745 |
|
|
|
|
|
|
|
|
|
|
$ |
7,489,795 |
|
|
$ |
10,011,022 |
|
|
|
|
|
|
|
|
Loss before income taxes is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
(16,018,802 |
) |
|
$ |
(52,299,065 |
) |
|
$ |
(35,667,790 |
) |
Foreign
|
|
|
(5,078,494 |
) |
|
|
(3,169,185 |
) |
|
|
(370,238 |
) |
|
|
|
|
|
|
|
|
|
|
Total Income Before Taxes
|
|
$ |
(21,097,296 |
) |
|
$ |
(55,468,250 |
) |
|
$ |
(36,038,028 |
) |
|
|
|
|
|
|
|
|
|
|
F-21
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Our benefit for income taxes were at rates other than the US
federal statutory tax rate for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
US Statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State taxes, net
|
|
|
3.7 |
% |
|
|
2.0 |
% |
|
|
6.9 |
% |
Foreign rate differential
|
|
|
1.8 |
% |
|
|
0.4 |
% |
|
|
(0.1 |
)% |
Benefit of tax credits
|
|
|
2.6 |
% |
|
|
1.3 |
% |
|
|
1.6 |
% |
Change in valuation allowance
|
|
|
(36.8 |
)% |
|
|
(14.8 |
)% |
|
|
(41.5 |
)% |
Stock based compensation
|
|
|
(5.1 |
)% |
|
|
(8.1 |
)% |
|
|
0.0 |
% |
In process R&D
|
|
|
0 |
% |
|
|
(14.7 |
)% |
|
|
0.0 |
% |
Other
|
|
|
(0.2 |
)% |
|
|
(0.1 |
)% |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
The Company accounts for income taxes under
SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets or liabilities
are computed based on the differences between the financial
statement and income tax bases of assets and liabilities using
the enacted tax rates. Deferred income tax expense or credits
are based on changes in the asset or liability from period to
period. The components of net deferred tax assets
(liabilities) are described in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets
|
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$ |
35,435,742 |
|
|
$ |
31,159,658 |
|
Tax credit carryforwards
|
|
|
3,484,494 |
|
|
|
2,542,262 |
|
Stock based compensation
|
|
|
3,790,367 |
|
|
|
3,782,964 |
|
Temporary differences
|
|
|
8,509,660 |
|
|
|
6,151,824 |
|
|
|
|
|
|
|
|
|
|
|
51,220,263 |
|
|
|
43,636,708 |
|
Less: valuation allowance
|
|
|
(50,002,096 |
) |
|
|
(42,233,874 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,218,167 |
|
|
|
1,402,834 |
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,218,167 |
) |
|
|
(1,402,834 |
) |
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company has recorded a full valuation allowance against its
net deferred tax assets because, based on the weight of
available evidence, the Company believes it is more likely than
not that the deferred tax assets will not be realized in the
near future. At December 31, 2004, the Company has federal
and state net operating loss carryforwards of approximately
$73,062,215 and $71,919,828, respectively, which begin to expire
in 2009 and 2005, respectively. The Company has federal and
state credit carryforwards of approximately $2,639,477 and
$1,280,328 which begin to expire in 2009 and 2013, respectively.
The Company also has foreign net operating loss carryforwards of
$13,165,922. The carryforwards expire through 2024 and are
subject to review and possible adjustment by the Internal
Revenue Service. Ownership changes, as defined in the Internal
Revenue Code, may have limited the amount of net operating loss
carryforwards that can be utilized annually to offset future
taxable income.
Of the $49 million valuation allowance, $3.8 million
relates to nonqualified stock option deductions, the benefit of
which will be credited to additional paid in capital if and when
realized.
F-22
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
At December 31, the Companys valuation allowance
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
|
|
|
Beginning of | |
|
|
|
|
|
Balance at | |
Description |
|
Period | |
|
Additions | |
|
Deductions | |
|
End of Period | |
|
|
| |
|
| |
|
| |
|
| |
2004
|
|
$ |
42,233,874 |
|
|
|
7,768,222 |
|
|
|
|
|
|
$ |
50,002,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$ |
28,965,573 |
|
|
|
13,268,301 |
|
|
|
|
|
|
$ |
42,233,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
$ |
13,520,000 |
|
|
|
15,445,573 |
|
|
|
|
|
|
$ |
28,965,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had the following long-term debt outstanding as of
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Debt facility loans
|
|
$ |
3,135,512 |
|
|
$ |
4,668,690 |
|
Related party note payable
|
|
|
15,422,400 |
|
|
|
14,280,000 |
|
Capital lease obligations
|
|
|
178,975 |
|
|
|
289,586 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
18,736,887 |
|
|
|
19,238,276 |
|
Less: current portion
|
|
|
(17,164,847 |
) |
|
|
(15,891,604 |
) |
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$ |
1,572,040 |
|
|
$ |
3,346,672 |
|
|
|
|
|
|
|
|
The American Jobs Creation Act of 2004 (the Act) was
signed into law on October 22, 2004. The Act contains
numerous amendments and additions to the U.S. corporate income
tax rules. While the Company continues to analyze these new
provisions in order to determine their impact to its financial
statements, none of these changes, either individually or in the
aggregate, is expected to have a significant effect on the
Companys income tax liability.
Debt facility
During 2002, 2001 and 2000, the Company entered into several
equipment term loans with the same financial institution.
Outstanding borrowings under these agreements amounted to
$5,172,000 at December 31, 2002. These borrowings bore an
interest rate of 4.25%-4.75% per annum, were collateralized
by equipment purchased and letters of credit of $1,350,000 and
certificates of deposit of $4,425,788. Letters of credit were
collateralized by a $650,000 certificate of deposit. These
borrowings were repaid in 2003.
In October 2003, the Company entered into a $5,000,000 loan
agreement with a financial institution. Borrowings under this
agreement bear interest at 6.9 percent per annum and are
collateralized by the fixed assets of the Company. Monthly
payments of interest and principal are due through October 2006.
Approximately $3,136,000 was outstanding under this loan as of
December 31, 2004. The Company was also required to make a
$1,750,000 cash deposit with the lender as additional collateral
for this loan. As of December 31, 2004 and 2003, the net
book value of the fixed assets which are collateralized under
this agreement was $3,159,000 and $4,721,000, respectively.
During 2004, $403,000 of the deposit was returned based on the
repayment schedule of the loan agreement. As of
December 31, 2004, the remaining deposit was $1,347,000 and
is included with other non-current assets in the accompanying
consolidated balance sheet.
The Company also issued a warrant, in connection with the above
financing, for the purchase of 18,750 shares of
Series J preferred stock with an exercise price of
$8 per share with a life of ten years.
F-23
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company valued the warrant under a Black-Scholes model
deriving a fair market value of approximately $57,000. This
amount was recorded as a deferred financing cost and is being
amortized over the term of the note. Total warrant amortization
was approximately $29,000 for the period ended December 31,
2004.
In connection with this debt facility, the Company entered into
a negative pledge agreement with GE Capital Corp. that, among
other things, precludes the Company from rolling, transferring,
assigning, mortgaging, leasing, granting a security interest in
or encumbering any of its intellectual property. The negative
pledge agreement, however, does not preclude the Company from
granting a license or sublicense in the ordinary course of
business. There are no financial covenants associated with this
new agreement.
Note Payable to Related Party
A portion of the consideration paid by the Company in its
acquisition of Kourion Therapeutics consisted of promissory
notes in an aggregate principal amount of $14.0 million.
The notes are held by several funds that are also stockholders
of the Company and that are affiliated with MPM Asset Management
LLC, the manager of which serves on the Companys board of
directors. The notes bear interest at a rate of 8% per
annum, compounded annually, and mature on September 30,
2007. The Company recorded $1,422,000 in accrued interest
related to this note for the period ended December 31,
2004. They are subject to mandatory prepayment upon the earlier
of an initial public offering of the Companys common stock
or a sale of the Company. The total outstanding principal and
unpaid accrued interest on the notes as of December 31,
2004 was $15,422,000. On January 26, 2005, following the
completion of its initial public offering the Company paid off
the related party note of $15,509,760, which included all
outstanding principal and interest owed at that date.
Capital Lease Obligations
The Company leases scientific equipment under lease agreements
that qualify for capitalized treatment under
SFAS No. 13, Accounting for Leases.
At December 31, 2004, payments of principal and interest on
existing debt were due as follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2005
|
|
$ |
17,334,137 |
|
2006
|
|
|
1,573,035 |
|
2007
|
|
|
36,652 |
|
2008
|
|
|
12,217 |
|
Thereafter
|
|
|
|
|
|
|
|
|
Total payment
|
|
|
18,956,041 |
|
Less: interest
|
|
|
(219,154 |
) |
|
|
|
|
Total debt
|
|
|
18,736,887 |
|
Less: current portion
|
|
|
(17,164,847 |
) |
|
|
|
|
Total long-term debt
|
|
$ |
1,572,040 |
|
|
|
|
|
|
|
9. |
Commitments and Contingencies |
Leases
The Company conducts its operations in leased facilities under
noncancelable operating leases expiring through 2014.
F-24
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Future minimum rental payments under the operating leases are
approximately as follows:
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
2005
|
|
$ |
2,022,015 |
|
|
2006
|
|
|
1,889,384 |
|
|
2007
|
|
|
1,931,998 |
|
|
2008
|
|
|
1,758,897 |
|
|
2009
|
|
|
1,704,181 |
|
|
Thereafter
|
|
|
8,041,094 |
|
|
|
|
|
|
Total lease payments
|
|
$ |
17,347,569 |
|
|
|
|
|
Rent expense was approximately $2,212,000, $1,797,000, and
$1,566,000 for the years ended December 31, 2004, 2003, and
2002, respectively.
In connection with the above commitments, the Company has issued
letters of credit totaling approximately $1,865,000 as
collateral against these leases. These letters of credit are
collateralized by certificates of deposit that are classified as
restricted cash on the accompanying balance sheets.
In 2004 the Company received approximately $1.0 million as
a tenant improvement allowance to offset the fixed asset costs
of our corporate office space.
Agreements
In December 2004, the Company entered into a Research Agreement
with Genzyme. Under the Research Agreement, the Company provides
islet stem cells to Genzyme, and Genzyme is obligated to conduct
specified research using the islet stem cells. The Company has
granted Genzyme a right of first negotiation to enter into an
agreement with it in the field of diseases and disorders of
glucose metabolism or insulin insufficiency, including diabetes,
using the results of the research conducted by Genzyme. If no
agreement is reached in such negotiations, the Company cannot,
for a period of 12 months following such negotiations,
enter into an agreement with another party on terms more
favorable than those last offered to Genzyme without first
offering such terms to Genzyme.
In January 2002, the Company executed two sponsored research
agreements with MGH, one relating to amyotrophic lateral
sclerosis (ALS) research and the other relating to muscular
dystrophy research. Pursuant to these two agreements, the
Company funded Dr. Robert Browns work in these areas
for 12 months, complementing its internal development
efforts in ALS and muscular dystrophy and potentially providing
it with new intellectual property. Under the agreements the
Company paid approximately $200,000 to MGH, and provided cord
blood stem cell populations expanded through Selective
Amplification to Dr. Brown for experiments in mouse models
of ALS and muscular dystrophy. These two agreements expired in
January 2003. The Company incurred $120,000 in related expenses
associated with this agreement for the period ended
December 31, 2004. The Company will not be continuing this
relationship after December 31, 2004.
In March 2002, the Company entered into a license agreement with
MGH under which the Company received exclusive, worldwide rights
to make, have made, use, sell, offer for sale, and import
products based on patents (currently pending) covering
inventions of Dr. Joel Habener pertaining to pancreatic
stem cells for treatment of diabetes. In exchange for these
rights, as part of this agreement, the Company committed to
spend up to $2,000,000 in the first 18 months of the
agreement to achieve a defined set of research objectives which
support pre-clinical development of a pancreatic stem cell
product for the treatment of diabetes. As of December 31,
2003, the Company had spent approximately $1,400,000 on this
project, and no further financial obligation relating to this
commitment will be incurred.
F-25
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Under this agreement, the Company is also obligated to reimburse
MGH for patent related costs and an annual license fee of
$30,000 per year until the patents expire in December 2020.
In addition, the Company shall pay certain amounts to MGH,
contingent upon the achievement of certain milestones as defined
in the agreement, totaling a minimum of $900,000 and shall pay
royalties to MGH upon commercial sale of products covered under
the license. No royalties were paid in connection with this
agreement.
In August 2002, the Company entered into a license agreement
with Massachusetts Institute of Technology (MIT) under
which the Company receives exclusive, worldwide rights to make,
have made, use, sell, offer for sale and import products based
on patents (currently pending) pertaining to a novel molecule
invented by Dr. Ram Sasisekharan for treatment of
neurological disorders, including stroke. In exchange for these
rights, the Company has paid an upfront fee of $50,000 and an
annual license fee of $20,000 for the life of the patents. In
addition, the Company shall pay certain amounts to MIT upon the
achievement of certain milestones defined in the agreement
totaling a maximum of $500,000 for each licensed product or
process and shall pay royalties to MIT upon commercial sale of
products covered under the license. No milestone payments were
made under this agreement.
The Company has entered into an agreement to provide no more
than $4,000,000 to fund stem cell research and development
programs conducted in Singapore. Under this agreement, the
government of Singapore reimburses a portion of these expenses
under a grant. The Company funded $1,045,000, $968,000, and
$527,000 of research and development in Singapore during the
years ended December 31, 2004, 2003, and 2002,
respectively, and recorded grant revenue of $287,000, $252,000
and $130,000 during the years ended December 31, 2004,
2003, and 2002, respectively.
Effective January 1, 2003, the Company entered into a
license agreement with GlaxoSmithKline and Glaxo Group Limited
for a nonexclusive license to four specific forms of
thrombopoietin mimetics for certain ex vivo uses. In
consideration for the license, the Company issued
12,500 shares of its Series I preferred stock as of
March 31, 2003 and paid a fee of $115,000 and $50,000
license fee in 2004. The value of the Series I preferred
stock of $100,000 was charged to in-process technology. In
addition, the Company will be required to make certain milestone
payments relating to the clinical development of products that
incorporate the technology provided under this license
agreement. The Company will be required to pay royalties on the
sale of commercial products incorporating the licensed
technology. The Company had paid no royalties under this
agreement and has accrued $50,000 in annual license fees as of
December 31, 2004.
On July 15, 2003, the Company entered into a license
agreement with Gamete Technology, Inc. for the exclusive rights
to utilize intellectual property developed by Gamete and MGH in
the field of human oocyte cryopreservation and storage. In
exchange for these rights, the Company is required to pay
certain royalties on preservation and storage revenues from
products that incorporate the licensed technology. The Company
is also required to spend at least $2,500,000 to develop this
technology during the first eighteen months of the agreement,
including fees of approximately $810,000 payable directly to
Gamete under a consulting agreement. As of December 31,
2004, the Company had paid Gamete $782,000 for consulting
services. For the period ended December 31, 2004 the
Company expensed $1,115,000 in the development of human oocyte
cryopreservation. No amounts were paid under the royalty
provision. As a component of the restructuring charge in
September 2004, (see note 14) the Company terminated its
agreement with Gamete Technology by paying a termination fee of
$175,000. All monies have been paid and there are no ongoing
commitments under this agreement as of December 31, 2004.
In December 2003, the Company entered into a license and
collaboration agreement with Amgen Inc., under which it licensed
certain stem cell growth factors from Amgen for use in
developing and manufacturing cell therapy products, and granted
Amgen an option to collaborate on any product or products that
incorporate any of those growth factors. There is no limit on
the number of such products
F-26
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)