Pharmasset 10-K 2011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal Year Ended September 30, 2011
For the transition period from to
Commission file number 1-33428
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code (609) 613-4100
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
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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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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) based on the last reported sale price of the common stock on March 31, 2011 was $2.51 billion.
As of October 31, 2011, the registrant had 75,657,230 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
The Company, Pharmasset, we, and us as used in this Annual Report on Form 10-K refer to Pharmasset, Inc., a Delaware corporation. Pharmasset and our logo are our trademarks. Other trademarks mentioned in this Annual Report on Form 10-K are the property of their respective owners.
This Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are principally contained in the sections entitled Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. For this purpose, any statement that is not a statement of historical fact should be considered a forward-looking statement. We may, in some cases, use words such as project, believe, anticipate, plan, expect, estimate, intend, potential, or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. These forward-looking statements include statements about the following:
Forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties. We discuss many of the risks and uncertainties associated with our business in greater detail under the heading Risk Factors. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. All forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report on Form 10-K.
You should read this Annual Report on Form 10-K and the documents that we reference in it completely and with the understanding that our actual future results may be materially different from what we expect. Our business, financial condition, results of operations, and prospects may change. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information. The forward-looking statements contained in this Annual Report on Form 10-K are subject to the safe-harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act).
We are a clinical-stage pharmaceutical company committed to discovering, developing, and commercializing novel drugs to treat viral infections. Our primary focus is on the development of nucleoside/tide analogs as oral therapeutics for the treatment of chronic hepatitis C virus (HCV) infection. Nucleoside/tide analogs are a class of compounds which act as alternative substrates for the viral polymerase, thus inhibiting viral replication.
We currently have three clinical-stage product candidates advancing in clinical trials in various HCV populations as follows:
Our pipeline currently consists of three nucleoside/tide analog polymerase inhibitors, PSI-7977, PSI-938 and mericitabine (or RG7128), that we believe have potential competitive advantages with respect to safety, efficacy across all genotypes, drug resistance, and convenience of dosing as compared to currently approved drugs and other known investigational agents for the treatment of HCV. Our objective is to address the significant unmet medical needs of the HCV patient population. We are developing PSI-7977 and PSI-938 ourselves. We have a strategic collaboration with Roche for the development of PSI-6130 and its prodrugs, including mericitabine. Under the collaboration, Roche pays all development costs associated with mericitabine and provides us with potential income from milestone and royalty payments that can be used to fund the advancement of our proprietary product candidates. The following table provides a summary of the status and next expected milestones for each of our three product candidates:
We are continuing to research nucleoside/tide analogs (both pyrimidines and purines) with the intention of identifying additional product candidates that can be used in combination with our nucleoside/tides, mericitabine and PSI-7977, in combination with other classes of direct acting antivirals (DAAs) for the treatment of HCV. The goal of these efforts is to identify compounds with improved potency, safety, convenience, oral bioavailability, and increased intrahepatic nucleotide triphosphate levels.
We were incorporated as Pharmasset, Inc. under the laws of Delaware on June 8, 2004.
Our primary objective is to become a leader in discovering, developing, and commercializing novel antiviral therapeutics that provide a competitive advantage and address unmet medical needs. Our primary focus is on the discovery and development of nucleoside/tide analogs as oral therapeutics for the treatment of HCV. To achieve this goal, we are pursuing the following strategies:
HCV is a leading cause of chronic liver disease and liver transplants. The World Health Organization estimates nearly 170 million people worldwide, or approximately three percent of the worlds population, are infected with HCV. About 130 million of these individuals are chronic HCV carriers who are at an increased risk of developing liver cirrhosis or liver cancer, approximately 15 million of whom are in the United States, Europe, and Japan. The Centers for Disease Control and Prevention (CDC) has reported that 4.1 million people in the United States have been infected with HCV, of whom 3.2 million are chronically infected. Of those chronically infected, the majority are undiagnosed and unaware of their HCV infection. Separately, approximately ten percent of diagnosed HCV patients in the United States are treated each year. In a recent paper published in Liver International (February 2011), the CDC data disclosed above was enhanced to include patients not covered in the original analysis. These enhancements included the incarcerated, homeless, nursing home residents, drug users, active military and veterans. Based on this enhanced survey, the CDC estimated there are at least an additional 1.1 million individuals infected with HCV in the U.S., bringing the total number of U.S. individuals infected with HCV to at least 5.2 million.
At least six major genotypes of HCV have been identified, each with multiple subtypes. Genotypes are designated with numbers (genotypes 1-6) and subtypes with letters. HCV genotypes 1, 2, 3, and 4 have a worldwide distribution, but their prevalence varies from one geographic area to another. Genotype 1 and its subtypes (1a and 1b) are the most common genotype globally, accounting for approximately 70% of infections. In the United States, approximately 67% and 33% of all of the genotype 1 HCV infections are subtypes 1a and 1b, respectively. Patients with genotype 2 or 3 represent approximately 25% of the worldwide chronically infected HCV population and the remaining five percent is comprised of genotypes 4 through 6. Worldwide sales of HCV drugs in recent years have been approximately $2.0 billion. This estimated annual sales level is expected to grow significantly in the near future with the introductions of Incivek and Victrelis (two HCV NS3a/4 protease inhibitors approved for the treatment of HCV during 2011) and are forecasted to reach more than $8.0 billion in 2015. Historically, sales of HCV drugs increase as new therapies are introduced that improve the sustained virologic response (SVR), defined as the inability to detect HCV RNA in a patients blood 24 weeks after discontinuation of therapy, with a standard polymerase chain reaction (PCR) test, which measures the amount of HCV in the blood.
Limitations of Current HCV Infection Therapy
Prior to the introduction of Victrelis (boceprevir) and Incivek (telaprevir) (two new protease inhibitors that were approved only for the treatment of patients with HCV genotype 1 during 2011), the standard of care for treating HCV was a combination of pegylated interferon plus ribavirin (Peg-IFN /RBV). Pegylated interferon is a modified version of alpha interferon, a protein that occurs naturally in the human body and boosts the immune systems ability to fight viral infections. Roche, our collaboration partner in the development of mericitabine, is the market leader in sales of pegylated interferon and branded ribavirin under the brand names Pegasys® and Copegus®, respectively. Patients were given pegylated interferon as a weekly injection, administered together with twice daily ribavirin tablets. Peg-IFN/RBV has limitations that result in less than optimal SVR rates. Substantial side effects can render treatment intolerable for many patients. For example, patients treated with Peg-IFN/RBV can have difficulties with fatigue, bone marrow suppression, anemia, and neuropsychiatric effects. In addition, genotype 1 patients typically receive 48 weeks of Peg-IFN/RBV, but less than 50% of these patients achieve an SVR, which many physicians and patients consider a low rate of success. Between 60% and 80% of the genotype 2 and 3 patients treated with Peg-IFN/RBV for 24 weeks achieve an SVR. The occurrence of side effects, some of which can be serious, combined with the inconvenient treatment regimen can result in many patients not completing therapy. Furthermore, a majority of individuals with HCV are unable to be treated with interferon due to contraindications, such as advanced liver disease or psychiatric conditions. The less than optimal antiviral efficacy, potential for dose-limiting side effects (some of which can be serious), contraindications, and inconvenient dosing regimen of the currently available Peg-IFN/RBV illustrate the unmet medical need of the HCV patient population. Current therapies may also not directly target the virus, suggesting additional patient benefit from agents which directly interfere with HCV replication.
With the introduction of Victrelis and Incivek during 2011, either drug is available for inclusion with Peg-IFN/RBV for treating patients with HCV genotype 1. These treatment regimens for HCV offer improved SVR rates for those patients who can tolerate the triple combination therapy. However, these protease inhibitors have not been approved for use in HCV genotypes 2, 3, 4, 5 and 6 and have lower barriers to resistance than nucleoside/tides currently being developed. Our product development programs are designed to address these substantial unmet medical needs.
Nucleoside/tide Analogs and Other Direct Acting Antivirals for HCV
HCV has several viral specific enzymes that are essential for its replication, thus providing multiple opportunities for therapeutic intervention. Many drug developers have focused on three of the HCV proteins: protease (NS3), polymerase (NS5b), and more recently, another protein, NS5a. The goal of HCV drug development is to discover and develop molecules that have a high affinity for binding to these enzymes thereby inhibiting enzymatic activity and, in turn, inhibiting viral replication. These compound classes are often referred to as protease inhibitors, polymerase inhibitors, and NS5a inhibitors. There are two types of polymerase inhibitors, each with a different mechanism of action. Nucleoside/tide analog polymerase inhibitors work by acting as alternative substrates that block the synthesis of HCV RNA, which is essential for the virus to replicate. The other type of polymerase inhibitor, non-nucleoside polymerase inhibitors, binds directly to the polymerase enzyme, causing a change in its shape. This conformational change inhibits its enzymatic activity.
Our research efforts focus on blocking HCV replication by discovering and developing nucleoside/tide analog polymerase inhibitors. A nucleoside is a basic building block of the nucleic acids, DNA and RNA, the genetic material of all living cells and viruses. Nucleosides consist of a molecule of sugar linked to a nitrogen-containing organic ring compound. In the most important naturally occurring nucleosides, the sugar is either ribose (used to construct RNA) or deoxyribose (used to construct DNA), and the nitrogen-containing organic ring compound, referred to as the base, is either a pyrimidine (cytosine, thymine, or uracil) or a purine (adenine or guanine). A nucleoside combined with a phosphate group becomes a nucleotide.
In biological systems, nucleotides are linked by enzymes, including the polymerase, in a specific order to make long, chainlike polynucleotides (DNA or RNA) of defined sequence to pass along genetic information for a
specific protein, a gene, or an entire organism, a genome. A nucleoside analog is a synthetic molecule that resembles a naturally occurring nucleoside. Chemical modifications in either the sugar portion or the base portion allow these compounds, once phosphorylated, to inhibit or disrupt the activity of the polymerase. When a nucleotide analog is incorporated into viral DNA or RNA during replication, it acts to prevent production of new virus by blocking the complete synthesis of the new viral DNA or RNA genome.
Experiments in vitro conducted by us and others show that nucleoside/tide analogs have conserved antiviral activity across all HCV genotypes. This characteristic of the nucleoside/tide analog class relates to its unique mechanism of action. Recent clinical studies of mericitabine, as more fully described below, show comparable anti-HCV activity across HCV genotypes 1, 2, and 3. Other classes of anti-HCV drugs (i.e., protease inhibitors and non-nucleoside polymerase inhibitors) have not yet shown comparable activity across a broad spectrum of HCV genotypes.
In clinical monotherapy studies with three separate nucleoside/tide analogs (including mericitabine) over 14 days, viral breakthrough while on therapy did not occur. In studies of non-nucleoside polymerase and protease inhibitors, viral breakthrough was seen as early as three to four days into the 14-day treatment period. The relative rapidity of the breakthrough with these classes of drugs suggests that the patients may have harbored HCV strains that were not susceptible to at least one component of the therapeutic regimen. With longer exposure to any DAA, drug resistant virus may be selected over time. The rapidity and frequency with which this occurs may have significant consequences for patients, including not obtaining an SVR.
Summary of Nucleoside/tide Analogs and Their Potential Use as Future Therapy
Current market research identifies the three most important attributes for improving HCV therapy, in order of importance, as: greater efficacy, improved tolerability, and shorter duration of treatment. Over the last several years, most efforts to improve SVR rates have focused on adding a DAA to Peg-IFN/RBV. Within the last six months, we and other developers of HCV DAAs have shifted our focus from investigating combinations that include Peg-IFN to investigating combination treatments with two or more DAAs in the absence of Peg-IFN with and without RBV. These DAA combinations may include a nucleoside/tide with a replication complex (NS5a) inhibitor, such as PSI-7977 with daclatasvir (BMS-790052), or with a protease inhibitor, such as PSI-7977 with TMC435, or mericitabine with Roches ritonavir-boosted danoprevir. These DAA combinations may also include one nucleoside/tide combined with a second complementary nucleoside/tide, such as PSI-938 and PSI-7977. We believe the use of two DAAs would improve tolerability and may lead to a shorter duration of treatment. Due to the unique attributes of nucleoside/tides, including their ability to have complementary resistance profiles and to show comparable activity across a broad spectrum of HCV genotypes, we believe that dual nucleoside/tides combinations could possess advantages over other DAA combinations that do not contain a nucleoside/tide.
Based primarily upon the results to date from all of Phase 1 and Phase 2 studies of PSI-7977 and PSI-938, we also believe the combination of a single DAA, such as PSI-7977 or potentially PSI-938, with RBV could significantly improve currently available HCV therapies. In support of this potential future treatment regimen for HCV, during November 2011 we initiated a pivotal Phase 3 program for PSI-7977 that currently consists of three interferon-free, 12-week studies in combination with RBV in subjects with all HCV genotypes. We anticipate submitting data from all three Phase 3 studies to support the marketing approval of PSI-7977 in the U.S. and European Union for patients with all genotypes during the second half of calendar year 2013.
We currently have three clinical-stage product candidates, PSI-7977, PSI-938 and mericitabine (or RG7128). We are developing PSI-7977 and PSI-938 ourselves and we have a strategic collaboration with Roche for the development of mericitabine.
Our pyrimidine, PSI-7977, is an unpartnered uracil nucleotide analog polymerase inhibitor being developed for the treatment of HCV. During November 2011, we advanced PSI-7977 into FISSION, a pivotal, interferon-free, 12-week Phase 3 study. The following table provides a summary of PSI-7977s current and future Phase 3 studies:
During November 2011, we initiated FISSION, an interferon-free, 12-week pivotal Phase 3 study of PSI-7977 in combination with RBV in treatment naïve patients with HCV genotypes 2 or 3. The primary objective of the study is to assess the efficacy of PSI-7977 in combination with RBV administered for 12 weeks compared with Peg-IFN/RBV for 24 weeks. The primary endpoint of the study will be SVR12 (defined as HCV RNA levels below the limit of detection 12 weeks after the discontinuation of all therapy). The study is expected to enroll approximately 500 subjects that will be randomized equally (1:1) into the following two arms:
POSITRON, NEUTRINO AND TIMING OF NDA (AND MAA) FILINGS
We plan to initiate POSITRON, a second pivotal, interferon-free, 12-week Phase 3 study of PSI-7977 in combination with RBV during the first calendar quarter of 2012. The primary objective of the POSITRON study will be to assess the efficacy of PSI-7977 in combination with RBV administered for 12 weeks in subjects with HCV genotypes 2 or 3 who cannot take interferon. The primary endpoint of the study will be SVR12. This study is expected to enroll approximately 225 subjects. Subjects will be randomized 2:1 into the following two arms:
We are also planning NEUTRINO, a third pivotal, interferon-free, 12 week Phase 3 study of PSI-7977 in combination with RBV in approximately 280 subjects with all HCV genotypes, including those with HCV genotype 1, who cannot take interferon. The final study design for NEUTRINO is expected to be based on emerging data from on-going studies, including ELECTRON and QUANTUM. We expect to initiate NEUTRINO during mid (calendar year) 2012. We anticipate submitting data from all three Phase 3 studies to support the marketing approval of PSI-7977 in the U.S. and European Union in patients with all genotypes during the second half of calendar year 2013.
In addition to the above Phase 3 studies, PSI-7977 is also being investigated in the following on-going studies:
ELECTRON (Parts 1, 2 and 3)
In December 2010, we began dosing of PSI-7977 400mg QD in combination with ribavirin, administered with and without pegylated interferon, in ELECTRON, a 3-part study in subjects with HCV genotypes 2 or 3, or with genotype 1, including subjects with a prior null response to an interferon-containing regimen and treatment experienced subjects. Part 1 of this study enrolled 40 treatment-naïve subjects. The primary goal of the study is to assess the safety and tolerability of PSI-7977 in combination with ribavirin for 12 weeks, with and without pegylated interferon. The study is being conducted in New Zealand and 40 subjects were randomized into one of four arms as follows:
During June 2011, we added Part 2 to the ELECTRON study. Part 2 of the ELECTRON study is expected to enroll an additional 30 subjects and to consist of three additional treatment arms as follows:
Interim results from all of the arms in Part 1 and the monotherapy arm of Part 2 of the ELECTRON study included the following:
The following table summarizes the results for each of the five treatment arms:
During October 2011, we added Part 3 to the ELECTRON study. Part 3 of the ELECTRON study is expected to enroll an additional 50 subjects into two additional treatment arms as follows:
We expect to report SVR12 results from the two arms with HCV genotype 1 subjects of the ELECTRON study during the second calendar quarter of 2012, and SVR12 results from the arm with HCV genotype 2 or 3 subjects of Part 3 of the ELECTRON study during the third calendar quarter of 2012.
We initiated QUANTUM, a Phase 2b study of our purine, PSI-938 during the third calendar quarter of 2011. PSI-7977 is being investigated in the following arms of this study:
All of the above arms are expected to be studied for both 12 and 24 weeks. We expect to report interim results from the 12 week arm of PSI-7977 in combination with RBV in the QUANTUM study during the first half of 2012. (See PSI-938, QUANTUM later in this section for additional information regarding the QUANTUM study).
During March 2011, we initiated ATOMIC, a Phase 2b study evaluating PSI-7977 400mg QD and ribavirin with either 12 or 24 weeks of pegylated interferon. We enrolled 315 treatment-naïve subjects with HCV genotype 1 and an additional 17 treatment-naïve subjects with HCV genotype 4, 5, 6 or indeterminate genotype. The primary endpoint of the study will be the safety and tolerability of PSI-7977 in combination with Peg-IFN/RBV for 12 and 24 weeks. The study is being conducted in the United States and subjects were randomized into the following arms:
HCV genotype 1 subjects will be stratified by IL28B status and baseline HCV RNA to ensure balance across cohorts. As of early November 2011, 15 out of 15 subjects with HCV genotype 1 that had received only 12 weeks of PSI-7977 in combination with Peg-IFN/RBV achieved an SVR4. These interim results from ATOMIC are consistent with results from (1) our PROTON study where 24 out of 24 subjects with HCV genotype 2 or 3 achieved an SVR24 with a similar 12 week treatment regimen, and (2) our ELECTRON study, further demonstrating PSI-7977s consistent antiviral activity across genotypes. We expect to report additional SVR12 results from the 12-week treatment arm of ATOMIC during the second calendar quarter of 2012, and report SVR12 results from the two 24-week treatment arms of ATOMIC during the third calendar quarter of 2012.
During January 2011, we entered into a clinical collaboration agreement with BMS to evaluate the utility of PSI-7977 in combination with daclatasvir (BMS-790052), BMSs NS5a replication complex inhibitor, for the treatment of chronic HCV. This collaboration represented the first cross-company collaboration combining two oral DAAs to address a significant unmet medical need in the treatment of HCV.
During May 2011, BMS initiated this Phase 2a proof of concept study of PSI-7977 in combination with daclatasvir. The study is expected to evaluate the potential to achieve an SVR, defined as a level of HCV RNA in a subject that is below the limit of detection (<10 IU/ml) after the discontinuation of therapy, with an all oral, once-daily, interferon-free treatment regimen in subjects across multiple HCV genotypes. The primary goal of the study is to assess the safety, pharmacokinetics and pharmacodynamics of PSI-7977 in combination with daclatasvir, with and without ribavirin. This Phase 2a study completed enrollment in September 2011 with approximately 84 treatment-naïve subjects chronically infected with HCV genotypes 1, 2, or 3, including HCV
genotype 1 subjects who previously failed treatment with a protease inhibitor. BMS is conducting the study and is responsible for all costs of the study, except for the cost of PSI-7977, which is being supplied by us. Neither party has licensed any commercial rights to the other party. The study is being conducted in the U.S. and subjects were randomized equally across each of the following arms based on HCV genotype:
HCV genotype 1 subjects:
HCV genotype 2 or 3 subjects:
On November 4, 2011, we and BMS announced the addition of four 12-week, interferon-free treatment arms to this on-going study. Approximately 120 subjects are expected to be randomized (2:2:1:1) into one of the following four arms:
BMS has indicated that it expects to report results from this study during the second half of calendar year 2012.
During July 2011, we entered into a clinical collaboration agreement with Tibotec to evaluate the safety and tolerability of PSI-7977 in combination with TMC435, Tibotecs HCV NS3a/4 protease inhibitor, for the treatment of chronic HCV. In October 2011, Tibotec initiated this Phase 2 proof of concept study of PSI-7977 in combination with TMC435 to evaluate the potential to achieve an SVR, defined as a level of HCV RNA in a subject that is below the limit of detection (<10 IU/ml) after the discontinuation of therapy, with an all oral, once-daily, interferon-free treatment regimen in subjects infected with HCV genotype 1. The primary goal of the study is to assess the safety, pharmacokinetics and pharmacodynamics of PSI-7977 in combination with TMC435, with and without ribavirin, in subjects chronically infected with HCV genotype 1 who had a prior null response to Peg-IFN/RBV. Tibotec is conducting the study and is responsible for all costs of the study, except for the cost of PSI-7977, which is being supplied by us. Neither party has licensed any commercial rights to the other party. The study is being conducted in the U.S. and subjects are being randomized into the following arms:
During October 2011, The National Institute of Allergy and Infectious Diseases (NIAID), which is part of the National Institutes of Health (NIH), initiated a 24 week study of PSI-7977 400mg QD with RBV and as monotherapy. The primary objective of the study is to assess the safety and efficacy of PSI-7977 with RBV and as monotherapy and the primary endpoint of the study is SVR12. The study is expected to enroll approximately 80 treatment naïve subjects with HCV genotype 1. NIAID is conducting the study and is responsible for all costs of the study, except for the cost of PSI-7977, which will be supplied by Pharmasset.
In August 2010, we began dosing of PSI-7977 in combination with Peg-IFN/RBV in PROTON, a 12-week Phase 2b dose-finding study. This study is evaluating PSI-7977 200mg QD and 400mg QD in combination with Peg-IFN/RBV in 121 treatment-naïve subjects with HCV genotype 1. The primary goal of the study is to assess the safety and tolerability of PSI-7977 in combination with Peg-IFN/RBV for 12 weeks. The primary efficacy endpoint of the study is the proportion of subjects who achieve an SVR12 and SVR24, defined as HCV RNA below the limit of detection (<15 IU/ml) 12 and 24 weeks, respectively, after the discontinuation of therapy. Subjects receiving PSI-7977 in combination with Peg-IFN/RBV for 12 weeks will discontinue treatment at week 24 if their HCV RNA is below the level of detection at week 4 through week 12; otherwise, subjects are expected to continue on Peg-IFN/RBV through week 48. Subjects were randomized into one of three arms as follows:
Results from the above three arms of the study included the following:
In a fourth, open label arm of the study, we enrolled 25 treatment-naïve subjects with HCV genotypes 2 or 3. Twenty-four subjects received 12 weeks of PSI-7977 400mg QD in combination with Peg-IFN/RBV with no Peg-IFN/RBV follow-up. One subject was lost to follow-up after the first visit. Final results from this open label arm indicated:
Our purine, PSI-938, is an unpartnered guanine nucleotide analog polymerase inhibitor being developed for the treatment of HCV. Purines are phosphorylated by different enzymes than the pyrimidines, and thus should not antagonize the antiviral activity of the pyrimidines. In vitro, the combination of a purine analog with a pyrimidine analog provides additive to synergistic antiviral activity, potentially due to the fact that each of these classes of analogs compete with a different class of naturally occurring nucleotides for incorporation into nascent HCV RNA. Such complementary activities offer the potential for a potent dual nucleoside/tide analog-based combination for the future treatment of HCV. In addition, a dual nucleoside/tide combination has the potential to provide therapeutic activity for all genotypes and since nucleoside/tides possess favorable resistance profiles, we believe that dual nucleoside/tide combinations could possess an advantage over other combinations that incorporate drug classes with less robust resistance profiles. This strategy of dual nucleoside/tide therapy underpins the current standard of care in HIV.
We are currently developing PSI-938 for potential use in one or more of the following three treatment regimens:
The following table provides a summary of PSI-938s recently completed and current studies:
*Study was completed during March 2011.
We initiated QUANTUM, a Phase 2b study of our purine, PSI-938 (and our pyrimidine, PSI-7977) during the third calendar quarter of 2011. This study is designed to enroll approximately 450 patients with chronic HCV of all viral genotypes who have not been treated previously. This study consists of two cohorts, each of which is expected to include approximately 225 subjects. The primary endpoint of the study will be SVR24. Patients are expected to be equally randomized across the following arms:
All of the above arms are expected to be studied for both 12 and 24 weeks, along with a placebo control for 24 weeks. HCV patients will be stratified by HCV genotype, baseline HCV RNA, and the presence of cirrhosis to ensure balance across cohorts. We completed enrollment of Cohort 1 during early November 2011. Our plan is to complete an interim review of the results from the 12 week arms of Cohort 1 during the first half of 2012 and to use these interim results, along with other study results, to design our Phase 3 program for PSI-938 and to finalize the design of NEUTRINO, our third pivotal, Phase 3 study of PSI-7977. We expect to report interim results from the 12 week arms of Cohort 1 of the QUANTUM study during the first half of calendar year 2012, and report SVR12 results from the 12 and 24 week arms of Cohort 1 of the QUANTUM study during the second half of calendar year 2012.
In late November 2010, we began dosing PSI-938 in NUCLEAR, Part 2 of a Phase 1 study that included the first combinations of a purine (PSI-938) and a pyrimidine (PSI-7977) nucleotide analog for the treatment of HCV. The cohorts within NUCLEAR evaluated PSI-938 QD, in the absence of interferon, as monotherapy and in combination with PSI-7977 QD. The primary objective of NUCLEAR was to assess the safety, tolerability and pharmacokinetics of PSI-938 alone and in combination with PSI-7977 over 14 days of dosing. The secondary objective of NUCLEAR was to evaluate the short-term change in HCV RNA.
Forty subjects with HCV genotype 1 were enrolled into one of four cohorts (10 subjects per cohort, n = 8 and placebo = 2) as follows:
Results from Part 2 of this Phase 1 study indicated:
1Cumulative total of individuals whose HCV RNA reached < LOD as a result of the study treatment.
2Includes 2 additional patients whose HCV RNA reached < LOD on day 16.
In summary, 15 of 16, or 94% of subjects receiving PSI-938 or PSI-7977 for 7 days followed by PSI-938 and PSI-7977 for 7 days had HCV RNA levels below the limit of detection at day 14. Including cohort 4 where 7 of 8 subjects had HCV RNA levels below the limit of detection after 14 days of dosing (2 of the 7 subjects HCV RNA levels were not below the level of detection until day 16), 22 of 24, or 92% of subjects had HCV RNA levels below the limit of detection.
Mericitabine (or RG7128)
In October 2004, we entered into a collaboration with Roche for the development and commercialization of PSI-6130 (an oral cytosine nucleoside analog polymerase inhibitor which we discovered) and its prodrugs, including mericitabine, for the treatment of HCV. A prodrug is a chemically modified form of a molecule designed to enhance the absorption, distribution, and metabolic properties of that molecule. Roche and we initiated an adaptive Phase 1 clinical trial with mericitabine in October 2006 under an IND filing. On October 12, 2007, we were informed by the FDA that mericitabine received fast track designation. The following table provides a summary of mericitabines current studies:
During November 2008, Roche, InterMune, Inc. (InterMune), and we announced the initiation of a Phase 1 study to investigate the combination of two DAAs in the absence of interferon and ribavirin. This study, named INFORM-1, combined for the first time two DAAs, mericitabine and danoprevir, in subjects naïve to therapy and in subjects who previously failed therapy. Danoprevir is an inhibitor of the HCV NS3/4 protease, which prior to October 2010, was being
developed by InterMune in collaboration with Roche. During October 2010, Roche purchased the worldwide development and commercialization rights to danoprevir from InterMune and simultaneously terminated the exclusive license and collaboration agreement it had entered into with InterMune to develop danoprevir.
During the quarter ended March 31, 2011, Roche initiated INFORM-SVR, a study of mericitabine in combination with ritonavir-boosted danoprevir with and without Copegus® (ribavirin) in interferon-naïve subjects with HCV genotype 1. This study is evaluating the safety and efficacy of the combination of mericitabine 1000mg, danoprevir 100mg, and ritonavir 100mg administered twice daily plus either Copegus® (ribavirin) or placebo for 12 weeks. The primary efficacy endpoint of the study is the proportion of subjects who achieve an SVR24, defined as HCV RNA below the limit of detection (<15 IU/ml) 24 weeks after the discontinuation of therapy. Subjects receiving mericitabine, danoprevir, and ritonavir with Copegus® (ribavirin) will discontinue treatment at week 12 if their HCV RNA is below the level of detection at weeks 2 and 10; otherwise, subjects are expected to receive another 12 weeks of therapy for a total of 24 weeks.
Roche recently added an arm to the INFORM-SVR study that is expected to enroll an additional 40 subjects with HCV genotype 1who are contraindicated to or intolerant of interferon. All of these 40 subjects are expected to receive a full 24 weeks of mericitabine, ritonavir-boosted danoprevir, and RBV, instead of the shortened duration of 12 weeks of treatment administered to subjects in the other arms of this study.
Matterhorn StudyDuring June 2011, Roche initiated Matterhorn, a Phase 2 study designed to evaluate ritonavir-boosted danoprevir and Copegus® (ribavirin) in combination with mericitabine and/or Pegasys®. The study is expected to enroll approximately 420 subjects with HCV genotype 1 who failed previous therapy and the primary efficacy endpoint of the study will be the proportion of subjects that achieve an SVR.
In April 2009, Roche began dosing in PROPEL, a Phase 2b study of mericitabine. During May 2010, dosing of mericitabine triple combination therapy (mericitabine plus Peg-IFN/RBV) or placebo plus Peg-IFN/RBV in 408 treatment-naïve, genotype-1 or genotype-4 HCV-infected subjects (cirrhotic and non-cirrhotic) was completed. The trial is evaluating the dose and duration of treatment of mericitabine in combination with Peg-IFN/RBV. The primary efficacy endpoint of the trial will be the proportion of subjects that achieve an SVR. Subjects were equally randomized into one of 5 arms of the study:
Subjects in the 24 week cohorts discontinued treatment at week 24 if they achieved a rapid virologic response (RVR), defined as HCV RNA below the limit of detection (<15 IU/mL as measured by Roche TaqMan assay) four weeks after the initiation of treatment, that is maintained until week 22, a strategy known as response-guided treatment. Subjects who did not meet these virologic criteria will continue on Peg-IFN/RBV until week 48.
An interim analysis of all 408 subjects that completed the first 12 weeks of the PROPEL study presented by Roche at the 2010 Annual Meeting of the American Association for the Study of Liver Diseases indicated the following:
An amendment to the protocol for the PROPEL study has been implemented which allows subjects who were initially randomized to the placebo/Peg-IFN/RBV arm and who are non-responders to receive open label mericitabine 1000mg BID in combination with Peg-IFN/RBV for 24 weeks, followed by an additional 24 weeks of Peg-IFN/RBV. Non-response is defined as a subject who does not achieve at least a 2 log decline in HCV RNA by week 12 of therapy, or who has HCV RNA above the limit of detection (15 IU/mL) at week 24 of therapy. This amendment will provide longer-term treatment data on subjects with prior non-response to Peg-IFN/RBV, including demonstrated null responders. Final data from the PROPEL study is expected to be available during the fourth calendar quarter of 2011.
Roche is also conducting JUMP-C, a 24-week Phase 2b study of mericitabine in combination with Peg-IFN/RBV in 166 treatment-naïve subjects with HCV genotypes 1 or 4 to evaluate the safety and efficacy of mericitabine in combination with Peg-IFN/RBV. Subjects with HCV RNA below the limit of detection at the end of week 4 through week 22 will stop all therapy (mericitabine and Peg-IFN/RBV) at week 24, while subjects who do not meet this response guideline will receive a full 48 weeks of Peg-IFN/RBV. Supportive data from this study could provide the flexibility for longer dosing of mericitabine which may be required in some populations, as well as combinations of mericitabine with other DAAs currently in development. This study completed enrollment during the second calendar quarter of 2010 and is being conducted at sites in the U.S. and Canada. Subjects were initially equally randomized into one of two arms of the study:
An interim analysis of all 81 subjects that completed the first 24 weeks of the JUMP-C study was delivered by Roche at the Annual Meeting of the European Association for the Study of the Liver (EASL) held March 30, 2011 through April 3, 2011 and included the following:
Final data from the JUMP-C study is expected to be available during the fourth calendar quarter of 2011.
An amendment to the protocol for this 24-week study has been implemented which allows subjects who were initially randomized to the placebo/Peg-IFN/RBV arm and who are non-responders to receive open label mericitabine 1000mg BID in combination with Peg-IFN/RBV for 24 weeks, followed by an additional 24 weeks of Peg-IFN/RBV. Non-response is defined as a subject who does not achieve at least a 2 log decline in HCV RNA by week 12 of therapy, or who has HCV RNA above the limit of detection (15 IU/mL) at week 24 of therapy. Subjects from this study as well as the initial Phase 2b PROPEL study of 12 weeks mericitabine who are randomized to placebo/Peg-IFN/RBV (described above) will provide longer-term treatment data on subjects with prior non-response to Peg-IFN/RBV, including demonstrated null responders.
Our Research Programs
We have a library of cataloged nucleoside/tide analogs, as well as several other chemically diverse compounds. This library is the result of substantial collective effort, and we continue to enhance the compound librarys value through the addition of new compounds. We screen potential new targets against this library as a means of identifying promising chemical compounds to pursue for further development. We use preclinical discovery and development technologies and viral and cellular assays that we believe form a reasonable basis for anticipating clinical results. Other than conducting clinical trials for our product candidates, developing additional compounds to treat HCV is the primary focus of our nucleoside/tide research and development activities. Our research and development expenses were $75.9 million, $48.3 million, and $52.6 million during the years ended September 30, 2011, 2010 and 2009, respectively.
Collaborations and Licensing Agreements
Hoffmann-La Roche Inc.
Hoffmann-La Roche Inc. is the U.S. affiliate of F. Hoffmann-La Roche Ltd, a Swiss company (collectively Roche). In October 2004, we entered into a collaboration and license agreement with Roche to develop PSI-6130 and its prodrugs for the treatment of chronic HCV infections. Roche paid us an up-front payment of $8.0 million. Roche has also agreed to make milestone payments to us for PSI-6130 or a pro-drug of PSI-6130, including mericitabine, of up to an aggregate of approximately $105.0 million, assuming successful development and regulatory approval in Roches territories. In addition, we will receive royalties paid as a percentage of total annual net product sales, if any, and we will be entitled to receive up to $30.0 million of one-time performance payments should net sales from the product exceed specified thresholds. Under this collaboration, Roche reimbursed us for all of the expenses associated with certain preclinical work, the IND filing, and the initial clinical trial, which we were responsible for and conducted. Roche has and will fund all of the expenses of, and be responsible for, other preclinical studies, future clinical development and commercialization of mericitabine. In addition to the $8.0 million up-front payment, we have received milestone payments of $30.0 million and research reimbursement payments of $5.0 million from Roche under this agreement as of September 30, 2011.
Roche had an option, which expired March 31, 2007, to license, in addition to PSI-6130 and its prodrugs, certain compounds shown to have activity against HCV polymerase during the collaboration period, which expired on December 31, 2006. Since Roche did not exercise this option (or pay the related fees) for any compounds, Roches license is limited to PSI-6130 and its prodrugs, including mericitabine. None of Pharmassets other product candidates, including PSI-7977, PSI-938 and PSI-661, were subject to Roches option and Pharmasset owns the rights to develop and commercialize them.
We granted Roche worldwide rights, excluding Latin America and Korea, to which we refer as our retained territory, to PSI-6130 and its prodrugs. With respect to our retained territory, we may grant rights to a third party to distribute, promote, market, or sell a product covered by this collaboration agreement, as long as we first offer these rights to Roche, subject to certain exceptions. We retained certain co-promotion rights in the United States, including the right to market and promote products comprising these compounds to physicians who treat HIV patients. We will be required to pay to Roche royalties on our net product sales, if any, in the territories we have retained.
We have the right to prosecute, maintain, enforce, and defend patents that are owned by us and are subject to the Roche collaboration, while Roche has the same right with respect to certain designated territories if we choose not to exercise our rights. With respect to Roches patents that are the subject of this collaboration, Roche has the right to prosecute, maintain, enforce, and defend these patents, while we have the same right with respect to certain designated territories if Roche chooses not to exercise its rights. With respect to joint patents that are the subject of this collaboration, Roche and we are each responsible for prosecuting, maintaining, enforcing, and defending those joint patents in our respective territories. Subject to certain exceptions, we have agreed to share with Roche any damages, monetary awards, and other amounts recovered, after costs and expenses, in connection with patent litigation related to this collaboration.
This agreement will terminate once there are no longer any royalty or payment obligations. Additionally, Roche may terminate the agreement in whole or in part by providing six months written notice to us. In the event of termination, Roche must assign or transfer to us all regulatory filings, trademarks, patents, preclinical and clinical data related to this collaboration. Provided that Roche has not terminated the agreement, our royalty obligations under this agreement terminate on a product-by-product and country-by-country basis upon either the expiration of the last to expire patent that covers a licensed compound in such country, or 10 years from the launch of such licensed compound in such country, whichever occurs later. Otherwise, either party may terminate the agreement in whole or in part in connection with a material breach of this agreement by the other party that is not timely cured.
In conjunction with this agreement, Roche purchased 400,000 shares of our Series R redeemable convertible preferred stock and received warrants to purchase up to an additional 470,588 shares of our Series R-1 redeemable convertible preferred stock for $4.0 million. These shares and warrants were initially recorded at fair value for financial reporting purposes. The 400,000 shares of Series R redeemable convertible preferred stock were converted into 266,666 shares of our common stock on May 2, 2007 when we completed our initial public offering, or IPO, and the related warrants expired without exercise on October 26, 2006.
We expect our revenues for at least the next few years to be derived primarily from payments under our current collaboration agreement with Roche and any additional collaborations that we may enter into in the future. In addition to the payments described above, we may receive future royalties on product sales, if any, under our collaboration agreement with Roche.
University of Cincinnati
In October 2007, we entered in a three year research collaboration and license agreement (renewable annually) with the University of Cincinnati (UC) on behalf of its Genome Research Institute (GRI) to identify active and selective compounds against antiviral targets for HCV, hepatitis B virus (HBV), and HIV. As part of the agreement, UC granted us access to the GRI Lead Generation Library, which includes over 250,000 compounds. We were also granted access to GRIs drug discovery capabilities, including high-throughput screening, computational chemistry and in silico docking expertise. UC granted us commercial rights for any lead compounds that are identified for HBV, HIV and HCV. We are required to make an annual payment to UC in support of the research collaboration and are responsible for all development expenses of products that may result from the collaboration. If a lead compound progresses through clinical development activities and achieves regulatory approval, we will make certain milestone payments to UC and pay to UC a royalty on any net sales of the product.
During September 2009, we and UC agreed to terminate our research collaboration. The UC license agreement and related access to the GRI Lead Generation Library and GRIs drug discovery capabilities as briefly described above remain unchanged. The annual maintenance fee for this license agreement is $75,000.
Apath, LLC (Apath) is a Missouri company that is engaged in the commercial application of molecular virology and viral genetics. On October 18, 2000, we entered into an agreement with Apath, as amended on
January 30, 2004, pursuant to which Apath granted us a non-exclusive right to use its HCV Replicon technology for the design, discovery, development and commercialization of compounds inhibiting HCV in humans. This agreement required us to pay Apath royalties on sales of compounds discovered using this technology, and on any consideration received by us from a licensee of such compounds. We used this technology in the discovery of antivirals for the treatment of HCV.
We do not have the right to advise or to consult with Apath regarding the prosecution or maintenance of the licensed patent rights. We are one of several sublicensees of the licensed patents and have no rights to enforce such patents.
This agreement was terminated on August 26, 2005, on which date we entered into a new agreement with Apath. Under the terms of the new agreement, we paid Apath a one-time sublicense fee of $550,000 and an annual maintenance fee of $75,000, subject to annual renewals, retroactive to October 18, 2000. Our only obligation under the new agreement is to pay the annual maintenance fee for any year for which we choose to renew this agreement, and we will have no other financial obligations to Apath in connection with the design, discovery, development and commercialization of compounds inhibiting HCV in humans.
This agreement expires on the date of expiration of the last-to-expire U.S. patent in the licensed patent rights. The last expiration of these patents is scheduled to occur in March 2018. Apath retains no rights to the compounds we discover, and they will receive no payments or royalties for any of the compounds we discover. We are entitled to sublicense these compounds to a third party without Apaths permission or consent. We may terminate the agreement for any reason or no reason by giving Apath 30 days prior written notice without any penalties. Apath is entitled to terminate the contract, but only should we breach the agreement, on 30 days notice in the event of any uncured breach.
In December 1998, we entered into an exclusive, worldwide license agreement to license the active pharmaceutical ingredient in Racivir from Emory University. During 2011, we terminated this license agreement and all of our rights to Racivir were returned to Emory University.
Emory University and University of Georgia Research Foundation, Inc.
During 2011, and following the conclusion of the arbitration with Emory University and University of Georgia Research Foundation, Inc. (the Claimants) (see Item 3, Legal Proceedings), the Claimants terminated our January 8, 2004 license agreement with Claimants (the Emory License) that was the subject of the arbitration. As a result of the termination of the Emory License, all rights granted to us under the Emory License were returned to the Claimants.
Manufacturing and Supply
We do not have our own manufacturing capabilities and we rely on third-party manufacturers for supply of the active pharmaceutical ingredients (APIs) of our product candidates used in preclinical studies and clinical trials. We do not expect to establish our own manufacturing facilities and we will continue to rely on third-party manufacturers to produce commercial quantities of any product candidates we commercialize. We believe all of the materials required for the manufacture of our current product candidates could be obtained from more than one source. Roche has responsibility for establishing a single source of API for mericitabine for both the Roche territory and our territory. We also have the right to establish ourselves as the secondary source of API supply for mericitabine, provided, however, that we may not supply in excess of 20% of the requirements for the global supply.
Regulation by governmental authorities in the United States and other countries is a significant factor in the research and development, manufacture and marketing of pharmaceutical products. Government authorities in the United States at the federal, state, and local levels and in foreign countries extensively regulate, among other things, the research, clinical development, testing, manufacture, labeling, promotion, advertising, marketing, distribution, sampling, and import and export of pharmaceutical products, biologics, and medical devices. All of our products will require regulatory approval by governmental agencies prior to commercialization. Various federal, state, local, and foreign statutes and regulations also govern, among other things, testing, manufacturing, safety, labeling, marketing, storage, and record-keeping related to such products. The process of obtaining these approvals and subsequent process of maintaining substantial compliance with applicable federal, state, local, and foreign statutes and regulations require the expenditure of extensive time and staffing as well as financial resources. In addition, these statutes, rules, regulations, and policies may change and our products may be subject to new legislation or regulations.
Pharmaceutical Regulation in the United States
In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations govern, among other things, the research, development, testing, safety, effectiveness, manufacture, quality control, storage, record keeping, labeling, promotion, marketing, and distribution of pharmaceutical products. The failure to comply with the applicable regulatory requirements may subject a company to a variety of sanctions such as the FDAs refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of operations, injunctions, fines, civil penalties, or criminal investigation and/or prosecution of the Company and/or employees. The FDA also administers certain controls over the export of drugs from the United States. Similar drug regulation exists in other regions such as the European Union (EU).
The steps ordinarily required before a new drug product may be marketed in the United States include preclinical laboratory tests, animal tests and formulation studies, the submission and activation of an Investigational New Drug Exemption (IND), and adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication for which FDA approval is sought. Any advice granted by FDA to a company during drug development is the best available at that time. The FDA may, at any time, change that advice and potentially cause substantial delay to the drug development or New Drug Approval (NDA) review timelines. For example, the FDA draft guidance for the development of direct acting antiviral compounds for the treatment of HCV may be superseded at any time, based upon new information available only to FDA. The following is a general overview of the development and approval process for a new drug.
Preclinical Phase. Preclinical tests include laboratory evaluation of biological mechanisms and drug metabolism, product chemistry, formulation, and stability, as well as studies to evaluate toxicity in animals. The results of preclinical tests, together with manufacturing information and analytical data, are submitted as part of an IND application to the FDA.
An IND must be prepared and submitted to the FDA to request authorization to begin human testing of the drug. Upon expiration of thirty (30) days after submission of an IND without comment from the FDA, or upon receipt of an FDA IND Safe to Proceed Letter (or similarly titled letter), and upon receipt of Institutional Review Board (IRB) approval, the sponsor can begin that testing.
Preclinical testing continues through the clinical phase of development and is employed as a guide to help ensure the safe conduct of human subject clinical studies. Throughout the development program, the drug substance (active ingredient), drug product (formulation), and the attendant manufacturing processes are defined, refined and carefully controlled and regulated to help ensure consistency.
Clinical Phase. The clinical phase of development includes the activities necessary to demonstrate safety and efficacy for the intended indication in humans. Clinical trials are conducted under written protocols detailing, among other things, the objectives of the study and the parameters to be used in assessing the safety and the efficacy of the drug. Each protocol under the IND must be submitted to the FDA, must be reviewed, approved, and conducted under the auspices of an IRB, and each trial includes each subjects signed informed consent. Sponsors, investigators, other clinical study staff, and IRBs also must satisfy compliance with current good clinical practice regulations and procedures (cGCP). Some later trials may include an independent data safety monitoring committee to judge, in an ongoing fashion, the ability of the study to continue; decisions may be reached on the basis of predefined criteria or newly available information.
Clinical trials to support NDAs are typically conducted in three sequential phases, which might be compressed, might overlap, or might be omitted in some circumstances.
In addition to ongoing IND communications with the FDA, a company may engage in meetings with the FDA at critical time points, such as the end of Phase 2, when the proposed Phase 3 clinical program is discussed. Agreements and understandings reached at such meetings are important for ensuring the adequacy of an NDA.
New Drug Application. In order for a drug to be approved for marketing, an NDA is prepared and submitted to the FDA. An NDA is a modular compilation of data, reports, and analyses that includes, among other things, the results of all preclinical and clinical studies, chemistry, manufacturing, and chemical quality information about the drug as well as draft labeling and a risk management plan. The cost of preparing and submitting an NDA is substantial. In most cases, the submission of an NDA is also subject to substantial application and establishment user fees. The manufacturer and/or sponsor under an approved NDA are also subject to ongoing annual product and establishment user fees.
The submission of the application is no guarantee that the FDA will find it complete and accept it for filing. It may refuse to file the application for review and will give reasons why. The FDA may request additional information rather than accept the application for filing, in which case, the application must be resubmitted with the supplemental information. This could cause a substantial delay for resubmission. Once an NDA is accepted for review and internal review proceeds, the FDA may refer the application to an advisory committee for review, evaluation, and an approval recommendation. The FDA is not bound by the opinion of the advisory committee. The current target NDA review time is 10 months for a Standard review. If the drug is initially granted a Priority review (six month target), FDA may, based upon the data, downgrade the Priority review to Standard and reset the review clock. FDA funding legislation starting in 2012 is likely to extend these review targets. Drugs that successfully complete NDA review, and for which an approval letter is received, may be marketed in the United States, subject to all conditions imposed by the FDA in the approval letter and all applicable laws and regulations.
If the FDA determines that the data in the marketing application from the clinical study sites, or manufacturing facilities are not sufficient for approval it will outline the deficiencies in a complete response
letter rather than an approval letter and will often request additional testing or information. The length of time required to satisfy the deficiencies depends on the nature of the deficiencies and could take years if new clinical data are required.
Post-Approval Phase. As a condition of NDA approval, the FDA may require Phase 4 clinical trials to evaluate issues which may have arisen during the NDA review. Manufacturing facilities subject to the NDA are inspected on a routine basis and many contemplated changes to manufacturing processes must be submitted to FDA. Once a product is approved, the requirements include FDA oversight of all promotional materials and timely reporting and analysis of marketed product safety information to FDA and labeling updates to include new information. Heightened awareness of the risk benefit profile of marketed drugs has increased the public scrutiny of drug safety, threatening even well established brand name drugs with voluntary market withdrawal.
As part of the regulatory review process, an NDA may be granted patent term restoration for applicable patents, marketing exclusivity of three or five years duration, and, potentially, pediatric exclusivity. Separately, the drug can also be designated an Orphan Drug, granting seven years marketing exclusivity for a specific indication.
Foreign Regulatory Requirements. Outside the United States, our ability to market our products will also be contingent upon receiving marketing authorizations from the appropriate regulatory authorities and compliance with applicable post-approval regulatory requirements. The company can conduct clinical trials in EU Member States (and other parts of the world such as New Zealand) through the Clinical Trial Application (CTA) process.
As a general matter, foreign regulatory procedures include risks similar to those associated with FDA regulation. In the EU, antiviral products are submitted as a centralized procedure in which approval of a single application to the European Medicines Agency results in EU-wide marketing approval which is then implemented by the Member States.
Even though global regulatory harmonization is a stated goal, regional (for example US vs. EU) regulatory requirements for approving an application may differ depending on issues such as different reviewers, local public health issues, reimbursement plans and political situations. Additionally, as in the United States, post-approval regulatory requirements, such as those regarding the conduct of clinical trials, product manufacturing, marketing, or distribution, would apply to any product that is approved in the EU.
Our research and development processes involve the controlled use of numerous hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local laws and regulations, and may be subject to foreign laws and regulations, governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products, including certain regulations promulgated by the U.S. Environmental Protection Agency, or EPA. The EPA regulations to which we are subject require that we register with the EPA as a generator of hazardous waste. Although we have safety procedures for handling and disposing of these materials, we cannot assure investors that accidental contamination or injury from these materials will not occur. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposures to blood-borne pathogens and the handling, transporting and disposing of biohazardous or radioactive materials. We do not expect the cost of complying with these laws and regulations to be material.
We face a broad range of current and potential competitors, from established global pharmaceutical companies with significant resources, to development-stage companies. In addition, we face competition from
academic and research institutions and government agencies for the discovery, development and commercialization of novel therapeutics to treat HCV. Many of our competitors, either alone or with their collaborative partners, have significantly greater financial, product development, technical, manufacturing, sales, and marketing resources than we do. In addition, many of our direct competitors are large pharmaceutical companies with internal research and development departments that have significantly greater experience in testing pharmaceutical products, obtaining FDA and other regulatory approvals of products, and achieving widespread market acceptance for those products.
We believe that a significant number of drugs are currently under development and will become available in the future for the treatment of HCV. For example, two new protease inhibitors, Victrelis and Incivek, were introduced in the U.S. in the second calendar quarter of 2011 and either drug is now available for inclusion with Peg-IFN/RBV for treating HCV genotype 1. We anticipate that we will face competition as new products enter the marketplace and advanced technologies become available. Our competitors products may be safer, more effective, or more effectively marketed and sold than any product we may commercialize. Competitive products may render one or more of our product candidates obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our product candidates. It is also possible that the development of a cure, effective vaccine, or new treatment methods for HCV could render one or more of our product candidates non-competitive, obsolete, or reduce the demand for our product candidates.
We believe that our ability to compete depends, in part, upon our ability to develop products, complete the clinical trials and regulatory approval processes, and effectively market any products we develop. Further, we need to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary product candidates or processes, and secure sufficient capital resources for the substantial time period between the discovery of lead compounds and their commercial sales, if any.
HCV Therapeutics Competition
In the United States, the current treatment for HCV is a combination of interferon alfa and a nucleoside analog named ribavirin (Peg-IFN/RBV). For patients with HCV genotype 1 only, one of two new protease inhibitors, Victrelis and Incivek, is now available for inclusion with Peg-IFN/RBV. Interferon alfa is approved in several chemically modified forms and is marketed by Roche, Merck (formerly Schering-Plough), and Kadmon Pharmaceuticals. Roche, Merck, Kadmon and several generic manufacturers market ribavirin. We are aware that Roche and other companies are also developing new drugs for the treatment of HCV. In addition, FDA is evaluating a regulatory framework for the review and approval of follow-on biologics. These would be chemically and biologically the same as the pioneer brand (for example Pegasys) but compete on price. The following table presents information about approved drugs and selected drug candidates for the treatment of HCV. These drug candidates are currently being developed:
In addition to the above two potential treatment regimens, PSI-7977 and PSI-938 (our two unpartnered product candidates) are also being developed in combination with and without RBV. PSI-7977 is also being developed in combination with RBV, and PSI-938 is being explored as monotherapy.
FDA-Approved HCV Therapeutics or Selected HCV Therapeutics in Development
Our policy is to pursue patents and to otherwise endeavor to defend our technologies, inventions, and improvements to inventions that are commercially important to the development of our business. We seek U.S. and international patent protection on the novel compounds, product candidates, and therapeutic processes we discover or improve, as well as the chemical synthesis and manufacturing of such compounds and product candidates.
Mericitabine (or RG7128). We own an issued U.S. patent (U.S. patent number 7,429,572) and pending U.S. and foreign patent applications directed to the PSI-6130 chemical compound, pharmaceutical formulations, therapeutic combinations and use to treat HCV infections. This patent was issued on September 30, 2008 and will expire on April 3, 2025. Any additional patents issuing from the pending applications would expire no earlier than 2024. We own an issued U.S. patent (U.S. patent number 7,601,820) and pending U.S. and foreign patent applications directed to the synthesis of PSI-6130 chemical compound, including synthetic intermediates thereof. This patent was issued on October 13, 2009 and will expire on November 13, 2025. Any additional patents issuing from the pending applications would expire no earlier than 2025. We and Roche co-own an issued U.S. patent (U.S. patent number 7,754,699) and pending U.S. and foreign patent applications directed to prodrugs of PSI-6130 (including mericitabine), therapeutic combinations and use to treat HCV infections. This patent was issued on July 13, 2010 and will expire on October 29, 2028. Any additional patents issuing from the pending applications would expire no earlier than 2028.
PSI-7977. The active drug composition of matter is protected by U.S. patent number 7,429,572 expiring April 3, 2025. In addition, we own pending U.S. and foreign patent applications directed to the PSI-7977 chemical compound, pharmaceutical formulations, use to treat HCV infections, and synthesis. Any patents issuing from the pending applications would expire no earlier than 2028. We own pending U.S. and foreign patent applications directed to processes for preparing the PSI-7977 chemical compound, including synthetic intermediates thereof. Any patents issuing from the pending applications would expire no earlier than 2030.
During June 2011 the United States Patent and Trademark Office issued U.S. patent 7,964,580 titled Nucleoside Phosphoramidate Prodrugs. This patent generally relates to the composition of matter of PSI-7977 and its diastereomeric mixture for the treatment of HCV. PSI-7977, a uracil nucleotide analogue polymerase inhibitor of HCV, is being studied in multiple phase 2 trials. This patent expires no earlier than 2029.
PSI-938. We own pending U.S. and foreign patent applications directed to the PSI-938 chemical compound, pharmaceutical formulations, use to treat HCV infections, and synthesis. Any patents issuing from the pending applications would expire no earlier than 2029. We own pending U.S. and foreign patent applications directed to processes for preparing the PSI-938 chemical compound, including synthetic intermediates thereof. Any patents issuing from the pending applications would expire no earlier than 2029.
PSI-661. We own pending U.S. and foreign patent applications directed to the PSI-661 chemical compound, pharmaceutical formulations, use to treat HCV infections, and synthesis. Any patents issuing from the pending applications would expire no earlier than 2029. We own pending U.S. and foreign patent applications directed to processes for preparing the PSI-661 chemical compound, including synthetic intermediates thereof. Any patents issuing from the pending applications would expire no earlier than 2029.
General Patent Matters
Except where precise dates are given, the patent expiration dates stated above do not take into account any patent term adjustments that may accrue due to procedural delays by the United States Patent and Trademark Office. The patent expiration dates stated above do not take into account any patent term extensions that may accrue due to regulatory delays.
Attempts to obtain patent protection both in the United States and abroad can be expensive, take years to complete, and may not be successful. In addition, issued patents are subject to attack, may not be enforceable, and may otherwise fail to protect our business. Moreover, the trade secret laws and other sources of intellectual
property protection may also be insufficient to protect our product candidates. For more information on these and other risks related to intellectual property rights, see Risk FactorsRisks Related to Our Intellectual Property.
In addition to protection offered by patent term and patent term restoration, regulatory authorities such as FDA and EMEA grant marketing exclusivity or data protection for new product approvals and certain supplemental applications. In addition, the US and EU may grant pediatric exclusivity which is dependent on the acceptance of a pediatric clinical program and conduct of trials in the pediatric population. Generic companies may litigate to modify or invalidate exclusivity and while the litigation may not be successful, should it occur, it would consume significant company resources.
As of September 30, 2011, we had 82 employees, 61 of whom performed research and development functions.
Additional information about our business is set forth in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated in this Item 1 by reference.
All periodic and current reports, registration statements, and other filings that we are required to file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act), are available free of charge from the SEC website (www.sec.gov), at 100 F Street N.E., Washington, DC 20549 or by calling 1-800-SEC-0330, as well as through our website at www.pharmasset.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) may also be obtained free of charge, upon written request to: Investor Relations, Pharmasset, Inc., 303-A College Road East, Princeton, NJ 08540. The website addresses included in this report are for identification purposes. The information contained therein or connected thereto are not intended to be incorporated into this report.
Risks Related to Our Business
Risks Related to Drug Discovery, Development, and Commercialization
We are subject to significant regulatory requirements which could delay, prevent, or limit our ability to market our product candidates.
Our research and development activities, preclinical studies, clinical trials, manufacturing, and anticipated marketing of our product candidates are subject to extensive regulation by a wide range of governmental authorities in the United States, including the FDA, and by comparable authorities in European and other countries. To date, none of our product candidates have been approved for sale by the FDA or any foreign regulatory authority. Neither we nor our collaborators, independently or collectively, will be able to commercialize any of our product candidates until we or they obtain FDA approval in the United States or approval by comparable regulatory agencies in Europe or other countries. To satisfy FDA or foreign regulatory approval standards for the commercial sale of our product candidates, we or our collaborators, independently or collectively, must, among other requirements, demonstrate in adequate and well-controlled clinical trials that our product candidates are safe and effective. The clinical trials of a drug candidate can be suspended at any time by us, a regulatory agency, institutional review board (IRB), an independent drug safety monitoring board, or others if there is a concern that subjects participating in the clinical trials are being exposed to unacceptable health risks or for other reasons. Adverse side effects of a product candidate on subjects in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any and all indications of use.
We or our collaborators have conducted preclinical studies and clinical trials of mericitabine (or RG7128), PSI-7977 and PSI-938. Many of these trials were not primarily designed to demonstrate the efficacy of these product candidates but, rather, to collect data on safety and assist in determining the appropriate dose. Even if our product candidates achieve positive results in preclinical and clinical trials, similar results may not be observed in subsequent trials and results may not prove to be statistically significant or demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies.
The FDA also regulates the manufacturing facilities of our collaborators and third-party manufacturers. Prior to approval, the FDA inspects manufacturing facilities to ensure compliance with current good manufacturing practice (cGMP), including quality control and record-keeping measures. Post-approval, the FDA and certain state agencies subject these facilities to unannounced inspections to ensure continued compliance with cGMP. Failure to satisfy the pre-approval inspection or subsequent discovery of problems with a product, or a manufacturing or laboratory facility used by us, our collaborators, or third-party manufacturers may result in an inability to receive approval, recall of products, delay in approval, or restrictions on the product or on the manufacturing post-approval, including a voluntary withdrawal of the drug from the market or suspension of manufacturing. Such inspections of third party manufacturers may adversely affect us whether or not our products are the cause of the inspection because other products or a general cGMP review may cause the inspection. Our collaborators and third-party manufacturers rely on a variety of suppliers of raw materials, equipment, and other supplies to comply with cGMP and other specifications and standards. The failure of a supplier to our collaborators and third-party manufacturers to meet such requirements could have a material adverse effect on our research, development, and future commercial activities. Foreign regulatory authorities have similar manufacturing compliance requirements which may result in similar outcomes to those noted above.
The FDA and foreign regulatory authorities also regulate the conduct of clinical trials, ensuring compliance with current good clinical practice regulations and guidance (cGCP) and other applicable U.S. and foreign regulatory requirements. Clinical investigator sites contracted by us or any of our collaborators may be inspected, unannounced, by any regulatory authority at any time. Failure of the clinical site to successfully complete the regulatory inspection may adversely affect us whether or not our trials are the cause of the inspection. This
occurs because clinical investigators routinely conduct trials for other companies and inspection of those trials may uncover more systemic problems at the site which were not known to us.
We also will be required to obtain foreign regulatory approval for the sale of our products outside of the United States. Foreign regulatory approval processes include all of the risks associated with the FDA approval processes described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by one regulatory agency, including the FDA, does not assure approval by other regulatory authorities. Many foreign regulatory authorities have different approval standards from each other and from those required by the FDA and may impose additional testing requirements for our product candidates. Furthermore, international ethical review boards may cause our clinical trials to be delayed pending their review of safety data, clinical procedures, and comments provided by foreign regulatory authorities. We have had limited interaction with foreign regulatory authorities. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to submit for foreign regulatory approvals, they may not accept the application and we may not receive necessary approvals to commercialize our existing and future product candidates in any market.
The regulatory approval process is expensive and, while the time required to complete clinical trials and for FDA and foreign regulatory approval processes is uncertain, it typically takes many years. Our analysis of data obtained from our preclinical studies and clinical trials is subject to confirmation and interpretation by different regulatory authorities who may have different views on the design, scope, or results of our clinical trials, which could delay, limit, or prevent regulatory approval. At any time, changes in regulatory policy during the development period of any of our product candidates, changes in, or the enactment of, additional regulations or statutes, or changes in regulatory review practices for a submitted product application may result in failure of the agency to accept our application for review, which could cause a delay in obtaining approval or result in the rejection of an application for regulatory approval. We could also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action or changes in FDA or foreign regulatory policies during the period of product development, clinical trials, or regulatory review. We seek to ensure a productive dialogue with regulatory authorities throughout product development, application review and thereafter. We may reach the conclusion to not follow all of the regulatory authorities advice for the content of a marketing application and instead justify our position with supporting data and expert analyses contained in the original application. The regulatory authority(ies) may agree or disagree with this approach, which may affect acceptance of the application, the length of agency review, or other action on the application. The regulatory review process may be subject to political, technical, economic, and other developments. This results in dynamic and unpredictable risks in drug development, regulatory compliance, and commercialization of pharmaceuticals.
As a result of these factors, our product candidates could require a significantly longer time to gain regulatory approval than expected or may never gain approval. We cannot assure you that, even after expending substantial time and resources, we will obtain regulatory approval for any of our product candidates. A delay or denial of regulatory approval could delay or prevent our ability to generate product revenues and to achieve profitability. If regulatory approval is obtained, our marketing of any product will be limited to its indicated uses, which will limit the size of the market for a product and affect our potential product revenues.
Our product candidates must undergo the conduct of rigorous clinical trials, the results of which are uncertain and could substantially delay or prevent us from bringing product candidates to market.
Before we can obtain regulatory approval for a product candidate, among other things, we must undertake extensive clinical trials in humans to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies. Clinical trials sufficient to obtain regulatory marketing approval are complex and expensive and take years to complete. The results of earlier-stage testing may not be predictive of results in future trials. For example, estimates of detectable circulating virus reduction and activity against HCV obtained from preclinical studies and early clinical trials are not necessarily indicative of results that could be achieved in subsequent clinical trials. Many companies in the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier preclinical studies and clinical trials. We cannot assure you that we or our collaborators will successfully complete the planned clinical trials. Our collaborators or we may experience unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following events:
We have limited experience conducting clinical trials, which could impair our timing or ability to obtain regulatory approval for our product candidates.
We have limited experience conducting and managing the clinical trials necessary to obtain FDA approval or approval by other regulatory authorities. Our past clinical experience has been limited to a small number of product candidates in a limited number of therapeutic areas. By contrast, larger pharmaceutical companies often have substantial staffs experienced in conducting clinical trials with multiple product candidates across multiple indications. As a result, we may be at a competitive disadvantage that could, for example, result in delays in obtaining regulatory approvals, if at all, for our product candidates for which we conduct or manage the clinical trial process.
Delays in conducting clinical trials could result in increased costs to us and delay our ability to obtain regulatory approval and commercialize our product candidates.
Significant delays in conducting clinical trials and related drug development programs could materially affect our product development costs and delay regulatory approval of our product candidates. We do not know whether planned clinical trials will begin on time, will need to be redesigned, or will be completed on schedule, if at all. A clinical trial can be delayed for a variety of reasons, including:
Failure to recruit, enroll, and retain subjects for clinical trials may cause the development of our product candidates to be delayed or development costs to increase substantially.
We have experienced, and expect to experience in the future, delays in subject enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocol depends, among other things, on our ability to enroll a sufficient number of subjects who remain in the study until its conclusion. The enrollment of subjects depends on many factors, including:
Our clinical trials compete with the clinical trials of other product candidates that are in the same therapeutic areas as our product candidates, and this competition reduces the number and types of subjects available to us, because some subjects who might have enrolled in our trials decide instead to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which reduces the number of subjects who are available for our clinical trials in such clinical trial site. Delays in patient enrollment in the future as a result of these and other factors may result in increased costs or may affect the timing or outcome of our clinical trials, which could prevent us from completing these trials and adversely affect our ability to advance the development of our product candidates.
Our product candidates may demonstrate or be associated with undesirable side effects when used alone or in combination with other products that prevent their regulatory approval or limit their use if approved.
We must adequately define the safety profile of our product candidates to obtain regulatory approval. Although in clinical trials completed to date, mericitabine, PSI-7977 and PSI-938 were generally well tolerated, these trials involved a relatively small number of subjects and we may observe significant adverse events for these product candidates in the future. Roche is currently conducting larger clinical studies of mericitabine and we are conducting, and planning to conduct, additional larger clinical studies of PSI-7977 and PSI-938. It is possible that any side effects associated with our product candidates may outweigh the benefits of our product candidates and prevent regulatory approval or demonstrate a risk/reward profile which would limit their market acceptance if they are approved. Recent developments in the pharmaceutical industry have prompted heightened government focus on safety reporting during both pre- and post-approval time periods and pharmacovigilance. Global health authorities may impose regulatory requirements to monitor safety that may burden our ability to commercialize our drug products.
Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our product candidates, which would negatively affect our ability to achieve profitability.
If approved for marketing, the commercial success of our product candidates will depend upon their acceptance by physicians and the medical community, patients, and private, government, and third-party payers as clinically safe and effective, and cost-effective, therapeutics. The degree of market acceptance of any of our approved products will depend upon a number of factors, including:
A significant number of product candidates are currently under development and may become available in the future for the treatment of HCV, and may be approved prior to any of our product candidates reaching the market. Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new therapeutics are introduced that are more favorably received than our products or that render our products obsolete, or if unacceptable levels of drug resistance or significant adverse events occur. If our products do not achieve and maintain market acceptance, we will not be able to generate sufficient revenue from product sales to attain profitability.
Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and foreign regulations or new safety data arise, we could lose our marketing approvals and our business would be seriously harmed.
Following initial regulatory approval of any drugs we or our collaborators may develop, we and our collaborators will be subject to continuing regulatory review by the FDA or other regulatory authorities, including the review of any adverse drug events and clinical results that are reported after product candidates become commercially available. This would include results from any post-marketing follow-up studies, routine safety surveillance or other reporting required as a condition to approval. The manufacture, distribution, sale, labeling, packaging, storage, advertising, promotion, reporting, and record-keeping related to the product will also be subject to extensive ongoing regulatory requirements, which are subject to change. In addition, incidents of adverse drug reactions, unintended side effects, or misuse relating to our products could result in additional regulatory controls or restrictions or even lead to voluntary withdrawal of a product from the market.
Furthermore, our third-party manufacturers and the manufacturing facilities that they use to make our product candidates are regulated by the FDA and other governmental authorities (including foreign authorities). Quality control and manufacturing procedures must continue to conform to cGMP after approval. Pharmaceutical manufacturers and their subcontractors are required to register their facilities and/or products manufactured at time of submission of the marketing application and then annually thereafter with the FDA and certain state and foreign agencies. They are also subject to periodic unannounced inspections by the FDA, state, and other foreign authorities. Any subsequent discovery of problems with a product, or a manufacturing or laboratory facility used by us or our collaborators, may result in restrictions on the product or on the manufacturing or laboratory facility, including marketed product recall, suspension of manufacturing, product seizure, or a voluntary withdrawal of
the drug from the market. Any change to an approved product, including the way it is manufactured or promoted, often requires FDA or other regulatory authority notification or approval before the product, as modified, can be marketed. We and our third-party manufacturers will also be subject to ongoing FDA or other regulatory authority requirements for submission of safety and other post-market information. If we, our collaborators, or our third-party manufacturers fail to comply with applicable continuing regulatory requirements, our business could be seriously harmed because a regulatory agency may:
The FDAs and foreign regulatory agencies policies are subject to change and additional federal, state, local, or foreign governmental regulations may be enacted that could affect our ability to maintain compliance. We cannot predict the likelihood, nature, or extent of adverse governmental regulation that may arise from future legislation or administrative action, either in the United States or abroad.
Our research and development efforts may not result in additional product candidates being discovered, which could limit our ability to generate revenues in the future.
Our research and development efforts may not lead to the discovery of any additional product candidates that would be suitable for further preclinical or clinical development. The discovery of additional product candidates requires significant research and preclinical studies as well as a substantial commitment of resources. Many lead compounds that appear promising in preclinical studies fail to progress to become product candidates in clinical trials. There is a great deal of uncertainty inherent in our research and development efforts and, as a consequence, in our ability to fill our drug development pipeline with promising additional product candidates.
We have no sales, marketing, or distribution experience. We will be required to invest significant amounts of financial and management resources in developing these resources.
If PSI-7977 and/or PSI-938 receive marketing approval in the United States, we intend to promote and commercialize these products, in certain cases without a partner. To develop internal sales, distribution, and marketing capabilities, we will have to invest significant amounts of financial and management resources. As a result, we could face a number of risks, including:
We and our collaborators will be subject to stringent federal, state, and foreign regulation of sales and marketing of any approved product candidate and a failure to comply with these regulations could result in substantial penalties.
The marketing and advertising of our drug products by our collaborators or us will be regulated by the FDA, certain state agencies, and foreign regulatory authorities. Violations of these laws and regulations, including
promotion of our products for unapproved uses or failing to adequately disclose risk information, are punishable by criminal and civil sanctions and may result in the issuance of enforcement letters, corrective advertising or other enforcement action by the FDA, or investigation, prosecution or enforcement action by the U.S. Department of Justice, or other state government agencies, or foreign regulatory or other legal authorities that could jeopardize our ability to market the product.
In addition to FDA, state, and foreign regulations, the marketing of drug products by us or our collaborators will be regulated by federal, state, or foreign laws pertaining to health care fraud and abuse, such as the federal anti-kickback law prohibiting bribes, kickbacks, or other remuneration for the order or recommendation of items or services reimbursed by federal health care programs. There are also federal and state laws applicable to items or services reimbursed by commercial insurers. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, and Veterans Affairs healthcare programs. Because of the far-reaching nature of these laws, we will need to regularly evaluate and, as appropriate, potentially revise our practices to ensure compliance with these laws. Health care fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. Any violations of these laws, or any action against us for violations of these laws, even if we successfully defend against it, could have a material adverse effect on our business, financial condition, and results of operations.
We could also become subject to false claims litigation under federal statutes, which can lead to civil money penalties, restitution, criminal fines, imprisonment, and exclusion from participation in Medicare, Medicaid, and other federal and state health care programs. These false claims statutes include the False Claims Act, which allows any person to bring a suit on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against pharmaceutical companies have increased significantly in volume and breadth in recent years. Some of these suits against pharmaceutical companies have been brought on allegations that certain sales practices amount to the promotion of drug products for unapproved uses. This new growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay fines or restitution, or be excluded from the Medicare, Medicaid, Veterans Affairs, and other federal and state healthcare programs as a result of an investigation arising out of such action. We may become subject to such litigation, the defense of which can be expensive, time consuming, and distracting. If we are not successful in defending against such actions, those actions may have a material adverse effect on our business, financial condition, and results of operations.
Failure to comply with the U.S. Foreign Corrupt Practices Act (FCPA) could subject us to penalties and other adverse consequences.
We are subject to the FCPA, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls, including at foreign-controlled subsidiaries.
Compliance with the FCPA may be expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and physicians and other hospital employees are considered to be foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to governmental officials and have led to FCPA enforcement actions.
We can make no assurance that our employees or other agents will not engage in prohibited conduct under our policies and procedures and FCPA for which we might be held responsible. If our employees or other agents
are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Financial Performance and Business Operations
We have incurred net losses since our inception and our future profitability is uncertain and we anticipate that we will incur significant continued net losses for the next several years.
We are a clinical-stage pharmaceutical company with a limited operating history upon which an investor can evaluate our operations and future prospects. We have incurred net losses in each year since our predecessor companys inception in 1998. For the years ended September 30, 2011, 2010, and 2009, we had net losses of $91.2 million, $66.1 million, and $55.6 million, respectively. As of September 30, 2011, we had an accumulated deficit of $324.7 million. We do not expect to generate significant sales revenue from our product candidates for at least the next two years and we expect to continue to incur significant operating losses in future periods. We expect to incur substantial costs to further our drug discovery and development programs and that our rate of spending will accelerate as a result of the increased costs and expenses associated with preclinical and clinical development of PSI-7977 and PSI-938 and other future product candidates. In addition, as we expand our operations, we will need to continue to improve our facilities and hire additional personnel. As a result, we expect that our annual operating losses will increase significantly over the next two years.
Our revenue and profit potential is unproven, and our limited operating history and the many risks inherent in drug development make our future operating results difficult to predict. To attain profitability, we and our collaborators will need to successfully develop products and effectively market and sell them. We have never generated revenue from the sale of products and there is no guarantee that we will be able to do so in the future. If our product candidates fail to show positive results in ongoing preclinical studies and clinical trials, if we or our collaborators do not receive regulatory approval, or if our product candidates do not achieve market acceptance even if approved, we may never become profitable. If we fail to become profitable, or if we are unable to continue to fund our continuing losses, we may be unable to continue our clinical development programs.
We will require substantial funds in the future and we may be unable to raise capital when needed, which could force us to delay, reduce, or eliminate some of our drug discovery, product development, and commercialization activities.
Developing product candidates, conducting clinical trials, and commercializing products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. Although we believe our existing cash resources as of September 30, 2011, together with anticipated payments under our existing collaboration agreement, will be sufficient to fund our projected cash requirements for the next 12 months, we will require significant additional financing in the future to fund our operations. Such financing may not be available on acceptable terms, if at all. Our future capital requirements will depend on many factors, including:
Our ability to raise additional funds will depend on financial, economic, and market conditions and other factors, many of which are beyond our control. Additional financing may not be available when we need it or, if available, may not be on terms that are favorable to us. If we are unable to obtain adequate funding on a timely basis, we may be required to delay, reduce the scope of, or eliminate one or more of our drug discovery or development programs.
Raising additional capital may dilute our stockholders equity, limit our flexibility, or require us to relinquish rights.
We may need to raise additional capital to fund our operations through public or private equity offerings or debt financings. To the extent that we raise additional capital by issuing equity or equity-linked securities, our stockholders ownership will be diluted. Any debt financing we enter into may include covenants that limit our flexibility in conducting our business. We also could be required to seek funds through arrangements with collaborators or others, which might require us to relinquish valuable rights to our intellectual property or product candidates that we would have otherwise retained.
Our success depends in part on our ability to retain and recruit key personnel, and if we fail to do so, it may be more difficult for us to successfully develop our product candidates or achieve our business objectives.
Our success depends in part on our ability to attract, retain and motivate highly qualified management, clinical, and scientific personnel. We are highly dependent on our senior management and scientific staff, particularly P. Schaefer Price, our Chief Executive Officer, Kurt Leutzinger, our Chief Financial Officer, and M. Michelle Berrey, M.D., M.P.H., our Chief Medical Officer. We do not maintain key person insurance for our senior management or scientific staff. The loss of the services of any of our senior management or key members of our scientific staff may significantly delay or prevent the successful completion of our preclinical studies and clinical trials or the commercialization of our product candidates. To date, we are not aware that any member of our senior management or scientific staff plans to leave the company.
The employment of each of our employees with us is at will and each employee can terminate his or her employment with us at any time. We currently have an employment agreement in place with P. Schaefer Price.
Our success will also depend on our ability to hire and retain additional qualified scientific and management personnel. Competition for qualified individuals in the pharmaceutical field is intense, and we face competition from numerous pharmaceutical and biotechnology companies, universities and other research institutions. We may be unable to attract and retain qualified individuals on acceptable terms given the competition for such personnel. Furthermore, there is a possibility that a qualified candidate we are recruiting might opt to accept a position with one of our competitors instead of with us because our competitor may have products that are already on the market and generating revenue. If we are unsuccessful in our recruiting efforts, we may be unable to execute our strategy.
We will need to increase the size of our organization, and we may encounter difficulties managing our growth.
As of September 30, 2011, we had 82 employees, 61 of whom perform research and development functions. We plan to hire a significant number of additional employees in the near future. As our product candidates continue to progress toward potential commercialization, we anticipate the need to hire additional employees as required to add depth and specialized expertise to our team. This growth could place a strain on our administrative and operational infrastructure. If the product candidates that we are developing continue to advance in clinical trials, we will need to expand our development, regulatory, manufacturing, quality, compliance, recordkeeping, information technology, training, marketing, and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to develop additional relationships with various collaborators, contract research organizations, suppliers, manufacturers, and other organizations. We may not be able to establish such relationships or may incur significant costs to do so. Our ability to manage our growth will also require us to continue to improve our operational, financial, and management controls, reporting systems and procedures, and other compliance programs and processes which will further increase our operating costs. If we are unable to successfully manage the expansion of our operations or operate on a larger scale, we will not achieve our strategic objectives.
Changes in foreign currency exchange rates could result in increased costs.
We are party to some agreements denominated, wholly or partly, in foreign currencies, and, in the future, we may enter into additional agreements denominated in foreign currencies. If the values of these currencies increase against the United States dollar, our costs would increase. To date, we have not entered into any contracts to reduce the risk of fluctuations in currency exchange rates. In the future, depending upon the amounts payable under any such agreements, we may enter into forward foreign exchange contracts to reduce the risk of unpredictable changes in these costs. However, due to the variability of timing and amount of payments under any such agreements, foreign exchange contracts may not mitigate the potential adverse impact on our financial results.
Risks Related to Our Dependence on Third Parties
We have licensed PSI-6130 and its prodrugs, including mericitabine, to Roche, and we will depend on Roche to continue its development and commercialization.
We are developing mericitabine under a collaborative licensing agreement that we entered into with Roche in October 2004. We are dependent on Roche to continue the development of mericitabine and successfully commercialize it. Roche may terminate its agreement with us without cause on six months notice. If Roche fails to aggressively pursue the development and marketing approval of mericitabine, if a dispute arises with Roche over the terms or the interpretation of the collaboration agreement or an alleged breach of any provision of the agreement, or if Roche terminates its agreement, then the development and commercialization of mericitabine, or our ability to receive the expected payments under this agreement, could be delayed or adversely affected.
Roche is subject to many of the same development and commercialization risks to which we are subject. If Roche decides to devote resources to alternative products, either on its own or in collaboration with other pharmaceutical companies, Roche may not devote sufficient resources to the development of mericitabine. Further, if Roche decides to pursue additional therapies for HCV, future sales of mericitabine could be adversely affected. Any adverse development in Roches operations or financial condition could adversely affect the development and commercialization of mericitabine or other prodrugs of PSI-6130, and our receipt of future milestone payments and royalties on its sales.
We and our collaborators depend on third parties to conduct our clinical trials, which may result in costs and delays that prevent us from obtaining regulatory approval or successfully commercializing our product candidates.
We and our collaborators engage clinical investigators and medical institutions to enroll subjects in our clinical trials and contract research organizations (CROs) to perform data collection and analysis and other
aspects of our preclinical studies and clinical trials. As a result, we depend on these third parties to perform these activities on a timely basis in accordance with the clinical protocols, good laboratory practices, good clinical trial practices, and other regulatory requirements. Our reliance on these third parties for clinical development activities reduces our control over these activities. Accordingly, if these third parties do not carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, or our data may be rejected by the FDA or other regulatory agencies. If it became necessary to replace a third party that was conducting one of our clinical trials, we believe that there are a number of other third-party contractors whom we could engage to continue these activities, although it may result in a delay of the applicable clinical trial. If there are delays in testing or obtaining regulatory approvals as a result of a third partys failure to perform, our drug discovery and development costs will increase, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.
Reliance on third parties to conduct and monitor clinical trials may result in increased financial and regulatory risks.
Most new drugs must undergo clinical trials on human subjects before they are approved for marketing in the United States or in other countries. In recent years, the number of clinical trials of new drugs has increased, due both to U.S. federal funding of biomedical research and to research investment by pharmaceutical and biotech companies and to increased global regulatory requirements such as long term safety testing prior to product approval. There has also been a trend toward increased monitoring and enforcement of laws and the issuance of industry guidelines applicable to clinical research, including those relating to fraud and abuse. Because we rely on third party CROs, service providers, and other organizations and institutions to conduct and monitor our clinical studies, we face risks related to fraud and abuse in the conduct of our clinical studies. Those risks include financial misconduct, misconduct associated with human subjects protection, and research misconduct.
Several aspects of financial management in clinical trials particularly increase potential risks relating to fraud and abuse concerns, including third-party payor coverage for clinical trials and related costs, research sponsor payments for clinical trial services and costs, and federal grants oversight and management. For example, allegations of False Claims Act violations in connection with Medicare billing for clinical trial services have been asserted against a number of research sites and the Department of Health and Human Service (HHS) Office of Inspector General (OIG) has repeatedly expressed concern that some industry-sponsored clinical trials may be suspect under the anti-kickback statute if they are motivated by marketing objectives. A number of research institutions have entered settlement agreements with the federal government following False Claims Act charges relating to mismanagement of federal grant funds.
Human subjects protection in the United States is addressed in regulations and guidance issued by HHS and the FDA that focus on subjects informed consent for clinical trial participation, institutional review board review and monitoring the conduct of clinical trials, and identification and management of researchers conflicts of interest. Knowing failure to comply with these requirements has resulted in fraud claims against CROs, researchers and institutional review boards. Recent allegations of community clinical research center mismanagement, increased enforcement actions such as warning letters, and failure to comply with informed consent requirements may result in additional governmental monitoring, regulation, and enforcement applicable to us, our collaborators and the CROs, researchers, and institutional review boards with whom we work.
We maintain compliance programs through our clinical operations and development personnel working with our finance and legal groups support. Our clinical trial vendors are required to monitor and report to us the possible remedial action required for the conduct of clinical studies and we are obliged to take the appropriate action. We also monitor clinical trial vendors through our regulatory and quality assurance staff and service providers. It is our understanding that Roche has undertaken to monitor the clinical trials it sponsors; and that it devotes substantial resources to this effort. However, we cannot assure you that our or our collaborators
programs and personnel will timely and fully discover any fraud or abuse that may occur in connection with our clinical trials. Such fraud or abuse, if it occurs, could have a material adverse effect on our research, development, or commercialization activities and results.
If parties on whom we rely to manufacture our product candidates do not manufacture active pharmaceutical ingredients or finished products of satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost, clinical development and commercialization of our product candidates could be delayed.
We do not own or operate manufacturing facilities. Consequently, we rely on third parties as sole suppliers of our product candidates. We do not expect to establish our own manufacturing facilities and we will continue to rely on third-party manufacturers to produce clinical supplies and commercial quantities of any drugs that we market or may supply to our collaborators. Our dependence on third parties for the manufacture of our product candidates may adversely affect our ability to develop and commercialize any product candidates on a timely and competitive basis. Our collaborators may decide to not accept the product that we supply them.
To date, our product candidates have only been manufactured in quantities sufficient for preclinical studies and early stage clinical trials. We rely on a single South Korean manufacturer to supply the active pharmaceutical ingredient (API) of PSI-7977 and PSI-938. For a variety of reasons, dependence on any single manufacturer may adversely affect our ability to develop and commercialize our product candidates on a timely and competitive basis. We do not currently have any long-term supply agreements in place for our product candidates and will need to enter into supply agreements for additional supplies of each of our product candidates to complete clinical development and/or commercialize them.
Additionally, in connection with our application for commercial approvals and if any product candidate is approved by the FDA or other regulatory agencies for commercial sale, we will need to procure commercial quantities from qualified third-party manufacturers. Neither we nor Roche may be able to contract for increased manufacturing capacity for any of our product candidates in a timely or economic manner or at all. A significant scale-up in manufacturing may require additional validation studies and commensurate financial investments by the contract manufacturers. If we or Roche are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage of supply, which could limit our sales and could initiate regulatory intervention to minimize the public health risk.
Other risks associated with our reliance on contract manufacturers include the following:
Changes to the manufacturing process during the conduct of clinical trials or after marketing approval also require regulatory submissions and the demonstration to the FDA or other regulatory authorities that the product manufactured under the new conditions complies with cGMP requirements. These requirements especially apply to moving manufacturing functions to another facility. In each phase of investigation, sufficient information about changes in the manufacturing process must be submitted to the regulatory authorities and may require prior approval before implementation with the potential of substantial delay or the inability to implement the requested changes.
We may experience difficulties in entering into contracts on favorable terms for supplies of our products for future preclinical studies and clinical trials, which could prevent us from completing these studies and delay the commercialization of our products.
Roche is supplying mericitabine for our joint clinical trials and development program. We are considering additional supply options of mericitabine. We have entered into an agreement with Roche for the purchase of clinical supplies of mericitabine and related clinical materials for our use in developing mericitabine outside of Roches licensed territory. We will need to enter into supply agreements for additional supplies of each of our product candidates to complete clinical development and/or commercialize them. We cannot assure you that we will be able to do so on favorable terms, if at all.
We also anticipate the need to procure additional product and drug supplies, including qualifying potential additional suppliers, of PSI-7977 and PSI-938.
If conflicts arise between our collaborators and us, our collaborators may act in their best interest and not in our best interest, which could adversely affect our business.
Conflicts may arise with our collaborators if they pursue alternative therapies for the diseases that we have targeted or develop alternative products either on their own or in collaboration with others. Competing products, either developed by our present collaborators or any future collaborators or to which our present collaborators or any future collaborators have rights, may result in development delays or the withdrawal of their support for one or more of our product candidates.
Additionally, conflicts may arise if there is a dispute about the progress of, or other activities related to, the clinical development of a product candidate, the achievement and payment of a milestone amount, or the ownership of intellectual property that is developed during the course of the collaborative arrangement. Similarly, the parties to a collaboration agreement may disagree as to which party owns newly developed products. If an agreement is terminated as a result of a dispute and before we have realized the benefits of the collaboration, our reputation could be harmed and we might not obtain revenues that we anticipated receiving.
We may rely on other collaborators in the future and if future collaborations are not successful, we may not be able to effectively develop and commercialize our product candidates.
We may decide to enter into future collaborations for the development and commercialization of PSI-7977 and/or PSI-938 or other future product candidates. We may not be successful in entering into any additional collaborations.
Relying on collaborative relationships poses a number of risks to us, including the following:
A collaborator may terminate its agreement with us or simultaneously pursue alternative products, therapeutic approaches, or technologies as a means of developing treatments for the diseases targeted by us or our collaborative effort. If a collaborator terminates its agreement with us, the development or commercialization of our product candidates could be delayed or terminated, or we could be required to undertake unforeseen additional responsibilities or devote unbudgeted additional resources to such development or commercialization.
If we fail to enter into additional in-licensing agreements or if these arrangements are unsuccessful, our ability to fill our clinical pipeline may be adversely affected.
In addition to entering into collaboration agreements with third parties for the development and commercialization of our product candidates, we intend to continue to explore opportunities to further enhance our discovery and development capabilities and develop our clinical pipeline by in-licensing product candidates that fit within our expertise and research and development capabilities. We face substantial competition for in-licensing opportunities from companies focused on antiviral therapies, many of which may have greater resources than we do. Additional in-licensing agreements for product candidates may not be available to us or, if available, the terms may not be favorable. We may also need to license additional technologies in order to continue to develop our clinical pipeline. If we are unable to enter into additional agreements to license product candidates or technologies, or if these arrangements are unsuccessful, our clinical pipeline may not contain a sufficient number of promising future product candidates and our research and development efforts could be delayed.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain adequate patent protection for our product candidates, we may be unable to commercialize our product candidates or to prevent other companies from using our intellectual property in competitive products in certain countries.
Our commercial success will depend, in large part, on our ability to obtain and maintain patents and proprietary intellectual property rights sufficient to prevent others from marketing our product candidates, as well as to successfully defend and enforce those patents against infringement and to avoid infringing the proprietary
rights of others, both in the United States and in foreign countries. Roche and we have been granted patents and have filed patent applications for mericitabine, and we have filed and may in the future file our own patent applications for our other technology. We have also licensed certain patents, patent applications and other proprietary rights from third parties. Except where precise dates are given, our current patent expiration dates do not take into account any patent term adjustments that may accrue due to procedural delays by the United States Patent and Trademark Office or patent term extensions that may accrue due to regulatory delays.
Our patent position, like that of many pharmaceutical and biotechnology companies, is uncertain and involves complex legal and factual questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, such patents may not adequately protect the products or technologies we own. Others may challenge, seek to invalidate, infringe, or circumvent any patents we own, and rights we receive under those patents may not provide competitive advantages to us. We cannot assure you as to the degree of protection that we will be afforded by any patents issued to us. The laws of many countries may not protect intellectual property rights to the same extent as U.S. laws, and those countries may lack adequate rules and procedures for defending our intellectual property rights. For example, we may not be able to prevent a third party from infringing our patents in a country that does not recognize or enforce patent rights, or that imposes compulsory licenses on or restricts the prices of life-saving drugs. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
An issued patent does not guarantee us the right to practice the patented technology or commercialize the patented product. Third parties may have or obtain rights to blocking patents that could be used to prevent us from commercializing our patented products and practicing our patented technology. Our issued patents and those that may be issued in the future may be challenged, invalidated, or circumvented, which could limit our ability to prevent competitors from marketing related product candidates or could limit the length of the term of patent protection of our product candidates. In addition, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology and our competitors may independently develop similar technologies. Moreover, 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 commercialized, any related patent or potential patent extension may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.
We may incur substantial costs or lose important rights as a result of litigation or other proceedings relating to patent and other intellectual property rights.
The defense and prosecution of intellectual property rights, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings in the United States and elsewhere are costly and time-consuming and their outcome is uncertain. In general, there is a substantial amount of litigation involving patent and other intellectual property rights in the biopharmaceutical industry. Litigation may be necessary to:
We were involved in a proceeding regarding our intellectual property rights (See the matter described in Item 3. Legal Proceedings). We incurred substantial expenses in the defense of this matter. If we become involved in any litigation, interference, or other administrative proceeding, we will incur substantial expense and it will divert the efforts of our scientific and management personnel. Uncertainties resulting from the initiation and continuation of litigation, interference, or other administrative proceedings could have a material adverse effect on our ability to compete in the marketplace pending resolution of the disputed matters. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially reasonable terms, if at all. We or our collaborators may be restricted or prevented from developing and commercializing our products in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. In such event, we may attempt to redesign our processes or technologies so that they do not infringe, which may not be commercially reasonable or technically possible.
While our product candidates are in clinical trials, we believe that the use of our product candidates in these clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As our product candidates progress toward commercialization, the possibility of a patent infringement claim against us increases. We attempt to ensure that our product candidates and the methods we employ to manufacture them, as well as the methods for their use we intend to promote, do not infringe other parties patents and other proprietary rights. There can be no assurance they do not, however, and competitors or other parties may assert that we infringe their proprietary rights in any event.
If we find during clinical evaluation that our product candidates should be used in combination with a product that is covered by a patent held by another company or institution, and that a labeling instruction is required in product packaging recommending that combination, we could be accused of, or held liable for, infringement of the third-party patents covering the product recommended for co-administration with our product. In such a case, we could be required to obtain a license from the other company or institution to use the required or desired package labeling, which may not be available on commercially reasonable terms, or at all.
We may be subject to claims that our board members, employees, or consultants or we have used or disclosed alleged trade secrets or other proprietary information belonging to third parties and any such individuals that are currently affiliated with one of our competitors may disclose our proprietary technology or information.
As is commonplace in the biotechnology and pharmaceutical industries, some of our board members, employees, and consultants are or have been employed at, or associated with, other biotechnology or pharmaceutical companies that compete with us. While employed at or associated with these companies, these individuals may become exposed to or involved in research and technology similar to the areas of research and
technology in which we are engaged. We may be subject to claims that we, or our employees, board members, or consultants have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of those companies. Litigation may be necessary to defend against such claims.
We have entered into confidentiality agreements with all of our employees. However, we do not have, and are not planning to enter into, any confidentiality agreements with our directors because they have a fiduciary duty of confidentiality as directors. There is the possibility that any of our former board members, employees, or consultants who are currently employed at, or associated with, one of our competitors may unintentionally or willfully disclose our proprietary technology or information.
The rights we rely upon to protect our unpatented trade secrets may be inadequate.
We rely on unpatented trade secrets, know-how, and technology. This intellectual property is difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public during the regulatory approval process. We seek to protect trade secrets, in part, by entering into confidentiality agreements with employees, consultants, and others. These parties may breach or terminate these agreements, and we may not have adequate remedies for such breaches. Furthermore, these agreements may not provide meaningful protection for our trade secrets or other proprietary information or result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized use or disclosure of confidential information or other breaches of the agreements. Despite our efforts to protect our trade secrets, we or our collaboration partners, board members, employees, consultants, contractors, or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors.
There is a risk that our trade secrets could have been, or could, in the future, be shared by any of our former employees with, and be used to the benefit of, any company that competes with us. For example, a former director and founder of Pharmasset has, along with several of our former scientists, started a new pharmaceutical company to develop drugs to treat viral infections (including human retroviral and hepatitis infections), cancer, and dermatological conditions, which may compete with us in the future. These individuals left Pharmasset in 2005. We have a confidentiality agreement in place with our former director, and have both confidentiality agreements and covenant not to compete agreements in place with the former scientists. The term of the confidentiality agreements is indefinite with regard to any confidential information that is not subsequently made public. The covenant not to compete agreements expired on February 28, 2007.
If we fail to maintain trade secret protection, our competitive position may be adversely affected. Competitors may also independently discover our trade secrets. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming, and uncertain. If our competitors independently develop equivalent knowledge, methods, and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.
Risks Related to Our Industry
Our industry is extremely competitive. If our competitors develop and market products that are equally or more effective, safer, or more affordable than ours, or obtain marketing approval before we do, our commercial opportunities may be limited.
Competition in the biotechnology and pharmaceutical industries is intense and continues to increase, particularly in the area of antiviral drugs. Many companies are pursuing the development of novel drugs that target the same diseases we are targeting. There are a significant number of drugs that are approved or currently under development that will become available in the future for the treatment of HCV and other viral infections. If any of the product candidates that our competitors are developing are successful, we will have difficulty gaining market share.
We face a broad range of current and potential competitors, from established global pharmaceutical companies with significant resources to development-stage companies. Listed below are some of the pharmaceutical and biotechnology companies developing compounds targeting HCV and other viral infections. Roche, Merck (formerly Schering-Plough), and Kadmon Pharmaceuticals market alpha interferon, a component of the current treatment for HCV, which is approved in several chemically modified forms. All three companies and several generic manufacturers market ribavirin, which is another component of the current treatment for HCV. Vertex and Merck also market Incivek (telaprevir) and Victrelis (boceprevir), respectively, either of which is now available for inclusion with alpha interferon and ribavirin in the current treatment of patients with HCV genotype 1. Roche, Merck, and other companies, such as Abbott, Boehringer Ingelheim, Bristol Meyers Squibb, Gilead Sciences, Idenix, Johnson & Johnson, Pfizer and Vertex are also developing new drugs for the treatment of HCV.
In addition, we face competition from academic and research institutions and government agencies for the discovery, development and, commercialization of novel therapeutics to treat HCV. Some early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies.
Many of our competitors have:
Our competitors may succeed in developing or commercializing equally or more effective, safe, or affordable products, which would render our product candidates less competitive or noncompetitive. Our competitors may discover technologies and techniques, or enter into partnerships with collaborators, in order to develop competing products that are more effective or less costly than the products we develop. This may render our technology or products obsolete and noncompetitive. These competitors also compete with us to recruit and retain qualified personnel, establish clinical trials sites and patient registration for clinical trials, as well as to acquire technologies and technology licenses complementary to our programs or advantageous to our business. Moreover, competitors that are able to achieve patent protection, obtain regulatory approvals, and commence commercial sales of their products before we do, and competitors who have already done so, will enjoy a significant competitive advantage. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.
If we successfully develop and obtain approval for our product candidates, we will face competition for market share based on the safety and efficacy of our products, the timing and scope of regulatory approvals, the availability of supply, marketing and sales capability, reimbursement coverage, price, patent position, and other factors.
The development of direct acting antivirals to treat HCV may present additional risks beyond those inherent in drug development.
We are developing, alone and with collaborator(s), nucleoside/tides to treat HCV. The potential therapeutic regimens being tested or planned for testing include our nucleoside/tide as monotherapy (alone) or in combination with:
These development programs and planned studies carry all the risks inherent in drug development activities, including the risk that they will fail to demonstrate meaningful efficacy or acceptable safety. However, these development programs are subject to regulatory, commercial, manufacturing, and other risks that may be additional to the risks described above. For example, regulatory guidelines for approval of direct acting antiviral drugs are evolving in the United States, Europe, and other countries. We anticipate that regulatory guidelines and regulatory agency responses to our, our collaborators, and our competitors development programs will continue to change, resulting in the risk that our and our collaborators activities may not meet unanticipated new standards or requirements, which could lead to delay, additional expense, or potential failure of development activities. Our development programs, in addition, involve testing product candidates alone and in combination with approved drugs as well as with currently unapproved product candidates, which increases the risk of significant adverse effects or test failures. The timing, outcome, and cost of this testing are difficult to predict and dependent on a number of factors that are outside our reasonable control. To the extent that we, our collaborator, or our competitors successfully develop direct acting antivirals whose use improves the current treatment for HCV or results in interferon-sparing treatment regimens, current HCV-treating physicians, HCV patients, healthcare payers, and others may not readily accept or pay for such improvements or new treatments. Because direct acting antivirals is an emerging field, the delay or failure of a competitor attempting to develop therapeutics that could have been combined with our product candidates or that are perceived to be similar to our product candidates could have a significant adverse effect on the commercial or regulatory environment for our product candidates or on the price of our stock. As we note elsewhere, other companies developing direct acting antivirals have more advanced development programs than we do. Their success or failure to successfully conclude clinical development and obtain marketing approval could have a material adverse effect on our development and commercialization plans and activities.
If third-party payers do not adequately reimburse patients for any of our product candidates that are approved for marketing, we may not be successful in selling them.
Our ability to commercialize any products successfully will depend in part on the extent to which reimbursement will be available from governmental and other third-party payers, both in the United States and in foreign markets. Even if we succeed in bringing one or more products to the market, the amount reimbursed for our products may be insufficient to allow our products to compete effectively with products that are reimbursed at a higher level. If the price we are able to charge for any products we develop is inadequate in light of our development costs, our profitability could be adversely affected.
Reimbursement by governmental and other third-party payers may depend upon a number of factors, including the governmental and other third-party payers determination that the use of a product is:
Obtaining reimbursement approval for a product from each third-party and government payer is a time-consuming and costly process that could require us to provide supporting scientific, clinical, and cost-effectiveness data for the use of our products to each payer. We may not be able to provide data sufficient to obtain reimbursement.
Eligibility for coverage does not imply that any drug product will be reimbursed in all cases or at a rate that allows us to make a profit. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not become permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost drugs that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or Medicare or Medicaid data used to calculate these rates. Net prices for products also may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.
The health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage, and negotiating reduced payment schedules with service providers for drug products. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the MMA, created a broader prescription drug benefit for Medicare beneficiaries. The MMA also contains provisions intended to reduce or eliminate delays in the introduction of generic drug competition at the end of patent or nonpatent market exclusivity. The impact of the MMA on drug prices and new drug utilization in the future is unknown. The MMA also made adjustments to the physician fee schedule and the measure by which prescription drugs are presently paid. The effects of these changes are unknown but may include decreased utilization of new medicines in physician prescribing patterns, and further pressure on drug company sponsors to provide discount programs and reimbursement support programs. There have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect reimbursement levels for our future products. In addition, the Centers for Medicare and Medicaid Services frequently change product descriptors, coverage policies, product and service codes, payment methodologies, and reimbursement values. Third-party payers often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates and may have sufficient market power to demand significant price reductions. The impact of healthcare reform legislation enacted in 2010 will not be known for many years. Future legislation may also limit the prices that can be charged for drugs we develop.
Foreign governments tend to impose strict price controls which may adversely affect our future profitability.
In most foreign countries, particularly in the European Union, prescription drug pricing and/or reimbursement is subject to governmental control. In those countries that impose price controls, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, or if there is competition from lower priced cross-border sales, our profitability will be negatively affected.
Even if we achieve market acceptance for our products, we may experience downward pricing pressure on the price of our drugs because of generic and biosimilar competition and social pressure to lower the cost of drugs to treat HCV.
Several of the FDA-approved individual and combination products face patent expiration in the next several years. As a result, generic versions and biosimilars of these drugs and biologicals may become available. We expect to face competition from these products, including price-based competition.
Pressure from HCV awareness and other social activist groups to reduce drug prices may also put downward pressure on the prices of emerging HCV drugs, including mericitabine, PSI-7977, and PSI-938, if they are commercialized.
We face a risk of product liability claims and, if we are not able to obtain adequate liability insurance, a product liability claim could result in substantial liabilities.
Our business exposes us to the risk of significant potential product liability claims that are inherent in the manufacturing, testing, and marketing of human therapeutic products, and we will face a greater risk if our collaborator(s) or we sell any products commercially. Regardless of their merit or eventual outcome, product liability claims may result in:
Product liability claims could result in an FDA or other regulatory authority investigation of the safety or efficacy of our products, our manufacturing processes and facilities, our marketing programs, our internal safety reporting systems or our staff conduct. A regulatory authority investigation could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension or withdrawal of approval. Product liability claims could also result in investigation, prosecution or enforcement action by the U.S. Department of Justice or other federal or state government agencies.
We currently have product liability insurance that covers our clinical trials for up to $15.0 million for each occurrence and up to a $15.0 million annual aggregate limit, subject to deductibles of $50,000 per occurrence. We intend to increase our insurance coverage and include the sale of commercial products if marketing approval is obtained. Because insurance coverage is becoming increasingly expensive, we may not be able to obtain or maintain adequate protection against potential product liabilities at a reasonable cost or at all, and the insurance coverage that we obtain may not be adequate to cover potential claims or losses.
We may incur significant costs to comply with laws regulating the protection of health and human safety and the environment, and failure to comply with these laws and regulations could expose us to significant liabilities.
Our research and development activities involve the controlled use of numerous hazardous materials, chemicals, and radioactive materials which produce waste products. We are subject to federal, state, and local laws and regulations, and may be subject to foreign laws and regulations, governing the use, manufacture, storage, handling, and disposal of hazardous materials and waste products, including certain regulations promulgated by the U.S. Environmental Protection Agency, or EPA. Our regulatory applications will include the request for an exemption to an environmental assessment for the impact of the product, materials, and processes subject to the application. The request could be denied, resulting in potentially substantial delays to our development time lines. The EPA regulations to which we are subject require that we register with the EPA as a
generator of hazardous waste. The risk of accidental contamination or injury from the handling, transporting, and disposing of hazardous materials and waste products cannot be entirely eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health, and workplace safety laws and regulations, including those governing laboratory procedures, exposures to blood-borne pathogens, and the handling, transporting, and disposing of biohazardous or radioactive materials. Although we maintain workers compensation insurance to cover us for the costs and expenses we may incur if our employees are injured as a result of using these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain, nor do we plan to obtain, additional insurance coverage relating to damage claims arising from our use of hazardous materials. Further, we may be required to indemnify our collaborators or licensees against damages and other liabilities arising out of our development activities or products. Compliance with the applicable environmental and workplace laws and regulations is expensive. Future changes to environmental, health, workplace, and safety laws could cause us to incur additional expenses or may restrict our operations or impair our research, development, and production efforts.
Risks Related to our Common Stock
Our stock price is volatile.
The stock market in general and the market for clinical-stage pharmaceutical stocks in particular have experienced extreme volatility that has often been unrelated or disproportionate to the operating performance of particular companies. The volume and price per share of our common stock may be negatively affected by the results or activities of investors, which may be unrelated to our operating performance. In addition, broad market fluctuations may adversely affect the volume or trading price for our common stock.
In this market environment, the sale of a substantial number of shares of our common stock in the public market or the perception that such a sale might occur would likely have an adverse effect on the market price of our common stock. A number of investors hold relatively large positions in our securities. Particularly in light of the relatively low volume of trading in our common stock during many trading sessions, a decision by any of these investors to sell all or a block of its holdings of our common stock could cause our stock price to drop significantly.
The market also continues to experience significant price and volume fluctuations, some of which are unrelated to the operating performance of particular companies. Since our IPO, the price of our common stock has fluctuated significantly and may continue to do so in the future. Many factors could have a significant effect on the market price for our common stock, including:
Any litigation brought against us as a result of this volatility could result in substantial costs and a diversion of our managements attention and resources, which could negatively impact our financial condition, results of operations, and the price of our common stock.
If we raise additional capital by issuing equity securities in a fluctuating market, many or all of our existing stockholders may experience substantial dilution, and if we need to raise capital by issuing equity securities at a time when our stock price is lower, we may have difficulty raising sufficient capital to meet our requirements. If any of the risks described in these Risk Factors occurred, or if any unforeseen risk affected our performance, it could have a dramatic and adverse impact on the market price of our common stock.
Provisions of our amended and restated certificate of incorporation, bylaws, and Delaware law could delay or discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our amended and restated certificate of incorporation, bylaws, and Delaware law may discourage, delay, or prevent a merger or acquisition that stockholders may consider favorable. In addition, these provisions could make it more difficult for our stockholders to replace or remove our board of directors.
These provisions include:
We have an operating lease for a 30,800 square foot building that has 12,000 square feet of laboratory space and approximately 18,000 square feet of administrative offices located in Princeton, New Jersey through May 22, 2015. The annual occupancy expense under this lease is approximately $810,000. This facility is equipped to perform drug research activities. We also have an operating lease for office space in Durham, North Carolina through December 31, 2015. The annual occupancy expense under this lease is approximately $80,000.
We are not a party to any material legal proceedings.
On July 28, 2009, Emory University and University of Georgia Research Foundation, Inc. (Claimants) filed a Demand for Arbitration and Relief (the Demand) with the American Arbitration Association in Atlanta, Georgia (the Emory Arbitration), claiming certain payments and seeking specific performance under the Companys January 8, 2004 license agreement with Claimants (the Emory License).
The Demand alleged that payments Pharmasset had received under the Roche collaboration agreement were subject to the Emory License and that Pharmasset had not paid fees to Claimants based on such payments. In addition, the Demand alleged that Pharmasset had not complied with certain terms and conditions of the Emory License and that other Pharmasset product candidates were, or will be, covered by the Emory License. The Demand requested, among other things, specific performance of the Emory License, including the payment of license fees related to past payments received by Pharmasset. The Companys response to the Demand was filed on August 14, 2009.
On December 6, 2010 a final arbitration award (the Award) was issued by a panel of AAA arbitrators. According to the Award, none of the payments the Company received under the Roche collaboration agreement were subject to the Emory License and, therefore, no license fees were owed to Emory based upon such payments. Furthermore, according to the Award, none of the other Company product candidates that were subject to the Demand are covered by the Emory License.
Our common stock began trading on the Global Market of The NASDAQ Stock Market LLC (NASDAQ) on April 27, 2007 under the symbol VRUS. Prior to that time, there was no established public trading market for our common stock.
During the fourth quarter of fiscal 2011, our board of directors declared a stock dividend to effect a two-for-one stock split. Holders of Pharmasset common stock at the close of business on August 22, 2011, the record date, received one additional share of common stock for every share of common stock they owned. The stock dividend was distributed at the close of business on August 31, 2011. All share and per share amounts have been restated for all periods presented to reflect the two-for-one stock split.
The following table sets forth for the periods indicated the high and low sale prices per share of our common stock on a post-split basis as reported by NASDAQ:
Holders of Record
As of October 31, 2011, there were 21 holders of record of our common stock.
Comparative Stock Performance
The following graph and related information should not be deemed soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
CUMULATIVE TOTAL RETURN
(Based on an initial investment of $100.00 on April 27, 2007 using
end of the quarter closing prices for each of the three investment options.)
We have never paid or declared any cash dividends on our common stock. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay cash dividends in the foreseeable future. Moreover, under the terms of our Loan Agreement with our lender, we are not permitted to pay any dividends without its written consent.
The following table presents our selected financial information. The statement of operations data for the years ended September 30, 2011, 2010, and 2009 and the balance sheet data as of September 30, 2011 and 2010 have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended September 30, 2008 and 2007, and the balance sheet data as of September 30, 2009, 2008, and 2007 have been derived from our audited financial statements that are not included in this Annual Report on Form 10-K.
The selected financial data set forth below should be read together with our financial statements and the related notes to those financial statements, as well as Managements Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected in any future period.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions set forth in the section titled Forward-Looking Statements, which can be found at the beginning of this report, and in Item 1A, Risk Factors. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the Risk Factors section and elsewhere in this report.
We are a clinical-stage pharmaceutical company committed to discovering, developing, and commercializing novel drugs to treat viral infections. Our primary focus is on the development of nucleoside/tide analogs as oral therapeutics for the treatment of chronic hepatitis C virus (HCV) infection. Nucleoside/tide analogs are a class of compounds which act as alternative substrates for the viral polymerase, thus inhibiting viral replication.
We currently have three clinical-stage product candidates advancing in clinical trials in various HCV populations as follows:
Our pipeline currently consists of three nucleoside/tide analog polymerase inhibitors, PSI-7977, PSI-938 and mericitabine (or RG7128), that we believe have potential competitive advantages with respect to safety, efficacy across all genotypes, drug resistance, and convenience of dosing as compared to currently approved drugs and other known investigational agents for the treatment of HCV. Our objective is to address the significant unmet medical needs of the HCV patient population. We are developing PSI-7977 and PSI-938 ourselves. We have a strategic collaboration with Roche for the development of PSI-6130 and its prodrugs, including mericitabine. Under the collaboration, Roche pays all development costs associated with mericitabine and provides us with potential income from milestone and royalty payments that can be used to fund the advancement of our proprietary product candidates. The following table provides a summary of the status and next expected milestones for each of our three product candidates:
We have incurred substantial operating losses since our inception because we have devoted substantially all of our resources to our research and development activities and have not generated any revenue from the sale of approved drugs. As of September 30, 2011, we had an accumulated deficit of $324.7 million. We expect our operating losses to increase for the next two years as we continue to pursue the clinical development of PSI-7977 and PSI-938 and as we expand our discovery and development pipeline.
We have funded our operations primarily through the sale of equity securities, payments received under collaboration agreements, borrowings under our Loan Agreement, and interest earned on investments. We expect to continue to fund our operations over the next two years through our existing cash resources, potential future milestone payments that we expect to receive from Roche if certain conditions are satisfied, interest earned on our investments, and additional capital to be raised through public or private equity offerings or debt financings. We will require additional financing in the future to fund our operations. Additional financing may not be available on acceptable terms, if at all. As of September 30, 2011, we had $166.5 million of cash and cash equivalents.
All of our product candidates are currently in development and, therefore, we do not expect to generate any direct revenues from product sales for at least the next two years, if at all. Our revenues to date have been generated primarily from milestone payments under our collaboration agreements, license fees, and research funding. We currently have a collaboration agreement with Roche for the development of mericitabine. We entered into our collaboration agreement with Roche in October 2004. Roche subsequently paid us an up-front payment of $8.0 million. As of September 30, 2011, we had received an aggregate of $44.5 million in payments under the Roche collaboration agreement, including research funding and related fees as well as up-front and milestone payments.
Under the current terms of the Roche collaboration agreement, if we and Roche succeed in obtaining all of the regulatory approvals specified in the agreement for mericitabine, as of September 30, 2011 the maximum future development and commercialization milestone payments payable to us is $105.0 million ($15.0 million for initiation of a Phase 3 study, $20.0 million for marketing submissions, $40.0 million for health authority approvals, and $30.0 million for achievement of sales milestones). We cannot assure you that we will receive any of these future payments.
We expect our revenues for the next two years to be derived primarily from payments under our current collaboration agreement with Roche and any additional collaboration(s) that we may enter into in the future. In addition to the payments described above, we may receive future royalties on product sales, if any, under our collaboration agreement with Roche.
Research and Development Expenses
Our research and development expenses consist primarily of costs of clinical trials (including active pharmaceutical ingredients (API)), salaries and related personnel expenses, fees paid to external service providers, up-front and milestone payments under our license agreements, patent-related legal fees, costs of preclinical studies, drug and laboratory supplies, and costs for facilities and equipment. We use external service providers to manufacture our product candidates for clinical trials and for the majority of our preclinical and clinical development work. We charge all research and development expenses to operations as they are incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.
Our research activities are primarily focused on discovering and developing novel drugs to treat HCV. Our development activities are primarily focused on the development of PSI-7977, PSI-938, and mericitabine (in collaboration with Roche) for the treatment of HCV. We are responsible for all costs incurred in the clinical development of PSI-7977 and PSI-938, as well as the research costs associated with our other internal research programs.
Under our collaboration with Roche, Roche will fund the clinical development and commercialization of mericitabine. Under this collaboration, Roche reimbursed us for all of the external expenses associated with, and we were responsible for, certain preclinical work, the IND filing, and the proof-of-concept clinical trial. During December 2008, we transferred the IND application for mericitabine to Roche. Roche will continue to fund all of the expenses of, and be responsible for, other preclinical studies and future clinical development of mericitabine in the territories licensed to Roche. We and Roche will continue to jointly oversee all development and marketing activities of mericitabine in the territories licensed to Roche. Roche received a license only to PSI-6130 and its pro-drugs, including mericitabine.
Under our clinical collaboration agreements with BMS and Tibotec, BMS and Tibotec will conduct and be responsible for all costs of their proof of concept studies of PSI-7977 in combination with either daclatasvir (BMS-790052) or TMC435, respectively, except for the cost of PSI-7977 to be used in each study, which will be supplied by Pharmasset.
We use our internal research and development resources, including our employees and discovery infrastructure, across various projects. Our related internal expenses are not attributable to a specific project, but are directed to broadly applicable research activities. Accordingly, we do not account for our internal research and development expenses on a project basis. We use external service providers to manufacture our product candidates for clinical trials and for the substantial majority of our preclinical and clinical development work. We have tracked some of these external research and development expenses on a project basis. To the extent that expenses are not attributable to a specific project, they are included in one of the unattributed expenses in the table below.
The following table summarizes our research and development expenses for our development projects for each of the three years ended September 30, 2011, 2010, and 2009.
We completed the termination process during the first quarter of fiscal 2010.
We will continue to make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis. These determinations will be made in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidates commercial potential. We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization for any of our product candidates, as there are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements such as competitive final product labeling and reasonable risk management programs, many of which cannot be determined with accuracy at this time based on our stage of development. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. For example, product candidates may be found ineffective or may cause harmful side effects during clinical trials, may take longer to progress through clinical trials than anticipated, may fail to receive necessary regulatory approvals, or may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality. The lengthy process of seeking FDA and other regulatory agency approvals requires the expenditure of substantial resources. Any failure or delay in obtaining regulatory approvals could materially adversely affect our product development effort and financial condition. Because of these and other risks and uncertainties, we cannot predict when or whether we will successfully complete the development of any of our product candidates or the ultimate product development cost or whether we will obtain any approval required by the FDA or other regulatory agencies on a timely basis, if at all.
As we obtain results from clinical trials, we may elect to discontinue or delay preclinical studies or clinical trials for a product candidate or development program in order to focus our resources on more promising product candidates or programs.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including accounting, finance, legal, business development, investor relations, information technology, and human resources. Other significant general and administration costs include facilities costs and professional fees for outside accounting and legal services, travel, insurance premiums, and depreciation.
Results of Operations
Year Ended September 30, 2011 Compared with Year Ended September 30, 2010
Revenues. Revenues were $0.9 million and $1.0 million during 2011 and 2010, respectively. Revenues during each fiscal year primarily consist of amortization of up-front and subsequent collaborative and license payments received from Roche previously recorded as deferred revenue.
The following is a reconciliation between cash payments received under contract revenue agreements and contract revenues reported:
Research and Development Expenses. Research and development expenses increased to $75.9 million during 2011 from $48.3 million in 2010. This net increase of $27.6 million consists primarily of:
In addition, there was a $3.7 million increase in compensation expense ($1.4 million of which was non-cash compensation expense), a $0.6 million increase in legal patent expense, and $0.4 million in other research and development expenses. Offsetting these increases were decreases of $3.5 million in preclinical study costs for PSI-661, as we decided to advance PSI-938 into later-stage clinical development instead, and $1.3 million in clinical trial expenses for clevudine resulting from our voluntary termination of our Phase 3 registration studies of clevudine, which was completed as of December 31, 2009.
General and Administrative Expenses. General and administrative expenses were $16.7 million during 2011, an increase of $0.2 million from $16.5 million in 2010. The net increase of $0.2 million was due to an increase of $1.3 million in compensation expense (including $0.9 million in non-cash compensation expense), $0.9 million in HCV market study costs, $0.3 million in insurance costs, $0.2 million in consulting fees, and $0.6 million in other administrative expenses. Mostly offsetting these increases was a decrease of $3.1 in legal expenses incurred in connection with our defense against the Demand for Arbitration and Relief (see Part I., Item 3.Legal Proceedings, for additional information).
Other Income. On October 29, 2010, we were awarded two grants ($244,479 each) totaling $489 thousand under the IRS Qualifying Therapeutic Discovery Project (QTDP) program, which was created by Congress as part of the Patient Protection and Affordable Care Act of 2010. The grants were received on November 12, 2010. One of the grants was awarded for the development of PSI-7977 and the other grant was awarded for the development of PSI-938 or PSI-661. The $489 thousand was recorded as Other income in the Statement of Operations and Comprehensive Loss during 2011.
Interest Expense. Interest expense decreased to $1.1 million in 2011 from $2.4 million in 2010. The decrease in interest expense was due to a lower amount of long-term debt outstanding during 2011 compared to 2010.
Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes was ($973 thousand) and $0 for 2011 and 2010, respectively. The benefit for income taxes recorded for 2011 solely reflects the reversal of a valuation allowance previously recorded against the Companys New Jersey State net operating losses (NOL) that resulted from the Companys sale of $12.3 million of its New Jersey State NOLs under the State of New Jerseys Technology Business Tax Certificate Transfer Program (the Program) for cash of $973 thousand, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash.
As of September 30, 2011, we had United States federal net operating loss (NOL) carryforwards of approximately $360.6 million available to offset future taxable income, if any. Of the federal NOLs, $72.0 million was generated from windfall tax benefit stock option deductions. The tax benefit of this portion of the NOL will be accounted for directly to equity as additional paid in capital as the stock option related losses are utilized. As of September 30, 2011 we also had research and development tax credits of approximately $0.2 million available to offset future tax liabilities. As of September 30, 2011, we had a net deferred tax asset of
$125.6 million, before consideration of a valuation allowance. We established a full valuation allowance on our net deferred tax asset as it is more likely than not that such tax benefits will not be realized. The loss carryovers and the research and development tax credits expire over a period of 2020 to 2031.
Under Section 382 of the Internal Revenue Code (the Code), utilization of the NOL and research and development tax credit carryforwards may be subject to a limitation if a change in our ownership, as defined in the Code, occurred previously or could occur in the future. We completed a Section 382 analysis regarding limitation of our NOL and research and development credit carryforwards that covered the period beginning three years prior to our IPO on May 2, 2007 through a public offering of its common stock on February 5, 2009, and concluded that a change in control occurred during the quarter ended September 30, 2008. This change in control limits the future use of our NOL and research and development credit carryforwards from fiscal 2008 and prior years. However, based upon our financial projections, we do not believe that this limitation will result in the expiration of any of these NOL and research and development credit carryforwards before they are able to be utilized.
We also completed a Section 382 analysis regarding limitation of our NOL and research and development credit carryforwards that covered the period from October 1, 2008 through September 30, 2011, and concluded that a change in control did not occur during this three year period. Any future changes in ownership could impact the use of our NOL and research and development credit carryforwards generated in the affected years. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization, which would reduce our gross deferred tax assets.
Year Ended September 30, 2010 Compared with Year Ended September 30, 2009
Revenues. Revenues were $1.0 million and $13.3 million during 2010 and 2009, respectively. Revenues during 2010 and 2009 include $1.0 million and $1.8 million, respectively, of amortization of up-front and subsequent collaborative and license payments received from Roche previously recorded as deferred revenue. Revenues during 2009 also include a $10.0 million milestone payment from Roche for initiating a Phase 2b study of mericitabine and $1.4 million of research and development payments from Roche for activities related to holding the IND application for mericitabine, for which we have no continuing performance obligations. Our performance obligations relating to the $10.0 million milestone payment consisted of successfully completing a Phase 1 study of mericitabine, which led to the initiation of the Phase 2b study for mericitabine that triggered the milestone payment.
The following is a reconciliation between cash payments received under contract revenue agreements and contract revenues reported:
Research and Development Expenses. Research and development expenses decreased to $48.3 million during 2010 from $52.6 million in 2009. This net decrease of $4.3 million consists primarily of a $25.4 million decrease in clinical trial expenses for clevudine resulting from our voluntary termination of our Phase 3 registration studies of clevudine, which was completed as of December 31, 2009, and a $0.5 million decrease in research collaboration expenses. Mostly offsetting this decrease were increases of $9.5 million, $6.6 million, and $4.8 million in clinical trial and preclinical study costs for PSI-7977, PSI-938, and PSI-661, respectively, and an increase of $0.7 million for non-cash stock compensation.
General and Administrative Expenses. General and administrative expenses were $16.5 million during 2010, an increase of $3.1 million from $13.4 million in 2009. The net increase of $3.1 million was due to an increase of $4.4 million in legal expenses incurred in connection with our defense against the Demand for Arbitration and Relief (see Part I., Item 3.Legal Proceedings, for additional information) partially offset by reductions of $0.4 million in marketing expense, $0.2 million of insurance expense, $0.2 million of consulting expense, and $0.5 million in other administrative expenses.
Investment Income. Investment income decreased to $8 thousand in 2010 from $0.2 million in 2009. The decrease was primarily due to significantly lower rates of return on the average invested cash balances.
Interest Expense. Interest expense decreased to $2.4 million in 2010 from $3.2 million in 2009. The decrease in interest expense was due to a lower amount of long-term debt outstanding during 2010 compared to 2009.
Income Taxes. As of September 30, 2010, we had NOL carryforwards of approximately $219.5 million available to offset future taxable income, if any. Of the federal NOLs, $14.1 million was generated from windfall tax benefit stock option deductions. The tax benefit of this portion of the NOL will be accounted for directly to equity as additional paid in capital as the stock option related losses are utilized. As of September 30, 2010 we also had research and development tax credits of approximately $0.1 million available to offset future tax liabilities. As of September 30, 2010, we had a net deferred tax asset of $81.3 million, before consideration of a valuation allowance. We established a full valuation allowance on our net deferred tax asset as it is more likely than not that such tax benefits will not be realized. The loss carryovers and the research and development tax credits expire over a period of 2020 to 2030.
Under Section 382 of the Internal Revenue Code (the Code), utilization of the NOL and research and development tax credit carryforwards may be subject to a limitation if a change in ownership of the Company, as defined in the Code, occurred previously or could occur in the future. The Company completed a Section 382 analysis regarding limitation of its NOL and research and development credit carryforwards that covered the period three years prior to its IPO on May 2, 2007 through a public offering of its common stock on February 5, 2009, and concluded that a change in control occurred at the Company during the quarter ended September 30, 2008. This change in control limits the future use of the Companys NOL and research and development credit carryforwards from fiscal 2008 and prior years. However, based upon the Companys financial projections, it does not believe that this limitation will result in the expiration of any of these NOL and research and development credit carryforwards before they are able to be utilized. Any future changes in ownership could impact the use of the Companys NOL and research and development credit carryforwards generated in the affected years. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization, which would reduce the Companys gross deferred tax assets.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through public and private offerings of our equity securities, payments received under our collaboration agreements, and borrowings under our Loan Agreement. Since our inception, we have raised approximately $443.5 million in net proceeds from sales of our equity securities, and borrowed a total of $23.3 million under our Loan Agreement entered into on September 30, 2007. At September 30, 2011, we held $166.5 million in cash and cash equivalents and have invested substantially all of our available cash and cash equivalents in a money market fund. Borrowings under our Loan Agreement were $2.6 million as of September 30, 2011.
Net cash used in operating activities was $84.1 million, $58.3 million, and $49.5 million during the years ended September 30, 2011, 2010, and 2009, respectively. The $25.8 million increase in net cash used in operating activities during 2011, as compared to 2010, was primarily due to increased operating expenses during 2011, driven by the:
The $8.8 million increase in net cash used in operating activities during 2010, as compared to 2009, was due primarily to a decrease in revenues of $12.3 million, as the revenues in 2009 include milestone payments totaling $10.0 million from Roche. This decrease in revenues was partially offset by lower operating expenses of $2.5 million and favorable changes in our working capital of $1.0 million.
Net cash (used in) provided by investing activities was ($0.9 million), ($0.5 million), and $0.1 million during the years ended September 30, 2011, 2010, and 2009, respectively. The net cash used in investing activities during 2011 and 2010 resulted from purchases of lab and computer equipment. The net cash provided by investing activities during 2009 resulted from the maturity of $0.5 million of short-term investments that was mostly offset by $0.3 million of purchases of equipment, and $0.1 million of restricted cash used as collateral for a letter of credit.
Net cash provided by financing activities was $124.3 million, $127.5 million, and $44.7 million during the years ended September 30, 2011, 2010, and 2009, respectively. The net cash provided by financing activities during 2011 includes $123.4 million of net proceeds from a common stock offering completed in January 2011 and proceeds from the exercise of stock options of $10.1 million that were partially offset by principal payments on long-term debt of $9.2 million. The net cash provided by financing activities during 2010 includes $133.9 million of net proceeds from common stock offerings completed in February 2010 and May 2010 and proceeds from the exercise of stock options of $1.9 million that were partially offset by principal payments on long-term debt of $8.3 million. The net cash provided by financing activities during 2009 includes $43.4 million of net proceeds from the common stock offering we completed in February 2009, borrowings of long-term debt of $3.3 million, and proceeds from the exercise of stock options of $1.2 million, that were partially offset by principal payments on long-term debt and capital lease obligations of $3.3 million.
On September 30, 2007, we entered into a Loan Agreement that allowed us to borrow up to $30.0 million in $10.0 million increments. We borrowed the first and second $10.0 million increments by signing two Secured Promissory Notes (Notes A and B) on October 5, 2007 and March 28, 2008. Notes A and B bear interest at 12%. On December 12, 2008, we amended the Loan Agreement and borrowed $3.3 million by signing a Secured Promissory Note (Note C). Note C bears interest at 12.5%. Note A was repaid in full during fiscal 2011. Notes B and C are to be repaid over a 45-month period with the first 15 monthly payments representing interest only followed by 30 equal monthly payments of principal and interest. The principal monthly payments on each of the two remaining notes begin and end as follows:
Prepayment of the loans made pursuant to the Loan Agreement is subject to penalty and substantially all of our tangible and intangible assets (except for intellectual property) are collateral for the Loan Agreement. Future total principal repayments of the two remaining Notes amount to $2.5 million in fiscal 2012, and $0.1 million in fiscal 2013. There are no additional borrowings available under the Loan Agreement.
Under the Loan Agreement, we agreed that in the event our market capitalization is below $90.0 million for 15 consecutive days in which the principal market for our common stock is open for trading to the public, we will be required to repay 50% of the then outstanding principal balance of the loans. We further agreed that in the event our market capitalization is below $40.0 million for 15 consecutive days in which the principal market for our common stock is open for trading to the public, we will be required to repay all of the then outstanding principal balance of the loans.
The Loan Agreement also contains covenants that, among other things, require us to obtain consent from the lender prior to paying dividends, making certain investments, changing the nature of our business, assuming or guaranteeing the indebtedness of another entity or individual, selling or otherwise disposing of a substantial portion of our assets, or merging or consolidating with another entity.
Developing drugs, conducting clinical trials and commercializing products is expensive and we will need to raise additional funds to achieve our strategic objectives. Although we believe our existing cash resources, together with anticipated payments under our existing collaboration agreement will be sufficient to fund our projected cash requirements for at least the next 12 months, we will require significant additional financing in the future to complete our clinical trials for PSI-7977 and PSI-938, to fund our portion, if any, of the cost of clinical trials for mericitabine (or RG7128) completed outside of the territories licensed by Roche, and to fund our other operations. Additional financing may not be available on acceptable terms, if at all. Our future capital requirements will depend on many factors, including:
Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through payments received under our collaborations, debt or equity financings, or by out-licensing product candidates. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts.
Contractual Obligations and Commitments
We have an operating lease for office and laboratory space located in Princeton, New Jersey through May 22, 2015. The annual occupancy expense under this lease is approximately $836,000. We also have an operating lease for office space located in Durham, North Carolina through December 31, 2015. The annual occupancy expense under this lease is approximately $84,000. We executed three secured promissory notes totaling $23.3 million; $10.0 million in October 2007, $10.0 million in March 2008, and $3.3 million in December 2008. The $10.0 million note executed in October 2007 was repaid in full during 2011 and the two remaining secured promissory notes require payments of interest only for the first 15 months followed by 30 equal monthly payments of principal and interest. As of September 30, 2011, future payments under the two remaining promissory notes and minimum future payments under non-cancellable operating leases are as follows:
The above contractual obligations table does not include amounts for milestone payments related to development, regulatory, or commercialization events to licensors or collaboration partners, as the payments are contingent on the achievement of these milestones, which we have not achieved.
Off-Balance Sheet Transactions
To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosures. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ substantially from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in Note 2 of the Notes to Financial Statements included elsewhere in this Annual Report on Form 10-K; however, we believe that the following accounting policies are critical to the judgments and estimates used in the preparation of our financial statements.
We recognize revenues when all of the following four criteria are present: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.
Our revenues are primarily related to our collaboration agreement with Roche. This agreement provides for various types of payments to us, including non-refundable upfront license fees, research and/or development payments, and milestone payments.
Where we have continuing performance obligations under the terms of a collaborative arrangement, non-refundable upfront license payments received upon contract signing are recorded as deferred revenue and recognized as revenue as the related activities are performed. The period over which these activities are to be performed is based upon managements estimate of the development period. Changes in managements estimate could change the period over which revenue is recognized. Research and/or development payments are recognized as revenues as the related research and/or development activities are performed and when we have no continuing performance obligations related to the research and development payment received.
Where we have no continuing involvement under a collaborative arrangement, we record nonrefundable license fee revenues when we have the contractual right to receive the payment, in accordance with the terms of the collaboration agreement, and record milestones upon appropriate notification to us of achievement of the milestones by the collaborative partner.
We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the vendors performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the vendors performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. Any amounts received under the agreement in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as we complete our performance obligations.
With regard to recognizing revenue for revenue recognition for multiple deliverable revenue arrangements, each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting under the guidance of the new authoritative guidance if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.
In addition, multiple deliverable revenue arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. We also apply a selling price hierarchy for determining the selling price of a deliverable, which includes (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available.
Deferred revenue associated with a non-refundable payment received under a collaborative agreement that is terminated prior to its completion results in an immediate recognition of the deferred revenue.
Research and Development ExpensesResearch and development expenses consist primarily of costs of clinical trials (including API) salaries and related personnel expenses, fees paid to external service providers, costs of preclinical studies, drug and laboratory supplies, costs for facilities and equipment, and the costs of intangibles that are purchased from others for use in research and development activities, such as in-licensed product candidates, that have no alternative future uses. Research and development expenses are included in operating expenses when incurred. Reimbursements received from the Companys collaborator(s) for third-party research and development expenses incurred by the Company on their behalf are recorded as a contra-expense. Amounts due from collaborators for reimbursement of research and development expenses are recorded on the balance sheets as Amounts due from collaboration partner.
Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.
We are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating the level of service performed on our behalf and the associated cost incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examples of areas in which subjective judgments may be required include costs associated with services provided by contract organizations for preclinical development, clinical trials and manufacturing of clinical materials. We account for expenses associated with these external services by determining the total cost of a given study based on the terms of the related contract. We accrue for costs incurred as the services are being provided by monitoring the status of the trials and the invoices received from our external service providers. In the case of clinical trials, the estimated cost normally relates to the projected costs of having subjects enrolled in our trials, which we recognize over the estimated term of the trial according to the number of subjects enrolled in the trial on an ongoing basis, beginning with subject enrollment. As actual costs become known to us, we adjust our accruals. To date, the number of clinical trials and related research service agreements has been relatively limited and our estimates have not differed significantly from the actual costs incurred. We expect, however, as clinical trials for PSI-7977 and PSI-938 advance, that our estimated accruals for clinical and research services will be more material to our operations in future periods.
We recognize stock compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value of those awards (with limited exceptions). The grant-date fair value of the award is recognized as compensation expense on a straight-line basis over the requisite service period. Equity instruments granted to consultants are periodically valued and recorded as stock compensation expense as the equity instrument vests.
Stock-based compensation expense is included in both research and development expenses and in general and administrative expenses in the statements of operations and comprehensive net income (loss). Since our stock was not publicly traded prior to April 27, 2007, the expected volatility was calculated for each equity award granted based on the peer method. We identified companies that traded publicly within the pharmaceutical industry that had similar SIC codes, employee count and revenues. Prior to October 1, 2006, we had chosen the weekly high price volatility for these companies for a period of five years. Subsequent to October 1, 2006, we have used the weekly high price for these companies for a period of six years to coincide with the expected term.
Recently Adopted Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income, (ASU 2011-05) which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. In accordance with this ASU, we adopted this guidance on October 1, 2011. The adoption of ASU 2011-05 did not have an impact on the Company.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amended ASC 820, Fair Value Measurements and Disclosures. This guidance addresses efforts to achieve convergence between U.S. GAAP and International Financial Reporting Standards (IFRS) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying U.S. GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entitys net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (a prohibition which currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. This guidance is effective for the Company in its interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company.
Interest Rate Risk
We invest our excess cash in high quality, interest-bearing securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid mutual and money market funds, and high quality marketable debt instruments of corporations, government agencies and financial institutions with maturities of less than two years. If a 10% change in interest rates were to have occurred on September 30, 2011, this change would not have had a material effect on future earnings, cash flows or the fair value of our investment portfolio as of that date. In addition, our secured promissory notes have fixed interest rates of 12% and 12.5%.
Foreign Currency Exchange Rate Risk
We have entered into some agreements denominated, wholly or partly, in foreign currencies, and, in the future, we may enter into additional, agreements denominated in foreign currencies. If the values of these currencies increase against the United States dollar, our costs would increase. To date, we have not entered into any contracts to reduce the risk of fluctuations in currency exchange rates. In the future, depending upon the amounts payable under any such agreements, we may enter into forward foreign exchange contracts to reduce the risk of unpredictable changes in these costs. However, due to the variability of timing and amount of payments under any such agreements, foreign exchange contracts may not mitigate the potential adverse impact on our financial results.
The information required by this Item is included in our Financial Statements and Supplementary Data listed in Item 15 of Part IV of this Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act as of September 30, 2011. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. These disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, management is required to apply its judgment in evaluating the benefits of possible disclosure controls and procedures relative to their costs to implement and maintain.
Based on managements evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported as specified in SEC rules and forms and that 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.
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 Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial and accounting officers and effected by our board of directors and management 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 and includes those policies and procedures that:
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 risks 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 September 30, 2011. In making this assessment, our 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 believes that, as of September 30, 2011, our internal control over
financial reporting is effective. In addition, no changes in our internal control over financial reporting have occurred during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements included elsewhere in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. That report appears in Item 15 of Part IV of this Annual Report on Form 10-K and is incorporated by reference to this Item 9A.
The information regarding executive officers and directors required by this Item 10 will be included in the Definitive Proxy Statement for our 2012 Annual Meeting, or 2012 Proxy Statement, under Proposal 1Election of Directors, Executive Officers of the Company, Director Nomination Process and Board Committees and is incorporated herein by reference. Other information required by this Item 10 will be included in the 2012 Proxy Statement under Section 16(a) Beneficial Ownership Reporting Compliance and Code of Ethics and Business Conduct and is incorporated herein by reference.
The information required by this item is incorporated herein by reference to the information contained under the sections captioned Executive Compensation, Compensation of Directors, Compensation Committee Interlocks and Insider Participation and Report of the Compensation Committee of the 2012 Proxy Statement.
The information required by this item is incorporated herein by reference to the information contained under the sections captioned Security Ownership of Certain Beneficial Owners and Management and Securities Authorized for Issuance Under Our Equity Incentive Plans of the 2012 Proxy Statement.
The information required by this item is incorporated herein by reference to the information contained under the sections captioned Certain Relationships and Related Transactions and Board Determination of Independence of the 2012 Proxy Statement.
The information required by this item is incorporated herein by reference to the information contained under the sections captioned Information About Fees of Independent Registered Public Accounting Firm and Pre-Approval Policies and Procedures of the 2012 Proxy Statement.
(a) (1) Financial Statements
The following documents are included on pages F-2 through F-23 attached hereto and are filed as part of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes thereto.
(a) (3) List of Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K. We are incorporating by reference to our previous SEC filings each exhibit that contains a footnote. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Each person, in so signing also makes, constitutes, and appoints Kurt Leutzinger as his true and lawful attorney-in-fact, with full power of substitution, in his name, place, and stead, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
We have audited the accompanying balance sheets of Pharmasset, Inc. (the Company) as of September 30, 2011 and 2010, and the related statements of operations and comprehensive net loss, stockholders equity, and cash flows for each of the three years in the period ended September 30, 2011. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharmasset, Inc. as of September 30, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2011 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pharmasset Inc.s internal control over financial reporting as of September 30, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 14, 2011 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
November 14, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
We have audited Pharmasset, Inc.s (the Company) internal control over financial reporting as of September 30, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (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, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) provide reasonable 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.
In our opinion, Pharmasset, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011, based on criteria established in Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Pharmasset, Inc. as of September 30, 2011 and 2010, and the related statements of operations and comprehensive net loss, stockholders equity, and cash flows for each of the three years in the period ended September 30, 2011 and our report dated November 14, 2011 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
November 14, 2011
(in thousands, except par value, share and per share amounts)
See notes to financial statements.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands except share and per share amounts)
See notes to financial statements.
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009
See notes to financial statements.
STATEMENTS OF CASH FLOWS