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| CGRB > SEC Filings for CGRB > Form 10QSB on 13-Aug-2007 | All Recent SEC Filings |
13-Aug-2007
Quarterly Report
Overview
Since the inception of Cougar Biotechnology, Inc. in May 2003, our efforts and resources have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. We are a development stage company and have no product sales to date and we will not generate any product sales until we receive approval from the U.S. Food and Drug Administration, or FDA, or an equivalent foreign regulatory authority to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Even if we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate until approximately 2011. Currently, a large portion of the development expenses have related to our lead product candidate, CB7630 (abiraterone acetate). As we proceed with the clinical development of CB7630, and as we further develop CB3304 (noscapaine) and CB1089 (seocalcital), our second and third product candidates, respectively, our research and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance further research and development will increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance development of the products. Our major sources of working capital have been proceeds from various private financings, primarily private sales of our common stock and other equity securities.
On April 3, 2006, SRKP Acquisition Corp., a wholly owned subsidiary of SRKP, merged with and into Cougar (the "Merger"), with Cougar remaining as the surviving corporation and a wholly owned subsidiary of SRKP. This transaction is referred to herein as the Merger. Cougar stockholders received, in exchange for all of the outstanding shares of capital stock in Cougar, shares of capital stock of SRKP representing 100% of the outstanding capital stock of SRKP, on a fully-diluted basis, after giving effect to the Merger and a redemption, completed contemporaneous with the closing of the Merger, of all shares of SRKP capital stock held by SRKP's former stockholders immediately prior to the Merger. In addition, at the time of effectiveness of the Merger, the board of directors of SRKP was reconstituted, such that the directors of SRKP immediately prior to the Merger resigned and were replaced by the directors of Cougar immediately prior to the Merger. Further, upon the effective time of the Merger, the business of SRKP was abandoned and the business plan of Cougar was adopted. The transaction was therefore accounted for as a reverse acquisition with Cougar as the acquiring party and SRKP as the acquired party. Accordingly, when we refer to our business and financial information relating to periods prior to the Merger, we are referring to the business and financial information of Cougar, unless otherwise indicated.
Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for regulatory and quality assurance support, licensing of drug compounds, conduct of clinical and pre-clinical studies, and other expenses relating to the manufacture, development, testing and enhancement of our product candidates. We expense our research and development costs as they are incurred.
General and administrative expenses consist primarily of salaries and related expense for executive, finance, and other administrative personnel, professional fees, business insurance, rent, general legal activities, and other corporate expenses.
Critical Accounting Policies
As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2007.
Results of Operations
Six months ended June 30, 2007 compared to six months ended June 30, 2006
General and administrative expenses: For the six months ended June 30, 2007, general and administrative expenses were $3,506,028 compared to $2,390,753 for the six months ended June 30, 2006 representing an increase of approximately $1,115,000. Our general and administrative bonus expense increased $1,350,000 as our Chief Executive Officer, in accordance with his employment agreement, was awarded milestone-based performance bonuses based on our aggregate market capitalization. Our payroll and related expenses increased approximately $245,600 as the administrative staff has grown from two employees to five employees. Recruiting fees for the six months ended June 30, 2007 were approximately $140,000 higher then the same period last year as we have retained several search firms for the recruitment of open positions. In June of 2006, we adopted a compensation program for the board of directors which resulted in increased expenses of approximately $173,000 for the six months ended June 30, 2007. The compensation program was amended June 2007 to reflect an annual retainer of $25,000, plus a fee of $2,500 for each meeting attended in person for each non-employee director, which will increase this expense for future periods. The production of our annual report and proxy statement for our annual stockholders meeting increased printing and print related cost by approximately $121,000 compared to the same period last year when we did not hold an annual meeting. We significantly increased our business insurance as a result of its increased market capitalization and stockholder base resulting in an increase in insurance cost of approximately $51,000 compared to the same period last year. All other normal operating expenses increased in aggregate approximately $274,400 for the six months ended June 30, 2007 compared to the same period last year resulting generally from our growth and the additional requirements of being a public reporting company. During the first half of 2006 several stock-based compensation grants, that vested immediately upon granting, were given to an employee and a consultant for past services resulting in a one time increase in stock-based compensation expense. Accordingly, we experienced a decrease in stock based compensation of approximately $1,245,000 for the six months ended June 30, 2007 compared to the same period last year.
Research and development expenses: For the six months ended June 30, 2007 and 2006, research and development expenses were $13,266,115 and $1,754,403, respectively, representing an increase of approximately $11,512,000. During the six months ended June 30, 2007, clinical trial expenses increased approximately $1,400,000 compared to the same period last year as we are currently conducting six clinical trials compared to two clinical trials during the same period last year. In support of the clinical trial expansion, we experienced an increase in contract drug manufacturing expense of approximately $4,417,000 for the six months ended June 30, 2007 compared to the same period in 2006. In further support of our expanded clinical trials our research and development staff has increased from two on June 30, 2006 to nine full-time and two part-time employees as of June 30, 2007, resulting in an increase in payroll and payroll related expenses of approximately $786,000. The increase in staffing resulted in an increase of approximately $163,000 for relocation expenses and $144,000 for recruiting fees for the six months ended June 30, 2007 compared to the same period last year. Consulting fees for the six months ended June 30, 2007 were approximately $134,000 higher then the same period last year. We have engaged the services of outside consultants for assistance in validating our document control and computer systems. All other normal operating expenses increased approximately $456,000 for the period ended June 30, 2007 compared to the same period last year in support of the clinical trial expansion and growth in employees. Non-employee stock options are revalued using the Black-Scholes option pricing model each reporting period to reflect the then current market value of our common stock. Accordingly, an increase in the fair value of our common stock from $4.50 per share to $23.60 per share in the revaluation of prior non-employee stock option grants plus amortization caused an increase in compensation expense of approximately $4,012,000.
Interest expense: For the six months ended June 30, 2007, we incurred no interest expense compared to approximately $1,012,600 for the same period last year. During the first half of 2006 we paid interest on a line of credit, a series of convertible notes and a series of promissory notes. These notes and the credit facility were paid in full in April 2006.
Other expense: For the six months ended June 30, 2007, we recorded liquidated damage expense of approximately $486,300, of which approximately $453,400 were paid in shares of our common stock to investors who participated in the April 3, 2006 private equity placement as a result of our registration statement not being declared effective by the SEC until February 2, 2007. We did not incur a similar expense in the six months ended June 30, 2006. In April 2006 contemporaneously with the closing of the Merger, SRKP redeemed an aggregate of 2,700,000 shares of its common stock from its stockholders for consideration of $200,000, which was charged to other expense.
Three months ended June 30, 2007 compared to three months ended June 30, 2006
General and administrative expenses: For the three months ended June 30, 2007, general and administrative expenses were $2,322,845 compared to $606,158 for the three months ended June 30, 2006, an increase of approximately $1,717,000. Our general and administrative bonus expense increased approximately $1,010,000 as our CEO, in accordance with his employment agreement, was awarded milestone-based performance bonuses in the aggregate amount of $1,350,000 based on our aggregate market capitalization. Our payroll and related expense increased approximately $135,000 for the three months ended June 30, 2007 compared to the same period last year, as the administrative staff has grown from two employees to five employees. Recruiting fees for the three months ended June 30, 2007 were approximately $140,000 higher then the same period last year as we have retained several search firms to fill open positions. In June 2006 we adopted a compensation program for the board of directors resulting in increased expenses of approximately $114,000 for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. The compensation program was amended in June 2007 to reflect an annual retainer of $25,000 for each non-employee director, plus a fee of $2,500 for each meeting attended in person, which will increase this expense for future periods. The production of our annual report and proxy statement increased printing and print related cost by approximately $83,000 compared to the same period last year when we did not hold an annual stockholders meeting. We significantly increased our business insurance as a result of our increased market capitalization and shareholder base resulting in an increase in insurance cost compared to the same period last year of approximately $25,000. Stock based compensation for the three months ended June 30, 2007 increased approximately $194,000 compared to the same period last year. All other normal operating expenses increased in aggregate approximately $16,000 for the three months ended June 30, 2007 compared to the same period last year resulting from our growth.
Research and development expenses: For the three months ended June 30, 2007 and 2006, research and development expenses were $7,224,169 and $561,840, respectively, representing an increase of approximately $6,662,000. During the three months ended June 30, 2007, clinical trial expenses increased approximately $1,039,000 compared to the same period last year as we are currently conducting six clinical trials compared to two clinical trials during the same period in 2006. In support of the clinical trial expansion, we experienced an increase in contract drug manufacturing expense of approximately $2,920,000 for the three months ended June 30, 2007. As a result of expanded clinical trials, the research and development staff has increased from two employees as of June 30, 2006 to nine full-time and two part-time employees as of June 30, 2007, resulting in an increase in payroll and payroll related expenses of approximately $456,000. The increase in staff also resulted in an increase of approximately $109,000 for relocation expenses and $133,000 for recruiting fees compared to the same period last year. Pre-clinical expenses for the three months ended June 30, 2007 increased approximately $192,000 compared to the same period last year. All other normal operating expenses increased approximately $167,000 for the period ended June 30, 2007 compared to the same period last year in support of the clinical trial expansion and growth in employees. Employee stock-based compensation increased approximately $160,000 as a result of employee stock option grants. Non-employee stock options are revalued using the Black-Scholes option pricing model each reporting period to reflect the then current market value of our common stock. Accordingly, an increase in the fair value of our common stock from $4.50 per share to $23.60 per share resulted in the revaluation of prior non-employee stock option grants and amortization caused an increase of approximately $1,486,000 for the three months ended June 30, 2007 compared to the same period last year.
Interest income: For the three months ended June 30, 2007 we recognized interest income of approximately $676,200 compared to approximately $261,400 for the same period last year. The increase is attributed to the proceeds of private placement funds.
Other expense: For the three months ended June 30, 2007 we incurred no other expense compared to approximately $200,000 for the same period last year. In April 2006 contemporaneously with the closing of the Merger, SRKP redeemed an aggregate of 2,700,000 shares of its common stock from its stockholders for consideration of $200,000, which was recorded as other expense.
Liquidity and capital resources: As of June 30, 2007, we had approximately $27.3 million in cash and cash equivalents and $40.4 million in available-for-sale investment securities that may be liquidated to provide cash if needed; however, we are still a development stage company that has not generated any revenue from operations. We reported a net loss of $16,230,681 and negative cash flow from operating activities of $9,802,844, for the six months ended June 30, 2007. The net loss from date of inception, May 14, 2003, to June 30, 2007 amounted to $39,441,914, while the negative cash flow from operating activities was $27,700,566.
We have financed our operations since inception primarily through equity and debt financing. During the six months ended June 30, 2007, we had a net increase in cash and cash equivalents of $13,170,352. We recognized net proceeds from the issuance of common stock through a private placement of approximately $46,800,000 and approximately $72,000 from the exercise of warrants. Operating activities consumed approximately $9,803,000 and the net purchase of short-term investments consumed approximately $23,300,000. The net cash used in operating activities was comprised of a net loss of approximately $16,230,700, adjusted for non-cash items of approximately $4,691,000, a decrease in prepaid expenses of approximately $147,000, and an increase in accounts payable and accrued expenses of approximately $1,588,900. The major non-cash adjustments were non-employee stock-based compensation of approximately $4,004,000, employee stock-based compensation of approximately $555,000, and the issuance of common stock for liquidated damages of approximately $453,000. The increase in accounts payable and accrued expenses of approximately $1,588,900 reflects the milestone bonus accrued for our Chief Executive Officer of $1,000,000, which is payable at such time as our aggregate market capitalization (computed on a fully-diluted basis) is at least $500 million for a period of 20 consecutive business days, or averages such amount over a 30-day period, as well as increased activity in support of our clinical trials and manufacturing activities.
We believe that we will continue to incur losses for the foreseeable future and will need additional equity or debt financing or will need to generate revenue from licensing of our products or by entering into strategic alliances to sustain operations until we can achieve profitability and positive cash flows, if ever.
Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we obtain will be sufficient to meet our needs in the long term. Through June 30, 2007, a significant portion of our financing has been through private placements of common stock and debt financing.
We will continue to fund operations from cash on hand and through similar sources of capital previously described. We can give no assurances that any additional capital we are able to obtain will be sufficient to meet our needs. There can be no assurance that such capital will be available to us on favorable terms or at all. If we are unable to raise additional funds in the future on acceptable terms, or at all, we may be forced to curtail our desired development. In addition, we could be forced to delay or discontinue product development and forego attractive business opportunities. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders.
Financings
In connection with a private placement that closed on April 3, 2006, we issued 9,486,752 shares of Series A Preferred Stock, the terms of which are set forth in a Certificate of Designation filed with the Secretary of the State of Delaware, for an aggregate amount of $42,728,037 in cash and debt conversion. The Series A Preferred Stock had a stated value of $4.50 per share. Commencing on the date of issue, holders of the Series A Preferred Stock were entitled to receive cumulative dividends, payable annually in arrears on each anniversary of the original issuance date, on each share of Series A Preferred Stock, payable in-kind or in cash, at our election, at the rate of 4% per annum of the stated value. Cumulative dividends as of June 30, 2007, were $1,583,496, or $0.167 per share. The Series A Preferred Stock was convertible at any time at the option of the stockholder in whole or in part into shares of common stock at an initial conversion price of $4.50 per share of common stock. Each share of Series A Preferred Stock automatically converted into shares of common stock at a conversion price of $4.50, subject to adjustment, in the event that the closing price of the our common stock exceeded 200% of the conversion price for twenty consecutive trading days. At the close of trading on March 8, 2007, the closing sale price of our common stock had exceeded 200% of the conversion price for 20 consecutive trading days, resulting in the automatic conversion of all shares of Series A Preferred Stock into our common stock on a one for one basis.
Current and Future Financing Needs
We have incurred negative cash flow from operations since we started our business. We have spent, and expect to continue to spend, substantial funds in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, and our research and development efforts. Given the current and desired pace of clinical development of our three product candidates, over the next 12 months we estimate that our research and development expenses will be approximately $24 million. We will need approximately $7 million for general and administrative expenses over the next 12 months, excluding the cost of stock-based compensation.
However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
the progress of our research activities;
the number and scope of our research programs;
the progress of our pre-clinical and clinical development activities;
the progress of the development efforts of parties with whom we have entered into research and development agreements;
our ability to maintain current research and development programs and to establish new research and development and licensing arrangements;
the cost involved in prosecuting and enforcing patent claims and other intellectual property rights; and
the cost and timing of regulatory approvals.
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner than planned or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of equity or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interests of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.
Plan of Operation
Our plan of operation for the next twelve months is to continue implementing our business strategy of in-licensing novel clinical stage products in order to accelerate clinical development and time to commercialization, and continue the clinical development of our three product candidates. We expect our principal expenditures during the next 12 months to include:
operating expenses, including expanded research and development and general and administrative expenses; and
product development expense, including the costs incurred with respect to applications to conduct clinical trials of our three products in the United States.
As part of our planned expansion, we have budgeted hiring up to 12 additional full-time employees devoted to research and development activities and up to 3 additional full-time employees for general and administrative activities. We anticipate hiring the majority of the additional professional research and development staff in the second half of 2007. These positions will require an advanced degree in medicine and/or bioscience and significant experience in the pharmaceutical or biotechnology industries. The annual payroll and payroll related expense are anticipated to increase by approximately $3.5 million. We anticipate spending approximately $1.3 million on recruiting and relocation expenses for these positions. In addition, we intend to use contract research organizations and third parties to perform our clinical studies and manufacturing. As indicated above, at our current and desired pace of clinical development of our three product candidates, during the next 12 months we expect to spend approximately $24 million on clinical development and research and development activities and approximately $7 million on general and administrative expenses, excluding stock-based compensation expense for employees and consultants.
CB7630. In April 2004, we licensed the exclusive worldwide rights to CB7630 (abiraterone acetate) from BTG plc. CB7630 is an orally active targeted inhibitor of the steroidal enzyme 17-hydroxylase/C17,20 lyase, a cytochrome p450 complex that is involved in testosterone production. In preclinical studies, CB7630 has demonstrated the ability to selectively inhibit the target enzyme, reducing levels of testosterone production in both the adrenals and the testes, which are believed to stimulate the growth of prostate cancer cells.
In December 2005, we initiated a Phase I/II trial of CB7630 for the treatment of advanced prostate cancer. The Phase I/II trial was conducted at The Institute of Cancer Research, in the Cancer Research UK Centre for Cancer Therapeutics, and at The Royal Marsden Hospital in the United Kingdom. The Phase I/II study was an open label, dose escalating study to evaluate the safety and efficacy of CB7630 administered daily as a second-line hormonal agent to patients with chemotherapy-naοve hormone refractory prostate cancer with a rising prostate-specific antigen or PSA, despite hormonal therapy. The Phase I portion of this trial was completed and the Phase II portion was initiated in December 2006. In July 2007, we announced the results of the Phase I portion of this clinical trial and the interim results of the Phase II portion of the study.
The results from the Phase I/II trial showed that in the 38 patients tested, CB7630 was well tolerated at doses as high as 2000 mg/day with no dose limiting toxicity observed. In the 38 patients who were evaluable in the Phase I/II trial, 33 patients (87%) experienced a decline in PSA levels with 23 patients (61%) experiencing a confirmed decline in PSA levels of greater than 50%, and 10 patients (26%) experiencing PSA declines of greater than 90%. Of the 20 evaluable patients with measurable tumor lesions, treatment with CB7630 resulted . . .
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