ATHEROGENICS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-31261
AtheroGenics, Inc.
(Exact name of Registrant as specified in its charter)
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Georgia
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58-2108232 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification Number) |
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8995 Westside Parkway,
Alpharetta, Georgia 30004
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(678) 336-2500 |
(Address of principal executive offices, including zip code)
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(Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Common Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of shares of voting stock held by nonaffiliates of the registrant,
computed by reference to the closing price of $13.05 as reported on the Nasdaq National Market as
of the last business day of AtheroGenics most recently completed second fiscal quarter (June 30,
2006), was approximately $133,924,072. AtheroGenics has no nonvoting common equity.
The number of shares outstanding of the registrants common stock, as of March 2, 2007:
39,467,927.
Documents Incorporated by Reference:
Portions of the proxy statement filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 with respect to the 2007 Annual Meeting of Shareholders are incorporated herein by
reference in Part II, Item 5 and Part III.
ATHEROGENICS, INC
FORM 10-K
INDEX
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PART I
Item 1. Business
Overview
AtheroGenics is a research-based pharmaceutical company incorporated in the State of Georgia
in 1993. We are focused on the discovery, development and commercialization of novel drugs for the
treatment of chronic inflammatory diseases, including coronary heart disease, organ transplant
rejection, rheumatoid arthritis and asthma. We have developed a proprietary vascular protectant,
or v-protectant®, technology platform to discover drugs to treat these types of
diseases. Based on our v-protectant® platform, we have two drug development programs in
clinical trials and are pursuing a number of other preclinical programs.
AGI-1067 is our v-protectant® candidate that is most advanced in clinical
development. AGI-1067 is designed to benefit patients with coronary heart disease (CHD), which is
atherosclerosis of the blood vessels of the heart. Atherosclerosis is a common disease that
results from inflammation and the buildup of plaque in arterial blood
vessel walls. Nearly 16
million people in the United States currently have diagnosed CHD. There are no medications
available for physicians to directly treat the underlying chronic inflammation associated with CHD.
Instead, physicians treat risk factors, such as high cholesterol and high blood pressure, to slow
the progression of the disease. The anti-inflammatory mechanism of AGI-1067 represents a novel,
direct therapeutic approach that may be suitable as a chronic treatment for all patients with CHD,
including those without traditional risk factors.
In 2004, we completed a Phase IIb clinical trial called CART-2, a 465-patient study that
examined the effect of 12 months of AGI-1067 therapy on atherosclerosis and post-angioplasty
restenosis, which is the re-narrowing of the arteries following angioplasty. Two leading cardiac
intravascular ultrasound laboratories independently analyzed the final data from CART-2. The
primary endpoint of the trial was a change in coronary atherosclerosis, measured as total plaque
volume after a 12-month treatment period compared to baseline values. Combined results of the
final analysis from the two laboratories, which were based on an evaluation of intravascular
ultrasounds from approximately 230 patients in the study, indicate that AGI-1067 reduced plaque
volume by an average of 2.3%, which was statistically significant. Results from the patient group
receiving both placebo and standard of care indicated a plaque volume measure that was not
statistically different from baseline. While the plaque regression observed in the AGI-1067 group
exceeded that observed in the standard of care group numerically, the difference did not reach
statistical significance, although a trend towards significance was seen in one laboratorys
analysis. An important secondary endpoint from the trial, change in plaque volume in the most
severely diseased subsegment, showed statistically significant regression from baseline by an
average of 4.8%. The results also demonstrated a significant reduction in myeloperoxidase, an
inflammatory biomarker that correlates with future cardiovascular events. Overall adverse event
rates were similar in the AGI-1067 and standard of care groups, and AGI-1067 was generally well
tolerated.
Based on the results of an End of Phase II meeting with the U.S. Food and Drug Administration
(FDA), we developed a pivotal Phase III clinical trial protocol to evaluate AGI-1067 for the
treatment of atherosclerosis. The Phase III protocol has received a Special Protocol Assessment
from the FDA. A Special Protocol Assessment is written confirmation from the FDA that the protocol
is adequately designed to support a New Drug Application (NDA) for the drug in the specified
treatment area.
In 2003, we initiated the pivotal Phase III trial Aggressive Reduction of Inflammation Stops
Events (ARISE), which was conducted in cardiac centers in the United States, Canada, the United
Kingdom and South Africa. ARISE will evaluate the impact of AGI-1067 on important outcome measures
such as death due to coronary disease, myocardial infarction, stroke, coronary re-vascularization
and unstable angina in patients who have CHD. The study will assess the incremental benefits of
AGI-1067 versus the current standard of care therapies in this patient population. As such, all
patients in the trial, including those on placebo, received other appropriate heart disease
medications, including statins and other cholesterol-lowering therapies, high blood pressure
medications and anti-clotting agents.
We completed patient enrollment with more than 6,100 patients in the study. The target number
of events will yield greater than 95 percent statistical power to detect a 20 percent difference in
clinical events between the study arms. We completed the ARISE trial in 2006 and expect to
announce the results in early 2007. Assuming positive results, we plan to file an NDA with the FDA
as soon as possible thereafter.
In 2005, we announced a license and collaboration agreement with IPR Pharmaceuticals, Inc.
(AstraZeneca) for the global development and commercialization of AGI-1067. Under the terms of
the agreement we received an upfront nonrefundable license fee of $50 million and, subject to the
achievement of specific milestones including a successful outcome in ARISE, we will be eligible
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for development and regulatory milestones of up to an aggregate of $300 million. The agreement
also provides for progressively demanding sales performance related milestones of up to an
additional $650 million in the aggregate. In addition, we will also receive royalties on product
sales. AstraZeneca is responsible for supplying all of the manufacturing, packaging and labeling.
AstraZeneca has the right to terminate the license and collaboration agreement at specified periods
as further described in Collaborations below.
In the second half of 2006, we were engaged by AstraZeneca to conduct FOCUS (Follow-up Of
Clinical Outcomes: The Long-term AGI-1067 Plus Usual Care Study). FOCUS is a follow-up Phase III
clinical trial for patients exiting ARISE, designed to collect extended safety information. The
trial could last two years beyond ARISE.
AGI-1096, our second v-protectant® candidate, is a novel antioxidant and selective
anti-inflammatory agent that is being developed to address the accelerated inflammation of grafted
blood vessels, known as transplant arteritis, common in chronic organ transplant rejection. We are
working with Astellas Pharma Inc. (Astellas) to further develop AGI-1096 in preclinical and
early-stage clinical trials. In a Phase I clinical trial investigating the safety and tolerability
of oral AGI-1096 in combination with Astellas tacrolimus (Prograf®) conducted in
healthy volunteers, results indicated that regimens of AGI-1096 administered alone, and concomitant
with tacrolimus, were generally well-tolerated, and there were no serious adverse events associated
with either regimen during the course of the study. AGI-1096 has also demonstrated pharmacological
activity in certain preclinical studies that were conducted as part of the ongoing collaboration.
In February 2006, we announced the extension of our collaboration with Astellas to conduct
additional studies, with Astellas funding all development costs during the term of the agreement.
Astellas will also retain the exclusive option to negotiate for late stage development and
commercial rights to AGI-1096.
We have also identified additional potential v-protectant® candidates to treat
other chronic inflammatory diseases, including asthma. We are evaluating these
v-protectants® to determine lead drug candidates for clinical development. We plan to
develop these compounds rapidly and may seek regulatory fast track status, if available, to
expedite development and commercialization. We plan to continue to expand upon our drug discovery
efforts to identify new compounds and novel therapeutic gene targets.
Business Strategy
Our objective is to become a leading pharmaceutical company focused on discovering, developing
and commercializing novel drugs for the treatment of chronic inflammatory diseases. The key
elements of our strategy include the following:
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Continue aggressive development program for AGI-1067. We intend to rapidly develop
AGI-1067 for the treatment and prevention of atherosclerosis in patients with CHD. |
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Extend our v-protectant® technology platform into additional therapeutic areas
that address unmet medical needs. We believe that our v-protectants® have the
potential for treating a wide variety of other chronic inflammatory diseases. These
indications include chronic organ transplant rejection, rheumatoid arthritis, asthma and
other diseases. We have completed two Phase I clinical trials with positive results for
AGI-1096 and we hope to develop this v-protectant® for the prevention of chronic
organ transplant rejection. |
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Expand our clinical product candidate portfolio. In addition to our existing discovery
programs, we intend to acquire rights to other product candidates and technologies that
complement our existing product candidate lines or that enable us to capitalize on our
scientific and clinical development expertise. We plan to expand our product candidate
portfolio by in-licensing or acquiring product candidates, technologies or companies. |
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Commercialize our products. We plan to collaborate with large pharmaceutical companies
to commercialize products that we develop to target patient or physician populations in
broad markets. For example, we have entered into a license and collaboration agreement with
AstraZeneca to commercialize AGI-1067 due to its applicability to broad commercial markets.
Additionally, we plan to develop a sales force to commercialize those of our other products
that we develop to target appropriate patient or physician populations in narrow markets.
For example, we plan to establish a 125-person sales force to co-promote AGI-1067 to a
narrow segment of specialist physicians. |
Inflammation and Disease
Inflammation is a normal response of the body to protect tissues from infection, injury or
disease. The inflammatory response begins with the production and release of chemical agents by
cells in the infected, injured or diseased tissue. These agents cause redness, swelling, pain,
heat and loss of function. Inflamed tissues generate additional signals that recruit white blood
cells to the site of
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inflammation. White blood cells destroy any infective or injurious agent, and remove cellular
debris from damaged tissue. This inflammatory response usually promotes healing but, if
uncontrolled, may become harmful.
The inflammatory response can be either acute or chronic. Acute inflammation lasts at most
only a few days. The treatment of acute inflammation, where therapy includes the administration of
aspirin and other non-steroidal anti-inflammatory agents, provides relief of pain and fever for
patients. In contrast, chronic inflammation lasts weeks, months or even indefinitely and causes
tissue damage. In chronic inflammation, the inflammation becomes the problem rather than the
solution to infection, injury or disease. Chronically inflamed tissues continue to generate
signals that attract white blood cells from the bloodstream. When white blood cells migrate from
the bloodstream into the tissue they amplify the inflammatory response. This chronic inflammatory
response can break down healthy tissue in a misdirected attempt at repair and healing. Diseases
characterized by chronic inflammation include, among others:
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atherosclerosis, including CHD; |
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organ transplant rejection; |
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rheumatoid arthritis; and |
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asthma. |
Atherosclerosis is a common cardiovascular disease that results from inflammation and the
buildup of plaque in arterial blood vessel walls. Plaque consists of inflammatory cells,
cholesterol and cellular debris. Atherosclerosis, depending on the location of the artery it
affects, may result in a heart attack or stroke.
Atherosclerosis of the blood vessels of the heart is called coronary artery disease or heart
disease. It is the leading cause of death in the United States, claiming more lives each year than
all forms of cancer combined. Recent estimates suggest that nearly 16 million Americans are
diagnosed with some form of atherosclerosis. When atherosclerosis becomes severe enough to cause
complications, physicians must treat those complications, which include angina, heart attack,
abnormal heart rhythms, heart failure, kidney failure, stroke, or obstructed peripheral arteries.
Many of the patients with established atherosclerosis are treated aggressively for their associated
risk factors, as with statins, which have been repeatedly shown to slow the progression of
atherosclerosis and prevent future adverse events such as heart attack, stroke and death. Other
risk factors associated with atherosclerosis include elevated triglyceride levels, high blood
pressure, smoking, diabetes, obesity and physical inactivity. Many atherosclerosis patients also
experience symptoms of angina and/or a history of acute coronary syndromes, such as myocardial
infarctions and unstable angina. In addition, most of these patients have high cholesterol, and as
a result, the current treatment focuses primarily on cholesterol reduction. Additionally, these
patients are routinely treated with anti-hypertensives and anti-platelet drugs to help prevent the
formation of blood clots. There are currently no medications available for physicians to treat
directly the underlying chronic inflammation of atherosclerosis.
Organ transplantation takes place when an organ from a donor is surgically removed and placed
in a recipient patient whose own organ has failed because of disease or infection. Except for
transplants between identical twins, all transplant donors and recipients are immunologically
incompatible. This biological incompatibility is a barrier that causes the recipients immune
system to try to destroy or reject the new organ. A patients white blood cells produce special
proteins called antibodies that are created specifically to latch onto the transplanted organ.
While attached to the organ, the antibodies alert the rest of the immune system to attack the organ
slowly and continuously. The current treatment for prevention of organ transplant rejection
focuses on the use of powerful immunosuppressive drugs such as cyclosporin A, tacrolimus and
rapamycin (sirolimus). These drugs, which are initiated during the acute rejection phase, need to
be taken continuously after the transplant procedure, often cause side effects, and may fail to
prevent long-term rejection of the transplant. Immunosuppressants may also impair the recipients
immune system in order to reduce the immune response against the transplant. The Scientific
Registry of Transplant Recipients reports that even with the use of immunosuppressants, patients
run the risk of losing a donated organ during the first three years following transplantation, and
roughly 50 percent of patients have functioning organ transplants after approximately ten years.
Rheumatoid arthritis is a common form of arthritis that is characterized by inflammation of
the membrane lining the joint, which causes pain, stiffness, warmth, redness and swelling. The
inflamed joint lining, the synovium, can invade and damage bone and cartilage. Inflammatory cells
release enzymes that may digest bone and cartilage. The involved joint can lose its shape and
alignment, resulting in pain and loss of movement. When the immune system works properly, it is
the bodys defense against bacteria, viruses and other foreign cells. In an immune disorder like
rheumatoid arthritis, the immune system works improperly and attacks the bodys own joints and
other organs. In rheumatoid arthritis, white blood cells move from the bloodstream into the joint
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tissues. Fluid containing inflamed cells accumulates in the joint. The white cells in the
joint tissue and fluid produce many substances, including enzymes, antibodies and other molecules
that attack the joint and can cause damage. In the United States, approximately 2.1 million people
have rheumatoid arthritis. The cause of rheumatoid arthritis is not yet known, and the disease
differs from person to person. Anyone can get rheumatoid arthritis, including children and the
elderly. However, the disease usually begins in the young- to middle-adult years. Among people
with rheumatoid arthritis, women outnumber men three-to-one. The disease occurs in all ethnic
groups and in all parts of the world.
Current treatment methods for rheumatoid arthritis focus on relieving pain, reducing
inflammation, stopping or slowing joint damage, and improving patient function and well-being, and
include non-steroidal anti-inflammatory drugs, corticosteroids and drugs designed to slow the
progression of disease, termed disease modifying anti-rheumatic drugs, or DMARDs. DMARDs can cause
serious side effects, and include drugs that were originally designed to treat cancer, such as
methotrexate. Modern treatments with DMARDs developed by other companies, Enbrel® (etanercept) and
Remicade® (infliximab), have substantially improved the quality of life for people with rheumatoid
arthritis. These drugs prove that blocking the activity of tumor necrosis factor, a molecule that
stimulates a broad range of cellular activities implicated in the inflammation process, improves
rheumatoid arthritis. However, both of these drugs must be injected and both increase the risk of
severe infection.
Asthma is a common chronic inflammatory disease of the bronchial tubes, which are the airways
in the lungs. Asthma is marked by episodic airway attacks that are caused by many stresses,
including allergy, cold air, ozone or exercise. Asthma therapy has concentrated on the use of
inhaled corticosteroids to reduce chronic inflammation and bronchodilators to provide symptomatic
relief. Asthmatic patients, however, continue to experience flare-ups, or exacerbations, that are
not prevented nor effectively treated by these medicines.
Many physicians are only now becoming aware of the key role of chronic inflammation in diverse
diseases such as atherosclerosis and asthma for which existing anti-inflammatory treatments are
incomplete and limited in use. As more physicians recognize that a wide range of chronic diseases
are inflammatory in nature, we believe that these physicians will require safer and more effective
anti-inflammatory treatments. We believe that one of these therapeutic approaches will be the
administration of drugs designed to block the migration of white blood cells through blood vessel
walls into inflamed tissues, unless the inflammation is due to infection.
V-Protectant® Technology
We have developed a proprietary v-protectant® technology platform targeted to the
treatment of chronic inflammatory diseases. This platform is based on the work of our scientific
co-founders R. Wayne Alexander, M.D., Ph.D. and Russell M. Medford, M.D., Ph.D. In 1993, Drs.
Alexander and Medford discovered a novel mechanism within arterial blood vessel walls that could
control the excessive accumulation of white blood cells without affecting the bodys ability to
fight infection. V-protectant® technology exploits the observation that the endothelial
cells that line the interior wall of the blood vessel play an active role in recruiting white blood
cells from the blood to the site of chronic inflammation. V-protectants® are intended
to block harmful effects of oxygen and other similar molecules, collectively called oxidants.
Scientists have known for some time that some oxidants can damage cells, but have more recently
determined that these same oxidants may also act as signals to modify gene activity inside cells.
This change in gene activity leads to the production of proteins that initiate or maintain
inflammation. The protein products of these cells, including an adhesion molecule, called VCAM-1,
attract white blood cells to the site of chronic inflammation. We believe that an excess number of
VCAM-1 molecules on the surface of cells is a disease state. We also believe that AGI-1067 and
other v-protectants® can act as antioxidants and can block the specific type of
inflammation caused by oxidants acting as signals. We believe that v-protectants® will
provide this anti-inflammatory benefit without undermining the bodys ability to protect itself
against infection.
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Products
The table below summarizes our therapeutic programs, their target indication or disease and
their development status.
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Therapeutic Program
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Disease/Indication
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Development Status
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V-PROTECTANTS®
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AGI-1067
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Atherosclerosis
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Phase III clinical trial
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AGI-1096
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Transplant rejection
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Phase I clinical trial
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AGI Series
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Chronic asthma
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Research
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Rheumatoid arthritis
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MEKK TECHNOLOGY PLATFORM
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Inflammatory diseases
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Research
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We have established therapeutic programs for product development using lead candidates we
select from among our compound libraries. We continue to test compounds to identify back-up and
second-generation product candidates. We are also pursuing other novel discovery targets in
chronic inflammation.
AGI-1067
AGI-1067 is our v-protectant® candidate that is most advanced in clinical
development. AGI-1067 is designed to benefit patients with CHD, which is atherosclerosis of the
blood vessels of the heart. Atherosclerosis is a common disease that results from inflammation and
the buildup of plaque in arterial blood vessel walls. Nearly 16 million people in the United
States currently have diagnosed CHD. There are no medications available for physicians to treat
directly the underlying chronic inflammation associated with CHD. Instead, physicians treat risk
factors, such as high cholesterol and high blood pressure, to slow the progression of the disease.
The anti-inflammatory mechanism of AGI-1067 represents a novel, direct therapeutic approach that
may be suitable as a chronic treatment for all patients with CHD, including those without
traditional risk factors.
We completed a 305-patient Phase II clinical trial of AGI-1067 called Canadian Antioxidant
Restenosis Trial (CART-1) in 2001. Results from the trial showed that the study met its primary
endpoint, which was improvement in the size of the luminal area, or coronary artery opening, as
measured by intravascular ultrasound six months after angioplasty, with statistical significance.
CART-1 data also showed that after only six weeks of therapy, there was an apparent
anti-atherosclerotic effect in blood vessels adjacent to the angioplasty site, but not involved in
the angioplasty. In the trial, AGI-1067 was well tolerated, with no increase in serious adverse
events versus placebo.
In 2004, we completed a Phase IIb clinical trial called CART-2, a 465-patient study that
examined the effect of 12 months of AGI-1067 therapy on atherosclerosis and post-angioplasty
restenosis. Two leading cardiac intravascular ultrasound laboratories independently analyzed the
final data from CART-2. The primary endpoint of the trial was a change in coronary
atherosclerosis, measured as total plaque volume after a 12-month treatment period compared to
baseline values. Combined results of the final analysis from the two laboratories, which were
based on an evaluation of intravascular ultrasounds from approximately 230 patients in the study,
indicate that AGI-1067 reduced plaque volume by an average of 2.3%, which was statistically
significant. Results from the patient group receiving both placebo and standard of care
indicated a plaque volume measure that was not statistically different from baseline. While the
plaque regression observed in the AGI-1067 group exceeded that observed in the standard of care
group numerically, the difference did not reach statistical significance, although a trend towards
significance was seen in one laboratorys analysis. An important secondary endpoint from the
trial, change in plaque volume in the most severely diseased subsegment, showed statistically
significant regression from baseline by an average of 4.8%. The results also demonstrated a
significant reduction in myeloperoxidase, an inflammatory biomarker that correlates with future
cardiovascular events. Overall adverse event rates were similar in the AGI-1067 and standard of
care groups, and AGI-1067 was generally well tolerated.
Based on the results of an end of Phase II meeting with the FDA, we developed a pivotal Phase
III clinical trial protocol to evaluate AGI-1067 for the treatment of atherosclerosis. The Phase
III protocol received a special protocol assessment from the FDA in 2003. A special protocol
assessment is written confirmation from the FDA that the protocol is adequately designed to support
an NDA for the drug in the specified treatment area.
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In 2003, we initiated the pivotal Phase III trial, called ARISE, which was conducted in
cardiac centers in the United States, Canada, the United Kingdom and South Africa. ARISE will
evaluate the impact of AGI-1067 on important outcome measures such as death due to coronary
disease, myocardial infarction, stroke, coronary re-vascularization and unstable angina in patients
who have CHD. The study will assess the incremental benefits of AGI-1067 versus the current
standard of care therapies in this patient population. As such, all patients in the trial,
including those on placebo, received other appropriate heart disease medications, including statins
and other cholesterol-lowering therapies, high blood pressure medications and anti-clotting agents.
We completed patient enrollment with more than 6,100 patients in the study. The target number
of events will yield greater than 95 percent statistical power to detect a 20 percent difference in
clinical events between the study arms. We completed the ARISE trial in 2006 and expect to
announce the results in early 2007. Assuming positive results, we plan to file an NDA with the FDA
as soon as possible thereafter.
In 2005, we announced a license and collaboration agreement with AstraZeneca for the global
development and commercialization of AGI-1067. Under the terms of the agreement, we received an
upfront nonrefundable license fee of $50 million and, subject to the achievement of specific
milestones including a successful outcome in ARISE, we will be eligible for development and
regulatory milestones of up to an aggregate of $300 million. The earned portion of the $50.0
million license fee, which is being amortized over 24 months, accounted for approximately $22.9
million in revenue or 72% of our total revenues, for the year ended December 31, 2006. The
agreement also provides for progressively demanding sales performance related milestones of up to
an additional $650 million in the aggregate. In addition, we will also receive royalties on
product sales. AstraZeneca is responsible for supplying all of the manufacturing, packaging and
labeling. AstraZeneca has the right to terminate the license and collaboration agreement at
specified periods as further described in Collaborations below.
In the second half of 2006, we were engaged by AstraZeneca to conduct FOCUS. FOCUS is a
follow-up Phase III clinical trial for patients exiting ARISE, designed to collect extended safety
information. The trial could last two years beyond ARISE. Research and development revenues
attributable to services performed for AstraZeneca related to the FOCUS clinical trial accounted
for $8.8 million in revenue, or 28% of our total revenues, for the year ended December 31, 2006.
AGI-1096
Organ transplant rejection is caused when patients immune systems recognize transplanted
organs as foreign and, therefore, reject them. Acute rejection occurs soon after transplantation,
while chronic rejection may take years. Recent industry sources report there are approximately
200,000 organ transplant recipients in the United States who are at risk of chronic organ
transplant rejection. Chronic rejection is a major factor contributing to organ shortage.
Physicians treat these patients with powerful immunosuppressants to block all immune and
inflammatory reactions that could cause organ transplant rejection. These immunosuppressive
therapies, however, may place patients at increased risk for infection. The vascular protection
provided by our drug candidate may protect organs from rejection beyond the first year without
increasing the risk of infection.
Our second v-protectant® candidate, AGI-1096, is a novel antioxidant and selective
anti-inflammatory agent which is being developed to address the accelerated inflammation of grafted
blood vessels, known as transplant arteritis, common in chronic organ transplant rejection.
AGI-1096 inhibits the expression of certain inflammatory proteins, including VCAM-1, in endothelial
cells lining the inside surfaces of blood vessel walls. We are working with Astellas to further
develop AGI-1096 in preclinical and early-stage clinical trials. We have conducted two Phase I
clinical trials of AGI-1096, including a trial investigating the safety and tolerability of oral
AGI-1096 in combination with Astellas tacrolimus (Prograf®) conducted in healthy
volunteers. Results from the trials indicated that regimens of AGI-1096 administered alone, and
concomitant with tacrolimus, were generally well-tolerated and there were no serious adverse events
associated with either regimen during the course of the study. AGI-1096 has also demonstrated
pharmacological activity in certain preclinical studies that were conducted as part of the ongoing
collaboration. In February 2006, we announced the extension of our collaboration with Astellas,
which will be funding all development costs during the term of the agreement. Astellas will also
retain the exclusive option to negotiate for late stage development and commercial rights to
AGI-1096.
Other V-Protectant® Candidates
We have also identified additional potential
v-protectant® candidates to treat
other chronic inflammatory diseases, including rheumatoid arthritis and asthma. Rheumatoid
arthritis is a chronic, progressively debilitating inflammatory disease that affects articular, or
rotating, joints resulting in significant pain, stiffness and swelling and leads to degradation of
the joint tissue. According
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to the Arthritis Foundation, there are 2.1 million people with rheumatoid arthritis in the
United States. Approximately 70 percent of patients with rheumatoid arthritis are women.
Physicians treat rheumatoid arthritis in a stepwise fashion, starting with the occasional to
regular use of anti-inflammatory agents such as aspirin or ibuprofen, and proceeding to treatment
with DMARDs, which can potentially be toxic. The newer DMARDs target the modulation of tumor
necrosis factor, tissue repair and proliferation. The recent successful introduction of new drugs
for rheumatoid arthritis has highlighted both the market potential and the size and scope of the
unmet medical need of these patients. These drugs are partially effective and may cause serious
side effects.
According to the Asthma and Allergy Foundation of America, approximately 20 million adults and
children in the United States currently suffer from asthma. Current therapies that target the
underlying disease include corticosteroids and several classes of drugs that relieve symptoms but
are not effective for chronic inflammation. We believe that v-protectants® may reduce
the inflammation associated with chronic asthma.
We are evaluating these v-protectants® to determine lead drug candidates for
clinical development. We plan to develop these v-protectants® rapidly and may seek
regulatory fast track status, if available, to expedite development and commercialization. We will
continue to expand upon our v-protectant® technology platform to identify novel
therapeutic gene targets.
Collaborations
AstraZeneca Agreement
In 2005, we announced a license agreement and a co-promotion agreement with AstraZeneca for
the global development and commercialization of AGI-1067. Under the terms of the agreement, we
received an upfront nonrefundable license fee of $50 million in February 2006 in partial
consideration for the licenses and other rights granted in the license agreement. We will be
eligible to receive up to an aggregate of $300 million upon achieving certain development and
regulatory milestones. We will also be eligible to receive up to an additional $650 million in the
aggregate upon achieving progressively demanding sales performance related milestones. Joint
development and management committees have been established and consist of members from each
company, who will oversee development, regulatory and marketing activities with respect to
AGI-1067, as more fully described below.
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Development. We have an obligation to use commercially diligent efforts to
carry out the development of AGI-1067. We are also responsible for the costs of
conducting and managing clinical studies through the filing of a NDA. |
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Regulatory Approvals. We are responsible for applying for and obtaining
regulatory approval of AGI-1067 in the United States; however, AstraZeneca will
assist us with obtaining that approval. AstraZeneca will have full responsibility
for all non-U.S. regulatory filings. |
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Manufacturing. AstraZeneca is responsible for all activities related to AGI-1067
manufacturing, packaging and labeling. We will use commercially diligent efforts
to facilitate any necessary transfer of technology to AstraZeneca or a third party
chosen by AstraZeneca for AGI-1067 manufacturing, packaging and labeling. |
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Marketing. AstraZeneca will be responsible for the distribution of AGI-1067 in
all markets throughout the world. In addition, AstraZeneca will bear all costs for
the marketing of AGI-1067 in all markets throughout the world, including
pre-approval and market development activities. AstraZeneca will be solely
responsible for setting pricing for AGI-1067, provided that the initial pricing
will be approved by a committee consisting of our representatives and
representatives from AstraZeneca. |
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Co-Promotion. We will have the right to co-promote AGI-1067 in the United
States. AstraZeneca will fund, for a minimum of three years, the formation and
operation of a sales force of up to a total of 125 people. This sales force will
focus on the cardiology field in the United States, and will co-promote both
AGI-1067 and one other of AstraZenecas drugs (which drug will be selected by
AstraZeneca) during that time. |
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License Fee. On February 1, 2006 upon receiving Hart-Scott Rodino regulatory
approval, AstraZeneca paid us the nonrefundable, noncreditable payment of $50
million in partial consideration for the licenses and other rights granted in the
license agreement.
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Milestone Payments. We have the right to receive payments based on our
achievement of certain development and commercial milestones, which amounts have an
aggregate value of up to $950 million. |
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Profit Sharing and Royalties. We also have the right to receive royalties from
AstraZeneca, based on AGI-1067 sales in all markets. |
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Term and Termination. The license agreement will be in effect until either (1)
the regulatory period of patent exclusivity elapses or is revoked; (2) ten years
from the first commercial sale of AGI-1067; or (3) either party materially breaches
the license agreement. In addition, AstraZeneca will have the right to terminate
the license agreement: (1) upon 90 days prior written notice at any time during the
45 day period following the release of the final ARISE results; (2) at any time in
the 30 day period following receipt of a letter from the FDA stating either that:
(a) the FDA will not approve the application, or (b) that it will only approve the
application if specific conditions are met, and such conditions make it reasonably
likely that (i) approval of AGI-1067 will occur more than 24 months following the
receipt of the FDA letter, or (ii) development costs will exceed a specified amount
(unless we agree to pay any amount in excess of a specified amount); (3) if the FDA
requires information or data from additional studies not contemplated in the
original license agreement, when the added cost to AstraZeneca of complying with
the FDA requirements is reasonably likely to exceed a specified amount (unless we
agree to pay any amounts in excess of a specified amount); and (4) for any reason
at any time during the one-year period following the third anniversary of receipt
of FDA approval, upon giving us 365 days written notice at any time during that
one-year period. |
In the second half of 2006, we were engaged by AstraZeneca to conduct FOCUS, a follow-up Phase
III clinical trial for patients exiting ARISE, designed to collect extended safety information.
The trial could last two years beyond ARISE.
Astellas Pharma Inc. (Formerly Known As Fujisawa Pharmaceutical Co., Ltd.) Agreement
In 2004, we announced a collaboration with Fujisawa Pharmaceutical Co., Ltd. (Fujisawa) to
develop AGI-1096 as an oral treatment for the prevention of organ transplant rejection. Under the
agreement, we agreed to collaborate with Fujisawa to conduct preclinical and early stage clinical
development trials, with Fujisawa funding all development costs during the term of the agreement.
Fujisawa received an option to negotiate for late stage development and commercial rights to the
compound. In 2005, Astellas was formed through the merger of Fujisawa and Yamanouchi
Pharmaceutical Co., Ltd. In February 2006, we extended the collaboration with Astellas.
Discovery Research Program
We have built a robust Discovery Research Program using our demonstrated expertise in
molecular biology, cell biology, physiology, pharmacology, biochemistry and medicinal chemistry.
Our Discovery Research Program has the following main objectives:
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To discover and develop v-protectants® with enhanced potency and improved
therapeutic properties. We are synthesizing novel compounds and testing them in a
variety of biochemical, cell-based and pharmacological assays to discover and develop
new, small molecule v-protectants®. We believe that these
v-protectants® may have improved therapeutic properties and applicability
across a wide range of chronic inflammatory diseases. We have identified several novel
series of highly potent and pharmacologically-active v-protectants® for
investigation. |
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To discover and develop new classes of anti-inflammatory drug candidates based upon
our MEKK inhibitor drug discovery platform. As a result of entering into a license
agreement with National Jewish Medical and Research Center in 2001, we have expanded our
research program to identify novel pharmacological inhibitors of this important family of
enzymes that participate in chronic inflammation. |
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To identify and develop new drug candidates based on promising therapeutic targets
identified by our drug discovery programs. Using knowledge gained from our
v-protectant® program and ongoing research activities, we are identifying
enzymes and other molecular targets that either control or are controlled by oxidant
signals. We believe these discoveries will enable our chemists to synthesize the next
generation of therapeutic agents that target chronic inflammation. We intend to use
these enzymes and other molecular targets for both internal efforts and as strategic
collaboration assets. |
8
Patents and Intellectual Property
We have established a patent portfolio of owned and in-licensed patents that cover our lead
compounds and their use. It is our goal to pursue both broad and specific patent protection in the
key areas of our research and development both in the United States and internationally, and to
identify value-added exclusive in-licensing opportunities.
V-Protectant® Technology
We have license agreements with Emory University (Emory) and The Regents of the University
of California covering aspects of our v-protectant® technology.
Under the license agreement with Emory (the Emory License Agreement), Emory granted to us an
exclusive license to make, use and sell methods and products covered by certain patents and patent
applications owned by Emory relating generally to the treatment and diagnosis of VCAM-1 related
diseases. In August 2005, we amended the Emory License Agreement to provide that Emory will
receive a portion of any milestones or royalties received by us from third parties (such as through
our joint licensing and collaboration agreement with AstraZeneca) in exchange for a reduced
participation in future revenues and the elimination of milestone payments. We must indemnify
Emory for all claims and/or losses caused or contributed to by AtheroGenics arising out of our use
of the license. We have procured commercial general liability insurance in specified amounts
customary in the industry naming Emory as an insured. Under the terms of our collaboration
agreement with AstraZeneca, all amounts due under the Emory License Agreement are the
responsibility of AstraZeneca.
The Emory License Agreement will terminate on October 30, 2012; after that date, our payment
obligations under the Emory License Agreement will cease, and we will be entitled to continue to
use on a non-exclusive basis all inventions, data or other information described and claimed in the
licensed patents and the licensed technology. Emory may terminate the agreement if, after Emory
gives notice to us, we fail to make a payment, we fail to render progress reports, we incur
specified financial problems, we decide to no longer develop licensed products under the agreement,
or we breach a material term of the agreement. We may terminate the agreement upon advance notice
to Emory, or if Emory violates certain material terms of the agreement.
Under our license agreement with The Regents of the University of California, we received a
license to make, use and sell diagnostic and therapeutic methods and products using monoclonal
antibodies in atherosclerosis and other diseases, which are claimed in applicable patent
applications owned by The Regents of the University of California in the U.S. and Canada. We must
make milestone payments to The Regents of the University of California upon occurrence of various
product development events of up to $45,000 for each therapeutic application and $35,000 for each
diagnostic application. In addition, we must pay to The Regents of the University of California a
percentage of the net revenue we receive from the sale of products covered by the patents and
patent applications and from our sublicensing the licensed patents and patent applications. The
Regents of the University of California may terminate the agreement upon proper notice for
violation of material terms of the agreement. The agreement expires in 2018, when the last patent
covered by the license expires. We may terminate the agreement at any time upon prior notice to
The Regents of the University of California. We must indemnify The Regents of the University of
California for all losses and claims arising out of our use of the license. In addition, we have
procured commercial liability insurance in specified amounts customary in the industry naming the
University of California as an insured.
As part of our v-protectant® technology patent portfolio, we also purchased U.S.
Patent No. 5,262,439 under an agreement with Dr. Sampath Parthasarathy. The agreement provides for
the payment of a royalty equal to a certain percentage of the gross selling price paid to
AtheroGenics by a purchaser of any process, service or product in which any of the claimed
inventions of the patent is utilized as a necessary component. These payment obligations will
expire upon the last to expire valid claim in the jurisdiction where the patent is enforceable.
Under the terms of our collaboration with AstraZeneca, all amounts payable to Dr. Parthasarathy are
the responsibility of AstraZeneca.
AGI-1067 Patent Portfolio
Our patent coverage on AGI-1067 is based on patent filings that we own and patent filings
exclusively licensed from Emory. We own one issued patent, U.S. Patent No. 5,262,439 and related
filings in Japan, Canada and Europe that generically cover the compound AGI-1067 as a member of a
class of related compounds. We own another patent, U.S. Patent No. 6,147,250, that protects the
specific compound AGI-1067 and its use to treat VCAM-1 mediated diseases including, among others,
atherosclerosis, post-angioplasty restenosis and coronary artery disease. We also own U.S. Patent
No. 6,121,319, which covers the use of a class of compounds including AGI-1067 to treat VCAM-1
mediated diseases. Applications corresponding to U.S. Patent No. 6,147,250 and
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U.S. Patent No. 6,121,319 have also been filed in foreign patent offices. The patents that we
have exclusively licensed from Emory include the use of a substance that inhibits a class of
oxidant signals to treat diseases mediated by VCAM-1.
AGI-1096 Patent Portfolio
Our patent coverage on AGI-1096 is based on patent filings that we own and patent filings
exclusively licensed from Emory. We own U.S. Patent No. 6,617,352 and associated non-U.S. patent
filings which describe AGI-1096 and its use to treat disorders mediated by VCAM-1. We also own
U.S. Patent No. 6,670,398 which claims methods of using AGI-1096 for treating transplant organ
rejection.
Other V-Protectant® Compounds
Certain patent applications in the United States and non-U.S. countries cover the use of a
number of compounds identified in our research program to act as v-protectants®, and
specifically for use in treating cardiovascular and inflammatory disease. In addition we have
exclusively licensed patents from Emory that cover the use of a class of compounds which act as
v-protectants®.
MEKK Technology
In June 2001, we entered into a worldwide exclusive license agreement with the National Jewish
Medical and Research Center. Under the agreement, National Jewish granted us an exclusive license
under several of its U.S. and foreign patents and patent applications and related technical
information to make, use and sell diagnostics and therapeutics for the treatment of human diseases,
including inflammation and asthma. Under the terms of the agreement with National Jewish, we may
grant sublicenses of our rights to others.
Under the agreement with National Jewish, we have assumed responsibility for all future costs
associated with research and development of products developed from the licensed technology. We
have also assumed responsibility for the costs of filing, prosecuting and maintaining the licensed
patent rights. We granted National Jewish a warrant to purchase up to 40,000 shares of our common
stock at an exercise price of $6.00 per share, subject to a vesting period. Under the agreement,
we made an upfront payment in connection with the execution of the agreement and will pay milestone
payments to National Jewish upon the achievement of certain clinical and regulatory milestones.
Upfront and milestone payments could aggregate up to approximately $800,000. If we fail to meet
various performance milestones by certain dates, some or all of the licensed technology will revert
to National Jewish. We must also pay a royalty to National Jewish on net sales of licensed
products. If we sublicense the licensed technology, we must pay to National Jewish a percentage of
the amounts paid to us by the sublicensee.
We may terminate the license agreement with National Jewish at any time upon at least 90 days
prior written notice. If we terminate the agreement in this manner, all licensed patent rights and
related technology revert to National Jewish. Either party to the agreement may also terminate it
upon a material, uncured breach by the other, or upon the bankruptcy or insolvency of the other.
We must indemnify National Jewish for all losses and claims arising out of our use of the license.
We will procure commercial liability insurance in amounts customary in the industry when required
by the agreement.
Our patent position, like that of many pharmaceutical companies, is uncertain and involves
complex legal and factual questions for which important legal principles are unresolved or unclear.
We may not develop or obtain rights to products or processes that are patentable. Even if we do
obtain patents, they may not adequately protect the technology we own or in-license. In addition,
others may challenge, seek to invalidate, infringe or circumvent any patents we own or in-license,
and rights we receive under those patents may not provide competitive advantages to us.
Our commercial success will depend in part on our ability to manufacture, use, sell and offer
to sell our product candidates and proposed product candidates without infringing patents or other
proprietary rights of others. We may not be aware of all patents or patent applications that may
impact our ability to make, use or sell any of our product candidates or proposed product
candidates. For example, U.S. patent applications do not publish until 18 months from their
effective filing date. Further, we may not be aware of published or granted conflicting patent
rights. Any conflicts resulting from patent applications and patents of others could significantly
reduce the coverage of our patents and limit our ability to obtain meaningful patent protection.
If others obtain patents with conflicting claims, we may be required to obtain licenses to these
patents or to develop or obtain alternative technology. We may not be able to obtain any licenses
or other rights to patents, technology or know-how necessary to conduct our business as described
in
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this report. Any failure to obtain such licenses or other rights could delay or prevent
us from developing or commercializing our product candidates and proposed product candidates, which
could materially affect our business.
Litigation or patent interference proceedings may be necessary to enforce any of our patents
or other proprietary rights, or to determine the scope and validity or enforceability of the
proprietary rights of others. The defense and prosecution of patent and intellectual property
claims are both costly and time consuming, even if the outcome is favorable to us. Any adverse
outcome could subject us to significant liabilities, require us to license disputed rights from
others, or require us to cease selling our future products.
Trademarks
The United States Patent and Trademark Office has issued to us Certificates of Registration
for the trademarks OXYKINE, ATHEROGENICS, AGI and V-PROTECTANT.
Manufacturing
We have entered into arrangements with third party manufacturers for the supply of AGI-1067
bulk drug substance and for the formulated drug product for use in our ongoing and currently
planned clinical trials. Under our joint license and collaboration agreement, AstraZeneca is
responsible for all of the AGI-1067 manufacturing, packaging and labeling for future clinical
trials and commercial supply.
The suppliers of the bulk drug substance for AGI-1067 operate under current Good Manufacturing
Practice guidelines using cost-effective and readily available materials and reliable processes.
The starting material used in the manufacturing process of AGI-1067 is Probucol USP, a material
that is available from a number of suppliers worldwide. We have sufficient quantities to support
development activities for the foreseeable future. Another third party supplier formulates
AGI-1067 into the drug product under current Good Manufacturing Practice guidelines. We anticipate
that these suppliers will be able to provide sufficient formulated drug product to complete our
ongoing and currently planned clinical trials.
We plan to establish manufacturing agreements with third parties that comply with Good
Manufacturing Practice guidelines for bulk drug substance and oral or intravenous formulations of
our other v-protectant® product candidates to support both ongoing and planned clinical
trials as well as commercial supply of the products following regulatory approval.
Sales and Marketing
We plan to collaborate with large pharmaceutical companies to commercialize products that we
develop to target patient or physician populations in broad markets. We believe that collaborating
with large companies that have significant marketing and sales capabilities provides for optimal
penetration into broad markets, particularly those areas that are highly competitive. We have
entered into a license and collaboration agreement with AstraZeneca to commercialize AGI-1067.
AstraZeneca has significant worldwide sales and marketing capability focused on pharmaceutical
products with profiles similar to AGI-1067. Additionally, we plan to develop a sales force to
promote our future products to appropriate patient or physician populations in narrow markets. We
plan to co-promote AGI-1067 to targeted physician specialists in the U.S. By using our own sales
and marketing organization for our products, we believe we can retain a higher percentage of the
profits generated from the sale of those products.
Competition
Developments by others may render our product candidates obsolete or noncompetitive. We face
intense competition from other companies with pharmaceutical, biotechnology and medical device
companies for establishing relationships for collaborative arrangements with academic and research
institutes and for licenses to proprietary technology. These competitors, either alone or in
collaboration, may succeed in developing technologies or products that are more effective than
ours.
We believe pharmaceutical, biotechnology and medical device companies, as well as academic and
research institutions and government agencies, have drug discovery and development programs related
to our named therapeutic areas of interest. Many of these companies and institutions, including,
but not limited to, Pfizer, GlaxoSmithKline, Merck and Novartis, have targeted indications that
overlap significantly with our targets and have substantially greater resources, longer operating
histories, larger client bases and greater marketing and financial resources than we do. They may,
therefore, succeed in commercializing products before we do that compete with us on the basis of
efficacy, safety and price.
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Our ability to compete is predicated on three related factors:
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First, our scientists and their collaborators have pioneered the basic
discoveries and research methodologies linking oxidant signals to vascular cell
inflammation. These discoveries and research methodologies form the foundation for our
proprietary drug discovery programs relating to chronic inflammation. |
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Second, our scientific expertise, coupled with our expertise in clinical drug
development, has enabled us to be the first company to conduct clinical trials of an
orally-administered, small molecule v-protectant®. |
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Third, we believe our scientific, development and licensing expertise strongly
positions us to acquire promising technologies and products discovered outside
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Governmental Regulation
We plan to develop prescription-only drugs for the foreseeable future. The FDA is the
regulatory agency in the United States that is charged with the protection of people who take
prescription medicines. Every country has a regulatory body with a similar mandate. The European
Union (EU) has vested centralized authority in the European Medicines Evaluation Agency and the
Committee for Medicinal Products for Human Use to standardize review and approval across EU member
nations.
These regulatory agencies enforce comprehensive statutes, regulations and guidelines governing
the drug development process. This process involves several steps. First, the drug company must
generate preclinical data to show safety before human testing may be initiated. In the United
States, the drug company must submit an Investigational New Drug application (IND) to the FDA
prior to securing authorization for human testing. The IND must contain adequate data on product
candidate chemistry, toxicology and metabolism and, where appropriate, animal research testing to
support initial safety evaluation in humans. In addition, the drug company must provide the FDA
with a clinical study plan, including protocols specifying the proposed use and testing of the drug
in healthy volunteers and patients.
Clinical trials for a new product candidate ordinarily proceed through three phases, and may
extend into a fourth phase:
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Phase I clinical trials explore safety, blood levels, metabolism and the
potential for interaction with other drugs. Phase I typically proceeds from healthy
volunteers to patients with the target disease. The study population during Phase I can
include up to approximately 200 total subjects. |
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Phase II clinical trials further support safety, and they establish the dose(s)
or strength(s) of the drug to be used in the more extensive clinical investigations to
be conducted during Phase III. These Phase II clinical trials may include hundreds of
patients who have the target disease and who are receiving a range of background
medications. In addition, Phase II clinical trials often verify the mechanisms of
action proposed preclinically. |
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Phase III clinical trials usually include at least two adequate and well
controlled studies in the target population. For most chronic diseases, drug companies
study a few thousand patients to assure a broadly applicable assessment of safety and
efficacy. |
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At the successful conclusion of Phase III, drug companies may submit a product license
application, called an NDA in the United States. The FDA, or non-U.S. regulatory
authorities, review the application for completeness, accuracy and adherence to
regulations. These authorities may use consultants to assist in the evaluation of the
data, and may convene an expert committee to advise on the safety, effectiveness and
usefulness of the proposed new product candidate prior to final regulatory judgment.
The final step to registration is development and approval of the prescribing
information that is incorporated in labeling, usually referred to as the package insert,
that accompanies the marketed drug. This labeling establishes conditions for the safe
and effective use of the drug and the content of drug company promotion and advertising
to physicians who may use the new drug. Approval of the NDA may be conditioned on the
conduct of post-approval studies, or Phase IV studies. |
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Phase IV clinical trials provide additional information to support marketing of
the drug for its approved indication. Phase IV clinical trials may generate data to
support promotion of the new drug in comparison with other approved drugs and to support
healthcare economics claims. In addition, every pharmaceutical company is responsible
for post-marketing surveillance for safety in the marketplace. |
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Clinical trials, including the adequate and well controlled clinical investigations conducted
in Phase III, are designed and conducted in a variety of ways. These Phase III studies are often
randomized, placebo-controlled and double-blinded. A placebo-controlled trial is one in which
one group of patients, referred to as an arm of the trial, receives the drug being tested and
another group receives a placebo, which is a substance known not to have pharmacologic or
therapeutic activity. In a double-blind study, neither the researcher nor the patient knows
which arm of the trial is receiving the drug or the placebo. Randomized means that upon
enrollment patients are placed into one arm or the other at random by computer. Other controls
also may be used by which the test drug is evaluated against a comparator. For example, parallel
control trials generally involve studying a patient population that is not exposed to the study
medication (i.e., is either on placebo or standard treatment protocols). In such studies
experimental subjects and control subjects are assigned to groups upon admission to the study and
remain in those groups for the duration of the study. Not all studies are highly controlled. An
open label study is one where the researcher and the patient know that the patient is receiving
the drug. A trial is said to be pivotal if it is designed to meet statistical criteria with
respect to pre-determined endpoints, or clinical objectives, that the sponsor believes, based
usually on its interactions with the relevant regulatory authority, will be sufficient to
demonstrate safety and effectiveness meeting regulatory approval standards.
Regulatory authorities, institutional review boards overseeing studies, or the sponsor may
suspend a clinical trial at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The FDA may require, or companies may pursue, additional clinical trials after a product is
approved. So-called Phase IV studies may be a condition of NDA approval to be satisfied after a
drug is commercially available. The results of Phase IV studies can confirm the effectiveness of a
product candidate and can provide important safety information to augment the FDAs voluntary
adverse drug reaction reporting system.
The results of product development, pre-clinical studies and clinical trials are submitted to
the FDA as part of an NDA for an unapproved drug candidate, or as part of an NDA supplement if the
drug product is already approved. Supplemental applications are submitted for various reasons,
including new indications for use and new strengths. The FDA may deny approval of an NDA or NDA
supplement if applicable regulatory criteria are not satisfied. In such cases, the FDA often
concludes that additional clinical data, particularly from new pivotal studies, are needed. Even
if such data are submitted, the FDA may ultimately decide that the NDA or NDA supplement does not
satisfy the criteria for approval. Once an approval is issued, the FDA may withdraw product
approval if ongoing regulatory standards are not met or if safety problems occur after the product
reaches the market. In addition, the FDA may require testing and surveillance programs to monitor
the effect of approved products that have been commercialized, and the FDA has the power to prevent
or limit further marketing of a product based on the results of these post-marketing programs.
Satisfaction of FDA requirements, or similar requirements of foreign regulatory agencies,
typically takes several years. The time required may vary substantially based upon the type,
complexity and novelty of the product or disease. Typically, if a drug product is intended to
treat a chronic disease, as is the case with the product candidates we are developing, safety and
efficacy data must be gathered over an extended period of time, which can range from six months to
three years or more. Government regulation may delay or prevent marketing of product candidates or
new drugs for a considerable period of time and impose costly limits upon our activities. We
cannot be certain that the FDA or any other regulatory agency will grant approvals for any
indications for our product candidates on a timely basis, if at all. Success in early stage
clinical trials does not ensure success in later stage clinical trials. Data obtained from
clinical activities is not always conclusive and may be susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. Even if a product candidate receives
regulatory approval, the approval may be significantly limited to specific disease states, patient
populations and dosages. Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market. In addition, we cannot predict what adverse
governmental regulations may arise from future United States or foreign governmental action.
The FDA closely regulates the marketing and promotion of drugs. A company can make only those
claims relating to safety and efficacy that are consistent with labeling approved by the FDA.
Failure to comply with these requirements can result in adverse publicity, warning letters,
corrective advertising and potential civil and criminal penalties.
The FDAs policies may change and additional government regulations may be enacted that could
prevent or delay regulatory approval of our product candidates or approval of new indications for
our existing products. We cannot predict the likelihood, nature or extent of adverse governmental
regulation that might arise from future legislative or administrative action, either in the United
States or abroad.
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We must meet regulatory standards prior to exposing subjects to any drug candidate. We remain
responsible for any of these development activities whether we perform them internally or contract
them to a third party. The FDA may audit us or our third party contractors at any time to
ascertain compliance with standards. The FDA may halt all ongoing work if it determines that we or
our contractors have deviated significantly from these standards. These standards include:
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Good Manufacturing Practices (GMP), which govern the formulation, manufacture,
testing, labeling, packaging, release and monitoring of a drug throughout its life
cycle; |
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Good Laboratory Practices, which govern the use of a drug in animal studies to
support establishment of safety or the disposition and metabolism of the administered
drug, and handling of human or other biological samples for drug assays; and |
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Good Clinical Practices, which govern the exposure of human subjects under our
investigational protocols. Good Clinical Practices set standards for the constitution
and activities of institutional review boards and clinical investigators that are
charged with assuring that the appropriate person gives informed consent prior to study
participation, protecting patients whether they receive an experimental drug, an
approved drug or a placebo, controlling and accounting for investigational drug
products, and producing timely and accurate study records. |
Any products manufactured or distributed by us pursuant to FDA approvals are subject to
continuing regulation by the FDA, including record-keeping requirements and reporting of adverse
experiences with the drug. Drug manufacturers and their contractors involved in the manufacture of
drug components or the required testing of the drug or its components are required to register
their establishments with the FDA and certain state agencies. As registered establishments, they
are subject to periodic unannounced inspections by the FDA and certain state agencies for
compliance with current GMP. These inspections are intended to assure that facilities are
appropriately qualified and maintained, personnel are properly experienced and trained, procedural
and documentation requirements are satisfied, and product meets established specifications. We
cannot be certain that we or our present or future suppliers will be able to comply with the
current GMP and other FDA regulatory requirements. If our present or future suppliers are not able
to comply with these requirements, the FDA may halt our clinical trials, require us to recall a
drug from distribution or withdraw approval of the NDA for that drug.
The FDA has expanded its expedited review process in recognition that certain severe or
life-threatening diseases and disorders have only limited treatment options. Fast track
designation expedites the development process, but places greater responsibility on a drug company
during Phase IV clinical trials. The drug company may request fast track designation for one or
more indications at any time during the IND process, and the FDA must respond within 60 days. Fast
track designation allows the drug company to develop product candidates faster based on the ability
to request an accelerated approval of the NDA. For accelerated approval the clinical effectiveness
is based on a surrogate endpoint in a smaller number of patients. In addition, the drug company
may request priority review at the time of the NDA submission. If the FDA accepts the NDA
submission as a priority review, the time for review is reduced from one year to six months. We
plan to request fast track designation and/or priority review, as appropriate, for internal drug
development programs.
In addition, our research and development processes and manufacturing activities involve the
controlled use of hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous materials and waste products.
Drug promotion and advertising are subject to FDA and other regulatory oversight in the United
States and national review elsewhere. In addition, state and local governments and other federal
agencies may control manufacturing, distribution, or disposal subject to local regulation.
Research and Development
Our research and development expenses in 2006, 2005 and 2004 were $82.9 million, $71.3 million
and $59.2 million, respectively. We plan to focus our near-term research and development efforts
on the continued development of the products in our current development pipeline, which include
AGI-1067, AGI-1096 and other preclinical v-protectant® compounds.
14
Employees
As of March 2, 2007, we had 127 full-time employees, including 92 in research and development.
The employee group includes 34 employees with Ph.D.s, seven with M.D.s and 31 with Masters
degrees. We believe that our employee relations are good.
Available Information
Our internet website is located at www.atherogenics.com. Copies of our reports filed
under Section 13(a) or 15(d) of the Exchange Act, including annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, may be
accessed from our website, free of charge, as soon as reasonably practicable after these reports
are electronically filed with or furnished to the Securities and Exchange Commission. The
reference to our website address does not constitute incorporation by reference of the information
contained on the website, which should not be considered part of this document. Additionally, you
may read and copy materials that we file with the SEC at the SECs Public Reference Room at 100 F
Street, N.E. Washington, D.C. 20549. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
Scientific Advisory Board
We have established a scientific advisory board to provide guidance and counsel on aspects of
our business. The board convenes about once a year and individual members are contacted as
required. Members of the advisory board provide input on product research and development
strategy, education and publication plans. The names and members of the advisory board are as
follows:
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R. Wayne Alexander, M.D., Ph.D., Chairman
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Chairman, Department of Medicine, Emory University
School of Medicine |
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Erwin W. Gelfand, M.D.
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Chairman, Department of Pediatrics, National
Jewish Medical and Research Center |
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Gary L. Johnson, Ph.D.
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Professor and Chairman, Department of
Pharmacology, University of North Carolina
School of Medicine |
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Peter Libby, M.D.
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Chief, Cardiovascular Division Department of
Medicine, Brigham and Womens Hospital |
15
Item 1A. Risk Factors
Forward-Looking Statements and Risks Related to Our Company and Business
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of AtheroGenics. AtheroGenics and its
representatives may from time to time make written or oral forward-looking statements, including
statements contained in this report and our other filings with the Securities and Exchange
Commission and in our reports to our shareholders. Generally, the words, believe, expect,
intend, estimate, anticipate, will and similar expressions identify forward-looking
statements. All statements which address operating performance, events or developments that we
expect or anticipate will occur in the future, including projections of our future results of
operations or of our financial condition, research, development and commercialization of our
product candidates, expected timing regarding the completion of our clinical trials and the related
release of results and anticipated trends in our business, are forward-looking statements within
the meaning of the Reform Act. The forward-looking statements are and will be based on our then
current views and assumptions regarding future events and operating performance, and speak only as
of their dates. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following are some of the factors that could affect our financial performance or could
cause actual results to differ materially from those expressed or implied in our forward-looking
statements:
Risks Related to Our Financial Results and Need for Additional Financing
We have a history of operating losses, and we may not generate revenue or achieve profitability
in the future.
Our ability to generate revenue and achieve profitability depends on our
ability, alone or with collaborators, to complete successfully the development of our product
candidates, conduct preclinical tests and clinical trials, obtain the necessary regulatory
approvals and manufacture and market the resulting drugs. We have had no product revenue to date.
We have experienced operating losses since we began operations in 1994. As of December 31, 2006,
we had an accumulated deficit of approximately $362.0 million. We expect to incur additional
operating losses and expect cumulative losses to increase as our research and development,
preclinical, clinical, manufacturing and marketing efforts expand. If we are unable to achieve and
then maintain profitability, the market value of our common stock and our outstanding notes will
decline.
If we need additional financing and cannot obtain it, we may not be able to develop or market
our products.
We expect our research and development expenses to increase in connection with
our ongoing activities. We believe that our existing cash, cash equivalents and short-term
investments will be sufficient to enable us to fund our operating expenses, obligations under our
financing arrangements and capital expenditure requirements for at least the next 12 months. Our
future capital requirements will depend on many factors, including:
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the scope and results of our research, preclinical and clinical development activities; |
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the timing of, and the costs involved in, obtaining regulatory approvals; |
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our ability to establish and maintain collaborations, the financial terms of any collaborations and our ability to achieve
pre-determined milestones in connection with such collaborations; |
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the cost of commercialization activities, including product marketing, sales and distribution; |
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the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs; |
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the extent to which we acquire or invest in businesses, products and technologies. |
If our future capital requirements exceed our available funds, we will need to
seek additional financing. We may be unable to raise capital when needed or on attractive terms.
If additional funds are not available, we may need to delay clinical studies, curtail
16
operations or obtain funds through collaborative arrangements that may require us to relinquish rights to some of
our products or potential markets.
Risks Related to Development and Commercialization of Product Candidates and Dependence on Third
Parties
We depend heavily on the success of our most advanced internal product candidate, AGI-1067 for
atherosclerosis, which is in clinical development. If we are unable to commercialize this
product candidate, or experience significant delays in doing so, our business will be materially
harmed.
AGI-1067 is our lead compound. Our ability to generate product revenues will
depend heavily on the successful development and commercialization of this compound. The
commercial success of AGI-1067 will depend on several factors, including the following:
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successful completion of clinical trials; |
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receipt of marketing approvals from the FDA and similar foreign regulatory authorities; |
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successfully preparing for, and sustaining, commercial manufacturing and distribution arrangements with third party
manufacturers, including our collaborator, AstraZeneca; |
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commencing commercial sales of the product, in collaboration with AstraZeneca; and |
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acceptance of the product in the medical community and with third party payors. |
AGI-1067 could fail in clinical trials if we are unable to show that it is effective or if it
causes unacceptable side effects in the patients we treated. While the plaque regression observed
in the group treated with AGI-1067 in the CART-2 trial exceeded that observed in the standard of
care group numerically, the difference was not statistically significant. Moreover, the results of
our Phase II clinical trials of AGI-1067 are not necessarily indicative of the results we will
obtain in our Phase III clinical trial of AGI-1067, particularly because the primary clinical
endpoints of these trials are not the same. Failure in clinical trials of AGI-1067 would have a
material adverse effect on our ability to generate revenue or become profitable. If we are not
successful in commercializing AGI-1067, or are significantly delayed or limited in doing so, our
business will be materially harmed.
We are substantially dependent on our collaboration with AstraZeneca for the development and
commercialization of AGI-1067.
We have entered into a license and collaboration agreement with AstraZeneca to develop and
commercialize AGI-1067. The development program is managed by us and AstraZeneca under joint
development and management committees. Under this collaboration, AstraZeneca will lead the
marketing efforts in all markets throughout the world, while we will have the right to co-promote
AGI-1067 with AstraZeneca in the United States.
Our collaboration with AstraZeneca to develop AGI-1067 may ultimately not be successful. The
success of any collaboration arrangement will depend heavily on the efforts and activities of our
collaborator. In general, we cannot control the amount and timing of resources that AstraZeneca
may devote to our collaboration. If AstraZeneca fails to assist in the development and
commercialization of AGI-1067, or if AstraZenecas efforts are not effective, our business may be
negatively affected. Our collaboration with AstraZeneca may not continue or result in
commercialized drugs. If we do not maintain a successful collaborative partnership with
AstraZeneca for the co-development and commercialization of AGI-1067, we may be forced to focus our
efforts internally to commercialize AGI-1067. This would require greater financial resources and
would result in us incurring greater expenses and may cause a delay in market penetration while we
continue to build our own commercial operation or seek alternative collaborative partners.
AstraZeneca has the right to terminate the agreement at its election upon the occurrence of
certain conditions. In particular, AstraZeneca may terminate the agreement: (1) upon 90 days prior
written notice at any time during the 45 day period following the release of the final ARISE
results; (2) at any time in the 30 day period following receipt of a letter from the FDA stating
either that: (a) the FDA will not approve the application, or (b) it will only approve the
application if specific conditions are met, and such conditions make it reasonably likely that (i)
approval of AGI-1067 will occur more than 24 months following the receipt of the FDA letter, or
(ii)
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development costs will exceed a specified amount (unless we agree to pay any amount in excess
of the specified amount); (3) if the FDA requires information or data from additional studies not
contemplated in the original license agreement, when the added cost to AstraZeneca of complying
with the FDA requirements is reasonably likely to exceed a specified amount (unless we agree to pay
any amounts in excess of the specified amount); and (4) for any reason at any time during the one-year
period following the third anniversary of receipt of FDA approval, upon giving us 365 days written
notice at any time during that one-year period.
If we do not successfully develop our other product candidates, we will have limited ability to
generate revenue.
Other than AGI-1067, all of our other product candidates are in early stages
of development, and only one other product candidate has undergone Phase I clinical trials. Our
product candidates are subject to the risks of failure inherent in developing drug products based
on new technologies. We do not expect any of our potential product candidates, including AGI-1067,
to be commercially available until at least 2008. Our drug discovery efforts may not produce any
other proprietary product candidates. Our failure to develop product candidates will limit our
ability to generate additional revenue.
If we fail to demonstrate adequately the safety and efficacy of a product candidate, we will not
be able to commercialize that product candidate.
Product candidates we develop, alone or with others, may not prove safe and
effective in clinical trials and may not meet all of the applicable regulatory requirements needed
to receive regulatory approval. If we fail to adequately demonstrate safety and efficacy for any
product candidate, we will not be able to commercialize that product candidate. Our failure to
commercialize a product candidate will materially adversely affect our revenue opportunities. We
will need to conduct significant research, preclinical testing and clinical trials before we can
file product approval applications with the FDA and similar regulatory authorities in other
countries. Preclinical testing and clinical trials are long, expensive and uncertain processes.
We may spend several years completing our testing for any particular product candidate. Failure can
occur at any stage.
The FDA or we may suspend our clinical trials at any time if either of us believes that we are
exposing the subjects participating in these trials to unacceptable health risks. The FDA or
institutional review boards at the medical institutions and healthcare facilities where we sponsor
clinical trials may suspend any trial indefinitely if they find deficiencies in the conduct of
these trials. The FDA and these institutional review boards have authority to oversee our clinical
trials, and the FDA may require large numbers of test subjects. In addition, we must manufacture
the product candidates that we use in our clinical trials under the FDAs Good Manufacturing
Practices.
Even if we achieve positive results in early clinical trials, these results do
not necessarily predict final results. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after achieving positive results in
earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial
could cause the FDA or us to terminate a clinical trial or require that we repeat it.
In addition, even if we receive approval for commercial sale of any of our
product candidates, after use in an increasing number of patients, our products could show side
effect profiles that limit their usefulness or require their withdrawal although the drugs did not
show the side effect profile in Phase I through Phase III clinical trials.
We may not be successful in establishing collaborations for product candidates we may seek to
commercialize, which could adversely affect our ability to discover, develop and commercialize
products.
A key element of our business strategy is to collaborate with third parties, particularly
leading pharmaceutical companies, to develop and commercialize some of our product candidates. We
expect to seek collaborations for the development and commercialization of product candidates in
the future. The timing and terms of any collaboration will depend on the evaluation by prospective
collaborators of the trial results and other aspects of the drugs safety and efficacy profile. If
we are unable to reach agreements with suitable collaborators for any product candidate, we would
be forced to fund the entire development and commercialization of such product candidates, and we
may not have the resources to do so. If resource constraints require us to enter into a
collaboration early in the development of a product candidate, we may be forced to accept a more
limited share of any revenues this product may eventually generate. We face significant
competition in seeking appropriate collaborators. Moreover, these collaboration arrangements are
complex and time-consuming to negotiate and document. We may not be successful in our efforts to
18
establish collaborations or other alternative arrangements for any product candidate. Even if we
are successful in establishing collaborations, we may not be able to ensure fulfillment by
collaborators of their obligations or our expectations.
In addition to our collaboration with AstraZeneca, we expect to depend significantly on
collaborations with third parties to develop and commercialize some of our product candidates.
If a potential collaborator were to change its strategy or the focus of its development and
commercialization efforts with respect to our relationship, the success of our product
candidates and our operations could be adversely affected.
In addition to our license and collaborative agreements with AstraZeneca to develop and
commercialize AGI-1067, we have entered into and renewed a collaboration agreement with Astellas to
develop AGI-1096 in preclinical testing and early-stage clinical trials and intend to pursue
additional collaborations in the future with large pharmaceutical companies to commercialize other
products that we develop to target patient or physician populations in broad markets. Our existing
collaborations and any other collaboration that we may establish may not be successful. The
success of any collaboration arrangement will depend heavily on the efforts and activities of our
collaborators. Collaborators will likely have significant discretion in determining the efforts
and resources that they will apply to these collaborations. The risks that we anticipate being
subject to in collaborations include:
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a collaborator may develop and commercialize, either alone or with others, products and services that are similar to or
competitive with the products that are the subject of the collaboration with us; |
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a collaborator may change the focus of its development and commercialization efforts. Pharmaceutical and biotechnology
companies historically have re-evaluated their priorities from time to time, including following mergers and
consolidations, which have been common in recent years in these industries; |
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the ability of our product candidates and products to reach their potential could be limited if our collaborators decrease
or fail to increase spending relating to these products; |
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a collaborator may terminate a collaboration; |
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a collaborator may fail to achieve or remain in regulatory compliance; and |
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a collaborator may fail to maintain or defend our intellectual property rights. |
The termination of any collaboration that we may establish might adversely affect the
development of the related product candidates and our ability to derive revenue from them.
Collaborations with pharmaceutical companies and other third parties often are terminated or
allowed to expire by the other party or by us. Any future terminations or expirations would
adversely affect us financially and could harm our business reputation. In that event, we might be
required to devote additional resources to the product or product candidate, seek a new
collaborator or abandon the product or product candidate, any of which could have an adverse effect
on our business.
Third parties failure to synthesize and manufacture our product candidates to our
specifications could delay our clinical trials or hinder our commercialization prospects.
We currently have no manufacturing facilities to synthesize or manufacture our
product candidates, nor do we intend to develop these capabilities in the near future. In December
2005, we entered into a joint license and collaboration agreement, with AstraZeneca, which is
responsible for all of the AGI-1067 manufacturing, packaging and labeling activities. Our reliance
on AstraZeneca and on other third parties for these services exposes us to various risks that could
delay our clinical trials or hinder our commercialization prospects. These risks include the
following:
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A finding that a third party did not comply with applicable
governmental regulations. Manufacturers of pharmaceutical products
are subject to continual review and periodic inspections by regulatory
agencies. Our present or future manufacturers may not be able to
comply with the FDAs current Good Manufacturing Practices regulations
and other FDA regulatory requirements or similar regulatory
requirements outside the United States. Failure of one of our third
party manufacturers to comply with applicable regulatory requirements,
whether or not related to our product candidates, could result in
sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of regulatory authorities to grant marketing
approval of |
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our product candidates, delays, suspension or withdrawal
of approvals, license revocation, seizures or recalls of product
candidates or products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely affect
supplies of our product candidates and products. |
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A failure to synthesize and manufacture our product candidates in
accordance with our product specifications. We need to maintain a
very low maximal amount of one of the starting materials used in the
manufacture of AGI-1067. The starting material, probucol, was
prescribed by physicians as a cholesterol-lowering agent until its
manufacturer withdrew the drug from the market for efficacy reasons.
AstraZeneca is responsible for supplying all of the manufacturing,
packaging and labeling under our joint licensing and collaboration
agreement. A failure by AstraZeneca or other third party
manufacturers to maintain an acceptable level of probucol in the
manufacture of AGI-1067 may result in chronic dosing of probucol,
which is associated with the occurrence of a rare side effect. |
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A failure to deliver product candidates in sufficient quantities or in
a timely manner. Any failure by our third party manufacturers to
supply our requirements for clinical trial materials or commercial
product, or to supply these materials in a timely manner, could
jeopardize the initiation or completion of clinical trials or could
have a material adverse effect on our ability to commercialize any
approved products and thereby generate revenue. |
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Termination or nonrenewal of an agreement by a third party, including
our collaborator AstraZeneca, based on its own business priorities, at
a time that is costly or inconvenient to us. Our product candidates
and any products that we successfully develop may compete with product
candidates and products of others for access to the third partys
manufacturing facilities. In addition, because we do not have any
internal manufacturing capabilities, the termination of a supply or
manufacturing agreement could severely impair our ability to
manufacture our products and could have a material adverse effect on
our financial condition and operating results. |
The commercial success of any products that we may develop will depend on the degree of market
acceptance by physicians, patients, healthcare payors and others in the medical community.
Any products that we bring to the market may not gain market acceptance by
physicians, patients, healthcare payors and others in the medical community. If these products do
not achieve an adequate level of acceptance, we may not generate material product revenues and we
may not become profitable. The degree of market acceptance of our product candidates, if approved
for commercial sale, will depend on a number of factors, including:
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the prevalence and severity of any side effects; |
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the efficacy and potential advantages over alternative treatments; |
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the ability to offer our product candidates for sale at competitive prices; |
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relative convenience and ease of administration; |
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; |
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the strength of marketing and distribution support; and |
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sufficient third party coverage or reimbursement. |
If our competitors develop and market products that are more effective, have fewer side effects
or are less expensive than our current or future product candidates, we may have limited
commercial opportunities.
The development and commercialization of new drugs is highly competitive. Our competitors
include large pharmaceutical and more established biotechnology companies. Moreover, there are
approved products on the market for many of the diseases for which we are developing drugs. In many
cases, these products have well known brand names, are distributed by large pharmaceutical
companies and have achieved widespread acceptance among physicians and patients. Our competitors
have significant resources and expertise in research and development, manufacturing, testing,
obtaining regulatory approvals and marketing. Potential competitors also include academic
institutions, government agencies, and other public and private research organizations that conduct
research,
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seek patent protection and establish collaborative arrangements for research,
development, manufacturing and commercialization. Any of these competitors could develop
technologies or products that would render our technologies or product candidates obsolete or
non-competitive, which could adversely affect our revenue potential. These third parties also
compete with us in recruiting and
retaining qualified scientific and management personnel, establishing clinical trial sites and
patient registration for clinical trials, as well as in acquiring technologies complementary to or
necessary for our programs or advantageous to our business.
We have not previously sold, marketed or distributed any products and may not be able to
successfully commercialize AGI-1067, or other drug candidates.
We have not previously sold, marketed or distributed any products and currently have no sales
or distribution capabilities. As our drug candidates progress towards ultimate commercialization,
we will need to develop our sales and marketing capabilities and enter into agreements with third
parties to perform these functions. Pursuant to our joint licensing and collaboration agreement,
AstraZeneca will be responsible for the distribution and marketing of AGI-1067 in all markets
throughout the world. In addition, AstraZeneca has agreed to fund a sales force of up to 125
people for three years. Prior to and during this three-year period, we may be unable to
successfully hire and retain key sales and marketing personnel that we need to effectively manage
and carry out the commercialization of AGI-1067, or any other drug candidates. Even if we manage
to hire and retain necessary personnel, we may be unable to implement our sales, marketing and
distribution strategies effectively or profitably. We have no experience in developing, training
or managing a sales force and will incur substantial additional expenses in doing so. The cost of
establishing and maintaining a sales force may exceed its cost effectiveness. In addition, we will
compete with many companies that currently have extensive and well-funded marketing and sales
operations. Lastly, in the event that AGI-1067 or another of our drug candidates is not approved
for marketing by the FDA, or if AstraZeneca terminates our joint licensing and collaboration
agreement, we may have incurred expenses for the buildup of a sales force that we may not be able
to recover, and may have difficulty continuing to maintain the sales force and marketing
infrastructure funded by AstraZeneca.
If we are unable to obtain adequate coverage and reimbursement from third party payors for any
products that we may develop or acceptable prices for those products, our revenues and prospects
for profitability will suffer.
Most patients rely on government payors, such as Medicare or Medicaid, private
health insurers or other third party payors to pay for their medical needs, including any
pharmaceutical products that we or any collaborators may bring to the market. If government or
other third party payors do not provide adequate coverage and reimbursement for any products that
we might develop, our revenues and prospects for profitability will suffer. In December 2003, the
Congress enacted the Medicare Prescription Drug and Modernization Act, which significantly expanded
Medicare coverage of prescription drugs by establishing Medicare Part D, a voluntary, limited
outpatient prescription drug program, which went into effect on January 1, 2006. The advent of the
Part D program might increase coverage for Medicare beneficiaries and thereby increase demand for
our products, however, Part D prescription drug plans will have substantial leverage in negotiating
the payments for drugs furnished through the program. This might result in lower payments for
products that are covered through the Part D program than we might otherwise obtain from private
plans. Price concessions that we provide to Part D plans could adversely impact our pricing with
non-Medicare third party payors.
A primary trend in the United States healthcare industry is toward cost
containment. Third party payors increasingly are challenging the prices charged for medical
products and services, and many third party payors limit coverage and reimbursement for
newly-approved healthcare products. In particular, third party payors might limit the indications
for which they will provide coverage for products that we develop or provide coverage barriers such
as requiring prior approval from the health plan based on a patients diagnosis and a physicians
letter of medical necessity. Cost control initiatives by payors could decrease the price we might
establish for products that we might develop, which could result in lower product revenues to us.
In addition, in some foreign countries, particularly the countries of the European Union, the
pricing of prescription pharmaceuticals is subject to governmental control. In these countries,
pricing negotiations with governmental authorities can take six to 12 months or longer after the
receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a clinical trial that compares the cost
effectiveness of our product candidates or products to other available therapies. The conduct of
such a clinical trial could be expensive and result in delays in commercialization of our products.
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If plaintiffs bring product liability lawsuits against us, we may incur substantial financial
loss or may be unable to obtain future product liability insurance at reasonable prices, if at
all, either of which could diminish our ability to commercialize our future products.
The testing and marketing of medicinal products entail an inherent risk of
product liability. Even if we perform careful clinical development, we cannot predict the full
range of adverse consequences that might be associated with the use, misuse, or abuse of our
products. We also must remain highly vigilant to emerging information and trends that may concern
our products. Clinical trial subjects, consumers, healthcare providers or pharmaceutical companies
or others selling our future products could bring product liability claims against us. If we cannot
successfully defend ourselves against claims that our product candidates or products caused
injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:
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decreased demand for any product candidates or products that we may develop; |
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injury to our reputation; |
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withdrawal of clinical trial participants; |
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costs to defend the related litigation; |
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substantial monetary awards to trial participants or patients; |
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loss of revenue; and |
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the inability to commercialize any products that we may develop. |
We may not be able to acquire or maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us from this kind of liability.
Risks Related to Our Intellectual Property
Our failure to protect adequately or enforce our intellectual property rights or secure rights
to third party patents could materially adversely affect our proprietary position in the
marketplace or prevent the commercialization of our products.
Our success will depend in large part on our ability to obtain and maintain
protection in the United States and other countries for the intellectual property covering or
incorporated into our technologies and products. The patents and patent applications in our patent
portfolio are either owned by us or licensed to us. Our ability to protect our product candidates
from unauthorized or infringing use by third parties depends substantially on our ability to obtain
and maintain valid and enforceable patents. Due to evolving legal standards relating to the
patentability, validity and enforceability of patents covering pharmaceutical inventions and the
scope of claims made under these patents, our ability to obtain and enforce patents is uncertain
and involves complex legal and factual questions for which important legal principles are
unresolved.
We may not be able to obtain patent rights on products, treatment methods or
manufacturing processes that we may develop or to which we may obtain license or other rights.
Even if we do obtain patents, rights under any issued patents may not provide us with sufficient
protection for our product candidates or provide sufficient protection to afford us a commercial
advantage against our competitors or their competitive products or processes. It is possible that
no patents will be issued from any pending or future patent applications owned by us or licensed to
us. Others may challenge, seek to invalidate, infringe or circumvent any patents we own or
license. Alternatively, we may in the future be required to initiate litigation against third
parties to enforce our intellectual property rights. The cost of this litigation could be
substantial and our efforts could be unsuccessful. Changes in either patent laws or in
interpretations of patent laws in the United States and other countries may diminish the value of
our intellectual property or narrow the scope of our patent protection.
Our patents also may not afford us protection against competitors with similar
technology. We may not have identified all patents, published applications or published literature
that affect our business either by blocking our ability to commercialize our
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product candidates, by
preventing the patentability of our drugs to us or our licensors or by covering the same or similar
technologies that may affect our ability to market our product candidates. For example, patent
applications in the United States are maintained in confidence for up to 18 months after their
filing. In some cases, however, patent applications remain confidential in the United States
Patent and Trademark Office for the entire time prior to issuance as a United States patent. Patent
applications filed in countries outside the United States are not typically published until at
least 18 months from their first filing date. Similarly, publication of
discoveries in the scientific or patent literature often lags behind actual discoveries.
Therefore, we or our licensors might not have been the first to invent, or the first to file,
patent applications on our drug candidates or for their use. The laws of some foreign
jurisdictions do not protect intellectual property rights to the same extent as in the United
States and many companies have encountered significant difficulties in protecting and defending
these rights in foreign jurisdictions. If we encounter such difficulties in protecting or are
otherwise precluded from effectively protecting our intellectual property rights in foreign
jurisdictions, our business prospects could be substantially harmed.
If we infringe or are alleged to infringe intellectual property rights of third parties, it will
adversely affect our business.
Our research, development and commercialization activities, as well as any
product candidates or products resulting from these activities, may infringe or be claimed to
infringe patents or patent applications under which we do not hold licenses or other rights. Third
parties may own or control these patents and patent applications in the United States and abroad.
These third parties could bring claims against us or our collaborators that would cause us to incur
substantial expenses and, if successful against us, could cause us to pay substantial damages.
Further, if a patent infringement suit were brought against us or our collaborators, we or they
could be forced to stop or delay research, development, manufacturing or sales of the product or
product candidate that is the subject of the suit.
As a result of patent infringement claims, or in order to avoid potential
claims, we or our collaborators may choose or be required to seek a license from the third party
and be required to pay license fees or royalties or both. These licenses may not be available on
acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the
rights may be nonexclusive, which could result in our competitors gaining access to the same
intellectual property. Ultimately, we could be prevented from commercializing a product, or be
forced to cease some aspect of our business operations, if, as a result of actual or threatened
patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable
terms. This could harm our business significantly.
There has been substantial litigation and other proceedings regarding patent
and other intellectual property rights in the pharmaceutical and biotechnology industries. In
addition to infringement claims against us, we may become a party to other patent litigation and
other proceedings, including interference proceedings declared by the United States Patent and
Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual
property rights with respect to our products and technology. The cost to us of any patent
litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings could have a
material adverse effect on our ability to compete in the marketplace. Patent litigation and other
proceedings may also absorb significant management time.
If we fail to comply with our obligations in our intellectual property licenses with third
parties, we could lose license rights that are important to our business.
Our commercial success will also depend on our ability to develop,
manufacture, use, sell and offer to sell our product candidates and proposed product candidates
without breaching our agreements with our patent licensors. We are a party to a number of license
agreements, including exclusive licenses to technologies from Emory, covering aspects of our
v-protectant® technology, and the National Jewish Medical and Research Center, covering aspects of
our MEKK technology platform. We expect to enter into additional licenses in the future. Our
exclusive license with Emory requires us to take steps to commercialize the licensed technology in
a timely manner. If we fail to meet these obligations, Emory can convert our exclusive license to
a non-exclusive license, can grant others non-exclusive rights in the licensed technology or can
require us to sublicense aspects of the licensed technology. Our license agreement with National
Jewish requires us to develop the licensed technology in a timely manner. If we fail to meet these
obligations, some or all of the licensed technology may revert to National Jewish. Our existing
licenses impose, and we expect future licenses will impose, various diligence, milestone payments,
royalty, insurance and other obligations on us. If we fail to comply with these obligations, the
licensor may have the right to terminate the license, in which event we might not be able to market
any product that is covered by the licensed patents.
23
If we are unable to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely affected.
In addition to patented technology, we rely on trade secrets, proprietary
know-how and technological advances, which we seek to protect through agreements with our
collaborators, employees and consultants. These persons and entities could breach our
agreements, for which breaches we may not have adequate remedies. In addition, others could become
aware of our trade secrets or proprietary know-how through independent discovery or otherwise. If
we are unable to protect the confidentiality of our proprietary information and know-how,
competitors may be able to use this information to develop products that compete with our products,
which could adversely impact our business.
Risks Related to Regulatory Approval of Our Product Candidates
Because we cannot predict whether or when we will obtain regulatory approval to
commercialize our product candidates, we cannot predict the timing of any future revenue from
these product candidates.
We cannot commercialize any of our product candidates, including AGI-1067 and
AGI-1096, until the appropriate regulatory authorities have reviewed and approved the applications
for the product candidates. The regulatory agencies may not complete their review processes in a
timely manner and we may not obtain regulatory approval for any product candidate we or our
collaborators develop. Satisfaction of regulatory requirements typically takes many years, if
approval is obtained at all, is dependent upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources. Regulatory approval processes outside the
United States include all of the risks associated with the FDA approval process. In addition, we
may experience delays or rejections based upon additional government regulation from future
legislation or administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. The FDA has substantial discretion in the
approval process and may refuse to accept any application or may decide that our data is
insufficient for approval and require additional preclinical, clinical or other studies. In
addition, varying interpretations of the data obtained from preclinical and clinical testing could
delay, limit or prevent regulatory approval of a product candidate.
We may experience delays in our clinical trials that could adversely affect our financial
results and our commercial prospects.
We do not know whether planned clinical trials will begin on time or whether
we will complete any of our clinical trials on schedule or at all. Product development costs to us
and our collaborators will increase if we have delays in testing or approvals or if we need to
perform more or larger clinical trials than planned. Significant delays may adversely affect our
financial results and the commercial prospects for our products, and delay our ability to become
profitable.
We rely heavily on independent clinical investigators, contract research
organizations and other third party service providers for successful execution of our clinical
trials, but do not control many aspects of their activities. We are responsible for ensuring that
each of our clinical trials is conducted in accordance with the general investigational plan and
protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred
to as Good Clinical Practices, for conducting and recording and reporting the results of clinical
trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. Our reliance on third parties
that we do not control does not relieve us of these responsibilities and requirements. Third
parties may not complete activities on schedule, or may not conduct our clinical trials in
accordance with regulatory requirements or our stated protocols. The failure of these third
parties to carry out their obligations could delay or prevent the development, approval and
commercialization of our product candidates.
Failure to obtain regulatory approval in international jurisdictions would prevent us from
marketing our products abroad.
We intend to have our products marketed outside the United States. In order to
market our products in the European Union and many other foreign jurisdictions, we must obtain
separate regulatory approvals and comply with numerous and varying regulatory requirements.
AstraZeneca will have responsibility to obtain regulatory approvals outside the United States with
respect to AGI-1067, and we will depend on AstraZeneca to obtain these approvals. The approval
procedure varies among countries and can involve additional testing. The time required to obtain
approval may differ from that required to obtain FDA approval. The foreign regulatory approval
process may include all of the risks associated with obtaining FDA approval. We may not obtain
foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries or
24
jurisdictions, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries
or jurisdictions or by the FDA. We and any future collaborators may not be able to file for
regulatory approvals and may not receive necessary approvals to commercialize our products in any
market.
If we do not comply with applicable regulatory requirements in the manufacture and distribution
of our products, we may incur penalties that may inhibit our ability to commercialize our
products and adversely affect our revenue.
Our failure to comply with applicable FDA or other regulatory requirements,
including manufacturing, quality control, labeling, safety surveillance, promoting and reporting,
may result in criminal prosecution, civil penalties, recall or seizure of our products, total or
partial suspension of production or an injunction, as well as other regulatory action against our
potential products or us. Discovery of previously unknown problems with a product, supplier,
manufacturer or facility may result in restrictions on the sale of our products, including a
withdrawal of such products from the market.
Even if the FDA approves our product candidates, the approval will be limited to those
indications and conditions for which we are able to show clinical safety and efficacy.
Any regulatory approval that we may receive for our current or future product candidates will
be limited to those diseases and indications for which these product candidates are clinically
demonstrated to be safe and effective. In addition to the FDA approval required for new
formulations, any new indication to an approved product also requires FDA approval. If we are not
able to obtain FDA approval for a broad range of indications for our product candidates, our
ability to effectively market and sell our product candidates may be greatly reduced and our
business will be adversely affected.
Risks Related to Our Operations
Our failure to attract, retain and motivate skilled personnel and cultivate key academic
collaborations could materially adversely affect our research and development efforts.
We are a small company with approximately 127 full-time employees. If we are
unable to continue to attract, retain and motivate highly qualified management and scientific
personnel and to develop and maintain important relationships with leading academic institutions
and scientists, we may not be able to achieve our research and development objectives. Competition
for personnel and academic collaborations is intense. We have entered into employment agreements
with each of our executive officers. These employment agreements are terminable by the employee on
short notice. Loss of the services of any of these officers or of our key scientific personnel
could adversely affect the progress of our research and development programs. All of our other
employees are at will employees. We do not carry key person insurance on any employee.
The outcome of informal inquiries by the SEC and NASD regarding our announcement of interim
results from the CART-2 clinical trial for AGI-1067 and related trading in our common stock is
uncertain.
In January 2005, we were contacted by the staff of the SEC and the NASD regarding informal
inquiries they are conducting related to our September 27, 2004 announcement of interim results
from the CART-2 clinical trial for AGI-1067 and trading in our common stock surrounding that
announcement. The SEC staffs notice states that its inquiry should not be construed as an
expression of opinion on the part of the SEC or its staff that any violations of law have occurred.
The SEC and NASD staff have requested that we voluntarily provide them with documents and other
information relating to that announcement. We have cooperated fully with these requests. Based on
our review of the facts as to the September 27, 2004 announcement and trading in our common stock
surrounding that announcement, we do not believe that we or any of our officers or directors have
violated any laws related to these inquiries. However, we cannot predict the outcome of these
inquiries, whether the SEC or NASD will undertake any form of investigation or proceeding relating
to us or our officers or directors or when these matters might be resolved.
Our activities involve the use of hazardous materials, which subject us to regulation, related
costs and delays and potential liabilities.
Our research and development involves the controlled use of hazardous materials, chemicals and
various radioactive compounds. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by
25
state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be eliminated. If an
accident occurs, we could be held liable for resulting damages, which could be substantial. We are
also subject to numerous environmental, health and workplace safety laws and regulations, including
those governing laboratory procedures, exposure to blood-borne pathogens and the handling of
biohazardous materials. Additional federal, state and local laws and regulations affecting our
operations may be adopted in the future. We may incur substantial costs to comply with, and
substantial fines or penalties if we violate, any of these laws or regulations.
Risks Related to our Common Stock and Indebtedness
Our stock price has been and may continue to be volatile.
The market price of our common stock, and the market prices for securities of pharmaceutical
and biotechnology companies in general, have been highly volatile and may continue to be highly
volatile in the future. During the period from January 1, 2006 to March 2, 2007, the closing sale
price of our common stock on the NASDAQ National Market ranged from a low of $9.25 per share to a
high of $20.67 per share. The following factors, in addition to other risk factors described in
this report, may have a significant impact on the market price of our common stock:
|
|
|
results of clinical trials of our product candidates, particularly AGI-1067, and those of our competitors; |
|
|
|
|
whether we maintain our collaboration agreement with AstraZeneca; |
|
|
|
|
developments concerning any research and development, manufacturing and marketing collaborations, including whether and
when we achieve milestones; |
|
|
|
|
announcements of technological innovations or new commercial products by our competitors or us; |
|
|
|
|
developments concerning proprietary rights, including patents; |
|
|
|
|
the addition or termination of research programs or funding support; |
|
|
|
|
publicity regarding actual or potential results relating to medicinal products under
development by our competitors or us; |
|
|
|
|
regulatory developments in the United States and other countries; |
|
|
|
|
litigation; |
|
|
|
|
economic and other external factors, including disasters or crises; |
|
|
|
|
period-to-period fluctuations in financial results; and |
|
|
|
|
analysts recommendations. |
In the past, following periods of volatility in the market price of a companys securities,
securities class action litigation has often been instituted. Similar lawsuits may be filed
against us and our executive officers and directors. Litigation can be costly, time consuming and
disruptive to normal business operations. The defense of these lawsuits could also result in
diversion of our managements time and attention away from business operations, which could harm
our business.
Our existing indebtedness and any future indebtedness we incur exposes us to risks that could
adversely affect our business, operating results and financial condition.
As of December 31, 2006, we had $286.0 million of total indebtedness outstanding. We may also
incur additional long-term indebtedness or obtain additional working capital lines of credit to
meet future financing needs. Our indebtedness could have significant negative consequences for our
business, operating results and financial condition, including:
|
|
|
increasing our vulnerability to adverse economic and industry conditions; |
26
|
|
|
limiting our ability to obtain additional financing; |
|
|
|
|
requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby
reducing the amount of our cash flow available for other purposes; |
|
|
|
|
limiting our flexibility in planning for, or reacting to, changes in our business; and |
|
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|
|
placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better
access to capital resources. |
If we do not achieve a significant increase in revenues, we could have difficulty making
required payments on our outstanding convertible notes and any indebtedness that we may incur in
the future. During each of the last five years, we had no earnings to cover our fixed charges. If
we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required
payments, or if we fail to comply with the various requirements of our convertible notes or any
other indebtedness which we may incur in the future, we would be in default, which would permit the
holders of the notes and that other indebtedness to accelerate the maturity of the notes and that
other indebtedness and could cause defaults under the notes and that other indebtedness. Any
default under our convertible notes or any indebtedness which we may incur in the future could have
a material adverse effect on our business, operating results and financial condition.
Conversion of our convertible notes will dilute the ownership interest of existing shareholders
and could adversely affect the market price of our common stock.
The conversion of some or all of the 1.5% convertible notes due 2012 or the 4.5% convertible
notes due 2008 will dilute the ownership interests of existing shareholders. In January 2006,
holders converted $14.0 million of the 4.5% convertible notes into 1,085,000 shares of our common
stock. Any sales in the public market of the common stock issuable upon such conversion could
adversely affect prevailing market prices of our common stock. In addition, the existence of the
notes may encourage short selling by market participants because the conversion of the notes could
depress the price of our common stock.
Our shareholder rights plan and anti-takeover provisions in our charter documents may make an
acquisition of us, which may benefit our shareholders, more difficult.
Our shareholder rights plan and provisions of our articles of incorporation and bylaws could
make it more difficult for a third party to acquire us. These documents include provisions that:
|
|
|
allow our shareholders the right to acquire common stock from us at discounted prices in the event a person acquires 15% or
more of our common stock or announces an attempt to do so without our board of directors prior consent; |
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|
authorize the issuance of blank check preferred stock by our board of directors without shareholder approval, which would
increase the number of outstanding shares and could thwart a takeover attempt; |
|
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|
limit who may call a special meeting of shareholders; |
|
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|
require shareholder action without a meeting by unanimous written consent; |
|
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|
establish advance notice requirements for nominations for election to the board of directors or for proposing matters that
can be acted upon at shareholder meetings; |
|
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|
|
establish a staggered board of directors whose members can only be dismissed for cause; |
|
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|
adopt the fair price requirements and rules regarding business combinations with interested shareholders set forth in
Article 11, Parts 2 and 3 of the Georgia Business Corporation Code; and |
|
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|
require approval by the holders of at least 75% of the outstanding common stock to amend any
of the foregoing provisions. |
27
Our five largest institutional shareholders collectively own more than 50% of our outstanding
shares, which could permit these shareholders to exercise considerable influence over us.
Certain of our existing institutional shareholders collectively own more than 50% of the
outstanding shares of our common stock. By reason of such holdings, these shareholders acting as a
group could exercise significant influence over our affairs and policies, including the election of
our board of directors and matters submitted to a vote of our shareholders such as mergers and
significant asset sales, and their interests might not be consistent with the interests of other
shareholders.
Item 1B. Unresolved SEC Staff Comments
None.
Item 2. Properties
Our scientific and administration facility encompasses approximately 50,000 square feet in
Alpharetta, Georgia. We lease our facility pursuant to a long-term lease agreement that expires in
2009, and our remaining aggregate commitment under this long-term, non-cancelable lease is
approximately $2.6 million. This lease may be extended at our option to 2019.
In November 2001, we leased a facility in Norcross, Georgia encompassing approximately 5,800
square feet. We lease this laboratory facility pursuant to a long-term lease agreement that, as
amended, expires in 2007, and our remaining aggregate commitment under this long-term,
non-cancelable lease is approximately $128,000. We have the option to renew this lease under
mutually agreeable terms.
Item 3.Legal Proceedings
None.
Item 4.Submission of Matters to a Vote of Security Holders
None.
28
PART II
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Common Stock Information
Our common stock is traded on the Nasdaq National Market under the symbol AGIX. The
following table sets forth the range of high and low reported last sale price per share of our
common stock as quoted on the Nasdaq National Market for each period indicated.
|
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|
|
Common Stock |
|
|
High |
|
Low |
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
20.67 |
|
|
$ |
15.00 |
|
Second quarter |
|
|
16.18 |
|
|
|
12.53 |
|
Third quarter |
|
|
14.17 |
|
|
|
12.23 |
|
Fourth quarter |
|
|
15.21 |
|
|
|
9.91 |
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
20.61 |
|
|
$ |
13.00 |
|
Second quarter |
|
|
16.87 |
|
|
|
10.66 |
|
Third quarter |
|
|
18.25 |
|
|
|
15.76 |
|
Fourth quarter |
|
|
21.14 |
|
|
|
14.42 |
|
As of March 2, 2007, there were approximately 16,200 holders of our common stock. This number
includes beneficial owners of our common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries.
Dividend Policy
We have never declared or paid any dividends on our capital stock. We currently intend to
retain all of our future earnings, if any, to finance our operations and do not anticipate paying
any cash dividends on our capital stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
We have set forth information relating to securities authorized for issuance under equity
compensation plans under the caption Equity Compensation Plan Information in our proxy statement
for our 2007 annual meeting of shareholders to be held on May 17, 2007. We are incorporating this
information by reference in this Form 10-K.
29
Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction with our financial
statements and the related notes and Managements Discussion and Analysis of Financial Condition
and Results of Operations, included in this annual report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
$ |
22,916,667 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Research and development |
|
|
8,758,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
31,674,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
82,855,340 |
|
|
|
71,278,945 |
|
|
|
59,235,833 |
|
|
|
46,660,960 |
|
|
|
23,746,127 |
|
General and administrative |
|
|
13,373,112 |
|
|
|
9,050,290 |
|
|
|
6,607,506 |
|
|
|
5,930,675 |
|
|
|
5,139,000 |
|
Total operating expenses |
|
|
96,228,452 |
|
|
|
80,329,235 |
|
|
|
65,843,339 |
|
|
|
52,591,635 |
|
|
|
28,885,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(64,553,607 |
) |
|
|
(80,329,235 |
) |
|
|
(65,843,339 |
) |
|
|
(52,591,635 |
) |
|
|
(28,885,127 |
) |
Interest and other income |
|
|
9,175,817 |
|
|
|
6,691,965 |
|
|
|
1,447,001 |
|
|
|
1,258,216 |
|
|
|
962,040 |
|
Interest expense |
|
|
(8,423,346 |
) |
|
|
(8,917,057 |
) |
|
|
(5,192,894 |
) |
|
|
(1,954,402 |
) |
|
|
(42,420 |
) |
Other expense |
|
|
(3,521,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(67,322,372 |
) |
|
$ |
(82,554,327 |
) |
|
$ |
(69,589,232 |
) |
|
$ |
(53,287,821 |
) |
|
$ |
(27,965,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(1.71 |
) |
|
$ |
(2.19 |
) |
|
$ |
(1.88 |
) |
|
$ |
(1.49 |
) |
|
$ |
(1.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share |
|
|
39,383,376 |
|
|
|
37,774,203 |
|
|
|
37,070,235 |
|
|
|
35,770,994 |
|
|
|
27,978,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table contains a summary of our balance sheet data as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments |
|
$ |
151,810,939 |
|
|
$ |
182,504,523 |
|
|
$ |
66,924,015 |
|
|
$ |
131,583,928 |
|
|
$ |
34,671,131 |
|
Working capital |
|
|
118,786,367 |
|
|
|
173,164,668 |
|
|
|
59,719,811 |
|
|
|
124,848,687 |
|
|
|
30,009,013 |
|
Total assets |
|
|
178,339,664 |
|
|
|
197,497,527 |
|
|
|
74,462,327 |
|
|
|
138,836,746 |
|
|
|
37,952,044 |
|
Long-term debt |
|
|
286,000,000 |
|
|
|
300,053,796 |
|
|
|
100,000,000 |
|
|
|
100,083,622 |
|
|
|
572,492 |
|
Accumulated deficit |
|
|
(361,997,246 |
) |
|
|
(294,674,874 |
) |
|
|
(212,120,547 |
) |
|
|
(142,531,315 |
) |
|
|
(89,243,494 |
) |
Total shareholders (deficit) equity |
|
|
(153,987,649 |
) |
|
|
(115,436,216 |
) |
|
|
(35,942,382 |
) |
|
|
30,377,006 |
|
|
|
32,493,713 |
|
30
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and
related notes included in this annual report. In this report, AtheroGenics, we, us and our
refer to AtheroGenics, Inc.
This annual report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject
to certain factors, risks and uncertainties that may cause actual results, events and performances
to differ materially from those referred to in such statements. These risks include statements
which address operating performance, events or developments that we expect or anticipate will occur
in the future, such as projections about our future results of operations or financial condition,
research, development and commercialization of our product candidates, expectations regarding the
completion of our clinical trials and the related release of results, anticipated trends in our
business, and other risks that could cause actual results to differ materially. You should
carefully consider these risks, which are discussed in this annual report, including, without
limitation, in the sections entitled Risk Factors and Managements Discussion and Analysis of
Financial Condition and Results of Operations, and in AtheroGenics SEC filings.
Overview
AtheroGenics is a research-based pharmaceutical company focused on the discovery, development
and commercialization of novel drugs for the treatment of chronic inflammatory diseases, including
coronary heart disease, organ transplant rejection, rheumatoid arthritis and asthma. We have
developed a proprietary vascular protectant, or v-protectant®, technology platform to
discover drugs to treat these types of diseases. Based on our v-protectant® platform, we
have two drug development programs in clinical trials and are pursuing a number of other
preclinical programs.
AGI-1067, our first candidate, is our v-protectant® that is most advanced in
clinical development. AGI-1067 is designed to benefit patients with coronary heart disease, or
CHD, which is atherosclerosis of the blood vessels of the heart. We are currently evaluating
AGI-1067 in the Phase III clinical trial called ARISE
(Aggressive Reduction of Inflammation Stops
Events) as an oral therapy for the treatment of atherosclerosis. We completed the ARISE trial in
2006 and expect to announce the results in early 2007. Assuming positive results, we plan to file
an NDA with the FDA as soon as possible thereafter. In December 2005, we announced a license and
collaboration agreement with AstraZeneca for the global development and commercialization of
AGI-1067. Under the terms of the agreement, we received an upfront nonrefundable license fee of
$50 million and, subject to the achievement of specific milestones, including a successful outcome
in ARISE, we will be eligible for development and regulatory milestones of up to an aggregate of
$300 million. The agreement also provides for progressively demanding sales performance related
milestones of up to an additional $650 million in the aggregate. In addition, we will also receive
royalties on product sales. AstraZeneca has the right to terminate the license and collaboration
agreement at specified periods as further described above in Item 1. Business Collaborations.
AGI-1096, our second candidate, is a novel antioxidant and selective anti-inflammatory agent
that is being developed to address the accelerated inflammation of grafted blood vessels, known as
transplant arteritis, common in chronic organ transplant rejection. We are working with Astellas
Pharma Inc. to further develop AGI-1096 in preclinical and early-stage clinical trials.
We previously were developing AGIX-4207, a v-protectant® candidate for the
treatment of rheumatoid arthritis. Based on our findings, however, we have discontinued clinical
development of AGIX-4207 for rheumatoid arthritis in 2004. We continue to have an active program
aimed at investigating other v-protectants® in rheumatoid arthritis and are working to
select another candidate to move into formal preclinical development.
We have also identified additional potential v-protectant® candidates to treat
other chronic inflammatory diseases, including asthma. We are evaluating these
v-protectants® to determine lead drug candidates for clinical development. We plan to
develop these compounds rapidly and may seek regulatory fast track status, if available, to
expedite development and commercialization.
31
The following table provides information regarding our research and development expenses for
our major product candidates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Direct external costs: |
|
|
|
|
|
|
|
|
|
|
|
|
AGI-1067 |
|
$ |
53,136,660 |
|
|
$ |
51,087,586 |
|
|
$ |
38,005,867 |
|
AGIX-4207 |
|
|
62,770 |
|
|
|
124,224 |
|
|
|
2,142,083 |
|
Unallocated costs and other programs |
|
|
29,655,910 |
|
|
|
20,067,135 |
|
|
|
19,087,883 |
|
|
|
|
|
|
|
|
|
|
|
Total research and development |
|
$ |
82,855,340 |
|
|
$ |
71,278,945 |
|
|
$ |
59,235,833 |
|
|
|
|
|
|
|
|
|
|
|
From inception, we have devoted the large majority of our research and development efforts and
financial resources to support development of the AGI-1067 product candidate. We will retain
responsibility for the ongoing ARISE clinical trial and for regulatory filings in the United
States. AstraZeneca will have full responsibility for pre-commercialization activities involving
AGI-1067 and will oversee all aspects of the marketing, sales and distribution of AGI-1067 on a
worldwide basis. AstraZeneca will also be responsible for all non-U.S. regulatory filings.
Spending for the AGI-1096 program in 2006, 2005 and 2004 was funded by our collaborative
development partner, Astellas.
The nature, timing and costs of the efforts to complete the successful development of any of
our product candidates are highly uncertain and subject to numerous risks, and therefore cannot be
accurately estimated. These risks include the rate of progress and costs of our clinical trials,
clinical trial results, cost and timing of regulatory approval and establishing commercial
manufacturing supplies. These risks and uncertainties, and their effect on our operations and
financial position, are more fully described above in our risk factors under the headings Risks
Related to Development and Commercialization of Our Product Candidates and Dependence on Third
Parties and Risks Related to Regulatory Approval of Our Product Candidates.
We have not derived any commercial revenues from product sales. We expect to incur
significant losses in most years prior to deriving any such product revenue as we continue our
research and development activities. We have funded our operations primarily through sales of
equity and debt securities. We have incurred significant losses since we began operations and, as
of December 31, 2006, had an accumulated deficit of $362.0 million. We cannot assure you that we
will become profitable or receive any milestone-related revenues under our agreement with
AstraZeneca. We expect that losses will fluctuate from quarter to quarter and that these
fluctuations may be substantial. Our ability to achieve profitability depends upon our ability,
alone or with others, to complete the successful development of our product candidates, to obtain
required regulatory clearances and to manufacture and market our future products.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions and select accounting policies
that affect the amounts reported in our financial statements and the accompanying notes. Actual
results could significantly differ from those estimates. We have identified the following policies
and related estimates as critical to our business operations and the understanding of our results
of operations. A description of these critical accounting policies and a discussion of the
significant estimates and judgments associated with these policies are set forth below. The impact
of and any associated risks related to these policies on our business operations are also discussed
throughout Managements Discussion and Analysis of Financial Condition and Results of Operations.
Research and Development Accrual
As part of the process of preparing our financial statements, we are required to estimate
expenses that we believe we have incurred, but have not yet been billed for. This process involves
identifying services and activities that have been performed by third party vendors on our behalf
and estimating the level to which they have been performed and the associated cost incurred for
such service as of each balance sheet date in our financial statements. Examples of expenses for
which we accrue include fees for professional services, such as those provided by certain clinical
research organizations and investigators in conjunction with clinical trials, and fees owed to
contract manufacturers in conjunction with the manufacture of clinical trial materials. We make
these estimates based upon progress of activities related to contractual obligations and also
information received from vendors.
32
Revenue Recognition
We recognize revenue in accordance with the SECs Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104,
Revenue Recognition, (SAB 104). SAB 104 provides guidance in applying U.S. generally accepted
accounting principles to revenue recognition issues, and specifically addresses revenue recognition
for upfront, nonrefundable fees received in connection with research collaboration agreements.
In accordance with SAB 104, license fees, which are nonrefundable, are recognized when the
related license agreements specify that no further efforts or obligations are required of us. In
February 2006, we received a $50.0 million nonrefundable license fee in connection with our license
and collaboration agreement with AstraZeneca. The upfront nonrefundable license payment will be
recognized on a straight-line basis over the 24 month period that we estimate we are obligated to
provide services to the licensee. In 2006, revenues were approximately $22.9 million related to
the amortization of the upfront license fee from AstraZeneca.
During the third quarter of 2006, AstraZeneca engaged AtheroGenics to perform FOCUS, a
follow-up Phase III clinical trial for patients who have completed ARISE. Revenues under the
research and development agreement pertaining to the FOCUS clinical trial are recognized in
accordance with SAB 104 and Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Gross
Revenue as a Principal vs. Net as an Agent. According to the criteria established by EITF Issue
No. 99-19, we are the primary obligor of the agreement because we are responsible for the
selection, negotiation, contracting and payment of the third party suppliers. In addition, any
liabilities resulting from the agreement are the responsibility of AtheroGenics. Research and
development revenues are recognized, on a gross basis, as activities are performed under the terms
of the related agreement. Revenues that have not been invoiced are reflected as unbilled
receivables as described in the accounts receivable note to the financial statements.
Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (SFAS) SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), which revises SFAS No.
123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. SFAS 123(R) requires that companies recognize
compensation expense associated with stock option grants and other equity instruments to employees
in the financial statements. That expense is recognized in the statement of operations over the
period during which an employee is required to provide service in exchange for the reward.
Stock-based compensation expense is recorded in research and development expense or marketing,
general and administrative expense depending on the employees job function. SFAS 123(R) applies
to all grants after the effective date and to the unvested portion of stock options outstanding as
of the effective date. The pro forma disclosures previously permitted under SFAS 123 are no longer
an alternative to financial statement recognition. We are using the modified-prospective method
and the Black-Scholes valuation model for valuing the share-based payments. We will continue to
account for transactions in which services are received in exchange for equity instruments based on
the fair value of such services received from non-employees, in accordance with SFAS 123 and 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.
Results of Operations
Comparison of Years Ended December 31, 2006 and 2005
Revenues
Total revenues were $31.7 million for the year ended December 31, 2006. The license fee
revenues of $22.9 million are attributable to the license and collaboration agreement, effective
January 2006, with AstraZeneca for the development and commercialization of AGI-1067. This amount
represents the earned portion of the $50.0 million nonrefundable license fee that is being
amortized over 24 months. The research and development revenues of $8.8 million are for services
performed for AstraZeneca related to the FOCUS clinical trial. There were no revenues during 2005.
Expenses
Research and Development. Research and development expenses were $82.9 million for the year
ended December 31, 2006, compared to $71.3 million for the same period in 2005. The increase of
$11.6 million, or 16%, is primarily due to expenditures associated with the ARISE clinical trial
and the start up of the FOCUS clinical trial, which include activities for clinical drug supply,
data management, study monitoring and payments to clinical investigators, and preparation for a New
Drug Application filing. Also
33
contributing to the increase was the non- cash stock-based compensation of $4.9 million, resulting
from the adoption of SFAS 123(R) in January 2006.
We expect that research and development expenses in 2007 will not be more than the 2006 level.
Expenses in 2007 will be primarily related to activities surrounding the FOCUS clinical trial of
approximately $25.0 million, which will be fully funded by AstraZeneca, and regulatory activities
related to U.S. NDA preparation.
Marketing, General and Administrative. Marketing, general and administrative expenses were
$13.4 million for the year ended December 31, 2006, compared to $9.1 million for the same period in
2005. The increase of $4.3 million, or 48%, is primarily due to the non-cash stock-based
compensation of $4.4 million, resulting from the adoption of SFAS123(R) in January 2006 partially
offset by lower professional fees associated with the license and collaboration agreement incurred
in 2005.
Interest and Other Income
Interest and other income is primarily comprised of interest income earned on our cash and
short-term investments. Interest and other income was $9.2 million for the year ended December 31,
2006, compared to $6.7 million for the same period in 2005. The increase was primarily a result of
higher interest rates on our investments.
Interest Expense
Interest expense was $8.4 million for the year ended December 31, 2006 compared to $8.9
million for the same period in 2005. The decrease in interest expense is due to the lower
aggregate principal amount of our 4.5% convertible notes outstanding compared to prior year. Our
outstanding debt balance was decreased by $14.0 million in January 2006 when certain note holders
elected to convert their holdings into shares of our common stock.
Other Expense
Other expense was $3.5 million for the year ended December 31, 2006. The increase in other
expense is due to $3.5 million of non-cash expense related to the exchange of $14.0 million of our
4.5% convertible notes for common stock in the first quarter of 2006. There was no other expense in 2005.
Income Taxes
As of December 31, 2006, we had net operating loss carryforwards and research and development
credit carryforwards of $331.9 million and $12.0 million, respectively, available to offset future
taxable income. The net operating loss carryforwards and the research and development credit
carryforwards will expire between 2010 and 2027. Because of our lack of earnings history, the
resulting deferred tax assets have been fully offset by a valuation allowance. The utilization of
the carryforwards is dependent upon the timing and extent of our future profitability. The annual
limitations combined with the expiration dates of the carryforwards may prevent the utilization of
all of the net operating loss and research and development credit carryforwards if we do not attain
sufficient profitability by the expiration dates of the carryforwards.
Comparison of Years Ended December 31, 2005 and 2004
Revenues
There were no revenues during 2005 or 2004.
Expenses
Research and Development. Research and development expenses were $71.3 million in 2005,
compared to $59.2 million in 2004. The increase of $12.0 million, or 20%, was primarily due to
increased expenditures for the AGI-1067 ARISE Phase III clinical trial, including manufacturing
activities for clinical drug supply, study monitoring, payments to clinical investigators and
salary and personnel related expenses.
General and Administrative. General and administrative expenses were $9.1 million in 2005,
compared to $6.6 million in 2004. The increase of $2.4 million, or 37%, was primarily due to an
increase in the cost of AGI-1067 business development activities,
34
including legal fees for the license and collaboration agreement with AstraZeneca and market
research costs. Also contributing to the increase were higher legal fees related to litigation
expenses.
Interest and Other Income
Interest and other income is primarily comprised of interest income earned on our cash and
short-term investments. Interest and other income was $6.7 million in 2005, compared to $1.4
million in 2004. The increase was due to the additional funds received from the issuance of $200.0
million in aggregate principal amount of 1.5% convertible notes in January 2005 along with an
increase in rates on our interest bearing accounts.
Interest Expense
Interest expense was $8.9 million in 2005 compared to $5.2 million in 2004. The increase in
interest expense is due to the issuance of $200.0 million in aggregate principal amount of 1.5%
convertible notes in January 2005.
Income Taxes
As of December 31, 2005, we had net operating loss carryforwards and research and development
credit carryforwards of $299.1 million and $9.4 million, respectively, available to offset future
taxable income.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through sales of equity securities
and convertible notes. At December 31, 2006, we had cash, cash equivalents and short-term
investments of $151.8 million, compared with $182.5 million and $66.9 million at December 31, 2005
and 2004, respectively. Working capital at December 31, 2006 was $118.8 million, compared to
$173.2 million and $59.7 million at December 31, 2005 and 2004, respectively. The decrease in
cash, cash equivalents, short-term investments and working capital in 2006 is primarily due to the
use of funds for operating purposes. The increase in cash, cash equivalents and short-term
investments and working capital in 2005 is due to funds received from the issuance of our 1.5%
convertible notes in January 2005 that raised net proceeds of approximately $193.6 million.
Net cash used in operating activities was $27.0 million in 2006 compared to $77.8 million in
2005 and $66.6 million in 2004. The decrease in the use of cash in operating activities in 2006 is
primarily attributable to funding a net loss of $67.3 million, partially offset by revenue
recognized in connection with the $50.0 million license fee received from AstraZeneca. The
increase in the use of cash in operating activities in 2005 and 2004 is principally due to funding
a net loss of $82.6 million and $69.6 million, respectively. The increase in cash needed to fund
the net loss is primarily attributable to expenditures for our ARISE Phase III clinical trial for
AGI-1067, as well as other ongoing product development activities. For 2007, cash expenditures for
the ARISE and FOCUS clinical trials are estimated to be approximately $15.0 million and $25.0
million, respectively.
Net cash provided by investing activities was $30.4 million in 2006 compared to net cash used
in investing activities of $51.7 million in 2005 and $27.1 million provided by investing activities
in 2004. Net cash provided by investing activities in 2006 consisted primarily of net sales of
available-for-sale securities. This was partially offset by $5.5 million to purchase equipment and
leasehold improvements, which includes $3.5 million for commercial manufacturing equipment. Net
cash used in investing activities in 2005 consisted primarily of net purchases of
available-for-sale securities. Additionally, in 2005, $3.0 million was used to purchase equipment
and leasehold improvements, which includes $1.9 million spent for commercial manufacturing
equipment. Net cash provided by investing activities in 2004 consisted primarily of net sales of
available-for-sales securities.
Net cash provided by financing activities was $1.7 million in 2006 compared to $196.5 million
in 2005 and $2.3 million in 2004. Net cash provided by financing activities in 2006 consisted
primarily of proceeds received upon exercise of common stock options. Net cash provided by
financing activities in 2005 consisted primarily of $193.6 million received from the issuance of
1.5% convertible notes in January 2005. Net cash provided by financing activities in 2004
consisted primarily of the proceeds received upon exercise of common stock options.
In August 2003, we issued $100 million in aggregate principal amount of 4.5% convertible notes
due 2008 through a Rule 144A private placement to qualified institutional buyers. These notes
initially are convertible into our common stock at a conversion rate of 65.1890 shares per $1,000
principal amount of notes, or approximately $15.34 per share. Net proceeds were approximately
$96.7 million. Interest on the 4.5% convertible notes is payable semi-annually in arrears on March
1 and September 1. As of December 31,
35
2006, we have recorded $1.3 million of accrued interest expense related to the notes, which is due
March 1, 2007. In January 2006, we exchanged $14.0 million in aggregate principal amount of the
4.5% convertible notes for 1,085,000 shares of our common stock. From time to time, we may enter
into additional exchange offers and/or purchases of these notes.
In January 2005, we issued $200 million in aggregate principal amount of 1.5% convertible
notes due 2012 through a Rule 144A private placement to qualified institutional buyers. These
notes are convertible into shares of our common stock at a conversion rate of 38.5802 shares per
$1,000 principal amount of notes, or approximately $25.92 per share. Interest on the 1.5%
convertible notes is payable semi-annually in arrears on February 1 and August 1. Net proceeds
were approximately $193.6 million. As of December 31, 2006, we have recorded $1.3 million of
accrued interest expense related to the notes, which is due February 1, 2007. We are using the net
proceeds from the sale of the notes to fund the ongoing costs of the ARISE Phase III clinical trial
for AGI-1067 and other research and development activities, including clinical trials, process
development and manufacturing support, and for general corporate purposes, including working
capital. Pending these uses, the net proceeds have been invested in interest-bearing, investment
grade securities.
The following table summarizes our long-term contractual obligations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Total |
|
|
2007 |
|
|
2008-2009 |
|
|
2010-2011 |
|
|
Thereafter |
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
2,830,028 |
|
|
$ |
1,381,773 |
|
|
$ |
1,446,500 |
|
|
$ |
1,755 |
|
|
$ |
|
|
Long-term debt |
|
|
286,000,000 |
|
|
|
|
|
|
|
86,000,000 |
|
|
|
|
|
|
|
200,000,000 |
|
Interest on long-term debt |
|
|
21,700,000 |
|
|
|
6,870,000 |
|
|
|
8,580,000 |
|
|
|
6,000,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
310,5308,028 |
|
|
$ |
8,251,773 |
|
|
$ |
96,026,500 |
|
|
$ |
6,001,755 |
|
|
$ |
200,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon the current status of our product development and commercialization plans, we
believe that our existing cash, cash equivalents and short-term investments will be adequate to
satisfy our capital needs for at least the next 12 months. However, our actual capital
requirements will depend on many factors, including those factors potentially impacting our
financial condition as discussed in Item 1A. Risk Factors and the following:
|
|
|
the scope and results of our research, preclinical and clinical development activities; |
|
|
|
|
the timing of, and the costs involved in, obtaining regulatory approvals; |
|
|
|
|
the timing, receipt and amount of sales and royalties, if any, from our potential product candidates; |
|
|
|
|
the timing, receipt and amount of milestone and other payments, if any; |
|
|
|
|
our ability to maintain our collaborations with AstraZeneca and Astellas and the financial terms of our collaborations; |
|
|
|
|
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related
costs; and |
|
|
|
|
the extent to which we acquire or invest in businesses, products and technologies. |
We have historically accessed the capital markets from time to time to raise adequate funds
for operating needs and cash reserves. Although we believe we have adequate cash for at least the
next 12 months, we may access capital markets when we believe market conditions or company needs
merit doing so.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal while at the same
time maximizing the income we receive from our investments without significantly increasing risk.
Some of the securities that we invest in may have market risk. This means that a change in
prevailing interest rates may cause the fair value of the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal
amount of our investment will probably decline. To minimize this risk in the future, we intend to
continue to maintain our portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, all of which have a minimum investment rating of A1/P1,
money market funds, and government and non-government debt securities. The average
36
duration of all of our investments has generally been less than one year. Due to the short-term
nature of these investments, we believe we have no material exposure to interest rate risk arising
from our investments.
The following table summarizes the maturity of the debt and projected annual weighted average
interest rates on our convertible notes as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008-2009 |
|
2010-2012 |
|
Total |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt fixed rate
Maturity |
|
$ |
|
|
|
$ |
86,000,000 |
|
|
$ |
200,000,000 |
|
|
$ |
286,000,000 |
|
|
$ |
246,600,000 |
|
Weighted average interest rate |
|
|
|
|
|
|
4.5 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
37
Item 8. Financial Statements and Supplementary Data
ATHEROGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
Contents
38
MANAGEMENTS ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of AtheroGenics, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended. AtheroGenics internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. AtheroGenics internal control over financial reporting
includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of AtheroGenics; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of AtheroGenics are being made
only in accordance with authorizations of management and directors of AtheroGenics; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of AtheroGenics assets that could have a material
effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management, including AtheroGenics principal executive officer and principal financial
officer, assessed the effectiveness of AtheroGenics internal control over financial reporting as
of December 31, 2006. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes that AtheroGenics maintained
effective internal control over financial reporting as of December 31, 2006.
AtheroGenics independent registered public accounting firm has issued an attestation report
on managements assessment of AtheroGenics internal control over financial reporting which is
included herein.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
The Board of Directors and Shareholders of AtheroGenics, Inc.
We have audited managements assessment, included in the accompanying Managements Annual
Report on Internal Control Over Financial Reporting, that AtheroGenics, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). AtheroGenics, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that AtheroGenics, Inc. maintained effective internal
control over financial reporting as of December 31, 2006 is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, AtheroGenics, Inc. maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2006
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of AtheroGenics, Inc. as of December 31, 2006
and 2005, and the related statements of operations, shareholders (deficit) equity and cash flows
for each of the three years in the period ended December 31, 2006 and our report dated March 7,
2007 expressed an unqualified opinion thereon.
Atlanta, Georgia
March 7, 2007
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
The Board of Directors and Shareholders of AtheroGenics, Inc.
We have audited the accompanying balance sheets of AtheroGenics, Inc. as of December 31, 2006
and 2005, and the related statements of operations, shareholders (deficit) equity and cash flows
for each of the three years in the period ended December 31, 2006. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of AtheroGenics, Inc. at December 31, 2006 and 2005, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the accompanying financial statements, the Company adopted Statement
of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of AtheroGenics, Inc.s internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 7, 2007 expressed an unqualified opinion thereon.
Atlanta, Georgia
March 7, 2007
41
ATHEROGENICS, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
87,846,079 |
|
|
$ |
82,831,679 |
|
Short-term investments |
|
|
63,964,860 |
|
|
|
99,672,844 |
|
Accounts receivable |
|
|
6,537,892 |
|
|
|
19,393 |
|
Prepaid expenses |
|
|
4,038,419 |
|
|
|
2,639,900 |
|
Interest receivable and other current assets |
|
|
643,097 |
|
|
|
880,799 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
163,030,347 |
|
|
|
186,044,615 |
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net of accumulated depreciation
and amortization |
|
|
9,684,965 |
|
|
|
4,108,462 |
|
Debt issuance costs and other assets |
|
|
5,624,352 |
|
|
|
7,344,450 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
178,339,664 |
|
|
$ |
197,497,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Deficit |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,183,511 |
|
|
$ |
2,188,461 |
|
Accrued research and development |
|
|
11,263,164 |
|
|
|
3,946,970 |
|
Accrued interest |
|
|
2,540,000 |
|
|
|
2,750,000 |
|
Accrued compensation |
|
|
1,465,644 |
|
|
|
2,649,640 |
|
Accrued and other liabilities |
|
|
791,661 |
|
|
|
1,344,876 |
|
Current portion of deferred revenue |
|
|
25,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
44,243,980 |
|
|
|
12,879,947 |
|
|
|
|
|
|
|
|
|
|
Convertible notes payable and equipment loan, net of current portion |
|
|
286,000,000 |
|
|
|
300,053,796 |
|
Long-term portion of deferred revenue |
|
|
2,083,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficit: |
|
|
|
|
|
|
|
|
Preferred stock, no par value: Authorized5,000,000 shares |
|
|
|
|
|
|
|
|
Common stock, no par value: |
|
|
|
|
|
|
|
|
Authorized100,000,000 shares; issued and outstanding
39,452,927 and 38,143,678 shares at December 31, 2006
and 2005, respectively |
|
|
207,388,894 |
|
|
|
178,771,376 |
|
Warrants |
|
|
613,021 |
|
|
|
620,223 |
|
Accumulated deficit |
|
|
(361,997,246 |
) |
|
|
(294,674,874 |
) |
Accumulated other comprehensive income (loss) |
|
|
7,682 |
|
|
|
(152,941 |
) |
|
|
|
|
|
|
|
Total shareholders deficit |
|
|
(153,987,649 |
) |
|
|
(115,436,216 |
) |
|
|
|
|
|
|
|
Total liabilities and shareholders deficit |
|
$ |
178,339,664 |
|
|
$ |
197,497,527 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
42
ATHEROGENICS, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
$ |
22,916,667 |
|
|
$ |
|
|
|
$ |
|
|
Research and development |
|
|
8,758,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
31,674,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
82,855,340 |
|
|
|
71,278,945 |
|
|
|
59,235,833 |
|
General and administrative |
|
|
13,373,112 |
|
|
|
9,050,290 |
|
|
|
6,607,506 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
96,228,452 |
|
|
|
80,329,235 |
|
|
|
65,843,339 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(64,553,607 |
) |
|
|
(80,329,235 |
) |
|
|
(65,843,339 |
) |
Interest and other income |
|
|
9,175,817 |
|
|
|
6,691,965 |
|
|
|
1,447,001 |
|
Interest expense |
|
|
(8,423,346 |
) |
|
|
(8,917,057 |
) |
|
|
(5,192,894 |
) |
Other expense |
|
|
(3,521,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(67,322,372 |
) |
|
$ |
(82,554,327 |
) |
|
$ |
(69,589,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic and diluted |
|
$ |
(1.71 |
) |
|
$ |
(2.19 |
) |
|
$ |
(1.88 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic and diluted |
|
|
39,383,376 |
|
|
|
37,774,203 |
|
|
|
37,070,235 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
43
ATHEROGENICS, INC.
STATEMENTS OF SHAREHOLDERS (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common Stock |
|
|
|
|
|
|
Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Shares |
|
|
Amount |
|
|
Warrants |
|
|
Compensation |
|
|
Deficit |
|
|
(Loss) Income |
|
|
(Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2004 |
|
|
36,763,407 |
|
|
$ |
172,452,536 |
|
|
$ |
950,588 |
|
|
$ |
(505,708 |
) |
|
$ |
(142,531,315 |
) |
|
$ |
10,905 |
|
|
$ |
30,377,006 |
|
Issuance of common stock for exercise of stock options
at $.30 to $16.52 per share |
|
|
495,265 |
|
|
|
2,783,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,783,894 |
|
Issuance of common stock for exercise of warrants |
|
|
109,986 |
|
|
|
289,540 |
|
|
|
(289,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to market value for variable stock options
and warrants issued to non-employees |
|
|
|
|
|
|
145,663 |
|
|
|
167,756 |
|
|
|
(313,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
|
|
|
|
|
41,632 |
|
|
|
|
|
|
|
494,520 |
|
|
|
|
|
|
|
|
|
|
|
536,152 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,589,232 |
) |
|
|
|
|
|
|
(69,589,232 |
) |
Unrealized loss on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,202 |
) |
|
|
(50,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,639,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
37,368,658 |
|
|
|
175,713,265 |
|
|
|
828,804 |
|
|
|
(324,607 |
) |
|
|
(212,120,547 |
) |
|
|
(39,297 |
) |
|
|
(35,942,382 |
) |
Issuance of common stock for exercise of stock options
at $.10 to $14.86 per share |
|
|
727,178 |
|
|
|
2,989,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,989,844 |
|
Issuance of common stock for exercise of warrants |
|
|
47,842 |
|
|
|
154,768 |
|
|
|
(154,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to market value for variable stock options
and warrants issued to non-employees |
|
|
|
|
|
|
(27,456 |
) |
|
|
(53,813 |
) |
|
|
81,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,293 |
|
|
|
|
|
|
|
|
|
|
|
184,293 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,554,327 |
) |
|
|
|
|
|
|
(82,554,327 |
) |
Unrealized loss on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113,644 |
) |
|
|
(113,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,667,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
38,143,678 |
|
|
|
178,830,421 |
|
|
|
620,223 |
|
|
|
(59,045 |
) |
|
|
(294,674,874 |
) |
|
|
(152,941 |
) |
|
|
(115,436,216 |
) |
Issuance of common stock for exercise of stock options
at $.30 to $16.52 per share |
|
|
224,249 |
|
|
|
1,762,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,762,357 |
|
Issuance of common stock for debt conversion |
|
|
1,085,000 |
|
|
|
17,562,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,562,557 |
|
Adjustments to market value for variable stock options
and warrants issued to non-employees |
|
|
|
|
|
|
(5,433 |
) |
|
|
(7,202 |
) |
|
|
12,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of non-employee deferred stock
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,410 |
|
|
|
|
|
|
|
|
|
|
|
46,410 |
|
Stock-based compensation |
|
|
|
|
|
|
9,238,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,238,992 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,322,372 |
) |
|
|
|
|
|
|
(67,322,372 |
) |
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,623 |
|
|
|
160,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,161,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
39,452,927 |
|
|
$ |
207,388,894 |
|
|
$ |
613,021 |
|
|
$ |
|
|
|
$ |
(361,997,246 |
) |
|
$ |
7,682 |
|
|
$ |
(153,987,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
44
ATHEROGENICS, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(67,322,372 |
) |
|
$ |
(82,554,327 |
) |
|
$ |
(69,589,232 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of license fee |
|
|
(22,916,667 |
) |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
9,285,402 |
|
|
|
184,293 |
|
|
|
536,152 |
|
Loss on debt conversion |
|
|
3,521,236 |
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
1,483,169 |
|
|
|
1,504,172 |
|
|
|
652,981 |
|
Depreciation and amortization |
|
|
972,009 |
|
|
|
808,599 |
|
|
|
883,312 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(6,518,499 |
) |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(1,398,519 |
) |
|
|
(5,603 |
) |
|
|
(1,490,291 |
) |
Interest receivable and other assets |
|
|
237,702 |
|
|
|
(351,787 |
) |
|
|
(28,963 |
) |
Accounts payable |
|
|
995,050 |
|
|
|
(649,592 |
) |
|
|
1,059,866 |
|
Accrued research and development |
|
|
6,262,136 |
|
|
|
(136,924 |
) |
|
|
1,122,809 |
|
Accrued interest |
|
|
68,250 |
|
|
|
1,250,000 |
|
|
|
(162,500 |
) |
Accrued compensation |
|
|
(1,183,996 |
) |
|
|
1,410,393 |
|
|
|
200,340 |
|
Accrued and other liabilities |
|
|
(519,431 |
) |
|
|
755,076 |
|
|
|
203,893 |
|
Deferred revenue |
|
|
50,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(27,034,530 |
) |
|
|
(77,785,700 |
) |
|
|
(66,611,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(102,945,761 |
) |
|
|
(200,633,447 |
) |
|
|
(76,544,056 |
) |
Sales and maturities of short-term investments |
|
|
138,814,368 |
|
|
|
151,882,055 |
|
|
|
103,984,437 |
|
Purchases of equipment and leasehold improvements |
|
|
(5,494,454 |
) |
|
|
(2,977,050 |
) |
|
|
(302,533 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
30,374,153 |
|
|
|
(51,728,442 |
) |
|
|
27,137,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of convertible notes |
|
|
|
|
|
|
193,566,977 |
|
|
|
|
|
Proceeds from the exercise of common stock options |
|
|
1,762,357 |
|
|
|
2,989,844 |
|
|
|
2,783,894 |
|
Payments on equipment loan |
|
|
(87,580 |
) |
|
|
(99,919 |
) |
|
|
(479,439 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,674,777 |
|
|
|
196,456,902 |
|
|
|
2,304,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
5,014,400 |
|
|
|
66,942,760 |
|
|
|
(37,169,330 |
) |
Cash and cash equivalents at beginning of year |
|
|
82,831,679 |
|
|
|
15,888,919 |
|
|
|
53,058,249 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
87,846,079 |
|
|
$ |
82,831,679 |
|
|
$ |
15,888,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6,871,927 |
|
|
$ |
6,162,886 |
|
|
$ |
4,676,472 |
|
The accompanying notes are an integral part of these financial statements.
45
NOTES TO FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Description of Business
AtheroGenics, Inc. (AtheroGenics) was incorporated on November 23, 1993 (date of inception)
in the State of Georgia to focus on the discovery, development and commercialization of novel
therapeutics for the treatment of chronic inflammatory diseases, such as heart disease
(atherosclerosis), organ transplant rejection, rheumatoid arthritis and asthma.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash and Cash Equivalents
AtheroGenics considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. AtheroGenics cash equivalents consist primarily of money
market accounts, commercial paper, government agency notes and corporate notes on deposit with
several financial institutions, and the carrying amounts reported in the balance sheets approximate
their fair value.
Short-Term Investments
Short-term investments consist of government agency notes, corporate notes, commercial paper
and certificates of deposit with original maturities of greater than three months when purchased.
Management determines the appropriate classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. These investments are
accounted for in accordance with Statement of Financial Accounting Standards, (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. AtheroGenics has classified all
investments as available-for-sale. Available-for-sale securities are carried at fair value, with
the unrealized gains and losses, net of tax, reported in a separate component of shareholders
(deficit) equity. Realized gains and losses are included in investment income and are determined
on a specific identification basis.
Fair Value of Financial Instruments and Concentration of Credit Risk
Financial instruments that subject AtheroGenics to concentration of credit risk consist
primarily of cash, cash equivalents and short-term investments. These assets are maintained by
reputable third party financial institution custodians. The carrying values reported in the
balance sheets for cash, cash equivalents and short-term investments approximate fair values.
Accounts Receivable
Accounts receivable consists of billed and unbilled receivables related to the FOCUS
(Follow-up Of Clinical Outcomes: The Long-term AGI-1067 Plus Usual Care Study) clinical trial and
our license and collaboration agreement with IPR Pharmaceuticals, Inc. (AstraZeneca). Unbilled
receivables represent amounts due, which have not been billed as of the current balance sheet date.
As of December 31, 2006, accounts receivable were $2,985,584 and unbilled receivables were
$3,552,308.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation of computer and lab
equipment is computed using the straight-line method over the estimated useful lives of three and
five years, respectively. Amortization of leasehold improvements is recorded over the shorter of:
(a) the estimated useful lives of the related assets; or (b) the lease term.
46
Research and Development Accrual
As part of the process of preparing its financial statements, AtheroGenics is required to
estimate expenses that it believes it has incurred, but has not yet been billed for. This process
involves identifying services and activities that have been performed by third party vendors on its
behalf and estimating the level to which they have been performed and the associated cost incurred
for such service as of each balance sheet date in its financial statements. Examples of expenses
for which AtheroGenics accrues include fees for professional services, such as those provided by
certain clinical research organizations and investigators in conjunction with clinical trials, and
fees owed to contract manufacturers in conjunction with the manufacture of clinical trial
materials. AtheroGenics makes these estimates based upon progress of activities related to
contractual obligations and also information received from vendors.
Revenue Recognition
AtheroGenics recognizes revenue in accordance with the SECs Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No.
104, Revenue Recognition, (SAB 104). SAB 104 provides guidance in applying U.S. generally
accepted accounting principles to revenue recognition issues, and specifically addresses revenue
recognition for upfront, nonrefundable fees received in connection with research collaboration
agreements.
In accordance with SAB 104, license fees, which are nonrefundable, are recognized when the
related license agreements specify that no further efforts or obligations are required of us.
Revenues under the research and development agreement pertaining clinical trials are
recognized in accordance with SAB 104 and Emerging Issues Task Force (EITF) Issue No. 99-19,
Reporting Gross Revenue as a Principal vs. Net as an Agent. According to the criteria established
by EITF Issue No. 99-19, AtheroGenics is the primary obligor of the agreement because it is
responsible for the selection, negotiation, contracting and payment of the third party suppliers.
In addition, any liabilities resulting from the agreement are the responsibility of AtheroGenics.
Research and development revenues are recognized, on a gross basis, as activities are performed
under the terms of the related agreement. Revenues that have not been invoiced are reflected as
unbilled receivables as described in the accounts receivable note to the financial statements.
Research and Development and Patent Costs
Research and development costs, including all related salaries, clinical trial expenses,
facility costs and expenditures related to obtaining patents, are charged to expense when incurred.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R),
Share-Based Payment, (SFAS 123(R)), which revises SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS 123) and supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) requires that companies recognize
expense associated with stock option grants and other equity instruments to employees in the
financial statements. SFAS 123(R) was effective January 1, 2006 and applies to all grants after
the effective date and to the unvested portion of stock options outstanding as of the effective
date.
On January 1, 2006, AtheroGenics adopted SFAS 123(R) using the modified prospective method.
For the year ended December 31, 2006, AtheroGenics recorded approximately $9.2 million of employee
stock-based compensation expense. As a result of adopting SFAS 123(R), AtheroGenics net loss per
share was impacted $(0.23) for the year ended December 31, 2006. AtheroGenics has a net operating
loss carryforward as of December 31, 2006, and therefore no excess tax benefits for tax deductions
related to the stock options were recognized. As of December 31, 2006, unamortized stock-based
compensation expenses of approximately $23.5 million remain to be recognized over a weighted
average period of approximately three years.
AtheroGenics estimated the fair value of stock options granted during the year ended December
31, 2006 using the Black-Scholes option valuation model. AtheroGenics has calculated a 5.66%
forfeiture rate based on historical data. The weighed average expected volatility of 64.92% is
based on historical volatility of AtheroGenics common stock. The expected term of five years for
the stock options granted is also based on historical data and represents the period of time that
stock options granted are expected to be outstanding. The weighted average risk free interest rate
of 4.7 % is based on the U.S. Treasury rates in effect at the time of the grant for periods
47
corresponding with the expected term of the options. The weighted average value per share of the
options granted during the year ended December 31, 2006 is $7.58.
Prior to the adoption of SFAS 123(R), AtheroGenics accounted for its stock-based compensation
expenses under the provision of APB 25 and related interpretations. Under APB 25, if the exercise
price of employee stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense was recognized. AtheroGenics had adopted the provisions of
SFAS 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure, using pro forma disclosure only.
The following table illustrates the effect on net loss and net loss per share as if the fair
value based method had been applied to all outstanding and unvested options in each period, based
on the provisions of SFAS 123 and SFAS 148.
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Net loss, as reported |
|
$ |
(82,554,327 |
) |
|
$ |
(69,589,232 |
) |
Add: Stock-based employee compensation expense included
in reported net loss |
|
|
|
|
|
|
57,511 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards |
|
|
(8,764,619 |
) |
|
|
(6,125,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(91,318,946 |
) |
|
$ |
(75,657,491 |
) |
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted, as reported |
|
$ |
(2.19 |
) |
|
$ |
(1.88 |
) |
|
|
|
|
|
|
|
Basic and diluted, pro forma |
|
$ |
(2.42 |
) |
|
$ |
(2.04 |
) |
|
|
|
|
|
|
|
The fair value for these options (which are granted with an exercise price equal to fair
market value on the grant date) was estimated using the Black-Scholes option valuation model with
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Expected life |
|
5 years |
|
5 years |
Risk-free interest rate |
|
|
4.21 |
% |
|
|
4.25 |
% |
Volatility |
|
|
77.75 |
% |
|
|
78.67 |
% |
Fair value of grants |
|
$ |
8.80 |
|
|
$ |
15.27 |
|
Income Taxes
The liability method is used in accounting for income taxes. Deferred income tax assets and
liabilities are determined based on differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are anticipated to reverse.
Comprehensive Income (Loss)
AtheroGenics computes comprehensive income (loss) in accordance with SFAS No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 establishes standards for the reporting and display of
comprehensive income (loss) and its components in the financial statements. Comprehensive income
(loss), as defined, includes all changes in equity during a period from non-owner sources, such as
unrealized gains and losses on available-for-sale securities. Comprehensive loss was $67,161,749,
$82,667,971 and $69,639,434 for the years ended December 31, 2006, 2005 and 2004, respectively.
48
Recently Issued Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB statement No. 109 (FIN 48). FIN 48 clarifies the accounting
uncertainty in income taxes by prescribing the recognition threshold a tax position is required to
meet before being recognized in the financial statements. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is
required to be adopted on January 1, 2007. AtheroGenics does not expect the adoption of FIN 48 to
have a material impact on its results of operations.
2. Collaborations
In 2005, AtheroGenics announced a license and collaboration agreement with AstraZeneca for the
global development and commercialization of AGI-1067. Under the terms of the agreement,
AtheroGenics received an upfront nonrefundable license fee of $50 million and, subject to the
achievement of specific milestones including a successful outcome in ARISE (Aggressive Reduction of
Inflammation Stops Events), AtheroGenics will be eligible for development and regulatory milestones
of up to an aggregate of $300 million. The agreement also provides for progressively demanding
sales performance related milestones of up to an additional $650 million in the aggregate. In
addition, AtheroGenics will also receive royalties on product sales. AstraZeneca is responsible
for supplying all of the manufacturing, packaging and labeling. AstraZeneca has the right to
terminate the license and collaboration agreement at specified periods. The upfront nonrefundable
license payment will be recognized on a straight-line basis over the 24 month period that
AtheroGenics estimates it is obligated to provide services to the licensee. In 2006, revenues were
approximately $22.9 million related to the amortization of the upfront license fee from
AstraZeneca.
In the second half of 2006, AtheroGenics was engaged by AstraZeneca to conduct FOCUS
(Follow-up Of Clinical Outcomes: The Long-term AGI-1067 Plus Usual Care Study). FOCUS is a
follow-up Phase III clinical trial for patients exiting ARISE, designed to collect extended safety
information. The trial could last two years beyond ARISE. In 2006, research and development
revenues were approximately $8.8 million related to services performed for AstraZeneca related to
the FOCUS clinical trial.
In 2004, AtheroGenics announced a collaboration with Astellas Pharma Inc. (Formerly Known As
Fujisawa Pharmaceutical Co., Ltd.) to develop AGI-1096 as an oral treatment for the prevention of
organ transplant rejection. Under the agreement, AtheroGenics agreed to collaborate with Astellas
to conduct preclinical and early stage clinical development trials, with Astellas funding all
development costs during the term of the agreement. Astellas received an option to negotiate for
late stage development and commercial rights to the compound. In February 2006, AtheroGenics
extended the collaboration with Astellas.
3. Short-Term Investments
Short-term investments consist of debt securities classified as available-for-sale and have
maturities greater than 90 days from the date of acquisition. AtheroGenics has invested primarily
in corporate notes and commercial paper, all of which have a minimum investment rating of A1/P1,
and government agency notes. There were no realized gains or losses from the sale of investments
for the year ended December 31, 2006. The realized loss from the sale of investments was $11,768
for the year ended December 31, 2005. The cumulative unrealized gains were $7,682 at December 31,
2006 and the cumulative unrealized losses were $152,941 at December 31, 2005. The following table
summarizes the estimated fair value of AtheroGenics short-term investments:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Government agency notes |
|
$ |
28,739,955 |
|
|
$ |
37,216,713 |
|
Commercial paper |
|
|
22,715,730 |
|
|
|
14,708,628 |
|
Corporate notes |
|
|
12,509,175 |
|
|
|
46,246,424 |
|
Certificate of deposit |
|
|
|
|
|
|
1,501,079 |
|
|
|
|
|
|
|
|
Total |
|
$ |
63,964,860 |
|
|
$ |
99,672,844 |
|
|
|
|
|
|
|
|
All available-for-sale securities held at December 31, 2006 will mature during 2007.
49
4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Construction-in-progress |
|
$ |
5,429,178 |
|
|
$ |
1,877,596 |
|
Laboratory equipment |
|
|
3,382,243 |
|
|
|
2,564,319 |
|
Leasehold improvements |
|
|
3,244,412 |
|
|
|
1,959,129 |
|
Computer and office equipment |
|
|
2,349,797 |
|
|
|
1,757,905 |
|
|
|
|
|
|
|
|
|
|
|
14,405,630 |
|
|
|
8,158,949 |
|
Accumulated depreciation and amortization |
|
|
(4,720,665 |
) |
|
|
(4,050,487 |
) |
|
|
|
|
|
|
|
Net equipment and leasehold improvements |
|
$ |
9,684,965 |
|
|
$ |
4,108,462 |
|
|
|
|
|
|
|
|
In March 2005, AtheroGenics had committed to purchase certain commercial manufacturing
equipment for AGI-1067, to be delivered in 2006. In March 2006, AstraZeneca assumed this
commitment, and the costs are shared equally between AtheroGenics and AstraZeneca, subject to a
limit on AtheroGenics portion, as part of the joint license and collaboration agreements that were
signed in December 2005. AtheroGenics expects that its portion of the cost of the equipment and
the construction, installation and start-up costs related to the equipment will be approximately
$9.0 million over the life of the project. Under the terms of the license agreement this amount
may be reimbursed by AstraZeneca when certain termination rights expire. As of December 31, 2006,
approximately $5.4 million has been recorded in construction-in-progress for this equipment.
5. Convertible Notes Payable
In August 2003, AtheroGenics issued $100,000,000 in aggregate principal amount of 4.5%
convertible notes due September 1, 2008 with interest payable semi-annually in March and September.
Net proceeds to AtheroGenics were approximately $96,700,000, after deducting expenses and
underwriters discounts and commissions. The issuance costs related to the notes are recorded as
debt issuance costs and other assets and are being amortized to interest expense over the five-year
life of the notes. The notes may be converted into shares of AtheroGenics common stock, at the
option of the holder, prior to the close of business on September 1, 2008 at a conversion rate of
65.1890 shares per $1,000 principal amount of notes, representing a conversion price of
approximately $15.34. In January 2006, AtheroGenics exchanged $14.0 million in aggregate principal
amount of the 4.5% convertible notes for approximately 1.1 million shares of AtheroGenics common
stock. In accordance with SFAS No. 84, Induced Conversion of Convertible Debt, this transaction
resulted in a non-cash charge of approximately $3.5 million related to the premium paid in excess
of the conversion price in order to induce conversion of the notes and the write-off of the portion
of debt issuance costs attributable to the notes converted. This amount is recorded as other
expense in the statements of operations.
In January 2005, AtheroGenics issued $200,000,000 in aggregate principal amount of 1.5%
convertible notes due February 1, 2012 with interest payable semi-annually in February and August.
Net proceeds to AtheroGenics were approximately $193,600,000, after deducting expenses and
underwriters discounts and commissions. The issuance costs related to the notes are recorded as
debt issuance costs and other assets and are being amortized to interest expense over the
seven-year life of the notes. The 1.5% convertible notes may be converted into shares of
AtheroGenics common stock, at the option of the holder, at a conversion rate of 38.5802 shares per
$1,000 principal amount of notes, which represents a conversion price of approximately $25.92.
The conversion rate for both series of notes is subject to adjustment for stock dividends and
other dilutive transactions. In addition, AtheroGenics Board of Directors may, to the extent
permitted by applicable law, increase the conversion rate provided that the Board of Directors has
determined that such increase is in the best interest of AtheroGenics and such increase remains
effective for a period of at least twenty days. AtheroGenics may also be required to redeem the
notes on an accelerated basis if AtheroGenics defaults on certain other debt obligations or if
AtheroGenics common stock or consideration received in exchange for such common stock is not
tradable on a national securities exchange or system of automated quotations.
As of December 31, 2006, AtheroGenics has reserved a total of 13,322,307 shares of common
stock for future issuance in connection with the 4.5% convertible notes and the 1.5% convertible
notes. In addition, as of December 31, 2006, there was approximately $1,290,000 of accrued
interest related to the 4.5% convertible notes, which is due March 1, 2007, and $1,250,000 of
accrued interest related to the 1.5% convertible notes, which is due February 1, 2007.
50
Maturities of long-term debt as of December 31, 2006 are as follows:
|
|
|
|
|
2008 |
|
$ |
86,000,000 |
|
2012 |
|
|
200,000,000 |
|
|
|
|
|
|
|
$ |
286,000,000 |
|
|
|
|
|
6. Net Loss Per Share
SFAS No. 128, Earnings per Share, requires presentation of both basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per share is
computed in the same manner as basic earnings per share except that diluted earnings per share
reflects the potential dilution that would occur if outstanding options, warrants and convertible
notes payable were exercised.
During all periods presented, AtheroGenics had securities outstanding that could potentially
dilute basic earnings per share in the future, but were excluded from the computation of diluted
net loss per share, as their effect would have been antidilutive. These outstanding securities
consist of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares underlying convertible notes |
|
|
13,322,307 |
|
|
|
14,234,953 |
|
|
|
6,518,904 |
|
Options |
|
|
6,521,524 |
|
|
|
4,375,632 |
|
|
|
4,955,801 |
|
Warrants |
|
|
82,436 |
|
|
|
82,436 |
|
|
|
142,310 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
19,926,267 |
|
|
|
18,693,021 |
|
|
|
11,617,015 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average conversion price of shares underlying
convertible notes |
|
$ |
21.47 |
|
|
$ |
22.39 |
|
|
$ |
15.34 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price of options |
|
$ |
11.73 |
|
|
$ |
11.17 |
|
|
$ |
10..20 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price of warrants |
|
$ |
5.64 |
|
|
$ |
5.64 |
|
|
$ |
4.78 |
|
|
|
|
|
|
|
|
|
|
|
Because AtheroGenics reported a net loss for all periods presented, shares associated with
stock options, warrants and the convertible notes are not included because they are antidilutive.
Basic and diluted net loss per share amounts are the same for the periods presented.
7. Common Stock
In November 2001, AtheroGenics Board of Directors adopted a Shareholder Rights Plan,
declaring a dividend distribution of one common stock purchase right on each outstanding share of
its common stock. Until the rights become exercisable, the rights will trade automatically with
the common stock of AtheroGenics and separate rights certificates will not be issued. Under the
rights plan, each right consists of an initial right and subsequent rights. Initial rights will be
exercisable only if a person or group acquires 15% or more of AtheroGenics common stock, whether
through open market or private purchases or consummation of a tender or exchange offer. If,
following the exercise of initial rights, a person or group again acquires 15% or more of
AtheroGenics common stock, or a person or group who had previously acquired 15% or more of
AtheroGenics common stock acquires an additional 10% or more of the common stock, the subsequent
rights become exercisable. Each right will initially entitle shareholders to buy eight shares of
common stock at an exercise price equal to 20% of the then current market value of the common
stock, calculated and adjusted according to the terms of the rights plan. The number of shares
that can be purchased upon exercise will increase as the number of shares held by the bidder
increases.
If AtheroGenics is acquired in a merger or other business combination, each right will entitle
its holder to purchase, at the rights then-current exercise price, a number of the acquiring
companys shares equal in value to those obtainable if the rights were exercisable in AtheroGenics
common stock.
The rights are intended to enable all shareholders to realize the long-term value of their
investment in AtheroGenics. They will not prevent a takeover, but should encourage anyone seeking
to acquire AtheroGenics to negotiate with the Board of Directors prior to attempting a takeover.
The Board of Directors may redeem any non-exercisable rights at any time at its option at a
redemption price of $.0001 per right. The rights plan expires at the close of business on November
8, 2011.
51
8. Stock Options and Warrants
During 1997, AtheroGenics established an equity ownership plan (the 1997 Plan) whereby
options to purchase AtheroGenics common stock may be granted to employees, directors, consultants
or contractors with exercise prices not less than the fair value of the shares on the dates of
grant. The 1997 Plan, as amended, authorizes the grant of options for up to 3,724,416 shares of
AtheroGenics common stock. As of December 31, 2006, AtheroGenics had 1,483,127 shares of common
stock reserved for issuance under the 1997 Plan in connection with outstanding options or future
grants. The 1997 Plan allows for grants of non-qualified options, incentive stock options and
shares of restricted stock. Non-qualified options granted under the 1997 Plan may vest immediately
for non-employees, but vest over a four-year period for employees. Incentive stock options
generally vest over four years.
During 2001, AtheroGenics established an equity ownership plan (the 2001 Plan) whereby
options to purchase AtheroGenics common stock may be granted to employees, directors, consultants
or contractors with exercise prices not less than the fair value of the shares on the dates of
grant. The 2001 Plan authorizes the grant of options for up to 2,000,000 shares of AtheroGenics
common stock. As of December 31, 2006, AtheroGenics had 1,563,464 shares of common stock reserved
for issuance under the 2001 Plan in connection with outstanding options or future grants. The
terms of the 2001 Plan are substantially similar to the terms of the 1997 Plan.
During 2004, AtheroGenics established an equity ownership plan (the 2004 Plan) whereby
options to purchase AtheroGenics common stock may be granted to employees, directors, consultants
or contractors with exercise prices not less than the fair value of the shares on the dates of
grant. The 2004 Plan authorizes the grant of options for up to 4,500,000 shares of AtheroGenics
common stock. As of December 31, 2006, AtheroGenics had 4,484,000 shares of common stock reserved
for issuance under the 2004 Plan in connection with outstanding options or future grants. The
terms of the 2004 Plan are substantially similar to the terms of the 2001 Plan and the 1997 Plan.
A summary of stock option activity under previous plans, the 1997 Plan, the 2001 Plan and the
2004 Plan follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Average |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Exercise Price |
|
Life |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2004 |
|
|
4,403,179 |
|
|
$ |
6.27 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,166,125 |
|
|
|
23.16 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(496,908 |
) |
|
|
5.72 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(116,595 |
) |
|
|
10.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
4,955,801 |
|
|
|
10.20 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
317,900 |
|
|
|
13.46 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(727,178 |
) |
|
|
4.11 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(170,891 |
) |
|
|
17.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
4,375,632 |
|
|
|
11.17 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,548,347 |
|
|
|
12.84 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(224,249 |
) |
|
|
7.86 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(178,206 |
) |
|
|
18.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
6,521,524 |
|
|
$ |
11.73 |
|
|
|
7.25 |
|
|
$ |
12,871,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2006 |
|
|
6,258,895 |
|
|
$ |
11.66 |
|
|
|
7.16 |
|
|
$ |
12,871,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 |
|
|
3,434,055 |
|
|
$ |
9.38 |
|
|
|
5.50 |
|
|
$ |
12,869,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years ended December 31, 2006, 2005
and 2004 was $2,036,178, $9,796,231 and $10,136,467, respectively. Cash received from option
exercises during the years ended December 31, 2006, 2005 and 2004 was $1,762,357, $2,989,844 and
$2,783,894, respectively. AtheroGenics has a net operating loss carryforward as of December 31,
2006, and therefore no excess tax benefits for tax deductions related to the stock options were
recognized.
52
The following table summarizes information concerning currently outstanding and
exercisable options granted under the 1997 Plan, the 2001 Plan and the 2004 Plan as of December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Number |
|
Weighted Average |
|
Weighted Average |
|
Number |
|
Weighted Average |
Exercise Price |
|
Outstanding |
|
Remaining Years |
|
Exercise Price |
|
Exercisable |
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ .30 $ 7.41
|
|
|
1,932,568 |
|
|
|
4.01 |
|
|
$ |
3.36 |
|
|
|
1,932,568 |
|
|
$ |
3.36 |
|
7.55 13.29
|
|
|
1,725,905 |
|
|
|
9.35 |
|
|
|
10.55 |
|
|
|
294,535 |
|
|
|
10.00 |
|
13.72 15.78
|
|
|
1,710,819 |
|
|
|
8.31 |
|
|
|
15.22 |
|
|
|
598,613 |
|
|
|
14.75 |
|
15.98 32.95
|
|
|
1,152,232 |
|
|
|
7.96 |
|
|
|
22.33 |
|
|
|
608,339 |
|
|
|
22.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.30 32.95
|
|
|
6,521,524 |
|
|
|
7.25 |
|
|
|
11.73 |
|
|
|
3,434,055 |
|
|
|
9.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, 2005 and 2004, AtheroGenics recorded a total of $46,410, $184,293 and $478,641,
respectively, of amortization of deferred stock compensation related to options and warrants which
had been granted to non-employees in prior years. At December 31, 2006, warrants to purchase
56,000 shares of AtheroGenics common stock remain outstanding which were issued in connection with
a license agreement in 2001.
9. Employee Benefit Plan
AtheroGenics has a defined contribution plan covering eligible employees, which is qualified
under Section 401(k) of the Internal Revenue Code (IRC). Under the provisions of the plan,
eligible participating employees may elect to contribute up to the maximum amount of tax deferred
contribution allowed by the IRC. AtheroGenics may make a discretionary contribution. During 2006,
AtheroGenics matched 50% of employees contributions, up to a maximum of 6% of the employees
annual base compensation. AtheroGenics contributions to the plan for 2006, 2005 and 2004
aggregated $261,098, $237,652 and $204,094, respectively. AtheroGenics stock is not an eligible
investment under this plan.
10. Income Taxes
AtheroGenics income tax expense was $0 for years ended December 31, 2006, 2005 and 2004. The
primary factors causing income tax expense to be different than the federal statutory rates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incomes tax benefit at statutory rate |
|
$ |
(22,889,606 |
) |
|
|
|
|
|
$ |
(28,068,471 |
) |
|
|
|
|
|
$ |
(23,660,339 |
) |
Incentive
stock options |
|
|
2,132,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax benefit net of federal tax benefit |
|
|
(2,416,408 |
) |
|
|
|
|
|
|
(3,269,151 |
) |
|
|
|
|
|
|
(2,783,569 |
) |
Other |
|
|
9,695 |
|
|
|
|
|
|
|
(136,356 |
) |
|
|
|
|
|
|
571,433 |
|
General business credit |
|
|
(2,663,331 |
) |
|
|
|
|
|
|
(2,965,400 |
) |
|
|
|
|
|
|
(2,247,414 |
) |
Valuation allowance |
|
|
25,827,506 |
|
|
|
|
|
|
|
34,439,378 |
|
|
|
|
|
|
|
28,119,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
53
At December 31, 2006, AtheroGenics had net operating loss carryforwards and research and
development credit carryforwards of $331,931,971 and $12,023,544, respectively, for income tax
purposes, which both begin to expire in 2010. The significant components of the deferred tax assets
are:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
125,480,818 |
|
|
$ |
113,542,150 |
|
Research credits |
|
|
12,023,544 |
|
|
|
9,360,213 |
|
Deferred revenue |
|
|
10,280,833 |
|
|
|
|
|
Deferred stock compensation |
|
|
1,380,850 |
|
|
|
501,775 |
|
Other |
|
|
462,546 |
|
|
|
396,947 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
149,628,591 |
|
|
|
123,801,085 |
|
Valuation allowance |
|
|
(149,628,591 |
) |
|
|
(123,801,085 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Because of AtheroGenics lack of earnings history, the deferred tax assets have been fully
offset by a valuation allowance. The valuation allowance increased
$25,827,506 and $36,009,472 in
2006 and 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Deferred tax valuation allowance at beginning of year |
|
$ |
123,801,085 |
|
|
$ |
87,791,613 |
|
Change in cumulative tax differences |
|
|
25,827,506 |
|
|
|
34,439,378 |
|
Excess tax benefit from disqualifying disposition of incentive stock options |
|
|
|
|
|
|
1,570,094 |
|
|
|
|
|
|
|
|
Deferred tax valuation allowance at end of year |
|
$ |
149,628,591 |
|
|
$ |
123,801,085 |
|
|
|
|
|
|
|
|
AtheroGenics net operating loss carryforwards and research and development credit
carryforwards may be subject to certain IRC Section 382 and Section 383 limitations on annual
utilization in the event of changes in ownership. These limitations could significantly reduce the
amount of the net operating loss carryforwards available in the future. The utilization of the
carryforwards is dependent upon the timing and extent of AtheroGenics future profitability. The
annual limitations combined with the expiration dates of the carryforwards may prevent the
utilization of all of the net operating loss and research and development credit carryforwards if
AtheroGenics does not attain sufficient profitability by the expiration dates of the carryforwards.
11. Commitments and Contingencies
On June 19, 1998, AtheroGenics entered into a ten-year operating lease for office and
laboratory space through March 1, 2009. Monthly lease payments of approximately $89,400 began March
2, 1999, the date occupancy commenced. These payments are subject to increases during each
successive 12-month period based on changes in the Consumer Price Index (CPI). Future increases
in monthly lease payments due to increases in the CPI are considered to be contingent rentals, and,
therefore, will be charged to expense over the lease term as they become payable. AtheroGenics may
extend the lease term for two successive five-year periods. AtheroGenics other operating lease
obligations are not significant.
At December 31, 2006, AtheroGenics minimum aggregate commitments under long-term,
non-cancelable operating leases are as follows:
|
|
|
|
|
2007 |
|
$ |
1,381,773 |
|
2008 |
|
|
1,237,098 |
|
2009 |
|
|
209,402 |
|
2010 |
|
|
1,755 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
2,830,028 |
|
|
|
|
|
Net rent expense under operating leases amounted to $1,351,190, $1,161,682 and $1,050,333 in
2006, 2005 and 2004, respectively.
54
In March 2006, AtheroGenics and AstraZeneca agreed to purchase certain commercial
manufacturing equipment. The costs are shared equally between AtheroGenics and AstraZeneca,
subject to a limit on AtheroGenics portion, as part of the joint license and collaboration
agreements that were signed in December 2005. AtheroGenics expects that its portion of the cost of
the equipment and the construction, installation and start-up costs related to the equipment will
be approximately $9.0 million over the life of the project. Under the terms of the license
agreement this amount may be reimbursed by AstraZeneca when certain termination rights expire.
12. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
1st Quarter |
|
2ndQuarter |
|
3rd Quarter |
|
4th Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,166,667 |
|
|
$ |
6,250,000 |
|
|
$ |
10,292,683 |
|
|
$ |
10,965,495 |
|
Operating loss |
|
|
(15,801,288 |
) |
|
|
(13,369,049 |
) |
|
|
(14,625,330 |
) |
|
|
(20,757,940 |
) |
Net loss |
|
|
(19,224,807 |
) |
|
|
(13,056,223 |
) |
|
|
(14,373,320 |
) |
|
|
(20,668,022 |
) |
Net loss per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
(0.49 |
) |
|
|
(0.33 |
) |
|
|
(0.36 |
) |
|
|
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(17,975,888 |
) |
|
$ |
(21,612,599 |
) |
|
$ |
(22,541,263 |
) |
|
$ |
(18,199,485 |
) |
Net loss |
|
|
(18,631,557 |
) |
|
|
(22,205,379 |
) |
|
|
(23,057,352 |
) |
|
|
(18,660,039 |
) |
Net loss per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
(0.50 |
) |
|
|
(0.59 |
) |
|
|
(0.61 |
) |
|
|
(0.49 |
) |
Because of the method used in calculating per share data, the quarterly per share data will
not necessarily add to the per share data as computed for the year.
55
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Managements annual report on internal control over financial reporting. Section 404 of the
Sarbanes-Oxley Act of 2002 requires management to include in this Annual Report on Form 10-K a
report on managements assessment of the effectiveness of our internal control over financial
reporting, as well as an attestation report from our independent registered public accounting firm
on managements assessment of the effectiveness of our internal control over financial reporting.
Managements annual report on internal control over financial reporting and the related attestation
report from our independent registered public accounting firm are located in Item 8 of this Form
10-K and are incorporated herein by reference.
Evaluation of disclosure controls and procedures. Our chief executive officer and chief
financial officer are responsible for establishing and maintaining disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for
AtheroGenics. Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
annual report, have concluded that our disclosure controls and procedures are effective.
Changes in internal control over financial reporting. There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have set forth information relating to the directors and executive officers and compliance
with Section 16(a) of the Securities Exchange Act of 1934 under the captions Nominees, Executive
Officers and Directors, Board Meetings and Committees and Section 16(a) Beneficial Ownership
Reporting Compliance, respectively, in our proxy statement for our 2007 annual meeting of
shareholders to be held on May 17, 2007. We are incorporating this information by reference in
this Form 10-K. Our definitive proxy statement will be filed with the SEC no later than 120 days
after December 31, 2006.
Code of Ethics
We have adopted a code of business conduct and ethics for directors, officers and employees,
including our principal executive officer and principal financial officer, known as the
AtheroGenics, Inc. Code of Business Conduct and Ethics. This is available on our website at
http:// www.atherogenics.com or you may request a free copy from:
AtheroGenics, Inc.
Attention: Investor Relations
8995 Westside Parkway
Alpharetta, Georgia 30004
(678) 336-2500
http://www.investor@atherogenics.com
Item 11. Executive Compensation
We have set forth information relating to executive compensation under the captions Director
Compensation, Executive Compensation, Employment Agreements and Compensation Committee
Interlocks and Insider Participation in the proxy statement referred to in Item 10 above. We are
incorporating this information by reference in this Form 10-K.
56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
We have set forth information relating to ownership of our common stock by certain persons and
to our equity compensation plans under the captions Security Ownership of Certain Beneficial
Owners and Management and Equity Compensation Plan Information, respectively, in the proxy
statement referred to in Item 10 above. We are incorporating this information by reference in this
Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We have set forth information relating to existing or proposed relationships or transactions
between us and certain of our affiliates under the caption Certain Relationships and Related
Transactions in the proxy statement referred to in Item 10 above. We are incorporating this
information by reference in this Form 10-K.
Item 14. Principal Accountant Fees and Services
We have set forth information relating to our principal accountant fees and services under the
caption Principal Accountant Fees and Services in the proxy statement referred to in Item 10
above. We are incorporating this information by reference in this Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules
|
(1) |
|
Financial Statements, filed as part of this report |
|
|
|
|
Report of Independent Registered Public Accounting Firm on Internal Control |
|
|
|
|
Report of Independent Registered Public Accounting Firm on Financial Statements |
|
|
|
|
Balance Sheets as of December 31, 2006 and 2005
Statements of Operations for the years ended December 31, 2006, 2005 and 2004 |
|
|
|
|
Statements Shareholders (Deficit) Equity for the years ended December 31, 2006,
2005 and 2004 |
|
|
|
|
Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 |
|
|
|
|
Notes to Financial Statements |
|
|
(2) |
|
Financial Statement Schedules |
|
|
|
|
No financial statement schedules are provided, because the information called for
is not required or is shown either in the financial statements or the notes
thereto. |
|
|
(3) |
|
Listing of Exhibits |
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
3.01
|
|
|
|
Fourth Amended and Restated Articles of Incorporation
of AtheroGenics, Inc. (filed as Exhibit 3.01 to
Amendment No. 1 to AtheroGenics Annual Report on
Form 10-K for the year ended December 31, 2004 on
April 6, 2005 and incorporated herein by reference). |
|
|
|
|
|
3.02
|
|
|
|
Third Amended and Restated Bylaws of AtheroGenics,
Inc., as amended (filed as Exhibit 3.02 to
AtheroGenics Annual Report on Form 10-K for the year
ended December 31, 2001 and incorporated herein by
reference). |
|
|
|
|
|
3.03
|
|
|
|
Amendment No. 1 to Third Amended and Restated Bylaws
of AtheroGenics, Inc. (filed as Exhibit 3.02 to
AtheroGenics Current Report on Form 8-K on December
8, 2006 and incorporated herein by reference). |
57
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
4.01
|
|
|
|
Form of Common Stock Certificate (filed as Exhibit 4.01 to Amendment No. 4 to
AtheroGenics Registration Statement on Form S-1, Registration No. 333-31140, on August
4, 2000 and incorporated herein by reference). |
|
|
|
|
|
4.02
|
|
|
|
Rights Agreement dated as of November 9, 2001 between AtheroGenics, Inc. and American
Stock Transfer & Trust Company, as Rights Agent (filed as Exhibit 4.4 of AtheroGenics
Form 8-K on November 19, 2001 and incorporated herein by reference). |
|
|
|
|
|
4.03
|
|
|
|
Indenture dated August 19, 2003 between AtheroGenics, Inc. and The Bank of New York
Trust Company of Florida N.A., as Trustee (filed as Exhibit 4.1 to AtheroGenics
Registration Statement on Form S-3, Registration No. 333-110160, on October 31, 2003 and
incorporated herein by reference). |
|
|
|
|
|
4.04
|
|
|
|
Global 41/2% Convertible Note Due 2008 (filed as Exhibit 4.04 to Amendment No. 1 to
AtheroGenics Annual Report on Form 10-K for the year ended December 31, 2004 on April
6, 2005 and incorporated herein by reference). |
|
|
|
|
|
4.05
|
|
|
|
Indenture dated January 12, 2005 between AtheroGenics, Inc. and The Bank of New York
Trust Company of Florida N.A., as Trustee, including the form of Global 1.50%
Convertible Note Due 2012 filed as Exhibit A thereto (filed as Exhibit 4.5 to
AtheroGenics Registration Statement on Form S-3, Registration No. 333-123895, on April
6, 2005 and incorporated herein by reference). |
|
|
|
|
|
10.01
|
|
|
|
Amended and Restated Master Rights Agreement dated October 31, 1995, as amended by First
Amendment dated November 1, 1995; Second Amendment dated July 30, 1996; Third Amendment
dated April 13, 1999; Fourth Amendment dated May 11, 1999; and Fifth Amendment dated
August 30, 1999 (filed as Exhibit 4.02 to AtheroGenics Registration Statement on Form
S-1, Registration No. 333-31140, on February 25, 2000 and incorporated herein by
reference). |
|
|
|
|
|
10.02+
|
|
|
|
Exclusive License Agreement dated July 17, 1998 between The Regents of the University of
California and AtheroGenics, Inc. (filed as Exhibit 10.02 to Amendment No. 4 to
AtheroGenics Registration Statement on Form S-1, Registration No. 333-31140, on August
4, 2000 and incorporated herein by reference). |
|
|
|
|
|
10.03+
|
|
|
|
License Agreement dated January 11, 1995 between Emory University and AtheroGenics, Inc.
(filed as Exhibit 10.03 to Amendment No. 2 to AtheroGenics Registration Statement on
Form S-1, Registration No. 333-31140, on July 13, 2000 and incorporated herein by
reference). |
|
|
|
|
|
10.04+
|
|
|
|
Patent Purchase Agreement dated April 26, 1995 between AtheroGenics, Inc. and Sampath
Parthasarathy, together with Services Agreement dated April 26, 1995 between
AtheroGenics, Inc. and Sampath Parthasarathy (filed as Exhibit 10.04 to Amendment No. 2
to AtheroGenics Registration Statement on Form S-1, Registration No. 333-31140, on July
13, 2000 and incorporated herein by reference). |
|
|
|
|
|
10.05+
|
|
|
|
Sponsored Research Agreement dated October 14, 1996 between Emory University and
AtheroGenics, Inc. (filed as Exhibit 10.05 to Amendment No. 2 to AtheroGenics
Registration Statement on Form S-1, Registration No. 333-31140, on July 13, 2000 and
incorporated herein by reference). |
|
|
|
|
|
10.06#
|
|
|
|
AtheroGenics, Inc. 1995 Stock Option Plan, together with form of nonqualified stock
option agreement (filed as Exhibit 10.07 to AtheroGenics Registration Statement on Form
S-1, Registration No. 333-31140, on February 25, 2000 and incorporated herein by
reference). |
|
|
|
|
|
10.07#
|
|
|
|
AtheroGenics, Inc. 1997 Equity Ownership Plan, as amended by Amendment No. 1 and
Amendment No. 2 (filed as Exhibit 10.08 to Amendment No. 2 to AtheroGenics Registration
Statement on Form S-1, Registration No. 333-31140, on July 13, 2000 and incorporated
herein by reference). |
|
|
|
|
|
10.08
|
|
|
|
Preferred Shares Purchase Warrant dated August 24, 1998 between AtheroGenics, Inc. and
certain Lenders named therein (filed as Exhibit 10.09 to AtheroGenics Registration
Statement on Form S-1, Registration No. 333-31140, on February 25, 2000 and incorporated
herein by reference). |
|
|
|
|
|
10.09
|
|
|
|
Series C Convertible Preferred Stock Purchase Warrants of AtheroGenics, Inc. (filed as
Exhibit 10.10 to AtheroGenics Registration Statement on Form S-1, Registration No.
333-31140, on February 25, 2000 and incorporated herein by reference). |
|
|
|
|
|
10.10
|
|
|
|
Promissory Note dated April 1, 1999 between Inhibitex, Inc. and AtheroGenics, Inc.
(filed as Exhibit 10.11 to AtheroGenics Registration Statement on Form S-1,
Registration No. 333-31140, on February 25, 2000 and incorporated herein by reference). |
58
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10.11++
|
|
|
|
Lease Agreement dated June 19, 1998 between Cousins Properties, Inc. and AtheroGenics,
Inc. (filed as Exhibit 10.12 to AtheroGenics Registration Statement on Form S-1,
Registration No. 333-31140, on February 25, 2000 and incorporated herein by reference). |
|
|
|
|
|
10.12#
|
|
|
|
Employment Agreement dated March 1, 2001 between AtheroGenics, Inc. and Russell M.
Medford (filed as Exhibit 10.14 to AtheroGenics Annual Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by reference). |
|
|
|
|
|
10.13
|
|
|
|
Amendment dated January 1, 2001 to Promissory Note dated April 1, 1999 between
Inhibitex, Inc. and AtheroGenics, Inc. (filed as Exhibit 10.15 to AtheroGenics Annual
Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by
reference). |
|
|
|
|
|
10.14+
|
|
|
|
Exclusive License Agreement dated as of June 29, 2001 between AtheroGenics, Inc. and
National Jewish Medical and Research Center (filed as Exhibit 10.17 to Amendment No. 1
to AtheroGenics Registration Statement on Form S-1, Registration No. 333-64228, on July
23, 2001 and incorporated herein by reference). |
|
|
|
|
|
10.15#
|
|
|
|
AtheroGenics, Inc. 2001 Equity Ownership Plan (filed as Appendix B to the proxy
statement on Schedule 14A for AtheroGenics 2001 Annual Shareholders Meeting as filed
on March 22, 2001 and incorporated herein by reference). |
|
|
|
|
|
10.16
|
|
|
|
Equipment Term Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon Valley
Bank (filed as Exhibit 10.20(b) to AtheroGenics Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002 and incorporated herein by reference). |
|
|
|
|
|
10.17
|
|
|
|
Loan and Security Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as Exhibit 10.20(c) to AtheroGenics Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002 and incorporated herein by reference). |
|
|
|
|
|
10.18
|
|
|
|
First Loan Modification dated June 20, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.
(filed as Exhibit 10.23 to AtheroGenics Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 and incorporated herein by reference). |
|
|
|
|
|
10.19
|
|
|
|
Second Loan Modification dated August 13, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as Exhibit 10.25 to AtheroGenics Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated herein by reference). |
|
|
|
|
|
10.20
|
|
|
|
Third Loan Modification dated December 29, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as Exhibit 10.26 to AtheroGenics Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated herein by reference). |
|
|
|
|
|
10.21
|
|
|
|
Negative Pledge Agreement dated December 29, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as Exhibit 10.27 to AtheroGenics Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated herein by reference). |
|
|
|
|
|
10.22#
|
|
|
|
Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and Mark P.
Colonnese (filed as Exhibit 10.28 to AtheroGenics Form 8-K on December 22, 2004 and
incorporated herein by reference). |
|
|
|
|
|
10.23#
|
|
|
|
Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and Martin A.
Wasserman (filed as Exhibit 10.29 to AtheroGenics Form 8-K on December 22, 2004 and
incorporated herein by reference). |
|
|
|
|
|
10.24#
|
|
|
|
Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and Robert A. D.
Scott (filed as Exhibit 10.30 to AtheroGenics Form 8-K on December 22, 2004 and
incorporated herein by reference). |
|
|
|
|
|
10.25#
|
|
|
|
Employment Agreement dated December 22, 2004 between AtheroGenics, Inc. and W. Charles
Montgomery (filed as Exhibit 10.31 to AtheroGenics Form 8-K on December 22, 2004 and
incorporated herein by reference). |
|
|
|
|
|
10.26#
|
|
|
|
AtheroGenics, Inc. 2004 Equity Ownership Plan (filed as Appendix B to the proxy
statement on Schedule 14A for AtheroGenics 2004 Annual Shareholders Meeting as filed
on March 26, 2004 and incorporated herein by reference). |
|
|
|
|
|
10.27#
|
|
|
|
AtheroGenics, Inc. 2004 Equity Ownership Plan form of incentive equity ownership
agreement and form of directors nonqualified equity ownership agreement (filed as
Exhibit 10.33 to AtheroGenics Annual Report on Form 10-K for the year ended December
31, 2004 on March 16, 2005 and incorporated herein by reference). |
59
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10.28#
|
|
|
|
Summary of non-employee director compensation (filed as the first paragraph under the
caption Director Compensation in the proxy statement on Schedule 14A for AtheroGenics
2005 Annual Meeting of Shareholders as filed with the SEC on March 28, 2005 and
incorporated herein by reference). |
|
|
|
|
|
10.29#
|
|
|
|
Summary of non-employee directors compensation and 2005 executive officers target cash
incentive (filed under Item 1.01 of AtheroGenics, Inc. Form 8-K on April 29, 2005 and
incorporated herein by reference). |
|
|
|
|
|
10.30#
|
|
|
|
Employment Agreement dated May 31, 2005 between AtheroGenics, Inc. and Joseph M. Gaynor,
Jr. (filed as Exhibit 10.1 to AtheroGenics Current on Form 8-K on July 7, 2005 and
incorporated herein by reference). |
|
|
|
|
|
10.31#
|
|
|
|
Transition Agreement dated June 22, 2005 between AtheroGenics, Inc. and Martin A.
Wasserman (filed as Exhibit 10.1 to AtheroGenics Current Report on Form 8-K on July 22,
2005 and incorporated herein by reference). |
|
|
|
|
|
10.32+
|
|
|
|
First Amendment dated August 3, 2005 to License Agreement dated January 11, 1995 between
AtheroGenics, Inc. and Emory University (filed as Exhibit 10.1 to AtheroGenics
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated
herein by reference). |
|
|
|
|
|
10.33
|
|
|
|
Registration Rights Agreement dated January 12, 2005 among AtheroGenics, Inc., as
Issuer, and Morgan Stanley & Co. Incorporated, Lehman Brothers, Inc., JPMorgan
Securities, Inc. and Lazard Freres & Co., as Initial Purchasers (filed as Exhibit 99.1
to AtheroGenics Current Report on Form 8-K on January 13, 2005 and incorporated herein
by reference). |
|
|
|
|
|
10.34+
|
|
|
|
Commercial Supply Agreement for Production of AGI-1067 and Probucol between The Dow
Chemical Company and AtheroGenics, Inc., dated October 6, 2005 (filed as Exhibit 10.34
to AtheroGenics Annual Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference). |
|
|
|
|
|
10.35+
|
|
|
|
License and Collaboration Agreement between AtheroGenics, Inc and IPR Pharmaceuticals,
LP, dated December 22, 2005 (filed as Exhibit 10.35 to AtheroGenics Annual Report on
Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
|
|
|
|
|
10.36+
|
|
|
|
Co-Promotion Agreement by and between AstraZeneca Pharmaceuticals LP and AtheroGenics,
Inc., dated as of December 22, 2005 (filed as Exhibit 10.36 to AtheroGenics Annual
Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by
reference). |
|
|
|
|
|
10.37+
|
|
|
|
Transition Services Agreement, by and between IPR Pharmaceuticals, LP and AtheroGenics,
Inc., dated December 22, 2005 (filed as Exhibit 10.37 to AtheroGenics Annual Report on
Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
|
|
|
|
|
10.38#
|
|
|
|
AtheroGenics, Inc. 2004 Equity Ownership Plan form of nonqualified equity ownership
agreement (filed as Exhibit 10.02 to AtheroGenics Current Report on Form 8-K on March
10, 2006 and incorporated herein by reference). |
|
|
|
|
|
10.39
|
|
|
|
Form of Indemnification Agreement dated July 5, 2006 (filed as Exhibit 10.1 to
AtheroGenics Current Report on Form 8-K on July 6, 2006 and incorporated herein by
reference). |
|
|
|
|
|
10.40#
|
|
|
|
Employment Agreement dated September 25, 2006 between AtheroGenics, Inc. and Russell M.
Medford (filed as Exhibit 10.1 to AtheroGenics Current Report on Form 8-K on September
29, 2006 and incorporated herein by reference). |
|
|
|
|
|
10.41#
|
|
|
|
Employment Agreement dated September 25, 2006 between AtheroGenics, Inc. and Mark P.
Colonnese (filed as Exhibit 10.2 to AtheroGenics Current Report on Form 8-K on
September 29, 2006 and incorporated herein by reference). |
|
|
|
|
|
10.42#
|
|
|
|
Employment Agreement dated September 25, 2006 between AtheroGenics, Inc. and Robert A.D.
Scott (filed as Exhibit 10.3 to AtheroGenics Current Report on Form 8-K on September
29, 2006 and incorporated herein by reference). |
|
|
|
|
|
10.43#
|
|
|
|
Employment Agreement dated September 25, 2006 between AtheroGenics, Inc. and W. Charles
Montgomery (filed as Exhibit 10.4 to AtheroGenics Current Report on Form 8-K on
September 29, 2006 and incorporated herein by reference). |
|
|
|
|
|
10.44#
|
|
|
|
Employment Agreement dated September 25, 2006 between AtheroGenics, Inc. and Joseph M.
Gaynor, Jr. (filed as Exhibit 10.5 to AtheroGenics Current Report on Form 8-K on
September 29, 2006 and incorporated herein by reference). |
|
|
|
|
|
23.01*
|
|
|
|
Consent of Ernst & Young LLP. |
60
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
24.01*
|
|
|
|
Powers of Attorney. |
|
|
|
|
|
31.1*
|
|
|
|
Certifications of Chief Executive Officer under Rule 13a-14(a). |
|
|
|
|
|
31.2*
|
|
|
|
Certifications of Chief Financial Officer under Rule 13a-14(a). |
|
|
|
|
|
32*
|
|
|
|
Certifications of Chief Executive Officer and Chief Financial Officer under Section 1350. |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Filed as the exhibit of the same number with AtheroGenics registration statement on Form
S-1, Registration No. 333-31140, declared effective by the SEC on August 8, 2000, and
incorporated herein by reference. |
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+ |
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Certain confidential information contained in this document has been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment under Rule 406 of the Securities Act of
1933, as amended. |
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We agree to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to this agreement upon request by the
Commission. |
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# |
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Management contract or compensatory plan or arrangement. |
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 7, 2007.
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ATHEROGENICS, INC.
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By: |
/s/ RUSSELL M. MEDFORD
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Russell M. Medford, M.D., Ph.D. |
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President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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Name |
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Title |
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Date |
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Principal Executive Officer: |
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/s/ RUSSELL M. MEDFORD
Russell M. Medford
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President and Chief Executive Officer,
Director
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March 7, 2007 |
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Principal Financial and Principal
Accounting Officer: |
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/s/ MARK P. COLONNESE
Mark P. Colonnese
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Executive Vice President, Commercial
Operations and Chief Financial Officer
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March 7, 2007 |
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/s/ CHARLES A. DEIGNAN
Charles A. Deignan
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Vice President, Finance and Administration
and Principal Accounting Officer
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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Director
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March 7, 2007 |
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*By:
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/s/ JOSEPH M. GAYNOR, JR.
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Joseph M. Gaynor, Jr. |
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Attorney-in-Fact |
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62