Form 10-Q for NEUROGEN CORP
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11-Aug-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion is intended to further the reader's understanding of the consolidated financial condition and results of operations of Neurogen Corporation ("Neurogen," "the Company," "we," "us," "our"). It should be read in conjunction with the financial statements in this quarterly report on Form 10-Q and our annual report on Form 10-K, as amended, for the year ended December 31, 2007.
Note Regarding Forward-looking Statements
Statements that are not historical facts, including statements about the Company's confidence and strategies, the status of various product development programs, the sufficiency of cash to fund planned operations and the Company's expectations concerning its development compounds, drug discovery technologies and opportunities in the pharmaceutical marketplace are "forward-looking statements" within the meaning of the Private Securities Litigations Reform Act of 1995 that involve risks and uncertainties and are not guarantees of future performance. These risks include, but are not limited to, difficulties or delays in development, testing, regulatory approval, production and marketing of any of the Company's drug candidates, in-licensing of drug candidates, collaborations and alliances, acquisitions or business combinations, the failure to attract or retain key personnel, any unexpected adverse side effects or inadequate therapeutic efficacy of the Company's drug candidates which could slow or prevent product development efforts, competition within the Company's anticipated product markets, the Company's dependence on corporate partners with respect to development funding, regulatory filings and manufacturing and marketing expertise, the uncertainty of product development in the pharmaceutical industry, inability to obtain sufficient funds through future collaborative arrangements, equity or debt financings or other sources to continue the operation of the Company's business, risk that patents and confidentiality agreements will not adequately protect the Company's intellectual property or trade secrets, dependence upon third parties for the manufacture of potential products, inexperience in manufacturing and lack of internal manufacturing capabilities, dependence on third parties to market potential products, lack of sales and marketing capabilities, potential unavailability or inadequacy of medical insurance or other third-party reimbursement for the cost of purchases of the Company's products, the Company's recent operational restructuring and other risks detailed in the Company's Securities and Exchange Commission filings, including its Annual Report on Form 10-K/A for the year ended December 31, 2007, each of which could adversely affect the Company's business and the accuracy of the forward-looking statements contained herein. Any new material changes in risk factors since the Annual Report on Form 10-K/A for the year ended December 31, 2007 are discussed further in Part II, Item 1A.
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Overview
Since its inception in September 1987, Neurogen has been engaged in the discovery and development of drugs. We have not derived any revenue from product sales and have incurred, and expect to continue to incur, significant losses in most years prior to deriving any such product revenues or earnings. Revenues to date have come from six collaborative research agreements, one license agreement and one technology transfer agreement.
During the first six months of 2008, we restructured our research and development operations to suspend our active discovery operations. This involved reducing our discovery research and administrative support staff by approximately 70 employees in February 2008 and by approximately 45 employees in early April 2008. (See Footnote 6 to our condensed consolidated financial statements.) This restructuring was a part of an initiative to focus our resources on advancing our four unpartnered clinical programs in insomnia, anxiety, restless legs syndrome, or RLS, and Parkinson's disease.
In the second quarter of 2008, we incurred significant expenses in conducting clinical trials and other development activities, such as formulation testing and toxicology studies, for aplindore, our lead compound in the RLS and Parkinson's disease programs and adipiplon, formerly NG2-73, our lead compound in the insomnia program and anxiety program. In February 2008, we commenced Phase 2 studies with aplindore, our dopamine partial agonist, in Parkinson's disease and in RLS.
Our ongoing Phase 2 Parkinson's study is a dose-ranging double-blind placebo controlled exploratory study of the safety, tolerability, efficacy and pharmacokinetics of aplindore in patients with early stage Parkinson's disease. The primary endpoint of the study is safety and efficacy. We will also explore efficacy as a secondary endpoint. We are doing this study in cohorts where we explore a different titration regimen and dose range in each cohort. We expect to dose up to five cohorts of eight patients each for two weeks of treatment with doses of aplindore administered twice per day.
Our ongoing Phase 2 RLS study is a Phase 2 single blind, placebo-controlled multi-center study designed to determine the efficacy and safety of escalating doses of aplindore administered once per day for at least three nights compared to placebo. The primary end point of this study is the number of periodic limb movements, or PLM's, per hour of sleep for patients receiving aplindore versus those receiving placebo. We are also exploring additional subjective outcomes in sleep measures in several secondary end points. We expect up to 24 adult patients with RLS to participate in the study.
In July 2008, we announced the suspension of an ongoing insomnia study comparing adipiplon with Ambien CR�. In this study, we observed a higher than anticipated rate of unwanted next-day effects suggesting the blood levels of the adipiplon bi-layer tablet being administered in the study were too high. We are currently evaluating data generated on the bi-layer tablets used in the study to determine whether the tablets released the active drug as designed and whether we can and should move forward with the insomnia program.
If aplindore or adipiplon were to progress through additional Phase 2 and Phase 3 studies without us entering into an agreement to partner with another firm to share costs and future revenue, clinical trial and other development expenses related to these drugs would be expected to increase. The actual amount of future development expenses will derive from the level of development activities being conducted and the level of these activities is contingent on the results of ongoing studies.
Research and development expenses accounted for 57% and 83% of total expenses in the six-month periods ended June 30, 2008 and 2007, respectively. As a result of the operational restructurings that we undertook in 2008, we are now planning to sell certain physical and intellectual property assets associated with our prior research operations. As a result, we reclassified a majority of our buildings and equipment as available for sale and wrote down the value of those buildings by $7.2 million. Based upon the result of the sale of equipment in an auction late in the second quarter, no loss was incurred, and therefore, no loss has been recorded for equipment that is anticipated to be sold in the future.
Results of Operations
Results of operations may vary from period to period depending on numerous factors, including the timing of income earned under existing or future collaborative agreements, the progress of our independent and partnered research and development projects, the size of our staff and the level of preclinical and clinical development spending on drug candidates in unpartnered programs. We believe our research and development costs could increase over the next several years as our drug development programs progress. In addition, general and administrative expenses would be expected to increase to support any expanded research and development activities.
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Three Months Ended June 30, 2008 and 2007
Operating revenues. We had no operating revenues for the three months ended June 30, 2008 compared to $5.5 million for the same period in 2007. The decrease is a result of the conclusion of the research component of our VR1 collaboration with Merck Sharp & Dohme Limited, a subsidiary of Merck & Co., Inc., or Merck. As of June 30, 2007, license fee revenue consisted of $2.1 million of the initial $15.0 million license fee received in 2003, $0.4 million of the first $2.5 million anniversary license fee received in 2004, $0.6 million of the second $2.5 million anniversary license fee received in 2005, and $0.7 million of the final $2.0 million anniversary license payment received in 2006. The research and development revenue consisted of $1.0 million of a $3.0 million nonsubstantive milestone received from Merck in October 2006 and $0.7 million in research funding received in March 2007. The nonsubstantive milestone and the license payment were being recognized over the remaining contract period, which was accelerated due to the conclusion of the research program component of the Company's VR1 collaboration with Merck. The research funding was being recognized over the associated service period of three months. The research program and our remaining obligations concluded as of August 28, 2007, and as such, remaining unearned revenue was recognized ratably over the period between May 30 and August 28, 2007.
Three Months Ended
June 30,
2008 2007 Change
(in thousands)
License fees $ - $ 3,867 $ (3,867 )
Research and development - 1,666 (1,666 )
Total operating revenue $ - $ 5,533 $ (5,533 )
We have no future revenues anticipated at this time; however, we are still eligible to receive milestone payments from Merck upon their achievement of certain development milestones.
Research and development expenses. Research and development expenses were $8.0 million and $16.4 million for the three months ended June 30, 2008 and 2007, respectively. The decrease in research and development costs in the period ended June 30, 2008 compared to the same period ended 2007 was primarily due to a $6.5 million reduction in internal research and development expenses (see table below) associated with the restructuring plans that occurred in 2008. The reduction of internal research and development expenses included a noncash credit of $1.4 million associated with the cancellation of stock options of employees terminated in the Company's 2008 restructurings offset by noncash expense of $0.6 million for options which continue to vest. Other salary and benefits expenses associated with the February and April 2008 restructurings are excluded from the table below and discussed further in Restructuring charges. The decrease in research and development expenses is also due to a decrease in outsourced clinical trials. An overall decrease in outsourced clinical trials was attributable to a $1.0 million decrease in clinical trial activity in the obesity program that we are no longer advancing and decreases of $1.7 million in the insomnia and anxiety programs partially offset by increases of $1.7 million in clinical expenses for the Parkinson's disease and RLS programs. Outsourced non-clinical development expenses, such as toxicology studies, chemical manufacturing, formulations and stability studies for all of our unpartnered programs decreased in 2008 compared to the same period in 2007. (See also Footnotes 6 to our condensed consolidated financial statements.)
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Three Months Ended June 30, 2008 2007 Change
(in thousands)
Outsourced clinical expenses
Insomnia and anxiety $ 2,128 $ 3,861 $ (1,733 ) Obesity - 955 (955 ) Parkinson's disease and RLS 1,731 - 1,731 Total outsourced clinical expenses 3,859 4,816 (957 ) Outsourced non-clinical development expenses 2,569 3,514 (945 ) Internal expenses
Salary and benefits 632 5,312 (4,680 ) Supplies and research 58 1,211 (1,153 ) Computer and office supplies 73 185 (112 ) Facilities and utilities 551 966 (415 ) Travel and other costs 253 369 (116 ) Total internal expenses 1,567 8,043 (6,476 )
Total research and development expenses $ 7,995 $ 16,373 $ (8,378 )
As mentioned above, unless currently unpartnered programs are partnered, we retain all rights to the programs, and we expect that development costs will increase as each program progresses.
General and administrative expenses. General and administrative expenses were $0.8 million and $3.5 million for the three months ended June 30, 2008 and 2007, respectively. This decrease was primarily due to a $1.5 million decrease in salaries and benefits expense (including a noncash credit of $0.7 million for the cancellation of stock options as a result of employee terminations offset by noncash expense of $0.3 million for options that continue to vest). Salary and benefits expenses associated with our February and April 2008 restructurings are excluded from the table below and discussed further in Restructuring charges. General and administrative expenses also decreased as a result of a decrease in patent and administrative expenses. As a result of the restructuring plan, we prosecuted fewer patents during the second three months of 2008 compared to the same period in 2007. In addition, the decrease in administrative expense is associated with a decrease in legal expenses. We capitalized legal expenses associated with the financing transaction in April 2008
Three Months Ended June 30,
2008 2007 Change
(in thousands)
Salary and benefits $ 242 1,713 (1,471 )
Supplies 89 140 (51 )
Patents 133 533 (400 )
Administrative 172 715 (543 )
Travel, facilities and other costs 120 372 (252 )
Total general and administrative expenses $ 756 $ 3,473 $ (2,717 )
Restructuring charges. Restructuring charges were $9.8 million for the three months ended June 30, 2008. We had no restructuring charges in the second quarter of 2007. The restructuring charge in the second quarter of 2008 is associated with the reduction in workforce announced on April 8, 2008. As part of this plan, we eliminated approximately 45 employee positions inclusive of both administrative and research functions, representing approximately 60% of our total workforce. Affected employees are eligible for a severance package that includes severance pay, continuation of benefits and outplacement services. A charge of $2.6 million was recorded in the second quarter of 2008, including $2.5 million related to employee separation costs and $0.1 million related to outplacement and administrative fees, the majority of which will be paid in the second and third quarters of 2008. We also recorded, in the second quarter, an estimated asset impairment charge of $7.2 million related to the buildings that are available for sale.
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Gain on warrants to purchase common stock. In the second quarter of 2008, we recorded a non-recurring gain on Warrants to purchase Common Stock of $12.0 million in connection with our April 2008 financing. The financing is discussed further in Liquidity and Capital Resources. (See also the Footnote 4 and Footnote 5 to our condensed consolidated financial statements.)
Other income, net of interest expense. Other income, net of interest expense, was $0.2 million for the three months ended June 30, 2008, compared to $0.6 million for the same period in 2007. The decrease is a result of our lower cash and marketable securities balance over the period.
Income tax benefit. The State of Connecticut provides companies with the opportunity to forego certain research and development tax credit carryforwards in exchange for cash. For the three months ended June 30, 2008, the Company recorded an income tax benefit of $0.02 million for the sale of R&D credits generated during this period to the State of Connecticut compared to the $0.1 million for the same period in 2007. The decrease in sale of R&D credits is attributable to a reduction in our research and development expenses.
Net loss attributable to common stockholders. The Company recognized a net loss attributable to common stockholders of $11.8 million for the three months ended June 30, 2008 compared to $13.6 million for the same period in 2007. The $1.8 million decrease in net loss was primarily a result of a decrease in operating expenses and a gain on warrants to purchase common stock offset by the impairment charge on the buildings and deemed preferred dividends.
Six Months Ended June 30, 2008 and 2007
Operating revenues. We had no operating revenues for the six months ended June 30, 2008 compared to $7.9 million for the same period in 2007. The decrease is a result of the conclusion of the research component of our VR1 collaboration with Merck. As of June 30, 2007, license fee revenue consisted of $2.9 million of the initial $15.0 million license fee received in 2003, $0.6 million of the first $2.5 million anniversary license fee received in 2004, $0.8 million of the second $2.5 million anniversary license fee received in 2005, and $0.9 million of the final $2.0 million anniversary license payment received 2006. The research and development revenue consisted of $1.3 million of a $3.0 million nonsubstantive milestone received from Merck in October 2006 and $1.4 million in research funding received in March 2008 and December 2007. The nonsubstantive milestone and the license payment were being recognized over the remaining contract period, which was accelerated due to the conclusion of the research program component of the Company's VR1 collaboration with Merck. The research funding was being recognized over the associated service period of three months. The research program and our remaining obligations concluded as of August 28, 2007, and as such, remaining unearned revenue was recognized ratably over the period between May 30 and August 28, 2007.
Six Months Ended June 30,
2008 2007 Change
(in thousands)
License fees $ - $ 5,232 $ (5,232 )
Research and development - 2,706 (2,706 )
Total operating revenue $ - $ 7,938 $ (7,938 )
We have no future revenues anticipated at this time; however, we are still eligible to receive milestone payments from Merck upon their achievement of certain development milestones.
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Research and development expenses. Research and development expenses were $20.0 million and $35.3 million for the six months ended June 30, 2008 and 2007, respectively. The decrease in research and development costs in the period ended June 30, 2008 compared to the same period ended 2007 was primarily due to a $8.6 million reduction in internal research and development (see table below) associated with the restructuring plans that occurred in 2008. The reduction in internal research and development expenses included a noncash credit of $1.8 million associated with the cancellation of stock options of employees terminated in the 2008 restructurings offset by noncash expense of $1.1 million for options that continue to vest. Other salary and benefits expenses associated with the 2008 restructurings are excluded from the table below and discussed further in Restructuring charges. The decrease in research and development expenses is also due to decreased outsourced clinical trials. An overall decrease in outsourced clinical trials was attributable to a $1.4 million decrease in clinical trial activity in the obesity program, which we are no longer advancing, as well as an $8.7 million decrease in costs for the insomnia program partially offset by a $4.2 increase in clinical expenses for the Parkinson's disease and RLS programs. Outsourced non-clinical development expenses, such as toxicology studies, chemical manufacturing, formulations and stability studies for all of our unpartnered programs decreased in 2008 compared to the same period in 2007.
Six Months Ended June 30,
2008 2007 Change
(in thousands)
Outsourced clinical expenses
Insomnia and anxiety $ 2,428 $ 11,094 $ (8,666 )
Obesity 157 1,597 (1,440 )
Parkinson's disease and RLS 4,584 400 4,184
Total outsourced clinical expenses 7,169 13,091 (5,922 )
Outsourced non-clinical development expenses 5,444 6,180 (736 )
Internal expenses
Salary and benefits 4,184 10,670 (6,486 )
Supplies and research 930 2,304 (1,374 )
Computer and office supplies 235 394 (159 )
Facilities and utilities 1,459 1,974 (515 )
Travel and other costs 628 683 (55 )
Total internal expenses 7,436 16,025 (8,589 )
Total research and development expenses $ 20,049 $ 35,296 $ (15,247 )
As mentioned above, unless currently unpartnered programs are partnered, we retain all rights to the programs, and we expect that development costs will increase as each program progresses.
General and administrative expenses. General and administrative expenses were $2.9 million and $7.2 million for the six months ended June 30, 2008 and 2007, respectively. This decrease was primarily due to a $2.2 million decrease in salaries and benefits expense (including a noncash credit of $0.8 million for cancellation of stock options as a result of employee terminations offset by noncash expense of $0.5 million for options which continue to vest). Salary and benefits expenses associated with our February and April 2008 restructurings are excluded from the table below and discussed further in Restructuring charges. General and administrative expenses also decreased as a result of decreases in, patents expense and administrative expense. As a result of the restructuring plan, we prosecuted fewer patents during the first six months of 2008 compared to the same period in 2007. In addition, the decrease in administrative expense is associated with a decrease in legal expenses. We capitalized legal expenses associated with the financing transaction in April 2008.
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Six Months Ended June 30, 2008 2007 Change
(in thousands)
Salary and benefits $ 1,200 $ 3,389 $ (2,189 ) Supplies 174 415 (241 ) Patents 240 1,149 (909 ) Administrative 906 1,560 (654 ) Travel, facilities and other costs 399 717 (318 )
Total general and administrative expenses $ 2,919 $ 7,230 $ (4,311 )
Restructuring charges. Restructuring charges were $12.3 million for the six months ended June 30, 2008. We had no restructuring charges in the first six months of 2007. The restructuring charge in 2008 is associated with the reductions in workforce announced on February 5, 2008 and April 8, 2008. As part of these plans, we eliminated approximately 115 employee positions inclusive of both administrative and research functions, representing approximately 78% of our total workforce. Affected employees are eligible for a severance package that includes severance pay, continuation of benefits and outplacement services. Charges of $5.1 million were recorded in the six month period ended June 30, 2008, including $4.9 million related to employee separation costs and $0.2 million related to outplacement and administrative fees. We also recorded, in the second quarter of 2008, an estimated asset impairment charge of $7.2 million related to the buildings that are available for sale.
Gain on warrants to purchase common stock. In the six months ended June 30, 2008, we recorded a non-recurring gain on Warrants to purchase Common Stock of $12.0 million in connection with our April 2008 financing. The financing is discussed further in Liquidity and Capital Resources. (See also the Footnote 4 and Footnote 5 to our condensed consolidated financial statements.)
Other income, net of interest expense. Other income, net of interest expense, was $0.3 million for the six months ended June 30, 2008, compared to $1.4 million for the same period in 2007. The decrease is a result of our lower cash and marketable securities balance over the period.
Income tax benefit. The State of Connecticut provides companies with the opportunity to forego certain research and development tax credit carryforwards in exchange for cash. For the six months ended June 30, 2008, the Company recorded an income tax benefit of $0.05 million for the sale of R&D credits generated during this period to the State of Connecticut compared to the $0.2 million for the same period in 2007. The decrease in sale of R&D credits is attributable to a reduction in our research and development expenses.
Net loss attributable to common stockholders. The Company recognized a net loss . . .
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