Employee Stock Plans
On May
10, 2007, Sonus shareholders approved a new incentive plan entitled the 2007
Performance Incentive Plan. Under the terms of this plan, the Company can
issue up to 3,900,000 additional shares of the Companys common stock through
the grant of stock options and restricted stock. Employee stock options and
restricted stock vest over a period of time determined by the Board of
Directors, generally four years, and director stock options are generally fully
vested on the date of grant. Stock options generally are granted at the fair
market value on the date of grant and expire ten years from the date of grant.
The
Company has an employee stock purchase plan whereby employees may contribute up
to 15% of their compensation to purchase shares of the Companys common stock
at 85% of the stocks fair market value at the lower of the beginning or end of
each six-month offering period. The Company recognized $8,117 in compensation
expense related to this plan for the nine month period ended September 30, 2007.
At September 30, 2007, a total of 76,083 shares remain available for purchase
by employees under the plan.
The Company has a 401(k) plan for all
employees under which it provides a specified percentage match on employee
contributions. Currently, the Company match is made in shares of the Companys
common stock.
The Company recognized compensation
expense related to this plan for the three and nine month periods ended
September 30, 2007 of $30,150 and $87,462, respectively.
At
September 30, 2007, a total of 51,615 shares remain available for future
issuances as matching contributions under the plan.
Stock-Based Compensation
During the three and nine month periods ended
September 30, 2007 and 2006, respectively, the Company recorded stock-based
compensation cost under the provisions of Statement of Accounting Standard 123
(revised 2004), Share Based Payment, or SFAS 123R. The fair value of stock
based awards is determined using the Black-Scholes-Merton pricing model. The
following table summarizes the income statement classification of stock-based
compensation:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Stock-based
compensation income (expense):
|
|
|
|
|
|
|
|
|
|
General &
administrative
|
|
$
|
(99,663
|
)
|
$
|
(208,208
|
)
|
$
|
(866,512
|
)
|
$
|
(808,142
|
)
|
Research &
development
|
|
99,918
|
|
(225,313
|
)
|
(442,723
|
)
|
(672,969
|
)
|
Total
stock-based compensation income (expense)
|
|
$
|
255
|
|
$
|
(433,521
|
)
|
$
|
(1,309,235
|
)
|
$
|
(1,481,111
|
)
|
The reversal of expense
in the research & development area for the third quarter related to the
impact of a mark to market adjustment for consultant option awards. These
awards are revalued at the end of each quarter. The significant decline in the
Companys stock price in the third quarter resulted in a decrease of
approximately $200,000 in stock compensation expense as compared to the second
quarter of 2007. In addition, the Companys change in the estimated forfeiture
rate based on personnel reductions in the fourth quarter of 2007 resulted in a
decrease of approximately $445,000 in stock compensation expense as compared to
the second quarter of 2007. These changes in estimates are based on events
which occurred or were triggered in the third quarter 2007 and are being
accounted for on a prospective basis. The fair value of each stock option used
in the calculations under SFAS 123R is estimated using the Black-Scholes-Merton
option pricing model. The assumptions used in this model include (1) the stock
price at grant date, (2) the exercise price, (3) an estimated option life of
6.6 years and four years as of September 30, 2007 and 2006, respectively, (4)
no expected dividends for each period presented, (5) stock price volatility
factor of 104.0%
and 68.5% as of September 30, 2007 and 2006, respectively,
(6) forfeiture rate of 16.0%
and 13.1% as of September 30, 2007 and 2006,
respectively, and (7) a risk-free interest rate of 4.6%
and
4.8% as of September 30, 2007 and 2006, respectively.
8
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This
report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Examples of these forward-looking statements include, but are not limited to:
timing and amount of future contractual
payments, product revenue and operating expenses;
progress and preliminary results of clinical
trials;
our anticipated future capital requirements
and the terms of any capital financing agreements;
anticipated regulatory filings, requirements
and future clinical trials; and
market acceptance of our products and the
estimated potential size of these markets.
While
these forward-looking statements made by us are based on our current beliefs
and judgments, they are subject to risks and uncertainties that could cause
actual results to vary from the projections in the forward-looking statements.
You should consider the risks below carefully in addition to other information
contained in this report before engaging in any transaction involving shares of
our common stock. If any of these risks occur, they could seriously harm our
business, financial condition or results of operations. In such case, the
trading price of our common stock could decline, and you may lose all or
part of your investment.
The
discussion and analysis set forth in this document contains trend analysis,
discussions of regulatory status and other forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statement as a result of the following factors, among others:
results
of research and preclinical studies may not be indicative of results in humans;
ability
to build out our product candidate pipeline through internal development,
product in-licensing or acquisition activities;
proper
management of our operations will be critical to the success of the Company;
history
of operating losses and uncertainty of future financial results;
volatility
in the value of our common stock;
continued
listing on the NASDAQ Global Market (formerly NASDAQ National Market);
dependence
on the development and commercialization of products;
uncertainty
of governmental regulatory requirements and lengthy approval process;
dependence
on third parties for funding, clinical development, regulatory approvals,
manufacturing and distribution;
dependence
on key employees;
uncertainty
of U.S. or international legislative or administrative actions;
competition
and risk of competitive new products;
limited
manufacturing experience and dependence on a limited number of contract
manufacturers and suppliers;
ability
to obtain and defend patents, protect trade secrets and avoid infringing
patents held by third parties;
limitations
on third-party reimbursement for medical and pharmaceutical products;
acceptance
of our products by the medical community;
potential
for product liability issues and related litigation;
potential
for claims arising from the use of hazardous materials in our business; and
other factors set forth under Risk Factors
contained in our Annual Report on Form 10-K for the fiscal year ended December
31, 2006 filed on March 16, 2007, Quarterly Reports on Form 10-Q filed on May
9, 2007 and August 3, 2007 for the first and second quarters ending March 31,
2007
and June 30, 2007, respectively,
and in this Quarterly Report on Form 10-Q.
11
MD&A Overview
In
Managements Discussion and Analysis of Financial Condition and Results of
Operations we explain the general financial condition and the results of
operations for our Company, including:
an overview of our business;
results of operations and why those results
are different from the prior year; and
capital resources we currently have and
possible sources of additional funding for future capital requirements.
Business Overview
Sonus Pharmaceuticals is developing novel small
molecule treatments for patients with cancer.
Our objective is to identify opportunities where there is the
possibility for major improvements in patient treatments and where we believe
we can mitigate development risk. We
currently have one drug in clinical development and four earlier stage
programs. Our plan is to continue to develop our internal pipeline of clinical
compound opportunities and to evaluate possible strategic alternatives,
including in-licensing, out-licensing and merger and acquisition opportunities,
as a means of achieving our business strategies and enhancing stockholder
value. On October 22, 2007, we announced
that we have engaged Ferghana Partners Inc., an international provider of
independent financial advisory services to firms in the biotechnology,
pharmaceuticals, diagnostics and specialty chemicals industries, to assist us.
Product
Candidates
TOCOSOL
Paclitaxel
TOCOSOL
Paclitaxel is a novel formulation of paclitaxel manufactured in a ready-to-use,
injectable vitamin E-based emulsion formulation. The Investigational New Drug
Application (IND) for TOCOSOL Paclitaxel was submitted to the FDA in 2000,
and Phase 1 testing was initiated shortly thereafter. On September 24, 2007 we
announced that TOCOSOL Paclitaxel failed to meet the primary endpoint in Phase
3 clinical testing. We have discontinued development of TOCOSOL Paclitaxel due
to results of the Phase 3 study and the time and cost that would be required to
conduct the necessary clinical studies to continue development, which at a
minimum, would include another Phase 3 pivotal trial. We believe that these
closure activities will be substantially complete by December 31, 2007. Based
on the results from the Phase 3 trial, we received a 30 day notice of
termination from Bayer Schering on October 3, 2007, under the terms of the
Agreement. In accordance with the terms of the Agreement, all rights to TOCOSOL
Paclitaxel have reverted back to us.
SN2310
SN 2310 is an injectable Emulsion (SN2310). This product candidate is
a novel camptothecin derivative formulated as an oil-in-water emulsion with
Sonus proprietary TOCOSOL technology. Camptothecins are an important class of
anti-cancer drugs introduced in recent years; however, the marketed
camptothecin analogs, irinotecan (Camptosar®) and topotecan (Hycamtin®), have
demonstrated limitations that may reduce their clinical utility. Irinotecan and
topotecan are used in the treatment of colorectal, lung, and ovarian cancers.
The active ingredient in SN2310 is SN-38, which is considered to be the active
ingredient in irinotecan. Our objective with SN2310 is to provide a
ready-to-use product that has enhanced anti-tumor activity and improved
tolerability compared with the approved camptothecin-based products. An IND was
submitted to the FDA for SN2310 in June 2006 and Phase 1 clinical testing was
initiated in September 2006. As this product candidate is early in clinical
development, we cannot give any assurance that this compound will be clinically
successful.
12
Pipeline
Compounds
We continue to invest in the research and development
of new oncology related product candidates, including those that we believe
could extend the application of our technology. We have identified three areas
of opportunity where we believe there is the possibility for major improvements
in patient treatments and where we believe we can mitigate development risk:
(1) prodrugs of existing small molecules, where the novel prodrug is designed
to provide greater patient convenience and improved patient outcome; (2) novel
small molecules, where an opportunity exists, using known moieties, to improve
clinical shortcomings of existing approved compounds; and (3) reformulation,
with the aim of improving on the safety or efficacy profile of an existing
parenteral drug. We are currently working on four early stage programs with
compounds under development that either use our TOCOSOL technology or other new
technologies under development.
Proprietary
Technology
We consider the protection
of our technology to be important to our business. In addition to seeking U.S.
patent protection for our inventions, we are also seeking patent protection in
other selected countries in order to broadly protect our proprietary rights. We
also rely upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain our competitive position.
Our
success will depend, in part, on our ability to obtain and defend patents and
protect trade secrets. As of September 30, 2007, sixteen United States patents
and seven patents outside the U.S. have been issued relating to our proprietary
technologies. Additional patent applications are pending in the United States
and counterpart filings have been made in selected countries outside the
U.S.
Collaboration and License
Agreement with Bayer Schering Pharma AG
On October 17, 2005, we entered the Agreement with
Bayer Schering Pharma AG (formerly Schering AG), a German corporation, pursuant
to which, among other things, we granted Bayer Schering an exclusive, worldwide
license to TOCOSOL Paclitaxel. At that time, the parties agreed to a core
development program consisting of the pivotal trial in metastatic breast
cancer, trials for additional indications and trials to support launch of the
TOCOSOL Paclitaxel, and agreed to share equally in the costs of the core
development program.
On October 3, 2007, we received notification from
Bayer Schering of its decision to terminate the Agreement in accordance with
its terms because the Phase 3 pivotal trial did not meet its primary endpoint
and the results of the trial do not support, in Bayer Scherings judgment, a
submission for a New Drug Application with the United States Food and Drug
Administration (FDA). The Agreement provides that the termination shall be
effective within thirty days of the date on which written notice was received by
us. In accordance with the terms of the Agreement, all rights to TOCOSOL
Paclitaxel have reverted back to us. We have discontinued development of
TOCOSOL Paclitaxel due to results of the Phase 3 study and the time and cost
that would be required to conduct the necessary clinical studies to continue
development, which at a minimum, would include another Phase 3 pivotal trial.
We believe that these closure activities will be substantially complete by
December 31, 2007. Due to the termination of the Agreement by Bayer Schering,
in October 2007, we will recognize $6.9 million of revenue in the fourth
quarter of 2007, which represents the balance of the unamortized deferred
revenue from the upfront license fee. There will also be a final net billing to
Bayer Schering in the fourth quarter of 2007 for accrued expenses related
primarily to reimbursable Phase 3 activity through the date of termination and
expenses associated with the termination of the Phase 3 trial. As we are still
in the process of finalizing these costs, no estimate can be provided at this
time. We do not expect recognition of any revenue related to the Agreement with
Bayer Schering beyond 2007.
Results of
Operations
As of September 30, 2007, our accumulated deficit was approximately
$126.7 million. We expect to incur substantial additional operating losses over
the next several years. Such losses have been and will continue to principally
be the result of various costs associated with our discovery and research and
development programs. Substantially all of our working capital in recent years
has resulted from equity
13
financings
and payments received under corporate partnership agreements. Our ability to
achieve a consistent, profitable level of operations depends in large
part on obtaining regulatory approval for future product candidates in
addition to successfully manufacturing and marketing those products if they are
approved. Even if we are successful in the aforementioned activities our operations
may not be profitable.
Our
revenue was $4.1 million for the three months ended September 30, 2007 as
compared with $4.9 million for the same period in 2006. We had revenue of $12.4
million for the nine months ended September 30, 2007 compared with $16.5
million for the same period in 2006. Revenue in both periods was fully
attributable to the Agreement with Bayer Schering. We recognized $1.4 million
and $4.1 million in amortization of an upfront license fee received from Bayer
Schering for the three and nine month periods ended September 30, 2007,
respectively and an additional $2.7 million and $8.3 million in research and
development reimbursements for the three month and nine month periods ended
September 30, 2007, respectively. Due to the termination of the Agreement by
Bayer Schering in October 2007, we will recognize $6.9 million of revenue in
the fourth quarter of 2007, which represents the balance of the unamortized
deferred revenue from the upfront license fee. There will also be a final net
billing to Bayer Schering in the fourth quarter of 2007 for accrued expenses
related primarily to reimbursable Phase 3 activity through the date of
termination and expenses associated with the termination of the Phase 3 trial. As
we are still in the process of finalizing these costs, no estimate can be
provided at this time. We do not expect recognition of any revenue related to
the Agreement with Bayer Schering beyond 2007.
Our
research and development (R&D) expenses were $8.9 million for the three
months ended September 30, 2007 compared with $10.3 million for the same period
in 2006. Our R&D expenses were $23.5 million for the nine months ended
September 30, 2007 compared with $29.6 million for the same period in 2006. The
decrease for both periods was primarily the result of lower spending on
clinical trials and drug supply and manufacturing costs related to the Phase 3
trial for TOCOSOL Paclitaxel. We expect R&D costs to increase in the fourth
quarter of 2007 due to expected costs we will incur for terminating all TOCOSOL
Paclitaxel related clinical trials, in addition to costs associated with
planned staff reductions. We expect R&D expenses in 2008 to be
significantly lower than levels experienced in 2007, absent any strategic
transaction which could affect R&D expenses.
Our
general and administrative (G&A) expenses were $1.6 million for the three
months ended September 30, 2007 compared with $1.8 million for the same period
in 2006. Our G&A expenses were $5.7 million for the nine months ended September
30, 2007 compared with $5.4 million for the same period in 2006. The
fluctuations for both periods were primarily related to normal variations in
personnel and market research type expenses. We expect G&A costs to
increase in the fourth quarter of 2007 due to costs associated with planned
staff reductions. We expect G&A expenses in 2008 to be lower than levels
experienced in 2007, absent any strategic transaction which could affect
G&A expenses.
We
expect our total operating expenses during the fourth quarter of 2007 to
increase due to expected costs associated with the termination of all TOCOSOL
Paclitaxel related clinical trials and planned staff reductions. We estimate
that R&D spending will comprise approximately 80%-90% of the anticipated
spending in 2007. A significant portion of
the R&D spending will be devoted to the cessation of TOCOSOL Paclitaxel
programs in addition to development activities related to other compounds in
our pipeline. These estimates and actual expenses are subject to change
depending on many factors. We expect operating expenses in 2008 to be
significantly lower than levels experienced in 2007, absent any strategic
transaction which could affect operating expenses.
Our
other income, net, was $546,000 for the three months ended September 30, 2007
compared with $843,000 for the same period in 2006. Our other income, net, was
$1.8 million for the nine month period ended September 30, 2007 compared with
$2.0 million for the same period in 2006. The
14
decrease
for both periods was due primarily to lower levels of invested cash in 2007
compared to the same periods in 2006.
The
Company had no income tax expense for the three and nine month periods ended
September 30, 2007 or 2006 as it had incurred pretax losses.
Liquidity and
Capital Resources
We
have historically financed operations with proceeds from equity financings and
payments under corporate partnerships with third parties. At September 30,
2007, we had cash, cash equivalents and marketable securities totaling $40.7
million compared to $58.3 million at December 31, 2006. The decrease was
primarily due to the net loss for the nine month period ended September 30,
2007 of $15.0 million, in addition to timing of items accrued in 2006 and paid
in 2007.
Net cash used in operating activities for the nine
months ended September 30, 2007, and 2006, was $17.6 million and $16.8 million,
respectively. Expenditures in all periods were a result of R&D expenses,
including clinical trial costs, and G&A expenses in support of our
operations and product development activities primarily related to TOCOSOL
Paclitaxel and to a lesser extent other potential product candidates. The
increase in net cash used in operating activities from the nine months ended
September 30, 2007 to the nine months ended September 30, 2006 was primarily
due timing of invoices and related payments.
Net
cash used in investing activities for the nine months ended September 30, 2007
and 2006 was $16.1 million and $17.3 million, respectively. The net cash used
in investing activities during both nine month periods ended September 30, 2007
and 2006 was primarily due to transactions involving marketable securities in
the normal course of business in addition to purchases of fixed assets. Activity
related to marketable securities relates primarily to the investment of money
raised in equity financings or received under collaborative agreements. The
related maturities and sales of those investments provide us with working capital
on an as needed basis. We also initiate shifts between cash equivalent
securities and marketable securities based on our cash needs and the prevailing
interest rate environment.
Net cash provided by
financing activities for the nine months ended September 30, 2007, and 2006 was
$218,000 and $29.0 million, respectively. The net cash provided by financing
activities during the nine month period ended September 30, 2007 was primarily
due to the issuance of common stock under employee benefit plans and the
exercise of common stock warrants. The net cash provided by financing
activities during the same period in the prior year was primarily due to
proceeds raised in our May 2, 2006 equity financing and the exercise of common
stock warrants.
We
expect that our cash requirements will decrease in 2008 due to the termination
of development of TOCOSOL Paclitaxel and related staff reductions. Under our
current forecasted cash needs, which assume continued development of SN2310 and
other earlier stage product candidates, we believe that existing cash, cash
equivalents and marketable securities, in addition to final payments from Bayer
Schering, will be sufficient to fund expected operations through at least the
third quarter of 2009. We will need additional capital in 2009 to support the
continued development SN2310, other product candidates and to fund continuing
operations. Our future capital requirements depend on many factors including:
our ability to obtain and timing of payments
under equity or debt financings;
outcome related to strategic activities
currently being evaluated;
timing and costs of preclinical development,
clinical trials and regulatory approvals;
timing and cost of drug discovery and
research and development;
15
entering into new collaborative or product
license agreements for products in our pipeline; and
costs related to obtaining, defending and
enforcing patents.
We have contractual
obligations in the form of operating leases which expire between 2010 and
2017. We signed a new facility lease in November 2006. The new facility lease
has a term of 10 years with a provision for two additional five year renewals. The
estimated commencement date for the new lease is December 2007. The following
table summarizes our contractual obligations under these agreements as of
September 30, 2007:
Contractual
Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations
|
|
$
|
25,823,624
|
|
$
|
1,878,513
|
|
$
|
4,593,821
|
|
$
|
4,892,136
|
|
$
|
14,459,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material Changes in Financial Condition
|
|
September 30,
2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,325,332
|
|
$
|
68,493,002
|
|
Total
liabilities
|
|
$
|
18,738,881
|
|
$
|
25,451,065
|
|
Shareholders
equity
|
|
$
|
29,586,451
|
|
$
|
43,041,937
|
|
The decline in assets from
December 31, 2006 primarily relates to declines in cash, cash equivalents and
marketable securities used to fund operations and timing of collections of
receivables. The decline in liabilities from December 31, 2006 relates
primarily to generally lower accrued liabilities on reduced manufacturing
activity and the reversal of 2007 bonus accruals and lower deferred revenue on
normal amortization. The decline in shareholders equity is primarily due to the
net loss for the year. We expect that the termination of the Agreement with
Bayer Schering in October 2007 will have a material financial impact in future
periods as that Agreement was our only source of revenue.
Critical Accounting Policies and Estimates
We previously identified
certain policies and estimates as critical to our business operations and the
understanding of our past or present results of operations in our Annual Report
on Form 10-K for the year ended December 31, 2006 and filed with the Securities
and Exchange Commission on March 16, 2007. These policies and estimates are
considered critical because they had a material impact, or they have the
potential to have a material impact, on our financial statements and because they
require significant judgments, assumptions or estimates. Our preparation of
financial statements requires us to make estimates and assumptions that affect
the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities at the date of our financial statements, and the reported
amounts of revenue and expenses during the reporting period.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Interest
rate risk:
The
market risk inherent in our marketable securities portfolio represents the
potential loss arising from adverse changes in interest rates. If market rates
hypothetically increase immediately and uniformly by 100 basis points from
levels at September 30, 2007, the decline in the fair value of the investment
portfolio would not be material. Given the short-term nature of our investment
portfolio, we do not expect our operating results or cash flows to be affected
to any significant degree by a sudden change in market interest rates.
16
Foreign currency exchange risk:
We
are exposed to risks associated with foreign currency transactions on certain
contracts denominated in foreign currencies (primarily Euro and Pound Sterling
denominated contracts) and we have not hedged these amounts. As our unhedged
foreign currency transactions fluctuate, our earnings might be negatively
affected. Accordingly, changes in the value of the U.S. dollar relative to the
Euro/Pound Sterling might have an adverse effect on our reported results of
operations and financial condition, and fluctuations in exchange rates might
harm our reported results and accounts from period to period. The impact of
foreign currency fluctuations related to realized gains and losses during the
three month and nine month periods ended September 30, 2007 and 2006,
respectively, was not material.
Item 4. Controls and Procedures
Evaluation of disclosure
controls and procedures
An
evaluation as of the end of the period covered by this report was carried out
under the supervision and participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon the
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC
filings. A controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls are met, and no
evaluation of controls can provide absolute assurance that all controls and
instances of fraud, if any, within a company have been, or will be, detected.
Changes in internal control
over financial reporting
We have not made any changes to our internal control
over financial reporting (as defined in rule 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter ended September 30, 2007 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Part II.
Other Information
Item 1A. Risk
Factors
You should consider the risks below carefully in
addition to other information contained in this report before engaging in any
transaction involving shares of our common stock. Potential risks and
uncertainties include, among other things, those factors discussed in the
sections entitled Business, Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the year ended December 31, 2006, the section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations in
this Quarterly Report on Form 10-Q, and as set forth below in this Item 1A.
Readers should carefully review those risks, as well as additional risks
described in other documents we file from time to time with the Securities and
Exchange Commission. The following risk factors include material changes to the
risk factors previously disclosed in our Form 10-K for the year ended December
31, 2006, and are not a complete list of our risk factors. We undertake no
obligation to publicly release the results of any revisions to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
17
The success of our potential
products in research and preclinical studies does not guarantee that these
results will be replicated in humans.
Several
of our drug development programs are currently in the research stage or in
preclinical development. Our only product in clinical trials, SN2310, began Phase
1 clinical testing in September 2006 and is still in the early stages of
clinical testing. Although our clinical development-stage drug candidate has
shown favorable results in preclinical studies, these results may not be
replicated in our clinical trials. Before we make any products from our
research and development programs commercially available, we will need to
conduct further research and development, including laboratory testing, animal
studies, clinical studies, and obtain product approval from the appropriate
regulatory authorities. These programs may not move beyond their current stages
of development. Even if our research does advance, we will need to engage in
certain additional preclinical development efforts to determine whether a
product is sufficiently safe and effective to enter clinical trials.
Consequently, there is no assurance that the results in our research and
preclinical studies are predictive of the results that we may see in our
clinical trials, that they are predictive of whether any resulting products
will be safe and effective in humans, or that the resulting products will be
approved by regulatory authorities.
Our success is dependent on the
proper management of our current and future business operations, and the
expenses associated with them given our limited resources.
Our
business strategy requires us to manage our operations to provide for the
continued development and potential commercialization of our drug candidates.
If we are unable to effectively manage our current operations given our limited
resources, we may not be able to implement our business strategy and our
financial condition and results of operations may be adversely affected. If we
are unable to effectively manage our expenses, we may find it necessary to reduce
our expenses through a reduction in our workforce and/or cancellation of
research & development programs, which could adversely affect our
operations.
If we fail
to develop new products, then we may never realize revenue from product
commercialization.
Most of our attention and
resources at this time are directed to the development of SN2310, a novel
camptothecin derivative as well as earlier stage oncology product candidates.
Camptothecins are a class of anti-cancer drugs used in the treatment of colorectal,
lung, and ovarian cancers. Significant expenditures in additional research and
development, clinical testing, regulatory, manufacturing, and sales and
marketing activities will be necessary in order for us to gain marketing
approval for our product candidates and subsequently commercialize them. There
can be no assurance that product candidates under development or any future
products will be safe and efficacious. If the product candidates under
development are ultimately ineffective in treating cancer, do not receive the
necessary regulatory approvals or do not obtain commercial acceptance, we will
incur additional losses, our accumulated deficit will increase and our business
will be materially adversely affected.
Even if we are successful in
developing our products, there is no assurance that such products will receive
regulatory approval or that a commercially viable market will develop.
We may merge with or acquire
other companies or drug candidates, and our failure to receive the anticipated
benefits in these transactions could harm our business.
We
are actively seeking strategic opportunities, which may include a merger or
acquisition, among other things. The success of any merger or acquisition
depends, in part, on our ability to realize the anticipated synergies, cost
savings and growth opportunities from integrating the business of the merged or
acquired company with our business. The integration of two independent
companies is a complex, costly and time-consuming process. The difficulties of
combining the operations of two companies include, among others:
18
consolidating research and
development operations;
retaining key employees;
consolidating corporate and
administrative infrastructures;
preserving the research and
development and other important relationships of the companies;
integrating and managing the
technology of two companies;
using the merged or acquired
companys liquid capital and other assets efficiently to develop the business
of the combined company;
diverting managements
attention from ongoing business concerns; and
coordinating geographically
separate organizations.
There
can be no assurance that we will find any attractive strategic opportunities,
or that if we find them, that we will be able to consummate a transaction on
favorable terms, or at all. If we do enter into a transaction, there can be no
assurance that we will receive all of the anticipated benefits of any
transaction, or that any of the risks described above will not occur. Our
failure to receive anticipated benefits of and our exposure to inherent risks
in, any such transaction could significantly harm our business, financial
condition and operating results.
Failure to
satisfy NASDAQ Global Market listing requirements may result in our common
stock being delisted from The NASDAQ Global Market.
Our common stock is
currently listed on The NASDAQ Global Market under the symbol SNUS. For continued
inclusion on The NASDAQ Global Market, we must maintain, among other
requirements, stockholders equity of at least $10.0 million, a minimum bid
price of $1.00 per share and a market value of our public float of at least
$5.0 million; or market capitalization of at least $50 million, a minimum bid
price of $1.00 per share and a market value of our public float of at least
$15.0 million. Between September 24, 2007 and November 5, 2007, the closing
price of our common stock, as reported on the NASDAQ Global Market, has traded
in a range of $0.49 and $0.78 per share.
On November 5, 2007, we received notice from NASDAQ that we do not
comply with NASDAQs continued listing standards because the closing bid price
of our common stock has been below the required minimum bid price of $1.00 for
30 consecutive business days. We have
until May 5, 2008 to regain compliance.
If we do not regain compliance by May 5, 2008, our common stock will be
delisted if we do not appeal NASDAQs determination to delist our common
stock. Alternatively, we may apply for
listing on The NASDAQ Capital Market if we meet the initial listing standards
for that market, in which case we would have an additional 180 days to regain
compliance. In addition, as of September
30, 2007, we had stockholders equity of approximately $29.6 million. In the
event that we fail to satisfy any of the listing standards on a continuous
basis, our common stock may be removed from listing on The NASDAQ Global
Market. If our common stock were delisted from The NASDAQ Global Market, our
common stock may be transferred to The NASDAQ Capital Market if we satisfy
the listing criteria for The NASDAQ Capital Market or trading of our common
stock, if any, may be conducted in the over-the-counter market in the
so-called pink sheets or, if available, the National Association of
Securities Dealers Electronic Bulletin Board. Consequently, broker-dealers may be less
willing or able to sell and/or make a market in our common stock. Additionally,
an investor would find it more difficult to dispose of, or to obtain accurate
quotations for the price of, our common stock. As a result of a delisting, it
may become more difficult for us to raise funds through the sale of our
securities.
We may not achieve our projected
development goals in the time frames we announce and anticipate.
We
set goals for and make public statements regarding the timing of certain
accomplishments, such as the commencement and completion of clinical trials,
anticipated regulatory approval dates and time of product launch, which we
sometimes refer to as milestones. These milestones may not be achieved, and the
actual timing of these events can vary dramatically due to a number of factors
such as delays or failures in our clinical trials, disagreements with future
collaborative partners, the uncertainties inherent in the regulatory approval
process and manufacturing scale-up and delays in achieving manufacturing or
marketing arrangements sufficient to commercialize our products. There can be
no assurance that our clinical trials will be completed, that we will make
regulatory submissions or receive regulatory approvals as planned or that we
will be able to launch any of our products in anticipated timeframes. If we
fail to achieve one or more of these milestones as planned, our business will be
materially adversely affected, and the price of our shares will decline.
19
We have not yet commercialized
any of our drug candidates; our ability to commercialize products is unproven.
We
have not yet commercialized any of our product candidates. Our
commercialization of products is subject to several risks, including but not
limited to:
the possibility that a
product is toxic, ineffective or unreliable;
failure to obtain regulatory
approval for the product;
difficulties in
manufacturing the product on a large scale;
difficulties in planning,
coordinating and executing the commercial launch of the product;
difficulties in marketing,
distribution or sale of the product;
the possibility of a failure
to comply with laws and regulations related to the marketing sale and
reimbursement of the product;
competition from superior
products; and
third-party patents that
preclude us from marketing a product.
Even
if a product candidate is approved for commercial sale, significant strategic
planning and resources will be necessary to effectively coordinate commercial
launch of the product in the approved indication or indications, and to
effectively market, distribute and sell the product for use in the approved
indication or indications. We currently have limited marketing and no
distribution capability.
We will
need additional capital in the future to support the continued development of
our product candidates and to fund continuing operations.
We expect that our cash
requirements will decrease in future periods due to the discontinuation of
development of TOCOSOL Paclitaxel. We believe that existing cash, cash
equivalents and marketable securities, in addition to final payments expected
from Bayer Schering, will be sufficient to fund operations through at least the
third quarter of 2009. We will need additional capital in 2009 to support the
continued development SN2310, other product candidates and to fund continuing
operations. Our future capital requirements depend on many factors including:
our ability to obtain, and the timing of
payments under, debt or equity financings;
timing and costs of preclinical development,
clinical trials and regulatory approvals;
timing and cost of drug discovery and
research and development;
entering into new collaborative or product
license agreements for products in our pipeline; and
costs related to obtaining, defending and
enforcing patents.
Any future debt or equity
financing, if available, may result in substantial dilution to existing
stockholders, and debt financing, if available, may include restrictive
covenants.
We have a
history of operating losses which we expect will continue and we may never
become profitable.
We have experienced
significant accumulated losses since our inception, and expect to incur net
losses for the foreseeable future. These losses have resulted primarily from
expenses associated with our research and development activities, including
nonclinical and clinical trials, and general and administrative expenses. As of
September 30, 2007, our accumulated deficit totaled $126.7 million. We
anticipate that our operating losses will continue as we further invest in
research and development for our products. Our results of operations have
varied and will continue to vary significantly and depend on, among other
factors:
our
ability to obtain and timing of payments under debt or equity financings;
20
outcome
related to strategic activities currently being evaluated;
timing
and costs of preclinical development, clinical trials and regulatory approvals;
drug
discovery and research and development;
entering
into new collaborative or product license agreements for products in our pipeline;
and
costs
related to obtaining, defending and enforcing patents.
Governmental regulatory
requirements are lengthy and expensive and failure to obtain necessary
approvals will prevent us from commercializing our product candidates.
We are subject to uncertain
governmental regulatory requirements and a lengthy approval process for our
products prior to any commercial sales of our products. The development and
commercial use of our products are regulated by the FDA, the European Medicines
Evaluation Agency, or EMEA, and comparable regulatory agencies in other
countries. The regulatory approval process for new products is lengthy and
expensive. Before we can submit an application to the FDA and comparable
international agencies, the product candidate must undergo extensive testing,
including animal studies and clinical trials that can take many years and
require substantial expenditures. Data obtained from such testing may be
susceptible to varying interpretations, which could delay, limit or prevent regulatory
approval. In addition, changes in regulatory policy for product approval
may cause additional costs in our efforts to secure necessary approvals.
Our product candidates are
subject to significant uncertainty because they are in early stages of development
and are subject to regulatory approval. The results of preclinical and clinical
testing of our products are uncertain and regulatory approval of our products
may take longer or be more expensive than anticipated, which could have a
material adverse effect on our business, financial condition and results of
operations. We cannot predict if or when any of our products under development
will be commercialized, if at all.
The
development of oncology related pharmaceutical products is extremely competitive,
and if we fail to compete effectively, it would negatively impact our business.
Competition in the
development of pharmaceutical products is intense and expected to increase. We
also believe that other medical and pharmaceutical companies will compete with
us in the areas of research and development, acquisition of products and
technology licenses, and the manufacturing and marketing of our products.
Success of products in these fields will be based primarily on:
efficacy;
safety;
price;
breadth of approved indications; and
physician, healthcare payor and patient acceptance.
Many of our competitors and
potential competitors, including large pharmaceutical, chemical and
biotechnology concerns and universities and other research institutions, have
substantially greater financial, technical and human resources than we do and
have substantially greater experience in developing products, obtaining
regulatory approvals and marketing and manufacturing medical products.
Accordingly, these competitors may succeed in obtaining FDA approval for
their products more rapidly than we do. In addition, other technologies or
products may be developed that have an entirely different approach that
would render our technology and products noncompetitive or obsolete. If we fail
to compete effectively, it would have a material adverse effect on our
business, financial condition and results of operations.
21
If we fail
to secure adequate intellectual property protection or become involved in an
intellectual property dispute, it could significantly harm our financial
results and ability to compete.
Our success will depend, in
part, on our ability to obtain and defend patents and protect trade secrets. As
of September 30, 2007, we held sixteen United States patents and seven patents outside the U.S. relating to
our proprietary technologies. Additional patent applications are pending
in the United States and counterpart filings have been made in Europe,
Canada and key countries in Asia and Latin America. The patent position of
medical and pharmaceutical companies is highly uncertain and involves complex
legal and factual questions. There can be no assurance that any claims which
are included in pending or future patent applications will be issued, that any
issued patents will provide us with competitive advantages or will not be
challenged by third parties, or that the existing or future patents of third
parties will not have an adverse effect on our ability to commercialize our
products. Furthermore, there can be no assurance that other companies will not
independently develop similar products, duplicate any of our products or design
around patents that may be issued to us. Litigation may be necessary
to enforce any patents issued to us or to determine the scope and validity of
others proprietary rights in court or administrative proceedings. Any
litigation or administrative proceeding could result in substantial costs to us
and distraction of our management. An adverse ruling in any litigation or
administrative proceeding could have a material adverse effect on our business,
financial condition and results of operations.
If we encounter difficulties
enrolling patients in our clinical trials, our trials could be delayed or
otherwise adversely affected.
Clinical
trials for our drug candidates require that we identify and enroll patients
with the disorder or condition under investigation. We may not be able to
enroll a sufficient number of patients to complete our clinical trials in a
timely manner.
Patient enrollment is
affected by factors including:
design of the protocol;
the size of the patient
population;
eligibility criteria for the
study in question;
perceived risks and benefits
of the drug under study;
Institutional Review
Boards/Ethics Committees approvals to conduct the study;
availability of competing
therapies;
efforts to facilitate timely
enrollment in clinical trials;
the success of our personnel
in making the arrangements with potential clinical trial sites necessary for
those sites to begin enrolling patients;
patient referral practices
of physicians;
availability of clinical
trial sites; and
other clinical trials
seeking to enroll subjects with similar profiles.
If
we have difficulty enrolling a sufficient number of patients to conduct our
clinical trials as planned, we may need to delay or terminate ongoing or
planned clinical trials, either of which would have a negative effect on our
business.
We may face fluctuations in
operating results.
Our
operating results may rise or fall significantly from period to period as a
result of many factors, including:
the amount of research and
development we engage in;
outcome related to strategic
activities currently being evaluated;
22
the number of product
candidates we have, their progress in research, preclinical and clinical
studies and the costs involved in manufacturing them;
our ability to enter into
new strategic relationships;
our ability to maintain our
facilities to support our operations;
the costs involved in
prosecuting, maintaining and enforcing patent claims;
the possibility that others
may have or obtain patent rights that are superior to ours;
changes in government
regulation;
changes in the price of our
common stock or other variables used as a basis for valuing stock-based awards;
changes in accounting
policies or principles; and
release of successful
products into the market by our competitors.
As
a result, we may experience fluctuations in our operating results from quarter
to quarter and continue to generate losses. Quarterly comparisons of our
financial results may not necessarily be meaningful, and investors should not
rely upon such results as an indication of our future performance. In addition,
investors may react adversely if our reported operating results are less
favorable than in a prior period or are less favorable than those anticipated
by investors or the financial community, which may result in a drop in the
market price of our common stock.
The impact of the recall by Bristol-Myers Squibb Pharmaceuticals of
certain batches of Taxol.
In March 2007, Bristol-Myers
Squibb Pharmaceuticals recalled certain batches of Taxol due to potential lack
of sterility assurance. At the time of the recall, there had been no reports of
non-sterile product and no stability failures had been detected. Among the
recalled batches were those being used in the reference arm of the Phase 3
TOCOSOL Paclitaxel pivotal study. Based on the available information, Sonus has
no reason to believe that the recalled batches had an adverse impact on
patients treated with those batches in the Phase 3 study.
The Company plans to return
all of the recalled material to its suppliers in accordance with the recall
notice. While we believe that we will receive a full refund for the returned
material, there can be no assurance that we will receive that refund or that it
will be received in a timely basis.
Item 6. Exhibits
10.1
Form of the Stock Option Agreement to the
2007 Stock Performance Incentive Plan. (1)
10.2
Form of the Restricted Stock Purchase
Agreement to the 2007 Stock Performance Incentive Plan. (1)
31.1
Certification
of President and Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a). (1)
31.2
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a). (1)
32.1
Certification
of President and Chief Executive Officer pursuant to Rule 13a-14(b) or
15d-14(b). (2)
32.2
Certification
of Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b). (2)
(1)
Filed
herewith.
(2)
Furnished
herewith and not filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
23
SIGNATURES
In accordance with the
requirements of the Securities Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
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SONUS PHARMACEUTICALS, INC.
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Date:
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November 9, 2007
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By:
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/s/ Alan Fuhrman
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Alan Fuhrman
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Senior Vice President,
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Chief Financial Officer
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(Principal Financial
Officer)
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24
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