UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________
FORM
10-Q
___________
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2008
Commission File No.
0-31261
ATHEROGENICS,
INC.
(Exact
name of registrant as specified in its charter)
Georgia
|
58-2108232
|
(State
of incorporation)
|
(I.R.S.
Employer Identification Number)
|
8995 Westside Parkway,
Alpharetta, Georgia 30004
(Address
of registrant's principal executive offices, including zip code)
_______________________
(Registrant's
telephone number, including area code):
(678)
336-2500
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ]
No
[ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated
filer [ ] Accelerated
filer [ X ]
Non-accelerated
filer [ ] Smaller
reporting company [ ]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [
X ]
As of May 7, 2008 there were 39,518,492
shares of the registrant's common stock outstanding.
_________________________
ATHEROGENICS,
INC.
FORM
10-Q
INDEX
PART
I. FINANCIAL INFORMATION
|
Page No.
|
|
|
Item
1. Condensed Financial Statements (unaudited)
|
|
|
|
Condensed
Balance Sheets
|
|
March
31, 2008 and December 31,
2007
|
1
|
|
|
Condensed
Statements of Operations
|
|
Three
months ended March 31, 2008 and
2007
|
2
|
|
|
Condensed
Statements of Cash Flows
|
|
Three
months ended March 31, 2008 and
2007
|
3
|
|
|
Notes
to Condensed Financial
Statements
|
4
|
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition
|
|
and
Results of
Operations
|
8
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
14
|
|
|
Item
4. Controls and
Procedures
|
14
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
6. Exhibits
|
14
|
|
|
SIGNATURES
|
15
|
|
|
PART
I. – FINANCIAL INFORMATION
Item
1. Financial Statements
ATHEROGENICS,
INC.
CONDENSED
BALANCE SHEETS
(Unaudited)
|
March
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash
equivalents
|
$
|
73,944,616
|
|
|
$
|
74,795,388
|
|
Short-term
investments
|
|
2,012,415
|
|
|
|
18,080,032
|
|
Accounts
receivable
|
|
58,065
|
|
|
|
2,634,422
|
|
Prepaid
expenses and other current
assets
|
|
728,869
|
|
|
|
1,290,260
|
|
Total
current
assets
|
|
76,743,965
|
|
|
|
96,800,102
|
|
|
|
|
|
|
|
|
|
Equipment
and leasehold improvements, net of accumulated
depreciation
|
|
|
|
|
|
|
|
and
amortization
|
|
2,163,744
|
|
|
|
2,361,053
|
|
Debt
issuance costs and other
assets
|
|
3,631,167
|
|
|
|
3,977,873
|
|
Total
assets
|
$
|
82,538,876
|
|
|
$
|
103,139,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
1,504,671
|
|
|
$
|
781,119
|
|
Accrued
research and
development
|
|
2,973,390
|
|
|
|
3,765,745
|
|
Accrued
interest
|
|
883,992
|
|
|
|
2,876,150
|
|
Accrued
compensation
|
|
1,728,576
|
|
|
|
2,258,051
|
|
Accrued
and other
liabilities
|
|
772,736
|
|
|
|
920,736
|
|
Current
portion of convertible notes
payable
|
|
30,500,000
|
|
|
|
35,968,750
|
|
Total
current
liabilities
|
|
38,363,365
|
|
|
|
46,570,551
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net of current
portion
|
|
253,330,804
|
|
|
|
252,163,102
|
|
|
|
|
|
|
|
|
|
Shareholders'
deficit:
|
|
|
|
|
|
|
|
Preferred
stock, no par value: Authorized—5,000,000
shares
|
|
—
|
|
|
|
—
|
|
Common
stock, no par value:
|
|
|
|
|
|
|
|
Authorized—100,000,000
shares; issued and outstanding —
|
|
|
|
|
|
|
|
39,518,492
shares at March 31, 2008
|
|
|
|
|
|
|
|
and
December 31,
2007
|
|
216,575,019
|
|
|
|
215,243,310
|
|
Warrants
|
|
613,021
|
|
|
|
613,021
|
|
Accumulated
deficit
|
|
(426,357,709
|
)
|
|
|
(411,465,815
|
)
|
Accumulated
other comprehensive
gain
|
|
14,376
|
|
|
|
14,859
|
|
Total
shareholders'
deficit
|
|
(209,155,293
|
)
|
|
|
(195,594,625
|
)
|
Total
liabilities and shareholders'
deficit
|
$
|
82,538,876
|
|
|
$
|
103,139,028
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
ATHEROGENICS,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
License
fees
|
|
$
|
—
|
|
|
$
|
6,250,000
|
|
Research
and
development
|
|
|
—
|
|
|
|
5,211,252
|
|
Total
revenues
|
|
|
—
|
|
|
|
11,461,252
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and
development
|
|
|
9,250,062
|
|
|
|
19,964,275
|
|
Marketing,
general and
administrative
|
|
|
3,135,159
|
|
|
|
3,945,503
|
|
Total
operating
expenses
|
|
|
12,385,221
|
|
|
|
23,909,778
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(12,385,221
|
)
|
|
|
(12,448,526
|
)
|
Interest
and other
income
|
|
|
893,637
|
|
|
|
1,883,683
|
|
Interest
expense
|
|
|
(3,400,310
|
)
|
|
|
(2,087,781
|
)
|
Net
loss
|
|
$
|
(14,891,894
|
)
|
|
$
|
(12,652,624
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share –
|
|
|
|
|
|
|
|
|
basic
and
diluted
|
|
$
|
(0.38
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
|
outstanding
– basic and
diluted
|
|
|
39,518,492
|
|
|
|
39,468,054
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
ATHEROGENICS,
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three
months ended
|
|
|
March
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Net
loss
|
$
|
(14,891,894
|
)
|
|
$
|
(12,652,624
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
1,331,709
|
|
|
|
2,597,004
|
|
Amortization
on 4.5% convertible notes due 2011
|
|
1,167,702
|
|
|
|
—
|
|
Amortization
of debt issuance
costs
|
|
325,371
|
|
|
|
370,281
|
|
Depreciation
and
amortization
|
|
197,309
|
|
|
|
265,233
|
|
Amortization
of deferred
revenue
|
|
—
|
|
|
|
(6,225,583
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
2,576,357
|
|
|
|
(44,976
|
)
|
Prepaid
expenses and other
assets
|
|
582,726
|
|
|
|
91,405
|
|
Accounts
payable
|
|
723,552
|
|
|
|
(1,301,973
|
)
|
Accrued
research and
development
|
|
(792,355
|
)
|
|
|
(2,256,073
|
)
|
Accrued
interest
|
|
(1,992,158
|
)
|
|
|
(1,717,500
|
)
|
Accrued
compensation
|
|
(529,475
|
)
|
|
|
(606,237
|
)
|
Accrued
and other
liabilities
|
|
(148,000
|
)
|
|
|
140,869
|
|
Net
cash used in operating
activities
|
|
(11,449,156
|
)
|
|
|
(21,340,174
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Sales
and maturities of short-term
investments
|
|
16,067,134
|
|
|
|
34,408,824
|
|
Purchases
of short-term
investments
|
|
—
|
|
|
|
(18,812,481
|
)
|
Purchases
of equipment and leasehold improvements
|
|
—
|
|
|
|
(164,014
|
)
|
Net
cash provided by investing
activities
|
|
16,067,134
|
|
|
|
15,432,329
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Retirement
of 4.5% convertible notes due
2008
|
|
(5,468,750
|
)
|
|
|
—
|
|
Proceeds
from the exercise of common stock options
|
|
—
|
|
|
|
15,555
|
|
Net
cash (used in) provided by financing activities
|
|
(5,468,750
|
)
|
|
|
15,555
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash
equivalents
|
|
(850,772
|
)
|
|
|
(5,892,290
|
)
|
Cash
and cash equivalents at beginning of
period
|
|
74,795,388
|
|
|
|
87,846,079
|
|
Cash
and cash equivalents at end of
period
|
$
|
73,944,616
|
|
|
$
|
81,953,789
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures
|
|
|
|
|
|
|
|
Interest
paid
|
$
|
3,899,396
|
|
|
$
|
3,435,000
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
ATHEROGENICS,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
and Nature of Operations
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, including diabetes and
coronary heart disease.
2. Basis
of Presentation
The accompanying unaudited condensed
financial statements reflect all adjustments (consisting solely of normal
recurring adjustments) which management considers necessary for a fair
presentation of the financial position, results of operations and cash flows of
AtheroGenics for the interim periods presented. Certain footnote
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been condensed or
omitted from the interim financial statements as permitted by the rules and
regulations of the Securities and Exchange Commission (the
“SEC”). Interim results are not necessarily indicative of results for
the full year.
The interim results should be read in
conjunction with the financial statements and notes thereto included in
AtheroGenics' Annual Report on Form 10-K for the year ended December 31, 2007
(the “Form 10-K”). Shareholders are encouraged to review the Form
10-K for a broader discussion of the opportunities and risks inherent in
AtheroGenics' business. Copies of the Form 10-K are available on
request.
3. Accounts
Receivable
Accounts receivable consists of
receivables related to our license and collaboration agreement with AstraZeneca
(See Note 4). These amounts are typically billed in the month
following the delivery of service.
4. Revenue
Recognition
AtheroGenics recognizes license fee
revenues in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in
Financial Statements,
as amended by SAB 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 over the period the related
license agreements specify that efforts or obligations are required of
AtheroGenics. In 2006, AtheroGenics received a $50 million license
fee in connection with its license and collaboration agreement with
AstraZeneca. The upfront nonrefundable license payment was being
recognized on a straight-line basis over the 24-month period that AtheroGenics
estimated it was obligated to provide services to the licensee. In
2007, AstraZeneca announced that it was ending the license and collaboration
agreements and any further obligations required of AtheroGenics at which time
the remaining unamortized deferred revenue was recognized.
During 2006, AstraZeneca separately
engaged AtheroGenics to perform FOCUS (Follow-up Of Clinical Outcomes: The
Long-term AGI-1067 plus Usual Care Study), a follow-up Phase III clinical trial
for patients who have completed ARISE (Aggressive Reduction of Inflammation
Stops Events). Revenues under the research and development agreement
pertaining to FOCUS were recognized in accordance with 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 was the primary obligor of the
agreement because it was responsible for the selection, negotiation, contracting
and payment of the third party suppliers. In addition, any
liabilities resulting from the agreement were the responsibility of
AtheroGenics. Research and development revenues were recognized, on a
gross basis, as activities were performed under the terms of the related
agreement. Payments received from AstraZeneca, related to FOCUS, for
activities not completed were recorded as deferred
revenue. FOCUS
was concluded in 2007 and AtheroGenics does not anticipate recording any further
revenues related to this agreement.
5. Income
Tax
AtheroGenics
files a U.S. federal and Georgia income tax return on an annual
basis. AtheroGenics is no longer subject to U.S. federal income or
state tax return examinations by tax authorities for years before
2002. However, since AtheroGenics has substantial tax net operating
losses originating in years before 2002, the tax authorities may review the
amount of the pre-2002 net operating losses. AtheroGenics is not
currently under examination by any tax authority.
AtheroGenics
adopted the provisions of the Financial Accounting Standards Board
Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
("FIN 48") effective January 1, 2007. No
cumulative adjustment was required or recorded as a result of the implementation
of FIN 48. As of March 31, 2008, AtheroGenics had no
unrecognized tax benefits. AtheroGenics will recognize accrued
interest and penalties related to unrecognized tax benefits in income tax
expense when and if incurred. AtheroGenics does not anticipate that
unrecognized benefits will be incurred within the next
12 months.
6. Net
Loss per Share
The Statement of Financial Accounting
Standards (“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 were exercised. Because AtheroGenics reported a net
loss for all periods presented, shares associated with stock options, warrants
and convertible notes are not included because their effect would be
antidilutive. Basic and diluted net loss per share amounts are the
same for the periods presented.
7. Stock-Based
Compensation
AtheroGenics
recognizes stock-based compensation in accordance with SFAS No. 123(R),
Share-Based
Payment.
Stock-based compensation of $1.3 million was recorded
for the three months ended March 31, 2008, and $2.6 million for the comparable
period in 2007. AtheroGenics’ net loss per share was increased by
$(0.04) for stock-based compensation related to stock options for the three
months ended March 31, 2008 compared to $(0.07) for the same period in
2007. As of March 31, 2008 and 2007, AtheroGenics has a net operating
loss carryforward and therefore no excess tax benefits for tax deductions
related to the stock options were recognized.
For the three months ended March 31,
2008 and 2007,
AtheroGenics calculated
a forfeiture rate of 11.36% and 5.16%, respectively, based on historical
data. Expected volatility is based on historical volatility of
AtheroGenics’ common stock. The expected term of 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 risk free
interest rate is based on the U.S. Treasury rates in effect at the time of the
grant for periods corresponding with the expected term of the
options. During the three months ended March 31, 2008, AtheroGenics
granted 18,000 stock options from the 2004 AtheroGenics, Inc. Equity Ownership
Plan. There were no options granted during the three months ended
March 31, 2007. For stock options granted during the three months
ended March 31, 2008 the following weighted average assumptions were
used:
|
Three
months ended
|
|
March
31, 2008
|
|
|
Expected
volatility
|
84.88%
|
Expected
term
|
5 years
|
Risk
free interest
rate
|
2.82%
|
Fair
value of
grants
|
$ 0.27
|
8. Convertible
Notes Payable
In August
2003, AtheroGenics issued $100.0 million in aggregate principal amount of 4.5%
convertible notes due September 1, 2008 (the “2008 Notes”) with interest
payable semi-annually in March and September. Net proceeds to
AtheroGenics were approximately $96.7 million, 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 4.5% convertible notes may be converted at the option of
the holder into shares of AtheroGenics common stock 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 per share.
In
January 2006, AtheroGenics exchanged $14.0 million in aggregate principal amount
of the 2008 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.
In July
2007, AtheroGenics extinguished $38.0 million in aggregate principal amount of
the 2008 Notes with certain holders and issued $60.4 million in aggregate
principal amount of 4.5% convertible cotes due 2011 (the “2011
Notes”). This exchange was accounted for as an extinguishment of the
2008 Notes in accordance with EITF 96-19,
Debtor’s Accounting for a
Modification or Exchange of Debt Instruments.
The 2011 Notes
were initially recorded at their fair value of $38.0 million. The
$22.4 million difference between the principal amount and the initial fair value
of the 2011 Notes, the discount, will be accreted up to the face amount of $60.4
million as additional interest expense using the effective interest method over
the remaining life of the new convertible notes. As of March 31,
2008, the remaining balance of the discount on these notes was approximately
$19.1 million.
In January 2008, AtheroGenics redeemed
$17.5 million of its 2008 Notes and, in exchange, issued $11.5 million of 2011
Notes along with $5.5 million of cash. This transaction was accounted
for as a modification in accordance with EITF 96-19
.
AtheroGenics
determined that the carrying value of the new 2011 Notes was $12.0
million. As $11.5 million of 2011 Notes were issued, this resulted in
a premium of approximately $500,000 that will be amortized as an offset to
interest expense over the life of these 2011 Notes.
The terms of the 2011 Notes are
substantially similar to the 2008 Notes including the same customary default
events except that the 2011 Notes will mature in March 2011 as opposed to
September 2008. The 2011 Notes, like the 2008 Notes, bear an interest
rate of 4.5%, payable semiannually in arrears on March 1 and
September 1.
Like the 2008 Notes, the 2011 Notes are
convertible into shares of AtheroGenics common stock at any time prior to the
close of business on the final maturity date, subject to AtheroGenics’ right to
redeem the 2011 Notes prior to their maturity. The initial conversion
rate for the 2011 Notes is 65.1890 shares per $1,000 principal amount of 2011
Notes.
Also like the 2008 Notes, AtheroGenics
may be required to redeem the 2011 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.
In
January 2005, AtheroGenics issued $200.0 million in aggregate principal amount
of 1.5% convertible notes due February 1, 2012 (the “2012 Notes”) with interest
payable semi-annually in February and August. Net proceeds to
AtheroGenics were approximately $193.6 million, 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 2012 Notes are convertible into shares of 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 per share.
The
conversion rate for all of the 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 March 31, 2008, AtheroGenics has
reserved a total of 14,391,278 shares of common stock for future issuances in
connection with all of the convertible notes. In addition, as of
March 31, 2008, there was approximately $384,000 of accrued interest expense
related to the 2008 and 2011 Notes, which is due August 1, 2008, and $500,000 of
accrued interest expense related to the 2012 Notes, which is due September 1,
2008.
The following table summarizes our
convertible notes as of March 31, 2008:
2008
Notes
|
|
$
|
30,500,000
|
|
|
|
|
|
|
2011
Notes
|
|
|
71,898,000
|
|
2012
Notes
|
|
|
200,000,000
|
|
Face
value of convertible
notes
|
|
|
271,898,000
|
|
Discount
on the 2011 Notes
|
|
|
(19,072,320
|
)
|
Premium
on the 2011
Notes
|
|
|
505,124
|
|
Total
2011 Notes and 2012
Notes
|
|
$
|
253,330,804
|
|
9. Recently
Issued Accounting Standards
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 157,
Fair Value Measurements,
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.
SFAS 157 prioritizes the inputs used in
measuring fair value into the following hierarchy:
Level 1 -
Quoted market prices in active markets for identical assets or liabilities as of
the reported date.
Level 2 -
Other than quoted market prices in active markets for identical assets or
liabilities, quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are
not active, and other than quoted prices for assets or liabilities and prices
that are derived principally from or corroborated by market data by correlation
or other means.
Level 3 -
Measurements using management's best estimate of fair value, where the
determination of fair value requires significant management judgment or
estimation.
AtheroGenics’ available-for-sale
securities must be measured under the fair value standard, and are included in
level 1 of the fair value hierarchy as of March 31, 2008. The fair
value of available-for-sale securities was determined based on quoted market
prices. Available-for-sale securities are reflected on AtheroGenics
condensed balance sheet in short-term investments and related gains and losses
are recorded in accumulated other comprehensive gain.
The adoption of SFAS 157 on January 1,
2008 did not have an impact on AtheroGenics’ results of operations.
In February 2007, FASB issued SFAS No.
159,
The Fair Value Option for
Financial Assets and Financial Liabilities,
(“SFAS 159”). SFAS
159 permits entities to choose to measure many financial instruments at fair
value rather than under other GAAP, such as historical costs. This
results in the financial instrument being marked to fair value every reporting
period with the gain or loss from a change in the fair value recorded in the
statement of operations. SFAS 159 is effective for fiscal years
beginning after November 17, 2007. AtheroGenics did not elect the
fair value option for any assets or liabilities previously recorded at
historical cost.
10. Subsequent
Event
In April 2008, AtheroGenics entered
into a Manufacturing and Supply Agreement (the “Agreement”) with ISP Pharma
Systems LLC (“ISP”) for the manufacture and supply of the active pharmaceutical
ingredient and an intermediate product (the “Product”) of AtheroGenics’ product
candidate, AGI-1067.
The
initial term of the Agreement expires on April 1, 2013 and the Agreement is
automatically extended for successive two year terms thereafter if neither
AtheroGenics nor ISP gives notice of non-renewal 180 days prior to the
expiration of the initial or renewal term.
Under the
terms of the Agreement, ISP has agreed to accept certain equipment used in the
manufacture of the Product from AtheroGenics, in exchange for producing initial
batches of the Product. If AtheroGenics elects to discontinue
development of AGI-1067 after completion of an on-going clinical trial,
AtheroGenics has agreed to pay ISP a specified fee for this work. In addition,
ISP has agreed to supply, and AtheroGenics has agreed to purchase, specified
percentages, which change over time, of the worldwide production requirements
for the Product. AtheroGenics will pay ISP a specified purchase
price, which varies based on annual quantities of the Product
supplied. This purchase price is adjustable based on any changes in
Product specifications mandated by AtheroGenics, and, following the end of each
contract year, based upon certain industry price indices.
The
Agreement also contains certain provisions regarding the rights and
responsibilities of the parties with respect to manufacturing specifications,
forecasting and ordering, delivery arrangements, payment terms, change orders,
intellectual property rights, confidentiality and indemnification, as well as
other customary terms and provisions.
Item
2.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following should be read with the financial statements and related footnotes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in AtheroGenics' Annual Report on Form 10-K for the fiscal
year ended December 31, 2007. The results discussed below are not
necessarily indicative of the results to be expected in any future
periods. The following discussion contains forward-looking statements
that are subject to risks and uncertainties which could cause actual results to
differ from the statements made. These risks are set forth in more
detail in our Form 10-K for the fiscal year ended December 31, 2007 under the
headings “Risk Factors” and “ Forward –Looking Statements” below. In
this report, "AtheroGenics," "we," "us" and "our" refer to AtheroGenics,
Inc.
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 diabetes and coronary heart disease. We currently have one
late stage clinical drug development program.
AGI-1067
is our investigational drug with demonstrated anti-inflammatory and antioxidant
properties that is being studied to determine its ability to improve blood sugar
control (glycemic control) in patients with diabetes and potentially reduce
clinical events in patients with cardiovascular disease.
In 2003,
we initiated a Phase III trial, referred to as ARISE (Aggressive Reduction of
Inflammation Stops Events), which evaluated the impact of AGI-1067 on a
composite measure of heart disease outcomes, including death due to coronary
disease, myocardial infarction (heart attack), stroke, coronary
re-vascularization and unstable angina. Important measures of
glycemic control were included for patients with diabetes who also had coronary
heart disease. The study assessed 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 and diabetes medications,
including statins and other cholesterol-lowering therapies, and glycemic control
agents.
The ARISE
trial results were reported in March 2007 and demonstrated that while AGI-1067
did not show a difference from placebo in the composite primary endpoint, the
study did achieve a number of other important
predefined
endpoints. These endpoints included a reduction in the composite of
“hard” atherosclerotic clinical endpoints, composed of cardiovascular death,
resuscitated cardiac arrest, myocardial infarction and
stroke. AGI-1067 achieved a significant reduction of 19% in the rate
of these combined hard endpoints. There were also improvements in the
key diabetes parameters of new-onset diabetes and glycemic
control. Based on our review of the ARISE results, we are pursuing
continued development of the compound, initially as a diabetes
medication. We expect that two positive registration studies in
patients with diabetes will be required to submit a New Drug Application (“NDA”)
for marketing approval.
In August 2007, we commenced the first
registration study for diabetes called ANDES (AGI-1067 as Novel Anti-Diabetic
Agent Evaluation Study), a multi-center, double-blind study with 6-month dosing
using two doses (150 mg and 75 mg), designed to compare the effects of AGI-1067
versus placebo on glycemic endpoints in subjects with confirmed Type 2
diabetes. Patient enrollment for ANDES was completed in December
2007. In April 2008, we announced topline results from a planned
interim analysis. The interim analysis of 806 patients who completed
three months in the study showed dose-related statistically significant
reductions in hemoglobin A1c for the 150 mg and 75 mg doses compared to
placebo. Final results from ANDES are expected to be available in the
third quarter of 2008. Further development activity, including design
of the second registration study, will be determined after reviewing the results
of ANDES and conducting discussions with the FDA.
In 2005, we entered into a license and
collaboration agreement with AstraZeneca for the global development and
commercialization of AGI-1067. Under the terms of the agreement, we
received a license fee of $50 million. In April 2007, AstraZeneca
notified us that pursuant to the terms of the agreement, it was ending the
collaboration. The agreement was terminated in July
2007.
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 was a follow-up Phase III clinical trial for patients
exiting ARISE, designed to collect extended safety
information. Pursuant to the terms of our license agreement,
AstraZeneca funded the entire cost of the trial, which has been
concluded.
AGI-1096,
our second v-protectant
®
candidate, is a novel antioxidant and selective anti-inflammatory agent to
address the accelerated inflammation of grafted blood vessels, known as
transplant arteritis, common in chronic organ transplant
rejection. We worked with Astellas Pharma Inc. (“Astellas”) to
further develop AGI-1096, with Astellas funding the costs for development
activities under the agreement. Astellas has informed us that they
have completed their current development activities and do not have further
development plans. We are not currently undertaking any development activities
on AGI-1096.
The following table provides
information regarding our research and development expenses for our major
product candidates:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Direct
external AGI-1067
costs
|
|
$
|
5,435,987
|
|
|
$
|
10,442,900
|
|
Unallocated
internal costs and other programs
|
|
|
3,814,075
|
|
|
|
9,521,375
|
|
Total
research and
development
|
|
$
|
9,250,062
|
|
|
$
|
19,964,275
|
|
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.
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 in our risk factors
included in our Form 10-K under the headings
Risks Related to Development and
Commercialization of 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. 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 March 31, 2008, had an accumulated deficit of $426.4
million. We cannot assure you that we will become
profitable. 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. AtheroGenics considers certain accounting policies related
to use of estimates, research and development accruals, revenue recognition and
stock-based compensation to be critical policies. There have been no
material changes in the critical accounting policies from what was previously
disclosed in our Form 10-K.
Results
of Operations
Comparison
of the Three Months Ended March 31, 2008 and 2007
Revenues
No revenues were recorded for the three
months ended March 31, 2008 compared to total revenues of $11.5 million for the
three months ended March 31, 2007. License fee revenues for the three
months ended March 31, 2007 were related to the AGI-1067 license agreement with
AstraZeneca that was concluded in 2007. The research and development
revenues of $5.2 million for the three months ended March 31, 2007 were for
services performed for AstraZeneca related to the FOCUS clinical trial, which
was also concluded in 2007.
Expenses
Research and
Development.
Research and development expenses were $9.3
million and $20.0 million for the three months ended March 31, 2008 and 2007,
respectively. The decrease in research and development expenses is
primarily due to decreased expenditures for the ARISE and FOCUS clinical trials,
which were concluded in 2007, and lower personnel costs resulting from the
organizational restructuring in May 2007. This is partially offset by
expenditures in the first quarter of 2008 for the ANDES clinical trial which
commenced in the second half of 2007.
Marketing, General and
Administrative.
Marketing, general and administrative expenses
were $3.1 million and $3.9 million for the three months ended March 31, 2008 and
2007. The decrease is primarily due to lower personnel related
costs.
Interest
and Other Income
Interest and other income is primarily
comprised of income earned on our cash and short-term
investments. Interest and other income decreased to $893,637 for the
three months ended March 31, 2008 from $1.9 million for the comparable period in
2007. The decrease for the three months ended March 31, 2008 was due
to the lower balance of cash and short-term investment funds than in the
comparable period in 2007 as well as lower interest rates.
Interest
Expense
Interest expense is primarily comprised
of interest expense related to our convertible notes. Interest
expense increased to $3.4 million for the three months ended March 31, 2008 from
$2.1 million for the comparable period in 2007. This increase is due
to the additional debt incurred as a result of the extinguishment of $38.0
million
of the
2008 Notes and issuing $60.4 million of the 2011 Notes in third quarter of 2007,
as well as the accretion of the discount recorded in connection with the new
notes.
Liquidity
and Capital Resources
Since inception, we have financed our
operations primarily through sales of equity securities and convertible
notes. At March 31, 2008, we had cash, cash equivalents and
short-term investments of $76.0 million, compared with $92.9 million at December
31, 2007. Working capital at March 31, 2008 was $38.4 million,
compared to $50.2 million at December 31, 2007. The decrease in cash,
cash equivalents and short-term investments and working capital for the three
months ended March 31, 2008 is due to the use of funds for operating purposes
and retiring $5.5 million of the 2008 Notes.
Net cash used in operating activities
was $11.4 million for the three months ended March 31, 2008 compared to $21.3
million for the three months ended March 31, 2007. The net cash used
in operating activities for the three months ended March 31, 2008 was
principally for expenditures related to the ANDES clinical trial. The
net cash used in operating activities for the three months ended March 31, 2007
was principally for the closeout of ARISE, the ongoing FOCUS clinical trial, and
our other ongoing product development programs. For 2008,
expenditures for the ANDES clinical trial are expected to be in the range of $15
million to $18 million.
Net cash provided by investing
activities was $16.1 million for the three months ended March 31, 2008 compared
to $15.4 million for the three months ended March 31, 2007. Net cash
provided by investing activities for the three months ended March 31, 2008 and
2007 consisted primarily of the net sales of short-term
investments.
Net cash used in financing activities
was $5.5 million for the three months ended March 31, 2008 compared to net cash
provided by financing activities of $16,000 for the three months ended March 31,
2007. Net cash provided by financing activities for the three months
ended March 31, 2008 was due to the retirement of $5.5 million of the 2008
Notes. Net cash provided by financing activities in the three months
ended March 31, 2007 consisted of the proceeds received upon exercise of common
stock options.
In August
2003, we issued $100 million in aggregate principal amount of 2008 Notes 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 2008 Notes is payable semi-annually in
arrears on March 1 and September 1. In January 2006, we exchanged
$14.0 million in aggregate principal amount of the 2008 Notes for 1,085,000
shares of our common stock. In July 2007, we extinguished $38.0
million of the 2008 Notes and in exchange, issued $60.4 million of 2011
Notes. The 2011 Notes were initially recorded at their fair value of
$38.0 million. The $22.4 million difference between the principal
amount and the initial fair value of the debt, the discount, is being accreted
up to the face amount as additional interest expense over the remaining life of
the 2011 Notes. As of March 31, 2008, the remaining balance of the
discount on these notes was approximately $19.1 million. In January
2008, we redeemed $17.5 million in aggregate principal amount of our 2008 Notes,
and in exchange issued $11.5 million of 2011 Notes and repaid $5.5 million in
cash. We recorded the new 2011 Notes at their fair value of $12.0
million. This resulted in a premium of approximately $500,000 that
will be amortized as an offset to interest expense over the life of these 2011
Notes. As of March 31, 2008, we have recorded $384,000 of accrued
interest expense related to the 2008 and 2011 Notes, which is due September 1,
2008. From time to time, we may enter into additional exchange offers
and/or purchases of these notes.
As of March 31, 2008, we had
approximately $30.5 million of 2008 Notes outstanding, which amount will become
due on September 1, 2008. Although we expect to have enough cash on
hand to repay all amounts due pursuant to the 2008 Notes and fund 2008
operations, this repayment will leave substantially less cash to fund ongoing
operations during 2009. Our strategy is to raise additional capital,
enter into collaboration arrangements to fund the development and
commercialization of AGI-1067, or restructure our 2008 Notes before they become
due. In addition, we received a notice from Nasdaq of a violation of
the listing standard related to failure to maintain a closing bid price of our
common stock above $1.00. If our common stock fails to be listed on
the Nasdaq Global Market or another national securities exchange, each holder of
the notes will have the right to require us to redeem the notes at face
value. If the maturity of the outstanding notes were accelerated we
would attempt to refinance or
restructure
these obligations. If we do not have sufficient liquidity to fund
operations or pay any of our debt when due, we may seek relief under Title 11 of
the U.S. Code (the “Bankruptcy Code”) at some point in the future.
In January 2005, we issued $200 million
in aggregate principal amount of 1.5% convertible notes due 2012 (2012 Notes)
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 2012 Notes is payable
semi-annually in arrears on February 1 and August 1. Net proceeds
were approximately $193.6 million. As of March 31, 2008, we have
recorded $500,000 of accrued interest expense related to the 2012 Notes, which
is due August 1, 2008.
The following table summarizes our
long-term contractual obligations as of March 31, 2008:
|
Payments
Due by Period
|
|
Total
|
|
2008
|
|
2009-2010
|
|
2011-2012
|
|
Thereafter
|
Contractual
obligations
|
|
|
|
|
|
|
|
|
|
Convertible
notes
|
$
302,398,000
|
|
$
30,500,000
|
|
$ —
|
|
$
271,898,000
|
|
$ —
|
Interest
on convertible
notes
|
22,392,480
|
|
3,803,955
|
|
12,470,820
|
|
6,117,705
|
|
—
|
Operating
leases
|
1,160,148
|
|
945,497
|
|
214,651
|
|
—
|
|
—
|
Total
contractual obligations
|
$
325,950,628
|
|
$
35,249,452
|
|
$
12,685,471
|
|
$
278,015,705
|
|
$ —
|
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
of our Form 10-K
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;
• our
ability to maintain and establish collaborations and the financial terms of any
collaborations;
|
•
|
the
cost of commercialization activities, including product marketing, sales
and distribution;
|
|
•
|
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.
FORWARD-LOOKING
STATEMENTS
The Private Securities Litigation
Reform Act of 1995 (the "Reform Act") 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. All 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, our financial
condition, our access to capital, our research, development and
commercialization of our product candidates 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
management's then current views and assumptions regarding future events and
operating performance, and speak only as of their dates. AtheroGenics
undertakes 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:
·
|
our
inability to successfully develop and commercialize
AGI-1067;
|
|
|
·
|
our
inability to raise additional capital before or after the maturity date of
the 2008 Notes, enter into collaboration arrangements for AGI-1067 or
restructure the 2008 Notes before they become due, we may seek relief
under the Bankruptcy Code;
|
|
|
·
|
the
actual results of clinical studies of AGI-1067 to treat diabetes and
related regulatory judgments concerning AGI-1067 for use in diabetes
management;
|
|
|
·
|
if
our common stock is no longer traded on a national securities exchange or
system of automated quotations, the holders of our convertible notes have
the right to require us to immediately repay amounts outstanding under
such notes, together with accrued interest up to such
date;
|
|
|
·
|
our
ability to generate positive cash flow in light of our history of
operating losses;
|
|
|
·
|
generally
evolving regulatory requirements for drug product approval and
marketing;
|
|
|
·
|
our
ability to successfully develop AGI-1096 or our other product
candidates;
|
|
|
·
|
our
ability to commercialize our product candidates if we fail to demonstrate
adequately their safety
|
|
and
efficacy;
|
|
|
·
|
possible
delays in our clinical trials;
|
|
|
·
|
our
inability to predict whether or when we will obtain regulatory approval to
commercialize our
|
|
product
candidates or the timing of any future revenue from these product
candidates;
|
|
|
·
|
our
need to comply with applicable regulatory requirements in the manufacture
and distribution
|
|
of
our products to avoid incurring penalties that my inhibit our ability to
commercialize our product;
|
|
|
·
|
regulatory
authorities may require that we conduct additional clinical trials or
modify existing clinical trials;
|
|
|
·
|
our
ability to protect adequately or enforce our intellectual property rights
or secure rights to third
|
|
party
patents;
|
|
|
·
|
the
ability of our competitors to develop and market anti-inflammatory
products that are more
|
|
effective,
have fewer side effects or are less expensive than our current or future
product candidates;
|
|
|
·
|
third
parties' failure to synthesize and manufacture our product candidates,
which could delay our
|
|
clinical
trials or hinder our commercialization prospects;
|
|
|
·
|
our
ability to create sales, marketing and distribution capabilities or enter
into agreements with third
|
|
parties
to perform these functions;
|
|
|
·
|
our
ability to attract, retain and motivate skilled personnel and cultivate
key academic collaborations;
|
|
|
·
|
our
ability to obtain an adequate level of reimbursement or acceptable prices
for our products;
|
|
|
·
|
we
may face product liability lawsuits which may cause us to incur
substantial financial loss or we 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;
|
·
|
our
ability to repay $30.5 million principal amount on the 4.5% convertible
notes due September 1, 2008 and our other notes as they become due;
and
|
|
|
·
|
the
conversion of our convertible notes would dilute the ownership interest of
existing shareholders
|
|
and
could adversely affect the market price of our common
stock.
|
The
foregoing list of important factors is discussed in more detail in our Form 10-K
in Item 1A.
Risk Factors
and is not an exhaustive list.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Market risk represents the risk of loss
that may impact our financial position, operating results or cash flows due to
changes in U.S. interest rates. This exposure is directly related to
our normal operating activities. Our cash, cash equivalents and
short-term investments are invested with high quality issuers and are generally
of a short-term nature. Interest rates payable on our convertible
notes are fixed. As a result, we do not believe that near-term
changes in interest rates will have a material effect on our future results of
operations.
Item
4. Controls and Procedures
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
quarterly report, have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.
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.
PART
II - OTHER INFORMATION
Item
6. Exhibits
Exhibits
Exhibit
10.1*
|
-
|
Manufacturing
and Supply Agreement between AtheroGenics, Inc. and ISP Pharma Systems LLC
dated April 1, 2008.
|
|
|
|
Exhibit
31.1
|
-
|
Certifications
of Chief Executive Officer under Rule 13a-14(a).
|
|
|
|
Exhibit
31.2
|
-
|
Certifications
of Chief Financial Officer under Rule 13a-14(a).
|
|
|
|
Exhibit
32
|
-
|
Certifications
of Chief Executive Officer and Chief Financial Officer under Section
1350.
|
|
*
|
Certain
confidential information contained in this document has been omitted and
filed separately with the Commission pursuant to a request for conditional
treatment.
|
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ATHEROGENICS,
INC.
|
|
|
Date: May
9, 2008
|
/s/MARK P. COLONNESE
|
|
Mark
P. Colonnese
|
|
Executive
Vice President, Commercial Operations and
|
|
Chief
Financial Officer
|
|
|
|
|
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