e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
|
|
(Mark One) |
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the fiscal year ended December 31, 2005 |
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the transition period
from to |
Commission file number: 0-51110
ViaCell, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization) |
|
04-3244816
(I.R.S. Employer
Identification No.) |
|
245 First Street,
Cambridge, Massachusetts |
|
02142
(Zip code) |
(Address of principal executive offices)
|
|
|
(Registrants telephone number, including area code)
(617) 914-3400
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes 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
the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Securities Exchange Act of
1934). Yes o No þ
The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant (without admitting that
any person whose shares are not included in such calculation is
an affiliate) computed by reference to the price at which the
common stock was last sold as of the last business day of the
Registrants most recently completed second fiscal quarter
was $301,894,783.
As of March 29, 2006, the Registrant had
38,602,549 shares of Common Stock, $0.01 par value,
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for our 2006 Annual
Meeting of Stockholders are incorporated by reference into
Part III of this Report.
ViaCell, Inc.
Annual Report on
Form 10-K
For the Fiscal Year Ended December 31, 2005
NOTE ABOUT REFERENCES TO VIACELL
Throughout this report, the words we,
our, us and ViaCell refer to
ViaCell, Inc. and its subsidiaries.
NOTE ABOUT TRADEMARKS
ViaCell®
and
ViaCord®
are registered trademarks of ViaCell, Inc.
ViaCytesm
is a service mark of ViaCell, Inc.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including
statements about our current projections as to future financial
performance, our expectations as to the potential and
anticipated results of our development programs, and our views
as to the possible outcome of pending litigation and actions
related to our intellectual property portfolio. We have based
these forward-looking statements on our current expectations
about such future events. While we believe these expectations
are reasonable, forward-looking statements are inherently
subject to risks and uncertainties, many of which are beyond our
control. Our actual results may differ materially from those
suggested by these forward-looking statements for various
reasons, including those discussed in this report under the
heading Risk Factors That May Affect Results
beginning at page 19. Given these risks and uncertainties,
you are cautioned not to place substantial weight on
forward-looking statements. The forward-looking statements
included in this report are made only as of the date of this
report. We do not undertake any obligation to update or revise
any of these statements.
2
TABLE OF CONTENTS
3
PART I
|
|
ITEM 1. |
DESCRIPTION OF BUSINESS |
Overview
ViaCell is a biotechnology company dedicated to researching,
developing and commercializing cellular therapies. We have a
pipeline of proprietary umbilical cord blood-derived and
adult-derived stem cell product candidates being studied as
possible treatments for cancer, cardiac disease and diabetes. We
are currently conducting a Phase I clinical trial of CB001,
our lead umbilical cord blood-derived stem cell therapy product
candidate as a possible treatment for hematopoietic stem cell
reconstitution in patients affected by a variety of cancers. In
addition to our therapeutic research and development programs,
we have a reproductive health business unit that generated
revenues of $43.8 million in 2005 from sales of ViaCord, a
product offering through which expectant families can preserve
their babys umbilical cord blood for possible future
medical use. We are working to leverage our commercial
infrastructure and product development capabilities by
developing
ViaCytesm,
our investigational product candidate intended to broaden
reproductive choices for women through the cryopreservation of
human unfertilized eggs.
ViaCell was incorporated in the State of Delaware on
September 2, 1994. Our corporate headquarters and main
research facility is located in Cambridge, Massachusetts. We
have processing and storage facilities in Hebron, Kentucky and
an additional research and development operation in Singapore.
Our Cellular Therapy Technology and Product Candidates
ViaCell is dedicated to enabling the widespread application of
human cells as medicine. We have focused our research and
development efforts on investigating the potential therapeutic
uses of umbilical cord blood-derived and adult-derived stem
cells and on technology for the expansion of the populations of
these cells. We are developing a pipeline of proprietary adult
and umbilical cord blood-derived stem cell product candidates
being studied as possible treatments for cancer, cardiac disease
and diabetes. Below is an overview of the cell therapy area and
a description of our cell therapy-related technology and product
candidates.
The human body is comprised not only of cells that have
differentiated into specific tissues (such as skin, liver or
blood) but also cells, known as stem cells that are not fully
differentiated. 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. To
date, researchers have identified many different types of stem
cells from many sources. These include, for example, stem cells
found in umbilical cord blood and placenta, hematopoietic stem
cells from bone marrow, pancreatic islet stem cells from the
pancreas, neural stem cells from the brain, and embryonic stem
cells from embryos. Each type of stem cell appears to have
unique properties. For instance, some stem cells propagate well
but are difficult to differentiate efficiently, some stem cells
differentiate efficiently but are difficult to propagate, some
stem cells appear to be unipotent in that they can only make one
class of tissue, while others appear to be pluripotent in that
they can make a variety of tissue types. 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 the medical and scientific communitys efforts to find
treatments and cures for human disease. Stem cell therapy
involves the use of stem cells to replace and initiate the
production of other cells and tissues that are missing or
damaged due to disease or injury. For example, today,
hematopoietic stem cell therapy is commonly used as a treatment
for a variety of cancers to re-establish and maintain the blood
and immune system by regenerating healthy, functioning bone
marrow. 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, if the transplant
4
is successful, 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:
|
|
|
|
|
replace diseased bone marrow with healthy, functioning bone
marrow for patients with blood diseases such as aplastic anemia; |
|
|
|
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 |
|
|
|
provide genetically healthy and functioning bone marrow to treat
patients with genetic diseases such as sickle cell anemia. |
According to the International Bone Marrow Transplant Registry,
45,000 hematopoietic stem cell transplants were performed
worldwide in 2002. Many more patients needed transplants, but
suitably compatible cells could not be found.
Current scientific and clinical research indicates that stem
cells may also have promise in the treatment of diseases in
addition to those currently addressed with hematopoietic stem
cell therapy. Researchers are investigating the therapeutic
potential of stem cells in a number of areas including in the
treatment of cardiac, neurological, neuromuscular,
immunological, genetic, pancreatic, liver and degenerative
diseases as well as various types of cancer.
Despite the proven clinical utility of hematopoietic stem cell
therapy and excitement over the potential of stem cell therapy
and other cellular therapies to treat other types of diseases,
significant challenges exist on the path toward widespread
application, including:
|
|
|
|
|
Need for HLA Matching. 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 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 potentially resulting in severe disease, significant
disability and often, in the most severe forms, death. 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 do not receive stem cells. |
|
|
|
Harvesting Cells. In general, harvesting
sufficient quantities of stem cells from a donor or a patient is
extremely difficult. For example, 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 bone marrow 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.
Umbilical cord blood is also rich in stem cells, but the volume
of blood collected is limited. A single cord blood unit is
generally too small to be suitable to treat adult patients. Stem
cells can also be derived from human embryonic tissue. However,
the utility of embryonic stem cells is presently technically
limited and is further hampered by ethical and regulatory issues
that restrict their use. |
|
|
|
Expansion. The number of stem cells collected from
any particular tissue source is typically low compared to the
quantity required for therapeutic benefit. For example, bone
marrow, processed |
5
|
|
|
|
|
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. 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 generally not considered
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. The mixed populations of cells that result
are also difficult to characterize, creating the possibility of
clinical side effects as compared to 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 that are needed given the low
concentration of stem cells. |
|
|
|
Our Expansion Technologies |
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. Our
process uses growth factors to promote the growth of stem cell
populations 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 when using conventional batch
culture methodologies for growth resulting in loss of stem
cells. 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 selection
at different time points, creating a range of potential cellular
products.
The Selective Amplification process is described below:
|
|
|
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.
The antibodies, which have magnetic particles associated with
them, link onto the surface of the differentiated cells. 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. |
|
|
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. |
|
|
Re-purification. After a specified growth period, we
re-purify the 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. |
|
|
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. |
|
|
Harvest, Characterize and Package. After a final step of
reselection and growth, the amplified target cells are
harvested, characterized and packaged for use. |
6
The following illustration shows the difference between
conventional stem cell growth methodologies and Selective
Amplification.
The Selective Amplification process results in a highly
characterized population of stem cells. Our lead product
candidate manufactured using this technology is CB001.
We are working on other approaches to expand populations of
cells in addition to Selective Amplification, including the use
of Unrestricted Somatic Stem Cells as a platform for cell
expansion. We believe our Selective Amplification and other
technologies may have broad range potential applications not
just as a potential therapeutic application, but also in
cellular therapy.
|
|
|
Our Product Candidates in Cellular Therapies |
CB001 consists of a highly enriched concentrated and purified
population of hematopoietic stem cells derived from umbilical
cord blood produced using Selective Amplification. CB001 is
currently being studied in a Phase I clinical trial for
hematopoietic stem cell reconstitution in the treatment of a
variety of cancers.
7
Background. Hematopoietic stem cell therapy is commonly
used as a treatment for a variety of cancers and certain serious
genetic and acquired diseases to re-establish and maintain the
blood and immune system by providing or regenerating healthy,
functioning bone marrow. In this type of therapy, hematopoietic
stem cells are obtained typically from bone marrow, but also
from umbilical cord blood or processed circulating blood, and
are infused into the patients circulatory system, where
they find their way to the bone cavity. Once established in the
bone, if the transplant is successful, the stem cells begin to
grow, or engraft, and produce cells of the blood and immune
systems. The treatment is usually undertaken in patients who are
very sick and for whom there are few, if any, alternatives. Even
when such a need exists, hematopoietic stem cell therapy may not
be an option often because of the lack of available bone marrow
donors with HLA matching cells. Umbilical cord blood is another
important source of hematopoietic cells. However, a single cord
blood unit is generally too small to be suitable to treat an
adult patient.
CB001 is being developed as a potential source of highly
purified stem cells for those for whom a suitable match from
other sources is not available. We believe that an expanded
umbilical cord blood-derived stem cell product like CB001 has
the potential to overcome the current limitations of
hematopoietic stem cell therapy by:
|
|
|
|
|
Increasing the Likelihood of Locating Compatible Stem
Cells. 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. Most cord blood units
collected, preserved and stored do not contain sufficient stem
cells to treat an adult patient. We are studying whether,
through Selective Amplification, 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 that exist with unexpanded cord
blood units, HLA matching limitations exist particularly for
racial minorities that are proportionally underrepresented in
current donor inventories. If every cord blood unit that is
collected, preserved and stored can be expanded, the likelihood
of locating compatible stem cells in sufficient quantities is
increased. |
|
|
|
Increasing the Number of Stem Cells. We have
increased hematopoietic stem cell populations by more than
100-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 may be able to achieve
may have significance in the potential for therapeutic effect. |
Program Status. We are currently conducting a ten patient
Phase 1 clinical study of CB001. We have enrolled and
completed treatment in eight of the ten patients called for in
the study. The patient population eligible for participation in
this trial includes children and adult patients
(ages 12-60) with acute lymphocytic leukemia, acute
myelogenous leukemia, chronic myelogenous leukemia,
myelodysplastic syndrome, and Non-Hodgkins lymphoma. The
patients receive CB001 (produced by Selective Amplification of a
donor umbilical cord) plus a standard cord blood transplant
(derived from a different donor) following high dose
chemotherapy and radiation therapy. Patients are followed for
100 days post transplant. We expect to enroll the final two
patients and complete analysis of the study data in 2006. We
resumed the study in December 2005 after the United States Food
and Drug Administration, or FDA, lifted a clinical hold. The FDA
had placed a clinical hold on the study in September 2005
following our decision to suspend enrollment after two patients
experienced acute Grade IV graft-versus-host disease, or
aGVHD, a potential and common side effect in transplantation.
Under the study protocol, two cases of Grade IV aGVHD
called for suspension of enrollment. Both patients recovered
from Grade IV GVHD, and were released from the hospital.
The CB001 Phase 1 clinical study is designed primarily as a
safety study. However, we may also be able to differentiate
between cells coming from CB001 and cells coming from the
standard cord blood transplant due to genetic differences in the
two types of donor cells. As a result, we also expect to
generate preliminary data on the clinical activity of CB001.
8
|
|
|
Unrestricted Somatic Stem Cells Cardiac |
We are working to develop a proprietary type of stem cell called
Unrestricted Somatic Stem Cells, or USSCs. USSCs are a
pluripotent class of stem cells derived from umbilical cord
blood. Scientific findings indicate that USSCs may have the
ability to differentiate into many cell types, including fat,
bone, cartilage and precursor neuronal cells under specified
in vitro culture conditions. Data from animal models
suggests that this cell type is also capable of differentiating
in a variety of tissue types as shown by positive histo-chemical
data from liver, bone, cartilage, brain and heart of
transplanted animals. We are currently studying the potential
for this technology in the treatment of cardiac disease.
Background. 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 or a plaque formed by arteriosclerosis. If the blood
supply is cut off for a prolonged period of time, heart muscle
cells suffer irreversible injury and die. According to a
statistical report from the American Heart Association (Heart
Disease and Stroke Statistics 2005 Update), there
are approximately 1.2 million cases of myocardial
infarction and fatal coronary heart disease each year in the
United States, with a terminal outcome in about 42% of cases.
Many patients who survive develop a chronic form of heart
disease called congestive heart failure, or CHF, which is
associated with a progressive deterioration of the heart muscle.
According to the American Heart Association, about
5 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 damaged
heart tissue or generating new tissue. Scientists have theorized
that stem cells may be able to play a role in tissue repair and
regeneration in the heart, and may help restore heart function
after a heart attack. Using rodent models, scientists conducting
research in the area have generated data that suggests that
adult stem cells when injected into the damaged area of the
heart can lead to improved function and increased survival. In
other experimental applications, scientists conducting research
in the area have used preparations of stem cells isolated from a
patients own bone marrow, and have seen improvement in
cardiac function. This area of investigation is still in the
early stages. Scientists are working to confirm the effect of
introducing stem cells to damaged areas in the heart and to
determine which types of stem cells might work, how to expand
the cells so that an adequate amount is delivered and how to
effectively deliver the cells to the impacted area. We are
studying the potential for USSCs in this area given their
ability to differentiate into myogenic (endothelial and
myocardiocyte) cells such as those found in cardiac muscle
tissue.
Status of Program. We continue to conduct preclinical
studies of USSCs in the cardiac area. We are focused on using
animal models to confirm that USSCs have the potential to
improve heart function, and on finding a catheter-based mode of
administration to deliver cells in a targeted manner to the
infarct region that can be applied by interventional
cardiologists. If we successfully complete preclinical
development, we expect to file an investigational new drug
application (IND) with the FDA in late 2006 or early
2007.
|
|
|
Pancreatic Stem Cells Diabetes |
We are conducting an early-stage research program in
collaboration with Genzyme Corporation to explore the potential
for pancreatic adult stem cells in the treatment of diabetes.
Type 1 diabetes, also known as juvenile-onset diabetes, is
caused by destruction of the insulin-producing islet cells of
the pancreas. In the absence of insulin, a sugar called glucose
cannot enter the cells and accumulates in abnormally high levels
in the blood. Patients with Type 1 diabetes must monitor their
blood sugar levels and take insulin several times a day. In the
most serious cases, doctors have had success in the treatment of
Type 1 diabetes with pancreas transplants. Researchers have also
experimented with use of transplanted islet cells rather than
transplant of the entire pancreas. One challenge in the
transplant area is the need for immune suppressive drugs to
prevent rejection. A second challenge, and the one that stem
cell therapy might help to address, is the lack of availability
of donor organs. We are conducting early-stage research into the
use of a novel population of adult stem cells isolated from
donated cadaver pancreatic tissue in the treatment of Type 1
diabetes. Pancreatic stem cells have shown the ability to
produce insulin in mouse models of diabetes. We are currently
9
investigating these findings with additional animal studies and
working to better understand how to isolate these cells and
expand them while still preserving their ability to produce
insulin. Our diabetes program is based on technology that has
been licensed to us by Massachusetts General Hospital.
We expect to supplement our internal research and product
development efforts through the acquisition or licensing from
third parties of products and technologies that support our
business strategy. We also expect to continue to look to
structure high value collaborative relationships with industry
leaders particularly where the involvement of a strategic
partner may significantly improve the chances of commercial
success or where a partner possesses the resources and expertise
to develop and commercialize products for indications outside
the scope of our internal development programs.
Our ViaCord Reproductive Health Business
Our ViaCord Reproductive Health business unit is responsible for
marketing and sales of our ViaCord product offering for the
collection, testing, processing and storage of umbilical cord
stem cells, and for development of ViaCyte, our product
candidate for the cryopreservation of human eggs for future
in vitro fertilization use.
|
|
|
ViaCord: Umbilical Cord Blood Preservation |
Through our ViaCord product offering, we offer expectant
families the chance to preserve their babys umbilical cord
blood for possible future use by the child or potentially a
related family member. Stem cells derived from umbilical cord
blood are currently a treatment option for over 40 diseases,
including cancers such as acute lymphoblastic leukemia and
Non-Hodgkins lymphoma, certain bone marrow failure syndromes
such as severe aplastic anemia and neuroblastoma, certain blood
disorders such as sickle cell anemia and other diseases such as
Hurler syndrome and severe combined immune deficiency, or SCID.
Studies have shown that umbilical cord stem cells transplants
from a persons own umbilical cord blood or a related
matching donor such as a sibling have a higher survival rate and
a lower incidence of GVHD, a serious potential side effect of
transplants, than transplants from an unrelated donor.
Through our ViaCord product offering, 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 to
our laboratory. The kit also provides for collecting a maternal
blood sample for later testing. |
|
|
Comprehensive Testing. At our 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. |
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.
Our ViaCell Reproductive Health business sales and marketing
organization consists of sales and marketing professionals
supporting our ViaCord product. We have an expanding field sales
organization, with representatives in territories which cover
the largest birthing centers in the United States who educate
obstetricians, child birth educators, and hospitals on the
benefits of cord blood preservation. In addition, our internal
marketing staff targets two primary segments: high-birthing
obstetrics practices and expectant
10
families. We educate expectant families through many mediums,
including targeted advertising, direct mail and web-based
marketing activities.
Over the past several years, the number of families choosing to
preserve their babys umbilical cord blood has grown
significantly. In 2005, we generated revenue of
$43.8 million from ViaCord compared to $36.8 million
in 2004. We currently store over 90,000 cord blood units for
customers. We have established a leading position in this
emerging field, with an estimated market share of approximately
24% total units stored, based on estimates by the independent
organization Parents Guide to Cord Blood Banks of total
units stored in family cord blood banks (356,000 as of the end
of 2005). We believe that, based on the demographic profile of
our average ViaCord customer, the total available target market
for the industry could grow to 30% of the approximately
4 million annual births in the United States in the next
several years.
We are working to leverage our ViaCord Reproductive Health
business unit by developing a proprietary media intended for the
cryopreservation of human oocytes. We believe that, if
successfully developed, an oocyte cryopreservation product could
allow a woman to have a child later in life, using one of her
own younger oocytes, and may also 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 in
order to preserve their ability to have a child in the future.
Oocyte cryopreservation may also be an attractive option for
women (or couples) who require IVF, but who have ethical
concerns about embryo cryopreservation as well as for those
individuals seeking donor oocytes, but for whom the logistics of
coordinating a donor-recipient cycle present a challenge.
Background. 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, as compared to 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. 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
cryopreservation of oocytes for treatment of
chemotherapy-treated, donor-recipient, IVF and age-related
infertility patients.
ViaCyte Product Candidate. We have licensed a proprietary
high choline cryopreservation media that is designed for use
with a slow freezing technique to help protect oocytes from
damage during cryopreservation. We believe that, if successfully
developed, our ViaCyte cryopreservation product candidate would
complement our existing ViaCord product by:
|
|
|
|
|
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 |
|
|
|
utilizing our sales, marketing and clinical support staff and
our current marketing channels to educate consumers and
healthcare professionals, including obstetricians,
gynecologists, and oncologists. |
Status of Program. We are in discussions with the FDA on
an Investigational Drug Exemption, or IDE, with the FDA to allow
our ViaCyte cryopreservation product candidate to be used in a
clinical trial. The goal of the clinical trial is to generate
data to submit to the FDA for a 510(k) application. In response
to the original 510(k) application filed by our media supplier,
the FDA indicated that the media supplier had not demonstrated
substantial equivalence of the media to a predicate device and,
as a result, the FDA could not clear the media for commercial
use. The FDA indicated that the 510(k) application could be
re-submitted when additional data supporting substantial
equivalence of the media to a predicate device was available.
The FDA has indicated that we will need to conduct a clinical
study of ViaCyte in oocyte cryopreservation that
11
produces pregnancy, birth rate data and safety information to
support the application. We are in discussions with the FDA
related to the IDE and, in particular, the design and size of
the trial. If we are able to reach agreement with the FDA, we
expect to commence a clinical trial of our ViaCyte oocyte
cryopreservation product candidate in late 2006.
Collaborations, Licenses and Strategic Relationships
Our most significant collaborations, licenses and strategic
relationships are described below:
In December 2003, we entered into a license and collaboration
agreement with Amgen Inc. under which we received a
royalty-free, worldwide, non-exclusive license to certain Amgen
growth factors for use as reagents in producing stem cell
therapy products. In August 2005, we expanded the collaboration
to include an additional growth factor. Amgen has an option to
collaborate with us on any product or products that incorporate
a licensed Amgen growth factor or technology. Each time Amgen
exercises a collaboration option, it must partially reimburse
our past development costs based on a pre-determined formula,
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 will 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. In the event Amgen does not exercise its option
to collaborate on a particular product, we will owe Amgen a
royalty on any sales of such product, if successfully developed.
Under this agreement, we can purchase current Good Manufacturing
Practices 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 or solely developed by us. The expiration
of the issued licensed Amgen patents will occur no earlier than
2013, 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.
In connection with the expansion of the collaboration agreement,
we issued Amgen a warrant to purchase 200,000 shares
of our common stock at an exercise price of $7.85 per
share. The warrant will vest upon the successful treatment of a
human in a Phase 2 clinical trial utilizing the specific
growth factor that is the subject of the amendment. The term of
the warrant is seven years from the effective date of the
amendment. The warrant will be recognized as in-process research
and development expense when and if it vests, based on the fair
value at that time.
|
|
|
Tyho Galileo Research Laboratory |
On September 1, 2004, we entered into a License Agreement
with Tyho Galileo Research Laboratory, or Galileo, under which
we received exclusive rights to a patent covering proprietary
media for use in the field of oocyte cryopreservation. As part
of this agreement, we also entered into a research collaboration
with Galileo which is focused on the development of technologies
in the field of oocyte and embryo cryopreservation. Our
12
agreement with Galileo includes funding by us of research at
Galileo, annual license fees, milestone payments to Galileo upon
achievement of certain events and a royalty on revenues
generated from the sale of ViaCyte, our oocyte cryopreservation
product candidate, if successfully developed. 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 expires in 2017 if not extended.
In December 2004, we entered into a Research Agreement with
Genzyme under which we provide islet stem cells from donated
pancreases to Genzyme, and Genzyme conducts 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. 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. Jan van Heek, former Executive Vice President of
Genzyme and currently an employee of that company, is a member
of our board of directors.
|
|
|
Johns Hopkins University License |
In August 2005, we entered into a license agreement with Johns
Hopkins University and Zhejiang University for an exclusive
license to inventions entitled Ex vivo Expansion of
Cord Mononuclear Cells on Umbilical Cord Blood derived Stromal
Cells. This license agreement allows us to develop and
market a new technology for the expansion of hematopoietic stem
cells that is based on a different principle than our
proprietary method of Selective Amplification. The agreement
also includes annual license fees, milestone payments upon
achievement of certain events, coverage of patent and legal fees
and a royalty on revenues generated from the sale of a resulting
product, if successfully developed. The term of the license is
for 20 years and can be cancelled by us at anytime without
cause with specified amount of notice.
|
|
|
Massachusetts General Hospital |
In March 2002, we entered into a license agreement with
Massachusetts General Hospital, or MGH under which we received
exclusive, worldwide rights to develop and commercialize
products based on patents (currently pending) covering
inventions of Dr. Joel Habener pertaining to pancreatic
stem cells for the treatment of diabetes. The agreement provides
for the payments of milestones to MGH upon certain events and
royalties based on sales of products covered by the license.
Intellectual Property
The protection of our intellectual property is a strategic part
of our business. We currently own or have exclusively
in-licensed six US patents. Three of our owned and issued US
patents are directed to methods of manufacturing target
populations of 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 two of these patents is core to the manufacture of
our lead stem cell product candidate, CB001. These patents
expire in 2015 if not extended. One of our owned and issued US
patents is directed to the method of isolating and expanding
hemangioblast cells from a non-fetal source. This patent expires
in 2017 if not extended. Corresponding international
applications are pending. One of our in-licensed US patents has
been exclusively licensed from Galileo, and is directed to a
method of cryopreserving human oocytes using proprietary media
so that the oocytes enter into a dormant state and are then
stored for future use. This patent expires in 2017 if not
extended. Another of our US patents, exclusively
13
in-licensed from MGH, broadly covers methods for the treatment
of type I insulin-dependent diabetes mellitus and other
conditions using nestin-positive islet derived progenitor cells,
or 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 covering a
variety of areas, and 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.
The patent positions of companies like ours present complex
legal and factual issues and, as a result, the enforceability of
our patents 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 under our patents 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. There may be existing
patents in the U.S. or in foreign countries or patents
issued in the future that might be asserted to be infringed by
our products, and that are unavailable to license on acceptable
terms. Our inability to obtain such licenses may hinder our
ability to develop or commercialize our products. We expect that
litigation may be necessary in some instances to determine the
validity and scope of certain of our proprietary rights, or to
determine the validity, scope and non-infringement of patent
rights claimed by third parties to be pertinent to our
activities. For example, Pharmastem Therapeutics, Inc. has filed
suit against us claiming that our ViaCord cord blood
preservation product offering infringes certain of
Pharmastems patents. For a description of this litigation,
see Item 3 Legal Proceedings. Intellectual
property litigation could create business uncertainty and
consume substantial financial and human resources. Ultimately
the outcome of such litigation could hinder our ability to
market our products. 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.
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 agreements with us, generally stating
that they will not disclose any confidential information about
us to third parties for a certain period of time, and will
otherwise not use confidential information for anyones
benefit but ours. In the case of our employees and certain of
our consultants, the agreements also provide that all inventions
conceived by such persons will be our exclusive property. These
agreements may not provide meaningful protection or adequate
remedies in the event of breach.
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 Corporation, Cellerant Therapeutics, Inc., Gamida-Cell
Ltd. and Osiris Therapeutics Inc. In particular, Gamida-Cell, a
private company based in Israel, has completed a Phase 1/2
trial of a hematopoietic stem cell product candidate made from
umbilical cord blood similar to CB001 that is intended for use
in hematopoietic stem cell transplants. Enrollment for this
trial was completed in August 2004.
14
If successfully developed, CB001 would also face competition
from the increasing availability of cord blood units and the
increasing use of multiple cord transplants. 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. In addition to these cell therapy products,
competition for CB001 may be in the form of new and better
non-cell based drugs to treat leukemias, lymphomas, myelomas and
certain genetic diseases.
We are aware of several competitors developing stem cell
therapies for the treatment of cardiac disease, including
Genzyme, Bioheart Inc., Cytori Therapeutics, Osiris
Therapeutics, and potentially others. Genzyme and Bioheart are
developing products consisting of skeletal myoblasts isolated
from muscle, expanded in culture, and injected into a
patients heart to repair dead tissue. Genzyme recently
announced that it has ceased enrollment of new patients in its
Phase 2 trial after its Data Monitoring Committee concluded
there was a low likelihood that the trial would result in the
hypothesized improvements in heart function. Bioheart is
conducting a Phase 1/2 study. Osiris is conducting a
Phase 1 study of its product candidate in the cardiac area
which consists of mesenchymal stem cells isolated from donor
bone marrow, expanded in culture. Cytori is developing
adipose-tissue derived stem cells intended to be used in cardiac
patients in an autologous manner and is in preclinical
investigations using large animal models. Other companies,
including Hydra Biosciences, have preclinical development
efforts using growth factors to stimulate repair of endogenous
heart tissue. In addition, many other companies are marketing or
developing non-cell based drugs for the treatment of cardiac
disease.
At this time, we cannot evaluate how our product candidates in
cell therapy, if successfully developed, would compare
technologically, clinically or commercially to any other
potential cellular and non-cellular products being developed by
or currently marketed by competitors because our product
candidates are in the early stages of development and we cannot
predict the cost, efficacy and safety of those products nor when
any such products would be available for sale.
Our competitors in the cord blood preservation industry include
the approximately 20 other private family cord blood banks in
the United States, including Cbr Systems (Cord Blood Registry),
Cryo-Cell International, California Cryo-bank, 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.
In 2005, President Bush signed into law the Stem Cell
Therapeutic and Research Act of 2005, or the Stem Cell
Therapeutic Act. The Stem Cell Therapeutic Act provides 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. We expect that the Stem Cell Therapeutic Act will
increase the number of public cord banks.
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 the development of oocyte cryopreservation
include IVF centers and individual companies that already offer
oocyte cryopreservation, though none has taken its product
through the rigors of the FDA approval process. We are aware of
approximately 20 IVF centers already offering oocyte
cryopreservation, which may make it more difficult for us to
establish our product if successfully developed, or to 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 cryopreservation include Extend
15
Fertility.
We are in discussion with the FDA on a clinical trial of our
ViaCyte oocyte cryopreservation product candidate. If we are
able to reach agreement with the FDA and are successful in our
development efforts, our ability to compete with these entities
will depend on our ability to demonstrate the success of our
oocyte cryopreservation method in producing healthy births from
previously cryopreserved oocytes, as well as our ability to
distinguish ourselves as a leading provider of a high quality
oocyte cryopreservation product and our ability to prevent
others from using our proprietary method. We expect that
companies with alternative forms of media and other techniques
for cryopreservation will also seek FDA approval. We anticipate
that, if we are successful in our development efforts, we will
face increased competition in the future from new companies and
individual IVF centers that offer oocyte cryopreservation using
these alternative methods.
Government Regulation
|
|
|
Regulations Relating to ViaCell |
Virtually all of the products we develop will require regulatory
approval or licensure by governmental agencies, including the
FDA, prior to commercialization. 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.
|
|
|
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:
|
|
|
|
|
preclinical laboratory and animal tests to assess a drugs
biological activity and to identify potential safety problems; |
|
|
|
submission to the FDA of an IND, which must receive FDA
clearance before clinical trials may begin; |
|
|
|
adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product for its intended
indication; |
|
|
|
compliance with cGMP regulations and standards; |
|
|
|
submission to the FDA of a biologics license application, or
BLA, or new drug application, or NDA, for marketing
that includes adequate results of preclinical testing and
clinical trials; and |
|
|
|
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 1 clinical trials
typically involve a small number of volunteers or patients and
are designed to provide information about both product safety
and the expected dose of the drug. Phase 2 clinical trials
generally provide additional information on efficacy and safety
in a limited patient population. Phase 3 clinical trials
are generally large-scale, well-controlled studies designed 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 involve considerable data
collection, verification, analysis and expense. In responding to
the submission of a BLA or NDA, the FDA must first accept the
filing and review 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. On occasion, regulatory
authorities may require larger or additional studies leading to
unanticipated delay or expense. In addition, the manufacturing
facilities must be inspected and found to be
16
in full compliance with cGMP standards before approval for
marketing and must continue to comply with cGMP standards post
approval. Further clinical trials may be required after approval
to continue to monitor safety or to gain approval to promote the
use of the product for any additional indications. Our cellular
therapeutic products will be regulated as biologics and subject
to the above requirements.
Premarket Clearance or Approval of Medical Devices.
Medical devices are also subject to extensive regulation by the
FDA, including 510(k) clearance or Premarket Approval, or
PMA, 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 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 accept
the filing and review 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 specific
testing, control, documentation and other quality assurance
procedures.
Assuming we are successful in our efforts to reach agreement
with the FDA on a clinical trial design and size, and if the
results of such trial are favorable, we expect to seek 510(k)
clearance for our ViaCyte oocyte cryopreservation product
candidate. There is no assurance, however that the FDA will
agree that we meet the standards for 510(k) clearance. The FDA
could at any time determine that some or all of the components
used to cryopreserve the oocytes will require PMA approval,
which would involve additional time and expense.
Compliance Requirements after Licensure, Approval or
Clearance. Manufacturers of biologics, drug products and
devices licensed, approved or cleared by the FDA 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.
Adverse Event Reporting. We are required to comply with
FDA regulations on reporting of side effects and adverse effects
that are reported during clinical trials and post-marketing.
Regulatory authorities track this information. Side effects or
adverse events that are reported during clinical trials can
delay, impede or prevent marketing approval. Similarly, adverse
events that are reported after marketing approval can result in
additional limitations being placed on the products use,
and potentially, withdrawal or suspension of the product from
the market.
Outside the U.S. To market a biologic drug product or
device outside the United States, we will most likely have to
obtain approval for manufacturing and marketing of each product
or device from foreign regulatory authorities. 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.
17
|
|
|
Regulations Relating To ViaCord |
FDA Regulations. 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, or
GTP, regulations that establish a comprehensive regulatory
program for human cellular and tissue-based products and
finalized rules for donor eligibility that became effective in
May 2005. We believe that we comply with applicable regulatory
requirements. These regulations do not require licensing of
minimally manipulated homologous, cryopreserved hematopoietic
stem cells for autologous use or use for a first or second
degree blood relative. As a result, ViaCord cord blood
collection kits, and the collected cells, while regulated, do
not need to be licensed or cleared. The FDA could, however, in
the future require us to file an IND or BLA and seek approval
for the cell product kits or could impose other regulatory
requirements applicable to the collection and storage of cord
blood. Medical device clearance or approval for the cord blood
collection kits or compliance with any new requirements that may
be imposed in the future might involve the submission of a
substantial volume of data and might require a lengthy
substantive review. In such event, the FDA 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.
State Regulations. 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 services be licensed, permitted or registered.
We are currently licensed, permitted or registered to operate in
all of these states. If other states adopt requirements for
licensing, permitting or registration of cord blood services, we
would have to obtain licenses, permits or registration to
continue providing services in those states.
Privacy Laws. Federal and state laws govern our ability
to obtain and, in some cases, to use and disclose data we may
need to conduct certain of our 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. Because ViaCell does not engage
in certain electronic transactions related to reimbursement for
health care and because blood and tissue procurement and banking
activities are exempt, ViaCell is not a covered health care
provider subject to HIPAA. Many of the health care providers and
research institutions with whom we collaborate and the
hospitals, obstetricians, and other healthcare providers who
collect umbilical cord blood for our ViaCord customers, however,
are subject to HIPAA. These entities may share identifiable
patient information with ViaCell only as permitted by HIPAA (for
example, with written patient authorizations which comply with
certain detailed requirements). Although ViaCell is not directly
subject to HIPAA, we could face substantial criminal penalties
if we knowingly receive individually identifiable health
information from a research collaborator or health care provider
who has not satisfied HIPAAs disclosure requirements.
HIPAA does not preempt or override state privacy laws that
provide even more protection for an individuals health
information. The requirements of these laws could further
complicate our ability to obtain necessary research data from
our collaborators or patient information related to our ViaCord
customers. In addition, certain state privacy and genetic
testing laws may directly regulate our research activities,
affecting the manner in which we use and disclose an
individuals health information, potentially increasing our
cost of doing business, and exposing us to liability claims. In
addition, patients, research collaborators and healthcare
providers may have contractual rights that further limit our
ability to use and disclose individually identifiable health
information. Claims that we have violated an 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 regulations enforced by
the FDA and privacy law requirements, 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.
18
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.
Employees
As of December 31, 2005, we employed 211 individuals. Of
our 211 employees, 202 are based in the United States, and 9 are
in Singapore. All of our employees are at-will employees, other
than Marc Beer, Stephen Dance, Morey Kraus, Stephan Wnendt, Mary
Thistle and Anne Marie Cook, who have 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.
ITEM 1A. RISK FACTORS THAT
MAY AFFECT RESULTS
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including
statements about our current projections as to future financial
performance, our expectations as to the potential and
anticipated results of our development programs, and our views
as to the possible outcome of pending litigation and actions
related to our intellectual property portfolio. We have based
these forward-looking statements on our current expectations
about such future events. While we believe these expectations
are reasonable, forward-looking statements are inherently
subject to risks and uncertainties, many of which are beyond our
control. Our actual results may differ materially from those
suggested by these forward-looking statements for various
reasons, including those discussed in this report under this
heading Risk Factors That May Affect Results. Given
these risks and uncertainties, you are cautioned not to place
substantial weight on forward-looking statements. The
forward-looking statements included in this report are made only
as of the date of this report. We do not undertake any
obligation to update or revise any of these statements.
|
|
|
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, 2005, we had cumulative net losses of
approximately $173.4 million. These losses have resulted
principally from the costs of our research and development
activities, which have totaled approximately $101.6 million
since our inception. We expect our losses to continue 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 research, clinical trials, submissions
for regulatory approvals, and the expansion of clinical and
commercial scale manufacturing facilities. Furthermore, we
expect to make additional sales and marketing investments in the
near term in our ViaCell Reproductive Health business, as we
seek to expand the market for our ViaCord product offering. Our
ability to become profitable will depend on many factors,
including our ability to increase sales of our ViaCord product
offering particularly in the face of significant competition,
and our ability to establish the safety and efficacy of our
product candidates, obtain necessary regulatory approvals for
such product candidates and successfully commercialize the
resulting products. We cannot assure you that we will ever
become profitable. Factors that may affect our ability to become
profitable are described in more detail elsewhere in this
Risk Factors that May Affect Results Section.
|
|
|
We may not be able to sustain our current level of
revenues or our recent growth rates. |
Revenues from ViaCord have grown significantly over the past
several years, from $7.1 million in fiscal year 2001, to
$20.1 million, $30.9 million, $36.8 million, and
$43.8 million in fiscal years 2002, 2003, 2004, and 2005,
respectively. We believe that this is a result of our increased
marketing efforts and from increased awareness by the public
generally of the concept of umbilical cord blood banking. We may
not be able in the
19
future, however, to sustain this growth rate nor the current
level of ViaCords revenues. The principal factors that may
adversely affect our revenues include competition from other
private cord blood banks, the risks of associated litigation, in
particular, the pending PharmaStem litigation, the risks of
operational issues and the risks of reputational damage. These
and other risks that may affect our future revenues are
described in more detail elsewhere in this Risk Factors
That May Affect Results section. If we are unable to
sustain our revenues, we may need to reduce our product
development activities or raise additional funds earlier than
anticipated or on unfavorable terms, and our stock price may be
adversely affected.
|
|
|
If we do not prevail in the PharmaStem litigation, we may
be prevented from selling our ViaCord product, or may have to
incur significant expenses. |
In 2002, PharmaStem Therapeutics, Inc. filed suit 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 (681) and No. 5,192,553 (553),
relating to certain aspects of the collection, cryopreservation
and storage of hematopoietic stem cells and progenitor cells
from umbilical cord blood. We believe that we do not infringe
these patents and that the patents are invalid.
In 2003, a jury ruled against us and the other defendants, Cbr
Systems Inc, CorCell, Inc. and Cryo-Cell International Inc, who
represent a majority of the family cord blood preservation
industry finding that the patents were valid and enforceable,
and that the defendants infringed the patents. 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. In 2004, the District
Court judge in the case overturned the jurys verdict and
entered judgment in our favor and against PharmaStem, stating
that PharmaStem had failed to show infringement. PharmaStem has
appealed the judges decision. We have appealed the
jurys finding as to validity of the patents. A hearing on
the appeal is scheduled for April 4, 2006.
In July 2004, PharmaStem filed a second complaint against us.
The second complaint was filed in the United States District
Court for the District of Massachusetts, alleging infringement
of U.S. Patents No. 6,461,645 (645) and
6,569,427 (427), which also relate to certain aspects of
the collection, cryopreservation and storage of hematopoietic
stem cells and progenitor cells from umbilical cord blood. We
believe that the patents in this new 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. We
believe the issues presented in this case are substantially the
same as the issues presented in the original 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 February 16, 2005, our request was granted. The cases
have been consolidated in Delaware.
The U.S. Patent and Trademark Office, or U.S. PTO, has
ordered the re-examination of both the 553 method patent
and the 681 composition patent at issue in the first case
and the 645 and the 427 patents at issue in the
second case based on prior art. A second re-examination of the
427 patent was ordered in order to determine whether
certain claims of the patent should expire in 2008, rather than
in 2010. Final decisions on the re-examinations have not yet
been issued.
On October 6, 2005, the Delaware court granted our motion
to stay all discovery in the second lawsuit pending decisions
from the Federal Circuit on PharmaStems appeal of the
District Court of Delawares ruling in the original case
and from the U.S. PTO on the patent re-examinations.
In either of the pending cases, if we are ultimately found to
infringe, we could have a significant damages award entered
against us. If we are found to infringe or at any other time
during the course of either case, including possibly if the
court of appeals were to overturn the district courts
non-infringement ruling, 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. 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 after October 15, 2004. While we
do not believe this outcome is likely, in the event of an
injunction, if we are not able to obtain a license under the
disputed patents on economically reasonable terms or at all and
we cannot operate under an equitable doctrine known as
intervening rights, we will be required to stop
preserving and storing cord
20
blood and to cease using cryopreserved umbilical cord blood as a
source for stem cell products. We may enter into settlement
negotiations with PharmaStem regarding the litigation. 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.
A loss in either of the PharmaStem lawsuits could have a
material adverse effect on our ability to generate revenues from
our ViaCord product offering, which is currently our only
commercialized product, and could create business uncertainty.
Even if we ultimately prevail, we are likely to incur
significant legal expenses during the course of the cases.
|
|
|
If we are not able to successfully develop and
commercialize new products, we may not generate sufficient
revenues to continue our business operations. |
No company has yet been successful in its efforts to develop and
commercialize a stem cell product. Stem cell products in general
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 its approval or commercial use.
Our cellular therapy product candidates are in the early stages
of development. Only one of our therapeutic product candidates,
CB001, has entered human clinical trials. CB001 consists of a
highly enriched population of hematopoietic stem cells which are
expanded from umbilical cord blood using our Selective
Amplification technology. While stem cell populations expanded
using our Selective Amplification technology have shown
promising results in preclinical research, those results have
not been obtained in humans and may not be indicative of results
we may encounter in clinical trials. We may discover that
manipulation of stem cells using Selective Amplification or any
of our other expansion technologies changes the biological
characteristics of the 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 product candidates to:
|
|
|
|
|
properly engraft into the recipients body in the desired
manner; |
|
|
|
provide the intended therapeutic benefits; or |
|
|
|
achieve benefits or a safety profile that is acceptable and
better or equal to existing therapies. |
Drug development in general involves a high degree of risk. We
are likely to encounter hurdles and unexpected issues as we
proceed in our development of any particular product candidate.
For example, in the second half of 2005, the FDA put our
Phase I clinical trial of CB001 on clinical hold while we
assessed two cases of Grade IV aGVHD, a potential and
sometimes fatal side effect of transplantation. The FDA lifted
the clinical hold in December 2005. However there is no
assurance that we will not encounter additional safety issues
that may cause us to further delay or discontinue the trial,
including additional cases of aGVHD. Several other factors could
also prevent completion or cause further delay in this trial,
including if we are unable to enroll the final two patients. To
date, enrollment in our Phase 1 clinical trial for CB001
has been slower than anticipated and we cannot predict whether
or when we will be able to enroll the final patients to complete
the trial. We also may encounter hurdles related to the clinical
path for CB001. For example, in improving our Selective
Amplification process, the resulting product candidate may be
viewed by the FDA as sufficiently different from the product
candidate being used in our current Phase 1 clinical trial.
If so, the FDA may require that we conduct new Phase 1
clinical trials using the product candidate manufactured using
the improved process to generate appropriate safety data to
support later stage clinical trials. Also, there is evidence
that clinicians are increasingly using a new procedure for stem
cell transplant patients involving less toxic doses of
chemotherapy and radiation than used in conventional
transplants. This so called mini-transplant
procedure is not being used in our Phase 1 trials. If we
need to redesign trials for CB001 that incorporate
mini-transplants, it could require repeating earlier trials.
Repeating clinical trials for any reason would significantly
delay in our development efforts related to CB001.
As we obtain results and safety information from preclinical or
clinical trials of our product candidates, we may elect to
discontinue development or delay additional preclinical studies
or clinical trials in order to
21
focus our resources on more promising product candidates. There
is no assurance, for example, that the results of the CB001
Phase 1 clinical trial will warrant further clinical
development or ultimately prove to be safe and effective. 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 earlier clinical
testing.
We cannot market any product candidate until regulatory agencies
grant marketing approval or licensure. The industry and the FDA
have relatively little experience with therapeutics based on
cellular medicine generally. As a result, the pathway to
regulatory approval for our stem cell-based product candidates,
including CB001, may be more complex and lengthy than the
pathway 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 the
appropriate governmental agencies. Standards for approval
outside the United States may differ from those required by the
FDA. 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.
The process of obtaining regulatory approval is lengthy,
expensive and uncertain, and we may never gain necessary
approvals. Any difficulties that we encounter in developing our
product candidates and in obtaining regulatory approval may have
a substantial adverse impact on our operations and cause our
stock price to decline significantly. If we are not able to
successfully develop our product candidates and obtain
regulatory approval, we will not be able to commercialize such
products, and therefore may not be able to generate sufficient
revenues to support our business.
We expect that none of our cellular therapy product candidates
will be commercially available for at least several 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 not be able to successfully develop our ViaCyte
oocyte cryopreservation product candidate. |
We are in discussions with the FDA on an IDE to allow our
ViaCyte cryopreservation product candidate to be used in a
clinical trial. The goal of the clinical trial is to generate
data to submit to the FDA for a 510(k) application. In response
to the original 510(k) application filed by our media supplier,
the FDA indicated that the media supplier had not demonstrated
substantial equivalence of the media to a predicate device and,
as a result, the FDA could not clear the media for commercial
use. The FDA indicated that the 510(k) application could be
re-submitted when additional data supporting substantial
equivalence of the media to a predicate device were available.
The FDA has indicated that we will need to conduct a clinical
study of ViaCyte in oocyte cryopreservation that produces
pregnancy and birth rate data to support the application. We are
in discussions with the FDA related to the IDE and, in
particular, the design and size of the trial. However, there is
no assurance that we will be able to reach agreement with the
FDA on a trial design or size that is feasible and acceptable to
both the FDA and us. In addition, even if we undertake the
clinical trial, there is no assurance that we will be able to
show that our ViaCyte cryopreservation product is safe and
effective for its intended use. 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 cryopreserving 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 cryopreservation of
oocytes. There is no assurance that we will be able to generate
the number of live births needed to show that our product
candidate is effective and there is no assurance that we will
not encounter unexpected safety issues. Even if we are
successful in our efforts to reach agreement with the FDA on a
clinical trial design and size and the results of such trial are
favorable, there is no assurance that the FDA will agree that we
have met the standards for 510(k) clearance. The FDA could at
any time determine that some or all of the components used to
cryopreserve the oocytes will require PMA approval and
additional trials, which would involve additional time and
expense. Even if we are successful in our efforts to
22
develop and gain approval for the ViaCyte oocyte
cryopreservation product candidate, the FDA could ask for
post-approval safety monitoring which would entail additional
expense.
|
|
|
We may not be able to raise additional funds necessary to
fund our operations. |
As of December 31, 2005, we had approximately
$60.5 million in cash, cash equivalents and short-term
investments. In order to develop and bring our new products to
market, we must commit substantial resources to costly and
time-consuming research and development, 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 three years, we may need or want
to raise additional funding sooner, particularly if our business
or operations change in a manner that consumes 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:
|
|
|
|
|
the level of cash flows from sales of our ViaCord product; |
|
|
|
the scope and results of our research and development programs; |
|
|
|
the clinical pathway for each of our product candidates,
including the number, size, scope and cost of clinical trials
required to establish safety and efficacy; |
|
|
|
the results of litigation; |
|
|
|
the timing of and the costs involved in obtaining regulatory
approvals for our product candidates, 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; |
|
|
|
the costs of research and development work focused on developing
clinical and commercial scale processes for manufacturing
cellular products and 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; |
|
|
|
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; |
|
|
|
the costs associated with expanding our portfolio of product
candidates through licensing, collaborations or acquisitions; |
|
|
|
the costs of maintaining, expanding and protecting our
intellectual property portfolio, including litigation costs and
liabilities; and |
|
|
|
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.
23
|
|
|
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 U.S. patents and three
international patents. We also own or have exclusive licenses to
14 pending applications in the United States and over 50 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 U.S. PTO 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 U.S. 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 to the validity of these patents, 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 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. Interference proceedings
brought by the U.S. PTO 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.
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 invalid or
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. 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.
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 will expire in 2015. 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 2015.
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 informa-
24
tion and techniques or otherwise gain access to our trade
secrets. 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.
|
|
|
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 patent applications of which we are unaware
that will result in issued patents in our field, 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 example,
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
believe 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 Flt3-L 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 or be
required to repeat earlier clinical trials, which would be
costly and time consuming.
We may be required to pay substantial damages to a patent holder
in an infringement case in the event of a finding of
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.
Further, if patent infringement suits are 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.
Patent infringement cases often involve substantial legal
expenses. For example, we are involved in two patent
infringement lawsuits filed against us by PharmaStem. As of
December 31, 2005, we have incurred total legal expenses of
approximately $7.1 million related to these cases.
Depending upon the results of PharmaStems appeal of the
District Courts decision to overturn the jury verdict
against us in this case, and the extent to which we are required
to litigate the second lawsuit brought by PharmaStem and any
related appeals, we estimate that we could incur at least an
additional $1.0 million to $5.0 million in litigation
expenses.
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
umbilical cord blood preservation field, which is the field in
which we currently do business with our ViaCord product and
potentially might relate to our CB001 product candidate, if
approved and commercialized. This patent expires in 2010. We are
25
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.
There is no assurance, 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 by us based on similar technology
and may also delay the regulatory approval process for future
product candidates. 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 may
harm our competitive position, be very costly and require
significant time and attention of our key management and
technical personnel.
|
|
|
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. While we are
continually in discussions with a number of companies,
universities, research institutions, 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 fail to perform their obligations in a timely manner,
the development or commercialization of our technology and
potential products may be substantially delayed.
|
|
|
Our cell preservation activities are subject to
regulations that may impose significant costs and restrictions
on us. |
Cord blood preservation. The FDA has adopted
GTP regulations that establish a comprehensive regulatory
program for human cellular and tissue-based products. Our
ViaCord product is subject to these GTP regulations. We have
registered with the FDA as an umbilical cord blood preservation
service, listed our products with the FDA, and we are subject to
FDA inspection. We believe that we comply with the new GTP
regulations as adopted, though we have not yet been inspected by
the FDA. 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 collection kits
have not been cleared as a medical device. The FDA could at any
time require us to obtain PMA approval or 510(k) clearance
for the collection kits, or new drug application supplement, or
sNDA, approval for a drug component of the kits or file an IND/
BLA and seek approval for the cell product. 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 or BLA, 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 or BLA approval prior to further
distribution of the kits on product use.
26
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 services be
licensed, permitted or registered. We are currently licensed,
permitted or registered to operate in all of these states. If
other states adopt requirements for the licensing, permitting or
registration of cord blood preservation services, we would have
to obtain licenses, permits or registration to continue
providing services in those states.
Oocyte cryopreservation. There are no established
precedents for U.S. and international regulation of oocyte
cryopreservation. The FDA has informed us that it will require a
clinical study to support approval of the technology used in
oocyte cryopreservation. Even if such a study is conducted, we
cannot assure you that the FDA will find the data sufficient to
grant 510(k) clearance.
If we conduct a clinical study and submit a new 510(k), and the
FDA does not find the information adequate to support 510(k)
clearance, we would need to obtain PMA approval. This
requirement would substantially lengthen our planned
developmental timeline and increase the costs of developing and
commercializing this product candidate. We cannot assure you
that this product candidate will receive either 510(k) clearance
or PMA approval. We believe that the time to conduct a clinical
study, prepare a new 510(k), and receive FDA clearance for our
oocyte cryopreservation product candidate, will take several
years.
We have not investigated the regulations for the
cryopreservation of oocytes in foreign jurisdictions.
There is no assurance that we will ever be able to generate
sufficient data to receive approval to market technology for the
cryopreservation of oocytes.
|
|
|
We have only limited experience manufacturing cell therapy
product candidates, and we may not be able to manufacture our
product candidates in quantities sufficient for 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, 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.
|
|
|
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. |
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 cGMP. To meet this
requirement, we will need to maintain supply agreements with
firms who manufacture these components to cGMP standards. Once
we engage these third parties, we may be dependent on them for
supply of cGMP grade components. If we are unable to obtain cGMP
grade biological components for our product candidates, we may
not be able to market our stem cell product candidates.
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 dependent on our suppliers
for such components as SCF, Flt3-L, TPO mimetic and cGMP grade
antibodies conjugated with magnetic particles. Some of these
components are
27
currently supplied to us by Amgen, GlaxoSmithKline and Miltenyi
Biotec, who are currently single-source suppliers. Other
components, such as research grade materials that are suitable
for production of stem cells used for research and in
Phase 1 human clinical studies, are purchased as catalog
products from vendors, such as StemCell Technologies and R&D
Systems, with whom we do not have relationships. In order to
continue our clinical trials and commercialize our Selective
Amplification product candidates, 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 product candidates. 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 product
candidates may be delayed and we may not be able to complete
development of or market our stem cell product candidates.
|
|
|
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 from our
cord blood banking customers and could affect our ability to
continue to provide umbilical cord blood banking services.
We have a clinical manufacturing facility located in Worcester,
Massachusetts that is capable of producing stem cells for
Phase 1 and 2 clinical trials. We have built out a facility
in Cambridge, Massachusetts that we intend to replace our
Worcester facility and be capable of producing stem cells for
Phase 2 and 3 clinical trials and initial
commercialization. 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 $21.9 million against
damage to our property and equipment, and an additional
$19.0 million to cover incremental expenses and loss of
profits resulting from such damage.
|
|
|
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 private umbilical cord banking business is highly
competitive. In private umbilical cord blood banking, we compete
with companies such as Cbr Systems, Cryo-Cell International,
Inc., CorCell, Inc. and LifeBank USA. Any of these companies may
choose to invest more 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.
28
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
Stem Cell Therapeutic Act, 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 HLA typing advances, then unrelated
cord blood transplantation may become safer and more
efficacious, similarly reducing the clinical advantage of
related cord blood transplantation.
The pharmaceutical and biotechnology businesses are also 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, Celgene, Gamida-Cell, Genzyme, Bioheart, and Osiris.
We also face competition in the cell therapy field from academic
institutions and governmental agencies. We are also aware that
some larger pharmaceutical and biopharmaceutical companies have
programs in the cell therapy area. 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 hematopoietic stem cell
therapy product candidate similar to CB001. This product has
been evaluated in a Phase 1/2 trial. Enrollment for this
trial was completed in August 2004. This product candidate, 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 Stem
Cell Therapeutic Act provides financing for a national system of
public cord blood banks to encourage cord blood donations from
an ethnically diverse population. An increase in the number and
diversity of publicly-available cord blood units from public
banks could diminish the necessity for cord blood-derived
therapeutics produced with our Selective Amplification
technology.
In oocyte cryopreservation, if our ViaCyte product candidate is
successfully developed and approved, we expect to compete with
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 cryopreservation
on a limited basis and Extend Fertility is offering related
services, which may make it more difficult for us to establish
our product candidate 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 cryopreservation 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 product candidates
obsolete.
|
|
|
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 reputation among clients and the medical and birthing
services community is extremely important to the commercial
success of our ViaCord product. 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 ourselves 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 problems. 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
29
preservation or storage process. Any such problems, 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.
|
|
|
The manufacture and sale of 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 our products or product candidates 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
with adequate coverage for potential liability arising from any
such potential products on acceptable terms 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.
|
|
|
If we are not able to recruit and retain qualified
management and other 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 employees with scientific or
other skills that we consider important to the successful
development of our technology. Any of our key employees 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.
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.
|
|
|
We may face difficulties in managing and maintaining the
growth of our business. |
We expect to continue expanding our reproductive health business
and our research and development activities. This expansion
could put significant strain on our management, operational and
financial resources. To manage future growth, we would need to
hire, train and manage additional employees.
Prior to completing our initial public offering in January 2005,
we maintained a small finance and accounting staff because we
were a private company. Our new reporting obligations as a
public company, as
30
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, place significant additional demands on our finance and
accounting staff, on our financial, accounting and information
systems and on our internal controls. We have increased the
number of 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.
|
|
|
If we acquire other businesses or technologies the
transactions may be dilutive and we may be 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 increase our net loss.
|
|
|
The successful commercialization of our other potential
cell therapy products will depend on obtaining reimbursement for
use of this product candidate from third party payers. |
If we successfully develop and obtain necessary regulatory
approvals for our therapeutic product candidates, we intend to
sell such products 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. Our 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 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
our 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
31
reimbursement. However, if our potential cell therapy products
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.
|
|
|
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 HIPAA. Although we ourselves are
not directly regulated by 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 HIPAAs 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.
|
|
|
Ethical and other concerns surrounding the use of stem
cell therapy may negatively affect regulatory approval or public
perception of our products and product candidates, thereby
reducing demand for our products and product candidates. |
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.
|
|
|
Our business involves the use of hazardous materials that
could expose us to environmental and other liability. |
We have facilities in Massachusetts, Kentucky, and Singapore
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 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.
32
|
|
|
Volatility of Our Stock Price |
The market price for our common stock is highly volatile, and
likely will continue to fluctuate due to a variety of factors,
including:
|
|
|
|
|
material public announcements; |
|
|
|
the data, positive or negative, generated from the development
of our product candidates; |
|
|
|
setbacks or delays in any of our development programs; |
|
|
|
the outcome of material litigation; |
|
|
|
the financial results achieved by our cord blood preservation
business; |
|
|
|
the impact of competition; |
|
|
|
unusual or unexpectedly high expenses; |
|
|
|
developments related to patents and other proprietary rights; |
|
|
|
market trends affecting stock prices in our industry; and |
|
|
|
economic or other external factors. |
|
|
ITEM 1B. |
UNRESOLVED STAFF COMMENTS |
None.
|
|
ITEM 2. |
DESCRIPTION OF PROPERTY |
Our corporate headquarters in Cambridge, Massachusetts comprise
approximately 26,000 square feet of office space which
houses our corporate and executive functions as well as our cord
blood preservation sales, customer support, marketing and
administrative personnel. At the same facility we have also
leased approximately 25,000 square feet of laboratory and
manufacturing space for our cell therapy product candidates. In
the second half of 2005, we completed the build-out of the
laboratory and manufacturing space. The lease on the Cambridge
facility expires in 2014.
We are currently manufacturing CB001 for our Phase 1 trial
at a 9,000 square foot leased facility in Worcester,
Massachusetts. We expect to complete transfer of our
manufacturing operations from the Worcester facility to the
Cambridge facility after completion of the CB001 Phase 1
trial. We have negotiated a short term extension of the
Worcester lease to allow us to complete manufacturing for the
trial. The new Cambridge manufacturing space is designed to be
able to produce cells for Phase 1, 2 and 3 trials, and
potentially initial commercialization if we receive marketing
approval.
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
operate under a lease, which expires in May 2007, for
approximately 3,800 square feet of laboratory space to
house our research operations in Singapore. In addition, as a
result of our acquisition of Kourion Therapeutics, we maintain a
lease, which expires in May 2008, for approximately
15,000 square feet of laboratory and administrative space
in Langenfeld, Germany. In 2005, we transferred our German
operations to the United States, and closed our operations in
Germany. We have sublet our German facility to a third party
under a sublease that terminates in December 2006.
In the future, we may require additional facilities to expand
our research and development and cord blood processing
activities or for additional clinical and commercial
manufacturing operations.
33
|
|
ITEM 3. |
LEGAL PROCEEDINGS |
In 2002, PharmaStem Therapeutics, Inc. filed suit 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 (681) and No. 5,192,553
(553), relating to certain aspects of the collection,
cryopreservation and storage of hematopoietic stem cells and
progenitor cells from umbilical cord blood. We believe that we
do not infringe these patents and that the patents are invalid.
In 2003, a jury ruled against us and the other defendants, Cbr
Systems Inc, CorCell, Inc. and Cryo-Cell International Inc, who
represent a majority of the family cord blood preservation
industry finding that the patents were valid and enforceable,
and that the defendants infringed the patents. 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. In 2004, the District
Court judge in the case overturned the jurys verdict and
entered judgment in our favor and against PharmaStem stating
that PharmaStem had failed to show infringement. PharmaStem has
appealed the judges decision to the Federal Circuit for
the Court of Appeals. We have appealed the jurys finding
as to validity of the patents. A hearing on the appeal is
scheduled for April 4, 2006.
In July 2004, PharmaStem filed a second complaint against us.
The second complaint was filed in the United States District
Court for the District of Massachusetts, alleging infringement
of U.S. Patents No. 6,461,645 (645) and
6,569,427 (427), which also relate to certain aspects of
the collection, cryopreservation and storage of hematopoietic
stem cells and progenitor cells from umbilical cord blood. We
believe that the patents in this new 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. We
believe the issues presented in this case are substantially the
same as the issues presented in the original 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 February 16, 2005, our request was granted. The cases
have been consolidated in Delaware.
The U.S. PTO has ordered the re-examination of both the
553 method patent and the 681 composition patent at
issue in the first case and the 645 and 427 patents
at issue in the second case based on prior art. A second
re-examination of the 427 patent was ordered in order to
determine whether certain claims of the 427 patent should
expire in 2008, rather than in 2010. Final decisions on the
re-examinations have not yet been issued.
On October 6, 2005, the Delaware court granted our motion
to stay all discovery in the second lawsuit pending decisions
from the Federal Circuit on PharmaStems appeal of the
District Courts ruling of non-infringement in the original
case and from the U.S. PTO on the patent re-examinations.
In either of the pending cases, if we are ultimately found to
infringe, we could have a significant damages award entered
against us. If we are found to infringe or at any other time
during the course of either case, including possibly if the
court of appeals were to overturn the district courts
non-infringement ruling, 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. 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 after October 15, 2004. While we
do not believe this outcome is likely, in the event of an
injunction, if we are not able to obtain a license under the
disputed patents on economically reasonable terms or at all and
we cannot 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. We may enter into settlement negotiations with
PharmaStem regarding the litigation. 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
34
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 brief for the appeal and a petition for a
writ of mandate. The petition has been dismissed and the appeal
is proceeding. The plaintiff has settled the litigation with all
defendants other than us. We are not yet able to conclude as to
the likelihood that plaintiffs claims would be upheld if
the judgment of dismissal were reversed on appeal, nor can we
estimate the possible financial consequences should plaintiff
prevail. However, we believe this suit to be without merit and
intend to continue to vigorously defend ourselves.
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. On
April 13, 2005, we answered the complaint, denying
Cbrs allegations, and filed counterclaims alleging false
and misleading advertising by Cbr. On October 27, 2005, we
entered into an agreement to settle the pending litigation with
Cbr. Under terms of the agreement the companies agreed to
dismiss all outstanding legal claims. There were no financial
payments to be made by either party under the settlement
agreement.
We have undertaken a review of our various job classifications
for legal compliance under state and federal employment laws.
Based on that review, we have identified certain job
classifications that may be subject to possible challenge,
although there is currently no such challenge pending, and for
which there is a reasonable possibility that we could incur a
liability, although we also believe that the present
classifications can be supported and defended. It is not
possible based on the current available information to
reasonably estimate the scope of any potential liability.
|
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
35
PART II
|
|
ITEM 5. |
MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED
STOCKHOLDER MATTERS |
Market for Common Equity
Our common stock has been traded on the NASDAQ National Market
System (NASDAQ) 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, 2006,
as reported by NASDAQ was $5.51.
The following table sets forth, for the periods indicated, the
high and low sales prices of our Common Stock on NASDAQ.
|
|
|
|
|
|
|
|
|
|
|
Price per Share | |
|
|
| |
For the Year Ended December 31, 2005 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter (from January 21, 2005)
|
|
$ |
14.60 |
|
|
$ |
6.75 |
|
Second Quarter
|
|
|
11.39 |
|
|
|
5.42 |
|
Third Quarter
|
|
|
11.51 |
|
|
|
4.97 |
|
Fourth Quarter
|
|
|
6.37 |
|
|
|
4.66 |
|
The following table sets forth information concerning our equity
compensation plans as of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information | |
|
|
| |
|
|
|
|
Number of Securities | |
|
|
|
|
Remaining Available for | |
|
|
Number of Securities to be | |
|
Weighted Average | |
|
Future Issuance Under | |
|
|
Issued Upon Exercise of | |
|
Exercise Price of | |
|
Equity Compensation Plan | |
|
|
Outstanding Options, | |
|
Outstanding Options, | |
|
(Excluding Securities | |
Plan Category |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
Referenced in Column (a)) | |
|
|
| |
|
| |
|
| |
|
|
(a) | |
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
3,930,694 |
|
|
$ |
2.77 |
|
|
|
2,080,738 |
|
Holders
As of March 29, 2006, there were 140 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 2005, we issued 688,014 shares of common stock to
employees, former employees, and consultants upon option
exercises for compensation for services provided, for an
aggregate sale price of approximately $1.2 million. 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 of 1933, as
amended, or the Securities Act under Rule 701 promulgated
there under, because the security was offered and sold pursuant
to either a written compensatory plan or a written contract
relating to compensation and made pursuant to an offer made
prior to our initial public offering.
36
Use of Proceeds from Registered Securities.
We registered shares of our common stock in connection with our
initial public offering under the Securities Act. 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
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 were approximately
$53,300,000.
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, except as described
below (ii) any person(s) owning 10% or more of any class of
our equity securities or (iii) any of our affiliates.
The net proceeds of the initial public offering, after payment
of approximately $15.5 million for all outstanding
principal and interest on promissory notes held by funds
affiliated with MPM Asset Management LLC, the manager of which
served on our board of directors until June 9, 2005, are
invested in investment grade securities with the weighted
average days to maturity of the portfolio less than six months
and no security with an effective maturity in excess of
12 months. To date, apart from the payment of promissory
notes of $15.5 million, we have not used any of the net
proceeds from the initial public offering and 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) of the Securities Act.
37
|
|
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
audited consolidated financial statements for the five years
ended December 31, 2005. 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003(1) | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per share data) | |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
44,443 |
|
|
$ |
38,274 |
|
|
$ |
31,880 |
|
|
$ |
20,375 |
|
|
$ |
7,298 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of processing and storage revenues:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
8,278 |
|
|
|
7,364 |
|
|
|
7,141 |
|
|
|
5,877 |
|
|
|
3,070 |
|
|
Royalty (recovery) expense
|
|
|
|
|
|
|
(3,258 |
) |
|
|
3,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and storage revenues
|
|
|
8,278 |
|
|
|
4,106 |
|
|
|
10,399 |
|
|
|
5,877 |
|
|
|
3,070 |
|
Research and development
|
|
|
13,359 |
|
|
|
15,134 |
|
|
|
13,226 |
|
|
|
11,429 |
|
|
|
6,978 |
|
Sales and marketing
|
|
|
24,702 |
|
|
|
19,322 |
|
|
|
20,959 |
|
|
|
16,578 |
|
|
|
9,349 |
|
General and administrative
|
|
|
12,193 |
|
|
|
13,468 |
|
|
|
15,222 |
|
|
|
10,920 |
|
|
|
7,086 |
|
In-process technology(3)
|
|
|
|
|
|
|
|
|
|
|
23,925 |
|
|
|
5,889 |
|
|
|
594 |
|
Stock-based compensation(4)
|
|
|
2,163 |
|
|
|
3,429 |
|
|
|
3,232 |
|
|
|
6,464 |
|
|
|
4,490 |
|
Restructuring
|
|
|
305 |
|
|
|
2,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
61,000 |
|
|
|
58,404 |
|
|
|
86,963 |
|
|
|
57,157 |
|
|
|
31,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(16,557 |
) |
|
|
(20,130 |
) |
|
|
(55,083 |
) |
|
|
(36,782 |
) |
|
|
(24,269 |
) |
Interest (expense) income, net
|
|
|
1,880 |
|
|
|
(967 |
) |
|
|
(385 |
) |
|
|
744 |
|
|
|
2,136 |
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(14,677 |
) |
|
$ |
(21,097 |
) |
|
$ |
(55,468 |
) |
|
$ |
(36,038 |
) |
|
$ |
(22,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(15,663 |
) |
|
$ |
(34,168 |
) |
|
$ |
(64,884 |
) |
|
$ |
(44,182 |
) |
|
$ |
(28,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$ |
(0.44 |
) |
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
$ |
(17.60 |
) |
|
$ |
(12.22 |
) |
Weighted average shares used in computing net loss per common
share, basic and diluted
|
|
|
35,777,308 |
|
|
|
2,707,219 |
|
|
|
2,634,096 |
|
|
|
2,510,632 |
|
|
|
2,352,468 |
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 | |
|
|
|
|
|
|
| |
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per share data) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short- and long-term investments
|
|
$ |
60,544 |
|
|
$ |
28,585 |
|
|
$ |
46,832 |
|
|
$ |
29,188 |
|
|
$ |
53,787 |
|
Working capital
|
|
|
60,946 |
|
|
|
14,437 |
|
|
|
22,857 |
|
|
|
25,407 |
|
|
|
46,062 |
|
Total assets
|
|
|
94,230 |
|
|
|
61,091 |
|
|
|
78,161 |
|
|
|
56,119 |
|
|
|
70,981 |
|
Long-term debt obligations, including current portion
|
|
|
1,627 |
|
|
|
18,736 |
|
|
|
19,238 |
|
|
|
5,173 |
|
|
|
1,586 |
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
175,173 |
|
|
|
162,141 |
|
|
|
110,912 |
|
|
|
101,268 |
|
Total stockholders equity (deficit)
|
|
|
56,010 |
|
|
|
(160,957 |
) |
|
|
(130,151 |
) |
|
|
(70,487 |
) |
|
|
(38,749 |
) |
|
|
(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 processing and storage
revenues based on a claim of patent infringement. As a result,
we recorded an expense of $3.3 million, included in cost of
processing and storage revenues, in 2003 to cover our exposure
to PharmaStem. In 2004, the Delaware district court overturned
the jury verdict. Based on the district courts ruling, we
reversed the entire royalty accrual in 2004. |
|
(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 the fair value of options
granted to non-employees. Total stock-based compensation for
employees and non- employees for the periods reported, and the
allocation of these expenses to operating expenses, is as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cost of processing and storage revenues
|
|
$ |
20 |
|
|
$ |
32 |
|
|
$ |
7 |
|
|
$ |
20 |
|
|
$ |
|
|
Research and development
|
|
|
294 |
|
|
|
896 |
|
|
|
1,073 |
|
|
|
2,489 |
|
|
|
2,249 |
|
Sales and marketing
|
|
|
207 |
|
|
|
175 |
|
|
|
414 |
|
|
|
670 |
|
|
|
222 |
|
General and administrative
|
|
|
1,642 |
|
|
|
2,083 |
|
|
|
1,738 |
|
|
|
3,283 |
|
|
|
2,019 |
|
Restructuring
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$ |
2,163 |
|
|
$ |
3,429 |
|
|
$ |
3,232 |
|
|
$ |
6,464 |
|
|
$ |
4,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
39
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.
Overview
ViaCell is a biotechnology company dedicated to researching,
developing and commercializing cellular therapies. We have a
pipeline of proprietary umbilical cord blood-derived and
adult-derived stem cell product candidates being studied as
possible treatments for cancer, cardiac disease and diabetes. We
are currently conducting a Phase I clinical trial of CB001,
our lead umbilical cord blood-derived stem cell therapy product
candidate as a possible treatment for hematopoietic stem cell
reconstitution in patients affected by a variety of cancers. In
addition to our therapeutic research and development programs,
we have a reproductive health business unit that generated
revenues of $43.8 million in 2005 from sales of ViaCord, a
product offering through which expectant families can preserve
their babys umbilical cord blood for possible future
medical use. We are working to leverage our commercial
infrastructure and product development capabilities by
developing
ViaCytesm,
our investigational product candidate intended to broaden
reproductive choices for women through the cryopreservation of
human unfertilized eggs.
Our management currently uses consolidated financial information
in determining how to allocate resources and assess performance.
We have determined that we conduct operations in one business
segment. The majority of our revenues since inception have been
generated in the United States, and the majority of our
long-lived assets are located in the United States.
Our current revenues are 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, processing and freezing of the
umbilical cord blood and an annual storage fee. The annual
storage fee provides a growing annuity of future revenue as the
number of stored umbilical 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 cord blood banking has gained increased popularity;
however, we are unable to predict our future revenues from our
umbilical cord blood business. We offer our customers the
opportunity to pay their fees directly to us or to finance them
with a third party credit provider. The majority of our
customers owe their fees directly to us, accordingly 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,
2005.
We are in ongoing litigation with PharmaStem Therapeutics over
PharmaStems claims that our cord blood preservation
business infringes certain of PharmaStems patents. In the
second half of 2004, the Delaware District Court overturned a
jury verdict of infringement against us in such suit. As a
result of this ruling, we do not expect the PharmaStem
litigation to have a materially adverse impact on our net sales,
revenues or income from continuing operations. However,
PharmaStem has appealed the courts decision and has also
filed a new suit claiming that we infringe additional patents.
Should we ultimately lose the appeal, or the additional ongoing
litigation with PharmaStem, it could have a material adverse
effect on our net sales, revenues or income from continuing
operations, including, possibly, resulting in an injunction
preventing us from operating our cord blood preservation
business.
In addition to the revenues generated by our ViaCord product, we
recorded revenues in the periods presented from grant agreements
with both the Governments of Singapore and Germany. We maintain
a research facility in Singapore. We closed our German research
facility in December 2004, and have transitioned the research
activities performed there to the United States. As a result,
revenues from grants in Germany have ceased as of
December 31, 2004.
40
Cost of processing and storage 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, for certain periods, an accrual of a royalty to
PharmaStem relating to ongoing patent infringement litigation.
Our cost of processing and storage revenues also includes
expenses incurred by third party vendors relating to the
transportation of cord blood to our processing facility and
certain assay testing performed by a third party 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 processing and
storage revenues does not include costs associated with our
grant revenue. Such costs are included in research and
development expense.
We recorded a royalty expense of $3.3 million in 2003
following an unfavorable jury verdict in the PharmaStem
litigation in October 2003. In 2004, the District Court
overturned the jury verdict. Based on the judges ruling,
we reversed the entire royalty accrual in 2004 and have not
recorded any royalties since such date. PharmaStem has appealed
the District Courts ruling. PharmaStem has also filed a
new lawsuit claiming that we infringe additional patents.
Pending a decision on the appeal and further action by the court
on the new litigation, 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 for
infringement of 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. We may enter into settlement
negotiations with PharmaStem regarding the litigation. 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 research and development expenses consist primarily of costs
associated with the continued development of our lead stem cell
product candidate, CB001, our expansion technologies, including
Selective Amplification, our other cellular therapy product
candidates and ViaCyte, our oocyte cryopreservation product
candidate. 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 for external service
providers, including preclinical studies 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 increase
in the foreseeable future as we add personnel, expand our
clinical trial activities and increase our discovery research
and clinical and regulatory capabilities. The amount of these
increases is difficult to predict due to the uncertainty
inherent in our research, development and manufacturing programs
and activities, the timing and scope of our clinical trials, the
rate of patient enrollment in our clinical trials, 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.
Our sales and marketing expenses relate to our ViaCell
Reproductive Health business. 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 sales
and marketing expenses will increase in the foreseeable future
as we expand our sales and marketing efforts.
41
Our general and administrative expenses include our costs
related to the finance, legal, human resources, business
development, investor relations 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
advisors, 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.
In September 2004, we restructured our operations to reduce
operating expenses and concentrate resources on our ViaCord
product offering and three key products and product candidates.
As a result, we recorded a $1.7 million restructuring
charge related to employee severance, contractual termination
fees 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 consists 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.
We are finalizing discussions with the German grant authorities
regarding repayment of part of certain grants made to our German
subsidiary in 2003 and 2004. We were notified that approximately
$500,000 in grant proceeds related to fixed asset and operating
expenditures in Germany were not reimbursable under the grant
and would have to be repaid. As a result, we reserved an
additional $410,000 during the year ended December 31, 2005
for our estimated liability under this grant. The additional
reserves resulted in reversals of grant revenue of approximately
$105,000 for the year ended December 31, 2005. In addition,
we reclassified approximately $200,000 of accrued restructuring
reserves to reduce outstanding grants receivable. In February
2006 we were notified by the State of North-Rhine-Westfalia,
Germany that it plans on performing an audit of the States
economic grants throughout its territory, including the grant to
Kourion. It is possible that the grant authorities could request
additional repayment of grant funds related to certain operating
expenses that were previously funded by the grant authorities
for research performed in Germany, however we consider this
possibility to be remote. As of December 31, 2005 we had
received approximately $3.6 million in cumulative grant
proceeds from the German grant authorities.
Results of Operations
|
|
|
Years Ended December 31, 2005, 2004 and 2003 (amounts
in millions, year over year changes based on rounded amounts in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Processing revenues
|
|
$ |
36.1 |
|
|
$ |
31.7 |
|
|
$ |
27.8 |
|
|
$ |
4.4 |
|
|
|
14 |
% |
|
$ |
3.9 |
|
|
|
14 |
% |
Storage revenues
|
|
|
7.7 |
|
|
|
5.1 |
|
|
|
3.1 |
|
|
|
2.6 |
|
|
|
51 |
% |
|
|
2.0 |
|
|
|
65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total processing and storage revenues
|
|
|
43.8 |
|
|
|
36.8 |
|
|
|
30.9 |
|
|
|
7.0 |
|
|
|
19 |
% |
|
|
5.9 |
|
|
|
19 |
% |
Grant and contract revenues
|
|
|
0.6 |
|
|
|
1.5 |
|
|
|
1.0 |
|
|
|
(0.9 |
) |
|
|
(60 |
)% |
|
|
0.5 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
44.4 |
|
|
$ |
38.3 |
|
|
$ |
31.9 |
|
|
$ |
6.1 |
|
|
|
16 |
% |
|
$ |
6.4 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in processing revenues of $4.4 million or 14%
from 2004 to 2005 and $3.9 million or 14% from 2003 to 2004
are due primarily to an increase in the total number of
umbilical cords processed, as well as a slight increase in the
average selling price for processing. The increase in storage
revenues of $2.6 million or 51% from 2004 to 2005 and
$2.0 million or 65% from 2003 to 2004 are due primarily to
increases in the number of umbilical cords stored, as well as a
slight increase in the average selling price for storage.
The decrease in grant and contract revenues of $0.9 million
or 60% from 2004 to 2005 was primarily due to the decrease of
$1.1 million in grant revenues from German grant
authorities following cessation of our operations in Germany in
2004 and a decrease in contract revenues derived from research
activities in the
42
United States of $0.2 million. These decreases were
partially offset by an increase in grant revenues from the
Government of Singapore of $0.4 million. The increase in
grant and contract revenues of $0.5 million or 50% from
2003 to 2004 was primarily due to the inclusion of German grant
revenue of $0.6 million attributable to the acquisition of
Kourion Therapeutics on September 30, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cost of processing and storage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
$ |
8.3 |
|
|
$ |
7.4 |
|
|
$ |
7.1 |
|
|
$ |
0.9 |
|
|
|
12 |
% |
|
$ |
0.3 |
|
|
|
4 |
% |
|
Royalty expense
|
|
|
|
|
|
|
(3.3 |
) |
|
|
3.3 |
|
|
|
3.3 |
|
|
|
100 |
% |
|
|
(6.6 |
) |
|
|
(200 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and storage revenues
|
|
$ |
8.3 |
|
|
$ |
4.1 |
|
|
$ |
10.4 |
|
|
$ |
4.2 |
|
|
|
102 |
% |
|
$ |
(6.3 |
) |
|
|
(61 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in direct costs of $0.9 million or 12% from
2004 to 2005 and $0.3 million or 4% from 2003 to 2004 were
due primarily to increases in variable expenses related to the
increased number of umbilical cords processed and number of
umbilical cords stored. These variable expenses relate to
transportation of the cord blood and materials for related
collection and testing of the umbilical cord blood. The royalty
expense of $3.3 million 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
overturned by the District Court judge in the second half of
2004 and a credit to royalty expense of $3.3 million was
recorded in 2004.
While PharmaStem has appealed the District Courts ruling,
we continue to believe that the lawsuit is without merit and, in
light of the judges ruling, have determined that no
royalty accrual or expense is required.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Clinical development
|
|
$ |
9.4 |
|
|
$ |
7.9 |
|
|
$ |
7.3 |
|
|
$ |
1.5 |
|
|
|
19 |
% |
|
$ |
0.6 |
|
|
|
8 |
% |
Pre-clinical programs
|
|
|
0.7 |
|
|
|
3.5 |
|
|
|
2.1 |
|
|
|
(2.8 |
) |
|
|
(80 |
)% |
|
|
1.4 |
|
|
|
67 |
% |
Basic research
|
|
|
2.5 |
|
|
|
3.0 |
|
|
|
3.1 |
|
|
|
(0.5 |
) |
|
|
(17 |
)% |
|
|
(0.1 |
) |
|
|
(3 |
)% |
Other R&D
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
14 |
% |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$ |
13.4 |
|
|
$ |
15.1 |
|
|
$ |
13.2 |
|
|
$ |
(1.7 |
) |
|
|
(11 |
)% |
|
$ |
1.9 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical development expense is related primarily to outside
services and clinical trial expenses for CB001. The increases in
clinical development expense of $1.5 million or 19% from
2004 to 2005 and $0.6 million or 8% from 2003 to 2004
reflected the increasing cost of conducting the Phase I
clinical trial that commenced in late 2003.
The decrease in costs associated with preclinical programs of
$2.8 million or 80% from 2004 to 2005 was primarily due to
the closure of our German research operations in December 2004,
and the discontinuation of our muscular dystrophy program in
September 2004. These changes resulted in lower ongoing employee
and facility related costs. The increase in costs associated
with preclinical programs of $1.4 million or 67% from 2003
to 2004 was primarily due to a complete year of expenses for our
German research operations following the acquisition of Kourion
Therapeutics in September 2003.
The decrease in basic research expense was primarily related to
the reduced facility and employee-related costs associated with
the closure of our Cambridge research facility as we
consolidated our general research activities into our Singapore
research center. Other research and development expense related
primarily to our umbilical cord blood processing and storage
business.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sales and marketing
|
|
$ |
24.7 |
|
|
$ |
19.3 |
|
|
$ |
21.0 |
|
|
$ |
5.4 |
|
|
|
28 |
% |
|
$ |
(1.7 |
) |
|
|
(8 |
)% |
The increase in sales and marketing expenses of
$5.4 million or 28% from 2004 to 2005 was primarily related
to increased staffing within both the internal and external
sales organization and increased external marketing program
spending to strengthen our market presence. The decrease in
sales and marketing expenses of $1.7 million or 8% from
2003 to 2004 was primarily due to cost savings attributed to a
reduction in the number of internal sales employees following
the implementation of call center automation technology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
General and administrative
|
|
$ |
12.2 |
|
|
$ |
13.5 |
|
|
$ |
15.2 |
|
|
$ |
(1.3 |
) |
|
|
(10 |
)% |
|
$ |
(1.7 |
) |
|
|
(11 |
)% |
The decrease in general and administrative expenses of
$1.3 million or 10% from 2004 to 2005 was primarily due to
a decrease in employee related costs of $0.9 million as a
result of our restructuring in September 2004 as well as a
decrease in consulting costs of $0.6 million, and a
decrease in litigation expenses of $0.7 million relating to
the PharmaStem lawsuit, partially offset by increased accounting
fees and outside service fees of $0.4 million and increased
insurance premiums of $0.5 million associated with being a
public company.
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 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 ViaCyte program of
$0.3 million, an 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
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 exiting employees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 |
|
2004 |
|
2003 | |
|
2004 to 2005 |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
|
|
|
|
| |
|
|
|
| |
|
| |
|
| |
In-process technology
|
|
$ |
|
|
|
$ |
|
|
|
$ |
23.9 |
|
|
$ |
|
|
|
|
N/A |
|
|
$ |
(23.9 |
) |
|
|
(100 |
)% |
No in-process technology expenses were incurred in 2004 and
2005. The expense in 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 licensed from GlaxoSmithKline.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Stock-based compensation
|
|
$ |
2.2 |
|
|
$ |
3.4 |
|
|
$ |
3.2 |
|
|
$ |
(1.2 |
) |
|
|
(35 |
)% |
|
$ |
0.2 |
|
|
|
6 |
% |
Stock-based compensation expense is primarily due to 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 and relates primarily to
options granted prior to our IPO. During the year ended
December 31, 2005, we did not grant any options with
exercise prices less than fair market value on the date of grant.
In July 2005, our Board of Directors approved an increase, from
90 days to three years, in the amount of time allowed for
non-employee directors to exercise vested options following
termination of service to ViaCell. As a result of this
modification of the option terms, we recorded $0.8 million
of stock-based compensation expense in the year ended
December 31, 2005. We will record stock-based compensation
expense related to the unamortized deferred compensation
associated with this option modification of approximately
$0.2 million in the years 2006 through 2008 based on
respective vesting schedules associated with each modified
option grant. 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.
44
The net decrease in stock-based compensation expense from 2004
to 2005 was primarily related to the amortization of the
deferred compensation account since no new options were granted
with exercise prices less than fair market value in 2005,
partially offset by the additional stock-based compensation
expense related to the modified option terms. The increase in
stock-based compensation expense from 2003 to 2004 was primarily
due to $0.2 million of additional stock-based compensation
expense incurred in 2004 related to the modification of employee
options to extend the option exercise period for employees
terminated in our restructuring.
In December 2004, the Financial Accounting Standards Board
(FASB) released SFAS No. 123(R)
-Share-Based Payment. This new accounting standard
requires all forms of stock compensation given to employees,
including stock options, to be reflected as an expense in our
financial statements. Public companies must adopt the standard
by their first annual fiscal period beginning after
June 15, 2005. We intend to apply the revised standard in
the annual period beginning January 1, 2006. Although we
have not finalized our analysis, we expect that the adoption of
the revised standard will result in higher operating expenses
and higher net loss per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
Restructuring
|
|
$ |
0.3 |
|
|
$ |
2.9 |
|
|
$ |
|
|
|
$ |
(2.6 |
) |
|
|
(90 |
)% |
|
$ |
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. As a result, we recorded a
$1.7 million restructuring charge related to employee
severance, contractual termination fees 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 consisted 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.
In November 2005, the sub-lessee verbally gave notice of their
intent to not extend the sublease past December 31, 2006.
The sub-lessee has prepaid rent through December 2006.
In 2005 we were notified that approximately $0.5 million in
grant proceeds related to fixed asset and operating expenditures
in Germany were not reimbursable under the grant and would have
to be repaid. As a result, we recorded restructuring expense of
$0.3 million in 2005 to reserve for this liability. In
February 2006 we were notified by the State of
North-Rhine-Westfalia, Germany that it plans on performing an
audit of the states economic grants granted throughout its
territory, including the grant to Kourion. It is also possible
that the German grant authorities could request additional
repayment of grant funds related to certain operating expenses
that were previously funded by them for research performed in
Germany, however we consider this possibility to be remote. As
of December 31, 2005, we had received approximately
$3.6 million in grant proceeds from the German grant
authorities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change | |
|
% Change | |
|
$ Change | |
|
% Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
2.2 |
|
|
$ |
0.5 |
|
|
$ |
0.3 |
|
|
$ |
1.7 |
|
|
|
340 |
% |
|
$ |
0.2 |
|
|
|
67 |
% |
Interest expense
|
|
|
(0.3 |
) |
|
|
(1.5 |
) |
|
|
(0.7 |
) |
|
|
1.2 |
|
|
|
80 |
% |
|
|
(0.8 |
) |
|
|
(114 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net
|
|
$ |
1.9 |
|
|
$ |
(1.0 |
) |
|
$ |
(0.4 |
) |
|
$ |
2.9 |
|
|
|
290 |
% |
|
$ |
(0.6 |
) |
|
|
(150 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income is earned primarily from the investment of our
cash in short-term securities and money market funds. The
increase in interest income of $1.7 million or 340% from
2004 to 2005 primarily relates to increased average investment
balances resulting from a higher cash balance available for
investment following our initial public offering in January
2005, as well as an increase in interest rates. The decrease in
interest expense of $1.2 million or 80% from 2004 to 2005
relates primarily to the reduction of interest on the related
party notes payable, which were paid in full following the
closing of our IPO in January 2005.
45
In the years 2004 and 2003, interest income was 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 and 2003 are primarily due to the changes in
our average cash balance during those periods. In the years 2004
and 2003, interest expense relates to interest payable on our
credit facility and, in 2004, $1.1 million of interest
expense was recorded on the $14.0 million note we issued in
connection with the acquisition of Kourion.
Liquidity and Capital Resources
From inception through December 31, 2005, we have raised
$192.0 million in common and preferred stock issuances,
which includes $53.3 million in net proceeds from our IPO
in January 2005. We used approximately $15.5 million of
these net proceeds to repay in full related party notes of
$14.0 million, and accrued interest thereon of
$1.5 million. As of December 31, 2005, we had
approximately $60.5 million in cash, cash equivalents and
investments, which we believe is sufficient to meet our
anticipated liquidity needs for at least the next three years.
Table excerpted from our Consolidated Statements of Cash Flows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
|
|
|
|
| |
|
$ Change | |
|
$ Change | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2004 to 2005 | |
|
2003 to 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net cash used in operating activities
|
|
$ |
(1.4 |
) |
|
$ |
(15.1 |
) |
|
$ |
(22.5 |
) |
|
$ |
$13.7 |
|
|
$ |
7.4 |
|
Net cash provided by (used in) investing activities
|
|
|
(9.1 |
) |
|
|
(15.2 |
) |
|
|
9.5 |
|
|
|
6.1 |
|
|
|
(24.7 |
) |
Net cash provided by (used in) financing activities
|
|
|
37.1 |
|
|
|
(1.7 |
) |
|
|
36.4 |
|
|
|
38.8 |
|
|
|
(38.1 |
) |
Cash and cash equivalents, end of period
|
|
$ |
33.1 |
|
|
$ |
6.7 |
|
|
$ |
39.0 |
|
|
$ |
26.4 |
|
|
$ |
(32.3 |
) |
Net cash used in operating activities was $1.4 million for
the year ended December 31, 2005, a decrease of 91% from
the $15.1 million used in 2004. Net cash used in operating
activities decreased 33% in 2004 compared to the
$22.5 million used in 2003. For the year ended
December 31, 2005, the $1.4 million cash used by
operations was primarily due to our net loss of
$14.7 million, reduced by non-cash expenses of
$4.9 million, cash received by us for reimbursement from
our landlord related to the build-out of our laboratory facility
in Cambridge of $2.4 million, net increases in deferred
rent of $0.9 million and net increases in deferred revenue
of $5.5 million, offset by a net increase in working
capital (accounts receivable, prepaid expenses and other current
assets, accounts payable, and accrued expenses) of
$0.4 million. The increase in deferred rent was due to
prepaid rent received by us from a sublease tenant in Germany.
The increase in deferred revenue of $5.5 million related to
sales of long-term pre-paid storage contracts, as well as
advances received in connection with our grant program with the
Government of Singapore. The decrease in the net cash used in
operations 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 to us of the
$2.9 million royalty escrow payment following the
judges ruling in the second half of 2004 in the PharmaStem
litigation that overturned a previous jury finding of
infringement.
Net cash used in investing activities for the year ended
December 31, 2005 was $9.1 million. Net cash used in
investing activities was $15.2 million in 2004 as compared
to net cash provided of $9.5 million in 2003. For the year
ended December 31, 2005, $36.5 million of
U.S. Government and high-rated corporate securities matured
and $42.1 million was invested in similar securities. We
also invested approximately $3.9 million in property and
equipment for the year ended December 31, 2005.
Approximately $2.5 million of the total spent on property
and equipment during the year ended December 31, 2005
related to the build-out of our manufacturing facility and
laboratory in Cambridge, which was completed in August 2005. We
expect that this facility will give us the capacity to complete
Phase 2 and Phase 3 clinical trials and proceed to
initial commercialization of CB001, if successfully developed.
We expect to need to build or acquire another manufacturing
facility in order to fully commercialize CB001 and our other
product candidates, if successfully developed. The timing and
cost of such a facility is not known at this time, however the
cost is likely to be substantial. We also received proceeds of
$0.4 million related to the return of a security deposit
which secured our long-term debt obligations.
46
In 2004, $22.7 million of US Government and high-rated
corporate securities matured and $36.7 million was
reinvested in similar securities. In 2003, $15.8 million of
similar investments matured during 2003 and $9.7 million
was reinvested. In addition, we acquired approximately
$2.4 million and $1.8 million in property and
equipment in 2004 and 2003, respectively. Of our investments in
property and equipment, approximately $1.1 million and
$1.9 million consisted of laboratory equipment in 2004 and
2003, respectively. The remaining investments in property and
equipment consisted of computer equipment, software and
furniture and fixtures. In 2004, we also received proceeds of
$0.4 million related to the return of a security deposit
which secured our long-term debt obligations. 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
$0.8 million and $3.2 million in 2004 and 2003,
respectively.
Net cash provided by financing activities in 2005 was
$37.1 million. Net cash used in financing activities
amounted to $1.7 million in 2004 and net cash provided by
financing activities amounted to $36.4 million in 2003. For
the year ended December 31, 2005, the net cash provided by
financing activities included net proceeds from our IPO of
$53.3 million, as well as proceeds of $1.1 million
relating to exercised stock options. These proceeds were
partially reduced by the amount of cash used to repay related
party notes of approximately $15.5 million related to the
acquisition of Kourion Therapeutics and to make repayments of
$1.8 million on our long-term debt obligations.
The net cash provided by financing activities in 2003 included
the proceeds from the issuance of redeemable convertible
preferred stock of $36.9 million. 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. In 2004 no additional financing occurred,
however we repaid $1.6 million on our credit facility, as
well as $0.2 million related to capital lease obligations,
offset by proceeds from common stock option exercises of
$0.1 million.
We anticipate that our current cash, cash equivalents and
investments 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.
Commitments and Contingencies
The table below summarizes our commitments and contingencies at
December 31, 2005 (in millions and does not include our
accounts payable and accrued expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than | |
|
One to Three | |
|
Four to Five | |
|
After Five | |
Contractual Obligations |
|
Total | |
|
One Year | |
|
Years | |
|
Years | |
|
Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating lease obligations
|
|
$ |
17.9 |
|
|
$ |
2.2 |
|
|
$ |
4.1 |
|
|
$ |
4.1 |
|
|
$ |
7.5 |
|
Capital lease obligations
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Short and long-term debt(1)
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting agreements
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
License agreements(2)
|
|
|
3.1 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
1.4 |
|
Contingent purchase price(3)
|
|
|
8.2 |
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
31.7 |
|
|
$ |
4.9 |
|
|
$ |
7.8 |
|
|
$ |
4.8 |
|
|
$ |
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
(1) |
Includes interest and principal obligations. |
|
(2) |
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 $3.1 million
payable under license agreements, $1.9 million relates to
these cancelable agreements. |
|
(3) |
See Notes 3 and 9 to our consolidated financial statements. |
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.
In 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 agreed to pay reasonable defense costs resulting
from such litigation, providing that the physician allowed us to
manage his or her defense. In addition, we agreed to indemnify
the physician against all potential financial liability
resulting from such litigation, and we agreed to 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 re-evaluated as of
December 31, 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 further
re-evaluated this reserve at December 31, 2005 and
concluded that no change in the reserve was necessary. To date,
no claims have been made under this program. We may record
additional charges if more physicians participate in this
program.
Other than outstanding warrants exercisable for up to
3,212,083 shares of our common stock at December 31,
2005, we have no off balance sheet arrangements, as
defined by Item 303(a)(4) of the SECs
Regulation S-K.
Please see note 11 of our consolidated financial statements
for a description of the warrants.
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 $1.5 million remained outstanding under this
loan as of December 31, 2005. In accordance with the terms
of the loan, we are required to maintain a cash deposit of
approximately $0.9 million with the lender as additional
collateral. This deposit is classified within prepaid expenses
and other current assets in our 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. In
February 2006, we amended this lease agreement for the rent of
an additional 7,600 feet of office space. Rent expense on
the office portion of this lease commenced in April 2004 and the
rent on the laboratory facilities commenced in November 2004,
48
for a term of ten years. Our office rent under this lease was
$0.4 million per year for the first two years of the lease,
increasing to $0.6 million in 2006, and to
$0.7 million in 2007 and through the remainder of the
lease. The increase in the lease obligation is related to
additional rent expense for an additional 7,600 square feet
of office space beginning in February 2006. 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. Approximately $2.5 million of
the total spent on property and equipment during the year ended
December 31, 2005 related to the build-out of our
manufacturing facility and laboratory in Cambridge,
Massachusetts, which was completed in August 2005. Our lease
agreement provided for an allowance from our landlord of
approximately $2.5 million to offset these capital
improvements, which was received in full in 2005. In connection
with this operating lease commitment, we entered into a letter
of credit with a commercial bank 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 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 two years, with options to extend the sub-lease
through the end of our maximum 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 $240,000.
In November 2005, the sub-lessee verbally gave notice of its
intent to not extend the sublease past December 31, 2006.
The sublessee has prepaid rent through December 2006.
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 Notes. 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 repaid in January 2005 following the initial public
offering of our common stock.
Milestones. There are potential future payments totaling
up to $12.0 million payable to former shareholders of
Kourion Therapeutics if certain USSC-related product development
milestones are achieved. 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 shareholder. Also, in our
acquisition of Kourion Therapeutics, we issued and deposited
241,481 shares of our Series I preferred stock (which
automatically converted into common stock upon the completion of
our IPO) into an escrow account, which we agreed would be
released immediately following a change in control of the
Company, should this event occur prior to September 30,
2006. If this event occurs, we would also issue to certain
former shareholders of Kourion Therapeutics an additional
289,256 shares of our common stock. 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.
49
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 is focused 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, if successfully
developed and commercialized.
|
|
|
Amgen Collaboration Agreement |
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 growth factors
for use as reagents in producing stem cell therapy products. In
August 2005, we expanded the collaboration to include an
additional growth factor. Amgen has an option to collaborate
with us on any product or products that incorporate a licensed
Amgen growth factor or technology. Each time Amgen exercises a
collaboration option, it must partially reimburse our past
development costs based on a predetermined formula, 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 will 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. In the event Amgen does not exercise its option
to collaborate on a particular product, we will owe Amgen a
royalty on any sales of such product, if successfully developed.
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.
In January 2005, we entered into development and supply
agreements with Miltenyi Biotec GmbH. The development agreement
provides for the development by Miltenyi of a cGMP cell
separation kit for us consisting of various antibodies
conjugated with magnetic particles to be used in our proprietary
Selective Amplification process for the development and
commercialization of certain of our cellular therapy product
candidates. Under the development agreement, Miltenyi is
obligated to perform various tasks set forth in the agreement in
connection with the development of the cell separation kit,
including making various filings with the U.S. Food and
Drug Administration, or FDA. We are obligated to pay Miltenyi up
to $950,000 for development work. As of December 31, 2005,
we had paid $700,000 relating to the development of the product,
and are recognizing expense as the work is performed over the
development period. For the year ended December 31, 2005,
we recognized $950,000 of expenses related to this development
agreement. The remaining payment of $250,000 relates to a
milestone to be paid upon filing the master files for the cell
separation kit with the FDA. The agreement terminates on the
earlier of the expiration of both parties obligations
under the development agreement or January 24, 2007.
The supply agreement with Miltenyi provides for the exclusive
supply of the cell separation kits to us by Miltenyi. The
initial term of the supply agreement is for seven years. We have
agreed to purchase at least $1.3 million of cell separation
kits within the first year after the process development program
has been completed. We also have certain minimum annual purchase
requirements starting in fiscal 2007 which will apply if our
investigational product for hematopoietic stem cell
transplantation, CB001, continues in clinical trials or is
commercialized. In January 2006, we paid the first installment
of approximately $625,000 for a quantity of the cell separation
kits to be used in our research.
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
50
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.
Net Operating Loss Carryforwards
At December 31, 2005, we had federal and state net
operating loss carryforwards of approximately $82.8 million
and $75.3 million, respectively. These carryforwards begin
expiring in 2009 and 2006, respectively. We also had federal and
state credit carryforwards of approximately $3.3 million
and $1.6 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. The Company also has foreign net operating loss
carryforwards of $14.9 million. The carryforwards expire
through 2024 and are subject to review and possible adjustment.
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.
Legal Proceedings
In 2002, PharmaStem Therapeutics, Inc. filed suit 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 (681) and No. 5,192,553 (553),
relating to certain aspects of the collection, cryopreservation
and storage of hematopoietic stem cells and progenitor cells
from umbilical cord blood. We believe that we do not infringe
these patents and that the patents are invalid.
In 2003, a jury ruled against us and the other defendants, Cbr
Systems Inc, CorCell, Inc. and Cryo-Cell International Inc, who
represent a majority of the family cord blood preservation
industry finding that the patents were valid and enforceable,
and that the defendants infringed the patents. 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. In 2004, the District
Court judge in the case overturned the jurys verdict
stating that PharmaStem had failed to show infringement.
PharmaStem has appealed the judges decision. We have
appealed the jurys finding as to validity of the patents.
A hearing on the appeal is scheduled for April 4, 2006.
In July 2004, PharmaStem filed a second complaint against us.
The second complaint was filed in the United States District
Court for the District of Massachusetts, alleging infringement
of U.S. Patents No. 6,461,645 (645) and
6,569,427 (427), which also relate to certain aspects of
the collection, cryopreservation and storage of hematopoietic
stem cells and progenitor cells from umbilical cord blood. We
believe that the patents in this new 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. We
believe the issues presented in this case are substantially the
same as the issues presented in the original 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 February 16, 2005, our request was granted. The cases
have been consolidated in Delaware.
The U.S. Patent and Trademark Office (U.S. PTO) has
ordered the re-examination of both the 553 method patent
and the 681 composition patent at issue in the first case
and the 645 and 427 patents at issue in the second
case based on prior art. A second re-examination of the
427 patent was ordered in order to determine whether
certain claims of the 427 patent should expire in 2008,
rather than in 2010. Final decisions on the re-examinations have
not yet been issued.
On October 6, 2005, the Delaware court granted our motion
to stay all discovery in the second lawsuit pending decisions
from the Federal Circuit on PharmaStems appeal of the
District Courts ruling of non-infringement in the original
case and from the U.S. PTO on the patent re-examinations.
51
In either of the pending cases, if we are ultimately found to
infringe, we could have a significant damages award entered
against us. If we are found to infringe or at any other time
during the course of either case, including possibly if the
court of appeals were to overturn the district courts
non-infringement ruling, 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. 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 October 15, 2004. While we do
not believe this outcome is likely, in the event of an
injunction, if we are not able to obtain a license under the
disputed patents on economically reasonable terms or at all and
we cannot 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. We may enter into settlement negotiations with
PharmaStem regarding the litigation. 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
brief for the appeal and a petition for a writ of mandate. The
petition has been dismissed and the appeal is proceeding. The
plaintiff has settled the litigation with all defendants other
than us. We are not yet able to conclude as to the likelihood
that plaintiffs claims would be upheld if the judgment of
dismissal were reversed on appeal, nor can we estimate the
possible financial consequences should plaintiff prevail.
However, we believe this suit to be without merit and intend to
continue to vigorously defend ourselves.
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. On
April 13, 2005, we answered the complaint, denying
Cbrs allegations, and filed counterclaims alleging false
and misleading advertising by Cbr. On October 27, 2005, we
entered into an agreement to settle the pending litigation with
Cbr. Under terms of the agreement the companies agreed to
dismiss all outstanding legal claims. There were no financial
payments to be made by either party under the settlement
agreement.
We have undertaken a review of our various job classifications
for legal compliance under state and federal employment laws.
Based on that review, we have identified certain job
classifications that may be subject to possible challenge,
although there is currently no challenge pending, and for which
there is a reasonable possibility that we could incur a
liability, although we also believe that the present
classifications can be supported and defended. It is not
possible based on the current available information to
reasonably estimate the scope of any potential liability.
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
52
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 accounts receivable; |
|
|
|
accounting for royalty expense in connection with the PharmaStem
litigation; |
|
|
|
accounting for research and development expenses; |
|
|
|
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 stand alone value to the customer and the fair
value of the undelivered storage services can be determined. The
Company has concluded that the collection, testing and freezing
service has stand alone 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 accounts receivable. Accounts receivable
consists of amounts primarily due from our ViaCord customers
that have used the ViaCord product. Accounts receivable are
stated at amounts due from customers, net of an allowance for
doubtful accounts. We determine the allowance by considering
receivables that are past due, our previous loss history, and
the customers current ability to pay its obligations. We
write off accounts receivable when they become uncollectible and
payments subsequently received on such accounts receivable are
credited to the allowance for doubtful accounts.
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 recorded an expense of
$0.5 million for the three months ended March 31,
2004, also based on 6.125% of revenues. In the second half of
2004, the court overturned the jury verdict finding that
PharmaStem had not shown infringement. Based on the judges
ruling we reversed the entire royalty accrual of
$3.8 million in the quarter ended June 30, 2004.
PharmaStem has appealed the courts decision. 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 second patent
infringement lawsuit brought by PharmaStem, could result in
damages payable at a higher or lower amount than previously
awarded by the Delaware jury. Should this occur or should an
injunction be issued at any time in either case, our financial
position and results of operations could be materially affected.
We may enter into settlement negotiations with
53
PharmaStem regarding our litigation. 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 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 $92,000, $73,000 and $43,000 as of
December 31, 2005, 2004, and 2003, respectively.
Accounting for our physician indemnification program. In
September 2004, we launched an indemnification program
protecting physicians from patent litigation actions taken
against them by PharmaStem Therapeutics, Inc. Under this program
we agreed to pay reasonable defense costs resulting from such
litigation, providing that the physicians allowed us to manage
their defense. In addition, we agreed to pay all
54
damages resulting from such litigation, and we agreed to 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, 2005 and
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, 2005 and 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, 2005 and 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
On December 16, 2004, the Financial Accounting Standards
Board (FASB) released
SFAS No. 123(R) Share-Based
Payment. 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 annual fiscal period beginning
after June 15, 2005. We intend to apply the revised
standard in the annual period beginning January 1, 2006.
Although we have not finalized our analysis, we expect that the
adoption of the revised standard will result in higher operating
expenses and higher net loss per share. We will most likely use
the modified prospective method in which
compensation cost is recognized beginning with the effective
date of this new accounting pronouncement (a) based on the
requirements of SFAS 123(R) for all share-based payments
granted after the effective date and (b) based on the
requirements of SFAS 123 for all awards granted to
employees prior to the effective date of SFAS 123(R) that
remain unvested on the effective date. 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 May 2005, the FASB issued SFAS 154, Accounting
Changes and Error Corrections, which replaces APB Opinion
No. 20, Accounting Changes, and supersedes FASB
Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements-an amendment of APB Opinion
No. 28. SFAS 154 requires retrospective
application to prior periods financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the
period-specific effects of an accounting change on one or more
individual prior periods presented, SFAS 154 requires that
the new accounting principle be applied to the balances of
assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and
that a corresponding adjustment be made to the opening balance
of retained earnings for that period rather than being reported
in an income statement. When it is impracticable to determine
the cumulative effect of applying a change in accounting
principle to all prior periods, SFAS 154 requires that the
new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. SFAS 154
shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15,
2005. We do not expect the provisions of the SFAS 154 will
have a significant impact on our results of operations.
55
|
|
ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Quantitative and Qualitative Disclosures 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 and Singapore subsidiaries are
recorded in euros and Singapore dollars, respectively. Exchange
gains or losses resulting from the translation of these
subsidiaries financial statements into US dollars are
included as a separate component of stockholders equity
(deficit). We hold euro-based and Singapore dollar-based
currency accounts to mitigate foreign currency transaction risk.
Since both the revenues and expenses of these subsidiaries are
denominated in euros and Singapore dollars, 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.
|
|
ITEM 8. |
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA |
Our consolidated financial statements are annexed to this report
beginning on page F-1.
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
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, 2005 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 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, 2005 that
have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
56
|
|
ITEM 9B. |
OTHER INFORMATION |
None.
PART III
|
|
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 2006 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 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.
MANAGEMENT
Executive Officers and Key Employees
Set forth below is information regarding our executive officers
and key employees as of March 29, 2006.
|
|
|
|
|
Name |
|
Age |
|
Positions |
|
|
|
|
|
Executive Officers:
|
|
|
|
|
Marc D. Beer
|
|
41 |
|
President, Chief Executive Officer and Director |
Stephen G. Dance
|
|
55 |
|
Senior Vice President, Finance and Chief Financial Officer |
Anne Marie Cook
|
|
44 |
|
Senior Vice President, Legal and General Counsel |
Mary T. Thistle
|
|
46 |
|
Senior Vice President, General Manager, ViaCell Reproductive
Health |
Stephan Wnendt, Ph.D
|
|
43 |
|
Senior Vice President, Research and Development |
Key Employee:
|
|
|
|
|
Morey Kraus
|
|
47 |
|
Vice President and Chief Technical Officer |
Executive Officers
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. From 1996 until April 2000, he was a senior manager at
Genzyme Corporation most recently serving in the role of Vice
President, Global Marketing. Mr. Beer has more than
15 years experience in profit and loss management,
and research and development program management in therapeutic,
surgical, and in vitro diagnostic systems businesses.
Mr. Beer also serves as a Director of RenaMed, a private
company. Mr. Beer has a B.S. from Miami University (Ohio).
57
Stephen G. Dance. Mr. Dance joined us as Senior Vice
President, Finance and Chief Financial Officer in January 2004.
From April 1999 until December 2003, he served as Senior Vice
President, Finance at SangStat Medical Corporation, a
biotechnology company, 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, which was subsequently acquired by Roche.
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.
Anne Marie Cook. Ms. Cook has served as Senior Vice
President, Legal and General Counsel since September 2005. Prior
to joining ViaCell, Ms. Cook spent thirteen years at Biogen
Idec Inc., most recently as Vice President, Chief Corporate
Counsel. Prior to joining Biogen Idec, Inc., she was in private
practice at Testa, Hurwitz & Thibeault, where she
represented both private and public corporations and venture
capital limited partnerships. Ms. Cook holds a Bachelor of
Science degree in Biology from Tufts University and graduated
Summa Cum Laude from the University of Notre Dame Law School.
Mary T. Thistle. Ms. Thistle joined ViaCell in
October 2000 as Vice President, Financial and Corporate Planning
and Treasurer, before becoming Vice President, ViaCord
Operations in 2002. In October 2004, she was appointed Senior
Vice President and General Manager of ViaCell Reproductive
Health. Prior to joining ViaCell, Ms. Thistle spent four
years at the accounting firm of Yoshida, Croyle &
Sokolski where she provided audit, tax and management consulting
services to various companies, including Viacord.
Ms. Thistle also held a variety of financial positions at
S.R.T, a subsidiary of Thermo Electron and Nashua Corporation as
well as Deloitte & Touche. Ms. Thistle has a B.S.
in accounting from the University of Massachusetts.
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 Kourion Therapeutics, Dr. Wnendt was Vice
President of Biopharmaceutical Development and General Manager
of JOMED GmbH, now Abbott Vascular Instruments GmbH from
November 2000 to February 2003. Previously, Dr. Wnendt
worked for nine years in various positions in research
management with Grunenthal, an international pharmaceutical
company. Dr. Wnendt is Assistant Professor at the
University of Technology in Aachen, Germany, and received a
Diploma in Biochemistry from the Free University of Berlin and a
Ph.D. from the University of Technology, Berlin.
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. From September 1994 until March 2000,
Mr. Kraus served as our Chairman and Chief Executive
Officer. 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.
Medical and Scientific Advisory Board
Our medical and scientific advisory 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 are:
|
|
|
Graham Molineux. Dr. Molineux has been a scientific
advisor since November 2005. He is currently Director of
Hematology and Oncology Research at Amgen Inc. Before joining
Amgen in 1994 he spent nearly twenty years at the Paterson
Institute for Cancer Research at Christie Hospital in |
58
|
|
|
Manchester, England. He trained at University of Manchester
specializing in stem cell biology. Dr. Molineux received
his Ph.D. from the University of Manchester Institute of Science
and Technology, a MS in Experimental Immunology and Oncology and
a BSc from Liverpool University. |
|
|
Barbara E. Bierer, M.D. Dr. Bierer has been a
member of our scientific advisory board since 2001 and has
served on our Board of Directors since June 2005. 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 the Massachusetts
Institute of Technology and an M.D. summa cum laude from Harvard
University. |
|
|
Leonard I. Zon, M.D. Dr. Zon has been a member
of our medical and scientific advisory board since February
2002. 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 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. |
|
|
Kurt Gunter, M.D. Dr. Gunter has been a member
of our medical and scientific advisory board since September
2005. He is currently Vice President, Clinical &
Medical Affairs/ Government Relations at ZymeQuest, Inc., a
private company focused on blood conversion products for use in
blood transfusion medicine. He also serves as an industry
representative on the FDAs Cellular, Tissue and Gene
Therapies Advisory Committee. Previously, he was Senior Vice
President, Clinical and Regulatory Affairs and Government
Relations at ViaCell, Inc. and served as Vice President,
Clinical and Regulatory Affairs at Transkaryotic Therapies, Inc.
Before joining the biotechnology industry, Dr. Gunter was
Director of Stem Cell Processing, Hematology and 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. He has a B.S. from Stanford University and
a M.D. from the University of Kansas School of Medicine. |
|
|
ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this item is incorporated by
reference to the Proxy Statement under the heading
Executive Compensation.
59
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information about security ownership of certain beneficial
owners and management appears under the heading Principal
Stockholders in the Proxy Statement, which portion of the
Proxy Statement is incorporated by reference into this report.
|
|
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.
|
|
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item is incorporated by
reference to the Proxy Statement under the heading
Ratification of the Selection of Our Independent
Registered Public Accounting Firm.
PART IV
|
|
ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are being filed as part of this
report:
|
|
|
(1) Consolidated Financial Statements |
|
|
|
The following consolidated financial statements of ViaCell, Inc.
are filed as part of this report. |
|
|
|
|
|
|
|
Page Number in | |
|
|
This Form 10-K | |
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
F-2 |
|
Consolidated Balance Sheets
|
|
|
F-3 |
|
Consolidated Statements of Operations
|
|
|
F-4 |
|
Consolidated Statements of Comprehensive Loss
|
|
|
F-5 |
|
Consolidated Statements of Stockholders Equity (Deficit)
|
|
|
F-6 |
|
Consolidated Statements of Cash Flows
|
|
|
F-7 |
|
Notes to Consolidated Financial Statements
|
|
|
F-8 |
|
|
|
|
(2) Financial Statement Schedules |
|
|
|
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) Exhibits
|
|
|
|
|
Exhibit No. |
|
Description of Document |
|
|
|
|
3 |
.1(1) |
|
Sixth Amended and Restated Certificate of Incorporation. |
|
|
3 |
.2(1) |
|
Amended and Restated By-laws. |
|
|
4 |
.1(1) |
|
Specimen Stock Certificate. |
|
|
4 |
.2(7) |
|
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(8) |
|
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. |
|
|
10 |
.1(6) |
|
Amended and Restated 1998 Equity Incentive Plan.** |
60
|
|
|
|
|
Exhibit No. |
|
Description of Document |
|
|
|
|
|
10 |
.1.2(8) |
|
Form of Nonstatutory Stock Option Certificate.** |
|
|
10 |
.1.3(8) |
|
Form of Incentive Stock Option Certificate.** |
|
|
10 |
.2(7) |
|
Letter Agreement dated June 7, 2001 between ViaCell and
Chris Adams.** |
|
|
10 |
.3(7) |
|
Letter Agreement dated May 2, 2000 between ViaCell and Marc
Beer.** |
|
|
10 |
.4(7) |
|
Letter Agreement dated May 14, 2001 between ViaCell and
Kurt Gunter.** |
|
|
10 |
.5(7) |
|
Letter Agreement dated April 11, 2000 between ViaCell and
Morey Kraus.** |
|
|
10 |
.6(1) |
|
Letter Agreement dated September 12, 2003 between ViaCell
and Jan van Heek.** |
|
|
10 |
.7(1) |
|
Letter Agreement dated November 4, 2003 between ViaCell and
Vaughn M. Kailian.** |
|
|
10 |
.8(7) |
|
Letter Agreement dated December 15, 2002 between ViaCell
and Paul Hastings.** |
|
|
10 |
.9(1) |
|
Stock Purchase Agreement dated September 30, 2003 by and
among ViaCell, Kourion Therapeutics AG and the shareholders of
Kourion Therapeutics signatory thereto. |
|
|
10 |
.10(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. |
|
|
10 |
.11.1(1) |
|
Form of Promissory Note issued by ViaCell to General Electric
Capital Corporation. |
|
|
10 |
.11.2(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 |
.11.3(1) |
|
Form of Security Deposit Pledge Agreement by and between ViaCell
and General Electric Capital Corporation. |
|
|
10 |
.12(1) |
|
Non-Exclusive License Agreement dated January 1, 2003
between ViaCell and SmithKline Beecham Corporation d/b/a
GlaxoSmithKline and Glaxo Group Limited. |
|
|
10 |
.13(1) |
|
Collaboration Agreement dated December 23, 2003 between
ViaCell and Amgen Inc. |
|
|
10 |
.14(1) |
|
License Agreement dated March 15, 2002 between ViaCell
Endocrine Science, Inc. and the General Hospital Corporation,
d/b/a Massachusetts General Hospital. |
|
|
10 |
.15(1) |
|
License Agreement dated August 1, 2002 between ViaCell and
Massachusetts Institute of Technology. |
|
|
10 |
.16(1) |
|
Lease Agreement dated April 12, 2002 between ViaCell and
Dugan Financing LLC. |
|
|
10 |
.17(1) |
|
Lease Agreement dated December 22, 2003 between ViaCell and
MA-Riverview/245 First Street, LLC. |
|
|
10 |
.18 |
|
First Amendment dated February 14, 2006 to Lease Agreement
dated December 22, 2003 between ViaCell and
MA-Riverview/245 First Street, LLC. |
|
|
10 |
.19(1) |
|
Letter Agreement dated March 11, 2004 between ViaCell and
Stephen Dance.** |
|
|
10 |
.20(3) |
|
License Agreement dated September 1, 2004 between Tyho
Galileo Research Laboratory, LLC and ViaCell, Inc. |
|
|
10 |
.21(5) |
|
Research Agreement dated December 13, 2004 between Genzyme
Corporation and ViaCell. |
|
|
10 |
.22(6) |
|
Letter Agreement dated December 29, 2004 from ViaCell to
Stephan Wnendt.** |
|
|
10 |
.23(8) |
|
Letter Agreement dated October 10, 2004 from ViaCell to
Mary Thistle.** |
|
|
10 |
.24(9) |
|
Development Agreement between ViaCell, Inc. and Miltenyi Biotec
GmbH, dated January 24, 2005 |
|
|
10 |
.25(9) |
|
Supply Agreement between ViaCell, Inc. and Miltenyi Biotec GmbH,
dated January 24, 2005 |
|
|
10 |
.26(10) |
|
Amendment No. 1 to Collaboration Agreement between ViaCell,
Inc. and Amgen, Inc., dated August 29, 2005 |
|
|
10 |
.27(10) |
|
Warrant Purchase Agreement between ViaCell, Inc. and Amgen,
Inc., dated August 29, 2005 |
|
|
10 |
.28(10) |
|
Purchase Warrant issued to Amgen, Inc., dated August 29,
2005 |
|
|
10 |
.29(10) |
|
Exclusive License Agreement among Johns Hopkins University,
Zheijiang University and ViaCell, Inc., dated August 29,
2005 |
|
|
10 |
.30(10) |
|
Letter Agreement dated August 1, 2005 from ViaCell to Anne
Marie Cook.** |
|
|
21 |
.1(1) |
|
Subsidiaries of ViaCell. |
61
|
|
|
|
|
Exhibit No. |
|
Description of Document |
|
|
|
|
|
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP |
|
31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer. |
|
31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer. |
|
32 |
.1 |
|
Section 1350 Certification of Chief Executive Officer. |
|
32 |
.2 |
|
Section 1350 Certification of Chief Financial Officer. |
|
|
(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 5, 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. |
|
(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.
333-114209) 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 SEC on January 30, 2002. |
|
(8) |
Incorporated by reference to the Companys annual report on
Form 10-K (No.
0-51110) filed with the SEC on March 31, 2005. |
|
(9) |
Incorporated by reference to the Companys quarterly report
on Form 10-Q (No.
0-51110) filed with the SEC on May 13, 2005. |
|
|
(10) |
Incorporated by reference to the Companys quarterly report
on Form 10-Q (No.
0-51110) filed with the SEC on November 14, 2005. |
|
|
|
|
|
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. |
62
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 D. Beer |
|
Chief Executive Officer |
Date: March 31, 2006
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, 2006.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Marc D. Beer
Marc D. Beer |
|
Chief Executive Officer and Director (Principal Executive
Officer) |
|
March 31, 2006 |
|
/s/ Stephen G. Dance
Stephen G. Dance |
|
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
March 31, 2006 |
|
/s/ Vaughn M. Kailian
Vaughn M. Kailian |
|
Director |
|
March 31, 2006 |
|
/s/ James Sigler
James Sigler |
|
Director |
|
March 31, 2006 |
|
/s/ Paul Blake
Paul Blake |
|
Director |
|
March 31, 2006 |
|
/s/ Paul Hastings
Paul Hastings |
|
Director |
|
March 31, 2006 |
|
/s/ Denise Pollard-Knight
Denise Pollard-Knight |
|
Director |
|
March 31, 2006 |
|
/s/ James Tullis
James Tullis |
|
Director |
|
March 31, 2006 |
|
/s/ Jan van Heek
Jan van Heek |
|
Director |
|
March 31, 2006 |
|
/s/ Barbara Bierer
Barbara Bierer |
|
Director |
|
March 31, 2006 |
63
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 consolidated statements of operations, comprehensive
loss, stockholders equity (deficit), and cash flows
present fairly, in all material respects, the financial position
of ViaCell, Inc. and its subsidiaries at December 31, 2005
and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2005 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 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 31, 2006
F-2
ViaCell, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands except | |
|
|
share data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
33,138 |
|
|
$ |
6,746 |
|
|
Short-term investments
|
|
|
27,406 |
|
|
|
21,339 |
|
|
Accounts receivable, less allowances of $1.1 million and
$1.2 million in 2005 and 2004, respectively
|
|
|
13,736 |
|
|
|
10,808 |
|
|
Prepaid expenses and other current assets
|
|
|
2,679 |
|
|
|
4,766 |
|
|
Restricted cash
|
|
|
162 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
77,121 |
|
|
|
43,821 |
|
Property and equipment, net
|
|
|
8,702 |
|
|
|
6,738 |
|
Goodwill
|
|
|
3,621 |
|
|
|
3,621 |
|
Intangible assets, net
|
|
|
2,823 |
|
|
|
3,025 |
|
Long-term investments
|
|
|
|
|
|
|
500 |
|
Restricted cash
|
|
|
1,932 |
|
|
|
1,953 |
|
Other assets
|
|
|
31 |
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
94,230 |
|
|
$ |
61,091 |
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT) |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt obligations
|
|
$ |
1,543 |
|
|
$ |
1,742 |
|
|
Accounts payable
|
|
|
1,141 |
|
|
|
1,271 |
|
|
Accrued expenses
|
|
|
7,706 |
|
|
|
7,490 |
|
|
Notes payable to related party
|
|
|
|
|
|
|
15,422 |
|
|
Deferred revenue
|
|
|
5,785 |
|
|
|
3,459 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,175 |
|
|
|
29,384 |
|
Deferred revenue
|
|
|
9,930 |
|
|
|
6,729 |
|
Deferred rent
|
|
|
3,876 |
|
|
|
1,035 |
|
Contingent purchase price
|
|
|
8,155 |
|
|
|
8,155 |
|
Long-term debt obligations, net of current portion
|
|
|
84 |
|
|
|
1,572 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
38,220 |
|
|
|
46,875 |
|
Redeemable convertible preferred stock (at redemption value)
authorized 30,396,809 shares in 2004, issued and
outstanding 25,628,075 in 2004
|
|
|
|
|
|
|
175,173 |
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.01 par value; authorized
428,191 shares; issued and outstanding 182,857 shares
(liquidation preference of $245,000) in 2004
|
|
|
|
|
|
|
2 |
|
Preferred stock, $0.01 par value; authorized
5,000,000 shares in 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; authorized 100,000,000 and
80,000,000 shares in 2005 and 2004, respectively; issued
and outstanding 38,117,725 and 2,763,961 shares in 2005 and
2004, respectively
|
|
|
381 |
|
|
|
28 |
|
Additional paid-in capital
|
|
|
229,955 |
|
|
|
|
|
Deferred compensation
|
|
|
(1,087 |
) |
|
|
(2,530 |
) |
Accumulated deficit
|
|
|
(173,443 |
) |
|
|
(158,766 |
) |
Accumulated other comprehensive income
|
|
|
204 |
|
|
|
309 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
56,010 |
|
|
|
(160,957 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders equity (deficit)
|
|
$ |
94,230 |
|
|
$ |
61,091 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ViaCell, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands except share and per share data) | |
Processing and storage revenues
|
|
$ |
43,775 |
|
|
$ |
36,805 |
|
|
$ |
30,884 |
|
Grant and contract revenues
|
|
|
668 |
|
|
|
1,469 |
|
|
|
996 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
44,443 |
|
|
|
38,274 |
|
|
|
31,880 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of processing and storage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
8,278 |
|
|
|
7,364 |
|
|
|
7,141 |
|
|
|
Royalty (recovery)expense
|
|
|
|
|
|
|
(3,258 |
) |
|
|
3,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and storage revenues
|
|
|
8,278 |
|
|
|
4,106 |
|
|
|
10,399 |
|
|
Research and development
|
|
|
13,359 |
|
|
|
15,134 |
|
|
|
13,226 |
|
|
Sales and marketing
|
|
|
24,702 |
|
|
|
19,322 |
|
|
|
20,959 |
|
|
General and administrative
|
|
|
12,193 |
|
|
|
13,468 |
|
|
|
15,222 |
|
|
In-process technology
|
|
|
|
|
|
|
|
|
|
|
23,925 |
|
|
Stock-based compensation(1)
|
|
|
2,163 |
|
|
|
3,429 |
|
|
|
3,232 |
|
|
Restructuring
|
|
|
305 |
|
|
|
2,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
61,000 |
|
|
|
58,404 |
|
|
|
86,963 |
|
|
|
|
|
|
Loss from operations
|
|
|
(16,557 |
) |
|
|
(20,130 |
) |
|
|
(55,083 |
) |
Interest income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,216 |
|
|
|
530 |
|
|
|
348 |
|
|
Interest expense
|
|
|
(336 |
) |
|
|
(1,497 |
) |
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense), net
|
|
|
1,880 |
|
|
|
(967 |
) |
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,677 |
) |
|
|
(21,097 |
) |
|
|
(55,468 |
) |
Accretion on redeemable convertible preferred stock
|
|
|
(986 |
) |
|
|
(13,071 |
) |
|
|
(9,416 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(15,663 |
) |
|
$ |
(34,168 |
) |
|
$ |
(64,884 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$ |
(0.44 |
) |
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
Weighted average shares used in basic and diluted net loss per
share computation
|
|
|
35,777,308 |
|
|
|
2,707,219 |
|
|
|
2,634,096 |
|
(1) Allocation of stock-based compensation expense is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cost of processing and storage revenues
|
|
$ |
20 |
|
|
$ |
32 |
|
|
$ |
7 |
|
Research and development
|
|
|
294 |
|
|
|
896 |
|
|
|
1,073 |
|
Sales and marketing
|
|
|
207 |
|
|
|
175 |
|
|
|
414 |
|
General and administrative
|
|
|
1,642 |
|
|
|
2,083 |
|
|
|
1,738 |
|
Restructuring
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$ |
2,163 |
|
|
$ |
3,429 |
|
|
$ |
3,232 |
|
|
|
|
|
|
|
|
|
|
|
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net loss
|
|
$ |
(14,677 |
) |
|
$ |
(21,097 |
) |
|
$ |
(55,468 |
) |
|
Foreign currency translation adjustment
|
|
|
(105 |
) |
|
|
(175 |
) |
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(14,782 |
) |
|
$ |
(21,272 |
) |
|
$ |
(54,984 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ViaCell, Inc.
Consolidated Statements of Stockholders Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
Additional | |
|
|
|
|
|
Other | |
|
Total | |
|
|
|
|
Par | |
|
|
|
Par | |
|
Paid-In | |
|
Deferred | |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders | |
|
|
Shares | |
|
Value | |
|
Shares | |
|
Value | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Income | |
|
Equity (Deficit) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands except share data) | |
Balance, December 31, 2002
|
|
|
182,857 |
|
|
$ |
2 |
|
|
|
2,558,574 |
|
|
$ |
26 |
|
|
$ |
8,822 |
|
|
$ |
(6,126 |
) |
|
$ |
(73,211 |
) |
|
$ |
|
|
|
$ |
(70,487 |
) |
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
101,280 |
|
|
|
1 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
Issuance of stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450 |
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,416 |
) |
Non-employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804 |
|
|
|
(804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527 |
) |
|
|
3,508 |
|
|
|
|
|
|
|
|
|
|
|
2,981 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,468 |
) |
|
|
|
|
|
|
(55,468 |
) |
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484 |
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
182,857 |
|
|
$ |
2 |
|
|
|
2,659,854 |
|
|
$ |
27 |
|
|
$ |
1,437 |
|
|
$ |
(3,422 |
) |
|
$ |
(128,679 |
) |
|
$ |
484 |
|
|
$ |
(130,151 |
) |
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
89,915 |
|
|
|
1 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,081 |
) |
|
|
|
|
|
|
(8,990 |
) |
|
|
|
|
|
|
(13,071 |
) |
Non-employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
14,192 |
|
|
|
|
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882 |
|
|
|
(2,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(413 |
) |
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774 |
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,121 |
) |
|
|
3,361 |
|
|
|
|
|
|
|
|
|
|
|
2,240 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,097 |
) |
|
|
|
|
|
|
(21,097 |
) |
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175 |
) |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
182,857 |
|
|
$ |
2 |
|
|
|
2,763,961 |
|
|
$ |
28 |
|
|
$ |
|
|
|
$ |
(2,530 |
) |
|
$ |
(158,766 |
) |
|
$ |
309 |
|
|
$ |
(160,957 |
) |
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
685,157 |
|
|
|
7 |
|
|
|
1,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,164 |
|
Initial public offering
|
|
|
|
|
|
|
|
|
|
|
8,625,000 |
|
|
|
86 |
|
|
|
56,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,148 |
|
Initial public offering offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,899 |
) |
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(986 |
) |
Conversion of reedemable convertible preferred stock
(Series A and B)
|
|
|
(182,857 |
) |
|
|
(2 |
) |
|
|
182,857 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of reedemable convertible preferred stock
(Series C and K)
|
|
|
|
|
|
|
|
|
|
|
25,628,075 |
|
|
|
256 |
|
|
|
175,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,159 |
|
Issuance of common stock upon exercise of warrants, net
|
|
|
|
|
|
|
|
|
|
|
229,818 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee stock compensation
|
|
|
|
|
|
|
|
|
|
|
2,857 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
Deferred compensation, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700 |
|
|
|
1,443 |
|
|
|
|
|
|
|
|
|
|
|
2,143 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,677 |
) |
|
|
|
|
|
|
(14,677 |
) |
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
|
|
|
$ |
|
|
|
|
38,117,725 |
|
|
$ |
381 |
|
|
$ |
229,955 |
|
|
$ |
$(1,087 |
) |
|
$ |
(173,443 |
) |
|
$ |
204 |
|
|
$ |
56,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(14,677 |
) |
|
$ |
(21,097 |
) |
|
$ |
(55,468 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,110 |
|
|
|
2,577 |
|
|
|
2,518 |
|
Stock-based compensation
|
|
|
2,163 |
|
|
|
3,429 |
|
|
|
3,232 |
|
Reserve for bad debt
|
|
|
515 |
|
|
|
248 |
|
|
|
777 |
|
Non-cash charge for acquired in-process R & D
|
|
|
|
|
|
|
|
|
|
|
23,925 |
|
Non-cash interest expense on related party notes
|
|
|
88 |
|
|
|
1,142 |
|
|
|
280 |
|
Loss on write-down of fixed assets
|
|
|
17 |
|
|
|
2,155 |
|
|
|
|
|
Tenant improvement allowance
|
|
|
2,437 |
|
|
|
1,004 |
|
|
|
|
|
Other
|
|
|
17 |
|
|
|
29 |
|
|
|
4 |
|
Changes in assets and liabilities, excluding the effect of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,276 |
) |
|
|
(3,376 |
) |
|
|
(2,034 |
) |
Prepaid expenses and other current assets
|
|
|
2,853 |
|
|
|
(615 |
) |
|
|
(2,267 |
) |
Accounts payable
|
|
|
(115 |
) |
|
|
(2,192 |
) |
|
|
415 |
|
Accrued expenses
|
|
|
34 |
|
|
|
(2,542 |
) |
|
|
4,630 |
|
Deferred revenue
|
|
|
5,527 |
|
|
|
4,092 |
|
|
|
1,498 |
|
Deferred rent
|
|
|
873 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,434 |
) |
|
|
(15,115 |
) |
|
|
(22,490 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,923 |
) |
|
|
(2,393 |
) |
|
|
(1,826 |
) |
Proceeds from maturities of investments
|
|
|
36,532 |
|
|
|
22,682 |
|
|
|
15,813 |
|
Purchase of investments
|
|
|
(42,099 |
) |
|
|
(36,697 |
) |
|
|
(9,688 |
) |
Proceeds from return of security deposits on debt obligations
|
|
|
414 |
|
|
|
403 |
|
|
|
|
|
Decrease in restricted cash
|
|
|
|
|
|
|
732 |
|
|
|
3,210 |
|
(Increase) decrease in long-term other assets
|
|
|
7 |
|
|
|
85 |
|
|
|
(1,751 |
) |
Cash acquired in acquisition, net of acquisition costs
|
|
|
|
|
|
|
|
|
|
|
3,738 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(9,069 |
) |
|
|
(15,188 |
) |
|
|
9,496 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of redeemable convertible preferred
stock, net
|
|
|
|
|
|
|
|
|
|
|
36,887 |
|
Proceeds from exercise of stock options
|
|
|
1,164 |
|
|
|
108 |
|
|
|
43 |
|
Net proceeds from sale of common stock in initial public
offering, net of offering costs
|
|
|
53,249 |
|
|
|
|
|
|
|
|
|
Proceeds from credit facilities
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Repayments on credit facilities
|
|
|
(1,674 |
) |
|
|
(1,562 |
) |
|
|
(5,452 |
) |
Repayment of notes payable to related party, including accrued
interest
|
|
|
(15,510 |
) |
|
|
|
|
|
|
|
|
Payments on capital lease principal
|
|
|
(86 |
) |
|
|
(267 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
37,143 |
|
|
|
(1,721 |
) |
|
|
36,429 |
|
|
|
|
|
|
|
|
|
|
|
Effect of change in exchange rates on cash
|
|
|
(248 |
) |
|
|
(238 |
) |
|
|
334 |
|
Net increase (decrease) in cash and cash equivalents
|
|
|
26,392 |
|
|
|
(32,262 |
) |
|
|
23,769 |
|
Cash and cash equivalents, beginning of period
|
|
|
6,746 |
|
|
|
39,008 |
|
|
|
15,239 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
33,138 |
|
|
$ |
6,746 |
|
|
$ |
39,008 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information and non cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
273 |
|
|
$ |
325 |
|
|
$ |
260 |
|
Income taxes paid
|
|
|
153 |
|
|
|
73 |
|
|
|
9 |
|
Acquisitions (Note 3)
|
|
|
|
|
|
|
|
|
|
|
28,705 |
|
Accretion of redeemable convertible preferred stock
|
|
|
986 |
|
|
|
13,071 |
|
|
|
9,416 |
|
Equipment purchased under capital lease, net of disposals
(Note 2)
|
|
|
56 |
|
|
|
140 |
|
|
|
155 |
|
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 is a biotechnology company dedicated to researching,
developing and commercializing cellular therapies. The Company
has a pipeline of proprietary umbilical cord blood-derived and
adult-derived stem cell product candidates being studied as
possible treatments for cancer, cardiac disease and diabetes.
The Company is currently conducting a Phase I clinical
trial of CB001, its lead umbilical cord blood-derived stem cell
therapy product candidate as a possible treatment for
hematopoietic stem cell reconstitution in patients affected by a
variety of cancers. In addition to the Companys
therapeutic research and development programs, it has a
reproductive health business unit that generated revenues of
$43.8 million in 2005 from sales of ViaCord, a service
offering through which expectant families can preserve their
babys umbilical cord blood for possible future medical
use. The Company is working to leverage its commercial
infrastructure and product development capabilities by
developing
ViaCytesm,
its investigational product candidate intended to broaden
reproductive choices for women through the cryopreservation of
human unfertilized eggs.
ViaCell was incorporated in the State of Delaware on
September 2, 1994. The Companys corporate
headquarters and main research facility is located in Cambridge,
Massachusetts. The Company has processing and storage facilities
in Hebron, Kentucky and an additional research and development
operation in Singapore.
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 $53,249,000 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 |
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.
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
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
F-8
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
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. The following table is in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Amortized | |
|
|
|
Unrealized | |
|
Amortized | |
|
|
|
Unrealized | |
|
|
Cost | |
|
Fair Value | |
|
(Loss) | |
|
Cost | |
|
Fair Value | |
|
(Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$ |
29,807 |
|
|
$ |
29,807 |
|
|
$ |
|
|
|
$ |
3,613 |
|
|
$ |
3,613 |
|
|
$ |
|
|
Government securities
|
|
|
1,432 |
|
|
|
1,432 |
|
|
|
|
|
|
|
1,485 |
|
|
|
1,485 |
|
|
|
|
|
Cash
|
|
|
1,899 |
|
|
|
1,899 |
|
|
|
|
|
|
|
1,648 |
|
|
|
1,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
33,138 |
|
|
|
33,138 |
|
|
|
|
|
|
|
6,746 |
|
|
|
6,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
27,406 |
|
|
|
27,362 |
|
|
|
(44 |
) |
|
|
21,339 |
|
|
|
21,262 |
|
|
|
(77 |
) |
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
498 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
27,406 |
|
|
|
27,362 |
|
|
|
(44 |
) |
|
|
21,839 |
|
|
|
21,760 |
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$ |
60,544 |
|
|
$ |
60,500 |
|
|
$ |
(44 |
) |
|
$ |
28,585 |
|
|
$ |
28,506 |
|
|
$ |
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1.9 million collateralized by
certificates of deposit totaling $1.9 million that are
classified as restricted cash on the accompanying consolidated
balance sheet.
During 2005, the Company revised the classification for certain
items, including security deposits and restricted cash, in the
Companys Consolidated Statements of Cash Flows. These
changes are now presented as investing activities. The revised
classifications have also been reflected in the comparative
prior year amounts for purposes of consistency.
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.
F-9
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
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 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 approximately $36,098,000, $31,737,000, and
$27,768,000 for the years ended December 31, 2005, 2004,
and 2003, respectively.
Revenue from storage fees is recognized over the contractual
period on a straight-line basis and amounted to approximately
$7,677,000, $5,068,000, and $3,116,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Deferred revenue of $15,715,000 and $10,187,000 at
December 31, 2005 and 2004, 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, 2005 and 2004 also
included approximately $731,000 and $154,000, respectively, 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
processing and storage 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 $130,000, $334,000, and $783,000 for the years ended
December 31, 2005, 2004, and 2003, respectively. The
rebates have been recorded as a reduction in processing revenue
for the years ended December 31, 2005, 2004, and 2003.
Revenues from short-term research contracts are recognized over
the contract period as services are provided. Revenues from
research contracts amounted to $0, $192,000, and $363,000 for
the years ended December 31, 2005, 2004, and 2003,
respectively.
F-10
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company recognized approximately $668,000, $1,277,000, and
$633,000 in grant revenue in the years ended December 31,
2005, 2004, and 2003, respectively, under grants from the
Economic Development Boards of Singapore and Germany. Under
these grant agreements, the Company is reimbursed for certain
defined expenses.
Accounts receivable consists of amounts primarily due from
customers for cord blood processing and storage revenues.
Accounts receivable are stated at amounts due from customers,
net of an allowance for doubtful accounts. The Company
determines the allowance by considering receivables that are
past due, our previous loss history, and the customers
current ability to pay its obligations. The Company writes off
accounts receivable when they become uncollectible and any
payments subsequently received on reserved accounts receivable
are credited to the allowance for doubtful accounts.
|
|
|
Cost of Processing and Storage Revenues |
Cost of processing and storage 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. We recorded
a royalty expense of $3.3 million in 2003 following an
unfavorable jury verdict in the PharmaStem litigation in October
2003. In 2004, the District Court overturned the jury verdict.
Based on the judges ruling, we reversed the entire royalty
accrual in 2004 and have not recorded any royalties since such
date. PharmaStem has appealed the District Courts ruling.
PharmaStem has also filed a new lawsuit claiming that we
infringe additional patents (Note 9). Pending a decision on
the appeal and further action by the court on the new
litigation, we do not intend to record a royalty expense in
future periods, since we believe PharmaStems claims are
without merit.
Costs incurred related to grant and contract revenues are
included in research and development expense.
Costs of media advertising are expensed at the time the
advertising takes place and are classified as sales and
marketing expense. Advertising costs totaled approximately
$3,100,000, $2,515,000, and $1,815,000 for the years ended
December 31, 2005, 2004, and 2003, respectively.
|
|
|
Research and Development Expenses |
Research and development expenses, 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.
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
F-11
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
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 recorded in accumulated other comprehensive
income within stockholders equity. Foreign currency
transaction gains and losses are reported in the accompanying
consolidated statements of operations and are immaterial to the
results of operations.
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 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 fair value due to short maturities and
the carrying value of the long-term financial instruments
approximate 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; |
F-12
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
customer lists; and |
|
|
|
trademarks. |
SFAS No. 142, Goodwill and Other Intangible Assets
requires that periodic tests of goodwills impairment
be performed 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, 20 years for trademarks, and
10 years for customer lists.
|
|
|
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, it tests 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, 2005 and 2004,
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, 2005 and 2004, 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 receivable
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Additions to | |
|
|
|
Balance at | |
|
|
Beginning of | |
|
Costs and | |
|
|
|
End of | |
|
|
Period | |
|
Expenses | |
|
Deductions | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
Allowance for doubtful accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
$ |
1,197 |
|
|
|
515 |
|
|
|
(644 |
) |
|
$ |
1,068 |
|
|
December 31, 2004
|
|
$ |
1,044 |
|
|
|
248 |
|
|
|
(95 |
) |
|
$ |
1,197 |
|
|
December 31, 2003
|
|
$ |
269 |
|
|
|
777 |
|
|
|
(2 |
) |
|
$ |
1,044 |
|
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 was
increased by periodic accretions, including cumulative
dividends, so that the carrying amount will equal the redemption
amount at the earliest redemption date. These increases were
effected through charges to additional paid-in capital to the
extent there are any, and, thereafter, to accumulated deficit.
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 Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure an amendment of FASB
Statement No. 123.
The Company accounts for equity instruments issued to
non-employees 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 be 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 year ended December 31, 2005, the Company did
not issue any stock options to employees with an exercise price
below fair market value. During the years ended
December 31, 2005, 2004, and 2003, the Company recorded
amortization of deferred compensation related to stock options
granted to employees and non-employee directors and charges
related to the modification of existing grants of approximately
$2.1 million, $3.0 million, and $3.0 million,
respectively (Note 12). At December 31, 2005 and
December 31,
F-14
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
2004, approximately $1.1 million and $2.5 million,
respectively, of deferred stock-based compensation related to
stock options remained unamortized.
During the years ended December 31, 2005, 2004, and 2003,
the Company recorded stock-based compensation expense of
approximately $20,000, $415,000 and $251,000, respectively,
related to stock options granted to non-employees.
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 stock
options consistent with SFAS No. 123, the pro forma
net loss per share would have been as follows (table in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net loss attributable to common stockholders as reported
|
|
$ |
(15,663 |
) |
|
$ |
(34,168 |
) |
|
$ |
(64,884 |
) |
Add: employee stock-based compensation expense included in
reported net loss
|
|
|
2,143 |
|
|
|
3,014 |
|
|
|
2,981 |
|
Deduct: total employee stock-based compensation expense
determined under fair value based method for all awards
|
|
|
(4,630 |
) |
|
|
(5,175 |
) |
|
|
(4,257 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$ |
(18,150 |
) |
|
$ |
(36,329 |
) |
|
$ |
(66,160 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported
|
|
$ |
(0.44 |
) |
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$ |
(0.51 |
) |
|
$ |
(13.42 |
) |
|
$ |
(25.12 |
) |
|
|
|
|
|
|
|
|
|
|
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,
2005, 2004 and 2003 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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.92 |
% |
|
|
2.86 |
% |
|
|
2.00 |
% |
Expected life
|
|
|
5 years |
|
|
|
5 years |
|
|
|
5 years |
|
Expected volatility
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Per share grant date fair value
|
|
$ |
6.26 |
|
|
$ |
8.00 |
|
|
$ |
8.15 |
|
During 2004, all stock 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 stock-based
compensation expense during 2004 in anticipation of the
Companys initial public offering, which occurred in
January 2005.
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 revenues from the sale of stem cell therapies. For
these reasons, the Company has determined that it conducts
operations in one business segment.
F-15
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following table presents total long-lived tangible assets by
geographic areas as of December 31, 2005 and 2004,
respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Long-lived assets, net
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
8,430 |
|
|
$ |
6,310 |
|
|
Germany
|
|
|
|
|
|
|
88 |
|
|
Singapore
|
|
|
272 |
|
|
|
340 |
|
|
|
|
|
|
|
|
|
Total long-lived tangible assets, net
|
|
$ |
8,702 |
|
|
$ |
6,738 |
|
|
|
|
|
|
|
|
The following table presents revenues by geographic area for the
period ended December 31, 2005 and 2004, respectively (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
United States
|
|
$ |
43,812 |
|
|
$ |
36,997 |
|
Germany
|
|
|
(101 |
) |
|
|
990 |
|
Singapore
|
|
|
732 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
44,443 |
|
|
$ |
38,274 |
|
|
|
|
|
|
|
|
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 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.
The following sets forth the computation of basic and diluted
net loss per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(15,663 |
) |
|
$ |
(34,168 |
) |
|
$ |
$(64,884 |
) |
|
Weighted average number of common shares outstanding
|
|
|
35,777 |
|
|
|
2,707 |
|
|
|
2,634 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(0.44 |
) |
|
$ |
(12.62 |
) |
|
$ |
(24.63 |
) |
|
|
|
|
|
|
|
|
|
|
F-16
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following potentially dilutive securities were excluded
because their effect was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Options
|
|
|
3,746,395 |
|
|
|
4,222,211 |
|
|
|
4,374,160 |
|
Warrants
|
|
|
3,349,455 |
|
|
|
1,428,750 |
|
|
|
1,413,906 |
|
Convertible preferred stock
|
|
|
1,433,941 |
|
|
|
25,810,932 |
|
|
|
25,810,932 |
|
|
|
|
Recent Accounting Pronouncements |
On December 16, 2004, the Financial Accounting Standards
Board (FASB) released
SFAS No. 123(R) Share-Based
Payment. 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 annual fiscal
period beginning after June 15, 2005. The Company intends
to apply the revised standard in the annual period beginning
January 2006. Although the Company has not finalized its
analysis, it expects that the adoption of the revised standard
will result in higher operating expenses and higher net loss per
share. The Company most likely will use the modified
prospective method in which compensation cost is
recognized beginning with the effective date of this new
accounting pronouncement (a) based on the requirements of
SFAS 123(R) for all share-based payments granted after the
effective date of this new accounting pronouncement and
(b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of
SFAS 123(R) that remain unvested on the effective date.
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.
In May 2005, the FASB issued SFAS 154, Accounting
Changes and Error Corrections, which replaces APB Opinion
No. 20, Accounting Changes, and supersedes FASB
Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements-an amendment of APB Opinion
No. 28. SFAS 154 requires retrospective
application to prior periods financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the
period-specific effects of an accounting change on one or more
individual prior periods presented, SFAS 154 requires that
the new accounting principle be applied to the balances of
assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and
that a corresponding adjustment be made to the opening balance
of retained earnings for that period rather than being reported
in an income statement. When it is impracticable to determine
the cumulative effect of applying a change in accounting
principle to all prior periods, SFAS 154 requires that the
new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. SFAS 154
shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15,
2005. We do not expect the provisions of the SFAS 154 will
have a significant impact on our results of operations.
|
|
|
Acquisition of Kourion Therapeutics AG |
In September 2003, the Company acquired all the outstanding
common shares of 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.
F-17
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
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. All
convertible preferred stock immediately converted to common
stock upon the completion of the Companys initial public
offering. 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 by
specified dates. 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 shareholders 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 involved contingent consideration, the Company was
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 as of the date of acquisition of $1.9 million and the
289,256 contingent shares with a face value as of the date of
acquisition 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.
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 (in thousands):
The aggregate purchase price of $28,705,000 consists of the
following:
|
|
|
|
|
|
Series I convertible preferred stock
|
|
$ |
4,400 |
|
Note payable to related party
|
|
|
14,000 |
|
Acquisition costs
|
|
|
2,150 |
|
Contingent consideration
|
|
|
8,155 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
28,705 |
|
|
|
|
|
The aggregate purchase price was allocated as follows:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
4,563 |
|
Other current assets, net
|
|
|
1,125 |
|
Property and equipment
|
|
|
1,432 |
|
Other assets
|
|
|
139 |
|
Current liabilities
|
|
|
(513 |
) |
Capital lease obligation
|
|
|
(141 |
) |
In-process technology
|
|
|
22,100 |
|
|
|
|
|
|
Total net assets acquired
|
|
$ |
28,705 |
|
|
|
|
|
F-18
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
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.
|
|
4. |
Property and Equipment |
Property and equipment consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Software
|
|
$ |
3,098 |
|
|
$ |
2,700 |
|
Laboratory equipment
|
|
|
5,230 |
|
|
|
4,674 |
|
Office and computer equipment
|
|
|
2,611 |
|
|
|
1,867 |
|
Leasehold improvements
|
|
|
5,267 |
|
|
|
3,130 |
|
Furniture and fixtures
|
|
|
767 |
|
|
|
717 |
|
Construction in progress
|
|
|
8 |
|
|
|
380 |
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
16,981 |
|
|
|
13,468 |
|
Less: accumulated depreciation and amortization
|
|
|
(8,279 |
) |
|
|
(6,730 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
8,702 |
|
|
$ |
6,738 |
|
|
|
|
|
|
|
|
At December 31, 2005 and 2004 the net book value of
property and equipment serving as collateral under loan
agreements amounted to $1,485,000 and $3,159,000, respectively.
At December 31, 2005 and 2004, equipment held under capital
leases totaled $492,126 and $474,776, and accumulated
depreciation related to this leased equipment totaled
approximately $299,133 and $250,909, respectively.
Depreciation and amortization expense on property and equipment
totaled approximately $1,909,000, $2,413,000, and $2,256,000 in
the years ended December 31, 2005, 2004, and 2003.
|
|
5. |
Long-Lived Assets and Goodwill |
Intangible assets consist of a trademark 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.
F-19
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Amortization of intangible assets was approximately $202,000,
$250,000, and $261,000 for the years ended December 31,
2005, 2004, and 2003, respectively.
At December 31, 2005 and 2004, ViaCells goodwill and
intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Goodwill
|
|
$ |
3,621 |
|
|
$ |
3,621 |
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Trademark
|
|
$ |
4,400 |
|
|
$ |
4,400 |
|
Employment agreements
|
|
|
288 |
|
|
|
288 |
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(1,865 |
) |
|
|
(1,663 |
) |
|
|
|
|
|
|
|
Intangible assets, net
|
|
$ |
2,823 |
|
|
$ |
3,025 |
|
|
|
|
|
|
|
|
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, 2005 and 2004, accrued expenses consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Payroll and payroll related
|
|
$ |
1,541 |
|
|
$ |
1,016 |
|
Management incentive
|
|
|
881 |
|
|
|
723 |
|
Professional fees
|
|
|
1,206 |
|
|
|
2,026 |
|
Accrued marketing
|
|
|
1,260 |
|
|
|
913 |
|
Accrued restructuring (Note 14)
|
|
|
632 |
|
|
|
907 |
|
Deferred rent, current
|
|
|
619 |
|
|
|
238 |
|
Accrued taxes
|
|
|
537 |
|
|
|
647 |
|
Other
|
|
|
1,030 |
|
|
|
1,020 |
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$ |
7,706 |
|
|
$ |
7,490 |
|
|
|
|
|
|
|
|
Loss before income taxes is as follows for the years ended
December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
(13,104 |
) |
|
$ |
(16,019 |
) |
|
$ |
(52,299 |
) |
Foreign
|
|
|
(1,573 |
) |
|
|
(5,078 |
) |
|
|
(3,169 |
) |
|
|
|
|
|
|
|
|
|
|
Total Loss Before Income Taxes
|
|
$ |
(14,677 |
) |
|
$ |
(21,097 |
) |
|
$ |
(55,468 |
) |
|
|
|
|
|
|
|
|
|
|
F-20
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Companys effective tax rate for the years ended
December 31 varies from the statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
US Statutory rate
|
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
State taxes, net
|
|
|
(0.66 |
)% |
|
|
3.70 |
% |
|
|
2.00 |
% |
Foreign rate differential
|
|
|
0.02 |
% |
|
|
1.80 |
% |
|
|
0.40 |
% |
Benefit of tax credits
|
|
|
4.37 |
% |
|
|
2.60 |
% |
|
|
1.30 |
% |
Change in valuation allowance
|
|
|
(34.41 |
)% |
|
|
(36.80 |
)% |
|
|
(14.80 |
)% |
Stock-based compensation
|
|
|
(1.41 |
)% |
|
|
(5.10 |
)% |
|
|
(8.10 |
)% |
In process R&D
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
(14.70 |
)% |
Other
|
|
|
(1.03 |
)% |
|
|
(0.20 |
)% |
|
|
(0.10 |
)% |
Change in local tax rate
|
|
|
(1.89 |
)% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(1.01 |
)% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$ |
37,323 |
|
|
$ |
35,436 |
|
Tax credit carryforwards
|
|
|
4,315 |
|
|
|
3,484 |
|
Stock-based compensation
|
|
|
2,802 |
|
|
|
3,790 |
|
Temporary differences
|
|
|
10,238 |
|
|
|
8,510 |
|
|
|
|
|
|
|
|
|
|
|
54,678 |
|
|
|
51,220 |
|
Less: valuation allowance
|
|
|
(53,614 |
) |
|
|
(50,002 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,064 |
|
|
|
1,218 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,064 |
) |
|
|
(1,218 |
) |
|
|
|
|
|
|
|
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. At
December 31, 2005, the Company has federal and state net
operating loss carryforwards of approximately $82.8 million
and $75.3 million, respectively, which begin to expire in
2009 and 2006, respectively. The Company has federal and state
credit carryforwards of approximately $3.3 million and
$1.6 million which begin to expire in 2009 and 2013,
respectively. The Company also has foreign net operating loss
carryforwards of $14.9 million. 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.
F-21
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
Of the $53.6 million valuation allowance, $2.8 million
relates to nonqualified stock option deductions, the benefit of
which will be credited to additional paid in capital if and when
realized.
In December 2004, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position
No. SFAS-109-2
(SFAS 109-2), Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. The American Jobs
Creation Act of 2004 (the Act) was passed in October
2004. The Act contains certain tax incentives including a
deduction for income from qualified production activities and an
85% dividend received deduction for certain dividends from
controlled foreign corporations. These incentives are subject to
a number of limitations. None of these incentives are expected
to have a significant impact on our income tax liability.
At December 31, the Companys valuation allowance
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
Beginning of |
|
|
|
|
|
Balance at |
Description |
|
Period |
|
Additions |
|
Deductions |
|
End of Period |
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
50,002 |
|
|
|
3,612 |
|
|
|
|
|
|
$ |
53,614 |
|
2004
|
|
$ |
42,234 |
|
|
|
7,768 |
|
|
|
|
|
|
$ |
50,002 |
|
2003
|
|
$ |
28,966 |
|
|
|
13,268 |
|
|
|
|
|
|
$ |
42,234 |
|
|
|
8. |
Long-Term Debt Obligations |
The Company had the following long-term debt obligations
outstanding as of December 31, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Debt facility loans
|
|
$ |
1,480 |
|
|
$ |
3,135 |
|
Notes payable to related party
|
|
|
|
|
|
|
15,422 |
|
Capital lease obligations
|
|
|
147 |
|
|
|
179 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,627 |
|
|
|
18,736 |
|
Less: current portion
|
|
|
(1,543 |
) |
|
|
(17,164 |
) |
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$ |
84 |
|
|
$ |
1,572 |
|
|
|
|
|
|
|
|
In October 2003, the Company entered into a $5,000,000 loan
agreement with GE Capital Corporation. Borrowings under this
agreement bear interest at 6.9 percent per annum and are
collateralized by the property and equipment of the Company.
Monthly payments of interest and principal are due through
October 2006. Approximately $1,485,000 was outstanding under
this loan as of December 31, 2005. In October 2003, the
Company was required to make a $1,750,000 cash deposit with the
lender as additional collateral for this loan. As of
December 31, 2005 and 2004, the net book value of the fixed
assets which are collateralized under this agreement was
$1,485,000 and $3,159,000, respectively.
During 2005, $413,632 of the deposit was returned based on the
repayment schedule of the loan agreement. As of
December 31, 2005, the remaining deposit was $943,000 and
is included with other current assets in the accompanying
consolidated balance sheet.
The Company also issued a warrant to GE Capital Corporation, 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.
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
F-22
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
term of the note. Warrant amortization was approximately $18,000
and $29,000 for the periods ended December 31, 2005 and
December 31, 2004, respectively.
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.
|
|
|
Notes Payable to Related Party |
A portion of the consideration paid by the Company in its
acquisition of Kourion consisted of promissory notes in an
aggregate principal amount of $14.0 million. The notes were
held by several funds that are also stockholders of the Company
and that are affiliated with MPM Asset Management LLC, the
manager of which served on the Companys board of
directors. The notes bore interest at a rate of 8% per
annum, compounded annually, and had a maturity date of
September 30, 2007. The Company recorded $1,422,000 in
accrued interest related to this note for the period ended
December 31, 2004. The notes were 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, 2005, payments of principal and interest on
existing debt were due as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
2006
|
|
$ |
1,594 |
|
|
2007
|
|
|
56 |
|
|
2008
|
|
|
30 |
|
|
|
|
|
Total payment
|
|
|
1,680 |
|
Less: interest
|
|
|
(53 |
) |
|
|
|
|
Total debt
|
|
|
1,627 |
|
Less: current portion
|
|
|
(1,543 |
) |
|
|
|
|
Total long-term debt
|
|
$ |
84 |
|
|
|
|
|
|
|
9. |
Commitments and Contingencies |
|
|
|
Contingent Purchase Price |
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 involved contingent consideration, the Company was
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 consolidated
F-23
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
balance sheet as a non-current liability (Note 3).
|
|
|
The Company conducts its operations in leased facilities under
noncancelable operating leases expiring through 2014. |
|
|
Future minimum rental payments under the operating leases are
approximately as follows (in thousands): |
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
2006
|
|
$ |
1,994 |
|
|
2007
|
|
|
1,896 |
|
|
2008
|
|
|
1,744 |
|
|
2009
|
|
|
1,704 |
|
|
2010
|
|
|
1,730 |
|
|
Thereafter
|
|
|
6,564 |
|
|
|
|
|
|
Total lease payments
|
|
$ |
15,632 |
|
|
|
|
|
Rent expense was approximately $1,812,000, $2,212,000, and
$1,797,000 for the years ended December 31, 2005, 2004, and
2003, respectively.
In connection with the above commitments, the Company has issued
letters of credit totaling approximately $1,844,000 as
collateral against these leases. These letters of credit are
collateralized by certificates of deposit that are classified as
restricted cash on the accompanying consolidated balance sheets.
In 2005 and 2004 the Company received approximately
$2.4 million and $1.0 million, respectively, as a
tenant improvement allowance to offset the fixed asset costs
incurred to build out the Companys office and lab
facility. The tenant improvement allowance is amortized as a
reduction to rent expense over the life of the lease.
In February 2006, the Company leased an additional
7,600 square feet of office space in its Cambridge facility
for a term of approximately 8.5 years to run concurrently
with its existing operating leases for office space in its
Cambridge facility. The total lease commitment for this
additional office space is approximately $1.9 million. As
this lease was effective subsequent to December 31, 2005,
it is not included in the future minimum rental payments
schedule above.
In January 2005, the Company entered into development and supply
agreements with Miltenyi Biotec GmbH. The development agreement
provides for the development by Miltenyi of a cGMP cell
separation kit for ViaCell consisting of various antibodies
conjugated with magnetic particles to be used in ViaCells
proprietary Selective Amplification process for the development
and commercialization of certain of ViaCells proprietary
cellular therapy product candidates. Under the development
agreement, Miltenyi is obligated to perform various tasks set
forth in the agreement in connection with the development of the
cell separation kit, including making various filings with the
FDA. The Company is obligated to pay up to $950,000. As of
December 31, 2005, the Company had paid $700,000 relating
to the development of the product, and is recognizing expense as
the work is performed over the development period. The remaining
payment of $250,000 relates to a milestone to be paid upon
filing the master files for the cell separation kits with the
FDA. For the year ended December 31, 2005, the Company
recognized $950,000 of expense related to this
F-24
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
development agreement. The agreement terminates on the earlier
of the expiration of both parties obligations under the
development agreement or January 24, 2007.
The supply agreement provides for the exclusive supply of the
cell separation kits by Miltenyi to ViaCell. The initial term of
the supply agreement is for seven years. The Company has agreed
to purchase at least $1.3 million of cell separation kits
within the first year after the process development program has
been completed. The Company also has certain minimum annual
purchase requirements starting in fiscal 2007 which will apply
if its investigational product for hematopoietic stem cell
transplantation, CB001, continues in clinical trials or is
commercialized.
The Company has entered into an agreement with the Economic
Development Board of the Government of Singapore under which the
Government of Singapore has agreed to give the Company a grant
of up to $4,000,000 to fund stem cell research and development
programs conducted in Singapore. Under this agreement, the
Government of Singapore reimburses the Company for a portion of
research and development expenses incurred for work done in
Singapore. The Company funded approximately $1,333,000,
$1,045,000, and $968,000 of research and development in
Singapore during the twelve months ended December 31, 2005,
2004, and 2003, respectively, and recorded grant revenue of
approximately $732,000, $287,000, and $252,000 during the twelve
months ended December 31, 2005, 2004, and 2003,
respectively.
The Company enters into indemnification provisions under its
agreements with other companies in the ordinary course of
business, typically with business partners, licensors and
clinical sites. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of the
partys activities. Certain indemnification provisions
survive termination of the underlying agreement. The maximum
potential amount of future payments the Company could be
required to make under these indemnification provisions is
unlimited. However, to date, the Company has not incurred
material costs to defend lawsuits or settle claims related to
these indemnification provisions. As a result, the estimated
fair value of these agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of
December 31, 2005.
In 2002, PharmaStem Therapeutics, Inc. filed suit against the
Company and several other defendants in the United States
District Court for the District of Delaware, alleging
infringement of US Patents No. 5,004,681 (681) and
No. 5,192,553 (553), relating to certain aspects of
the collection, cryopreservation and storage of hematopoietic
stem cells and progenitor cells from umbilical cord blood. The
Company believes that it does not infringe these patents and
that the patents are invalid.
In 2003, a jury ruled against the Company and the other
defendants, Cbr Systems Inc, CorCell, Inc. and Cryo-Cell
International Inc, who represent a majority of the family cord
blood preservation industry finding that the patents were valid
and enforceable, and that the defendants infringed the patents.
A judgment was entered against the Company for approximately
$2.9 million, based on 6.125% royalties on the
Companys revenue from the processing and storage of
umbilical cord blood since April 2000. In 2004, the District
Court judge in the case overturned the jurys verdict
stating that PharmaStem had failed to show infringement.
PharmaStem has appealed the judges decision. The Company
has appealed the jurys finding as to validity of the
patents. A hearing on the appeal is scheduled for April 4,
2006.
In July 2004, PharmaStem filed a second complaint against the
Company. The second complaint was filed in the United States
District Court for the District of Massachusetts, alleging
infringement of U.S. Patents No. 6,461,645 (645)
and 6,569,427 (427), which also relate to certain aspects
of the collection, cryopreservation and storage of hematopoietic
stem cells and progenitor cells from umbilical cord blood. The
Company believes that the patents in this new action are invalid
and that the Company does not infringe them in any event. On
January 7, 2005, PharmaStem filed a Motion for Preliminary
Injunction in the Massachu-
F-25
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
setts litigation. That motion is currently stayed. The Company
believes the issues presented in this case are substantially the
same as the issues presented in the original Delaware
litigation. Accordingly, the Company 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 February 16, 2005, the Companys
request was granted. The cases have been consolidated in
Delaware.
The U.S. PTO has ordered the re-examination of both the
553 method patent and the 681 composition
patent at issue in the first case and the 645 and
427 patents at issue in the second case based on prior
art. A second re-examination of the 427 patent was ordered
in order to determine whether certain claims of the 427
patent should expire in 2008, rather than in 2010. Final
decisions on the re-examinations have not yet been issued.
On October 6, 2005, the Delaware court granted the
Companys motion to stay all discovery in the second
lawsuit pending decisions from the Federal Circuit on
PharmaStems appeal of the District Courts ruling of
non-infringement in the original case and from the U.S. PTO
on the patent re-examinations.
In either of the pending cases, if the Company is ultimately
found to infringe, the Company could have a significant damages
award entered against us. If the Company is found to infringe or
at any other time during the course of either case, including
possibly if the court of appeals were to overturn the district
courts non-infringement ruling, the Company could also
face an injunction which could prohibit the Company from further
engaging in the umbilical cord stem cell business absent a
license from PharmaStem. PharmaStem would be under no legal
obligation to grant the Company a license or to do so on
economically reasonable terms, and previously informed the
Company that it would not do after October 15, 2004. While
the Company does not believe this outcome is likely, in the
event of an injunction, if the Company is not able to obtain a
license under the disputed patents on economically reasonable
terms or at all and the Company cannot operate under an
equitable doctrine known as intervening rights, the
Company 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. The Company may enter into
settlement negotiations with PharmaStem regarding the
litigation. The Company 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, the Company 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 the Company . 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, the Company 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 brief for the appeal and a petition for a writ of
mandate. The petition has been dismissed and the appeal is
proceeding. The plaintiff has settled the litigation with all
defendants other than the Company. The Company is not yet able
to conclude as to the likelihood that plaintiffs claims
would be upheld if the judgment of dismissal were reversed on
appeal, nor can the Company estimate the possible financial
consequences should plaintiff prevail. However, the Company
believes this suit to be without merit and intend to continue to
vigorously defend itself.
On February 24, 2005, Cbr Systems, Inc., a private cord
blood banking company, filed a complaint against the Company in
the United States District Court for the Northern District of
California alleging false and misleading advertising by the
Company in violation of the federal Lanham Act and various
California
F-26
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
statutes and common law and seeking an injunction from
continuing such advertising and unspecified damages. On
April 13, 2005, the Company answered the complaint, denying
Cbrs allegations, and filed counterclaims alleging false
and misleading advertising by Cbr. On October 27, 2005, the
Company entered into an agreement to settle the pending
litigation with Cbr. Under terms of the agreement the companies
agreed to dismiss all outstanding legal claims. There were no
financial payments to be made by either party under the
settlement agreement.
The Company has undertaken a review of its various job
classifications for legal compliance under state and federal
employment laws. Based on that review, the Company has
identified certain job classifications that may be subject to
possible challenge and for which there is a reasonable
possibility that the Company could incur a liability, although
the Company also believes that the present classifications can
be supported and defended. It is not possible based on the
current available information to reasonably estimate the scope
of any potential liability.
|
|
|
Physician Indemnification Program |
During September 2004, the Company launched an indemnification
program offering protection to physicians from patent litigation
actions taken against them by PharmaStem Therapeutics, Inc.
Under this program, the Company agrees to pay reasonable defense
costs resulting from such litigation, providing that the
physicians allow ViaCell to manage their defense. In addition,
the Company agrees to indemnify the physicians against all
potential financial liability resulting from such litigation,
and 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 physicians are
required to comply with certain requirements, including
returning a signed acknowledgement form regarding the
particulars of the indemnification program. The Company has
recorded a reserve of $51,000 associated with this program as of
December 31, 2005 and 2004. The reserve is equal to the
estimated fair value of the indemnifications in place at
December 31, 2005 and 2004, in accordance with FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). The
Company has 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, 2005 and 2004. The Company may record
additional reserves as more physicians enroll in this program.
|
|
|
ViaCord Guarantee Program |
Beginning in November 2002, the Company began providing its
customers a product guarantee under which the Company agreed to
pay $25,000 to defray the costs associated with the original
collection and storage of the cord blood, and procurement of an
alternative stem cell source, if medically indicated, in the
event that the customers cord blood (unit) is
used in a stem cell transplant and fails to engraft. The Company
has never experienced any claims under the guarantee program nor
has it incurred costs related to these guarantees. However, the
Company does not maintain insurance to cover these potential
liabilities and, therefore, maintains reserves to cover these
potential liabilities. The Company accounts for the guarantee as
a warranty obligation and, accordingly, recognizes the
obligation in accordance with the provisions of
SFAS No. 5, Accounting for Contingencies. The
reserve balance is determined by the Company 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.
F-27
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following table summarizes the activities in the ViaCord
Guarantee Program reserve for the years ended December 31,
2005, and 2004 (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance at the beginning of the period
|
|
$ |
73 |
|
|
$ |
43 |
|
Accrual for additional units sold during the period
|
|
|
19 |
|
|
|
30 |
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$ |
92 |
|
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
10. |
Redeemable Convertible Preferred Stock, Preferred Stock, and
Common Stock |
The Companys redeemable convertible preferred stock is
accreted to redemption value through the redemption date and
consists of the following as of December 31, 2005 and 2004,
respectively (table in thousands):
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
175,173 |
|
Accretion
|
|
|
986 |
|
Conversion to Common Stock at IPO
|
|
|
(176,159 |
) |
|
|
|
|
Balance, December 31, 2005
|
|
$ |
|
|
|
|
|
|
In 2005 the Company incurred an additional $986,000 in accretion
associated with the outstanding redeemable convertible preferred
stock through January 26, 2005 aggregating to a total of
approximately $176 million. All preferred stock immediately
converted to common stock upon the completion of the
Companys initial public offering.
The Companys convertible preferred stock consisted of the
following as of December 31, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A | |
|
Series B | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance, December 31, 2004
|
|
$ |
1,000 |
|
|
$ |
829 |
|
|
$ |
1,829 |
|
Conversion to Common Stock at IPO
|
|
|
(1,000 |
) |
|
|
(829 |
) |
|
|
(1,829 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Board of Directors authorized
30,825,000 shares of $0.01 par value preferred stock.
On June 1, 1999, the Company issued 1,983,334 shares
of its Series E convertible preferred stock at
$3.00 per share for total gross proceeds to the Company of
approximately $5,950,000. In connection with the sale, the
Company issued warrants to investors to purchase up to
100,000 shares of the Companys common stock at an
exercise price of $1.50 per share.
In connection with the April 2000 merger with ViaCord, the
Company authorized and issued 2,666,666 shares of
$0.01 par value Series F convertible preferred stock.
Upon closing, the Company also issued 3,666,667 shares of
$0.01 par value Series G convertible preferred stock
at $3.00 per share to three venture capital investors in
exchange for a total of $11,000,000.
On November 10, 2000, the Company issued
7,577,334 shares of Series H convertible preferred
stock at $6.38 per share and received proceeds of
approximately $48,200,000, net of $120,000 of financing costs.
On October 25, 2001, the Company issued
1,875,000 shares of Series I convertible preferred
stock for gross proceeds of approximately $15,000,000, excluding
$79,000 of issuance costs. In addition, the Company
F-28
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
may sell and issue an additional 375,000 shares of
Series I stock for $8 per share pursuant to an option
agreement dated October 25, 2001.
In January 2002, the Company issued 187,500 shares of
Series I preferred stock for an aggregate price of
$1,500,000 upon the exercise of an option. In connection with
this exercise, the option holder and the Company mutually agreed
to terminate the remaining portion of the option.
In connection with the September 2003 acquisition of Kourion,
the Company issued 549,854 shares of $0.01 par
Series I convertible preferred stock. The Company
determined the fair value of the Series I preferred stock
to be $8.00 per share. The Company also issued
241,481 shares to an escrow account. These shares will be
released either upon a change in control of the company or an
underwritten initial public offering of its common stock at a
price per share of at least $9.70 resulting in net proceeds of
at least $50 million. If neither event occurs prior to
September 30, 2006, the escrow shares will revert back to
the Company.
In September 2003 and October 2003, the Company issued 2,190,000
of its Series J convertible preferred stock for total gross
proceeds to the Company of $17,520,000. The Company incurred
approximately $505,000 of issuance costs related to the
Series J offering. The fair value of the Companys
Series J convertible preferred stock was determined to be
$8.57 per share. A right to contingent warrants was granted
to all purchasers of Series J preferred stock. Upon the
earlier to occur of an initial public offering that is not a
Qualified Public Offering (an initial public offering at a
minimum price of $9.70 per share in which net proceeds
equal or exceed $50 million) or the three year anniversary
of the Initial Closing (September 30, 2006), the Company
will issue warrants to the holders of Series J preferred
stock for the purchase of Common Stock equal to the number of
shares owned of Series J (2,190,000 shares). The
initial warrant purchase price will be $5.00. The warrant price
and number of shares purchasable will be adjustable from time to
time based on specific criteria to prevent dilution. The right
to the contingent warrants had a fair value of approximately
$1,620,000 at the time of grant. The fair value was estimated
using a binomial valuation model. The Company recorded the
Series J convertible preferred stock and the contingent
warrants, at their relative fair values of $15,622,000 and
$1,390,000, respectively. In January 2005, the Company completed
its initial public offering. Since this offering was not a
Qualified Public Offering the Company issued the warrants to the
holders of Series J preferred stock in February 2005.
In December 2003, in connection with the license and
collaboration agreement described in Note 9, the Company
issued 2,500,000 warrants of its Series K convertible
preferred stock to Amgen at $8.00 per share for total gross
proceeds to the Company of $20,000,000 and incurred issuance
costs of approximately $127,000. The Company recorded this
preferred stock at its determined fair value of $8.69 per
share. The excess of the fair value of the Series I
preferred stock over the gross proceeds of $1,725,000 was
allocated to the technology license and was charged to expense
as in-process technology.
In connection with the shares of Series K convertible
preferred stock issued to Amgen and the current PharmaStem
litigation, the Company has a side agreement under which Amgen
has a one-time option to require the Company to redeem up to
1,250,000 of its Series K shares at a price of
$8.00 per share. This option is triggered upon the
occurrence of the earliest of June 23, 2007, a settlement
or final judgment against the Company for a total amount
exceeding $30 million (including the initial judgment
amount as well as certain royalties, if any, that the Company
becomes obligated to pay PharmaStem), or an injunction enjoining
the Companys cord blood preservation operations that has
not been stayed or vacated. This option expires upon the
earliest of the second anniversary of the triggering event, a
settlement or final judgment against the Company for a total
amount less than or equal to $30 million (provided that an
injunction is not currently in effect at the time), or a public
offering of the Companys common stock in which all
outstanding shares of convertible preferred stock of the Company
automatically convert into common stock. All preferred stock
immediately converted to common stock upon the completion of the
Companys initial public offering.
F-29
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
Common and Preferred Stock |
As of December 31, 2005, the Company has authorized
100,000,000 and 5,000,000 shares of common and preferred
stock, respectively, each with a $0.01 par value. Each
holder of a share of common stock is entitled to one vote for
each share held at all meetings of stockholders.
In August 2005, the Company amended its existing license and
collaboration agreement with Amgen to include a nonexclusive
license to patent rights covering an additional Amgen growth
factor. In connection with this amendment, the Company issued
Amgen a warrant to purchase 200,000 shares of the
Companys common stock at an exercise price of
$7.85 per share. The warrant will vest upon the successful
treatment of a human in a Phase II clinical trial utilizing
the specific growth factor that is the subject of the amendment.
The term of the warrant is seven years from the effective date
of the amendment. The warrant will be recognized as in-process
research and development expense when and if it vests, based on
the fair value at that time.
In December 2003, the Company entered into a license and
collaboration agreement under which Amgen, Inc. made a
$20 million investment in the Companys preferred
stock. As part of this agreement, the Company may offer Amgen
the right to make an additional investment of up to
$15 million in connection with a future strategic
transaction by the Company that would further the Companys
collaboration with Amgen. Amgen also holds a warrant to
purchase 560,000 shares of the Companys common
stock at $12.00 per share as consideration for a previous
license agreement that was superseded by this license and
collaboration agreement.
In September and October 2003, the Company issued
2,190,000 shares of its Series J convertible preferred
stock for total gross proceeds to the Company of $17,520,000. A
right to contingent warrants was granted to all purchasers of
Series J preferred stock (the Series J
investors). Under that right, upon the earlier to occur of
an initial public offering that is not a Qualified Public
Offering (an initial public offering at a minimum price of
$9.70 per share in which net proceeds equal or exceed
$50 million) or September 30, 2006, the Company would
be required to issue warrants to the Series J investors for
the purchase of Common Stock equal to the number of shares of
Series J owned (for a total of 2,190,000 shares). The
initial warrant purchase price would be $5.00. The right to the
contingent warrants had a fair value of approximately $1,620,000
at the time of grant. The fair value was estimated using a
binomial valuation model. The Company recorded the Series J
convertible preferred stock and the contingent warrants, at
their relative fair values of $15,622,000 and $1,390,000,
respectively. In January 2005, the Company completed its initial
public offering. Since the offering was not a Qualified Public
Offering, the Company issued warrants to purchase a total of
2,190,000 shares of Common Stock to the Series J
investors in February 2005. During the year ended
December 31, 2005, certain Series J investors fully
exercised their warrants using a net exercise
feature that resulted in the issuance of 82,447 shares of
the Companys Common Stock in consideration of canceling
the remaining portion of the warrants covering
138,803 shares. In January 2006, certain Series J
investors fully exercised their warrants using a net
exercise feature that resulted in the issuance of
207,116 shares of the Companys Common Stock in
consideration of canceling the remaining portion of the warrants
covering 1,574,134 shares. The Company also canceled
additional warrants to convert into 187,500 shares of the
Companys Common Stock.
In November 1997, in connection with the issuance of
Series D preferred stock, the Company issued warrants to
certain stockholders (Series D investors) to
purchase 750,000 shares of the Companys common
stock at a price per share of $1.50. These warrants vested
100 percent on the date of grant and are exercisable
through November 12, 2007. The value ascribed to these
warrants was not material. During the year ended
December 31, 2005, certain Series D investors fully
exercised their warrants using a net exercise
feature that resulted in the issuance of 142,800 shares of
our common stock in consideration of canceling the remaining
portion of the warrants covering 23,867 shares.
F-30
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
In May 1999, in connection with the issuance of Series E
preferred stock, the Company issued a warrant to a shareholder
to purchase 100,000 shares of the Companys
common stock at a price per share of $1.50. The warrant vested
100 percent on the date of grant and is exercisable through
May 21, 2009. The value ascribed to this warrant was not
material.
The ViaCell, Inc. Amended and Restated 1998 Equity Incentive
Plan (the Plan), which was adopted on
February 12, 1998, provides for the granting of incentive
and nonqualified stock options to purchase an aggregate of
4,000,000 shares of common stock to employees, consultants
and directors of the Company. The Board of Directors increased
the number of shares of common stock available for issuance
under the Plan from 5,000,000 to 6,000,000 in 2003, to 7,200,000
in 2004. The number of shares of common stock available for
issuance under the Plan as of December 31, 2005 was
7,200,000. Incentive stock options may only be granted to
employees of the Company. The exercise price of each option is
determined by the Board of Directors. The exercise price of each
incentive stock option, however, may not be less than the fair
market value of the stock on the date of grant, as determined by
the Board of Directors.
Options granted under the Plan vest over a period of four years
and expire ten years from the grant date. At December 31,
2005, there were 2,081,504 shares available for future
grant under the Plan. Information with respect to option
activity is as follows (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
Number of | |
|
Number of | |
|
|
|
|
|
Average | |
|
|
Options | |
|
Options | |
|
|
|
Aggregate | |
|
Exercise | |
|
|
Authorized | |
|
Outstanding | |
|
Exercise Price | |
|
Exercise Price | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding, December 31, 2002
|
|
|
5,000,000 |
|
|
|
4,375,752 |
|
|
|
$0.10-5.00 |
|
|
$ |
7,627 |
|
|
$ |
1.74 |
|
Authorized
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
713,436 |
|
|
|
5.00 |
|
|
|
3,567 |
|
|
|
5.00 |
|
Exercised
|
|
|
|
|
|
|
(101,280 |
) |
|
|
0.15-5.00 |
|
|
|
(54 |
) |
|
|
0.53 |
|
Canceled
|
|
|
|
|
|
|
(282,572 |
) |
|
|
0.30-5.00 |
|
|
|
(1,096 |
) |
|
|
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
6,000,000 |
|
|
|
4,705,336 |
|
|
|
0.10-5.00 |
|
|
|
10,044 |
|
|
|
2.13 |
|
Authorized
|
|
|
1,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
903,500 |
|
|
|
5.00 |
|
|
|
4,518 |
|
|
|
5.00 |
|
Exercised
|
|
|
|
|
|
|
(89,915 |
) |
|
|
0.30-5.00 |
|
|
|
(109 |
) |
|
|
1.21 |
|
Canceled
|
|
|
|
|
|
|
(1,063,383 |
) |
|
|
0.30-5.00 |
|
|
|
(4,308 |
) |
|
|
4.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
7,200,000 |
|
|
|
4,455,538 |
|
|
|
0.30-5.00 |
|
|
|
10,145 |
|
|
|
2.28 |
|
Authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
420,200 |
|
|
|
5.31-11.10 |
|
|
|
3,065 |
|
|
|
7.30 |
|
Exercised
|
|
|
|
|
|
|
(689,164 |
) |
|
|
0.30-5.00 |
|
|
|
(1,170 |
) |
|
|
1.70 |
|
Canceled
|
|
|
|
|
|
|
(255,880 |
) |
|
|
0.75-11.10 |
|
|
|
(1,164 |
) |
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
7,200,000 |
|
|
|
3,930,694 |
|
|
|
$0.30-11.10 |
|
|
$ |
10,876 |
|
|
$ |
2.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2003
|
|
|
|
|
|
|
1,806,628 |
|
|
|
$ 0.30-5.00 |
|
|
$ |
1,784,266 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2004
|
|
|
|
|
|
|
2,228,710 |
|
|
|
$ 0.30-5.00 |
|
|
$ |
3,161,845 |
|
|
$ |
1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2005
|
|
|
|
|
|
|
2,080,738 |
|
|
|
$0.30-11.10 |
|
|
$ |
4,090,384 |
|
|
$ |
1.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at | |
|
|
Options Outstanding at December 31, 2005 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
Number of | |
|
Remaining | |
|
Weighted Average | |
|
Number of | |
|
Weighted Average | |
Exercise Price |
|
Shares | |
|
Contractual Life | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 0.30
|
|
|
1,396,843 |
|
|
|
4.56 |
|
|
$ |
0.30 |
|
|
|
1,096,843 |
|
|
$ |
0.30 |
|
0.75
|
|
|
45,450 |
|
|
|
5.08 |
|
|
|
0.75 |
|
|
|
45,450 |
|
|
|
0.75 |
|
0.95
|
|
|
130,987 |
|
|
|
5.49 |
|
|
|
0.95 |
|
|
|
130,987 |
|
|
|
0.95 |
|
2.00
|
|
|
731,425 |
|
|
|
6.02 |
|
|
|
2.00 |
|
|
|
197,650 |
|
|
|
2.00 |
|
4.00
|
|
|
51,775 |
|
|
|
6.23 |
|
|
|
4.00 |
|
|
|
43,174 |
|
|
|
4.00 |
|
5.00
|
|
|
1,233,619 |
|
|
|
7.62 |
|
|
|
5.00 |
|
|
|
502,876 |
|
|
|
5.00 |
|
5.31
|
|
|
138,781 |
|
|
|
9.72 |
|
|
|
5.31 |
|
|
|
8,694 |
|
|
|
5.31 |
|
5.62
|
|
|
18,000 |
|
|
|
9.93 |
|
|
|
5.62 |
|
|
|
249 |
|
|
|
5.62 |
|
7.25
|
|
|
25,000 |
|
|
|
9.32 |
|
|
|
7.25 |
|
|
|
4,687 |
|
|
|
7.25 |
|
8.17
|
|
|
102,064 |
|
|
|
9.44 |
|
|
|
8.17 |
|
|
|
39,398 |
|
|
|
8.17 |
|
9.00
|
|
|
7,500 |
|
|
|
9.11 |
|
|
|
9.00 |
|
|
|
|
|
|
|
9.00 |
|
10.89
|
|
|
40,000 |
|
|
|
9.53 |
|
|
|
10.89 |
|
|
|
10,000 |
|
|
|
10.89 |
|
11.10
|
|
|
9,250 |
|
|
|
9.53 |
|
|
|
11.10 |
|
|
|
730 |
|
|
|
11.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,930,694 |
|
|
|
|
|
|
$ |
2.77 |
|
|
|
2,080,738 |
|
|
$ |
1.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted in 2005, 2004
and 2003 was $6.26, $7.23 and $6.18, respectively.
In September 2004 the Company recorded stock-based compensation
expense of approximately $774,000 related to the modification of
existing grants to severed employees to allow them an additional
90 days to exercise their vested options following
termination due to restructuring (Note 14). The impact of
the option modification was partially offset by the cancellation
of 244,726 unvested options in connection with the restructuring
and the reversal of the accelerated amortization expense related
to the actual vested shares at the date of termination amounting
to $532,000.
In July 2005 the Companys Board of Directors approved an
increase, from 90 days to three years, in the amount of
time allowed for non-employee directors to exercise vested
options following the termination of their service to the
Company. As a result, the Company recognized additional
stock-based compensation expense of approximately $763,000 in
the year ended December 31, 2005. An additional $241,000
will be recognized in years 2006 through 2008 based on
respective vesting schedules associated with each modified
option grant.
|
|
13. |
Employee Benefit Plan |
The Company maintains a qualified 401(k) retirement savings plan
(the 401(k) Plan) covering all employees. Under the
401(k) Plan, the participants may elect to defer a portion of
their compensation, subject to certain limitations. Company
matching contributions may be made at the discretion of the
Board of Directors. There have been no discretionary
contributions made by the Company to the 401(k) Plan to date.
In September 2004, the Company restructured its operations to
reduce operating expenses and concentrate its resources on four
key products and product candidates, and related business
initiatives. These products and product candidates consist of
the Companys ViaCord service, and its ViaCyte, CB001 and
cardiac research and development programs. As a result, the
Company recorded a $1.7 million restructuring
F-32
ViaCell, Inc.
Notes to Consolidated Financial
Statements (Continued)
charge in the third quarter of 2004 related to employee
severance, contract termination costs and the write-down of
excess equipment. The majority of the contract termination costs
related to a $175,000 payment to terminate its agreement with
Gamete Technologies.
In December 2004, the Company restructured its German operations
and sublet its laboratory facility in Germany to a third party
effective January 1, 2005. As a result, the Company
recorded an additional restructuring charge of $1.2 million
in the fourth quarter of 2004, including facility-related costs
of $1.1 million and a contract termination fee of
$0.1 million. The majority of the facility related costs
consisted of the write off of the leasehold improvements and
fixed assets in the Companys 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 sublease payments received from the sublessee. At
December 31, 2004, restructuring costs of $1.2 million
had been paid, 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 Company is finalizing discussions with the German grant
authorities regarding repayment of part of certain grants made
to our German subsidiary in 2003 and 2004. The Company was
notified that approximately $500,000 in grant proceeds related
to fixed asset and operating expenditures in Germany were not
reimbursable under the grant and would have to be repaid. As a
result, the Company reserved an additional $410,000 during the
year ended December 31, 2005 for its estimated liability
under this grant. The additional reserves resulted in reversals
of grant revenue of approximately $105,000 for the year ended
December 31, 2005. In addition, the Company reclassified
approximately $200,000 of accrued restructuring reserves to
reduce outstanding grants receivable. In February 2006 the
Company was notified by the State of North-Rhine-Westfalia,
Germany that it plans on performing an audit of the States
economic grants granted throughout its territory, including the
grant to Kourion. It is possible that the grant authorities
could request additional repayment of grant funds related to
certain operating expenses that were previously funded by the
grant authorities for research performed in Germany, however the
Company considers this possibility to be remote. As of
December 31, 2005 the Company had received approximately
$3.6 million in cumulative grant proceeds from the German
grant authorities.
The Companys activity in the restructuring accrual for the
years ended December 31, 2005 and December 31, 2004
consisted of the following: