Form 10KSB for MEDIVATION, INC.
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23-Feb-2007
Annual Report
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2006, included elsewhere in this Report. The following Management's Discussion and Analysis or Plan of Operation contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend that these forward-looking statements be subject to the safe harbors created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "may," "should," "forecast," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or other similar words. The forward-looking statements contained in this Report involve a number of risks and uncertainties, many of which are outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to, those discussed in "Risk Factors" elsewhere in this Report. Readers are expressly advised to review and consider those Risk Factors, which include risks associated with (1) our ability to
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successfully conduct clinical and preclinical trials for our product candidates,
(2) our ability to obtain required regulatory approvals to develop and market our product candidates, (3) our ability to raise additional capital on favorable terms, (4) our ability to execute our development plan on time and on budget, and (5) our ability to identify and obtain additional product candidates. Although we believe that the assumptions underlying the forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The Company
We are a biopharmaceutical company engaged in the acquisition, research and development of promising medical technologies. We focus particularly on technologies that have strong intellectual property positions, address large unmet medical needs, and have the potential to enter clinical development within 12 to 18 months after acquisition, and on driving development in a rapid, cost-effective manner. We intend to build and maintain a portfolio of four to six development programs at all times, and remain actively engaged in evaluation of new technologies to further expand our portfolio.
Our Current Portfolio
Our current portfolio consists of small molecule drugs in development to treat three large, unmet medical needs-Dimebon™ for the treatment of Alzheimer's disease, Dimebon for the treatment of Huntington's disease, and MDV3100 for the treatment of hormone-refractory prostate cancer. Dimebon is a small molecule drug that was approved in 1983 by the Russian Ministry of Health for use as an oral antihistamine. MDV3100 is the lead development candidate in a family of approximately 170 novel small molecules that we refer to as the MDV300 series compounds.
Alzheimer's Disease Program. Our proprietary small molecule Dimebon has been shown to inhibit the death of brain cells (neurons) in preclinical models of Alzheimer's disease and Huntington's disease, making it a novel potential treatment for many neurodegenerative diseases. In September 2006, we announced that Dimebon met all five efficacy endpoints in a six-month randomized, double-blinded, placebo-controlled Phase 2 trial of 183 patients with mild to moderate Alzheimer's disease conducted at 11 sites in Russia. Patients in the trial were tested for a full spectrum of problems typically caused by Alzheimer's disease, including memory loss, behavioral disturbances, and inability to perform everyday activities such as bathing and dressing. After six months of treatment, Dimebon-treated patients scored significantly better on all of these tests than did placebo-treated patients. Dimebon-treated patients also improved significantly over their own starting baseline scores on all of these tests. Dimebon also was well tolerated in this study. Medivation and its advisors designed this study to match closely the design of pivotal registration studies previously accepted by the FDA to approve drugs to treat mild to moderate Alzheimer's disease, including duration of treatment, clinical endpoints and patient inclusion/exclusion criteria. Based on these results, we intend aggressively to pursue further development of Dimebon as a potential treatment for Alzheimer's disease.
Huntington's Disease Program. In October 2006, we began a U.S. Phase 1-2a clinical study of Dimebon in Huntington's disease patients, which we are conducting in collaboration with the Huntington Study Group. Our study design has two parts. Part A is an open-label dose escalation phase in which patients will be treated with increasing doses of Dimebon to determine safety, tolerability, pharmacokinetics, and the recommended doses for Part B of the study. Part B is a randomized, double-blinded, placebo-controlled phase in which approximately 75 patients will be treated for a period of 90 days to further evaluate the safety and preliminary efficacy of Dimebon as a treatment for Huntington's disease. We expect Part B of the study to begin in the first half of 2007, after the FDA has reviewed the results of additional animal toxicology studies it required us to complete.
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Hormone-Refractory Prostate Cancer Program. Our MDV300 series compounds are in development for the treatment of HRPC. In the first half of 2007 we expect to begin a Phase 1-2a clinical study of our lead compound, MDV3100, in HRPC patients. Our proposed study design is an open-label dose-escalation trial with each patient continuing on MDV3100 for at least three months in the absence of a significant safety issue or disease progression. In addition, 20 subjects will be enrolled and treated with the maximum-tolerated dose for at least 90 days to further evaluate the safety, tolerability and preliminary efficacy of MDV3100 as a treatment for HRPC. Patients' serum levels of PSA, a frequently-used surrogate marker of prostate cancer progression, will be measured regularly in the study. Patients will be given the option in certain circumstances to continue treatment for longer periods of time.
Our Current Development Plan
Our current development plan for our Alzheimer's disease, Huntington's disease
and HRPC programs, and the presently estimated timeline for each development
milestone, are as follows:
Estimated Estimated
Program Development Milestone Start Finish
Alzheimer's Phase 2 twelve-month efficacy trial
disease: (Russia) In progress Q2 2007
Phase 1 clinical trial (U.S.) 1H 2007 2H 2007
Phase 2 dose finding clinical trial
(U.S.) 2H 2007 2008
Phase 3 clinical trials (global) 2008 2010
Apply for U.S. and European marketing
approval 2010 n/a
Huntington's Phase 1-2a* clinical trial, Part A
disease: (U.S.) In progress 1H 2007
Phase 1-2a* clinical trial, Part B
(U.S.) 1H 2007 2H 2007
Phase 3 clinical trials (global) 2008 2009
Apply for U.S. and European marketing
approval 2009 n/a
Hormone-refractory
prostate cancer: Phase 1-2a* clinical trial (U.S.) 1H 2007 2008
Report efficacy data from the first
subset of patients 2H 2007 n/a
Determine whether to proceed to Phase 3
clinical trials 2008 n/a
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* As used in this Report, a "Phase 1-2a" clinical study is one conducted in patients with the applicable disease and that includes at least one efficacy endpoint.
Because of Dimebon's prior history of human use in Russia, the Russian Ministry of Health allowed us to proceed directly to a large efficacy study with the same duration of treatment and clinical endpoints accepted by the FDA to approve drugs for mild to moderate Alzheimer's disease. Taking this approach allowed us to generate risk-reducing data on the safety and efficacy of Dimebon in Alzheimer's disease patients sooner than would have been possible under a more conventional drug development pathway, in which a sponsor typically would complete Phase 1 and Phase 2 dose finding studies before beginning large efficacy studies. With respect to subsequent Alzheimer's disease clinical trials, however, our current clinical development plan assumes that we will follow the more conventional drug development pathway and complete Phase 1 and Phase 2 dose finding studies before starting Phase 3 clinical trials. In Huntington's disease and HRPC, by contrast, we expect to proceed directly to Phase 3 clinical trials in those indications if our Phase 1-2a clinical trials are positive.
Based on presently available information, our management believes that achievement of the above development milestones relating to our existing product candidates by the estimated dates set forth above is a reasonably achievable goal. However, both our proposed development milestones and their estimated start and finish dates are forward-looking statements, and as such are subject to significant risk and uncertainty. We caution you that the development of biomedical product candidates like ours is subject to high levels of risk, including risks presented by subsequent developments that are unforeseen or unforeseeable, as well as risks that are entirely outside of our control, including the risk of unfavorable results in any of our ongoing or planned
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preclinical and clinical studies. We also caution you that we have not yet received clearance from the FDA or any comparable foreign regulatory agencies to begin any of the clinical trials listed above, except for the ongoing extension phase of our Russian Phase 2 efficacy study in Alzheimer's disease and Part A of our ongoing U.S. Phase 1-2a clinical trial in Huntington's disease. We thus face the risk that the FDA and/or comparable foreign regulatory agencies will deny, or impose burdensome conditions on, our requests to begin any of our proposed clinical studies, or require us to conduct additional studies not listed above. We thus cannot guarantee that we will be able to complete any of our projected milestone events, or that any of them that we do achieve will be on time or on budget.
Liquidity and Capital Resources
We have incurred aggregate net losses of $28,456,571 through December 31, 2006, and we expect to incur substantial and increasing additional losses in the future as we expand our research and development activities, particularly the conduct of preclinical and clinical studies, increase our headcount and seek to expand our clinical development portfolio.
In particular, based on the positive Phase 2 Alzheimer's disease clinical trial results we reported in September 2006, we have accelerated and significantly expanded our research and development work on Dimebon beginning in the fourth quarter of 2006. Reflecting this expansion, total operating expenses increased to $6,165,863 in the fourth quarter of 2006 from $3,702,339 in the third quarter, an increase of $2,463,524 (or 67%). Of this increase, $1,867,928 (or 76%) was attributable to increased cash operating expenses, and the remaining $595,596 (or 24%) was attributable to increased stock-based compensation, a non-cash expense. The increase in cash operating expense was due primarily to increased preclinical and clinical study expenses, which increased by $1,261,917 (or 64%) to $3,232,010 in the fourth quarter of 2006 from $1,970,093 in the prior quarter. We expect cash operating expenses in 2007 to increase further beyond fourth quarter 2006 levels as we continue to expand our Dimebon research and development activities, begin our planned Phase 1-2a clinical trial of MDV3100 in HRPC, and increase our headcount to staff these activities.
We have not generated any revenue from operations to date, and do not expect to generate operating revenue for several years, if ever. All of our operations to date have been funded through the sale of our debt and equity securities, and we expect this to continue to be the case for the foreseeable future.
As of December 31, 2006, we had cash, cash equivalents and short-term investments of $47,183,592, accounts payable and other current liabilities of $1,739,614, and no long-term debt. We expect that our current cash, cash equivalents and short term investments will be sufficient to fund the presently budgeted costs of executing our development plan through our planned initiation of global Phase 3 clinical trials of Dimebon in Alzheimer's disease and Huntington's disease in 2008, as described above. However, we caution you that this is a forward-looking statement and is subject to significant risk and uncertainty, and that we may require additional financing sooner than expected for any of a number of reasons, including without limitation if we were to incur significant delays or cost overruns in the execution of our development plan or if we were to expand our portfolio to include new product development programs.
We do not expect to purchase or sell any plant or significant equipment for the foreseeable future.
Risk Factors
Our business and prospects are subject to the following material risks described below. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, may also adversely affect our business.
Risks Related to our Business
We have incurred net losses since inception, expect to incur increasingly large losses in the future as we expand our development activities, and may never achieve revenues or profitability. We are a development stage
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company and have never recognized any revenue from the sale of products or any other source. We have not completed development of any of our product candidates, and do not expect that any of our present or future product candidates will be commercially available for a number of years, if at all. We have incurred losses since inception and expect to continue to incur substantial and increasing losses for the foreseeable future as we increase our spending to finance clinical and preclinical studies of our existing product candidates, the evaluation, acquisition and development of additional product candidates, additional headcount, and the costs associated with operating as a public company. Our operating losses have had, and will continue to have, an adverse impact on our working capital, total assets and stockholders' equity. We do not know when or if we will ever generate revenue or become profitable because of the significant uncertainties with respect to our ability to generate revenue from any of our current or future product candidates.
Because we depend on financing from third parties for our operations, our business may fail if such financing becomes unavailable or is offered on commercially unreasonable terms. To date, we have financed all of our operations through borrowings and the sale of our equity securities. We will require significant additional capital to develop our existing product candidates, and to acquire and develop other product candidates. Our future capital requirements will depend on many factors, including:
• the scope and results of our preclinical and clinical trials;
• whether we experience delays in our preclinical and clinical development programs, or slower than anticipated product development;
• whether we identify other product candidates that we wish to acquire, and the costs of acquiring and developing those product candidates;
• whether we are able to enter into collaborative partnerships with regard to any of our product candidates, and the terms of any such collaboration;
• the timing and requirements of, and the costs involved in, conducting studies required to obtain regulatory approvals for our product candidates from the FDA and comparable foreign regulatory agencies;
• as necessitated by our business model, the availability of third parties to perform the key development tasks on our product candidates, including conducting preclinical and clinical studies and manufacturing the products to be tested in those studies, and the associated costs of those services;
• the availability and cost of raw materials required to manufacture products for testing in our preclinical and clinical studies; and
• the costs involved in preparing, filing, prosecuting, maintaining, defending the validity of, and enforcing, patent claims and other patent-related costs, including litigation costs and the results of such litigation.
We may not be able to obtain additional financing when we need it on acceptable terms or at all. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our product candidates, acquire or develop additional product candidates or respond to competitive pressures or unanticipated requirements. For these reasons, any inability to raise additional capital when we require it would seriously harm our business.
Our business strategy depends on our ability to identify and acquire additional product candidates which we may never acquire or identify for reasons that may not be in our control, or are otherwise unforeseen or unforeseeable to us. A key component of our business strategy is to diversify our product development risk by identifying, acquiring and developing additional product candidates, whether drugs or medical devices. However, we may not be able to identify other promising technologies. In addition, the competition to acquire promising biomedical technologies is fierce, and many of our competitors are large, multinational pharmaceutical, biotechnology and medical device companies with considerably more financial, development and commercialization
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resources and experience than we have. Thus, even if we succeed in identifying promising technologies, we may not be able to acquire rights to them on acceptable terms or at all. If we are unable to identify and acquire new technologies, we will be unable to diversify our product risk. We believe that any such failure would have a significant negative impact on our prospects because the risk of failure of any particular development program in the pharmaceutical and medical device fields, including that of our existing programs, is high.
Because we depend on our management to oversee the execution of development plans for our existing product candidates and to identify and acquire promising new product candidates, the loss of any of our managers would harm our business. Our future success depends upon the continued services of our executive officers. We are particularly dependent on the continued services of David Hung, M.D., our President and Chief Executive Officer and a member of our board of directors. Dr. Hung identified all of our existing product candidates for acquisition, and has primary responsibility for identifying and evaluating other potential product candidates. We believe that Dr. Hung's services in this capacity would be difficult to replace. None of our executive officers is bound by an employment agreement for any specific term, and they may terminate their employment at any time. In addition, we do not have "key person" life insurance policies covering any of our executive officers. The loss of the services of any of our executive officers could delay the development of our existing product candidates, and delay or preclude the identification and acquisition of new product candidates, either of which events could harm our business.
Our reliance on third parties for the operation of our business may result in material delays, cost overruns and/or quality deficiencies in our development programs. We rely on outside vendors to perform key product development tasks, such as conducting preclinical and clinical studies and manufacturing the product candidates to be tested in those studies. In order to manage our business successfully, we will need to identify, engage and properly manage qualified external vendors who will perform these development activities. For example, we need to monitor the activities of our vendors closely to ensure that they are performing their tasks correctly, on time, on budget and in compliance with strictly-enforced regulatory standards. Our ability to identify and retain key vendors with the requisite knowledge is critical to our business and the failure to do so could have a material adverse impact on our business. Because all of our key vendors perform services for other clients in addition to us, we also need to ensure that they are appropriately prioritizing our projects. If we fail to manage our key vendors well, we could incur material delays, cost overruns or quality deficiencies in our development programs, as well as other material disruptions to our business.
Risks Related to our Product Development Candidates
Our product candidates require extensive, time consuming and expensive preclinical and clinical testing to establish safety and efficacy. We may never attract partners for our technologies or receive marketing approval in any jurisdiction. The research and development of pharmaceuticals and medical devices is an extremely risky industry. Only a small percentage of product candidates that enter the development process ever receive marketing approval. Except for Dimebon's approval in Russia as an antihistamine, which is not a commercially attractive opportunity for us, none of our product candidates is currently approved for sale anywhere in the world, and none of them may ever receive such approval. Furthermore, none of our product candidates other than Dimebon has yet been tested in humans. The process of conducting the preclinical and clinical testing required to establish safety and efficacy and obtain marketing approval is expensive, uncertain and takes many years. If we are unable to complete preclinical or clinical trials of any of our current or future product candidates, or if the results of these trials are not satisfactory to convince regulatory authorities or potential partners of their safety or efficacy, we will not be able to attract partners or obtain marketing approval for any products. Furthermore, even if we or our potential partners are able to obtain marketing approvals for any of our product candidates, those approvals may be for indications that are not as broad as desired, or may contain other limitations that would adversely affect our ability to generate revenue from sales of those products. If this occurs, our business will be materially harmed and our ability to generate revenue will be severely impaired.
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Positive results in any of our early- and mid-stage clinical trials, including our Phase 2 clinical trial of Dimebon in Alzheimer's disease, may not be predictive of future clinical trial results. Even where we achieve positive results in early- or mid-stage clinical trials, including our Phase 2 clinical trial of Dimebon in Alzheimer's disease, we cannot predict whether the results of later-stage clinical trials will be positive because product candidates in later stages of clinical trials often fail to show the desired safety and efficacy traits despite having progressed successfully through prior stages of preclinical and clinical testing.
Our industry is highly regulated by the U.S. Food and Drug Administration (FDA) and comparable foreign regulatory agencies. We must comply with extensive, strictly-enforced regulatory requirements in order to develop and seek marketing approval for any of our product candidates. Before we or our potential partners can obtain regulatory approval for the sale of our product candidates, they must be subjected to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans. The preclinical and clinical trials of any product candidates that we develop must comply with regulation by numerous federal, state and local government authorities in the U.S., principally the FDA, and by similar agencies in other countries. In the case of our pharmaceutical product candidates, we will be required to obtain and maintain an effective investigational new drug application to conduct human clinical trials in the U.S. and must obtain and maintain regulatory approval before proceeding to successive phases of our clinical trials. Similar regulatory requirements apply to medical devices, and may become relevant to us should we acquire any medical device product candidates. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information for each therapeutic indication to establish the product candidate's safety and efficacy for its intended use. It takes years to complete the testing of a new drug or medical device, and development delays and/or failure can occur at any stage of testing. For example, in February 2006 the FDA required us to conduct additional rat toxicology studies in order to proceed with our Phase 1-2a clinical trial of Dimebon in Huntington's disease patients, which requirement increased development costs and slowed development. Similarly, any of our present and future clinical trials may be delayed or halted due to any of the following:
• any preclinical test or clinical trial may fail to produce safety and efficacy results satisfactory to the FDA or foreign regulatory authorities;
• preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;
• negative or inconclusive results from a preclinical test or clinical trial or adverse medical events during a clinical trial could cause a preclinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;
• the FDA or foreign regulatory authorities can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury;
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