UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 000-51745
SGX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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06-1523147
(I.R.S. Employer
Identification No.)
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10505 Roselle Street
San Diego, CA 92121
(Address of principal executive office)
(858) 558-4850
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do not check if a
smaller reporting company)
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act): Yes
o
No
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The number of shares of the registrants Common Stock, $.001 par value per share, outstanding
as of April 30, 2008 was 20,647,440 shares.
SGX PHARMACEUTICALS, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2008
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS AND NOTES TO UNAUDITED FINANCIAL STATEMENTS
SGX Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
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March 31,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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30,162
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$
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38,022
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Short-term investments
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705
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968
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Accounts receivable
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1,645
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2,706
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Prepaid expenses and other current assets
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1,847
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1,187
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Total current assets
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34,359
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42,883
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Property and equipment, net
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3,842
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3,889
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Goodwill and intangible assets, net
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3,424
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3,426
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Other assets
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861
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858
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Total assets
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$
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42,486
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$
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51,056
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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3,183
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$
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2,964
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Accrued liabilities
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3,853
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4,543
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Other current liabilities
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124
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250
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Current portion of line of credit
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3,338
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4,194
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Deferred revenue
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1,692
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13,040
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Total current liabilities
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12,190
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24,991
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Deferred revenue, long-term
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904
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1,042
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, par value $0.001;
Authorized shares 5,000,000 at March
31, 2008 and December 31, 2007; and no
shares issued and outstanding at March
31, 2008 and December 31, 2007
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Common stock, par value $0.001;
Authorized shares 75,000,000 at March
31, 2008 and December 31, 2007; issued
and outstanding shares 20,644,315 and
20,480,282 at March 31, 2008 and
December 31, 2007, respectively
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21
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21
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Additional paid-in capital
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205,648
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204,739
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Accumulated other comprehensive loss
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(263
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)
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(1
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Accumulated deficit
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(176,014
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)
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(179,736
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)
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Total stockholders equity
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29,392
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25,023
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Total liabilities and stockholders equity
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$
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42,486
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$
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51,056
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See accompanying notes to unaudited condensed consolidated financial statements.
1
SGX Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
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Three Months
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Ended
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March 31,
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2008
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2007
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(In thousands, except per share amounts)
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(Unaudited)
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Revenue:
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Collaborations and commercial agreements
(1)
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$
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15,001
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$
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5,647
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Grants
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1,971
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5,321
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Total revenue
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16,972
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10,968
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Expenses:
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Research and development
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11,349
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10,018
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General and administrative
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2,121
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2,233
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Total operating expenses
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13,470
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12,251
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Income (loss) from operations
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3,502
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(1,283
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Interest income and expense, net
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219
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185
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Net income (loss)
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$
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3,721
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$
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(1,098
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)
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Net income (loss) per common share:
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Basic and diluted
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$
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0.18
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$
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(0.07
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Shares used in the calculation of net income (loss) per
common share:
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Basic
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20,530
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15,228
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Diluted
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21,089
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15,228
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(1)
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Collaboration revenue for the three months ended March 31, 2008 reflects the recognition of
$10.8 million of deferred revenue that related to the portion of the upfront payment which had not
yet been earned upon the conclusion of the research term under our Novartis collaboration that
ended in late March 2008.
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See accompanying notes to unaudited condensed consolidated financial statements.
2
SGX Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
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Three Months Ended
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March 31,
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2008
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2007
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(In thousands)
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(Unaudited)
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Operating activities:
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Net income (loss)
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$
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3,721
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$
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(1,098
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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364
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572
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Share-based compensation
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626
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989
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Issuance of common stock for services
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42
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101
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Amortization of discount on warrants
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42
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42
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Deferred rent
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1
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(22
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Gain on sale of property and equipment, net
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(8
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Changes in operating assets and liabilities:
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Accounts receivable
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1,061
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993
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Prepaid expenses and other current assets
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(624
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)
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(600
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Accounts payable, accrued liabilities and other current liabilities
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(598
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)
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(2,147
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)
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Deferred revenue
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(11,486
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)
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(1,234
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)
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Other assets
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(3
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)
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Net cash used in operating activities
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(6,862
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)
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(2,404
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)
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Investing activities:
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Purchases of short-term investments
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(15,000
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)
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Sales and maturities of short-term investments
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15,000
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Purchases of property and equipment, net
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(343
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)
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(66
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)
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Net cash used in investing activities
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(343
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)
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(66
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)
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Financing activities:
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Principal payments on lines of credit and notes payable
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(898
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)
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(878
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Proceeds from repayment of notes receivable from stockholders
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16
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Issuance of common stock for cash, net of repurchases and offering costs
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243
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210
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Net cash used by financing activities
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(655
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)
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(652
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)
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Net decrease in cash and cash equivalents
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(7,860
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)
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(3,122
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)
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Cash and cash equivalents at beginning of period
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38,022
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27,877
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Cash and cash equivalents at end of period
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$
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30,162
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$
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24,755
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Supplemental schedule of cash flow information:
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Cash paid for interest
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$
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105
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$
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190
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See accompanying notes to unaudited condensed consolidated financial statements.
3
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business
SGX Pharmaceuticals, Inc. (SGX or the Company, formerly known as Structural GenomiX,
Inc.), was incorporated in Delaware on July 1998. SGX is a biotechnology company focused on the
discovery, development and commercialization of novel, targeted therapeutics directed at addressing
unmet medical needs in oncology.
SGX is subject to risks common to companies in the biotechnology industry including, but not
limited to, risks and uncertainties related to drug discovery, development and commercialization,
obtaining regulatory approval of any products it or its collaborators may develop, competition from
other biotechnology and pharmaceutical companies, its effectiveness at managing its financial
resources, its ability to enter into and perform new collaborations, difficulties or delays in its
preclinical studies or clinical trials, difficulties or delays in manufacturing its clinical trial
materials, implementation of, and the level of success under, its collaborations, the level of
efforts that its collaborative partners devote to development and commercialization of its product
candidates, its ability to successfully discover and develop products and market and sell any
products it develops, the scope and validity of patent protection for its products and proprietary
technology, dependence on key personnel, product liability, litigation, its ability to comply with
U.S. Food and Drug Administration (FDA) and other government regulations and its ability to
obtain additional funding to support its operations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Securities and Exchange Commission
(SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the results of these interim periods have
been included. The results of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the full year. These unaudited
consolidated financial statements should be read in conjunction with the audited financial
statements and related notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, which was filed with the SEC on March 27, 2008.
The preparation of consolidated financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 159,
The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
(SFAS No. 159) which
provides entities the option to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective for the
Company on January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on the
Companys consolidated financial statements because the Company has currently chosen not to elect
the fair value option for any items that are not already required to be measured at fair value in
accordance with GAAP.
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) on EITF Issue No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities
(EITF 07-3). EITF Issue
No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are delivered or the related services are
performed or such time when the entity does not expect the goods to be delivered or services to be
performed. EITF No. 07-3 is effective, on a prospective basis, for fiscal years beginning after
December 15, 2007. The adoption of EITF No. 07-3 did not have a material impact on the Companys
consolidated financial statements.
4
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
In December 2007, the SEC staff issued SAB No. 110,
Share-Based Payment (SAB 110)
, which
amends SAB 107,
Share-Based Payment
, to permit public companies, under certain circumstances, to
use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of
the simplified method after December 2007 is permitted only for companies whose historical data
about their employees exercise behavior does not provide a reasonable basis for estimating the
expected term of the options. The Company currently uses the simplified method to estimate the
expected term for employee option grants as adequate historical experience is not available to
provide a reasonable estimate. SAB 110 is effective for employee options granted after December
31, 2007. The Company adopted SAB 110 effective January 1, 2008 and will continue to apply the
simplified method until enough historical experience is readily available to provide a reasonable
estimate of the expected term for employee option grants. The impact of adopting SAB 110 on
January 1, 2008 did not have a material impact on the Companys consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value and expands disclosure
requirements about fair value measurements. SFAS No. 157 was effective for the Company on January
1, 2008. However, in February 2008, the FASB released FASB Staff Position (FSP) FAS 157-2,
Effective Date for FASB Statement No. 157 (FSP FAS 157-2)
, which delayed the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). The Companys adoption of SFAS No. 157 had no effect on the valuation of the Companys
financial assets or impact on its consolidated financial statements for the three months ended
March 31, 2008. The adoption of SFAS No. 157 for its financial assets and liabilities, effective
January 1, 2008, did not have a material impact on the Companys consolidated financial statements.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of less than
three months when purchased to be cash equivalents. Cash equivalents are recorded at cost, which
approximates market value.
In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
, the Companys short-term investments are carried at fair value and classified as
available-for-sale. Unrealized holding gains and losses, net of tax, are reported as a component of
accumulated other comprehensive income in stockholders equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale securities are included
in interest income. The cost of the securities is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are included in interest
income.
Short-term investments held as of March 31, 2008 and December 2007 consists of an auction rate
security (ARS). The Company recorded an unrealized loss associated with this ARS as of March 31,
2008. The Company recorded a realized loss associated with this ARS as of December 31, 2007. This
ARS is a debt instrument with a long-term maturity and an interest rate that is reset in short-term
intervals through auctions. The Companys ARS matures in 2017 and was purchased within the
Companys previous investment policy guidelines during 2007. The ARS had an AAA/Aaa credit rating
at the time of purchase, which remains unchanged. With the liquidity issues experienced in global
credit and capital markets, this ARS has experienced multiple failed auctions as the amount of
securities submitted for sale has exceeded the amount of purchase orders. The estimated market
value at March 31, 2008 was $0.7 million, which reflects an unrealized loss of $0.3 million from
the principal value held as of December 31, 2007. In October 2007, the Company changed its
investment policy to prohibit future purchases of ARS.
5
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Fair Value Measurements
On January 1, 2008, the Company adopted SFAS No. 157, which defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the observable and unobservable inputs used to measure fair value into three levels of
inputs as follows:
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Level 1 Quoted prices in active markets for identical assets or liabilities.
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Level 2 Observable inputs other than quoted prices included in
Level 1, such as quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
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Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
|
The Company has segregated all financial assets and liabilities at fair value on a recurring
basis (at least annually) into the most appropriate level within the fair value hierarchy based on
the inputs used to determine the fair value at the measurement date in the table below. FSP FAS
157-2 delayed the effective date for all nonfinancial assets and liabilities until January 1, 2009,
except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis.
Assets measured at fair value on a recurring basis are summarized below (in thousands). The
Company has no financial liabilities measured at fair value:
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Fair Value Measurements at March 31, 2008 Using:
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Total Carrying
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Quoted Prices in
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Significant Other
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Significant
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Value at
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Active Markets
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Observable
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Unobservable
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March 31,
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(in thousands)
|
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(Level 1)
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Inputs (Level 2)
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Inputs (Level 3)
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2008
|
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|
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|
|
Auction rate security
|
|
$
|
705
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
705
|
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|
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Total assets at fair value
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$
|
705
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|
$
|
|
|
|
$
|
|
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition
The Companys collaboration agreements and commercial agreements contain multiple elements,
including non-refundable upfront fees, payments for reimbursement of research costs, payments for
ongoing research, payments associated with achieving specific milestones and, in the case of
collaboration agreements, development milestones and royalties based on specified percentages of
net product sales, if any. The Company applies the revenue recognition criteria outlined in Staff
Accounting Bulletin (SAB) No. 104,
Revenue Recognition,
and EITF Issue 00-21,
Revenue
Arrangements with Multiple Deliverables
(EITF 00-21). In applying these revenue recognition
criteria, the Company considers a variety of factors in determining the appropriate method of
revenue recognition under these arrangements, such as whether the elements are separable, whether
there are determinable fair values and whether there is a unique earnings process associated with
each element of a contract.
Cash received in advance of services being performed is recorded as deferred revenue and recognized
as revenue as services are performed over the applicable term of the agreement.
When a payment is specifically tied to a separate earnings process, revenues are recognized
when the specific performance obligation associated with the payment is completed. Performance
obligations typically consist of significant and substantive milestones pursuant to the related
agreement. Revenues from non-refundable milestone payments may be considered separable from funding
for research services because of the uncertainty surrounding the achievement of milestones for
products in early stages of development. Accordingly, these payments could be recognized as revenue
if and when the performance milestone is achieved if they represent a separate earnings process as
described in EITF 00-21.
In connection with certain research collaborations and commercial agreements, revenues are
recognized from non-refundable upfront fees, which the Company does not believe are specifically
tied to a separate earnings process, ratably over the term of the agreement. Research services
provided under some of the Companys agreements are on a fixed fee basis. Revenues associated with
long-term fixed fee contracts are recognized based on the performance requirements of the
agreements and as services are performed.
6
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Revenues derived from reimbursement of direct out-of-pocket expenses for research costs
associated with grants are recorded in compliance with EITF Issue 99-19,
Reporting Revenue Gross
as a Principal Versus Net as an Agent
, and EITF Issue 01-14,
Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred
. According to the criteria
established by these EITF Issues, in transactions where the Company acts as a principal, with
discretion to choose suppliers, bears credit risk and performs part of the services required in the
transaction, the Company records revenue for the gross amount of the reimbursement. The costs
associated with these reimbursements are reflected as a component of research and development
expense in the statements of operations.
None of the payments that the Company has received from collaborators to date, whether
recognized as revenue or deferred, is refundable even if the related program is not successful.
Comprehensive Income
The Company reports comprehensive income (loss) in accordance with SFAS No. 130,
Reporting
Comprehensive Income
(SFAS No.130). SFAS No. 130 establishes rules for the reporting and display
of comprehensive income (loss) and its components. The Companys components of comprehensive income
(loss) consist entirely of unrealized losses on available-for-sale securities. The comprehensive
income for the three months ended March 31, 2008 was $3.5 million. The comprehensive loss for the
three months ended March 31, 2007 was $1.1 million.
Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS No. 128,
Earnings per
Share
(SFAS No. 128). Under the provisions of SFAS No. 128, basic net income (loss) per common
share is computed by dividing net income (loss) by the weighted-average number of common shares
outstanding. Diluted net income (loss) per common share is computed by dividing net income (loss)
by the weighted-average number of common shares and dilutive common share equivalents then
outstanding. Common equivalent shares consist of the incremental common shares issuable upon the
conversion of common shares issuable upon the exercise of stock options, vesting of restricted
stock units and exercise of warrants. For the three months ended March 31, 2007, 0.4 million
common share equivalents were excluded from diluted loss per share because of their anti-dilutive
effect.
Shares used in calculating basic and diluted earnings per share were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
Shares used in calculating per share amounts Basic
(Weighted average common shares outstanding)
|
|
|
20,530
|
|
|
|
15,228
|
|
Net effect of dilutive common share equivalents
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating per share amounts Diluted
|
|
|
21,089
|
|
|
|
15,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares excluded from basic and
diluted earnings per share because of their
anti-dilutive effect
|
|
|
3,245
|
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
Share-Based Compensation
The Company recorded $0.6 million and $1.0 million of total share-based compensation expense
for the three months ended March 31, 2008 and 2007, respectively. These charges had no impact on
the Companys cash flows. Share-based compensation expense is allocated among the following
categories (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Research and development expenses
|
|
$
|
294
|
|
|
$
|
501
|
|
General and administrative expenses
|
|
|
332
|
|
|
|
488
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
626
|
|
|
$
|
989
|
|
|
|
|
|
|
|
|
Share-based compensation expense per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
7
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company has computed the estimated fair values of all share-based compensation using the
Black-Scholes option pricing model and has applied the assumptions set forth in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Risk-Free
|
|
Dividend
|
|
Average
|
|
Average Option
|
|
|
Interest Rate
|
|
Yield
|
|
Volatility
|
|
Life (Years)
|
Three months ended March 31, 2008
|
|
|
2.97
|
%
|
|
|
0
|
%
|
|
|
73.0
|
%
|
|
|
6.06
|
|
Three months ended March 31, 2007
|
|
|
4.68
|
%
|
|
|
0
|
%
|
|
|
73.0
|
%
|
|
|
6.25
|
|
Prior to January 1, 2008, the Company utilized a simplified method of calculating the expected
life of options for grants made to its employees under the 2005 Plan in accordance with the
guidance set forth in the SECs Staff Accounting Bulletin No. 107 (SAB No. 107) due to the lack
of adequate historical data with regard to exercise activity. For grants made subsequent to January
1, 2008, the Company continues to utilize the simplified method of calculating the expected life
due to the lack of adequate historical data as allowable under the SECs Staff Accounting Bulletin
No. 110 The Company determined expected volatility for the periods presented using the average
volatilities of the common stock of comparable publicly traded companies using a blend of
historical, implied and average of historical and implied volatilities for this peer group of 10
companies, consistent with the guidance in SFAS123(R),
Share-Based Payment
and SAB No. 107.
The Black-Scholes option pricing model requires the input of highly subjective assumptions.
Because the Companys employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing models may not provide a
reliable single measure of the fair value of its employee stock options, restricted stock units or
common stock purchased under the 2005 Employee Stock Purchase Plan (the Purchase Plan). In
addition, management will continue to assess the assumptions and methodologies used to calculate
estimated fair value of share-based compensation. Circumstances may change and additional data may
become available over time, which may result in changes to these assumptions and methodologies,
which could materially impact the Companys fair value determination.
A summary of stock option activity under the 2005 Equity Incentive Plan (2005 Plan) for the
three-month period ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Option Shares
|
|
|
Price
|
|
Outstanding at December 31, 2007
|
|
|
2,139,894
|
|
|
$
|
4.02
|
|
Granted
|
|
|
606,050
|
|
|
$
|
4.00
|
|
Exercised
|
|
|
(31,276
|
)
|
|
$
|
1.05
|
|
Cancelled
|
|
|
(29,483
|
)
|
|
$
|
5.34
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
2,685,185
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
Options exercisable as of March 31, 2008
|
|
|
1,254,402
|
|
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, total unrecognized estimated compensation expense related to non-vested
stock options granted was $3.2 million, which is expected to be recognized over a weighted-average
period of 2.8 years.
3. Stockholders Equity
Common Stock
In connection with a stock purchase agreement with a director, the Company has the option to
repurchase, at the original issuance price, the unvested shares in the event of termination of
continuous service to the Company. Shares under this agreement vest over a period of three years.
At March 31, 2008, 1,737 shares were subject to repurchase by the Company.
Stock Options
In February 2000, the Company adopted its 2000 Equity Incentive Plan (the 2000 Plan). The
2000 Plan provided for the grant of up to 1,755,000 shares pursuant to incentive and non-statutory
stock options, stock bonuses or sales of restricted stock. The Company ceased granting options
under the 2000 Plan upon the effectiveness of the Companys initial public offering.
8
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company adopted in August 2005, and the stockholders approved in October 2005, the 2005
Plan. The 2005 Plan became effective upon the effectiveness of the Companys initial public
offering. An aggregate of 750,000 shares of our common stock were initially authorized for issuance
under the 2005 Plan, plus the number of shares remaining available for future issuance under the
2000 Plan that were not covered by outstanding options as of the termination of the 2000 Plan on
the effective date of the initial public offering. In addition, this amount is automatically
increased annually on the first day of the Companys fiscal year, from 2007 until 2015, by the
lesser of (a) 3.5% of the aggregate number of shares of common stock outstanding on December 31 of
the preceding fiscal year or (b) 500,000 shares of common stock. On January 1, 2008, the share
reserve under the 2005 Plan automatically increased by an aggregate of 500,000 shares of common
stock. At March 31, 2008, 113,624 shares remained available for future issuance or grant under the
2005 Plan.
Options granted under both the 2000 Plan and the 2005 Plan generally expire no later than ten
years from the date of grant (five years for a 10% stockholder). Options generally vest over a
period of four years. The exercise price of incentive stock options must be equal to at least the
fair value of the Companys common stock on the date of grant, and the exercise price of
non-statutory stock options may be no less than 85% of the fair value of the Companys common stock
on the date of grant. The exercise price of any option granted to a 10% stockholder may not be less
than 110% of the fair value of the Companys common stock on the date of grant.
2005 Non-Employee Directors Stock Option Plan
The Company adopted in August 2005, and the stockholders approved in October 2005, the 2005
Non-Employee Directors Stock Option Plan (the Directors Plan). The Directors Plan became
effective upon the effectiveness of the Companys initial public offering. The Directors Plan
provides for the automatic grant of non-qualified options to purchase shares of our common stock to
our non-employee directors. An aggregate of 75,000 shares of common stock were initially reserved
for issuance under the Directors Plan. This amount is increased annually on the first day of the
Companys fiscal year, from 2007 until 2015, by the aggregate number of shares of our common stock
subject to options granted as initial grants and annual grants under the Directors Plan during the
immediately preceding year. No options were granted under the Directors Plan during the three
months ended March 31, 2008. During the three months ended March 31, 2008, 5,833 options under the
Directors Plan have been cancelled and none have been exercised. At March 31, 2008, 80,833 shares
remained available for issuance under the Directors Plan.
Restricted Stock and Restricted Stock Unit Grants
In May 2005, the Company granted a restricted stock award under the Companys 2000 Plan of
70,000 shares of the Companys common stock. Twenty-five percent of the shares subject to the award
were immediately vested as of the date of grant and the remaining shares subject to the award vest
in equal monthly installments over a two year period.
In March 2006, the Company granted restricted stock unit awards in the amount of 75,000 each
to two members of the Companys executive management team under the Companys 2005 Plan.
Twenty-five percent of the shares subject to the restricted stock awards were vested on the
one-year anniversary of their respective hire dates, with the remaining shares subject to such
awards vesting in equal monthly installments over the following three years.
Changes in the Companys restricted stock and restricted stock units for the three months
ended March 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Restricted
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
Non-vested restricted stock at January 1, 2008
|
|
|
76,563
|
|
|
$
|
7.66
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Vested
|
|
|
(9,375
|
)
|
|
$
|
7.66
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at March 31, 2008
|
|
|
67,188
|
|
|
$
|
7.66
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008, the Company recorded share-based compensation
expense of $0.1 million related to outstanding restricted stock grants and restricted stock units.
As of March 31, 2008, there was $0.3 million of unrecognized compensation cost related to
non-vested restricted stock arrangements. The cost is expected to be recognized over a weighted
average period of 1.74 years. The total fair value of shares vested during the three months ended
March 31, 2008 was $0.1 million.
9
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Common Stock Options to Consultants
As of March 31, 2008, the Company had outstanding options to purchase 119,854 shares of common
stock that were granted to consultants. Of the total shares granted, 59,898 were exercised and
5,758 were unvested. These options were granted in exchange for consulting services to be rendered
and vest over periods of up to four years. The Company recorded charges to operations for stock
options granted to consultants using the graded-vesting method of approximately ($11,000) and
$23,000 during the three months ended March 31, 2008 and 2007, respectively. The unvested shares
held by consultants have been and will be revalued using the Companys estimate of fair value at
each balance sheet date pursuant to EITF Issue No. 96-18,
Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
2005 Employee Stock Purchase Plan
The Company adopted in August 2005, and the stockholders approved in October 2005, the
Purchase Plan. The Purchase Plan became effective upon the effectiveness of the Companys initial
public offering. The Purchase Plan will terminate at the time that all of the shares of the
Companys common stock then reserved for issuance under the Purchase Plan have been issued under
the terms of the Purchase Plan, unless the board of directors terminates it earlier. An aggregate
of 375,000 shares of the Companys common stock were initially reserved for issuance under the
Purchase Plan. This amount is increased annually on the first day of the Companys fiscal year,
from 2007 until 2015, by the lesser of (i) 1% of the fully-diluted shares of common stock
outstanding on January 1 of the current fiscal year or (ii) 150,000 shares of common stock. On
January 1, 2008, the share reserve under the Purchase Plan automatically increased by an aggregate
of 150,000 shares of common stock.
Unless otherwise determined by the board of directors or its authorized committee, common
stock is purchased for accounts of employees participating in the Purchase Plan at a price per
share equal to the lower of (1) 85% of the fair market value of a share of the Companys common
stock on the date of commencement of participation in the offering or (2) 85% of the fair market
value of a share of the Companys common stock on the date of purchase.
During the three months ended March 31, 2008 and 2007, the Company recorded share-based
compensation expense of approximately $64,000 and $86,000, respectively, related to the Purchase
Plan. On March 14, 2008 and March 15, 2007, 123,382 shares and 80,683 shares, respectively, of
common stock were purchased under the Purchase Plan. At March 31, 2008, 297,645 shares remained
available for issuance under the Purchase Plan.
4. License and Collaboration Agreement
In March 2006, the Company entered into a License and Collaboration Agreement (the
Agreement) with Novartis Institutes for Biomedical Research, Inc., (Novartis) focused on the
development and commercialization of BCR-ABL inhibitors for the treatment of CML. Under the
agreement, the parties agreed to collaborate to develop one or more BCR-ABL inhibitors and Novartis
was granted exclusive worldwide rights to such compounds, subject to the Companys
commercialization option in the United States and Canada. Pursuant to an amendment to the Companys
agreement with Novartis signed in September 2007, the Company has the right, but not the
obligation, to develop and commercialize SGX393 outside of the collaboration, subject to a
reacquisition right of Novartis that may be exercisable at a future date. The Company has also
granted Novartis rights to include certain compounds that the Company does not want to pursue under
the collaboration in Novartis screening library and the Company will be entitled to receive
royalties on sales of products based on those compounds. The research term under this agreement
concluded in late March 2008 and Novartis remains responsible for further development of BCR-ABL
inhibitors identified pursuant to the collaboration, other than SGX393. The Company initially determined the amortization period of the upfront payment to be four years. However, following the
conclusion of the research term in March 2008, the Company has no further performance obligations under the Agreement
which would necessitate deferring the recognition of the upfront payment as revenue. Therefore, the Company accelerated the recognition of the deferred
revenue of $10.8 million, which reflected the unamortized portion of the upfront payment, through the end of the research term as of March 31, 2008.
Under the terms of the Agreement, the Company received $25.0 million of upfront payments,
including $5.0 million for the purchase by Novartis Pharma AG of shares of the Companys common
stock. The Company was also entitled to receive research funding over the first two years, which
ended in late March 2008, of the collaboration of $9.1 million. With payments for achievement of
specified development, regulatory and commercial milestones, including $9.5 million for events up
to and including commencement of the first Phase I clinical trial, total payments to the Company
could exceed $515 million. To date, under the collaboration, the Company has not received any
milestone payments. At this time, an Investigational New Drug application (IND) for a drug
candidate under the collaboration is not anticipated in 2008.
10
SGX Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Novartis is responsible for funding 100% of the development costs of product candidates from
the collaboration, other than SGX393. The research and development activities of the parties are
overseen by committees with equal representation of the parties, with Novartis having the right to
make the final decision on certain matters. The Company is also eligible to receive royalties based
on net sales. In addition, the Company retains an option to co-commercialize in the United States
and Canada oncology products developed under the Agreement through a sales force trained and funded
by Novartis.
While the research term of the Agreement ended in late March 2008, the Agreement will continue
until the expiration of all of Novartis royalty payment obligations, unless the Agreement is
terminated earlier by either party. Novartis and the Company each have the right to terminate the
Agreement early if the other party commits an uncured material breach of its obligations. If
Novartis terminates the Agreement for material breach by the Company, Novartis licenses under the
agreement will continue subject to certain milestone and royalty payment obligations. If the
Company terminates the Agreement for material breach by Novartis, all rights to compounds developed
under the collaboration will revert to the Company. Further, Novartis may terminate the Agreement
without cause if it reasonably determines that further development of compounds or products from
the collaboration is not viable, in which event all rights to the compounds and products revert to
the Company. In the event of a change in control of the Company, in certain circumstances Novartis
may terminate only the joint committees and co-commercialization option, with all other provisions
of the Agreement remaining in effect, including Novartis licenses and its obligations to make
milestone and royalty payments.
5. Income Taxes
At December 31, 2007, the Company had federal and California tax net operating loss (NOL)
carryforwards of approximately $124.2 million and $95.9 million, respectively. The federal and
California tax loss carryforwards will begin to expire in 2019 and 2009, respectively, unless
previously utilized. The Company also has federal and California research and development tax
credit carryforwards totaling approximately $4.8 million and $3.2 million, respectively. The
federal research and development tax credit carry forward will begin to expire in 2019, unless
previously utilized and the California research and development tax credit will carry forward
indefinitely until utilized.
Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual
limitation due to ownership change limitations that may have occurred or that could occur in the
future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code),
as well as similar state provisions. These ownership changes may limit the amount of NOL and
research and development credit carryforwards that can be utilized annually to offset future
taxable income and tax, respectively. In general, an ownership change as defined by Section 382
of the Code results from a transaction, or series of transactions, over a three-year period
resulting in an ownership change of more than 50 percentage points of the outstanding stock of a
company by certain stockholders or public groups. Since the Companys formation, the Company has
raised capital through the issuance of capital stock (both before and after its public offering)
which, combined with the purchasing stockholders subsequent disposition of those shares, may have
resulted in such an ownership change, or could result in an ownership change in the future upon
subsequent disposition.
The Company has not completed a study to assess whether an ownership change has occurred or
whether there have been multiple ownership changes since the Companys formation due to the
complexity and cost associated with such a study, and the fact that there may be additional such
ownership changes in the future. If the Company has experienced an ownership change at any time
since its formation, utilization of the NOL or tax credit carryforwards would be subject to an
annual limitation under Section 382 of the Code, which is determined by first multiplying the value
of the Companys stock at the time of the ownership change by the applicable long-term, tax-exempt
rate, and then could be subject to additional adjustments, as required. Any limitation may result
in expiration of all or a portion of the NOL or tax credit carryforwards before utilization. Until
this analysis has been completed the Company has removed the deferred tax assets for net operating
losses of $49.0 million and research and development credits of $6.9 million generated through 2007
from its deferred tax asset schedule and have recorded a corresponding decrease to its valuation
allowance. When this analysis is finalized, the Company plans to update its unrecognized tax
benefits under FIN No. 48. Due to the existence of the valuation allowance, future changes in the
Companys unrecognized tax benefits will not impact the Companys effective tax rate.
The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized
tax benefits as of the date of adoption that would, if recognized, affect the effective tax rate.
The Company files income tax returns in the United States and in various state jurisdictions
with varying statutes of limitations.
Due to net operating losses incurred, the Companys income tax returns from inception to date
are subject to examination by taxing authorities. The Companys policy is to recognize interest
expense and penalties related to income tax matters as a component of income tax expense. The
Company has no interest or penalties accrued for uncertain tax positions at March 31, 2008 and
December 31, 2007.
11
|
|
|
Item 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
You should read the following discussion and analysis by our management of our financial
condition and results of operations in conjunction with our audited consolidated financial
statements and related notes thereto included as part of our Annual Report on Form 10-K for the
year ended December 31, 2007 and our unaudited condensed consolidated financial statements for the
three month period ended March 31, 2008 included elsewhere in this Quarterly Report on Form 10-Q.
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles and are presented in U.S. dollars.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934 which are subject to the safe harbor created by those sections. These forward-looking
statements include, but are not limited to, statements concerning our strategy, future operations,
future financial position, future revenues, projected costs, prospects and plans and objectives of
management. The words anticipates, believes, estimates, expects, intends, may, plans,
projects, will, would and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words. We may not
actually achieve the plans, intentions or expectations disclosed in our forward-looking statements
and you should not place undue reliance on our forward-looking statements. Actual results or events
could differ materially from the plans, intentions and expectations disclosed in the
forward-looking statements that we make. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from those in the
forward-looking statements, including, without limitation, the risks set forth in Item 1A, Risk
Factors in this Quarterly Report on Form 10-Q and in our other filings with the Securities and
Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2007.
Our forward-looking statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation
to update any forward-looking statements.
BUSINESS OVERVIEW
We are a biotechnology company focused on the discovery, development and commercialization of
novel, targeted therapeutics that address unmet medical needs in oncology. Our lead development
programs are directed at the MET receptor tyrosine kinase, an enzyme implicated in a broad array of
human malignancies, and the tyrosine kinase enzyme BCR-ABL, for treatment of Chronic Myelogenous
Leukemia (CML), a cancer of the bone marrow. Our drug discovery programs focus on a portfolio of
other protein and enzyme targets that have been implicated in human cancers, including JAK2, RAS,
RON, ALK, and IKKε.
We are taking an integrated approach to the discovery and development of therapeutic agents in
oncology by seeking to identify small molecules that selectively block (or inhibit) the actions of
proteins responsible, either wholly or in part, for the uncontrolled growth of malignant cells in
human cancers. Generally, we have selected targets for which there is strong scientific evidence
that DNA abnormalities activate the target protein and in turn lead to uncontrolled cellular growth
and replication. Uncontrolled cellular growth and replication are both typically associated with
cancer. Our strategy for the clinical development of such targeted inhibitors is to design and
execute directed proof-of-concept clinical trials involving patients who appear to have the
requisite activating DNA abnormality. We believe this directed, targeted approach increases the
potential for demonstrating clinical benefit and potentially decreases the time required to conduct
the clinical study, reduces the number of patients enrolled in a clinical study, and reduces the
cost of the clinical study as compared to conventional more inclusive large-scale clinical trials.
We believe this approach could reduce the time required to obtain necessary regulatory approvals.
MET Program:
Our MET program is focused on the development of compounds that inhibit both wild type and
activated mutant forms of the MET receptor tyrosine kinase. MET plays an important role in the
control of cell growth, division, and motility, and the formation of blood vessels, and has been
implicated in a broad range of solid tumors, including lung, colon, prostate, gastric, and kidney
cancers, plus the blood cancer multiple myeloma. Recent scientific publications also implicate MET
in the emergence of resistance to both targeted and cytotoxic (or cell killing) anti-cancer agents
(e.g., Iressa®, Herceptin®, Gemzar®, and Oxaliplatin®).
We are currently focusing our attention on our second MET development candidate, SGX126, which
is in IND enabling preclinical development. Our first MET development candidate, SGX523, exhibited
dose limiting renal toxicity at doses lower than anticipated, in Phase I clinical trials commenced
earlier this year. This renal toxicity was not anticipated from the preclinical toxicology studies.
Subsequent analysis of blood samples from patients from the Phase I trials has identified
significant blood levels of a metabolite of SGX523 that was present at only very low levels in our
preclinical toxicology studies. However, we have no data at this stage to be able to conclude
whether this metabolite was the cause of or contributed to the toxicity. Based on the observed
toxicity, we have no plans for further clinical development of SGX523.
12
SGX126 is a selective MET inhibitor with potent
in-vitro
and
in-vivo
activity, and based on
preclinical studies, has the potential to demonstrate MET inhibition or suppression at lower doses
in humans than SGX523. The SGX523 metabolite we identified is not produced by SGX126, which is
structurally distinct from SGX523. We are conducting further preclinical studies of SGX126 in
support of clinical development. Pending successful completion of these studies, we are now
targeting filing an IND application for SGX126 in early 2009.
Additional SGX MET inhibitors are currently being evaluated for possible selection as further
MET development candidates.
BCR-ABL Program:
Our BCR-ABL development program is focused on SGX393, a compound targeted for the second-line
treatment of CML, a cancer of the bone marrow. Second-line treatment is for patients that relapse
while on Gleevec and those intolerant of Gleevec. Our BCR-ABL development candidate, SGX393, is
currently in IND-enabling preclinical development. SGX393 is an internally developed, potent,
selective, orally bioavailable small molecule that inhibits wild-type BCR-ABL and many drug
resistant forms of BCR-ABL, including the T315I mutant form of the kinase. Pending successful
completion of IND-enabling studies, an IND application for SGX393 is targeted for the second
quarter of 2008.
We have also been collaborating with Novartis under a license and collaboration agreement we
entered into in March 2006, to discover, develop and commercialize oral BCR-ABL inhibitors for the
front-line treatment of CML. The research term of this agreement ended in late March 2008. Novartis
remains responsible for the further preclinical and clinical development of BCR-ABL inhibitors
identified under the collaboration, other than SGX393. A number of compounds discovered within the
collaboration are now undergoing further evaluation at Novartis.
Other Drug Discovery Programs:
Our drug discovery program focuses on a portfolio of other protein and enzyme targets that
have been implicated in human cancers. These discovery targets include JAK2, RAS, RON, ALK, and
IKKε. In addition to these areas of focus, we are evaluating a number of additional oncology
targets for future inclusion in our portfolio. We are advancing our internal oncology product
pipeline through the application of our proprietary approach to drug discovery that is based upon
the use of small fragments of drug-like molecules, or scaffolds, known as Fragments of Active
Structures, or FAST, and underpinned by a state-of-the-art X-ray crystallographic platform for the
determination of protein structures.
Our current goal is to advance our oncology pipeline and nominate at least two development
candidates per year into IND-enabling toxicology studies and file at least one IND per year. We
intend to continue our strategy of entering into collaborative alliances around certain of our
internal programs in order to generate near-term revenue and offset discovery and development
costs, as we did with our BCR-ABL program. Based on FAST and related technologies, we have
generated aggregate revenues from collaborations, commercial agreements and grants of approximately
$101.2 million in the quarter ended March 31, 2008 and the full years ended 2007, 2006 and 2005.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, expenses and related
disclosures. Actual results could differ from those estimates. While our significant accounting
policies are described in more detail in Note 1 of the Notes to Consolidated Financial Statements
included elsewhere in this report, we believe the following accounting policies to be critical to
the judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
Our collaboration agreements and commercial agreements contain multiple elements, including
non-refundable upfront fees, payments for reimbursement of research costs, payments for ongoing
research, payments associated with achieving specific milestones and, in the case of our
collaboration agreements, development milestones and royalties based on specified percentages of
net product sales, if any. We apply the revenue recognition criteria outlined in Staff Accounting
Bulletin No. 104,
Revenue Recognition,
and Emerging Issues Task Force Issue 00-21,
Revenue
Arrangements with Multiple Deliverables
, or EITF 00-21. In applying these revenue recognition
criteria, we consider a variety of factors in determining the appropriate method of revenue
recognition under these arrangements, such as whether the elements are separable, whether there are
determinable fair values and whether there is a unique earnings process associated with each
element of a contract.
Cash received in advance of services being performed is recorded as deferred revenue and
recognized as revenue as services are performed over the applicable term of the agreement.
13
When a payment is specifically tied to a separate earnings process, revenues are recognized
when the specific performance obligation associated with the payment is completed. Performance
obligations typically consist of significant and substantive milestones pursuant to the related
agreement. Revenues from milestone payments may be considered separable from funding for research
services because of the uncertainty surrounding the achievement of milestones for products in early
stages of development. Accordingly, these payments could be recognized as revenue if and when the
performance milestone is achieved if they represent a separate earnings process as described in
EITF 00-21.
In connection with certain research collaborations and commercial agreements, revenues are
recognized from non-refundable upfront fees, which we do not believe are specifically tied to a
separate earnings process, ratably over the term of the agreement. Research services provided under
some of our collaboration agreements and commercial agreements are on a fixed fee basis. Revenues
associated with long-term fixed fee contracts are recognized based on the performance requirements
of the agreements and as services are performed.
Revenues derived from reimbursement of direct out-of-pocket expenses for research costs
associated with grants are recorded in compliance with EITF Issue 99-19,
Reporting Revenue Gross as
a Principal Versus Net as an Agent
, and EITF Issue 01-14,
Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred.
According to the criteria
established by these EITF Issues, in transactions where we act as a principal, with discretion to
choose suppliers, bear credit risk and perform part of the services required in the transaction, we
record revenue for the gross amount of the reimbursement. The costs associated with these
reimbursements are reflected as a component of research and development expense in the statements
of operations.
None of the payments that we have received from collaborators to date, whether recognized as
revenue or deferred, is refundable even if the related program is not successful.
Share-Based Compensation Expense
In December 2004, FASB issued SFAS No. 123R,
Share-Based Payment
, which requires companies to
expense the estimated fair value of employee stock options and similar awards. This statement is a
revision to SFAS No. 123,
Accounting for Stock-Based Compensation
, and supersedes Accounting
Principles Board (APB), Opinion No. 25,
Accounting for Stock Issued to Employees
, and amends FASB
Statement No. 95,
Statement of Cash Flows.
The accounting provisions of SFAS No. 123R became
effective for us on January 1, 2006.
We grant options to purchase our common stock to our employees and directors under our stock
option plans. Eligible employees can also purchase shares of our common stock under the employee
stock purchase plan at the lower of: (i) 85% of the fair market value on the first day of a
two-year offering period; or (ii) 85% of the fair market value on the last date of each six-month
purchase period within the two-year offering period. The benefits provided under these plans are
share-based payments subject to the provisions of SFAS 123R. Share-based compensation expense
recognized under SFAS 123R for the three months ended March 31, 2008 was $0.6 million (excluding
share-based compensation expense for share based awards to non-employees). At March 31, 2008, total
unrecognized estimated compensation expense related to non-vested stock options granted prior to
that date was $3.2 million, which is expected to be recognized over a weighted average period of
2.8 years. Total stock options granted during the three months ended March 31, 2008 and March 31,
2007 represented 2.9% and 4.6% of our total outstanding shares as of the end of each fiscal
quarter, respectively.
Both prior and subsequent to the adoption of SFAS 123R, we estimated the value of share-based
awards on the date of grant using the Black-Scholes option pricing model. Prior to the adoption of
SFAS 123R, the value of each share-based award was estimated on the date of grant using the
Black-Scholes model for the pro forma information required to be disclosed under SFAS 123. The
determination of the fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include, but are not limited to, our expected
stock price volatility over the term of the awards, risk-free interest rate and the expected term
of the awards.
For purposes of estimating the fair value of stock options granted during the three months
ended March 31, 2008 using the Black-Scholes option pricing model, we have made a subjective
estimate regarding our stock price volatility (weighted average of 73%). Expected volatility is
based on average volatilities of the common stock of comparable publicly traded companies using a
blend of historical, implied and average of historical and implied volatilities for this peer group
of 10 companies, consistent with the guidance in SFAS 123R and Staff Accounting Bulletin 107,
Share
Based Payment
(SAB No. 107).
Prior to January 1, 2008, we utilized a simplified method of calculating the expected life
of options for grants made to its employees under the 2005 Plan in accordance with the guidance set
forth in the SECs Staff Accounting Bulletin No. 107 (SAB No. 107) due to the lack of adequate
historical data with regard to exercise activity. For grants made subsequent to January 1, 2008, we
continue to utilize the simplified method of calculating the expected life due to the lack of
adequate historical data as allowable under the SECs Staff Accounting Bulletin No. 110. The
expected term of options granted is derived from the average midpoint between vesting and the
contractual term and is 6.06 years for the three months ended March 31, 2008
.
The risk-free interest rate for the expected term of the option is based on the average U.S.
Treasury yield curve on the first day of each month for which the option is granted for the
expected term (weighted average of 2.97% for the three months ended March 31, 2008).
14
We are required to assume a dividend yield as an input to the Black-Scholes model. The
dividend yield assumption is based on our history and current expectations with respect to paying
dividends. As we have never issued dividends and as we do not anticipate paying dividends in the
foreseeable future, we have utilized a dividend yield of 0.0%.
Accrued Expenses
As part of the process of preparing financial statements, we are required to estimate accrued
expenses. This process involves identifying services which have been performed on our behalf, and
estimating the level of service performed and the associated costs incurred for such service as of
each balance sheet date in our financial statements. Examples of estimated expenses for which we
accrue include contract service fees paid to contract manufacturers in conjunction with the
production of preclinical and clinical drug supplies and to contract research organizations,
particularly in conjunction with the conduct of clinical trials. In connection with such service
fees, our estimates are most affected by our understanding of the status and timing of services
provided relative to the actual levels of services incurred by such service providers. The majority
of our service providers invoice us monthly in arrears for services performed. The date on which
certain services commence, the level of services performed on or before a given date and the cost
of such services are often determined based on subjective judgments. We make these judgments based
upon the facts and circumstances known to us in accordance with United States generally accepted
accounting principles.
Deferred Tax Asset Valuation Allowance
Our estimate for the valuation allowance for deferred tax assets requires us to make
significant estimates and judgments about our future operating results. Our ability to realize the
deferred tax assets depends on our future taxable income as well as limitations on utilization. A
deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized prior to its expiration. The
projections of our operating results on which the establishment of a valuation allowance is based
involve significant estimates regarding future demand for our products, competitive conditions,
product development efforts, approvals of regulatory agencies and product cost. We have recorded a
full valuation allowance on our net deferred tax assets as of March 31, 2008 and December 31, 2007
due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable
future. These deferred tax assets primarily consist of certain net operating loss carry-forwards
and research and development tax credits.
We have not completed a study to assess whether a change in control has occurred, or whether
there have been multiple changes of control since our formation, due to the significant complexity
and cost associated with such study and the possibility that there could be additional changes in
the future. If we experienced a greater than 50 percent change or shift in ownership over a 3-year
time frame since its formation, utilization of its net operating losses or research and development
credit carryforwards would be subject to an annual limitation under Sections 382 and 383. The
annual limitation generally is determined by multiplying the value of our stock at the time of the
ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any
limitation may result in expiration of a portion of the net operating loss or research and
development credit carryforwards before utilization. Further, until a study is completed and any
limitation known, no amounts are being presented as an uncertain tax position under FASB
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109
.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2008 and 2007
Collaboration, Commercial Agreement and Grant Revenue.
Collaboration, commercial agreement and grant revenues for the three months ended March 31,
2008 and 2007 were $17.0 million and $11.0 million, respectively. The increase of $6.0 million, or
55%, was primarily due to revenues recognized under our Novartis collaboration which increased by
$9.1 million. The $9.1 million increase was primarily due to the conclusion of the research term
of the collaboration in late March 2008, which led to the recognition of revenue related to that
portion of the upfront payment which had not yet been recognized due to our prior estimate that we
would substantially accomplish our contractual obligations in March 2010. The increase in
collaborative revenue was offset by a decrease in revenues from our federal research grant. This
decrease was primarily due to the recognition of $3.5 million of
revenue during the first quarter of 2007 in connection with an agreement on
the reimbursement of overhead costs incurred since the commencement of the grant in July 2005.
Research and Development Expense.
Research and development expenses for the three months ended March 31, 2008 and 2007 were
$11.3 million and $10.0 million, respectively. The increase of $1.3 million, or 13%, was primarily
attributable to a $1.6 million increase in preclinical and clinical development of our MET
inhibitors in the first quarter of 2008 and was partially offset by a decrease of $0.2 million
related to share-based compensation expense.
General and Administrative Expense.
General and administrative expenses for the three months ended March 31, 2008 and 2007 were
$2.1 million and $2.2 million, respectively. The decrease of $0.1 million, or 5%, was primarily
attributable to a $0.2 million decrease in share-based compensation expense.
15
Interest Income (Expense), net
For the three months ended March 31, 2008 and March 31, 2007, we recorded net interest income
of $0.2 million. During the three months ended March 31, 2008, our interest income decreased due to
a lower average cash balance, but this was offset by a reduction in interest expense due to lower
balances in our debt obligations.
Net Income (Loss)
Net income for the first quarter of 2008 was $3.7 million, or $0.18 per basic and diluted
earnings per share, compared to a net loss of $1.1 million, or $0.07 per basic and diluted loss per
share for the same period in 2007. Net income during the first quarter of 2008 is attributable to
the recognition of deferred revenues related to the Novartis collaboration. However, we expect to
incur a net loss in 2008 as we continue to fund our discovery and development pipeline.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
We have historically funded our operations primarily through the sale of our equity securities
and funds received from our collaborations, commercial agreements, grants and debt financings.
We have recorded revenues from our collaborations, commercial agreements and grants totaling
$17.0 million, $34.7 million, and $27.8 million for the three months ended March 31, 2008 and the
years ended December 31, 2007 and 2006, respectively.
As of March 31, 2008, an aggregate of approximately $3.3 million was outstanding under our
line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance
Corporation. The debt agreements subject us to certain financial and non-financial covenants. As
of March 31, 2008, we were in compliance with these covenants. These obligations are secured by our
assets, excluding intellectual property, and are due in monthly installments through 2010. They
bear interest at effective rates ranging from approximately 9.95% to 11.03% and are subject to
prepayment fees of up to 4% of the outstanding principal balance as of the prepayment date. We made
principal payments on our debt of approximately $0.9 million in each of the three months ending
March 31, 2008 and 2007, respectively.
In November 2007, we completed a private placement offering of an aggregate of 4,943,154
shares of our common stock, together with warrants to purchase an aggregate of 1,482,944 shares of
our common stock, and raised net proceeds of approximately $23.2 million, after deducting offering
expenses of approximately $1.8 million. In February 2006, we completed an initial public offering
of an aggregate of 4,152,904 shares of our common stock and raised net proceeds of approximately
$20.6 million, after deducting the underwriting discount and offering expenses, and including the
underwriters over-allotment option which was exercised in March 2006. Upon the completion of our
initial public offering in February 2006, all of our previously outstanding shares of preferred
stock converted into an aggregate of 8,346,316 shares of our common stock and a convertible note of
$6.0 million converted into 1,000,000 shares of our common stock.
In September 2005, we entered into a line of credit and equipment financing agreement with
Silicon Valley Bank and Oxford Finance Corporation to provide $8.0 million of general purpose
working capital financing and $2.0 million of equipment and leasehold improvements financing. The
debt bears interest at a rate of approximately 10% per annum and is due in monthly installments
over three years. In September and December 2005, we borrowed approximately $4.0 million and $4.9
million, respectively, of the funds available under this line of credit and equipment financing
agreement for general purpose working capital needs and capital expenditures spending, and issued
the lenders warrants to purchase an aggregate of 45,184 shares of our common stock, at an exercise
price of $9.42 per share. In November and December of 2006, we borrowed the remainder of the
available financing under this line of credit and equipment financing agreement of approximately
$1.1 million, and issued the lenders warrants to purchase an aggregate of 5,771 shares of our
common stock at an exercise price of $9.42 per share.
Cash Flows
Our cash flows for 2008 and beyond will depend on a variety of factors, some of which are
discussed below.
As of March 31, 2008, cash, cash equivalents and short-term investments totaled $30.9 million
compared to $39.0 million at December 31, 2007. The decrease of $8.1 million during the first
quarter of 2008 is primarily due to cash used to fund ongoing operations and debt repayments, which
were offset by cash received associated with our existing grant, collaborations and commercial
arrangements.
Net cash used in operating activities was $6.9 million during the three months ended March 31,
2008 and is primarily comprised of net income for this period of $3.7 million, decrease in deferred
revenue of $11.5 million, which is primarily related to the amortization of upfront fees into
revenue from our Novartis collaboration, and non-cash expenses of $1.1 million. For the three
months ended March 31, 2007, net cash used in operating activities was $2.4 million and is
primarily comprised of a net loss for this period of $1.1 million, decrease in accounts payable and
accrued liabilities of $2.1 million, non-cash expenses of $1.7 million, decrease in deferred
revenues of $1.2 million and a net decrease in accounts receivable and other assets of $0.4
million.
16
Net cash used in investing activities was $0.3 million during the three months ended March 31,
2008 and was the result of capital equipment purchases. Net cash used in investing activities was
$0.1 million during the three months ended March 31, 2007 and was the result of capital equipment
purchases.
Net cash used by financing activities was $0.7 million during the three months ended March 31,
2008, and was attributable to $0.9 million in principal payments on debt offset by net proceeds
from the issuance of common stock of $0.2 million. Net cash used by financing activities was $0.7
million for the three months ended March 31, 2007, reflecting $0.9 million in principal payments on
debt, offset by net proceeds from the issuance of common stock of $0.2 million.
We are unable to estimate with certainty the costs we will incur in the preclinical and
clinical development of product candidates we may develop. We expect our cash outflow to increase
as we advance product candidates through preclinical and clinical development if such development
is not funded by a collaborator, such as Novartis in the case of the BCR-ABL compounds, other than
SGX393. We are funding the preclinical and any clinical development of SGX393. Our drug discovery
program focuses on a portfolio of other protein and enzyme targets that have been implicated in
human cancers. The most advanced of these discovery targets include
JAK2, RAS, RON, ALK, and IKKε.
We anticipate that we will make determinations as to which research and development projects to
pursue, which to license to or partner with a third party, and how much funding to direct toward
each project on an on-going basis in response to the scientific and clinical success of each
product candidate and the potential terms associated with any particular licensing or partnering
opportunity and other strategic and financial considerations.
Funding Requirements
Our future capital uses and requirements depend on numerous factors, including but not limited
to the following:
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terms and timing of, and material developments under, any new or existing collaborative,
licensing and other arrangements, including potentially partnering of our internal
discovery and development programs, such as MET, or potentially retaining such programs
through later stages of preclinical and clinical development;
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rate of progress and cost of our preclinical studies and clinical trials and other
research and development activities;
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scope, prioritization and number of clinical development and research programs we pursue;
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costs and timing of preparing regulatory submissions and obtaining regulatory approval;
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costs of establishing or contracting for sales and marketing capabilities;
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costs of manufacturing;
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extent to which we acquire or in-license new products, technologies or businesses;
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effect of competing technological and market developments; and
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costs of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights.
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Historically, we have funded our operations through a combination of proceeds from offerings
of our equity securities, collaborations, commercial agreements, grant revenue, and debt financing.
As part of our business strategy, we expect to continue to pursue new collaborations and
commercial agreements. We believe that our existing cash, cash equivalents and short-term
investments, together with interest thereon and cash from existing and new collaborations,
commercial agreements and grants, will be sufficient to meet projected operating requirements into
the second half of 2009. We expect to continue to finance our future cash needs through the sale of
equity securities, strategic collaboration agreements and debt financing. However, we may not be
successful in obtaining additional collaboration agreements or commercial agreements, or in
receiving milestone or royalty payments under existing agreements. In addition, we cannot be sure
that additional financing will be available when needed or that, if available, financing will be
obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to
delay, scale back or eliminate some or all of our research or development programs or to relinquish
greater or all rights to product candidates at an earlier stage of development or on less favorable
terms than we would otherwise choose. Many of our programs are at early stages of development and
as a result we may note be able to generate significant revenue by partnering such programs.
Failure to enter into new collaborations or otherwise obtain adequate financing may also adversely
affect our ability to operate as a going concern. If we raise additional funds by issuing equity
securities, substantial dilution to existing stockholders may result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve significant cash payment obligations
as well as covenants and specific financial ratios that may restrict our ability to operate our
business.
17
Off-Balance Sheet Arrangements
As of March 31, 2008, we had not invested in any variable interest entities. We do not have
any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in these relationships. We do not have relationships or
transactions with persons or entities that derive benefits from their non-independent relationship
with us or our related parties other than as described in our Annual Report on Form 10-K for the
year ended December 31, 2007.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal while maximizing
income without significantly increasing risk. Some of the securities in which we invest may be
subject to market risk. This means that a change in prevailing interest rates may cause the market
value of the investment to fluctuate. To minimize this risk, we typically maintain our portfolio of
cash equivalents in a variety of securities, including commercial paper, money market funds, debt
securities, and certificates of deposit. We are exposed to market risk primarily in the area of
changes in conditions in the credit markets, particularly because we have an auction rate security (ARS). Consistent with
the investment policy guidelines in place at the time, we purchased an ARS during 2007. Our ARS
investment had an AAA/Aaa credit rating at the time of purchase, which remains unchanged. With the
liquidity issues experienced in global credit and capital markets, the ARS held by us at March 31,
2008 has experienced multiple failed auctions as the amount of securities submitted for sale has
exceeded the amount of purchase orders. The estimated market value of our ARS at March 31, 2008
was $0.7 million, which reflects a $0.3 million unrealized loss from the principal value held as of
December 31, 2007. In October 2007, our investment policy was updated to eliminate future
purchases of ARS.
We do not have any material foreign currency or other derivative financial instruments. The
risk associated with fluctuating interest rates is limited to our investment portfolio and we do
not believe that a 1% change in interest rates would have had a significant impact on our interest
income for 2008. As of March 31, 2008, all of our cash equivalents were held in operating accounts
and money market accounts.
Item 4T.
CONTROLS AND PROCEDURES
Prior to the filing of this report, an evaluation was performed under the supervision and with
the participation of our management, including our chief executive officer and chief financial
officer (collectively, our certifying officers), of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.
Based on their evaluation, our certifying officers concluded that these disclosure controls and
procedures were effective, as of the end of the period covered by this report. Disclosure controls
and procedures are designed to ensure that the information required to be disclosed by us in our
periodic reports filed with the SEC is recorded, processed, summarized and reported within the time
periods specified by the SECs rules and SEC reports and that such information is accumulated and
communicated to our management, including our certifying officers, to allow timely decisions
regarding required disclosure.
We believe that a controls system, no matter how well designed and operated, is based in part
upon certain assumptions about the likelihood of future events, and therefore can only provide
reasonable, not absolute, assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
An evaluation was also performed under the supervision and with the participation of our
management, including our certifying officers, of any change in our internal control over financial
reporting that occurred during our last fiscal quarter and that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting. That
evaluation did not identify any change in our internal control over financial reporting that
occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
18
Part II OTHER INFORMATION
Item 1A.
RISK FACTORS.
The risk factors in this report have been revised to incorporate changes to our risk factors
from those included in our Annual Report on
Form 10-K
for the year ended December 31, 2007. You
should carefully consider the following information about these risks, together with the other
information appearing elsewhere in this report. If any of the following risks actually occur, our
business, financial condition, results of operations and future growth prospects would likely be
materially and adversely affected. In these circumstances, the market price of our common stock
could decline, and you may lose all or part of your investment in our common stock.
The risk factors set forth below with an asterisk (*) next to the title are new risk factors,
or risk factors that contain changes, including any material changes, from the risk factors
previously disclosed in Item 1A of our Annual Report on
Form 10-K
for the year ended December 31,
2007, as filed with the Securities and Exchange Commission
.
Risks Relating to Our Business
* Our drug discovery approach and technologies are unproven and may not allow us to establish or
maintain a clinical development pipeline or result in the discovery or development of commercially
viable products.
Our drug discovery approach and the technologies on which we rely are unproven and may not
result in the discovery or development of commercially viable products. There are currently no
drugs on the market that have been discovered or developed using our proprietary technologies.
The process of successfully discovering and developing product candidates is expensive,
time-consuming and unpredictable, and the historical rate of failure for drug candidates is
extremely high. Research programs to identify product candidates require a substantial amount of
our technical, financial and human resources even if no product candidates are identified. Our
product candidates and drug discovery research and development programs are in early stages and
require significant time-consuming and costly research and development, testing and regulatory
approvals. In March of this year, we observed dose limiting toxicity in our Phase 1 clinical
trials of SGX523, an inhibitor of the MET protein kinase, at lower doses than anticipated. As a
result, we have decided not to continue further clinical development of SGX523. Our other programs
are all at the preclinical or research stage. There is no guarantee that we will successfully
create and advance product candidates through preclinical or clinical development or that our
approach to drug discovery will lead to the development of approvable or marketable drugs.
Moreover, other than BCR-ABL, there is presently little or no clinical validation for the targets
which are the focus of the programs in our oncology pipeline. Although drugs have been approved
that inhibit the activity of kinases and other enzymes, to our knowledge no company has received
regulatory approval for a MET kinase inhibitor and there is no guarantee that we will be able to
successfully advance any of our MET inhibitors, such as SGX126, or any other compounds from our
kinase inhibitor programs. There is no guarantee that SGX126 or any other MET inhibitor we may advance as a development candidate
will not have the same toxicity as
SGX523. In addition, compounds we recommend for clinical development in any of our programs may
not be effective or safe for their designated use, which would prevent their advancement into and
through clinical trials and impede our ability to maintain or expand our clinical development
pipeline. Although it has been our goal to file one IND per year, to date, we have filed only one
IND for an internally developed product candidate. We may never successfully file any other INDs or
commence clinical trials of any other internally developed compounds.
* If we fail to establish new collaborations and other commercial agreements, we may have to reduce
or limit our internal drug discovery and development efforts and our business may be adversely
affected.
Revenue generation utilizing compounds identified by us from the application of our
technologies, and our FAST drug discovery platform and related technologies is important to us to
provide us with funds for reinvestment in our internal drug discovery and development programs. If
we fail to enter into collaboration or out-licensing agreements on our second MET development
candidate, SGX126, or on one or more of our other existing programs on acceptable terms, or at all,
we may not generate sufficient revenue to support our internal discovery and development efforts.
Many of our drug discovery and development programs are at early
stages of development and, as a
result, the revenues we may be able to generate by partnering such programs may not be adequate to
continue to fund our business. In addition, since our existing collaborations and commercial
agreements are generally not long-term contracts, we cannot be sure we will be able to continue to
derive comparable revenues from these or other collaborations or commercial agreements in the
future. Even if we successfully establish collaborations, these relationships may never result in
the successful development or commercialization of any product candidates or the generation of
sales or royalty revenue. Under our commercial arrangements with other pharmaceutical and
biotechnology companies, such as under all of our beamline services agreements, we are providing
specific services for fees without any interest in future product sales or profits. While we
believe these commercial arrangements help to offset the expenses associated with our drug
discovery efforts, they may force us to divert valuable resources from our own discovery efforts in
order to fulfill our contractual obligations.
19
* Because the results of preclinical studies are not necessarily predictive of results in humans,
any product candidate we advance into clinical trials may not have favorable results or receive
regulatory approval.
There can be no assurance that additional preclinical work conducted in the future will be
positive or supportive of continued development of any product candidate. Even if product
candidates advance through preclinical development, positive results from preclinical studies
should not be relied upon as evidence that clinical trials will succeed. We will be required to
demonstrate through clinical trials that our product candidates are safe and effective for use in a
diverse population before we can seek regulatory approvals for their commercial sale. Success in
preclinical testing does not mean that clinical trials will be successful because product
candidates in clinical trials may fail to demonstrate sufficient safety and efficacy despite having
progressed through preclinical testing. For example, in our SGX523 clinical trials we observed
toxicity in patients that was not anticipated from the preclinical studies. Companies frequently
suffer significant setbacks in clinical trials, even after preclinical and earlier clinical trials
have shown promising results. If negative preclinical results are seen in one compound from a
particular chemical series, there may be an increased likelihood that additional compounds from
that series will demonstrate the same or similar negative results. There is typically an extremely
high rate of attrition from the failure of drug candidates proceeding through clinical trials.
If any product candidate fails to demonstrate sufficient safety and efficacy in any clinical
trial we are able to undertake, we would experience potentially significant delays in, or be
required to abandon, development of that product candidate which may cause our stock price to
decline and may materially and adversely affect our business.
Part of our strategy is to select drug discovery and development targets for which there is
strong scientific evidence that DNA abnormalities activate the target protein and to design and
execute initial clinical trials involving patients who are selected on the basis of strong
scientific evidence of the requisite activating DNA abnormality. Our goal from this strategy is to
potentially decrease the time required to conduct the clinical trial, reduce the number of patients
enrolled in the clinical trial, and reduce the cost of the clinical trial as compared to
conventional more inclusive large-scale clinical trials. However, there is no guarantee that this
strategy will be successful and that we will be able to decrease the time required to conduct
clinical trials or reduce the number of patients or costs of such trials.
* Delays in the commencement or completion of clinical testing could result in increased costs to
us and delay our ability to generate significant revenues.
Delays in the commencement or completion of clinical testing of any product candidate we may
advance into clinical studies could significantly impact our product development costs and delay
our ability to generate significant revenues. For example, although our Phase 1 clinical trials
for SGX523 commenced on schedule in March of this year, we observed dose limiting toxicity in these
trials at a lower dose than anticipated and have decided not to continue further development of
SGX523. We do not know whether any clinical trials that we may plan in the future will begin on
time or be completed on schedule, if at all. The commencement of clinical trials can be delayed for
a variety of reasons, including delays in:
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identifying and selecting a suitable development candidate;
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successful completion of toxicology, formulation or other preclinical studies;
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obtaining any required approvals from our collaborators, such as Novartis for any BCR-ABL product
candidates that may be selected under our license and collaboration agreement with Novartis (other than
SGX393);
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obtaining regulatory approval to commence a clinical trial;
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reaching agreement on acceptable terms with prospective contract research organizations and trial sites;
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manufacturing sufficient quantities of a product candidate;
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obtaining institutional review board approval to conduct a clinical trial at a prospective site; and
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identifying, recruiting and enrolling patients to participate in a clinical trial.
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20
In addition, once a clinical trial has begun, patient recruitment and enrollment may be slower
than we anticipate for a number of reasons including unexpected safety issues or patient
availability. For instance, for SGX393 or any other BCR-ABL product candidate that may be selected
for clinical development, we may have difficulty in recruiting a sufficient number of patients on
an acceptable timeline due to the competing product candidates in clinical development and the
relatively small number of patients available in the initial indication which we would expect to
target. Patient enrollment may also slow as a result of safety issues that emerge during the trial,
the relatively small number of patients and the significant health issues of patients suffering
from the indication we are targeting. Further a clinical trial may be suspended or terminated by
us, our data and safety monitoring board, our collaborators, the FDA or other regulatory
authorities due to a number of factors, including:
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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
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inspection of the clinical trial operations or trial site by the FDA
or other regulatory authorities resulting in the imposition of a
clinical hold;
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unforeseen safety issues or insufficient efficacy; or
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lack of adequate funding to continue the clinical trial.
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If we experience delays in the completion of, or termination of, any clinical trial of any
product candidate we advance into clinical trials, the commercial prospects for product candidates
we may develop will be harmed, and our ability to generate product revenues from any product
candidate we may develop will be delayed. In addition, many of the factors that cause, or lead to,
a delay in the commencement or completion of clinical trials may also ultimately lead to the denial
of regulatory approval of a product candidate. Even if we are able to ultimately commercialize
product candidates, other therapies for the same indications may have been introduced to the market
during the period we have been delayed and such therapies may have established a competitive
advantage over our products.
* Any product candidate we advance into clinical trials may cause undesirable side effects that
could delay or prevent its regulatory approval or commercialization.
Undesirable side effects caused by any product candidate we advance into clinical trials, such
as those observed in our Phase I clinical trials of SGX523, could interrupt, delay or halt clinical
trials and could result in the denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications. This, in turn, could inhibit or prevent us from
partnering or commercializing any product candidates we advance into clinical trials and our
business would be materially adversely affected. In addition, if any product candidate receives
marketing approval and we or others later identify undesirable side effects caused by the product:
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regulatory authorities may withdraw their approval of the product;
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we may be required to change the way the product is administered,
conduct additional clinical trials or change the labeling of the
product; or
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our reputation may suffer.
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Any one or a combination of these events could prevent us from achieving or maintaining market
acceptance of the affected product or could substantially increase the costs and expenses of
commercializing the product, which in turn could delay or prevent us from generating significant
revenues from the sale of the product.
* We have limited manufacturing experience. We primarily rely on third parties to provide
sufficient quantities of our product candidates to conduct preclinical and clinical studies. We
have no control over our manufacturers and suppliers compliance with manufacturing regulations,
and their failure to comply could result in an interruption in the supply of our product
candidates.
To date, our product candidates have been manufactured in relatively small quantities for
preclinical and clinical trials. We have no experience in manufacturing any of our product
candidates and have contracted with third party manufacturers to provide material for preclinical
studies and clinical trials and to assist in the development and optimization of our manufacturing
processes and methods. We currently rely on a single manufacturer for clinical trial material for
SGX126 and another single manufacturer for SGX393. Our ability to conduct clinical trials and
commercialize our product candidates will depend on the ability of such third parties to
manufacture our product candidates on the timeline we have set and in accordance with cGMP and
other regulatory requirements, and for clinical studies beyond the Phase 1 studies, to manufacture
on a large scale and at a competitive cost. Significant scale-up of manufacturing, which will be
required for large scale clinical studies, may require additional validation studies, which the FDA
must review and approve. There is no assurance that the formulations of our product candidates
that we use for pre-clinical studies or initial clinical trials will be suitable for larger scale
clinical studies or for commercialization. If we are not able to obtain contract cGMP
21
manufacturing on commercially reasonable terms, obtain or develop the necessary materials and
technologies for manufacturing, or obtain intellectual property rights necessary for manufacturing,
we may not be able to conduct or complete clinical trials or commercialize our product candidates.
There can be no assurance that we will be able to obtain such requisite terms, materials,
technologies and intellectual property necessary to successfully manufacture our product candidates
for clinical trials or commercialization. Our product candidates require precise, high-quality
manufacturing. The failure to achieve and maintain these high manufacturing standards, including
the incidence of manufacturing errors or the failure to maintain consistent standards across
different batches, could result in delays in commencement of clinical studies, patient injury or
death, product recalls or withdrawals, delays or failures in product testing or delivery, cost
overruns or other problems that could seriously hurt our business
The facilities used by our contract manufacturers must undergo inspections by the FDA for
compliance with cGMP regulations before our product candidates produced there can receive marketing
approval. If these facilities do not receive a satisfactory cGMP inspection result in connection
with the manufacture of our product candidates, we may need to conduct additional validation
studies, or find alternative manufacturing facilities, either of which would result in significant
cost to us as well as a delay of up to several years in obtaining approval for any affected product
candidate. In addition, after approval of a product candidate for commercial use our contract
manufacturers, and any alternative contract manufacturer we may utilize, will be subject to ongoing
periodic inspection by the FDA and corresponding state and foreign agencies for compliance with
cGMP regulations, similar foreign regulations and other regulatory standards. We do not have
control over our contract manufacturers compliance with these regulations and standards. Any
failure by our third-party manufacturers or suppliers to comply with applicable regulations could
result in sanctions being imposed on them (including fines, injunctions and civil penalties),
failure of regulatory authorities to grant marketing approval of our product candidates, delays,
suspension or withdrawal of approvals, license revocation, seizures or recalls of product
candidates or products, operating restrictions and criminal prosecution.
Materials necessary to manufacture our product candidates currently under development may not be
available on commercially reasonable terms, or at all, which may delay our development and
commercialization of these drugs.
Some of the materials necessary for the manufacture of our product candidates currently under
development may, from time to time, be available either in limited quantities, or from a limited
number of manufacturers, or both. We and/or our collaborators need to obtain these materials for
our clinical trials and, potentially, for commercial distribution when and if we obtain marketing
approval for these compounds. Suppliers may not sell us these materials at the time we need them or
on commercially reasonable terms. If we are unable to obtain the materials needed for the conduct
of our clinical trials, product testing and potential regulatory approval could be delayed,
adversely impacting our ability to develop the product candidates. If it becomes necessary to
change suppliers for any of these materials or if any of our suppliers experience a shutdown or
disruption in the facilities used to produce these materials, due to technical, regulatory or other
problems, it could significantly hinder or prevent manufacture of our drug candidates and any
resulting products.
The success of our BCR-ABL inhibitor program depends heavily on the activities of Novartis. If
Novartis is unable to identify any development candidates or is unwilling to further develop or
commercialize development candidates that may be identified under the collaboration, or experiences
significant delays in doing so, our business may be harmed.
As the research term of our collaboration with Novartis ended in late March 2008 and Novartis
is responsible for the further discovery and development of drug candidates identified under the
collaboration, other than SGX393, the future success of our BCR-ABL program for the treatment of
front-line CML will depend in large part on the activities of Novartis with respect to compounds
and potential drug candidates licensed to Novartis under the collaboration agreement. To date, the
nomination of a development candidate has taken longer than anticipated, and we may experience
further delays in the collaborations progress. It is possible that we and Novartis may never
select a development candidate or commence clinical trials. We do not have a significant history of
working together with Novartis and cannot predict the progress and success of the collaboration.
While Novartis is subject to certain diligence obligations under the collaboration agreement, we
cannot guarantee that Novartis will not reduce or curtail its efforts to discover and develop
product candidates under the collaboration, because of changes in its research and development
budget, its internal development priorities, the success or failure of its other product candidates
or other factors affecting its business or operations. For example, Novartis markets
Gleevec
®
(imatinib mesylate) and has other drug candidates under development that could
compete with any BCR-ABL inhibitor that may be developed under our collaboration with Novartis. It
is possible that Novartis may devote greater resources to its other competing programs, or may not
pursue as aggressively our BCR-ABL program or market as aggressively any BCR-ABL product that may
result from our collaboration.
22
Any product candidates we advance into clinical trials are subject to extensive regulation,
compliance with which can be costly and time consuming, cause unanticipated delays or prevent the
receipt of the required approvals to commercialize our product candidates.
The clinical development, manufacturing, labeling, storage, record-keeping, advertising,
promotion, export, marketing and distribution of any other product candidates we advance into
clinical trials are subject to extensive regulation by the FDA in the United States and by
comparable governmental authorities in foreign markets. In the United States, neither we nor our
collaborators are permitted to market our product candidates until we or our collaborators receive
approval of an NDA from the FDA. The process of obtaining NDA approval is expensive, often takes
many years, and can vary substantially based upon the type, complexity and novelty of the products
involved. Approval policies or regulations may change. In addition, as a company, we have not
previously filed an NDA with the FDA. This lack of experience may impede our ability to obtain FDA
approval in a timely manner, if at all, for our product candidates for which development and
commercialization is our responsibility. Despite the time and expense invested, regulatory approval
is never guaranteed. The FDA or any of the applicable European, Canadian or other regulatory bodies
can delay, limit or deny approval of a product candidate for many reasons, including:
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a product candidate may not be safe and effective;
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regulatory agencies may not find the data from preclinical testing and clinical trials to be sufficient;
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regulatory agencies may not approve of our third party manufacturers processes or facilities; or
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regulatory agencies may change their approval policies or adopt new regulations.
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In addition, while we may seek to take advantage of various regulatory processes intended to
accelerate drug development and approval for SGX393 , there is no guarantee that the FDA will
review or accept an NDA under the accelerated approval regulations, based on our clinical trial
design, the results of any clinical trials we may conduct or other factors.
Also, recent events implicating questions about the safety of marketed drugs, including those
pertaining to the lack of adequate labeling, may result in increased cautiousness by the FDA in
reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in
significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to
obtain, applicable regulatory approvals would prevent us from commercializing our product
candidates.
* We have limited clinical development and commercialization experience.
We have very limited experience conducting clinical trials and have never obtained regulatory
approvals for any drug. To date, we have filed only one IND application, initiated two Phase 1
clinical trials (in which we observed dose limiting toxicity and discontinued further clinical
development), and one Phase 2/3 clinical trial (which was ultimately suspended and terminated). We
have not filed an NDA or commercialized a drug. We have no experience as a company in the sale,
marketing or distribution of pharmaceutical products and do not currently have a sales and
marketing organization. Developing commercialization capabilities will be expensive and
time-consuming, could delay any product launch, and we may not be able to develop a successful
commercial organization. To the extent we are unable or determine not to acquire these resources
internally, we would be forced to rely on third-party clinical investigators, clinical research or
marketing organizations. If we were unable to establish adequate capabilities independently or with
others, our drug development and commercialization efforts could fail and we may be unable to
generate product revenues.
* We rely on third parties to conduct our clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may not be able to
obtain regulatory approval for or commercialize our product candidates.
We rely on third parties, such as medical institutions, clinical investigators and contract
laboratories, to conduct any clinical trials. We may not be able to control the amount and timing
of resources that third parties devote to any clinical trials we may commence or the quality or
timeliness of the services performed by such third parties. In any of our clinical trials, in the
event that we are unable to maintain our relationship with any clinical trial sites, or elect to
terminate the participation of any clinical trial sites, we may experience the loss of follow-up
information on patients enrolled in such clinical trial unless we are able to transfer the care of
those patients to another qualified clinical trial site. In addition, principal investigators for
our clinical trials may serve as scientific advisors or consultants to us from time to time and
receive cash or equity compensation in connection with such services. If these relationships and
any related compensation result in perceived or actual conflicts of interest, the integrity of the
data generated at the applicable clinical trial site may be jeopardized. If these third parties do
not successfully carry out their contractual duties or
obligations or meet expected deadlines in connection with any future clinical trials, or if the
quality or accuracy of the clinical data is compromised due to the failure to adhere to clinical
protocols or for other reasons, our clinical trials may be extended, delayed or terminated, our
reputation in the industry and in the investment community may be significantly damaged, and we may
not be able to obtain regulatory approval for or successfully commercialize our product candidates.
23
Even if any product candidate we advance into clinical trials receives regulatory approval, our
product candidates may still face future development and regulatory difficulties.
If any product candidate we advance into clinical trials receives U.S. regulatory approval,
the FDA may still impose significant restrictions on the indicated uses or marketing of the product
candidate or impose ongoing requirements for potentially costly post-approval studies. In addition,
regulatory agencies subject a product, its manufacturer and the manufacturers facilities to
continual review and periodic inspections. If a regulatory agency discovers previously unknown
problems with a product, such as adverse events of unanticipated severity or frequency, or problems
with the facility where the product is manufactured, a regulatory agency may impose restrictions on
that product, our collaborators or us, including requiring withdrawal of the product from the
market. Our product candidates will also be subject to ongoing FDA requirements for the labeling,
packaging, storage, advertising, promotion, record-keeping and submission of safety and other
post-market information on the drug. If our product candidates fail to comply with applicable
regulatory requirements, a regulatory agency may:
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issue warning letters;
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impose civil or criminal penalties;
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withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to approved applications filed by us or our collaborators;
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impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products or require a product recall.
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Moreover, in order to market any products outside of the United States, we and our
collaborators must establish and comply with numerous and varying regulatory requirements of other
countries regarding safety and efficacy. Approval procedures vary among countries and can involve
additional product testing and additional administrative review periods. The time required to
obtain approval in other countries might differ from that required to obtain FDA approval. The
regulatory approval process in other countries may include all of the risks described above
regarding FDA approval in the United States. Regulatory approval in one country does not ensure
regulatory approval in another, but a failure or delay in obtaining regulatory approval in one
country may negatively impact the regulatory process in others. Failure to obtain regulatory
approval in other countries or any delay or setback in obtaining such approval could have the same
adverse effects detailed above regarding FDA approval in the United States. As described above,
such effects include the risk that our product candidates may not be approved for all indications
requested, which could limit the uses of our product candidates and adversely impact potential
royalties and product sales, and that such approval may be subject to limitations on the indicated
uses for which the product may be marketed or require costly, post-marketing follow-up studies. If
we or our collaborators fail to comply with applicable domestic or foreign regulatory requirements,
we and our collaborators may be subject to fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal prosecution.
* We are dependent on our collaborations, and events involving these collaborations or any future
collaborations could prevent us from developing or commercializing product candidates.
We have entered into drug discovery collaborations, such as those with Novartis and the Cystic
Fibrosis Foundation. In each case, our collaborators have agreed to finance the clinical trials for
product candidates resulting from these collaborations and, if they are approved, manufacture and
market them. Accordingly, we are dependent on our collaborators to gain regulatory approval of, and
to commercialize, product candidates resulting from most of our collaborations. Depending upon the
success of our collaboration with Novartis, we may derive a substantial portion of our near-term
revenues from Novartis. However, it has taken longer than anticipated to identify a development
candidate under this collaboration and there is no guarantee that a development candidate will be
identified. No further research funding will be received under the collaboration as a result of the
conclusion of the research term of the collaboration in late March 2008. At this time, an IND for a
development candidate under the collaboration is not anticipated in 2008 and it is possible that an
IND may never be filed. While Novartis is subject to certain diligence obligations under the
collaboration agreement, we cannot guarantee that Novartis will not reduce or curtail its efforts
to develop product candidates that may be identified under the collaboration, because of changes in
its research and development budget, its internal development priorities, the success or failure of
its other product candidates or other factors affecting its business or operations. If no
development candidates are identified
under the collaboration or Novartis determines that the further development of compounds being
developed under the collaboration is not viable for competitive, safety or efficacy reasons, our
business may be materially and adversely affected.
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We have limited control over the amount and timing of resources that our current collaborators
or any future collaborators (including collaborators resulting from a change of control) devote to
our programs or potential products. In some instances, our collaborators, such as Novartis, may
have competing internal programs or programs with other parties, and such collaborators may devote
greater resources to their internal or other programs than to our collaboration and any product
candidates developed under our collaboration. Our collaborators may prioritize other drug
development opportunities that they believe may have a higher likelihood of obtaining regulatory
approval or may potentially generate a greater return on investment. These collaborators may breach
or terminate their agreements with us or otherwise fail to conduct their collaborative activities
successfully and in a timely manner. Further, our collaborators may not develop products that arise
out of our collaborative arrangements, such as SGX393, or devote sufficient resources to the
development, manufacture, marketing or sale of these products. Moreover, in the event of
termination of a collaboration agreement, termination negotiations may result in less favorable
terms than we would otherwise choose.
We and our present and future collaborators may fail to develop or effectively commercialize
products covered by our present and future collaborations for a variety of reasons, including:
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we do not achieve our objectives under our collaboration agreements;
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we or our collaborators are unable to obtain patent protection for the product candidates or
proprietary technologies we discover in our collaborations;
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we are unable to manage multiple simultaneous product discovery and development collaborations;
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our potential collaborators are less willing to expend their resources on our programs due to
their focus on other programs, including their internal programs, or as a result of general
market conditions;
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our collaborators become competitors of ours or enter into agreements with our competitors;
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we or our collaborators encounter regulatory hurdles that prevent the further development or
commercialization of our product candidates; or
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we develop products and processes or enter into additional collaborations that conflict with
the business objectives of our other collaborators.
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If we or our collaborators are unable to develop or commercialize products as a result of the
occurrence of any one or a combination of these events, our business may be seriously harmed.
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Conflicts may arise between us and our collaborators that could delay or prevent the development or
commercialization of our product candidates.
Conflicts may arise between our collaborators and us, such as conflicts concerning which
compounds, if any, to select for pre-clinical or clinical development, the interpretation of
clinical data, the achievement of milestones, the interpretation of financial provisions, the
exercise of reacquisition or other rights or the ownership of intellectual property developed
during the collaboration. If any conflicts arise with existing or future collaborators, they may
act in their self-interest, which may be adverse to our best interests. Any such disagreement
between us and a collaborator could result in one or more of the following, each of which could
delay or prevent the development or commercialization of our product candidates, and in turn
prevent us from generating sufficient revenues to achieve or maintain profitability:
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disagreements regarding the payment of research funding, milestone payments, royalties or other payments we believe are
due to us under our collaboration agreements or from us under our licensing agreements;
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uncertainty regarding ownership of intellectual property rights arising from our collaborative activities, which could
prevent us from entering into additional collaborations;
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actions taken by a collaborator inside or outside a collaboration which could negatively impact our rights under or
benefits from such collaboration;
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unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and
commercialization activities or to permit public disclosure of the results of those activities; or
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slowing or cessation of a collaborators development or commercialization efforts with respect to our product candidates.
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Our drug discovery efforts are dependent on continued access to and use of our beamline facility,
which is subject to various governmental regulations and policies and a user agreement with the
University of Chicago and the U.S. Department of Energy. If we are unable to continue the use of
our beamline facility, we may be required to delay, reduce the scope of or abandon some of our drug
discovery efforts, and may fail to perform under our collaborations, commercial agreements and
grants, which would result in a material reduction in our revenue.
We generate protein structures through our beamline facility, housed at the Advanced Photon
Source at the Argonne National Laboratory, a national synchrotron-radiation facility funded by the
U.S. Department of Energy, Office of Science, and Office of Basic Energy Sciences, located in
Argonne, Illinois. Accordingly, our access to and use of the facility is subject to various
government regulations and policies. In addition, our access to the beamline facility is subject to
a user agreement with the University of Chicago and the U.S. Department of Energy with an initial
five year term expiring in January 1, 2009. Although the term of our user agreement automatically
renews for successive one-year periods, the University of Chicago may terminate the agreement and
our access to the beamline facility by providing 60 days notice prior to the beginning of each
renewal period. In addition, the University of Chicago may terminate the agreement for our breach,
subject to our ability to cure the breach within 30 days. In the event our access to or use of the
facility is restricted or terminated, we would be forced to seek access to alternate beamline
facilities. There are currently only a very small number of alternate beamline facilities
worldwide, which we believe are comparable to ours. To obtain equivalent access at a single
alternate beamline facility would likely require us building out a new beamline at such facility
which could take over two years and would involve significant expense. However, we cannot be
certain that we would be able to obtain equivalent access to such a facility on acceptable terms or
at all. In the interim period, we would have to obtain beamline access at a combination of
facilities, and there is no guarantee that we would be able to obtain sufficient access time on
acceptable terms or at all. If alternate beamline facilities are not available, we may be required
to delay, reduce the scope of or abandon some of our early drug discovery efforts. We may also be
deemed to be in breach of certain of our commercial agreements. Even if alternate beamline
facilities are available, we cannot be certain that the quality of or access to the alternate
facilities will be adequate and comparable to those of our current facility. Failure to maintain
adequate access to and use of beamline facilities may materially adversely affect our ability to
pursue our own discovery efforts and perform under our collaborations, commercial agreements and
grants, which are our current primary source of revenue.
26
* If our competitors develop treatments for cancer indications we target that are approved more
quickly, marketed more effectively or demonstrated to be more effective or safer than our current
or future product candidates, our ability to generate product revenue will be reduced or
eliminated.
Most cancer indications for which we are developing products have a number of established
therapies with which our product candidates will compete. Most major pharmaceutical companies and
many biotechnology companies are aggressively pursuing new cancer development programs, including
both therapies with traditional as well as novel mechanisms of action. In addition to programs that
specifically compete with ours, our product candidates could be adversely affected by new
approaches to the treatment of cancer.
We are aware of competitive products in each of the markets we target. These competitive
products include approved and marketed products as well as products in development. With respect to
our MET program, we are aware of a number of companies working in the area of small molecule
inhibitors of MET, which are at varying stages of preclinical or clinical development, including
Exelixis, Inc., Arqule, Inc., Pfizer, Inc., SuperGen, Inc., Methylgene Inc., Johnson & Johnson and
Merck and Co. Ltd. We are also aware of a number of companies working in the area of biological
agents that interfere with MET, which are at varying stages of preclinical or clinical development,
including Amgen, Inc., Schering Plough Corporation, Takeda Pharmaceutical Company Limited,
Genentech, Inc. and Astra Zeneca Ltd.
With respect to our BCR-ABL inhibitors, we are aware of a number of companies working in this
area which are at varying stages of preclinical or clinical development, including Bristol Myers
Squibb, Inc., Merck and Co., Wyeth, Inc., Innovive Pharmaceuticals, Inc., ChemGenex, Inc., Kyowa
Hakko Kogyo Pharma, Inc., Exelixis, Inc., Ariad Pharmaceuticals, Inc., Kinex Pharmaceuticals, Inc.,
Pfizer, Inc., and Deciphera Pharmaceuticals, Inc.
With respect to our drug discovery programs, in particular JAK2 and ALK, we are aware of a
number of companies that have programs directed at these targets which are at varying stages of
preclinical or clinical development.
Significant competitors in the area of fragment-based drug discovery include Astex
Therapeutics Limited, Plexxikon Inc., Evotec AG, Vernalis Plc., Sunesis Pharmaceuticals, Inc., and
Active Site, Inc. In addition, many large pharmaceutical companies are exploring the internal
development of fragment-based drug discovery methods.
Many of our competitors have significantly greater financial, product development,
manufacturing and marketing resources than us. Large pharmaceutical companies have extensive
experience in clinical testing and obtaining regulatory approval for drugs. These companies also
have significantly greater research capabilities than us. In addition, many universities and
private and public research institutes are active in cancer research, some in direct competition
with us. Smaller or early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established companies.
Our competitors may succeed in developing products for the treatment of diseases in oncology
therapeutic areas in which our drug discovery programs are focused that are more effective, better
tolerated or less costly than any which we may offer or develop. Our competitors may succeed in
obtaining approvals from the FDA and foreign regulatory authorities for their product candidates
sooner than we do for ours. We will also face competition from these third parties in recruiting
and retaining qualified scientific and management personnel, establishing clinical trial sites and
patient registration for clinical trials, and in acquiring and in-licensing technologies and
products complementary to our programs or advantageous to our business.
27
We have limited experience in identifying, acquiring or in-licensing, and integrating third
parties products, businesses and technologies into our current infrastructure. If we determine
that future acquisition, in-licensing or other strategic opportunities are desirable and do not
successfully execute on and integrate such targets, we may incur costs and disruptions to our
business.
An important part of our business strategy is to continue to develop a broad pipeline of
product candidates. These efforts may include potential licensing and acquisition transactions.
Although we are not currently a party to any in-licensing agreements or commitments, we may, seek
to expand our product pipeline and technologies, at the appropriate time and as resources allow, by
acquiring or in-licensing products, or combining with businesses that we believe are a strategic
fit with our business and complement
our existing internal drug development efforts and product candidates, research programs and
technologies. Future transactions, however, may entail numerous operational and financial risks
including:
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exposure to unknown liabilities;
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disruption of our business and diversion of our managements time and attention to the development of acquired products
or technologies;
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incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;
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dilution to existing stockholders in the event of an acquisition by another entity;
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higher than expected acquisition and integration costs;
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increased amortization expenses;
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difficulties in and costs of combining the operations and personnel of any businesses with our operations and personnel;
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impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and
ownership; and
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inability to retain key employees.
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Finally, we may devote resources to potential in-licensing opportunities or strategic
transactions that are never completed or fail to realize the anticipated benefits of such efforts.
If we are unable to establish sales and marketing capabilities or enter into agreements with third
parties to market and sell any products we may develop, we may not be able to generate product
revenue.
We do not currently have a sales organization for the sales, marketing and distribution of
pharmaceutical products. In order to commercialize any products, we must build our sales,
marketing, distribution, managerial and other non-technical capabilities or make arrangements with
third parties to perform these services. In North America, we currently expect to commercialize any
BCR-ABL product candidates that may result from our collaboration with Novartis, and certain other
potential product candidates for other indications that are of strategic interest to us, and plan
to establish internal sales and marketing capabilities for those product candidates. We plan to
seek third party partners for indications and in territories, such as outside North America, which
may require more extensive sales and marketing capabilities. The establishment and development of
our own sales force to market any products we may develop in North America will be expensive and
time consuming and could delay any product launch, and we cannot be certain that we would be able
to successfully develop this capacity. If we are unable to establish our sales and marketing
capability or any other non-technical capabilities necessary to commercialize any products we may
develop, we will need to contract with third parties to market and sell any products we may develop
in North America. If we are unable to establish adequate sales, marketing and distribution
capabilities, whether independently or with third parties, we may not be able to generate product
revenue and may not become profitable.
28
The commercial success of any product that we may develop depends upon market acceptance among
physicians, patients, health care payors and the medical community.
Even if any product we may develop obtains regulatory approval, our products, if any, may not
gain market acceptance among physicians, patients, health care payors and the medical community.
The degree of market acceptance of any of our approved products will depend on a number of factors,
including:
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our ability to provide acceptable evidence of safety and efficacy;
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relative convenience and ease of administration;
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the prevalence and severity of any adverse side effects;
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availability of alternative treatments;
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pricing and cost effectiveness;
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effectiveness of our or our collaborators sales and marketing strategies; and
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our ability to obtain sufficient third party coverage or reimbursement.
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If any of our product candidates is approved, but does not achieve an adequate level of
acceptance by physicians, healthcare payors and patients, we may not generate sufficient revenue
from these products and we may not become profitable.
We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our product candidates, could hinder or prevent our product candidates
commercial success.
The continuing efforts of the government, insurance companies, managed care organizations and
other payors of health care costs to contain or reduce costs of health care may adversely affect
one or more of the following:
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our ability to set a price we believe is fair for our products;
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our ability to generate revenues and achieve profitability;
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the future revenues and profitability of our potential customers, suppliers and collaborators; and
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the availability of capital.
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In certain foreign markets, the pricing of prescription drugs is subject to government control
and reimbursement may in some cases be unavailable. In the United States, given recent federal and
state government initiatives directed at lowering the total cost of health care, Congress and state
legislatures will likely continue to focus on health care reform, the cost of prescription drugs
and the reform of the Medicare and Medicaid systems. For example, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 provided a new Medicare prescription drug benefit
beginning in 2006 and mandated other reforms in the Medicare and Medicaid systems that have been
subject to various amendments and modifications over the past several years. We are not yet able to
assess the full impact of this legislation and it is possible that the new Medicare prescription
drug benefit, which will be managed by private health insurers and other managed care
organizations, will result in decreased reimbursement for prescription drugs, which may further
exacerbate industry-wide pressure to reduce prescription drug prices. In addition, because we are
approaching an election year, there may be significant healthcare reform and other measures that
may adversely impact our business. This could harm our ability to market our products and generate
revenues. It is also possible that other proposals having a similar effect will be adopted.
Our ability to commercialize successfully any product candidates we advance into clinical
trials will depend in part on the extent to which governmental authorities, private health insurers
and other organizations establish appropriate coverage and reimbursement levels for the cost of our
products and related treatments. Third party payors are increasingly challenging the prices charged
for medical products and services. Also, the trend toward managed health care in the United States,
which could significantly influence the purchase of health care services and products, as well as
legislative proposals to reform health care or reduce government insurance programs, may result in
lower prices for our product candidates or exclusion of our product candidates from coverage and
reimbursement programs. The cost containment measures that health care payors and providers are
instituting and the effect of any health care reform could significantly reduce our revenues from
the sale of any approved product.
29
* We may need to increase or decrease the size of our organization, and we may experience
difficulties in managing those organizational changes.
Since we were incorporated in 1998, we have increased the number of our full-time employees to
123 as of March 31, 2008. In the future, we may need to expand our managerial, operational,
financial and other resources in order to manage and fund our operations, continue our research and
development and collaborative activities, progress our product candidates through preclinical
studies and clinical trials, and eventually commercialize any product candidates for which we are
able to obtain regulatory approval. It is possible that our management and scientific personnel,
systems and facilities currently in place may not be adequate to support this potential future
growth. Setbacks in our perceived prospects for future success, such as the recent discontinuation
of SGX523 clinical development, may make it more difficult to maintain or grow our organization
sufficiently to accomplish our objectives, even if funding is available. Our need to effectively
manage our operations, potential future growth and various projects requires that we manage our
internal research and development efforts effectively while carrying out our contractual
obligations to collaborators and third parties, continue to improve our operational, financial and
management controls, reporting systems and procedures and to attract and retain sufficient numbers
of talented employees. We may be unable to successfully implement these tasks on a larger scale
and, accordingly, may not achieve our research, development and commercialization goals.
Alternatively, we may need to decrease the number of our full-time employees in the future in
response to adverse business events. Reducing our workforce may lead to additional unanticipated
attrition. If our future staffing is inadequate because of additional unanticipated attrition or
because we failed to retain the staffing level required to accomplish our business objectives we
may be delayed or unable to continue the development or of our product candidates, which could
impede our ability to generate revenues and achieve or maintain profitability.
If we fail to attract and keep key management and scientific personnel, we may be unable to
successfully develop or commercialize our product candidates.
We will need to expand and effectively manage our managerial, operational, financial and other
resources in order to successfully pursue our research, development and commercialization efforts
for any future product candidates.
Our success depends on our continued ability to attract, retain and motivate highly qualified
management and chemists, biologists, and preclinical and clinical personnel. The loss of the
services of any of our senior management, particularly Michael Grey, our President and Chief
Executive Officer, or Stephen Burley, our Senior Vice President and Chief Scientific Officer, could
have an adverse effect on our business. We do not maintain key man insurance policies on the
lives of these individuals or the lives of any of our other employees. We employ these individuals
on an at-will basis and their employment can be terminated by us or them at any time, for any
reason and with or without notice. We have scientific and clinical advisors who assist us in
formulating our research, development and clinical strategies. These advisors are not our employees
and may have commitments to, or consulting or advisory contracts with, other entities that may
limit their availability to us. In addition, our advisors may have arrangements with other
companies to assist those companies in developing products or technologies that may compete with
ours.
We may not be able to attract or retain qualified management and scientific personnel in the
future due to the intense competition for qualified personnel among biotechnology, pharmaceutical
and other businesses, particularly in the San Diego, California area. If we are not able to attract
and retain the necessary personnel to accomplish our business objectives, we may experience
constraints that will impede significantly the achievement of our research and development
objectives, our ability to raise additional capital and our ability to implement our business
strategy. In particular, if we lose any members of our senior management team, we may not be able
to find suitable replacements and our business may be harmed as a result.
Earthquake or fire damage to our facilities, systems failures or other adverse events affecting our
facilities could delay our research and development efforts and adversely affect our business.
Our headquarters and research and development facilities in San Diego are located in a seismic
zone, and there is the possibility of an earthquake, which could be disruptive to our operations
and result in delays in our research and development efforts. In addition, while our facilities
were not adversely impacted by the wildfires in recent years, there is the possibility of future
fires in the area. Our internal computer systems are also vulnerable to damage from computer
viruses, unauthorized access, natural disasters, terrorism, and telecommunications and electrical
failures. In the event of an earthquake or fire or any systems failure, if our facilities, the
equipment in our facilities or our computer or other systems are significantly damaged, destroyed
or disrupted for any reason, we may not be able to rebuild or relocate our facilities, replace any
damaged equipment or repair any systems failures in a timely manner and our business, financial
condition, and results of operations could be materially and adversely affected. We do not have
insurance for damages resulting from earthquakes. While we do have fire insurance for our property
and equipment located in San Diego, any damage sustained in a fire could cause a delay in our
research and development efforts and our results of operations could be materially and adversely
affected.
30
Risks Relating to our Finances and Capital Requirements
* We will need substantial additional funding and may be unable to raise capital when needed, which
would force us to delay, reduce or eliminate our research and development programs or
commercialization efforts.
Historically, we have funded our operations through a combination of proceeds from offerings
of our equity securities, collaborations, commercial agreements, grant revenue, and debt financing.
As part of our business strategy, we expect to continue to pursue new collaborations and commercial
agreements. We believe that our existing cash, cash equivalents and short-term investments,
together with interest thereon and cash from existing and new collaborations, commercial agreements
and grants, will be sufficient to meet projected operating requirements into the second half of
2009. Because we do not anticipate that we will generate significant continuing revenues for
several years, if at all, we will need to raise substantial additional capital to finance our
operations in the future. Many of our programs are at early stage development and as a result we
may not be able to generate significant revenue by partnering such programs. Our additional
funding requirements will depend on, and could increase significantly as a result of, many factors,
including the:
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terms and timing of, and material developments under, any new or existing collaborative, licensing and other
arrangements, including potentially partnering our internal discovery and development programs, such as MET, or
potentially retaining such programs through later stages of preclinical and clinical development;
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rate of progress and cost of our preclinical studies and clinical trials and other research and development activities;
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scope, prioritization and number of clinical development and research programs we pursue;
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costs and timing of preparing regulatory submissions and obtaining regulatory approval;
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costs of establishing or contracting for sales and marketing capabilities;
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costs of manufacturing;
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extent to which we acquire or in-license new products, technologies or businesses;
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effect of competing technological and market developments; and
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costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
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We expect to continue to finance our future cash needs through the sale of equity securities,
strategic collaboration agreements and debt financing. However, we may not be successful in
obtaining additional collaboration agreements or commercial agreements, or in receiving milestone
or royalty payments under existing agreements. In addition, we cannot be sure that additional
financing will be available when needed or that, if available, financing will be obtained on terms
favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back
or eliminate some or all of our research or development programs or to relinquish greater or all
rights to some or all of our product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose. Failure to obtain adequate financing may also
adversely affect our ability to operate as a going concern.
If adequate funds are not available, we may be required to delay, reduce the scope of or
eliminate one or more of our research and development programs or pursue other strategic
opportunities, including potential merger or acquisition strategies.
* We expect our net operating losses to continue for at least several years, and we are unable to
predict the extent of future losses or when we will become profitable, if ever.
We have incurred substantial net operating losses since our inception. For the years ended
December 31, 2007 and 2006, we had a net loss attributable to common stockholders of $16.0 million
and $28.1 million, respectively. For the quarter ended March 31, 2008, we reported net income of
$3.7 million. As of March 31, 2008, we had an accumulated deficit of approximately $176.0 million.
The net income reported for the quarter ended March 31, 2008 was the result of the recognition of
deferred revenue that related to the portion of the upfront payment which had not yet been earned
upon the conclusion of the research term under our Novartis collaboration that ended in late March
2008.
We expect our annual net operating losses to continue over the next several years as we
conduct our research and development activities, and incur preclinical and clinical development
costs. Because of the numerous risks and uncertainties associated with our research and development
efforts and other factors, we are unable to predict the extent of any future losses or when we will
become profitable, if ever. We will need to commence clinical trials, obtain regulatory approval
and successfully commercialize a product candidate or product candidates before we can generate
revenues which would have the potential to lead to profitability.
31
* We currently lack a significant continuing revenue source and may not become profitable.
Our ability to become profitable depends upon our ability to generate significant continuing
revenues. To obtain significant continuing revenues, we must succeed, either alone or with others,
in developing, obtaining regulatory approval for, and manufacturing and marketing product
candidates with significant market potential. However, we cannot guarantee when, if ever, products
resulting from our MET, BCR-ABL or other oncology programs will generate product sales, or that any
such sales will be sufficient to allow us to become profitable. We had revenues from
collaborations, commercial agreements and grants totaling $17.0 million for the three months ended
March 31, 2008 and totaling $34.7 million and $27.8 million for the years ended December 31, 2007
and 2006, respectively. As described above, the $17.0 million for the three months ended March 31,
2008 includes approximately $10.8 million of deferred revenue recognized upon the conclusion of the
research term under our Novartis collaboration which ended in late March 2008. Though we
anticipate that our collaborations, commercial agreements and grants will continue to be our
primary sources of revenues for the next several years, these revenues alone will not be sufficient
to lead to profitability.
Our ability to generate continuing revenues depends on a number of factors, including:
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obtaining new collaborations and commercial agreements;
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performing under current and future collaborations, commercial agreements and grants, including achieving milestones;
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successful completion of clinical trials for any product candidate we advance into clinical trials;
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achievement of regulatory approval for any product candidate we advance into clinical trials; and
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successful selling, manufacturing, distribution and marketing of our future products, if any.
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If we are unable to generate significant continuing revenues, we will not become profitable,
and we may be unable to continue our operations.
Raising additional funds by issuing securities or through licensing arrangements may cause dilution
to existing stockholders, restrict our operations or require us to relinquish proprietary rights.
We may raise additional funds through public or private equity offerings, debt financings or
licensing arrangements. To the extent that we raise additional capital by issuing equity
securities, our existing stockholders ownership will be diluted. Any debt financing we enter into
may involve covenants that restrict our operations. These restrictive covenants may include
limitations on additional borrowing, specific restrictions on the use of our assets as well as
prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.
In addition, if we raise additional funds through licensing arrangements, as we did in our recent
collaboration with Novartis, it may be necessary to relinquish potentially valuable rights to our
potential products or proprietary technologies, or grant licenses on terms that are not favorable
to us.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. The revenues we
generate, if any, and our operating results will be affected by numerous factors, including:
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our addition or termination of research programs or funding support;
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variations in the level of expenses related to our product candidates or research programs;
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our execution of collaborative, licensing or other arrangements, and the timing of
payments we may make or receive under these arrangements;
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any intellectual property infringement lawsuit in which we may become involved; and
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changes in accounting principles.
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Quarterly fluctuations in our operating results may, in turn, cause the price of our stock to
fluctuate substantially. We believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of our future performance.
32
We may incur substantial liabilities from any product liability claims if our insurance coverage
for those claims is inadequate.
We face an inherent risk of product liability exposure related to the testing of our product
candidates in human clinical trials, and will face an even greater risk if we sell our product
candidates commercially. An individual may bring a liability claim against us if one of our product
candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend
ourselves against the product liability claim, we will incur substantial liabilities. Regardless of
merit or eventual outcome, liability claims may result in any one or a combination of the
following:
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decreased demand for our product candidates;
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injury to our reputation;
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withdrawal of clinical trial participants;
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costs of related litigation;
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substantial monetary awards to patients or other claimants;
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loss of revenues; and
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the inability to commercialize our product candidates.
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We have product liability insurance that covers our Phase 1 clinical trials of SGX 523. We
intend to expand our insurance coverage to include the sale of commercial products if marketing
approval is obtained for any of our product candidates. However, insurance coverage is increasingly
expensive. We may not be able to maintain insurance coverage at a reasonable cost, and we may not
be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.
We use biological and hazardous materials, and any claims relating to improper handling, storage or
disposal of these materials could be time consuming or costly.
We use hazardous materials, including chemicals, biological agents and radioactive isotopes
and compounds, which could be dangerous to human health and safety or the environment. Our
operations also produce hazardous waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and disposal of these materials and
wastes. Compliance with applicable environmental laws and regulations may be expensive, and current
or future environmental laws and regulations may impair our drug development efforts.
In addition, we cannot entirely eliminate the risk of accidental injury or contamination from
these materials or wastes. If one of our employees was accidentally injured from the use, storage,
handling or disposal of these materials or wastes, the medical costs related to his or her
treatment would be covered by our workers compensation insurance policy. However, we do not carry
specific biological or hazardous waste insurance coverage and our property and casualty and general
liability insurance policies specifically exclude coverage for damages and fines arising from
biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination
or injury, we could be held liable for damages or penalized with fines in an amount exceeding our
resources, and our clinical trials or regulatory approvals could be suspended.
* Negative conditions in the global credit markets may impair the liquidity of a portion of our
investment portfolio.
Our short-term investment held as of March 31, 2008 and December 31, 2007 consists of an
auction rate security (ARS) with an original par value of $1.5 million. We recorded an
unrealized loss associated with this ARS as of March 31, 2008. We recorded a realized loss
associated with this ARS as of December 31, 2007. This ARS is a debt instrument with a long-term
maturity and an interest rate that is reset in short-term intervals through auctions. Our ARS
matures in 2017 and was purchased within our previous investment policy guidelines during 2007. The
ARS had an AAA/Aaa credit rating at the time of purchase, which remains unchanged. With the
liquidity issues experienced in global credit and capital markets, this ARS has experienced
multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of
purchase orders. The estimated market value at March 31, 2008 was $0.7 million, which reflects an
unrealized loss of $0.3 million from the principal value held as of December 31, 2007. In October
2007, our investment policy was updated to eliminate future purchases of ARS. If the credit ratings
of the ARS issuer deteriorate or if uncertainties in these markets continue and any decline in
market value is determined to be other-than-temporary, we would be required to adjust the fair
value of the investment through an additional impairment charge, which could negatively affect the
Companys financial condition. There is no guarantee that we will be able to liquidate our ARS or
that we will not incur further realized losses.
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Risks Relating to our Intellectual Property
Our success depends upon our ability to protect our intellectual property and our proprietary
technologies.
Our commercial success depends on obtaining and maintaining patent protection and trade secret
protection for our product candidates, proprietary technologies and their uses, as well as
successfully defending these patents against third party challenges. There can be no assurance that
our patent applications will result in patents being issued or that issued patents will afford
protection against competitors with similar technology, nor can there be any assurance that the
patents issued will not be infringed, designed around, or invalidated by third parties. Even issued
patents may later be found unenforceable, or be modified or revoked in proceedings instituted by
third parties before various patent offices or in courts.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions for which important legal principles remain unresolved.
Changes in either the patent laws or in the interpretations of patent laws in the United States and
other countries may diminish the value of our intellectual property. Accordingly, we cannot predict
the breadth of claims that may be allowed or enforced in our patents or in third party patents.
The degree of future protection for our proprietary rights is uncertain. Only limited
protection may be available and may not adequately protect our rights or permit us to gain or keep
any competitive advantage. For example:
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we might not have been the first to file patent applications for these inventions;
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we might not have been the first to make the inventions covered by each of our pending patent
applications and issued patents;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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the patents of others may have an adverse effect on our business;
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it is possible that none of our pending patent applications will result in issued patents;
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our issued patents may not encompass commercially viable products, may not provide us with any
competitive advantages, or may be challenged by third parties;
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our issued patents may not be valid or enforceable; or
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we may not develop additional proprietary technologies that are patentable.
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Patent applications in the U.S. are maintained in confidence for up to 18 months after their
filing. Consequently, we cannot be certain that we were the first to invent, or the first to file,
patent applications on our compounds or drug candidates. We may not have identified all U.S. and
foreign patents or published applications that may affect our business by blocking our ability to
commercialize any drugs for which we are able to successfully develop and obtain regulatory
approval.
Proprietary trade secrets and unpatented know-how are also very important to our business.
Although we have taken steps to protect our trade secrets and unpatented know-how, including
entering into confidentiality agreements with third parties, and confidential information and
inventions agreements with employees, consultants and advisors, third parties may still obtain this
information or we may be unable to protect our rights. Enforcing a claim that a third party
illegally obtained and is using our trade secrets or unpatented know-how is expensive and time
consuming, and the outcome is unpredictable. In addition, courts outside the United States may be
less willing to protect trade secret information. Moreover, our competitors may independently
develop equivalent knowledge, methods and know-how, and we would not be able to prevent their use.
If we are sued for infringing intellectual property rights of third parties, it will be costly and
time consuming, and an unfavorable outcome in that litigation would have a material adverse effect
on our business.
Our commercial success also depends upon our ability and the ability of our collaborators to
develop, manufacture, market and sell our product candidates and use our proprietary technologies
without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued
patents and pending patent applications, which are owned by third parties, exist in the fields in
which we and our collaborators are developing products. Because patent applications can take many
years to issue, there may be currently pending applications which may later result in issued
patents that our product candidates or proprietary technologies may infringe.
34
We may be exposed to, or threatened with, future litigation by third parties having patent,
trademark or other intellectual property rights alleging that we are infringing their intellectual
property rights. If one of these patents was found to cover our product candidates, research
methods, proprietary technologies or their uses, or one of these trademarks was found to be
infringed, we or our collaborators could be required to pay damages and could be unable to
commercialize our product candidates or use our proprietary technologies unless we or they obtain a
license to the patent or trademark, as applicable. A license may not be available to us or our
collaborators on acceptable terms, if at all. In addition, during litigation, the patent or
trademark holder could obtain a preliminary injunction or other equitable right which could
prohibit us from making, using or selling our products, technologies or methods. In addition, we or
our collaborators could be required to designate a different trademark name for our products, which
could result in a delay in selling those products.
There is a substantial amount of litigation involving patent and other intellectual property
rights in the biotechnology and biopharmaceutical industries generally. If a third party claims
that we or our collaborators infringe its intellectual property rights, we may face a number of
issues, including, but not limited to:
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infringement and other intellectual property claims which, with or
without merit, may be expensive and time-consuming to litigate and may
divert our managements attention from our core business;
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substantial damages for infringement, including treble damages and
attorneys fees, which we may have to pay if a court decides that the
product or proprietary technology at issue infringes on or violates
the third partys rights;
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a court prohibiting us from selling or licensing the product or using
the proprietary technology unless the third party licenses its
technology to us, which it is not required to do;
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if a license is available from the third party, we may have to pay
substantial royalties, fees and/or grant cross licenses to our
technology; and
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redesigning our products or processes so they do not infringe which
may not be possible or may require substantial funds and time.
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There can be no assurance that third party patents containing claims covering our product
candidates, technology or methods do not exist, have not been filed, or could not be filed or
issued. Because of the number of patents issued and patent applications filed in our areas or
fields of interest, particularly in the area of protein kinase inhibitors, we believe there is a
significant risk that third parties may allege they have patent rights encompassing our product
candidates, technology or methods. In addition, we have not conducted an extensive search of third
party trademarks, so no assurance can be given that such third party trademarks do not exist, have
not been filed, could not be filed or issued, or could not exist under common trademark law. If
there is uncertainty with respect to our intellectual property rights related to our product
candidates, technologies or methods, we may have difficulty entering into collaboration or
licensing arrangements with third parties with respect to such product candidates, technologies or
methods.
Other product candidates that we may develop, either internally or in collaboration with
others, could be subject to similar risks and uncertainties.
Risks Relating to the Securities Markets and Ownership of our Common Stock
* Market volatility may affect our stock price.
Until our initial public offering in February 2006, there was no market for our common stock,
and despite our initial public offering, an active public market for these shares may not develop
or be sustained. We have had relatively low volume of trading in our stock since our initial public
offering and we do not know if the trading volume of our common stock will increase in the future.
In addition, the market price of our common stock has been volatile and may continue to be volatile
in the future. For example, our stock has traded as high as $11.38 and as low as $1.24 per share
in the period from February 3, 2006 through April 1, 2008. The stock market has experienced
significantly volatility with respect to pharmaceutical and biotechnology based company stocks.
The price of our stock may continue to fluctuate significantly in response to a number of factors,
most of which we cannot control, including:
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changes in the preclinical or clinical development status of or clinical trial results for our product candidates;
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announcements of new products or technologies, commercial relationships or collaboration arrangements or other
events by us or our competitors, or investor expectations with respect to such arrangements or events;
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events affecting our collaborations, commercial agreements and grants;
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variations in our quarterly operating results;
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35
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changes in securities analysts estimates of our financial performance;
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regulatory developments in the United States and foreign countries;
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fluctuations in stock market prices and trading volumes of similar companies;
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sales of large blocks of our common stock, including sales by our executive officers, directors and significant
stockholders;
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additions or departures of key personnel;
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discussion of us or our stock price by the financial and scientific press and in online investor communities; and
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changes in accounting principles generally accepted in the United States.
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In addition, class action litigation has often been instituted against companies whose
securities have experienced periods of volatility in market price. Any such litigation brought
against us could result in substantial costs and a diversion of managements attention and
resources, which could hurt our business, operating results and financial condition.
* If we fail to meet the requirements for continued listing on the Nasdaq Global Market, our common
stock could be delisted from trading, which would adversely affect the liquidity of our common
stock and our ability to raise additional capital.
Our common stock is currently listed for quotation on the Nasdaq Global Market. We are
required to meet specified financial requirements in accordance with NASDAQ Marketplace Rule
4450(A)(5) in order to maintain our listing on the Nasdaq Global Market. One such requirement is
that we maintain a minimum closing bid price of at least $1.00 per share for our common stock. If
our stock price falls below $1.00 per share for 30 consecutive business days, we will receive a
deficiency notice from Nasdaq advising us that we have 180 days to regain compliance by maintaining
a minimum bid price of at least $1.00 for a minimum of ten consecutive business days. Under certain
circumstances, Nasdaq could require that the minimum bid price exceed $1.00 for more than ten
consecutive days before determining that a company complies with its continued listing standards.
In addition to maintaining a minimum bid price, NASDAQ Marketplace Rule 4450(A)(5) requires us to
maintain stockholders equity of at least $10 million, among other requirements. If in the future
we fail to satisfy the Nasdaq Global Markets continued listing requirements, our common stock
could be delisted from the Nasdaq Global Market, in which case we may transfer to the Nasdaq
Capital Market, which generally has lower financial requirements for initial listing or, if we fail
to meet its listing requirements, the OTC Bulletin Board. Any potential delisting of our common
stock from the Nasdaq Global Market would make it more difficult for our stockholders to sell our
stock in the public market and would likely result in decreased liquidity and increased volatility
for our common stock.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and bylaws may delay or
prevent an acquisition of us or a change in our management. These provisions include a classified
board of directors, a prohibition on actions by written consent of our stockholders, and the
ability of our board of directors to issue preferred stock without stockholder approval. In
addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203
of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits
stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with
us. Although we believe these provisions collectively provide for an opportunity to receive higher
bids by requiring potential acquirors to negotiate with our board of directors, they would apply
even if the offer may be considered beneficial by some stockholders. In addition, these provisions
may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of
directors, which is responsible for appointing the members of our management.
We may incur increased costs as a result of changes in laws and regulations relating to corporate
governance matters.
Changes in the laws and regulations affecting public companies, including the provisions of
the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by
the Nasdaq Stock Market, have resulted in and will continue to result in increased costs to us as
we respond to their requirements. These laws and regulations could make it more difficult or more
costly for us to obtain certain types of insurance, including director and officer liability
insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. The impact of these requirements could also
make it more difficult for us to attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers. We are presently evaluating and
monitoring developments with respect to these laws and regulations and cannot predict or estimate
the amount or timing of additional costs we may incur to respond to their requirements.
36
*
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If our executive officers, directors and largest stockholders choose to act together, they may be
able to control our operations and act in a manner that advances their best interests and not
necessarily those of other stockholders.
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Our executive officers, directors and holders of 5% or more of our outstanding common stock
beneficially own approximately 64% of our common stock. As a result, these stockholders, acting
together, are able to control all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination transactions. The
interests of this group of stockholders may not always coincide with our interests or the interests
of other stockholders, and they may act in a manner that advances their best interests and not
necessarily those of other stockholders. These stockholders also may not act together and disputes
may arise among these stockholders with respect to matters that require stockholder approval. Any
disagreements among our significant stockholders, including among significant stockholders that are
affiliated with members of our Board of Directors, may also make it more difficult for us to obtain
stockholder approval of certain matters and may lead to distraction of management or have other
adverse impact on our operations.
Item 6.
EXHIBITS
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Exhibit
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Number
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Description of Document
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3.1(1)
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Form of Registrants Amended and Restated Certificate of Incorporation.
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3.2(5)
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Form of Registrants Amended and Restated Bylaws.
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4.1(4)
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Form of Common Stock Certificate of Registrant.
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4.2(1)
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Form of Warrant to Purchase Common Stock issued by Registrant in July 2005 to Timothy Harris and Linda Grais.
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4.3(4)
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Form of Warrants issued by Registrant in July 2002 to GATX Ventures, Inc.
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4.4(3)
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Amended and Restated Warrant issued by Registrant in January 2005 to Oxford Finance Corporation.
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4.5(4)
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Warrant issued by Registrant in July 2002 to Silicon Valley Bank.
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4.6(1)
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Amended and Restated Investor Rights Agreement dated April 21, 2005 between Registrant and certain of its
stockholders.
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4.7(2)
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Form of Warrant issued by Registrant in September and December 2005 to Oxford Finance Corporation and
Silicon Valley Bank.
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4.8(5)
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First and Second Amendments to Amended and Restated Investor Rights Agreement, dated October 31, 2005 and
March 27, 2006, respectively, each between Registrant and certain of its stockholders.
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4.9(6)
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Form of Warrant issued by Registrant to Oxford Finance Corporation and Silicon Valley Bank.
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4.10(7)
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Form of Warrant issued by Registrant in November 2007.
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31.1
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Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities and Exchange
Act of 1934, as amended.
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31.2
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Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities and Exchange
Act of 1934, as amended.
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32
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Certification by the Chief Executive Officer and the Chief Financial Officer of the Registrant, as required
by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350).
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(1)
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Filed with the Registrants Registration Statement on Form S-1 on September 2, 2005 and incorporated herein by reference.
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(2)
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Filed with Amendment No. 1 to the Registrants Registration Statement on Form S-1 on October 14, 2005 and incorporated
herein by reference.
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(3)
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Filed with Amendment No. 3 to the Registrants Registration Statement on Form S-1 on November 14, 2005 and incorporated
herein by reference.
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(4)
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Filed with Amendment No. 4 to the Registrants Registration Statement on Form S-1 on January 4, 2006 and incorporated
herein by reference.
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(5)
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Filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2006 filed with the commission on
March 30, 2007 and incorporated herein by reference.
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(6)
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Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with
the Commission on May 15, 2007, and incorporated herein by reference.
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(7)
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Filed with the Registrants Current Report on Form 8-K on November 20, 2007 and incorporated herein by reference.
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38
SIGNATURE
Pursuant to the requirements 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.
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SGX PHARMACEUTICALS, INC.
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/s/ W. Todd Myers
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W. Todd Myers
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Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
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May 13, 2008
39
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