U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
or
Commission file number 0-26866
Sonus Pharmaceuticals, Inc.
22026 20th Ave. SE, Bothell, Washington 98021(Address of Principal Executive Offices)
(425) 487-9500(Registrant’s Telephone Number, Including Area Code)
Indicate by check whether the issuer (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
State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date.
Page 1 of 13 PagesExhibit Index appears on Page 12
TABLE OF CONTENTS
Sonus Pharmaceuticals, Inc.Index to Form 10-Q
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Part I. Financial Information
Item 1. Financial Statements
Sonus Pharmaceuticals, Inc.Balance Sheets
See accompanying notes.
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Sonus Pharmaceuticals, Inc.Statements of Operations(Unaudited)
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Sonus Pharmaceuticals, Inc.Statements of Cash Flows(Unaudited)
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Sonus Pharmaceuticals, Inc.Notes to Financial Statements(Unaudited)
1. Basis of Presentation
The unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.
The financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Form 10-K for the year ended December 31, 2001 and filed with the Securities and Exchange Commission on March 5, 2002.
2. Comprehensive Income (Loss)
3. Common Stock
In January 2002, the Company sold 1.9 million shares of common stock in a private placement transaction for gross proceeds of $13.6 million ($12.5 million net of transaction costs). In connection with the placement, the Company issued warrants to purchase up to 385,800 shares of common stock. The warrants are exercisable at $9.40 per share and expire in January 2007.
4. Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities consist of the following:
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:
While these forward-looking statements made by us are based on our current beliefs and judgement, they are subject to risks and uncertainties that could cause actual results to vary from the projections in the forward-looking statements. You should consider the risks below carefully in addition to other information contained in this report before purchasing shares of our common stock. If any of the risks listed below occur, they could seriously harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
The discussion and analysis set forth in this document contains trend analysis, discussions of regulatory status and other forward-looking statements. Actual results could differ materially from those projected in the forward-looking statement as a result of the following factors, among others:
Certain of these risk factors are discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2001.
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MD&A Overview
In Management’s Discussion and Analysis of Financial Condition and Results of Operations we explain the general financial condition and the results of operations for our Company, including:
Business Overview
The Company is applying its expertise in drug delivery to make therapeutic drugs safer, easier to administer and more effective. The Company’s TOCOSOL™ drug delivery technology, a Vitamin E based oil-in-water emulsion, is broadly applicable to multiple drugs, diseases and dosage forms. We currently have a cancer therapy product, TOCOSOL Paclitaxel (formerly known as S-8184), in Phase 2 clinical trials, and we also have several active compounds under investigation in therapeutic areas that target cancer, cardiovascular disease, diabetes and infection. We plan to file an Investigational New Drug Application (IND) on one of these compounds in late 2002.
The Company’s first application of its TOCOSOL drug delivery technology is an injectable paclitaxel emulsion formulation, TOCOSOL Paclitaxel. Paclitaxel is the active ingredient in the world’s leading cancer drug, Taxol® (the Bristol-Myers Squibb product), which is approved in the U.S. for the treatment of breast, ovarian and non-small cell lung tumors. We filed an Investigational New Drug Application, or IND, for TOCOSOL Paclitaxel with the U.S. Food and Drug Administration (FDA) in September 2000 and initiated a Phase 1 human clinical study in December 2000. The Company has completed the Phase 1 study and TOCOSOL Paclitaxel is currently being studied in four Phase 2 studies to evaluate efficacy in non-small cell lung, ovarian, bladder and colorectal cancers.
The Company completed its Phase 1 study in May 2002 after enrolling a total of 37 patients. The objectives of the Phase 1 study were to determine the maximum tolerated dose of TOCOSOL Paclitaxel and to evaluate safety. Preliminary Phase 1 results suggest that TOCOSOL Paclitaxel may provide safety and convenience advantages for both patients and physicians including a reduction in side effects, steroid premedications and administration time using a ready-to-use formulation in a single, quick injection administered in less than 15 minutes compared to the three-hour infusion of existing formulations of paclitaxel. Based on preclinical and clinical studies, we also believe there may be potential efficacy benefits of TOCOSOL Paclitaxel that may result from higher concentrations of the drug delivered to the tumor and higher sustained dose density within the tumor. In Phase 1 tests measuring levels of paclitaxel in blood, a quick injection of TOCOSOL Paclitaxel resulted in higher peak drug concentrations, higher total drug exposure and slower clearance times compared with published literature for a three-hour infusion of Taxol.
Anti-tumor activity observed in the Phase 1 study, defined as partial responses, minor responses and stable disease, was demonstrated in 15 out of 36 evaluable patients. The maximum tolerated dose (MTD) in the Phase 1 study was determined to be 200 mg/m2 for administration once every three weeks, which compares to the standard dose of Taxol at 175 mg/m2 once every three weeks. Dose limiting toxicities seen in the Phase 1 study include myalgia (muscle aches), fatigue, and neutropenia (low white cell count). No Grade 3 or 4 neuropathy was seen at doses up to 200 mg/m2. All of the patients in the Phase 1 study had advanced cancers and no other therapeutic options.
Phase 2 studies for TOCOSOL Paclitaxel were initiated in March of 2002. The Phase 2 program is designed to evaluate the efficacy of TOCOSOL Paclitaxel in specific tumor types. Our goal is to obtain
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a clear measure of efficacy with TOCOSOL Paclitaxel and to quickly determine the indications where the product shows the greatest efficacy. The first four Phase 2 studies will evaluate TOCOSOL Paclitaxel in non-small cell lung, ovarian, bladder and colorectal cancers using weekly dosing of TOCOSOL Paclitaxel. Each Phase 2 study will begin with a dose escalation phase to determine the MTD of TOCOSOL Paclitaxel. Weekly dose levels to be studied include 80, 100 and 120 mg/m2. The MTD will be determined separately for each of the four studies. These will be single agent, second line studies enrolling patients that have not previously had taxane chemotherapy treatments. Initial efficacy data is expected in the third quarter of 2002 and patient enrollment is expected to continue through mid-2003.
As of early July 2002, a total of 72 patients had been enrolled in the four Phase 2 studies (18 per study). MTD in the colorectal study has been determined at 120 mg/m2 per week, which corresponds to 360 mg/m2 over a three-week period. As a comparison, the standard dose of Taxol is 175 mg/m2 once every three weeks. MTD data for the other three Phase 2 studies is expected by the end of the third quarter 2002. Based on Phase 2 data to date from 39 of the 72 patients enrolled, there has not been a single case of any grade of neuropathy reported at any dose. Neuropathy, which is a numbness or tingling in the hands and feet, is a side effect commonly seen with Taxol and often limits a patient’s ability to stay on therapy. Another side effect experienced with Taxol is neutropenia, a decrease in the white cell count. In the Phase 2 studies to date, results show that the rate of neutropenia for TOCOSOL Paclitaxel has been one third of that described in the Taxol package insert, which is based on once per three week dosing.
In addition to TOCOSOL Paclitaxel, we are evaluating other products and additional therapeutic drug formulations to expand our TOCOSOL drug delivery technology platform. We currently have several active compounds under investigation in therapeutic areas that target cancer, cardiovascular disease, diabetes and infection. In addition to injectable dosage forms, we are also seeing preliminary evidence supporting oral administration using the TOCOSOL technology platform in certain of these compounds. Our near-term objective is to file one Investigational New Drug (IND) application with the FDA by the end of 2002. Our research and development efforts on potential new products are preliminary and we cannot give any assurance that our efforts will be successful or that any INDs will be filed.
In June 2002, the Company entered into a manufacturing and supply agreement with Gensia Sicor Pharmaceuticals, Inc. for TOCOSOL Paclitaxel. The agreement provides the Company with a reliable manufacturer of the product for future clinical studies and commercialization requirements. Sonus and Gensia Sicor will collaborate to scale and validate the manufacturing process over the next 6 to 12 months.
Results of Operations
Our results of operations have varied and will continue to vary significantly and depend on, among other factors:
Historically, our reported revenues have been derived from payments received under contractual and license agreements with third parties. The Company reported no revenue in the second quarter of 2002 compared to $91,000 for the second quarter of 2001. Revenues for the second quarter of the prior year represent royalty income under a prior agreement with Nycomed Amersham plc. For the six
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months ended June 30, 2002, revenue was $25,000 compared to $1.2 million for the prior year period. Included in 2001 is a $1.0 million non-refundable license fee payment received under an ultrasound contrast patent license agreement with Chugai Pharmaceutical Co. Ltd.
Total operating expenses were $3.7 million for the second quarter of 2002 compared with $1.9 million for the prior year. The increase in operating expenses from the prior year was primarily due to higher research and development expenses ($2.8 million in the second quarter of 2002 compared to $1.3 million in the second quarter of 2001). This planned increase was largely due to increased activity related to the manufacture, development and clinical testing of our lead cancer therapy product, TOCOSOL Paclitaxel, as the drug advances through phase 2 clinical trials as well as increased costs to support new product development. General and administrative expenses were also higher ($861,000 in the second quarter of 2002 compared to $616,000 in the second quarter of 2001) primarily due to higher personnel and consulting costs. For the first six months of 2002, total operating expenses were $6.2 million compared to $3.8 million for the prior year period. The increase reflects the advancement of our lead product, TOCOSOL Paclitaxel, into phase 2 clinical trials, continued development of additional new drug compounds and higher personnel costs as we expand our operations.
We anticipate that total operating expenses for the next several quarters will be consistent with or slightly higher than the second quarter of 2002 as we continue to invest in current and future product development activities. Net cash burn for the full year 2002 is expected to be approximately $13.0 to $14.0 million.
Net interest income was $150,000 and $258,000 for the three and six months ended June 30, 2002 compared with $107,000 and $238,000 for the same periods in 2001. The increase in net interest income was primarily due to higher levels of invested cash in the current year, offset partially by lower interest rates.
Net loss for the second quarter of 2002 was $3.5 million, compared with a net loss of $1.7 million for the same period of the prior year. Net loss for the six months ended June 30, 2002 was $6.0 million compared with a net loss of $2.5 million for the same period of the prior year.
Liquidity and Capital Resources
We have historically financed operations with payments under contractual agreements with third parties and proceeds from equity financings. At June 30, 2002, we had cash, cash equivalents and marketable securities of $22.1 million compared to $15.1 million at December 31, 2001. The increase was primarily due to $12.5 million of net proceeds from a private placement of common stock in January 2002, offset in part by the year-to-date net loss of $6.0 million.
In June 2002, the Company entered into a manufacturing and supply agreement with Gensia Sicor Pharmaceuticals, Inc. for TOCOSOL Paclitaxel. Sonus and Gensia Sicor will collaborate to scale and validate the manufacturing process, and Sonus expects to spend approximately $1.5 million over the next 6 to 12 months for the dedicated equipment and technology transfer to support these activities. Approximately $1.0 million is expected to be incurred during the second half of this year and is included in the Company’s previously disclosed projected 2002 net cash burn of $13.0 to $14.0 million.
We expect that our cash requirements will increase in future periods due to development costs associated with our TOCOSOL drug delivery products. Based on our current operating plan, including planned clinical trials and other product development costs including technology transfer costs related to our manufacturing and supply agreement, we estimate that existing cash and marketable securities will be sufficient to meet our cash requirements through 2003. However, we will need additional funding to complete late stage clinical trials and regulatory approval of TOCOSOL Paclitaxel and to
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fund other product development activities beyond this timeframe. Accordingly, we intend to seek additional funding through available means, which may include debt and/or equity financing or funding under additional third party collaborative agreements. Our future capital requirements depend on many factors including:
We cannot give assurance that additional financing will be available on acceptable terms, if at all. Any equity financing would likely result in dilution to our existing stockholders and debt financing, if available, may include restrictive covenants. If we are unable to raise additional financing, we may be required to curtail or delay the development of our products and new product research and development, which could seriously harm our business.
Critical Accounting Policies and Estimates
The preparation of the financial statements requires management to make estimates and assumptions. On an on-going basis, management evaluates its estimates and judgements including those related to revenue recognition and research and development costs. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgements and estimates used in the preparation of its financial statements.
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Item 3. Market Risk
The market risk inherent in our short-term investment portfolio represents the potential loss that could arise from adverse changes in interest rates. If market rates hypothetically increase immediately and uniformly by 100 basis points from levels at June 30, 2002, the decline in the fair value of the investment portfolio would not be material. Because we have the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Information regarding matters submitted to a vote of security holders at our annual meeting of stockholders held on April 23, 2002, is set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended June 30, 2002.
Items 1, 2, 3 and 5 are not applicable and have been omitted.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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