e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 0-51110
ViaCell, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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04-3244816
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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245 First Street,
Cambridge, Massachusetts
(Address of principal
executive offices)
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02142
(Zip code)
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(Registrants
telephone number, including area code)
(617) 914-3400
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Securities registered pursuant
to Section 12(b) of the Act:
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Name of Exchange On Which
Registered:
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Common Stock, $0.01 par
value
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The Nasdaq Stock Market
LLC
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Securities registered pursuant to Section 12(g) of the
Act:
(Title of class)
None
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 þ Non-accelerated
filer o
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 $156,937,890.
As of March 9, 2007, the Registrant had
38,714,960 shares of Common Stock, $0.01 par value,
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for our 2007 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, 2006
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. Cell
Sentineltm
is a trademark of Pall Corporation. Motherhood
Maternity®,
A Pea in the
Pod®,
Mimi
Maternity®,
and Destination
Maternitytm
are trademarks of Mothers Work, 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 research and development programs,
and our views as to the possible outcome of pending litigation
related to our intellectual property portfolio and other
disputes. 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 in
Part I, Item 1A Risk Factors beginning at
page 17. 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.
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PART I
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ITEM 1.
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DESCRIPTION
OF BUSINESS
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Overview
ViaCell is a biotechnology company dedicated to enabling the
widespread application of human cells as medicine. We have a
reproductive health business that generated revenues of
$54.1 million in 2006 from sales of ViaCord, a service
offering through which expectant families can preserve their
babys umbilical cord blood for possible future medical
use. Stem cells from umbilical cord blood are a treatment option
today for over 40 diseases, including certain blood cancers and
genetic diseases. We are also working to leverage our commercial
infrastructure and product development capabilities by
developing
ViaCytesm,
our product candidate being studied for its potential to broaden
reproductive choices for women through the cryopreservation of
human unfertilized eggs. Our other research and development
efforts are focused on investigating the potential for new
therapeutic uses of umbilical cord blood-derived and adult stem
cells and on technology for expanding populations of these
cells. We are concentrating these efforts in the areas of
cancer, cardiac disease and diabetes.
ViaCell was incorporated in the State of Delaware on
September 2, 1994. Our corporate headquarters and main
research facility are located in Cambridge, Massachusetts. We
have processing and storage facilities in Hebron, Kentucky and
an additional research and development operation in Singapore.
Our
ViaCell Reproductive Health Business
Our ViaCell Reproductive Health business is responsible for
marketing and sales of our ViaCord service offering for the
collection, testing, processing and storage of umbilical cord
blood stem cells, and for development of ViaCyte, our product
candidate for the cryopreservation of human unfertilized eggs
for future in vitro fertilization use. We also
continue to evaluate opportunities to license, acquire or
collaborate on other products or product candidates in the areas
of womens health that would leverage our existing sales
and marketing infrastructure.
ViaCord
Collection, Testing, Processing and Storage of Umbilical Cord
Blood Stem Cells
Background
Umbilical cord blood is an important source of blood-forming
stem cells, also known as hematopoietic stem cells. Physicians
are increasingly using stem cells derived from umbilical cord
blood as an alternative to bone marrow and peripheral blood
transplants when a patients existing bone marrow is
diseased or has been impacted by a genetic disorder, or is
damaged by high-dose chemotherapy. In this type of treatment,
blood from the umbilical cord containing hematopoietic stem
cells is infused into the patients circulatory system from
which the cells find their way to the bone cavity. Once
established in the bone, if the transplant is successful, the
cells begin to grow or engraft and produce new cells of the
blood and immune system. 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.
Scientists are also continuing to investigate other potential
therapeutic uses of umbilical cord blood-derived stem cells.
Data supports the potential of these stem cells to differentiate
into cells found in various tissue and organs, including the
liver, cartilage, brain and heart.
Umbilical cord blood stem cells for transplant can be sourced
from a patients own umbilical cord blood that has been
collected at birth and stored or through a match with a sibling
or family member or a match with donor umbilical cord blood from
an unrelated person, depending in each case on availability and
the particular medical condition being treated. Studies have
shown that umbilical cord blood stem cell 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 graft-versus-host-disease (GVHD), a serious
potential side effect following transplantation, than
transplants from an unrelated donor.
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ViaCord
Service Offering
Through our ViaCord service 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. Over the past several years, the number
of families choosing to preserve their babys umbilical
cord blood has grown significantly. We currently store over
110,000 cord blood units for customers. In 2006, we generated
revenues of $54.1 million from our ViaCord service offering
compared to $43.8 million in 2005.
As part of our ViaCord service 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. These materials include the
Cell
Sentineltm
collection bag, the only FDA-approved cord blood collection bag
suitable for use in a sterile field. The kit also provides the
materials necessary for collecting a maternal blood sample for
later testing.
Comprehensive Testing. At our laboratory in
Hebron, Kentucky, we conduct several tests on the cord blood
unit which are essential in the event the unit is ever needed
for transplant. These tests determine the volume collected, the
number and viability of nucleated cells, the percent of stem
cells in the unit, sterility and blood typing. The maternal
blood sample is tested for infectious diseases.
Processing. At our laboratory in Hebron,
Kentucky, we process the cord blood using a process designed to
maximize the number of stem cells preserved. We take a
customized approach to processing with the ability to use the
first FDA-cleared fully automated processing system or a
semi-automated system depending in part on the cord blood
collection volume.
Cryopreservation. After processing and
testing, we freeze the cord blood unit in a controlled manner
and store it at our laboratory in Hebron, Kentucky using liquid
nitrogen. Published data indicates that cord blood retains
viability and function for 15 years, and potentially
longer, when stored in this manner.
We continually work to differentiate our ViaCord service
offering. We collaborated with Pall Corporation on the
development and design of the Cell Sentinel bag which became
part of the ViaCord collection kit in the second quarter of
2006. In January 2007, we began to integrate automation
technology into our processing system at our laboratory in
Hebron, Kentucky. The automation technology we use is the SEPAX
Cord Blood Processing System from Biosafe SA, a functionally
closed and sterile processing system that efficiently harvests
stem cells from cord blood in a large-scale processing
environment. SEPAX is the first FDA-cleared cord blood
processing system. Biosafe received FDA clearance for SEPAX in
January 2007 and European CE mark approval in 2001. We also
collaborate with leading hospitals and universities in the area
of cord blood banking and transplantation. In May 2006, we
entered into an agreement with Childrens Hospital Oakland
Research Institute, or CHORI, to combine our directed transplant
programs for sibling donor cord blood. The CHORI/ViaCord sibling
transplant program, or Sibling Connection, offers umbilical cord
blood preservation services to expectant parents who have a
child with a disease currently treatable with cord blood stem
cells and who meet the other requirements of the program.
Sales and
Marketing
Our Reproductive Health sales and marketing organization
consists of sales and marketing professionals supporting our
ViaCord service offering. We substantially completed an
expansion of our field sales organization in the second quarter
of 2006. We now have sales representatives in territories
covering most of the high birthing areas in the United States.
Our sales representatives in the field educate obstetricians,
child birth educators, labor and delivery room nurses, and
hospitals on the benefits of cord blood preservation. Our
internal sales and customer service staff directs its efforts at
educating expectant families and guiding families who choose to
preserve their childs umbilical cord blood through the
collection, processing and storage process. We educate expectant
families through many media, including targeted advertising,
direct mail and web-based marketing activities.
From time to time, we augment our internal marketing
efforts with external relationships. In August 2006, we entered
into a data license and marketing services agreement with
Mothers Work, Inc., the worlds largest designer and
retailer of maternity apparel. Mothers Work operates several
large maternity store retail chains such as
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Motherhood
Maternity®,
A Pea in the
Pod®,
Mimi
Maternity®,
and Destination
Maternitytm.
Under the terms of our agreement, Mothers Work has granted us an
exclusive license within the field of preserving stem cells from
cord blood and other sources to market directly to those Mothers
Work customers who have affirmatively agreed to permit
disclosure of their data and information. Mothers Work has also
agreed to provide certain in-store marketing services related to
the ViaCord service offering. Under the terms of our agreement,
we will pay Mothers Work $5,000,000 per year over the
three-year term of the agreement which began on January 1,
2007 and, unless earlier terminated, ends on December 31, 2009.
Under certain circumstances, we will also be obligated, at the
beginning of 2009, to issue Mothers Work a warrant to purchase
100,000 shares of our common stock (see Note 10 to our
consolidated financial statements). The agreement can be
terminated early by either company if the other company commits
a material breach of the agreement or under certain
circumstances arising from claims by a third party alleging that
the third party has rights that supersede Mothers Works
commitment to us. The dispute between Mothers Work and the third
party was the subject of an arbitration proceeding. In February
2007, the arbitrator ruled in favor of Mothers Work. While there
is no assurance that the third party will not challenge the
arbitrators ruling, we believe that reversal of the ruling
is unlikely and that the termination rights under our agreement
with Mothers Work are unlikely to be triggered. As a condition
to commencing the agreement on January 1, 2007, we agreed
to indemnify Mothers Work for any damages that Mothers Work may
be assessed in the event that Mothers Work is found to be in
breach of its agreement with the third party as a result of
having entered into an agreement with us. We also agreed to
reimburse Mothers Work for certain legal fees if the fees exceed
a specified threshold. Our potential obligation to Mothers Work
under the indemnification agreement is unlimited. However, based
on our assessment of the low likelihood that we might have to
pay damages or legal fees given the arbitrators ruling, we
concluded the fair value of our indemnification obligation is
not material and have not recorded a liability as of
December 31, 2006.
ViaCyte
We are working to leverage our Reproductive Health business by
developing a proprietary media intended for the cryopreservation
of human unfertilized 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 are seeking in vitro
fertilization, 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, also known as
IVF, 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 chloride 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 product candidate would complement our
ViaCord service offering by:
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using our existing operational infrastructure and facilities,
including our cell processing and storage facility in Hebron,
Kentucky where long-term storage of oocytes would be
maintained; and
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utilizing our sales, marketing and clinical support staff and
our current marketing channels to educate consumers and
healthcare professionals, including obstetricians,
gynecologists, and oncologists.
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Status of Program. In June 2006, the FDA gave
us conditional approval of our Investigational Device Exemption,
or IDE, to allow our ViaCyte cryopreservation product candidate
to be used in a clinical trial. The FDA has approved the design
and size of the trial. We expect to initiate the pivotal
clinical trial in March 2007. The primary objective of the study
is to determine the efficacy of the ViaCyte media for the
cryopreservation and thawing of human oocytes. The open-label
study will also evaluate safety. The eligible patient population
for the study is women seeking IVF, diagnosed with male factor
infertility. The primary endpoint of the study is 50 live
births. Participants in the study will undergo traditional IVF.
After the eggs are retrieved, the oocytes will be cryopreserved
using the ViaCyte media, and stored in liquid nitrogen. The
oocytes will then be thawed and subsequently inseminated.
Embryos will be transferred to the subjects uterus using a
non-surgical procedure. The goal of the clinical trial is to
generate data to submit to the FDA for a 510(k) application. In
February 2007, we entered into an agreement with Invitrogen,
Inc. to manufacture the ViaCyte media to be used in the clinical
trial.
Our
Cellular Therapy Technology and Product Candidates
ViaCell is dedicated to enabling the widespread application of
human cells as medicine. We direct our research and development
efforts in this area to investigating the potential therapeutic
uses of umbilical cord blood-derived and adult stem cells and on
technology for the expansion of the populations of these cells.
Our primary focus is in the areas of cancer, cardiac disease and
diabetes.
Background
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.
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. 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.
Our
Programs in Cellular Therapies
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,
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cartilage, brain and heart of transplanted animals. We are
currently studying the potential for these cells to be used 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 a heart attack 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 into 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
pre-clinical 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. In June 2006, we entered
into a research collaboration agreement with the Stem Cell
Internal Venture of Centocor Research and Development, Inc., or
SCIV Centocor, a wholly-owned subsidiary of Johnson &
Johnson, Inc., to evaluate USSCs as a potential treatment for
cardiac disease. The collaboration is also supported by the
Biologics Delivery Systems Group of Cordis Corporation, also a
wholly-owned subsidiary of Johnson & Johnson, Inc., and
is focused on dosing, delivery, and targeting of USSCs using
Cordis NOGA XP delivery system in pre-clinical models. We
expect to generate sufficient data in 2007 from the pre-clinical
development work to determine whether we will file an
investigational new drug application, or IND, with the FDA.
Hematopoietic
Stem Cells
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 from bone marrow, 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 have few, if any, therapeutic
options.
Despite the proven clinical utility of hematopoietic stem cell
therapy and the potential of stem cell therapy to treat other
types of diseases, significant challenges exist on the path
toward widespread application, including the challenges of
harvesting sufficient quantities of stem cells. The number of
stem cells collected from any particular tissue source is
typically low compared to the quantity required for therapeutic
benefit. For example, most cord blood units collected do not
alone contain sufficient stem cells to treat an adult patient.
The likelihood and speed of successful stem cell engraftment are
impacted by the number of stem cells transplanted. Through our
research and development efforts, we are exploring ways to
expand the number of stem cells derived from umbilical cord
blood and to improve clinical outcome in transplant therapy.
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In February 2007, we announced the results of a Phase 1
clinical trial of one of our product candidates in this area,
CB001. CB001 is comprised of stem cells isolated from umbilical
cord blood and expanded using ViaCells proprietary
Selective Amplification technology. The Phase 1 clinical
trial was primarily designed to evaluate safety in patients with
advanced hematologic cancers in need of a hematopoietic stem
cell transplant and who were unable to find a suitable bone
marrow donor. Patients participating in the study received CB001
plus a standard cord blood unit following full myeloablative
therapy. Patients were followed for 100 days
post-transplant. Ten patients received treatment in the study.
The study achieved its primary endpoint with no evidence of
infusion toxicity related to CB001. Engraftment, based on
neutrophil reconstitution, was demonstrated in nine of ten
patients. In the patients who achieved neutrophil recovery, the
median time to engraftment was 24 days. This compares to
published clinical trial data showing a median time to
engraftment of 23 days when two umbilical cord blood grafts
are transplanted. Platelet recovery was demonstrated in seven of
ten patients. The time to platelet recovery based on cumulative
incidence was 54 days compared to published clinical trial
data showing 97 days reported for dual cord transplants.
Three of ten patients were positive for the presence of CB001
cells at day 7; however, there was no chimerism contribution
from CB001 between days
21-28.
Chimerism, the presence of donor cells, is, by day
21-28, an
indication of the potential ability of a transplant source to
reconstitute a patient. Four of ten of patients experienced
Grade III/IV acute GVHD, a common side effect in transplant
medicine. This rate is within the range of rates reported in the
literature to date for cord blood transplantation. Eight of ten
patients were alive at day 100 post transplant. Given these
results and the shift in the treatment paradigm in transplant
medicine from single cord to dual cord transplants, we made the
decision not to advance CB001 in future clinical trials.
We continue to work on other approaches to expand the
populations of stem cells from umbilical cord blood for
potential use in hematopoietic stem cell therapy, including the
use of USSCs as a platform for cell expansion.
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 the 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
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, or MGH.
Other
Areas of Interest
We expect to supplement our internal research and development
efforts through the acquisition or licensing from third parties
of product candidates or 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.
Research
and Development Expenses
Our research and development expenses were $14.0 million,
$13.7 million and $16.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
9
Collaborations,
Licenses and Strategic Relationships
Our most significant collaborations, licenses and strategic
relationships are described below:
Stem
Cell Internal Venture of Centocor Research &
Development, Inc.
In June 2006, we entered into a research collaboration agreement
with SCIV Centocor to evaluate USSCs as a potential treatment
for cardiac disease. The collaboration is also supported by the
Biologics Delivery Systems Group of Cordis Corporation, and is
focused on dosing, delivery, and targeting of USSCs using
Cordis NOGA XP delivery system. Under the terms of the
agreement, we received an initial up-front payment of $350,000.
SCIV Centocor is responsible for its own costs under the
collaboration and pays 50% of the research costs that we incur
under the collaboration, consistent with the agreed upon budget.
In addition, the agreement provides SCIV Centocor with the first
right to negotiate a collaboration with us on the clinical
development and commercialization of a cardiac product offering
based on our proprietary cord blood stem cells. Either party may
terminate the agreement following an uncured material breach by
the other. In addition, SCIV Centocor has the right to terminate
the agreement at the end of each new phase of the joint research
program.
Johns
Hopkins University
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
20 years. The agreement may be terminated by us at any time
without cause with a specified amount of notice.
Genzyme
Corporation
In December 2004, we entered into a research agreement with
Genzyme under which Genzyme conducts specified research using
pancreatic 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 expires in June 2007, and may be terminated earlier 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.
Tyho
Galileo Research Laboratory
In September 2004, we entered into a license agreement with Tyho
Galileo Research Laboratory, or Galileo, under which we received
exclusive rights to intellectual property covering proprietary
media for use in the field of oocyte cryopreservation. Our
agreement with Galileo includes 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 licensed U.S. patent
expires in 2017 if not extended.
10
Amgen
Inc.
In December 2003, we entered into a license and collaboration
agreement with Amgen Inc. under which we received a 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 the agreement, we
can purchase current Good Manufacturing Practices, or cGMP,
grade growth factors manufactured by Amgen at a specified price.
Upon the mutual agreement of both parties, we also may receive a
license to additional Amgen growth factors or technologies that
may be useful in stem cell therapy. The agreement may be
terminated by either party following an uncured material breach
by the other party, by mutual consent or by Amgen in certain
events involving our bankruptcy or insolvency. Unless earlier
terminated, the agreement terminates on the later of the
expiration of the licensed Amgen patents or when no products are
being co-developed or jointly commercialized between us and
Amgen 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 the 2003 license and collaboration
agreement, Amgen made a $20 million investment in ViaCell.
As part of our agreement with Amgen, 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
vested warrant to purchase 560,000 shares of our common
stock at $12.00 per share issued as consideration for a
previous license agreement that was superseded by the 2003
license and collaboration agreement. In connection with the
expansion of the collaboration agreement in 2005, 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.
Massachusetts
General Hospital
In March 2002, we entered into a license agreement with MGH
under which we received exclusive, worldwide rights to develop
and commercialize products based on patents and patent
applications 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, if successfully developed.
Intellectual
Property
The protection of our intellectual property is a strategic part
of our business. We have exclusively licensed from Galileo a
U.S. patent 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. We have exclusively licensed
from MGH a U.S. patent broadly covering 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
U.S. patent applications directed to compositions and
methods of using USSCs to treat a broad class of diseases. We
have three issued U.S. patents directed at methods of
manufacturing target populations of cells for use as cellular
medicines. These patents broadly cover the use of
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selective elements to select a target population of cells. These
patents expire in 2015 if not extended. Furthermore, we own or
have licensed a number of patent applications pending in the
U.S. and in other countries.
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 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 product candidates. 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 service 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 product candidates. 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 results of operation 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
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, a
subsidiary of Cord Blood America, Inc., LifeBankUSA, a division
of Celgene Cellular Therapeutics, a wholly-owned subsidiary of
Celgene Corporation, 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 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
financing for a national system of public cord blood banks in
the U.S. to encourage cord blood donations from an
ethnically diverse population. In addition, many states are
evaluating the feasibility of establishing cord blood
repositories for transplantation purposes. An increase in the
number and diversity of publicly-available cord blood units from
public banks would correspondingly increase the probability of
finding suitably matched cells for a family member, which may
result in a decrease in demand for private cord blood banking.
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
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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, including Extend Fertility, though none
has taken its product through the rigors of the FDA approval
process. We are aware of approximately twenty IVF centers
already offering oocyte cryopreservation, which may make it more
difficult for ViaCyte, if successfully developed, to achieve a
significant market share. We expect to initiate a clinical trial
of ViaCyte in March 2007. If we 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.
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,
Inc., Cellerant Therapeutics, Inc., Celgene Corporation, Cytori
Therapeutics, Inc., Gamida-Cell, Ltd., Genzyme Corporation,
Bioheart, Inc. and Osiris Therapeutics, Inc. 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.
In addition, public cord blood banks may, as a result of the
Stem Cell Therapeutic Act, be able to better compete with our
potential cell therapy products. 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.
Other than ViaCyte, our product candidates are at an early stage
of development. We are aware of products manufactured or under
development by competitors that are used, or being studied for
use, in the prevention or treatment of diseases and health
conditions which we have targeted for product development. For
example, several companies are developing stem cell therapies
for the treatment of cardiac disease. Other companies have
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.
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 pre-clinical 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. The
regulatory approval process can take many years and requires the
expenditure of substantial resources.
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FDA
Regulation of Biologics, Drugs, and Medical
Devices
The FDA regulates human therapeutic products in one of three
broad categories: biologics, drugs, or medical devices.
Premarket Approval of Biologics and Drugs. The
FDA generally requires the following steps for premarket
approval or licensure of a new biological product or new drug
product:
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pre-clinical laboratory and animal tests to assess a drugs
biological activity and to identify potential safety problems;
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submission to the FDA of an IND, which must receive FDA
clearance before clinical trials may begin;
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adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product for its intended
indication;
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compliance with cGMP regulations and standards;
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submission to the FDA of a biologics license application, or
BLA, or new drug application, or NDA, for marketing that
includes adequate results of pre-clinical testing and clinical
trials; and
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FDA review of the marketing application in order to determine,
among other things, whether the product is safe, effective and
potent for its intended uses.
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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 involves 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, manufacturing
facilities must be inspected and found to be 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 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, is required for Class III devices,
those devices which are 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) clearance. The PMA pathway is much more costly, lengthy
and uncertain than the 510(k) clearance pathway. A PMA applicant
must provide extensive pre-clinical and clinical trial data as
well as information about the device and its components
regarding, among other things, device design, manufacturing,
14
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 its Quality
System Regulations, or QSRs. QSRs impose specific testing,
control, documentation and other quality assurance procedures on
manufacturers.
We expect to seek 510(k) clearance for our ViaCyte oocyte
cryopreservation product candidate if the results of the
clinical trial are favorable. 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 pre-clinical 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
provide.
Regulations
Relating To ViaCord
FDA Regulations. We have registered ViaCord
with the FDA as a cord blood preservation service and are
subject to FDA inspection. In addition, the FDAs good
tissue practice regulations, or GTPs, establish a comprehensive
regulatory program for human cellular and tissue-based products
and rules for donor eligibility. We believe that we comply with
applicable GTPs. 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 or could impose
other regulatory requirements applicable to the collection and
storage of cord blood. For example, in January 2007, FDA
published a draft guidance document for comment that would
require public cord blood banks to file BLAs. While the draft
guidance does not currently apply to us, the FDA could decide to
impose these requirement or others on our business. 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 us to cease distribution of the collection
kits and obtain 510(k) clearance or PMA prior to further
distribution of the kits.
State Regulations. We provide cord blood
preservation services in all 50 states. Several states
require that cord blood services be licensed, permitted or
registered. We believe that we are currently licensed, permitted
or registered to operate in all states where we are required to
be licensed, permitted or registered. 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.
15
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 we do not
engage in certain electronic transactions related to
reimbursement for health care and because blood and tissue
procurement and banking activities are exempt, we are 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 us only as
permitted by HIPAA (for example, with written patient
authorizations which comply with certain detailed requirements).
Although we are 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 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 other local, state and federal laws and
regulations, including telemarketing laws and other laws related
to the marketing of healthcare products as well as laws and
regulations related 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. The laws related to use and disposal of
hazardous or potentially hazardous substances include the
Occupational Safety and Health Act, the Toxic Test Substances
Control Act and the Resource Conservation and Recovery Act.
Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards
prescribed by state and federal regulations, we cannot assure
you that accidental contamination or injury to employees and
third parties from these materials will not occur. We may not
have adequate insurance to cover claims arising from our use and
disposal of these hazardous substances.
Employees
As of December 31, 2006, we had 254 full-time
employees, of which 246 are based in the United States and 8 are
based in Singapore. All of our employees are at-will employees,
other than Marc Beer, Anne Marie Cook, Jim Corbett, Stephen
Dance, Morey Kraus and Mary Thistle, 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.
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This report contains forward-looking statements, including
statements about our current projections as to future financial
performance, our expectations as to events and potential results
related to our research and development programs, and our views
as to the possible outcome of pending litigation related to our
intellectual property portfolio and other disputes. 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 Risk
Factors section. 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 may
not achieve our goal of becoming cash flow positive, and may
never become profitable.
We have generated operating losses since our inception. As of
December 31, 2006, we had cumulative net losses of
approximately $194.5 million. These losses have resulted
principally from the costs of our research and development
activities, which have totaled approximately $115.6 million
since our inception. We expect that our research and development
expenses will continue to increase over the next several years
as a result of increased costs and expenses associated with our
ViaCyte clinical trial and possible future clinical trials of
other product candidates, if pre-clinical data supports moving
forward. Future research and development expenses may also
include costs associated with product candidates that we might
license or acquire, and, if our programs are successful, costs
and expenses associated with submissions for regulatory
approvals and the expansion of clinical and commercial scale
manufacturing facilities. However, the amount of these increases
is difficult to predict, and will depend on a number of factors,
such as results of our clinical programs, the design of future
clinical trials, the results of our efforts to acquire or
license new technologies, and decisions made with respect to
advancement of our clinical programs. Furthermore, we may make
additional sales and marketing investments in our Reproductive
Health business, if deemed advisable to expand the market for
our ViaCord service offering. Our ability to become cash flow
positive and to achieve profitability, and the timing of such
events, will depend on many factors, including some or all of
the following:
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our ability to increase sales of our ViaCord service offering
particularly in the face of significant competition;
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continued acceptance in the marketplace for private cord blood
banking;
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the impact of any unexpected issues or failures related to the
collection, processing, or storage of umbilical cord blood by us
or others in the industry;
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the impact of any potential adverse outcome in the patent
infringement lawsuit brought against us by PharmaStem, including
legal expenses, and the material impact on our business if
PharmaStem were able to obtain an injunction;
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the level of our expenses, including as a result of difficulties
or delays related to our research and development programs, and
any unexpected expenses; and
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the overall net impact on revenues and expenses of new licensing
deals, collaborations or other strategic efforts.
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We cannot assure you that we will ever become cash flow positive
or profitable. Other factors that may affect our ability to
become cash flow positive and profitable are described in more
detail elsewhere in this Risk Factors section.
We may
not be able to sustain our current level of revenues or our
recent growth rates.
Revenues from sales of ViaCord have grown significantly over the
past several years, from $7.1 million in 2001, to
$20.1 million, $30.9 million, $36.8 million,
$43.8 million and $54.1 million in 2002, 2003, 2004,
2005 and 2006, respectively. We believe that this revenue growth
is a result of our increased marketing efforts and from
17
increased awareness by the public generally of the concept of
umbilical cord blood preservation. We may not be able in the
future, however, to sustain this growth rate or the current
level of ViaCords revenues. The principal factors that may
adversely affect our revenues include competition from other
private cord blood banks, any decline in the market or market
acceptance for cord blood banking, the impact or recommendations
as to public banking over private banking from physician groups,
such as the recent policy statement issued by the American
Academy of Pediatricians, the risks associated with litigation,
in particular, the pending PharmaStem litigation, the risk of
operational issues, the risks of not being able to maintain
relationships with key third party marketing partners, 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 section. If we are
unable to sustain our revenues, we may need to reduce our
research and 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 service offering, or may have to incur
significant expenses.
In 2002, PharmaStem Therapeutics, Inc. filed suit against us and
several other defendants in the U.S. District Court for the
District of Delaware, alleging infringement of U.S. 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., which is now a subsidiary of Cord
Blood America 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 revenues 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 prove infringement. Consequently,
we have not recorded a liability as of December 31, 2006.
PharmaStem has appealed the judges decision. We have
appealed the jurys finding as to validity of the patents.
A hearing on the appeal was held at the U.S. Court of Appeals
for the Federal Circuit on April 4, 2006. A final ruling
has not been issued in the appeal.
In July 2004, PharmaStem filed a second complaint against us.
The second complaint was filed in the U.S. 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. 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.
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
described below.
In late 2006, the U.S. PTO issued final decisions in the
existing 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. The U.S. PTO had ordered a second
re-examination of the 427 patent in order to determine
whether certain claims of the patent should expire in 2008,
rather than in 2010. The U.S. PTO issued notice of its
intent to allow the remaining claims of all of the patents.
In either of the pending cases, if we are ultimately found to
infringe valid claims of the PharmaStem patents, we could have a
significant damages award entered against us. If we are found to
infringe during the course of either case, including if the
court of appeals were to overturn the district courts
non-infringement ruling, we could also
18
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
could 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.
A loss in either of the PharmaStem lawsuits could have a
material adverse effect on our ability to generate revenues from
our ViaCord service offering, which is currently our only
commercialized product, and would have a significant adverse
impact on our business, results of operations and stock price.
Even if we ultimately prevail, we are likely to incur
significant legal expenses during the course of the cases.
A
third party could try to challenge the arbitrators
decision related to our agreement with Mothers
Work.
We have an agreement with Mothers Work related to the marketing
of our ViaCord service offering. The agreement can be terminated
early by either company if the other company commits a material
breach of the agreement or under certain circumstances arising
from claims by a third party alleging that the third party has
rights that supersede Mothers Works commitment to us. A
third party has claimed that it has rights under an agreement
with Mothers Work that supersede Mothers Works commitment
to us. The dispute between Mothers Work and the third party was
the subject of an arbitration proceeding. In February 2007, the
arbitrator ruled in favor of Mothers Work. There is no assurance
that the third party will not challenge the arbitrators
ruling, although we believe that reversal of the ruling is
unlikely. If the third party were to be successful in efforts to
overturn the arbitrators decision, the termination rights
under our agreement with Mothers Work could be triggered. In
addition, as a condition to commencing the agreement on
January 1, 2007, we agreed to indemnify Mothers Work for
any damages that Mothers Work may be assessed in the event that
Mothers Work is found to be in breach of its agreement with the
third party as a result of having entered into an agreement with
us. We also agreed to reimburse Mothers Work for certain legal
fees if the fees exceed a specified threshold. Our potential
obligation to Mothers Work under the indemnification agreement
is unlimited. However, based on our assessment of the low
likelihood that we might have to pay damages or legal fees given
the arbitrators ruling, we concluded the fair value of our
indemnification obligation is not material and have not recorded
a liability as of December 31, 2006.
The
Government of Singapore may seek to recover grant funds received
by us if we do not agree to extend the term of the current
grant.
We record revenues from a grant agreement with the Economic
Development Board (EDB) of the Government of Singapore related
to our research facility in Singapore. Government grants are
routinely subject to review. We are in discussions with the EDB
regarding conclusion of our current grant, which expires in May
2007. In the course of these discussions, the EDB has taken the
position that a prior period increase in the EDBs cost
reimbursement percentage constituted an advance on future grant
funding. We, however, believe that the increase constituted a
mutually agreed upon increase in the reimbursement percentage
for the period, after which the reimbursement rate was to revert
to the rate prior to such increase. The amount received by us
under the increased reimbursement percentage was approximately
$1.0 million. The EDB has asked for repayment of the
disputed amount. In connection with this dispute, the EDB is now
also asserting that we have not fulfilled a commitment to employ
a specified number of people in Singapore that was an original
condition of the grant. Under the terms of the grant, a breach
by us of a condition of the grant could result in the EDB
pursuing repayment of some or all of the amounts disbursed to
us. We believe that the EDB has waived this commitment, and
that, as a result, we have satisfied all requirements under the
grant. If we do not agree to repay the disputed amount, the EDB
may seek to recover grant funds previously paid
and/or
withhold payment of existing or future grant claims that are as
yet unpaid. We believe we have met our performance obligations
and would be successful in our defense of any such claims. We
are attempting to resolve this dispute with the EDB and have
proposed the possibility of amending the grant to reduce its
term and cumulative funding. Accordingly, we have recorded
negative revenues of approximately $0.2 million in
19
the quarter ended December 31, 2006 as estimated settlement
costs. As of December 31, 2006, we had received grant
payments from EDB totaling approximately $1.9 million and
had recognized cumulative grant revenues of approximately
$1.7 million as of December 31, 2006.
If we
are not able to successfully develop and commercialize new
products, our future prospects may be limited.
Very few companies have been successful in their 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 their approval
or commercial use.
Our cellular therapy product candidates are in the early stages
of development. Drug development in general involves a high
degree of risk. As we obtain results and safety information from
pre-clinical or clinical trials of our product candidates, we
may elect to discontinue development or delay additional
pre-clinical studies or clinical trials in order to focus our
resources on more promising product candidates. For example, we
recently made the decision not to advance CB001, one of our
product candidates in the area of hematopoietic stem cell
therapy, in future clinical trials. 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
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 U.S., we will need to
submit clinical data concerning our products and receive
regulatory approval from the appropriate governmental agencies.
Standards for approval outside the U.S. 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.
In June 2006, the FDA gave us conditional approval of our
Investigational Device Exemption, or IDE, to allow our ViaCyte
cryopreservation product candidate to be used in a clinical
trial. We expect to initiate the pivotal clinical trial in March
2007. We are currently planning to conduct a single, pivotal
clinical trial to study the safety and efficacy of ViaCyte. 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 prior 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. There is no assurance that
we will be able to show that our ViaCyte cryopreservation
product candidate is safe and effective for its intended use.
While methods for preserving sperm and embryos are
well-established and have been utilized for in vitro
fertilization procedures, methods for cryopreserving oocytes
have not been widely
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employed due to difficulties encountered in freezing this cell.
We may not be able to generate the number of live births needed
to show that our product candidate is effective. We may also
encounter unexpected safety issues. Even if the results of the
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
pre-market approval, or PMA, and additional trials, which would
involve additional time and expense. Even if we are successful
in our efforts to develop and gain approval for ViaCyte, the FDA
could ask for post-approval safety monitoring which would entail
additional expense. The FDA could also restrict the label for
the product to limited patient populations which could limit its
commercial potential.
We may
not be able to raise additional funds necessary to fund our
operations.
As of December 31, 2006, we had approximately
$51.2 million in cash, cash equivalents and short-term
investments. In order to develop and bring new products to
market, we must commit substantial resources to costly and
time-consuming research and development, pre-clinical 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:
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the level of cash flows from sales of our ViaCord service
offering;
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the scope and results of our research and development programs;
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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;
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the results of litigation and other disputes;
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the costs associated with expanding our portfolio of product
candidates through licensing, collaborations or acquisitions;
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the costs of increasing or expanding our ViaCord sales and
marketing efforts;
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the costs of research and development work focused on developing
clinical and commercial scale processes for manufacturing
cellular products and, if we advance our products, the costs of
building and operating our manufacturing facilities, both to
support our clinical activities and also in anticipation of
growing our commercialization activities;
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funds spent in connection with acquisitions of related
technologies or businesses, including contingent payments that
may be made in connection with our acquisition of Kourion
Therapeutics;
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the costs of maintaining, expanding and protecting our
intellectual property portfolio, including litigation costs and
liabilities; and
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our ability to establish and maintain collaborative arrangements
and obtain milestones, royalties and other payments from
collaborators.
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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,
21
reduce the scope of or eliminate one or more of our programs,
any of which could have a material adverse effect on our
business.
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 U.S. patents and international
patents. We also own or have exclusive licenses to pending
applications in the U.S. and 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 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 technologies. For example, our
patent applications covering Unrestricted Somatic Stem Cells, or
USSCs, claim these cells
and/or their
use in the treatment of many diseases. It is possible, however,
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 our 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. 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. Others may
independently develop substantially equivalent proprietary
information 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 U.S.
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Third
parties may own or control patents or patent applications that
are infringed by our technologies or product
candidates.
Our success depends in part on our not infringing other
parties patents and proprietary rights as well as not
breaching any licenses relating to our technologies and product
candidates. In the U.S., 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.
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 U.S., 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 specific 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, 2006, we have incurred total legal expenses of
approximately $7.4 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.
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
23
on their own or in collaboration with others or commercialize or
market competitive products 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, potential products or
existing products may be substantially delayed or adversely
impacted.
Our
cell preservation activities are subject to regulations that may
impose significant costs and restrictions on us.
Cord blood preservation. The FDA has adopted
good tissue practice regulations, or GTPs, that establish a
comprehensive regulatory program for human cellular and
tissue-based products. Our ViaCord service offering is subject
to GTPs. We have registered with the FDA as an umbilical cord
blood preservation service and we are subject to FDA inspection.
We believe that we comply with GTPs, 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. Unlike our business of private cord blood banking
for related use, the collection, processing and storage of
umbilical cord blood stem cells intended to be used in a
recipient unrelated to the donor is regulated as biological
products. In January 2007, the FDA published draft guidance
document for comment that would require public cord blood banks
to file BLAs. While the draft guidance does not currently apply
to us, the FDA could decide to impose these requirements or
others on our business. Moreover, the cost of compliance with
government regulations may adversely affect our revenues and
profitability. If the FDA were to require companies that bank
umbilical cord blood for related use to comply with the
recommendations set forth in the guidance, we would need to
change certain of our processes. The costs of such changes or
the cost of compliance with any other new requirements that may
be imposed in the future could adversely affect our revenues and
profitability. Regulation of our cord blood preservation
services in foreign jurisdictions is still evolving.
We provide cord blood banking services in all 50 states.
Several states currently require that cord blood services be
licensed, permitted or registered. We believe that we are
currently licensed, permitted or registered to operate in all
states requiring us to be licensed, permitted or registered. 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. In June 2006, the FDA gave us
conditional approval of an IDE to allow our ViaCyte
cryopreservation product candidate to be used in a clinical
trial. We are currently planning to conduct a single, pivotal
clinical trial to study the safety and efficacy of ViaCyte. We
expect to initiate the pivotal clinical trial in March 2007. The
goal of the clinical trial is to generate data to submit to the
FDA for a 510(k) application. There is no assurance that we will
be able to complete the clinical trial or that we will be able
to show that our ViaCyte cryopreservation product candidate is
safe and effective for its intended use. If we submit a new
510(k) and the FDA does not find the information adequate to
support 510(k) clearance, the FDA could require us to obtain PMA
to market ViaCyte. This requirement could substantially lengthen
our planned developmental timeline and increase the costs of
developing and commercializing ViaCyte. We may not receive
either 510(k) clearance or PMA for ViaCyte. 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. We may not be able to generate sufficient data to
receive approval to market ViaCyte in the U.S. or any other
jurisdictions.
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
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-
24
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
costs 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 to successfully
commercialize our ViaCord service offering, for certain
components of our product candidates and to manufacture and
supply our ViaCyte product candidate. The loss of such suppliers
or our inability to establish such relationships may inhibit our
ability to commercialize ViaCord, delay development or limit our
ability to manufacture our stem cell therapy products or our
ViaCyte product candidate.
In order to produce cells for use in clinical studies and
produce stem cell products for commercial sale, certain
biological components used in our production process will need
to be manufactured in compliance with current good manufacturing
practices, or cGMP. To meet this requirement, we will need to
maintain supply agreements with third parties 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. 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 pre-clinical 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 advance the development of our
pre-clinical stem cell product candidates.
We are utilizing Invitrogen, Inc. to manufacture, supply and
package our ViaCyte product candidate for our clinical trial. We
are dependent on Invitrogen and our relationships with component
and testing service providers to satisfy all regulatory
requirements and produce sufficient amounts of cGMP-quality
product on commercially reasonable terms for the trial.
Invitrogen has the ability to terminate its obligation to
manufacture clinical supplies of ViaCyte under certain
conditions including if it is unable for reasons outside of its
control to consistently meet specifications or there is a change
in specifications it cannot meet or due to an uncured material
breach of the agreement by us. If ViaCyte is successfully
developed, we will need to establish similar relationships for
our commercial supply. In the event that we are unable to
maintain a suitable contract manufacturer that is willing to
produce such products on commercially reasonable terms or the
contract manufacturer terminates or breaches its relationship
with us or we encounter unexpected manufacturing hurdles or
delays, we may not be able to complete our clinical trial or, if
successfully developed, to commercialize our ViaCyte product
candidate.
We also source a substantial portion of the components of our
ViaCord collection kits and processing and testing services from
a concentrated group of third party contractors. The production
of the collection kits and the processing and testing of cord
blood units require successful coordination among us and
multiple third party providers. Our inability to coordinate
these efforts or any other problems with the operations of our
third party contractors could increase our costs, cause us to
lose revenue or market share, and damage our reputation. Some of
the components of the ViaCord collection kits, including the
Cell Sentinel bag, are produced by single source providers. For
other components, we make every effort to qualify new vendors
and to develop contingency plans so that our ViaCord business is
not impacted by short-term issues associated with single source
providers. Our business could be materially impacted by
long-term or chronic issues associated with single source
providers or other vendors.
25
If our
cord blood processing and storage facility or our clinical
manufacturing facilities are damaged or destroyed, our business,
programs and prospects could 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 preservation services.
We expect to manufacture all of our stem cell product candidates
in our Cambridge manufacturing facility for the next several
years. If the Cambridge 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 $22.2 million against
damage to our property and equipment, and an additional
$18.8 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., a subsidiary of Cord Blood America Inc.,
and LifeBank USA, a division of Celgene Cellular Therapeutics, a
wholly-owned subsidiary of Celgene Corporation. 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 other public cord blood
banks around the world. Public cord blood banks provide families
with the option of donating their cord blood for public use at
no cost. The Stem Cell Therapeutic Act provides financing for a
national system of public cord blood banks in the U.S. to
encourage cord blood donations from an ethnically diverse
population. In addition, many states are evaluating the
feasibility of establishing cord blood repositories for
transplantation purposes. An increase in the number and
diversity of publicly-available cord blood units from public
banks would increase the probability of finding suitably matched
cells for a family member, which may result in a decrease in the
demand for private cord blood banking. If the science of human
leukocyte antigens, or 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,
Inc., Cellerant Therapeutics, Inc., Celgene Corporation, Cytori
Therapeutics, Inc., Gamida-Cell Ltd., Genzyme Corporation,
Bioheart, Inc., and Osiris Therapeutics, Inc. 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.
In addition, public cord blood banks may, as a result of the
Stem Cell Therapeutic Act, be able to better compete with our
potential cell therapy products. 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.
26
In oocyte cryopreservation, if our ViaCyte product candidate is
successfully developed and approved, we expect to compete with
IVF centers 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 are already performing oocyte
cryopreservation on a limited basis and Extend Fertility is
offering related services, which may make it more difficult
ViaCyte, if successfully developed and approved, to 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.
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. 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 service offering. This is due in
significant part to the nature of the service we provide. For
instance, as part of our ViaCord service offering, we are
assuming custodial care of a childs umbilical cord blood
stem cells 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 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. Loss or damage to the units would be loss or damage to
the customers property. 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, and if we are found liable, whether 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 clinical and commercial activities, we will need to
increase our insurance coverage if and when we begin
commercializing additional 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.
Our
success is dependent upon recruiting and retaining qualified
management and other personnel.
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, has significant and unique expertise in stem cell
expansion and related technologies. We maintain key man life
insurance on the lives of
27
Mr. Beer and Mr. Kraus. Additionally, we have several
other employees with scientific or other skills that we consider
important to the successful commercialization of our products
and 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.
Our reporting obligations as a public company, as well as our
need to comply with the requirements of the Sarbanes-Oxley Act
of 2002, the rules and regulations of the Securities and
Exchange Commission and the NASDAQ Global Market, place
significant 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.
Our
business could be disrupted or harmed and we could be subject to
liability if we are unable to operate our information systems
effectively, successfully implement new technologies and protect
the confidentiality of our or our customers
data.
The efficient operation of our business is dependent on our
information systems, including our ability to operate them
effectively and to successfully implement new technologies,
systems, controls and adequate disaster recovery systems. In
addition, we must protect the confidentiality of our and our
customers data, including credit card information. The
failure of our information systems to perform as designed or our
failure to implement and operate them effectively could disrupt
our business, harm our reputation
and/or
subject us to liability, any of which could impact our financial
condition and results of operations.
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, Inc. 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. 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.
28
The
successful commercialization of products may depend on patients
and physicians obtaining reimbursement for products 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 U.S. and, potentially,
outside the U.S. In the U.S., 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 patients and physicians 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 U.S. 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. If our potential cell therapy products are not
reimbursed by 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.
Although we are aware of a small fraction of ViaCord customers
receiving reimbursement, we believe our ViaCord service
offering, like other private cord blood banking, is not
generally subject to reimbursement. We do not currently believe
that our ViaCyte product candidate will be subject to
reimbursement. In cases of preserving eggs for fertility
preservation for cancer patients, it is unknown at this time if
it will be covered.
We
face potential liability related to the privacy of health
information we obtain from research collaborators or from
providers who enroll patients and collect cord blood or human
oocytes.
Our business relies on the acquisition, analysis, and storage of
potentially sensitive information about individuals
health, both in our research activities and in our reproductive
health product and service offerings. These data are protected
by numerous federal and state privacy laws.
Most health care providers, including research collaborators
from whom we obtain patient information, are subject to privacy
regulations promulgated under the Health Insurance Portability
and Accountability Act of 1996, or HIPAA. Although we ourselves
are not directly regulated by HIPAA, 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.
29
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 U.S., 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.
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:
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material public announcements;
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the data, positive or negative, generated from the development
of our product candidates;
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setbacks or delays in any of our development programs;
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the outcome of material litigation;
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the financial results achieved by our cord blood preservation
business;
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the impact of competition;
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unusual or unexpectedly high expenses;
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developments related to patents and other proprietary rights;
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market trends affecting stock prices in our industry; and
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economic or other external factors.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
30
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
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. We completed the
transfer of our manufacturing operations from our former
Worcester, Massachusetts facility to the Cambridge manufacturing
facility in late 2006. We expect that the Cambridge
manufacturing facility will be able to produce cells for
Phase 1, 2 and 3 trials of our current cell therapy product
candidates, and potentially initial commercialization of our
first approved product if we receive any marketing approvals.
The lease on the Cambridge facility expires in 2014.
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 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.
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ITEM 3.
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LEGAL
PROCEEDINGS
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In 2002, PharmaStem Therapeutics, Inc. filed suit against us and
several other defendants in the U.S. 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., which was recently acquired by Cord
Blood America 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 prove infringement, consequently
we have not recorded a liability as of September 30, 2006.
PharmaStem has appealed the judges decision. We have
appealed the jurys finding as to validity of the patents.
A hearing on the appeal was held at the U.S. Court of Appeals
for the Federal Circuit, on April 4, 2006 and a final
ruling has not been issued.
In July 2004, PharmaStem filed a second complaint against us.
The second complaint was filed in the U.S. 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/or 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.
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
described below.
In late 2006, the U.S. PTO issued final decisions in the
existing 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. The U.S. PTO had ordered a second
re-examination of the 427 patent in order to determine
31
whether certain claims of the patent should expire in 2008,
rather than in 2010. The U.S. PTO issued notice of its
intent to allow the remaining claims of all of the patents.
In either of the pending cases, if we are ultimately found to
infringe valid claims of the PharmaStem patents, we could have a
significant damages award entered against us. If we are found to
infringe or at any time during the course of either case,
including 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
could 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.
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 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.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
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ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for Common Equity
Our common stock has been traded on the NASDAQ Global Market, or
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 9, 2007, as reported by NASDAQ, was
$5.01.
The following tables set 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, 2006
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
6.28
|
|
|
$
|
4.79
|
|
Second Quarter
|
|
|
5.95
|
|
|
|
3.90
|
|
Third Quarter
|
|
|
4.54
|
|
|
|
3.56
|
|
Fourth Quarter
|
|
|
5.84
|
|
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
32
The following table sets forth information concerning our equity
compensation plan as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 plan approved
by security holders
|
|
|
3,991,327
|
|
|
$
|
3.02
|
|
|
|
1,829,118
|
|
Holders
As of February 28, 2007, there were 94 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
None.
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 and normal investing activities, 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.
Issuer
Purchase of Equity Securities
None.
33
|
|
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, 2006. 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(1)
|
|
|
2002
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
54,426
|
|
|
$
|
44,443
|
|
|
$
|
38,274
|
|
|
$
|
31,880
|
|
|
$
|
20,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of processing and storage
revenues:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
10,253
|
|
|
|
8,298
|
|
|
|
7,396
|
|
|
|
7,148
|
|
|
|
5,897
|
|
Royalty (recovery) expense
|
|
|
|
|
|
|
|
|
|
|
(3,258
|
)
|
|
|
3,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and
storage revenues
|
|
|
10,253
|
|
|
|
8,298
|
|
|
|
4,138
|
|
|
|
10,406
|
|
|
|
5,897
|
|
Research and development
|
|
|
13,984
|
|
|
|
13,653
|
|
|
|
16,030
|
|
|
|
14,299
|
|
|
|
13,918
|
|
Sales and marketing
|
|
|
37,154
|
|
|
|
24,909
|
|
|
|
19,497
|
|
|
|
21,373
|
|
|
|
17,248
|
|
General and administrative
|
|
|
18,525
|
|
|
|
13,835
|
|
|
|
15,551
|
|
|
|
16,960
|
|
|
|
14,205
|
|
In-process technology(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,925
|
|
|
|
5,889
|
|
Restructuring
|
|
|
(1,070
|
)
|
|
|
305
|
|
|
|
3,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78,846
|
|
|
|
61,000
|
|
|
|
58,404
|
|
|
|
86,963
|
|
|
|
57,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(24,420
|
)
|
|
|
(16,557
|
)
|
|
|
(20,130
|
)
|
|
|
(55,083
|
)
|
|
|
(36,782
|
)
|
Interest income (expense), net
|
|
|
3,090
|
|
|
|
1,880
|
|
|
|
(967
|
)
|
|
|
(385
|
)
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before cumulative effect
of change in accounting principle
|
|
$
|
(21,330
|
)
|
|
$
|
(14,677
|
)
|
|
$
|
(21,097
|
)
|
|
$
|
(55,468
|
)
|
|
$
|
(36,038
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(21,047
|
)
|
|
$
|
(15,663
|
)
|
|
$
|
(34,168
|
)
|
|
$
|
(64,884
|
)
|
|
$
|
(44,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted before cumulative effect of change in accounting
principle
|
|
$
|
(0.56
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(12.62
|
)
|
|
$
|
(24.63
|
)
|
|
$
|
(17.60
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(12.62
|
)
|
|
$
|
(24.63
|
)
|
|
$
|
(17.60
|
)
|
Weighted average shares used in
computing net loss per common share, basic and diluted
|
|
|
38,377,238
|
|
|
|
35,777,308
|
|
|
|
2,707,219
|
|
|
|
2,634,096
|
|
|
|
2,510,632
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,039
|
|
|
$
|
33,138
|
|
|
$
|
6,746
|
|
|
$
|
39,008
|
|
|
$
|
15,239
|
|
Investments
|
|
|
33,206
|
|
|
|
27,406
|
|
|
|
21,839
|
|
|
|
7,824
|
|
|
|
13,949
|
|
Working capital
|
|
|
48,004
|
|
|
|
60,946
|
|
|
|
14,437
|
|
|
|
22,857
|
|
|
|
25,407
|
|
Total assets
|
|
|
82,282
|
|
|
|
94,230
|
|
|
|
61,091
|
|
|
|
78,161
|
|
|
|
56,119
|
|
Long-term debt obligations,
including current portion
|
|
|
82
|
|
|
|
1,627
|
|
|
|
18,736
|
|
|
|
19,238
|
|
|
|
5,173
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
175,173
|
|
|
|
162,141
|
|
|
|
110,912
|
|
Total stockholders equity
(deficit)
|
|
|
38,317
|
|
|
|
56,010
|
|
|
|
(160,957
|
)
|
|
|
(130,151
|
)
|
|
|
(70,487
|
)
|
|
|
|
(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 year
ended December 31, 2002 represented the fair value of
warrants related to technology licensed from Amgen of
$5.9 million. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis by our management of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements and the
accompanying notes appearing at the end of this report. This
discussion and other parts of this report contain
forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from
those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are
not limited to, those discussed in Part I
Item 1A (Risk Factors) of this report.
Overview
ViaCell is a biotechnology company dedicated to enabling the
widespread application of human cells as medicine. We have a
reproductive health business that generated revenues of
$54.1 million in 2006 from sales of ViaCord, a service
offering through which expectant families can preserve their
babys umbilical cord blood for possible future medical
use. Stem cells from umbilical cord blood are a treatment option
today for over 40 diseases, including certain blood cancers and
genetic diseases. We are also working to leverage our commercial
infrastructure and product development capabilities by
developing
ViaCytesm,
our product candidate being studied for its potential to broaden
reproductive choices for women through the cryopreservation of
human unfertilized eggs. Our other research and development
efforts are focused on investigating the potential for new
therapeutic uses of umbilical cord blood-derived and adult stem
cells and on technology for expanding populations of these
cells. We are concentrating these efforts in the areas of
cancer, cardiac disease and diabetes.
35
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 U.S., and the majority of our long-lived assets
are located in the U.S.
Revenues
Our current revenues are derived primarily from fees charged to
families for the processing and storage of a childs
umbilical cord blood stem cells collected at birth. These fees
consist of an initial fee for collection, processing and
freezing of the umbilical cord blood stem cells and an annual
storage fee. The annual storage fee provides a growing annuity
of future revenue as the number of stored umbilical cord stem
cells increases. Our revenues are recorded net of discounts and
rebates that we offer our customers from time to time under
certain circumstances. 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
long-term future revenues from our umbilical cord blood
preservation 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 pay 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 as of December 31, 2006.
We are in ongoing litigation with PharmaStem Therapeutics, Inc.
over PharmaStems claims that our cord blood preservation
business infringes certain claims 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 separate 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 service
offering, we recorded revenues in the periods presented from a
grant agreement with the Economic Development Board (EDB) of the
Government of Singapore. We maintain a research facility in
Singapore. We are in discussions with the EDB regarding
conclusion of our current grant, which expires in May 2007. In
the course of these discussions, the EDB has taken the position
that a prior period increase in the EDBs cost
reimbursement percentage constituted an advance on future grant
funding. We, however, believe that the increase constituted a
mutually agreed upon increase in the reimbursement percentage
for the period, after which the reimbursement rate was to revert
to the rate prior to such increase. The amount received by us
under the increased reimbursement percentage was approximately
$1.0 million. The EDB has asked for repayment of the
disputed amount. In connection with this dispute the EDB is now
also asserting that we have not fulfilled a commitment to employ
a specified number of people in Singapore that was an original
condition of the grant. Under the terms of the grant, a breach
by us of a condition of the grant could result in the EDB
pursuing repayment of some or all of the amounts disbursed to
us. We believe that the EDB has previously waived this
commitment, and that, as a result, we have satisfied all
requirements under the grant. If we do not agree to repay the
disputed amount, the EDB may seek to recover grant funds
previously paid
and/or
withhold payment of existing or future grant claims that are as
yet unpaid. We believe we have met our performance obligations
and would be successful in our defense of any such claims. We
are attempting to resolve this dispute with the EDB and have
proposed the possibility of amending the grant to reduce its
term and cumulative funding. Accordingly, we have recorded
negative revenues of approximately $0.2 million during the
quarter ended December 31, 2006 as estimated settlement
costs. As of December 31, 2006, we had received grant
payments from EDB totaling approximately $1.9 million and
had recognized cumulative grant revenues of approximately
$1.7 million.
Operating
Expenses
Cost of processing and storage revenues reflects the cost of
transporting, testing, processing and storing umbilical cord
blood stem cells at our processing facility in Hebron, Kentucky.
Our cost of processing and storage revenues includes expenses
incurred by third party vendors relating to the transportation
of cord blood stem cells to
36
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.
In 2003, we recorded a royalty expense of $3.3 million
following an unfavorable jury verdict in the PharmaStem
litigation. In 2004, the District Court overturned the jury
verdict. Based on the courts 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. In July 2004, PharmaStem filed a separate
lawsuit claiming that we infringed additional patents. Pending a
decision on the appeal and further action by the court in this
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 our
litigation with PharmaStem could result in us being required to
pay damages to PharmaStem 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 to PharmaStem, or what those amounts might be.
Our research and development expenses consist primarily of costs
associated with development of our stem cell product candidates,
including our recently completed Phase 1 clinical trial of
our expanded umbilical cord blood product candidate, CB001, and
development of 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 those involved in pre-clinical studies,
consulting expenses, and lab supplies. The major outside
expenses relating to our CB001 clinical trial included 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 included site
costs and the cost of the cord blood. We recently announced
that, based on the results of the Phase 1 study, we have
decided not to advance CB001 in further clinical trials.
We expect that our research and development expenses will
continue to increase over the next several years as a result of
increased costs and expenses associated with our ViaCyte
clinical trial and possible future clinical trials of other
product candidates, if pre-clinical data supports moving
forward. Future research and development expenses may also
include costs associated with product candidates that we might
license or acquire, and, if our programs are successful, costs
and expenses associated with submissions for regulatory
approvals and the expansion of clinical and commercial scale
manufacturing facilities. 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, other than ViaCyte, are currently in
early stages. Based on these assessments, we consider options
for each program, 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 reproductive
health business and, specifically, our ViaCord service offering.
The majority of these costs relate to our sales force and
support personnel, marketing expenses and telecommunications
expense related to our call center. We also incur external costs
associated with advertising, direct mail, promotional and other
marketing services. However, we may, from time to time,
implement additional promotions and other marketing programs
that may increase sales and marketing expenses, and augment our
internal marketing efforts with external relationships such as
the data license and marketing services agreement we entered
into with Mothers Work, Inc. in August 2006. For a description
of the agreement with Mothers Work, including the risks related
thereto, see Commitments and Contingencies
Other Arrangements.
37
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.
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,
as described in Results of Operations
Restructuring.
In August 2006, we amended our German facility office lease to
change the termination date from May 31, 2008 to
December 31, 2006. In addition, we sold fixed assets at the
facility that had been written off in the December 2004
restructuring for approximately $0.6 million. The sale of
fixed assets, combined with the amendment of the lease, is
reflected as a change in our December 2004 restructuring
estimates of approximately $1.1 million for the year ended
December 31, 2006.
During the year ended December 31, 2006, we finalized
discussions with German grant authorities regarding repayment of
part of certain grants made to our German subsidiary in 2003 and
2004 and remitted approximately $0.5 million to satisfy all
potential claim reimbursements. We also paid approximately
$0.1 million in professional fees incurred in connection
with the negotiations with the German grant authorities and fees
associated with the August 2006 lease amendment and sale of
fixed assets.
As of December 31, 2006, we had received approximately
$3.6 million in cumulative grant proceeds from the German
grant authorities and remitted back approximately
$0.5 million as noted above.
Results
of Operations
Years
Ended December 31, 2006, 2005 and 2004 (amounts in
millions, year over year changes based on rounded amounts in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
Processing revenues
|
|
$
|
43.5
|
|
|
$
|
36.1
|
|
|
$
|
31.7
|
|
|
$
|
7.4
|
|
|
|
20
|
%
|
|
$
|
4.4
|
|
|
|
14
|
%
|
Storage revenues
|
|
|
10.6
|
|
|
|
7.7
|
|
|
|
5.1
|
|
|
|
2.9
|
|
|
|
38
|
%
|
|
|
2.6
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total processing and storage
revenues
|
|
|
54.1
|
|
|
|
43.8
|
|
|
|
36.8
|
|
|
|
10.3
|
|
|
|
24
|
%
|
|
|
7.0
|
|
|
|
19
|
%
|
Grant and contract revenues
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
1.5
|
|
|
|
(0.3
|
)
|
|
|
(50
|
)%
|
|
|
(0.9
|
)
|
|
|
(60
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
54.4
|
|
|
$
|
44.4
|
|
|
$
|
38.3
|
|
|
$
|
10.0
|
|
|
|
23
|
%
|
|
$
|
6.1
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in processing revenues of $7.4 million, or
20%, from 2005 to 2006 and $4.4 million, or 14%, from 2004
to 2005 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 increases in storage
revenues of $2.9 million, or 38%, from 2005 to 2006 and
$2.6 million, or 51%, from 2004 to 2005 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
$0.3 million, or 50%, from 2005 to 2006 was related to a
decrease in grant revenues from the EDB of Singapore and the
creation of a reserve to cover potential grant settlement costs.
The reserve reflects our recent dispute with the EDB regarding
conclusion of the grant. 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 United States
of $0.2 million. These decreases were partially offset by
an increase in grant revenues from the EDB of $0.4 million.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
Cost of processing and storage
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
$
|
10.3
|
|
|
$
|
8.3
|
|
|
$
|
7.4
|
|
|
$
|
2.0
|
|
|
|
24
|
%
|
|
$
|
0.9
|
|
|
|
12
|
%
|
Royalty recovery
|
|
|
|
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
0
|
%
|
|
|
3.3
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and
storage revenues
|
|
$
|
10.3
|
|
|
$
|
8.3
|
|
|
$
|
4.1
|
|
|
$
|
2.0
|
|
|
|
24
|
%
|
|
$
|
4.2
|
|
|
|
102
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in direct costs of $2.0 million, or 24%, from
2005 to 2006 and the increase in direct costs of
$0.9 million, or 12%, from 2004 to 2005 were due primarily
to higher variable expenses related to the increased numbers of
umbilical cords processed and stored. These variable expenses
relate to transportation of the cord blood, materials for
related collection and testing and additional costs associated
with the processing and storage of the umbilical cord blood.
The royalty recovery of $(3.3) million in 2004 was due to
the reversal of the accrual of $3.3 million, recorded in
2003, that we took to cover our cumulative royalty expense from
August 2000 through December 31, 2003 following the jury
verdict of infringement in the PharmaStem lawsuit in October
2003. The jury verdict of infringement was overturned by the
District Court judge in the second half of 2004 and we
subsequently recorded a credit to royalty expense of
$3.3 million 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
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
Research and development
|
|
$
|
14.0
|
|
|
$
|
13.7
|
|
|
$
|
16.0
|
|
|
$
|
0.3
|
|
|
|
2
|
%
|
|
$
|
(2.3
|
)
|
|
|
(14
|
)%
|
During the years ended December 31, 2006 and 2005, our
research and development expenses primarily consisted of costs
related to the CB001 trial and ongoing costs of pre-clinical
testing of our therapeutic product candidates, as well as
expenses related to ViaCyte, our product candidate being studied
for its potential to broaden reproductive options for women
through the cryopreservation of oocytes. In February 2007, we
announced our decision not to advance development of CB001 and
expect to reduce our hematopoietic program-related costs in
2007. The increase in costs associated with research and
development of $0.3 million, or 2%, from 2005 to 2006 was
primarily due to an increase in outside services related to
clinical and pre-clinical testing of our therapeutic product
candidates.
The decrease in our research and development expenses of
$2.3 million, or 14%, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
Sales and marketing
|
|
$
|
37.2
|
|
|
$
|
24.9
|
|
|
$
|
19.5
|
|
|
$
|
12.3
|
|
|
|
49
|
%
|
|
$
|
5.4
|
|
|
|
28
|
%
|
The increase in sales and marketing expenses of
$12.3 million, or 49%, from 2005 to 2006 was due to the
significant expansion of our inside sales and field sales teams,
as well as increased spending on marketing programs. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
General and administrative
|
|
$
|
18.5
|
|
|
$
|
13.8
|
|
|
$
|
15.6
|
|
|
$
|
4.7
|
|
|
|
34
|
%
|
|
$
|
(1.8
|
)
|
|
|
(12
|
)%
|
39
The increase in general and administrative expenses of
$4.7 million, or 34%, from 2005 to 2006 was primarily due
to increased accounting fees and outside service fees of
approximately $1.5 million associated with compliance with
the Sarbanes-Oxley Act of 2002, increased employee-related
expenses of approximately $1.4 million, increased expenses
related to our ViaCord service offering of approximately
$1.4 million, as well as increased stock-based compensation
expense associated with the adoption of Statement of Financial
Accounting Standards No. 123R Share-Based
Payment (SFAS 123R) of approximately
$0.4 million. The decrease in general and administrative
expenses of $1.8 million, or 12%, from 2004 to 2005 was
primarily due to a decrease in employee-related costs of
$0.9 million resulting from our restructuring in September
2004 as well as a decrease in consulting costs of
$0.6 million, a decrease in litigation expenses of
$0.7 million relating to the PharmaStem lawsuit and a
decrease in stock-based compensation expense of
$0.5 million, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
Restructuring
|
|
$
|
(1.1
|
)
|
|
$
|
0.3
|
|
|
$
|
3.2
|
|
|
$
|
1.4
|
|
|
|
(467
|
)%
|
|
$
|
(2.9
|
)
|
|
|
(91
|
)%
|
The income related to restructuring expense of $1.1 million
for the year ended December 31, 2006 reflects changes to
the original estimate of our restructuring accrual, recorded in
2004, due to the August 2006 sale of fixed assets and lease
amendment. During 2006, we recorded a reduction to restructuring
expense of approximately $0.6 million related to our
agreement to sell certain property, plant and equipment
previously written off in the December 2004 restructuring. We
also accelerated the recognition of $0.4 million of prepaid
rent received from our German
sub-lessee
for the period of January 2007 through May 2008 as a result of
the August 2006 amendment of our German facility lease which
changed the lease termination date from May 31, 2008 to
December 31, 2006. In 2006, we also settled with the German
grant authorities and remitted approximately $0.5 million
to satisfy all potential claim reimbursements, all of which was
previously accrued.
Restructuring expense of $0.3 million for the year ended
December 31, 2005 was related to changes in estimates of
the grant refunds due to the German grant authorities.
In September 2004, we restructured our operations to reduce
operating expenses and concentrate our resources on certain key
products and product candidates. As a result, we recorded a
$1.7 million restructuring charge in 2004 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
second restructuring charge of $1.2 million in the fourth
quarter of 2004, including facility-related costs of
$1.1 million and $0.1 million related to a contract
termination fee. The majority of the facility-related costs
consisted of the write off of the leasehold improvements and
fixed assets in our German facility, 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.
Following is the activity in our restructuring accrual (in
thousands):
|
|
|
|
|
Balance, December 31, 2004
|
|
$
|
907
|
|
Adjustments
|
|
|
255
|
|
Payments
|
|
|
(530
|
)
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
632
|
|
Adjustments
|
|
|
(34
|
)
|
Payments
|
|
|
(598
|
)
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
2004 to 2005
|
|
|
Interest income
|
|
$
|
3.2
|
|
|
$
|
2.2
|
|
|
$
|
0.5
|
|
|
$
|
1.0
|
|
|
|
45
|
%
|
|
$
|
1.7
|
|
|
|
340
|
%
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(1.5
|
)
|
|
|
0.2
|
|
|
|
(67
|
)%
|
|
|
1.2
|
|
|
|
(80
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense),
net
|
|
$
|
3.1
|
|
|
$
|
1.9
|
|
|
$
|
(1.0
|
)
|
|
$
|
1.2
|
|
|
|
63
|
%
|
|
$
|
2.9
|
|
|
|
290
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1.0 million, or 45%, from
2005 to 2006 primarily related to higher interest rates during
2006.
The increase in interest income of $1.7 million, or 340%,
from 2004 to 2005 primarily related to increased average
investment balances resulting from a higher cash balance
available for investment following our initial public offering
in January 2005, or IPO, as well as higher interest rates.
The decrease in interest expense of $0.2 million, or 67%,
from 2005 to 2006 was primarily related to lower outstanding
debt obligations. The decrease in interest expense of
$1.2 million, or 80%, from 2004 to 2005 relates primarily
to lower outstanding debt obligations, as well as the reduction
of interest on the related party notes payable, which were paid
in full following the closing of our IPO in January 2005.
Liquidity
and Capital Resources
From inception through December 31, 2006, we have raised
$192.5 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 payable
of $14.0 million, and accrued interest thereon of
$1.5 million. As of December 31, 2006, we had
approximately $51.2 million in cash, cash equivalents and
investments.
Table excerpted from our Consolidated Statements of Cash Flows
(in millions):
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Years Ended December 31,
|
|
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$ Change
|
|
|
$ Change
|
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|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005 to 2006
|
|
|
2004 to 2005
|
|
|
Net cash used in operating
activities
|
|
$
|
(8.4
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(15.1
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
13.7
|
|
Net cash used in investing
activities
|
|
|
(6.7
|
)
|
|
|
(9.5
|
)
|
|
|
(15.6
|
)
|
|
|
2.8
|
|
|
|
6.1
|
|
Net cash provided by (used in)
financing activities
|
|
|
(0.1
|
)
|
|
|
37.6
|
|
|
|
(1.3
|
)
|
|
|
(37.7
|
)
|
|
|
38.9
|
|
Cash and cash equivalents, end of
period
|
|
$
|
18.0
|
|
|
$
|
33.1
|
|
|
$
|
6.7
|
|
|
$
|
(15.1
|
)
|
|
$
|
26.4
|
|
Net cash used in operating activities was $8.4 million for
the year ended December 31, 2006, an increase of 500% from
the $1.4 million used in 2005. Net cash used in operating
activities decreased 91% in 2005 compared to the
$15.1 million used in 2004.
For the year ended December 31, 2006, the $8.4 million
cash used in operating activities was primarily due to our net
loss of $21.0 million and a net decrease in deferred rent
of $1.0 million due to amortization against rent expense of
rent credits received from our landlord, reduced by non-cash
expenses of $6.0 million, a net increase in deferred
revenue of $6.3 million related to sales of long-term
pre-paid storage contracts, and a net decrease in working
capital (accounts receivable, prepaid expenses and other current
assets, accounts payable, and accrued expenses) of
$1.3 million.
Net cash used in investing activities for the year ended
December 31, 2006 was $6.7 million, a decrease of 29%
from the $9.5 million used in 2005. Net cash used in
investing activities decreased 39% in 2005 compared to the
$15.6 million used in 2004. For the year ended
December 31, 2006, $50.6 million of
U.S. Government and high-rated corporate securities matured
and $56.4 million was invested in similar securities. We
also invested approximately $1.8 million in property and
equipment during 2006 and received proceeds of approximately
$0.6 million related to our agreement to sell certain
property and equipment previously written off in the December
2004 restructuring.
41
Net cash used in financing activities in 2006 was
$0.1 million, net cash provided by financing activities
amounted to $37.6 million in 2005 and net cash used in
financing activities amounted to $1.3 million in 2004. For
the year ended December 31, 2006, the net cash used in
financing activities was related to repayment of debt
obligations of $1.5 million, offset by proceeds from the
return of a security deposit related to our debt obligations of
$0.9 million and proceeds of $0.5 million from the
exercise of stock options.
We anticipate that our current cash, cash equivalents and
investments will be sufficient to fund our operations and meet
our anticipated liquidity needs 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 and meet our liquidity needs is a forward-looking
statement that involves risks and uncertainties. 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, 2006 (in millions and does not include our
accounts payable and accrued expenses):
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|
Less Than
|
|
|
One to Three
|
|
|
Four to Five
|
|
|
After Five
|
|
Contractual Obligations
|
|
Total
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Operating lease obligations
|
|
$
|
15.0
|
|
|
$
|
1.8
|
|
|
$
|
3.8
|
|
|
$
|
4.0
|
|
|
$
|
5.4
|
|
Capital lease obligations
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(1)
|
|
|
20.0
|
|
|
|
6.5
|
|
|
|
11.1
|
|
|
|
1.1
|
|
|
|
1.3
|
|
Contingent purchase price(2)
|
|
|
8.2
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
43.3
|
|
|
$
|
10.6
|
|
|
$
|
14.9
|
|
|
$
|
5.1
|
|
|
$
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the $20.0 million payable under purchase obligations,
$2.2 million relates to cancelable agreements. |
|
(2) |
|
See Note 8 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, provided that the physician allows 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 of $51,000
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, 2006 and
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.
42
Other than outstanding warrants exercisable for up to
1,443,333 shares of our common stock at December 31,
2006, we have no off balance sheet arrangements, as
defined by Item 303(a)(4) of the SECs
Regulation S-K.
Please see note 10 of our consolidated financial statements
for a description of the warrants.
Loan
Obligation
In October 2003, we entered into a $5.0 million loan
agreement with a lender. Borrowings under this agreement bore
interest at 6.9% percent per annum and were collateralized by
our property and equipment. The loan balance was fully repaid in
October 2006. Upon repayment of the loan, the $0.9 million
deposit held by the lender was refunded to us.
Lease
Obligations
We entered into a new operating lease commitment in December
2003 to consolidate our headquarters and U.S. laboratory
facilities in one location in Cambridge, Massachusetts. Rent
expense on the office portion of the original lease commenced in
April 2004 and the rent on the laboratory facilities commenced
in November 2004, for a term of ten years. Our office rent under
this lease 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. In February 2006, we amended this lease agreement to add
an additional 7,600 feet of office space. 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 had 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. In November
2005, the
sub-lessee
verbally gave notice of its intent not to extend the sublease
past December 31, 2006. The sublessee had prepaid rent
through December 2006. In August 2006, we amended our lease
agreement to terminate the lease on December 31, 2006 and
sold the clean room and laboratory equipment for approximately
$0.6 million in cash.
In February 2002, we entered into a lease commitment for our
research facility in Singapore. This lease has a five-year term
that terminates in May 2007 with an annual rent of approximately
$0.1 million per year.
Acquisition
of Kourion Therapeutics
There are potential future payments totaling up to
$9.0 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, as potential
additional consideration in our acquisition of Kourion
Therapeutics, we issued 241,481 additional shares of
Series I convertible preferred stock (which automatically
converted into common stock upon completion of our IPO) to an
escrow account and reserved 289,256 shares of Series I
convertible preferred stock for possible issuance in the future.
We have made a determination that the underlying conditions for
issuance of the escrow
43
shares and the reserved shares are no longer capable of being
met. As a result, as of September 30, 2006, the escrow
shares were deemed cancelled and the reserved shares will not be
issued.
License
Agreement
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. The agreement provides for 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.
Other
Arrangements
Mothers
Work Data and Marketing Services
In August 2006, we entered into a data license and marketing
services agreement with Mothers Work, Inc., the worlds
largest designer and retailer of maternity apparel. Mothers Work
operates several large maternity store retail chains such as
Motherhood
Maternity®,
A Pea in the
Pod®,
Mimi
Maternity®,
and Destination
Maternitytm.
Under the terms of our agreement, Mothers Work has granted us an
exclusive license within the field of preserving stem cells from
cord blood and other sources to market directly to those Mothers
Work customers who have affirmatively agreed to permit
disclosure of their data and information. Mothers Work has also
agreed to provide certain in-store marketing services related to
the ViaCord service offering. Under the terms of our agreement,
we will pay Mothers Work $5,000,000 per year over the
three-year term of the agreement which began on January 1,
2007 and, unless earlier terminated, ends on December 31,
2009. Under certain circumstances, we will also be obligated, at
the beginning of 2009, to issue Mothers Work a warrant to
purchase 100,000 shares of our common stock (See
Note 10 to our consolidated financial statements). A third
party is claiming that it has rights under an agreement with
Mothers Work that supersede Mothers Works commitment to
us. The dispute between Mothers Work and the third party was the
subject of an arbitration proceeding. In February 2007, the
arbitrator ruled in favor of Mothers Work. While there is no
assurance that the third party will not challenge the
arbitrators ruling, we believe that reversal of this
ruling is unlikely and that the termination rights under our
agreement with Mothers Work are unlikely to be triggered. As a
condition to commencing the agreement on January 1, 2007,
we agreed to indemnify Mothers Work for any damages that Mothers
Work may be assessed in the event that Mothers Work is found to
be in breach of its agreement with the third party as a result
of having entered into an agreement with us. We also agreed to
reimburse Mothers Work for certain legal fees if the fees exceed
a specified threshold. Our potential obligation to Mothers Work
under the indemnification agreement is unlimited. However, based
on our assessment of the low likelihood that we might have to
pay damages or legal fees given the arbitrators ruling, we
concluded the fair value of our indemnification obligation is
not material and have not recorded a liability as of
December 31, 2006.
SCIV
Centocor Research Collaboration
In June 2006, we entered into a research collaboration agreement
with the Stem Cell Internal Venture of Centocor Research and
Development, Inc., or SCIV Centocor, to evaluate our proprietary
cord blood-derived multi-potent stem cells in pre-clinical
testing as a potential treatment for cardiac disease. The
collaboration is also supported by the Biologics Delivery
Systems Group of Cordis Corporation, and will focus on dosing,
delivery and targeting of our expanded proprietary cord blood
stem cells using Cordis NOGA XP delivery system. Under the
terms of the agreement, we received an initial up-front payment
of $350,000 which we recorded as a liability and are amortizing
as a reduction of research and development expense, as work is
performed. SCIV Centocor will be responsible for its own costs
under the collaboration and will pay 50% of the research costs
that we incur under the collaboration, consistent with the
agreed upon budget. In addition, the agreement provides SCIV
with the first right to negotiate a collaboration with us on the
clinical development and commercialization of a cardiac product
offering based on our proprietary cord blood stem cells.
44
Amgen
Collaboration
In December 2003, we entered into a license and collaboration
agreement with Amgen under which we received a 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 current Good Manufacturing Practices, or 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.
Miltenyi
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 was
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 were obligated to pay Miltenyi
up to $1.0 million for development work. As of
December 31, 2006, we had paid the entire $1.0 million
relating to the development of the product.
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. In
2006, we purchased approximately $1.3 million of cell
separation kits to be used in our research. We have a firm order
to purchase an additional $0.3 million of kits in 2007.
Since we have decided not to progress CB001 into further
clinical trials, we do not expect that we will have any
additional commitments beyond our current firm order.
We are a party to various agreements in addition to those
previously discussed, including license, research collaboration,
consulting and employment agreements and expect to enter into
additional agreements in the future. We may require additional
funds for conducting clinical trials and for pre-clinical
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, 2006, we had federal and state net
operating loss carryforwards of approximately $87.8 million
and $93.3 million, respectively. These carryforwards begin
expiring in 2009 and 2006, respectively. We also had federal and
state credit carryforwards of approximately $3.4 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. We also have foreign net operating loss
carryforwards of $14.8 million. The carryforwards expire
through 2024 and are subject to review and possible adjustment
by the local tax authorities. 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
45
offset future taxable income. Of the $61.0 million
valuation allowance, $1.0 million relates to nonqualified
stock option deductions, the benefit of which will be credited
to additional paid in capital if and when realized.
Legal
Proceedings
In 2002, PharmaStem Therapeutics, Inc. filed suit against us and
several other defendants in the U.S. District Court for the
District of Delaware, alleging infringement of U.S. 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., a subsidiary of Cord Blood America
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 prove infringement, consequently we have not
recorded a liability as of September 30, 2006. PharmaStem
has appealed the judges decision. We have appealed the
jurys finding as to validity of the patents. A hearing on
the appeal took place at the U.S. Court of Appeals for the
Federal Circuit on April 4, 2006 and a final ruling has not
been issued.
In July 2004, PharmaStem filed a second complaint against us.
The second complaint was filed in the U.S. 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/or that
we do not infringe them. 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.
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
described below.
In late 2006, the U.S. PTO issued final decisions in the
existing 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. The U.S. PTO had ordered a second
re-examination of the 427 patent in order to determine
whether certain claims of the patent should expire in 2008,
rather than in 2010. The U.S. PTO issued notice of its
intent to allow the remaining claims of all of the patents.
In either of the pending cases, if we are ultimately found to
infringe valid claims of the PharmaStem patents, we could have a
significant damages award entered against us. If we are found to
infringe during the course of either case, including 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 could 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.
46
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 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, or GAAP. The preparation of these
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions. Our critical accounting
policies include:
|
|
|
|
|
revenue recognition;
|
|
|
|
accounting for stock-based compensation;
|
|
|
|
accounting for accounts receivable;
|
|
|
|
accounting for research and development expenses; and
|
|
|
|
accounting for the Mothers Work indemnification agreement.
|
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 Revenue Recognition in
Financial Statements, (SAB 101) as amended by
SAB 104, Revenue Recognition, corrected
copy, and Emerging Issues Task Force (EITF) Issue
No. 00-21
Revenue Arrangements with Multiple Deliverables
(EITF
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.
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. We
have concluded that the collection, testing and freezing service
has stand alone value to the customer. The fair value of our
processing service cannot be determined but we have objective
evidence of the fair value of the undelivered
storage. The fair value of the storage is equal to the annual
storage fee charged to customers on a stand-alone basis. We
charge an initial fee which covers collection, testing,
freezing, and, typically, one year of storage. We defer the fair
value of the revenue related to the future storage of the unit
and recognize the remainder of the revenue for processing under
the residual method.
Accounting for Stock-Based Compensation. We
have one stock-based employee compensation plan. On
January 1, 2006, we adopted SFAS 123R using the
modified prospective method, which results in the provisions of
SFAS 123R only being applied to the consolidated financial
statements on a going-forward basis (that is, the prior period
results have not been restated). Under the fair value
recognition provisions of SFAS 123R, stock-based
compensation expense is measured at the grant date based on the
value of the award and is recognized as expense over the
requisite service period. Stock-based employee compensation
expense was $3.1 million for the year ended
December 31, 2006. Previously, we had followed Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, which
resulted in the accounting for employee stock options at their
intrinsic value in the consolidated financial statements.
47
We utilize the Black Scholes option pricing model to calculate
the fair value of stock options granted under SFAS 123(R).
We are required to make significant estimates to note all
required inputs to the Black Scholes model including expected
volatility and expected term which are discussed separately.
Changes in the subjective input assumptions can materially
affect the fair value estimate of stock-based compensation
expense. Our expected stock-price volatility assumption is based
on both current implied volatility and historical volatilities
of the underlying stock which is obtained from public data
sources. For stock options granted during the year ended
December 31, 2006, we used a weighted-average expected
stock-price volatility of 65%. Higher estimated volatility
increases the fair value of a stock option, and therefore
increases the expense to be recognized per stock option. We also
determined the weighted-average option life assumption based on
the exercise behavior that different employee groups exhibited
historically, adjusted for specific factors that may influence
future exercise patterns. For stock option grants made during
the year ended December 31, 2006, we used a
weighted-average expected option life assumption of
4.57 years. Longer expected term assumptions increase the
fair value of the stock option, and therefore increase the
expense to be recognized per stock option.
We recognized the full impact of our stock-based employee
compensation plan in the consolidated statement of income for
year ended December 31, 2006 under SFAS 123R and did
not capitalize any such costs on the consolidated balance
sheets. Upon adoption of SFAS 123R, using the modified
prospective method, we recognized a benefit of $0.3 million
during the year ended December 31, 2006 as a cumulative
effect of a change in accounting principle resulting from the
requirement to estimate forfeitures of our stock option grants
at the date of grant instead of recognizing them as incurred.
The estimated forfeiture rate was applied to the previously
recorded
stock-based
compensation expense of our unvested stock options in
determining the cumulative effect of a change in accounting
principle.
Accounting for accounts receivable. Accounts
receivable consists of amounts primarily due from customers that
have used the ViaCord service offering. 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 research and development
expenses. Our research and development expenses
consist primarily of costs associated with development of our
stem cell product candidates, including the recently completed
Phase 1 clinical trial of our expanded umbilical cord blood
product candidate, CB001, and development of ViaCyte, our oocyte
cryopreservation product candidate. 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. 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
these potential increases 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.
48
Accounting for the Mothers Work indemnification
agreement. In August 2006, we entered into a data
license and marketing services agreement with Mothers Work,
Inc., the worlds largest designer and retailer of
maternity apparel. Mothers Work operates several large maternity
store retail chains such as Motherhood
Maternity®,
A Pea in the
Pod®,
Mimi
Maternity®,
and Destination
Maternitytm.
Under the terms of our agreement, Mothers Work has granted us an
exclusive license within the field of preserving stem cells from
cord blood and other sources to market directly to those Mothers
Work customers who have affirmatively agreed to permit
disclosure of their data and information. Mothers Work has also
agreed to provide certain in-store marketing services related to
the ViaCord service offering. The agreement can be terminated
early by either company if the other company commits a material
breach of the agreement or under certain circumstances arising
from claims by a third party alleging that the third party has
rights that supersede Mothers Works commitment to us. The
dispute between Mothers Work and the third party was the subject
of an arbitration proceeding. In February 2007, the arbitrator
ruled in favor of Mothers Work. While there is no assurance that
the third party will not challenge the arbitrators ruling,
we believe that reversal of the ruling is unlikely and that the
termination rights under our agreement with Mothers Work are
unlikely to be triggered. As a condition to commencing the
agreement on January 1, 2007, we agreed to indemnify
Mothers Work for any damages that Mothers Work may be assessed
in the event that Mothers Work is found to be in breach of its
agreement with the third party as a result of having entered
into an agreement with us. We also agreed to reimburse Mothers
Work for certain legal fees if the fees exceed a specified
threshold. FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
(FIN 45) requires us to record a liability based
on the estimated fair value of the indemnification provided. Our
potential obligation to Mothers Work under the indemnification
agreement is unlimited. However, based on our assessment of the
amount of damages and legal fees that could be payable, and the
low likelihood that they might have to be paid given the
arbitrators ruling, we concluded the fair value of our
indemnification obligation is not material and have not recorded
a liability as of December 31, 2006. Our assumptions
involve judgments by management and are subject to change based
on on-going developments or binding results of the arbitration
proceedings that could result in materially different results
than our current estimate.
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115
(SFAS 159), which permits entities to choose to
measure many financial instruments and certain other items at
fair value. SFAS 159 will be effective for the first fiscal
year that begins after November 15,2007. We have not yet
completed our evaluation of the impact of adoption of
SFAS 159 on our financial position or results of operations.
In September 2006, FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS No. 157) which defines fair value
under GAAP, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value
measurements. Where applicable, SFAS No. 157
simplifies and codifies related guidance within GAAP and does
not require any new fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We do not expect
the adoption of SFAS No. 157 to have a significant
immediate effect on our financial position or results of
operations.
In June 2006, FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 will be effective for
fiscal years beginning after December 15, 2006. FIN 48
also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. We do not expect the adoption of
FIN 48 to have a significant immediate effect on our
financial position or results of operations.
49
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Quantitative
and Qualitative Disclosures About Market Risks
Investment
Risk
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.
Foreign
Exchange Risk
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 U.S. 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 the 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.
Interest
Rate Risk
We invest our cash in a variety of financial instruments,
principally securities issued by the U.S. government and its
agencies, investment grade corporate and money market
instruments. These investments are denominated in U.S. dollars.
These bonds are subject to interest rate risk, and could decline
in value if interest rates fluctuate. Due to the conservative
nature of these instruments, we do not believe that we have a
material exposure to interest rate risk.
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ITEM 8.
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CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements are annexed to this report
beginning on
page F-1.
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ITEM 9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
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ITEM 9A.
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CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures and Internal Control over Financial
Reporting
Controls
and Procedures
We have carried out an evaluation, under the supervision and the
participation of our management, including our principal
executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act), as of December 31, 2006. Based
upon that evaluation, our principal executive officer and
principal financial officer concluded that, as of the end of
that period, our disclosure controls and procedures are
effective in providing reasonable assurance that (a) the
information required to be disclosed by us in the reports that
we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and (b) such
information 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. In designing and evaluating our
disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives,
50
and our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Changes
in Internal Control over Financial Reporting
We evaluate the effectiveness of our internal control over
financial reporting in order to comply with Section 404 of
the Sarbanes-Oxley Act of 2002. Section 404 requires us to
evaluate annually the effectiveness of our internal controls
over financial reporting as of the end of each fiscal year, and
to include a management report assessing the effectiveness of
our internal control over financial reporting in all annual
reports. We have not made any changes in our internal control
over financial reporting during the quarter ended
December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act as a process designed by, or
under the supervision of, a companys principal executive
and principal financial officers and effected by a
companys board of directors, management and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that:
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pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and
directors; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
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Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2006.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control
Integrated Framework.
Based on our assessment, our management has concluded that, as
of December 31, 2006, our internal control over financial
reporting is effective based on those criteria. Our
managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on
page F-2
of this Annual Report on
Form 10-K.
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ITEM 9B.
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OTHER
INFORMATION
|
None.
51
PART III
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ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required with respect to directors is
incorporated herein by reference to the information contained in
the definitive proxy statement for our 2007 Annual Meeting of
Stockholders, or the Proxy Statement. The information with
respect to our audit committee and the 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 Corporate 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 Corporate 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
Corporate Code of Business Conduct and Ethics on our website.
Stockholders may request a free copy of the Corporate 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
Set forth below is information regarding our executive officers
and key employees as of March 8, 2007.
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Name
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Age
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Positions
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Executive Officers:
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Marc D. Beer
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42
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President, Chief Executive Officer
and Director
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Anne Marie Cook
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45
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General Counsel, Senior Vice
President, Business and Corporate Development
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Stephen G. Dance
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55
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Senior Vice President, Finance and
Chief Financial Officer
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Jim Corbett
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44
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President, ViaCell Reproductive
Health
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Morey Kraus
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48
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Vice President and Chief
Technology Officer
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Mary T. Thistle
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47
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Senior Vice President, Business
Development, ViaCell Reproductive Health
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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).
Anne Marie Cook. Ms. Cook has served as
General Counsel, Senior Vice President, Business and Corporate
Development, 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, 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.
52
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.
Jim Corbett. Mr. Corbett has served as
our President, ViaCell Reproductive Health since April 2006.
Prior to joining ViaCell, Mr. Corbett co-founded CADx
Systems, a company focused on the oncology market, where he held
the position Executive Vice President and Director with
responsibility for worldwide sales and marketing, technical
support and business development. Following the 2004 acquisition
of CADx by iCAD, Inc., Mr. Corbett served as Chief
Commercial Officer of the combined company. Prior to founding
CADx Systems, Mr. Corbett held a variety of sales and
marketing positions at Abbott Laboratories, Inc., including
Worldwide Marketing Manager for Abbott Diagnostics Immunoassay
Systems and Region Manager of Abbott Diagnostics.
Mr. Corbett received a B.Sc. from the University of
Massachusetts, Amherst.
Morey Kraus. Mr. Kraus is the co-founder
of ViaCell. Mr. Kraus 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.
Mary T. Thistle. Ms. Thistle has served
as our Senior Vice President, Business Development, ViaCell
Reproductive Health since April 2006. Prior to her current
position, she served as our Senior Vice President and General
Manager of ViaCell Reproductive Health from October 2004 to
April 2006, Vice President, ViaCord Operations from March 2002
to October 2004, and Vice President, Financial and Corporate
Planning and Treasurer, from October 2000 to March 2002. 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. 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, Amherst.
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ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference to the Proxy Statement under the heading
Executive Compensation.
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ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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.
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ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item is incorporated by
reference to the Proxy Statement under the heading Related
Person Transactions and Director Independence.
53
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ITEM 14.
|
PRINCIPAL
ACCOUNTANT 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
|
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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.
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Page Number in
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This
Form 10-K
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F-1
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F-3
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F-4
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F-5
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F-6
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F-7
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F-8
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(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
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Exhibit No.
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Description of Document
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3
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.1(1)
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Sixth Amended and Restated
Certificate of Incorporation.
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3
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.2(1)
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Amended and Restated By-laws.
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4
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.1(1)
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Specimen Stock Certificate.
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4
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.2(5)
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Form of Warrant to purchase Common
Stock, together with a list of holders.
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4
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.3(1)
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Warrant issued to Amgen Inc. on
April 9, 2002.
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4
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.4(9)
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Warrant issued to Amgen Inc. on
August 29, 2005.
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10
|
.1(4)
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Amended and Restated 1998 Equity
Incentive Plan.**
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10
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.2(7)
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Form of Non-statutory Stock Option
Certificate.**
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10
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.3(7)
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Form of Incentive Stock Option
Certificate.**
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10
|
.4(1)
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Letter agreement dated
September 12, 2003 between ViaCell and Jan van Heek.**
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10
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.5(1)
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Letter agreement dated
November 4, 2003 between ViaCell and Vaughn M. Kailian.**
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10
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.6(6)
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Letter agreement dated
December 15, 2002 between ViaCell and Paul Hastings.**
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10
|
.7(1)
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Stock Purchase Agreement dated
September 30, 2003 by and among ViaCell, Kourion
Therapeutics AG and the shareholders of Kourion Therapeutics.
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10
|
.8(2)
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|
Amendment to Stock Purchase
Agreement dated October 25, 2004 by and among ViaCell,
Kourion Therapeutics AG and the shareholders of Kourion
Therapeutics.
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10
|
.9(1)
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Non-Exclusive License Agreement
dated January 1, 2003 between ViaCell and SmithKline
Beecham Corporation d/b/a GlaxoSmithKline and Glaxo Group
Limited.
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10
|
.10(1)
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Collaboration Agreement dated
December 23, 2003 between ViaCell and Amgen Inc.
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54
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Exhibit No.
|
|
Description of Document
|
|
|
10
|
.11(1)
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License Agreement dated
March 15, 2002 between ViaCell Endocrine Science, Inc. and
the General Hospital Corporation, d/b/a Massachusetts General
Hospital.
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10
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.12(1)
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License Agreement dated
August 1, 2002 between ViaCell and Massachusetts Institute
of Technology.
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10
|
.13(1)
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Lease Agreement dated
April 12, 2002 between ViaCell and Dugan Financing LLC.
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10
|
.14(1)
|
|
Lease Agreement dated
December 22, 2003 between ViaCell and MA-Riverview/245
First Street, LLC.
|
|
10
|
.15(10)
|
|
First Amendment dated
February 14, 2006 to Lease Agreement between ViaCell and
MA-Riverview/245 First Street, LLC.
|
|
10
|
.16(1)
|
|
Letter Agreement dated
March 11, 2004 between ViaCell and Stephen Dance.**
|
|
10
|
.17(2)
|
|
License Agreement dated
September 1, 2004 between Tyho Galileo Research Laboratory,
LLC and ViaCell.
|
|
10
|
.18(3)
|
|
Research Agreement dated
December 13, 2004 between Genzyme Corporation and ViaCell.
|
|
10
|
.19(8)
|
|
Development Agreement dated
January 24, 2005 between ViaCell and Miltenyi Biotec GmbH.
|
|
10
|
.20(8)
|
|
Supply Agreement dated
January 24, 2005 between ViaCell and Miltenyi Biotec GmbH.
|
|
10
|
.21(9)
|
|
Amendment No. 1 to
Collaboration Agreement dated August 29, 2005 between
ViaCell and Amgen Inc.
|
|
10
|
.22(9)
|
|
Warrant Purchase Agreement dated
August 29, 2005 between ViaCell and Amgen Inc.
|
|
10
|
.23(9)
|
|
Exclusive License Agreement dated
August 29, 2005 among Johns Hopkins University, Zheijiang
University and ViaCell.
|
|
10
|
.24(4)
|
|
2004 Employee Stock Purchase
Plan.**
|
|
10
|
.25(11)
|
|
Amended and restated employment
agreement dated March 12, 2007 between ViaCell and Marc D.
Beer.**
|
|
10
|
.26(11)
|
|
Amended and restated letter
agreement dated March 12, 2007 between ViaCell and Anne
Marie Cook.**
|
|
10
|
.27(11)
|
|
Amended and restated letter
agreement dated March 12, 2007 between ViaCell and Jim
Corbett.**
|
|
10
|
.28(11)
|
|
Amended and restated employment
agreement dated March 12, 2007 between ViaCell and Morey
Kraus.**
|
|
10
|
.29(11)
|
|
Amended and restated letter
agreement dated March 12, 2007 between ViaCell and Mary
Thistle.**
|
|
21
|
.1
|
|
Subsidiaries of ViaCell.
|
|
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. 3 to the registration statement on
Form S-1
(No. 333-114209)
filed with the SEC on October 26, 2004. |
|
(3) |
|
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. |
|
(4) |
|
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. |
|
(5) |
|
Incorporated by reference to the Companys registration
statement on Form
S-1
(No. 333-81650)
filed with the SEC on January 30, 2002. |
55
|
|
|
(6) |
|
Incorporated by reference to the Companys Amendment
No. 1 to the registration statement on
Form S-1
(No. 333-81650)
filed with the SEC on March 25, 2002. |
|
(7) |
|
Incorporated by reference to the Companys annual report on
Form 10-K
(No. 000-51110)
filed with the SEC on March 31, 2005. |
|
(8) |
|
Incorporated by reference to the Companys quarterly report
on
Form 10-Q
(No. 000-51110)
filed with the SEC on May 13, 2005. |
|
(9) |
|
Incorporated by reference to the Companys quarterly report
on
Form 10-Q
(No. 000-51110)
filed with the SEC on November 14, 2005. |
|
(10) |
|
Incorporated by reference to the Companys annual report on
Form 10-K
(No. 000-51110)
filed with the SEC on March 31, 2006. |
|
(11) |
|
Incorporated by reference to the Companys current report
on
Form 8-K
(No. 000-51110)
filed with the SEC on March 13, 2007. |
|
|
|
|
|
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. |
56
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.
ViaCell, Inc.
Marc D. Beer
Chief Executive Officer
Date: March 16, 2007
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, 2007.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Marc
D. Beer
Marc
D. Beer
|
|
Chief Executive Officer and
Director (Principal Executive Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Stephen
G. Dance
Stephen
G. Dance
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Barbara
Bierer
Barbara
Bierer
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Paul
Blake
Paul
Blake
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Paul
Hastings
Paul
Hastings
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Vaughn
M. Kailian
Vaughn
M. Kailian
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Denise
Pollard-Knight
Denise
Pollard-Knight
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ James
Sigler
James
Sigler
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ James
Tullis
James
Tullis
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Jan
van Heek
Jan
van Heek
|
|
Director
|
|
March 16, 2007
|
57
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ViaCell, Inc.:
We have completed an integrated audit of ViaCell, Inc.s
2006 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2006
and audits of its 2005 and 2004 consolidated financial
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of ViaCell, Inc.
and its subsidiaries at December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Annual Report on Internal Control Over
Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable
F-1
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2007
F-2
ViaCell,
Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,039
|
|
|
$
|
33,138
|
|
Short-term investments
|
|
|
33,206
|
|
|
|
27,406
|
|
Accounts receivable, less
allowances of $1,787 and $1,068 in 2006 and 2005, respectively
|
|
|
12,616
|
|
|
|
13,736
|
|
Prepaid expenses and other current
assets
|
|
|
2,008
|
|
|
|
2,679
|
|
Restricted cash
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
65,869
|
|
|
|
77,121
|
|
Property and equipment, net
|
|
|
8,376
|
|
|
|
8,702
|
|
Goodwill
|
|
|
3,621
|
|
|
|
3,621
|
|
Intangible assets, net
|
|
|
2,621
|
|
|
|
2,823
|
|
Restricted cash
|
|
|
1,795
|
|
|
|
1,932
|
|
Other assets
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
82,282
|
|
|
$
|
94,230
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
obligations
|
|
$
|
55
|
|
|
$
|
1,543
|
|
Accounts payable
|
|
|
960
|
|
|
|
1,141
|
|
Accrued expenses
|
|
|
9,550
|
|
|
|
7,706
|
|
Deferred revenue
|
|
|
7,300
|
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,865
|
|
|
|
16,175
|
|
Deferred revenue
|
|
|
14,666
|
|
|
|
9,930
|
|
Deferred rent
|
|
|
3,252
|
|
|
|
3,876
|
|
Contingent purchase price
|
|
|
8,155
|
|
|
|
8,155
|
|
Long-term debt obligations, net of
current portion
|
|
|
27
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
43,965
|
|
|
|
38,220
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; authorized 5,000,000 shares in 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; authorized 100,000,000 shares in 2006 and 2005,
respectively; issued and outstanding 38,525,036 and
38,117,725 shares in 2006 and 2005, respectively
|
|
|
385
|
|
|
|
381
|
|
Additional paid-in capital
|
|
|
232,215
|
|
|
|
229,955
|
|
Deferred compensation
|
|
|
|
|
|
|
(1,087
|
)
|
Accumulated deficit
|
|
|
(194,490
|
)
|
|
|
(173,443
|
)
|
Accumulated other comprehensive
income
|
|
|
207
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
38,317
|
|
|
|
56,010
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
82,282
|
|
|
$
|
94,230
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ViaCell,
Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except share and per share data)
|
|
|
Processing and storage revenues
|
|
$
|
54,136
|
|
|
$
|
43,775
|
|
|
$
|
36,805
|
|
Grant and contract revenues
|
|
|
290
|
|
|
|
668
|
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
54,426
|
|
|
|
44,443
|
|
|
|
38,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of processing and storage
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
10,253
|
|
|
|
8,298
|
|
|
|
7,396
|
|
Royalty recovery
|
|
|
|
|
|
|
|
|
|
|
(3,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of processing and
storage revenues
|
|
|
10,253
|
|
|
|
8,298
|
|
|
|
4,138
|
|
Research and development
|
|
|
13,984
|
|
|
|
13,653
|
|
|
|
16,030
|
|
Sales and marketing
|
|
|
37,154
|
|
|
|
24,909
|
|
|
|
19,497
|
|
General and administrative
|
|
|
18,525
|
|
|
|
13,835
|
|
|
|
15,551
|
|
Restructuring
|
|
|
(1,070
|
)
|
|
|
305
|
|
|
|
3,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78,846
|
|
|
|
61,000
|
|
|
|
58,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(24,420
|
)
|
|
|
(16,557
|
)
|
|
|
(20,130
|
)
|
Interest income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,141
|
|
|
|
2,216
|
|
|
|
530
|
|
Interest expense
|
|
|
(51
|
)
|
|
|
(336
|
)
|
|
|
(1,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense),
net
|
|
|
3,090
|
|
|
|
1,880
|
|
|
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(21,330
|
)
|
|
|
(14,677
|
)
|
|
|
(21,097
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,047
|
)
|
|
|
(14,677
|
)
|
|
|
(21,097
|
)
|
Accretion on redeemable
convertible preferred stock
|
|
|
|
|
|
|
(986
|
)
|
|
|
(13,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(21,047
|
)
|
|
$
|
(15,663
|
)
|
|
$
|
(34,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share before cumulative effect of change in accounting
principle
|
|
$
|
(0.56
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(12.62
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(12.62
|
)
|
Weighted average shares used in
basic and diluted net loss per share computation
|
|
|
38,377,238
|
|
|
|
35,777,308
|
|
|
|
2,707,219
|
|
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(21,047
|
)
|
|
$
|
(14,677
|
)
|
|
$
|
(21,097
|
)
|
Foreign currency translation
adjustment
|
|
|
3
|
|
|
|
(105
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(21,044
|
)
|
|
$
|
(14,782
|
)
|
|
$
|
(21,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ViaCell,
Inc.
Consolidated
Statements of Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
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, 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 on redeemable convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,081
|
)
|
|
|
|
|
|
|
(8,990
|
)
|
|
|
|
|
|
|
(13,071
|
)
|
Non-employee stock-based
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 costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,899
|
)
|
Accretion on redeemable convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(986
|
)
|
Conversion of redeemable
convertible preferred stock (Series A and B)
|
|
|
(182,857
|
)
|
|
|
(2
|
)
|
|
|
182,857
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of redeemable
convertible preferred stock (Series C through 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-based
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
|
|
|
|
|
|
$
|
0
|
|
|
|
38,117,725
|
|
|
$
|
381
|
|
|
$
|
229,955
|
|
|
$
|
(1,087
|
)
|
|
$
|
(173,443
|
)
|
|
$
|
204
|
|
|
$
|
56,010
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
198,938
|
|
|
|
2
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
541
|
|
Issuance of common stock upon
exercise of warrants, net
|
|
|
|
|
|
|
|
|
|
|
208,373
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,087
|
)
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,810
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,047
|
)
|
|
|
|
|
|
|
(21,047
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
38,525,036
|
|
|
$
|
385
|
|
|
$
|
232,215
|
|
|
$
|
|
|
|
$
|
(194,490
|
)
|
|
$
|
207
|
|
|
$
|
38,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,047
|
)
|
|
$
|
(14,677
|
)
|
|
$
|
(21,097
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,244
|
|
|
|
2,110
|
|
|
|
2,577
|
|
Stock-based compensation
|
|
|
3,095
|
|
|
|
2,163
|
|
|
|
3,429
|
|
Cumulative effect of change in
accounting principle
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
Reserve for bad debt
|
|
|
1,502
|
|
|
|
515
|
|
|
|
248
|
|
Non-cash interest expense on
related party notes
|
|
|
|
|
|
|
88
|
|
|
|
1,142
|
|
(Gain) loss on disposal of property
and equipment
|
|
|
(528
|
)
|
|
|
17
|
|
|
|
2,155
|
|
Tenant improvement allowance
|
|
|
60
|
|
|
|
2,437
|
|
|
|
1,004
|
|
Changes in assets and liabilities,
excluding the effect of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(367
|
)
|
|
|
(3,276
|
)
|
|
|
(3,376
|
)
|
Prepaid expenses and other current
assets
|
|
|
(192
|
)
|
|
|
2,853
|
|
|
|
(615
|
)
|
Accounts payable
|
|
|
(208
|
)
|
|
|
(115
|
)
|
|
|
(2,192
|
)
|
Accrued expenses
|
|
|
2,050
|
|
|
|
51
|
|
|
|
(2,513
|
)
|
Deferred revenue
|
|
|
6,251
|
|
|
|
5,527
|
|
|
|
4,092
|
|
Deferred rent
|
|
|
(1,005
|
)
|
|
|
873
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(8,428
|
)
|
|
|
(1,434
|
)
|
|
|
(15,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,791
|
)
|
|
|
(3,923
|
)
|
|
|
(2,393
|
)
|
Proceeds from sale of property and
equipment
|
|
|
603
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and sales
of investments
|
|
|
50,645
|
|
|
|
36,532
|
|
|
|
22,682
|
|
Purchases of investments
|
|
|
(56,444
|
)
|
|
|
(42,099
|
)
|
|
|
(36,697
|
)
|
Restricted cash
|
|
|
317
|
|
|
|
|
|
|
|
732
|
|
Security deposit
|
|
|
|
|
|
|
7
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(6,670
|
)
|
|
|
(9,483
|
)
|
|
|
(15,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
541
|
|
|
|
1,164
|
|
|
|
108
|
|
Net proceeds from sale of common
stock in initial public offering, net of offering costs
|
|
|
|
|
|
|
53,249
|
|
|
|
|
|
Proceeds from return of security
deposits on debt obligations
|
|
|
943
|
|
|
|
414
|
|
|
|
403
|
|
Repayments on credit facilities
|
|
|
(1,485
|
)
|
|
|
(1,674
|
)
|
|
|
(1,562
|
)
|
Repayments of notes payable to
related party, including accrued interest
|
|
|
|
|
|
|
(15,510
|
)
|
|
|
|
|
Payments on capital lease principal
|
|
|
(65
|
)
|
|
|
(86
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(66
|
)
|
|
|
37,557
|
|
|
|
(1,318
|
)
|
Effect of change in exchange rates
on cash
|
|
|
65
|
|
|
|
(248
|
)
|
|
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(15,099
|
)
|
|
|
26,392
|
|
|
|
(32,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
beginning of period
|
|
|
33,138
|
|
|
|
6,746
|
|
|
|
39,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
18,039
|
|
|
$
|
33,138
|
|
|
$
|
6,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information and non cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
53
|
|
|
$
|
273
|
|
|
$
|
325
|
|
Income taxes paid
|
|
|
71
|
|
|
|
153
|
|
|
|
73
|
|
Accretion of redeemable convertible
preferred stock
|
|
|
|
|
|
|
986
|
|
|
|
13,071
|
|
Equipment purchased under capital
lease, net of disposals
|
|
|
|
|
|
|
56
|
|
|
|
140
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
ViaCell,
Inc.
|
|
1.
|
Organization
and Nature of Business
|
ViaCell, Inc. (the Company or ViaCell)
is a biotechnology company dedicated to enabling the widespread
application of human cells as medicine. The Company has a
reproductive health business that generated revenues of
$54.1 million in 2006 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 in this area
by developing
ViaCytesm,
its product candidate intended to broaden reproductive choices
for women through the cryopreservation of human unfertilized
eggs. The Companys other research and development efforts
are focused on investigating new potential therapeutic uses of
umbilical cord-derived and adult stem cells and on technology
for expanding populations of these cells.
ViaCell was incorporated in the State of Delaware on
September 2, 1994. The Companys corporate
headquarters and main research facility are located in
Cambridge, Massachusetts. The Company has processing and storage
facilities in Hebron, Kentucky and an additional research and
development operation in Singapore.
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
outstanding immediately prior to the initial public offering
converted into 25,810,932 shares of common stock. On
January 26, 2005, the Company paid in full a related party
note of $15,509,760, which included all outstanding principal
and interest owed at that date.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Certain reclassifications of prior year amounts have been made
to conform with current year presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
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, 2006
|
|
|
December 31, 2005
|
|
|
|
Amortized
|
|
|
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Gain
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Cash and cash equivalents (money
market accounts)
|
|
$
|
14,492
|
|
|
$
|
14,492
|
|
|
$
|
|
|
|
$
|
29,807
|
|
|
$
|
29,807
|
|
|
$
|
|
|
Government securities
|
|
|
1,144
|
|
|
|
1,144
|
|
|
|
|
|
|
|
1,432
|
|
|
|
1,432
|
|
|
|
|
|
Cash
|
|
|
2,403
|
|
|
|
2,403
|
|
|
|
|
|
|
|
1,899
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
18,039
|
|
|
|
18,039
|
|
|
|
|
|
|
|
33,138
|
|
|
|
33,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
33,206
|
|
|
|
33,216
|
|
|
|
10
|
|
|
|
27,406
|
|
|
|
27,362
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short term investments
|
|
$
|
51,245
|
|
|
$
|
51,255
|
|
|
$
|
10
|
|
|
$
|
60,544
|
|
|
$
|
60,500
|
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with Companys commitments under various
agreements (Note 8) and one of the Companys
operating bank accounts, the Company issued letters of credit
totaling $2.6 million collateralized by certificates of
deposit of which $1.8 million are classified as restricted
cash on the accompanying consolidated balance sheet.
Revenue
Recognition
The Company recognizes revenue from cord blood processing and
storage fees in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements. The Company receives fees for collecting,
testing, freezing and storing of cord blood units. Once the cord
blood units are collected, tested, screened and successfully
meet all of the required attributes, the Company freezes the
units and stores them in a cryogenic freezer. Upon successful
completion of collection, testing, screening and freezing
services, the Company recognizes revenue for the processing fees.
When evaluating multiple element arrangements subsequent to
July 1, 2003, the Company considers whether the components
of the arrangement represent separate units of accounting as
defined in Emerging 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 undelivered items that have a right of return.
|
F-9
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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.
Revenue recognized from the collection, testing and freezing of
cord blood units was approximately $43.5 million,
$36.1 million, and $31.7 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Revenue from storage fees is recognized over the contractual
period on a straight-line basis and amounted to approximately
$10.6 million, $7.7 million, and $5.1 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
Deferred revenue of $22.0 million and $15.7 million at
December 31, 2006 and 2005, respectively, consists
primarily of the unearned portions of annual storage fees and
deposits paid by customers prior to completion of the
Companys processing service. Deferred revenue at
December 31, 2006 and 2005 also includes approximately $0
and $0.7 million, respectively, of unearned revenue related
to the Companys grant from the Economic Development Board
of Singapore.
The Company recognizes shipping costs billed to customers as
revenues and records the corresponding amount incurred 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 $0.5 million, $0.1 million, and $0.3 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. The rebates have been recorded as a reduction of
processing revenues for the years ended December 31, 2006,
2005 and 2004.
Revenues from short-term research contracts are recognized over
the contract period as services are provided. Revenues from
research contracts amounted to $0, $0, and $0.2 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
The Company recognized approximately $0.3 million,
$0.7 million, and $1.3 million in grant revenues in
the years ended December 31, 2006, 2005, and 2004,
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
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 their 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.
F-10
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 reversal of a royalty accrual in 2004. In
2003, the Company recorded a royalty expense of
$3.3 million following an unfavorable jury verdict in the
ongoing litigation with PharmaStem in October 2003. In 2004, the
District Court overturned the jury verdict. Based on the
judges ruling, the Company reversed the entire royalty
accrual in 2004 and has not recorded any royalties since such
date. PharmaStem has appealed the District Courts ruling.
PharmaStem has also filed a new lawsuit claiming that the
Company infringes additional patents (Note 8). Pending a
decision on the appeal and further action by the court on the
new litigation, the Company does not intend to record a royalty
expense in future periods, since the Company believes
PharmaStems claims are without merit.
Costs incurred related to grant and contract revenues are
included in research and development expenses.
Advertising
Costs
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
$3.7 million, $3.1 million, and $2.5 million for
the years ended December 31, 2006, 2005 and 2004,
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.
Foreign
Currency Translation
The financial statements of the Companys German
subsidiary, Kourion Therapeutics AG (Kourion), are
translated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, Foreign Currency
Translation. The functional currency of Kourion is the local
currency (Euro), and accordingly, all assets and liabilities of
the foreign subsidiary are translated using the exchange rate at
the balance sheet date except for capital accounts which are
translated at historical rates. Revenues and expenses are
translated at average rates during the period. Adjustments
resulting from the translation from the financial statements of
Kourion into U.S. 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.
Income
Taxes
The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases
of assets and liabilities, as well as net operating loss
carryforwards, and are measured using enacted tax rates in
effect for the year in which the differences are expected to
reverse. Deferred tax assets may be reduced by a valuation
allowance to reduce deferred tax assets to the amounts expected
to be realized.
Property
and Equipment
Property and equipment are initially recorded at cost and
depreciated over the estimated useful lives on a straight-line
basis. Leasehold improvements are amortized on a straight-line
basis over the estimated useful life of the asset or the lease
term, if shorter. The Company accounts for internal-use software
and website development
F-11
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 the statement of 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, and equipment loans. 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; 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 and 20 years for trademarks.
Accounting
for the Impairment of Long-Lived Assets
The Company periodically evaluates its long-lived assets for
potential impairment under SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The
Company performs these evaluations whenever events or changes in
circumstances suggest that the carrying amount of an asset or
group of assets is not recoverable. Indicators of potential
impairment include but are not limited to:
|
|
|
|
|
a significant change in the manner in which an asset is used;
|
|
|
|
a significant decrease in the market value of an asset;
|
|
|
|
a significant adverse change in its business or the industry in
which an asset is sold; and
|
F-12
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
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 long-lived assets to its results of
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, 2006 and 2005,
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, 2006 and 2005, 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.
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
|
|
|
Write-Offs
|
|
|
Period
|
|
|
December 31, 2006
|
|
$
|
1,068
|
|
|
|
1,502
|
|
|
|
(783
|
)
|
|
$
|
1,787
|
|
December 31, 2005
|
|
$
|
1,197
|
|
|
|
515
|
|
|
|
(644
|
)
|
|
$
|
1,068
|
|
December 31, 2004
|
|
$
|
1,044
|
|
|
|
248
|
|
|
|
(95
|
)
|
|
$
|
1,197
|
|
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. The Company has registered ViaCord with the FDA as a
cord blood preservation service and is subject to inspection by
the FDA.
Stock-Based
Compensation
The ViaCell, Inc. Amended and Restated 1998 Equity Incentive
Plan (the Plan) provides for the grant of incentive
and nonqualified stock options and other equity-based
compensation to employees, consultants and directors of the
Company. The number of shares of common stock authorized for
issuance under the Plan as of December 31, 2006 was
7,200,000. Incentive stock options may only be granted to
employees of the Company. The exercise price of each stock
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. On
January 1, 2006, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123R
Share-Based Payment (SFAS 123R)
using the modified prospective method, which results in the
provisions of SFAS 123R
F-13
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
only being applied to the consolidated financial statements on a
going-forward basis (that is, the prior period results have not
been restated). Under the fair value recognition provision of
SFAS 123R, stock-based compensation expense related to
stock options awarded by the Company is measured using the
Black-Scholes option pricing model at the grant date based on
the value of the award and is recognized as expense on a
straight-line basis over the requisite service period.
Previously, the Company had followed Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretation, which resulted in
the accounting for employee stock options at their intrinsic
value in the consolidated financial statements. The Company
recognized the full impact under SFAS 123R of the
Companys equity-based plan as stock-based compensation
expense in its consolidated statements of operations for the
year ended December 31, 2006 as no amounts qualified for
capitalization. Stock-based compensation included in the
Companys statements of operations is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of processing and storage
revenues
|
|
$
|
67
|
|
|
$
|
20
|
|
|
$
|
32
|
|
Research and development
|
|
|
446
|
|
|
|
294
|
|
|
|
896
|
|
Sales and marketing
|
|
|
282
|
|
|
|
207
|
|
|
|
175
|
|
General and administrative
|
|
|
2,300
|
|
|
|
1,642
|
|
|
|
2,083
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
3,095
|
|
|
$
|
2,163
|
|
|
$
|
3,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had previously adopted the provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, through disclosure only. The
following table illustrates the effect on net loss and net loss
per share for the years ended December 31, 2005 and 2004 as
if the Company had applied the fair value recognition provisions
of SFAS No. 123 to stock-based employee awards (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss attributable to common
stockholders as reported
|
|
$
|
(15,663
|
)
|
|
$
|
(34,168
|
)
|
Add: employee stock-based
compensation expense included in reported net loss
|
|
|
2,143
|
|
|
|
3,014
|
|
Deduct: total employee stock-based
compensation expense determined under fair value based method
for all awards
|
|
|
(4,630
|
)
|
|
|
(5,175
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to
common stockholders
|
|
$
|
(18,150
|
)
|
|
$
|
(36,329
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share as reported
|
|
$
|
(0.44
|
)
|
|
$
|
(12.62
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net
loss per common share
|
|
$
|
(0.51
|
)
|
|
$
|
(13.42
|
)
|
|
|
|
|
|
|
|
|
|
The Companys expected stock-price volatility assumption in
its Black-Scholes option-pricing model for SFAS 123(R) is
based on both current implied volatility and historical
volatilities of the underlying stock which is obtained from
public data sources. The Company determined the weighted-average
option life assumption based on the exercise behavior that
different employee groups exhibited historically, adjusted for
specific factors that may influence future exercise patterns.
F-14
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The fair market value of the stock options at the date of grant
was estimated using the Black-Scholes option-pricing model with
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
4.66
|
%
|
|
|
3.92
|
%
|
|
|
2.86
|
%
|
Expected life
|
|
|
4.57 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
65
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
As of December 31, 2006, there remained approximately
$3.1 million of compensation costs related to non-vested
stock options to be recognized as expense over a
weighted-average period of approximately 1.7 years.
Presented below is the Companys stock option activity for
the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Options
|
|
|
|
|
|
Aggregate
|
|
|
Exercise
|
|
Amounts in Thousands Except Share Data
|
|
Authorized
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Exercise Price
|
|
|
Price
|
|
|
Outstanding, December 31, 2005
|
|
|
7,200,000
|
|
|
|
3,930,694
|
|
|
$
|
0.30-11.10
|
|
|
$
|
10,876
|
|
|
$
|
2.77
|
|
Granted
|
|
|
|
|
|
|
613,525
|
|
|
|
4.00- 5.21
|
|
|
|
3,035
|
|
|
|
4.95
|
|
Exercised
|
|
|
|
|
|
|
(199,018
|
)
|
|
|
0.30- 5.21
|
|
|
|
(541
|
)
|
|
|
2.72
|
|
Canceled and forfeited
|
|
|
|
|
|
|
(353,874
|
)
|
|
|
0.30-11.10
|
|
|
|
(1,319
|
)
|
|
|
3.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
7,200,000
|
|
|
|
3,991,327
|
|
|
$
|
0.30-11.10
|
|
|
$
|
12,051
|
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2006
|
|
|
|
|
|
|
2,333,832
|
|
|
$
|
0.30-11.10
|
|
|
$
|
5,960
|
|
|
$
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at December 31, 2006
|
|
|
Options Exercisable at December 31, 2006
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Number of Shares
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Number of Shares
|
|
|
1,252,543
|
|
|
3.36
|
|
|
$
|
0.30
|
|
|
|
952,543
|
|
32,200
|
|
|
4.36
|
|
|
|
0.75
|
|
|
|
32,200
|
|
96,986
|
|
|
4.38
|
|
|
|
0.95
|
|
|
|
96,986
|
|
718,625
|
|
|
4.97
|
|
|
|
2.00
|
|
|
|
361,375
|
|
30,775
|
|
|
7.41
|
|
|
|
4.00
|
|
|
|
16,709
|
|
65,375
|
|
|
9.55
|
|
|
|
4.04
|
|
|
|
5,092
|
|
23,650
|
|
|
9.95
|
|
|
|
4.50
|
|
|
|
1,250
|
|
981,210
|
|
|
6.85
|
|
|
|
5.00
|
|
|
|
586,362
|
|
259,812
|
|
|
9.38
|
|
|
|
5.03
|
|
|
|
92,834
|
|
210,870
|
|
|
9.17
|
|
|
|
5.21
|
|
|
|
41,026
|
|
135,452
|
|
|
8.72
|
|
|
|
5.31
|
|
|
|
42,808
|
|
9,562
|
|
|
8.93
|
|
|
|
5.62
|
|
|
|
2,655
|
|
25,000
|
|
|
8.32
|
|
|
|
7.25
|
|
|
|
10,937
|
|
93,533
|
|
|
8.01
|
|
|
|
8.17
|
|
|
|
66,308
|
|
7,000
|
|
|
8.36
|
|
|
|
9.00
|
|
|
|
1,750
|
|
40,000
|
|
|
8.78
|
|
|
|
10.89
|
|
|
|
20,000
|
|
8,734
|
|
|
8.53
|
|
|
|
11.10
|
|
|
|
2,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,991,327
|
|
|
|
|
|
|
|
|
|
|
2,333,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The aggregate intrinsic value of outstanding and exercisable
options as of December 31, 2006 and 2005 was
$8.1 million and $5.7 million, respectively. The
intrinsic value of options exercised during the years ended
December 31, 2006, 2005 and 2004 was $0.5 million,
$4.5 million and $0.3 million, respectively.
Options granted under the Plan generally vest over a period of
four years and expire ten years from the grant date. At
December 31, 2006, there were 1,829,118 shares
available for future grant under the Plan.
The weighted average fair value of options granted in 2006, 2005
and 2004 was $2.79, $5.55 and $3.77, respectively.
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.
Segment
Information
The Companys management currently uses consolidated
financial information in determining how to allocate resources
and assess performance. The Company may organize its business
into more discrete business units when and if it generates
significant revenues from the sale of stem cell therapies. For
these reasons, the Company has determined that it conducts
operations in one business segment.
The following table presents total long-lived tangible assets by
geographic areas as of December 31, 2006 and 2005,
respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Long-lived assets, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,183
|
|
|
$
|
8,430
|
|
Singapore
|
|
|
193
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
Total long-lived tangible assets,
net
|
|
$
|
8,376
|
|
|
$
|
8,702
|
|
|
|
|
|
|
|
|
|
|
The following table presents revenues by geographic areas (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
United States
|
|
$
|
54,136
|
|
|
$
|
43,812
|
|
Germany
|
|
|
|
|
|
|
(101
|
)
|
Singapore
|
|
|
290
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
54,426
|
|
|
$
|
44,443
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
Comprehensive loss is comprised of net loss and certain changes
in stockholders equity that are excluded from net loss.
The Company includes foreign currency translation adjustments
for Kourion in comprehensive loss.
Net
Loss Per Common Share
Basic net loss per common 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 common 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
F-16
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Basic and diluted net loss per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(21,047
|
)
|
|
$
|
(15,663
|
)
|
|
$
|
(34,168
|
)
|
Weighted average number of common
shares outstanding
|
|
|
38,377
|
|
|
|
35,777
|
|
|
|
2,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(12.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following weighted average potentially dilutive securities
were excluded because their effect was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Options
|
|
|
3,787,146
|
|
|
|
3,746,395
|
|
|
|
4,222,211
|
|
Warrants
|
|
|
1,558,541
|
|
|
|
3,349,455
|
|
|
|
1,428,750
|
|
Convertible preferred stock
|
|
|
|
|
|
|
1,433,941
|
|
|
|
25,810,932
|
|
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115
(SFAS 159), which permits entities to choose to
measure many financial instruments and certain other items at
fair value. SFAS 159 will be effective for the first fiscal
year that begins after November 15,2007. The Company has
not yet completed its evaluation of the impact of adoption of
SFAS 159 on its financial position or results of operations.
In September 2006, FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS No. 157) which defines fair value
under GAAP, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value
measurements. Where applicable, SFAS No. 157
simplifies and codifies related guidance within GAAP and does
not require any new fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company does
not expect the adoption of SFAS No. 157 to have a
significant immediate effect on its financial position or
results of operations.
In June 2006, FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 will be effective for
fiscal years beginning after December 15, 2006. FIN 48
also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. The Company does not expect the
adoption of FIN 48 to have a significant immediate effect
on its financial position or results of operations.
F-17
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
3.
|
Property
and Equipment
|
Property and equipment consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Software
|
|
$
|
3,389
|
|
|
$
|
3,098
|
|
Laboratory equipment
|
|
|
5,996
|
|
|
|
5,230
|
|
Office and computer equipment
|
|
|
3,021
|
|
|
|
2,611
|
|
Leasehold improvements
|
|
|
5,310
|
|
|
|
5,267
|
|
Furniture and fixtures
|
|
|
907
|
|
|
|
767
|
|
Construction in progress
|
|
|
46
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
18,669
|
|
|
|
16,981
|
|
Less: accumulated depreciation and
amortization
|
|
|
(10,293
|
)
|
|
|
(8,279
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
8,376
|
|
|
$
|
8,702
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, the net book value of
property and equipment serving as collateral under loan
agreements amounted to $0, and $1.5 million, respectively.
Equipment held under capital leases totaled $0.5 million at
both December 31, 2006 and 2005, and accumulated
depreciation related to this leased equipment totaled
approximately $0.4 million and $0.3 million, at
December 31, 2006 and 2005, respectively.
Depreciation and amortization expense on property and equipment
totaled approximately $2.0 million, $1.9 million, and
$2.4 million in the years ended December 31, 2006,
2005 and 2004, respectively.
|
|
4.
|
Intangible
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 when the Company adopted SFAS No. 142.
Amortization of intangible assets was approximately
$0.2 million, $0.2 million, and $0.3 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
At December 31, 2006 and 2005, the Companys goodwill
and intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Goodwill
|
|
$
|
3,621
|
|
|
$
|
3,621
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Trademark
|
|
$
|
4,400
|
|
|
$
|
4,400
|
|
Employment agreements
|
|
|
288
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, gross
|
|
|
4,688
|
|
|
|
4,688
|
|
Less: accumulated amortization
|
|
|
(2,067
|
)
|
|
|
(1,865
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
2,621
|
|
|
$
|
2,823
|
|
|
|
|
|
|
|
|
|
|
The Company expects amortization of these intangible assets to
be approximately $0.2 million annually through 2019, at
which point they will be fully amortized.
F-18
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
At December 31, 2006 and 2005, accrued expenses consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Payroll and payroll related
|
|
$
|
1,904
|
|
|
$
|
1,541
|
|
Management incentive
|
|
|
1,047
|
|
|
|
881
|
|
Professional fees
|
|
|
1,829
|
|
|
|
1,206
|
|
Accrued marketing
|
|
|
2,079
|
|
|
|
1,260
|
|
Accrued restructuring
(Note 12)
|
|
|
|
|
|
|
632
|
|
Deferred rent, current
|
|
|
345
|
|
|
|
619
|
|
Accrued taxes
|
|
|
459
|
|
|
|
537
|
|
Other
|
|
|
1,887
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
9,550
|
|
|
$
|
7,706
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes is as follows for the years ended
December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Domestic
|
|
$
|
(21,398
|
)
|
|
$
|
(13,104
|
)
|
|
$
|
(16,019
|
)
|
Foreign
|
|
|
351
|
|
|
|
(1,573
|
)
|
|
|
(5,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss Before Income Taxes
|
|
$
|
(21,047
|
)
|
|
$
|
(14,677
|
)
|
|
$
|
(21,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate for the years ended
December 31 varies from the statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
US Statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes, net
|
|
|
(0.12
|
)%
|
|
|
(0.66
|
)%
|
|
|
3.70
|
%
|
Foreign rate differential
|
|
|
(0.77
|
)%
|
|
|
0.02
|
%
|
|
|
1.80
|
%
|
Benefit of tax credits
|
|
|
1.47
|
%
|
|
|
4.37
|
%
|
|
|
2.60
|
%
|
Change in valuation allowance
|
|
|
(31.22
|
)%
|
|
|
(34.41
|
)%
|
|
|
(36.80
|
)%
|
Stock-based compensation
|
|
|
(1.78
|
)%
|
|
|
(1.41
|
)%
|
|
|
(5.10
|
)%
|
Other
|
|
|
(1.78
|
)%
|
|
|
(1.03
|
)%
|
|
|
(0.20
|
)%
|
Change in local tax rate
|
|
|
0.00
|
%
|
|
|
(1.89
|
)%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(0.20
|
)%
|
|
|
(1.01
|
)%
|
|
|
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
F-19
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$
|
41,506
|
|
|
$
|
37,323
|
|
|
$
|
35,436
|
|
Tax credit carryforwards
|
|
|
4,470
|
|
|
|
4,315
|
|
|
|
3,484
|
|
Stock-based compensation
|
|
|
1,727
|
|
|
|
2,802
|
|
|
|
3,790
|
|
Temporary differences
|
|
|
14,403
|
|
|
|
10,238
|
|
|
|
8,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,106
|
|
|
|
54,678
|
|
|
|
51,220
|
|
Less: valuation allowance
|
|
|
(61,045
|
)
|
|
|
(53,614
|
)
|
|
|
(50,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,061
|
|
|
|
1,064
|
|
|
|
1,218
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,061
|
)
|
|
|
(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, 2006, the Company has federal and state net
operating loss carryforwards of approximately $87.8 million
and $93.3 million, respectively, which begin to expire in
2009 and 2006, respectively. The Company has federal and state
credit carryforwards of approximately $3.4 million and
$1.6 million, respectively which begin to expire in 2009
and 2013, respectively. The Company also has foreign net
operating loss carryforwards of $14.8 million. The
carryforwards expire through 2024 and are subject to review and
possible adjustment by the local tax authorities. Ownership
changes, as defined in the Internal Revenue Code, may have
limited the amount of net operating loss carryforwards that can
be utilized annually to offset future taxable income.
Of the $61.0 million valuation allowance, $1.0 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, 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 the Companys 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
|
|
|
2006
|
|
$
|
53,614
|
|
|
|
7,431
|
|
|
|
|
|
|
$
|
61,045
|
|
2005
|
|
$
|
50,002
|
|
|
|
3,612
|
|
|
|
|
|
|
$
|
53,614
|
|
2004
|
|
$
|
42,234
|
|
|
|
7,768
|
|
|
|
|
|
|
$
|
50,002
|
|
F-20
ViaCell,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
7.
|
Long-Term
Debt Obligations
|
The Company had the following long-term debt obligations
outstanding as of December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Debt facility loans
|
|
$
|
|
|
|
$
|
1,480
|
|
Capital lease obligations
|
|
|
82
|
|
|
|
147
|
|
|
|
|