Form 10-Q for CELL THERAPEUTICS INC
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10-May-2005
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q contains, in addition to historical information, forward-looking statements which involve risks and uncertainties. These statements relate to our future plans, objectives, expectations, intentions and financial performance, and assumptions that underlie these statements. When used in this Form 10-Q, terms such as "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," should," or "will" or the negative of those terms or other comparable terms are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Our actual results may differ significantly from the results discussed in such forward-looking statements. These factors include those listed under "Factors Affecting Our Operating Results and Financial Condition," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q.
OVERVIEW
We develop, acquire and commercialize novel treatments for cancer. Our goal is to build a leading, vertically-integrated biopharmaceutical company with a diversified portfolio of proprietary cancer drugs. Our research and in-licensing activities are concentrated on identifying new, less toxic and more effective ways to treat cancer. As of March 31, 2005, we had incurred aggregate net losses of approximately $761.9 million since inception. We expect to continue to incur additional operating losses for at least the next two years.
On January 1, 2004, we completed our merger with Novuspharma S.p.A., a public biopharmaceutical company located in Italy, currently CTI Europe S.r.l., or CTI (Europe). This provided us with worldwide rights to pixantrone, approximately $92.5 million of cash and cash equivalents upon closing of the acquisition, and a high-quality drug discovery organization and staff with an extensive track record in cancer drug development. The merger and addition of pixantrone to the pipeline are consistent with our strategy of growth by strategic acquisition and our goal to develop improved cancer therapies.
XYOTAX
In June 1998, we entered into an agreement with PG-TXL Company, L.P., or PG-TXL, and scientists at The University of Texas M. D. Anderson Cancer Center, granting us an exclusive worldwide license to the rights to paclitaxel poliglumex and to all potential uses of PG-TXL's polymer technology. Paclitaxel poliglumex is paclitaxel linked to polyglutamate, and is branded as XYOTAX™. Under the terms of the agreement, we will fund the research, development, manufacture, marketing and sale of drugs developed using PG-TXL's polymer technology. As of March 31, 2005, we have made $5.0 million in milestone payments upon the attainment of significant achievements and are obligated to make additional future milestone payments of up to $15.5 million. We are also obligated to make royalty payments on net product sales as defined in the agreement.
In September 2001, we entered into a supply agreement with Natural Pharmaceuticals, Inc., or NPI, for paclitaxel, a key starting material for our XYOTAX drug candidate. Under the supply agreement, we prepaid for paclitaxel. Based on the original terms of the agreement, NPI is behind in its delivery of paclitaxel to us although we expect to receive delivery through August 2005. NPI has provided a security deposit in escrow in an amount equal to the undelivered paclitaxel, to be reduced as the deliveries are received. We are also purchasing paclitaxel supply from two additional suppliers. We may need to obtain paclitaxel from other sources, which we may not be able to receive on a timely basis, if at all.
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In October 2001, we entered into a licensing agreement with Chugai Pharmaceutical Co., Ltd., or Chugai, for the development and commercialization of XYOTAX. This agreement grants an exclusive license to Chugai to develop and commercialize XYOTAX in several Asian markets. Upon execution of the agreement, Chugai made a $3.0 million initial payment, which has been recorded as deferred revenue and is being recognized as license revenue over the development period of approximately seven years on a straight-line basis. Under the agreement, we received and recognized as revenue a $3.0 million milestone payment during 2002 resulting from the filing of the first investigational new drug application, or IND, in Japan. We may also receive future milestone payments totaling up to $13.0 million upon Chugai's achievement of certain milestones, and we are entitled to receive royalties on product sales in the territories covered under the agreement. Chugai has also committed to incur up to $54.0 million in development expenditures over the course of the licensing agreement. As of March 31, 2005, we have received approximately $3.8 million in development expenditure reimbursements from Chugai.
In 2002, we initiated a XYOTAX phase III clinical trial for second-line treatment of non-small cell lung cancer, or NSCLC, and two additional phase III trials of XYOTAX in the front-line treatment of poor performance status, or PS2, patients with NSCLC.
In June 2003, we received fast track designation from the Food and Drug Administration, or FDA, for our XYOTAX pivotal trials in PS2 patients with advanced NSCLC. In November 2003, we completed enrollment in one of our XYOTAX phase III pivotal trials, known as STELLAR 3, for the potential use in combination with platinum as front-line treatment of PS2 patients with NSCLC.
In April 2004, we announced that we entered into a clinical trials agreement with the Gynecologic Oncology Group, or GOG, to perform a phase III trial of XYOTAX in patients with ovarian cancer. In July 2004, the GOG submitted an IND along with the protocol for a special protocol assessment, or SPA, to the FDA. The trial was activated by the GOG in March 2005.
In May 2004, we completed enrollment in our second pivotal phase III trial of XYOTAX, known as STELLAR 4, for the potential use as front-line single agent treatment of PS2 patients with NSCLC.
In July 2004, we completed enrollment in our third and final pivotal phase III trial of XYOTAX, known as STELLAR 2, for the potential use as second-line single agent treatment of patients with NSCLC.
In March 2005, we announced that while the STELLAR 3 study missed its primary endpoint of superior overall survival, it had equivalent efficacy to paclitaxel in combination with carboplatin. XYOTAX had a reduction in certain side effects, including hair loss, muscle and joint pain, and cardiac symptoms. Complete research findings from this trial will be presented at the American Society of Clinical Oncology, or ASCO, meeting in May 2005.
In May 2005, we announced that the STELLAR 2 and 4 clinical trials demonstrated comparable survival with significant reductions in certain serious side effects compared to the comparator arms, although both studies missed their primary endpoints of superior overall survival. In STELLAR 2, XYOTAX patients experienced significantly fewer hematologic side effects, including grade 3/4 infections, severe neutropenia, and febrile neutropenia, and significant reductions in hair loss, fatigue, asthenia, or general weakness, breathing problems, severe hypoxia, or decreased oxygen in the blood, mucositis, and eye toxicity, than patients on the docetaxel arm. Severe neuropathy on XYOTAX at a dose of 210 mg/m2 was higher than on the docetaxel arm. In STELLAR 4, side effects were comparable on both arms, except for a significant reduction in all cardiac toxicities, gastrointestinal side effects, nausea, and vomiting. XYOTAX patients also had a significant reduction in hematologic toxicities including anemia, neutropenia, and thrombocytopenia. Hair loss was uncommon on both arms. Grade 3/4 neuropathy was observed more frequently on the XYOTAX arm.
In all of the STELLAR studies XYOTAX was given in a convenient 10-minute infusion without the requirement for steroids and other premedications. Hypersensitivity on XYOTAX was rare despite the lack of premedication.
We believe XYOTAX addresses an important medical need - an effective, better tolerated taxane with easier administration, and we will continue our ongoing dialogue with the FDA regarding submission of an NDA for
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XYOTAX based on the STELLAR trials. Depending on successful discussions with the FDA, our revised target for submission of an NDA for XYOTAX would be late 2005 or early 2006, with a XYOTAX approval targeted in late 2006 with launch shortly thereafter. If there are regulatory issues, such as the FDA requiring another trial, our NDA filing could be delayed.
TRISENOX
In January 2000, we entered a Merger Agreement to acquire PolaRx Biopharmaceuticals, Inc., or PolaRx, a biopharmaceutical company that owned the rights to TRISENOX (arsenic trioxide), an anti-cancer compound for which we submitted and received approval to market from the FDA and EMEA. The acquisition was accounted for as a purchase transaction. Under the terms of the Merger Agreement, we have made additional contingent payments to former PolaRx stockholders of approximately $4.0 million for meeting a $10.0 million TRISENOX sales threshold in 2002 and approximately $5.0 million for achieving a $20.0 million TRISENOX sales threshold in 2003. Under the Merger Agreement, we are also required to make an additional payout of a 2% royalty on total net sales of arsenic products, payable in cash or common stock at the then fair market of our stock, for any calendar year during which sales of TRISENOX exceed $40.0 million.
In September 2000, we received marketing approval from the FDA for TRISENOX and sales of TRISENOX in the United States commenced in October 2000. In March 2002, we received approval from the EMEA to market TRISENOX in the European Union, or EU, and we commenced the launch and sale of TRISENOX in the EU during the second quarter of 2002.
We have recorded cumulative net product sales for TRISENOX of approximately $72.8 million through March 31, 2005. TRISENOX is manufactured primarily by two vendors and sold through our direct sales force.
In December 2002, we entered into a distribution agreement with Nippon Shinyaku Co. Ltd., or Nippon. This agreement grants an exclusive license to Nippon to market and distribute TRISENOX injection in Japan, South Korea and Taiwan. Upon execution of the agreement, Nippon paid us a $750,000 initial payment. Under the agreement, we received and recognized as revenue a $500,000 milestone payment in 2003 related to Nippon's submission of an NDA in Japan. In October 2004, Nippon received approval from the Japanese Ministry of Health, or JMH, to market TRISENOX for patients with relapsed or refractory acute promyelocytic leukemia, or APL, in Japan. Under the agreement, we received an additional $500,000 milestone payment from Nippon upon its receipt of approval to market TRISENOX in Japan. In December 2004, Nippon launched TRISENOX for the treatment of relapsed/refractory APL in Japan. We may also receive additional future milestone payments totaling up to $3.0 million upon attainment of certain milestones.
In April 2004, the U.S. Patent and Trademark office issued a patent directed to TRISENOX injection that extends our market exclusivity in the United States for the drug from 2007 to 2018. This extension is eleven years beyond the original orphan drug exclusivity for APL that currently expires in 2007.
In December 2004, we entered into a royalty interest financing arrangement with PharmaBio Development, Inc., or PharmaBio, for $25.0 million in financing and $5.0 million in clinical and other services to be provided by PharmaBio and its affiliates and paid by PharmaBio. From 2006 through 2010, PharmaBio is entitled to receive a royalty based on a percentage of TRISENOX annual net sales in the United States and select countries in the European Union as set forth in the arrangement. Our royalty obligation under the arrangement ranges from $53.0 million to $69.0 million depending on our achievement of TRISENOX sales targets and certain other factors. Also under the arrangement, we committed to certain development and commercialization efforts which if not met, would increase our minimum royalty obligation from $53.0 million to $58.0 million. Based on our current development plans, we believe our minimum royalty obligation will be $58.0 million.
In April 2005, we announced that a phase III study of TRISENOX consolidation treatment in patients with newly diagnosed APL completed enrollment with approximately 500 patients. The study is being conducted under the Cooperative Research and Development Agreement, or CRADA, between CTI and the U.S. National Cancer Institute, or NCI, and involves three of the largest adult cooperative groups; the Eastern Cooperative Oncology Group, or ECOG, the Southwest Oncology Group, or SWOG, and the Cancer and Leukemia Group B, or CALGB, along with the National Cancer Institute of Canada and the Children's Oncology Group. If TRISENOX improves
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event-free survival, CTI may explore the potential to use the results to file a supplement new drug application, or sNDA for TRISENOX in first-line, consolidation for APL patients.
We have approximately 40 company-sponsored and investigator-sponsored TRISENOX trials ongoing, with an emphasis on blood-related cancers, including front-line APL, multiple myeloma and myelodysplastic syndrome, or MDS, also known as 'smoldering' leukemia or preleukemia, which are a group of diseases in which the bone marrow does not function normally and insufficient numbers of mature blood cells are in circulation.
PIXANTRONE
We acquired pixantrone, a novel compound, for the potential treatment of non-Hodgkin's lymphoma, or NHL, through our merger with Novuspharma S.p.A. in January 2004. We are developing pixantrone and have several clinical trials ongoing, including a pivotal phase III trial for the treatment of patients with relapsed aggressive NHL. In July 2004, we announced that the FDA granted fast track designation for pixantrone for the potential treatment of relapsed aggressive NHL on the basis that relapsed aggressive NHL in third-line or subsequent recurrence is a life threatening disease and responses have been noted in phase II trials with patients with relapsed, aggressive NHL. Based on development plans for pixantrone, we are targeting an interim analysis from the ongoing phase III study late in 2005 or early 2006, and if successful, we would submit an NDA for accelerated approval in late 2006 with a potential launch in 2007. If full study results are required, we would submit an NDA for full approval in 2007 with potential commercial launch in 2008. We do not expect to receive significant cash inflows from pixantrone until 2008.
OTHER COMPOUNDS
We are developing a novel polyglutamate-camptothecin molecule, or CT-2106. We filed an IND in December 2001 for this compound and initiated a phase I clinical study in the first quarter of 2002. In April 2004, we initiated a phase I/II clinical trial of CT-2106 in combination with infusional 5 fluorouracil/folinic acid, or 5-FU/FA, in patients with metastatic colorectal cancer who have failed front-line therapy with oxaliplatinum. Additionally, we initiated a phase II clinical trial of CT-2106 in ovarian cancer at the end of 2004.
Critical Accounting Policies and Estimates
Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted in the United States in the preparation of our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis and base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our consolidated financial statements and require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements.
Product Sales
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title has passed and delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Product sales are generally recorded upon shipment net of an allowance for estimated returns and discounts. Customers may return damaged or expired inventory up to one year after the expiration date. In estimating returns, we analyze historical returns, sales patterns, estimated inventory on hand at the distributors and the remaining shelf life of that inventory. To arrive at the accrual for product returns, we match the returns to the corresponding production batch to assess the historical trend for returns. Based on this analysis, the estimated return percentage is applied to current period sales. Allowances for returns, discounts and bad debts are netted against accounts
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receivable. If customers have product acceptance rights or product return rights, and we are unable to reasonably estimate returns related to that customer or market, we defer revenue until such rights have expired.
License and Contract Revenues
We may generate revenue from technology licenses, collaborative research and development arrangements, cost reimbursement contracts and research grants. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding, and various milestone and future product royalty or profit-sharing payments.
Revenue associated with up-front license fees, and research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. If the time period is not defined in the agreement, we calculate the revenue recognition period based on our current estimate of the research and development period considering experience with similar projects, level of effort and the stage of development. Should there be a change in our estimate of the research and development period, we will revise the term over which the initial payment is recognized. Revenue from substantive at-risk milestones and future product royalties is recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Revenue under cost reimbursement contracts and research grants is recognized as the related costs are incurred. Payments received in advance of recognition as revenue are recorded as deferred revenue.
We evaluate multiple element arrangements pursuant to Emerging Issues Task Force, or EITF, 00-21, Revenue Arrangements with Multiple Deliverables. Pursuant to EITF 00-21, in multiple element arrangements where we have continuing performance obligations, contract, milestone and license fees are recognized together with any up-front payments over the term of the arrangement as we complete our performance obligation, unless the delivered technology has stand alone value to the customer and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. Additionally, pursuant to the guidance of Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB 104), unless evidence suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the expected term of the arrangement.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using a weighted-average method. Finished goods inventory consists of our FDA and EMEA approved pharmaceutical drug, TRISENOX. We also record an allowance for inventory that may expire and become unsaleable due to the expiration of shelf life. In estimating inventory obsolescence reserves, we analyze (i) the shelf life and the expiration date, (ii) sales forecasts and (iii) inventory levels compared to forecasted usage. Judgment is required in determining whether the forecasted sales and usage information is sufficiently reliable to enable us to estimate inventory obsolescence reserve.
Research and Development Expenses
Research and development expenses include salaries and benefits, clinical trial and clinical manufacturing costs, contract and other outside service fees, and facilities and overhead costs related to our research and development efforts. Research and development expenses also consist of costs incurred for proprietary and collaboration research and development and include activities such as product registries and investigator-sponsored trials. Research and development costs are expensed as incurred. In instances where we enter into agreements with third parties for research, clinical trial, and related clinical trial manufacturing costs, costs are expensed upon the earlier of when non-refundable amounts are due or as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.
Derivative Financial Instruments
We are subject to risks associated with fluctuations in the LIBOR interest rate from lease payments on our leased aircraft. Our policy is to hedge a portion of these forecasted transactions through an interest rate swap
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agreement. This swap agreement has been designated as a cash flow hedge. The portion of the net gain or loss on the derivative instrument that is effective as a hedge is reported as a component of accumulated other comprehensive income or loss in shareholders' deficit and is reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining net gain or loss on the derivative in excess of the present value of the expected cash flows of the hedged transaction is recorded in earnings immediately. If a derivative does not qualify for hedge accounting, or a portion of the hedge is deemed ineffective, the change in fair value is recorded in earnings. The swap was perfectly effective at March 31, 2005 and December 31, 2004. We do not enter into forward agreements for trading purposes.
Purchase Price Allocation
The purchase price for Novuspharma S.p.A. was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date of January 1, 2004. An independent third-party valuation firm was engaged to assist in determining the fair values of in-process research and development and identifiable intangible assets. Such a valuation requires significant estimates and assumptions including but not limited to: determining the timing and expected costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows from product sales resulting from in-process projects, and developing appropriate discount rates and probability rates by project. We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. However, these assumptions may be inaccurate, and unanticipated events and circumstances may occur.
Royalty Obligation
We recognize interest expense on our royalty obligation using the effective interest method. The imputed interest rate is determined based on our estimate as to total royalty and interest payments due under the arrangement which vary depending on whether we reach certain TRISENOX targets and certain other factors as described in the agreement. We will reassess the imputed interest rate as circumstances change.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 and 2004.
Product sales. TRISENOX is our pharmaceutical grade arsenic product that has been approved by the FDA, EMEA and the JMH to treat patients with relapsed or refractory APL. We recorded net product sales of approximately $6.0 million and $3.9 million for TRISENOX for the three months ended March 31, 2005 and 2004, respectively. The increase in net sales is due to an increase in the sales volume for our product for the three months ended March 31, 2005. Demand for our product during the first quarter of 2004 was affected by a technical error made by Center for Medicare Services, or CMS, stating a payment rate of $2.81/mg for TRISENOX when administered in a physician's office versus the correct rate of $32.94/mg. This error delayed physicians and patients from receiving accurate approved reimbursement information for the product until the correct payment rate was published in early February 2004. We also had additional wholesaler purchases in the fourth quarter of 2003 that were generated from an anticipated price increase which occurred in December 2003. This additional wholesaler inventory and CMS error resulted in lower sales in the first part of 2004. Additionally, we recorded a $0.2 million adjustment for the three months ended March 31, 2005 to decrease our sales reserve to reflect a lower than expected estimated weighted average return rate for our remaining open production batches and a lower than expected actual return rate on our most recently closed production batch. We expect a slight increase in net sales for 2005 as compared to 2004 due to increases in sales in Europe and Asia.
License and contract revenue. In October 2001, we entered into a licensing agreement with Chugai for the development and commercialization of XYOTAX. Upon execution of the agreement, Chugai made a $3.0 million initial payment, which we recorded as deferred revenue and which is being recognized as revenue over the estimated development period of approximately seven years on a straight-line basis. In December 2002, we entered into a distribution agreement with Nippon for the distribution and commercialization of TRISENOX. We received
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$750,000 upon execution of the agreement which was recorded as deferred revenue and was recognized as revenue on a straight-line basis over the performance period which ended during the fourth quarter of 2004.
For the three month period ended March 31, 2005, we recognized approximately $0.1 million of license and contract revenue, relating to the amortization of the initial payments from Chugai. For the three months ended March 31, 2004, we . . . |
