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ENTREMED INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW We are a clinical-stage pharmaceutical company focused on developing ENMD-2076, an Aurora A and angiogenic kinase inhibitor for the treatment of cancer. ENMD-2076 has completed Phase 1 studies in patients with advanced solid tumors and leukemia and is currently in a Phase 1 study in multiple myeloma patients and multi-center Phase 2 study in patients with platinum resistant ovarian cancer. We continue to move forward with our clinical development of ENMD-2076. As previously reported, at the American Society of Clinical Oncology (ASCO) Annual Meeting in June, Phase 2 data in ovarian cancer patients was presented by the principal investigator conducting the Phase 2 ENMD-2076 study. The data demonstrated ENMD-2076 activity in difficult to treat platinum resistant patients. We continue to monitor patients who are receiving ENMD-2076, and are focused on collecting the additional data necessary to update our analyses. We expect to provide those results during the third quarter of 2011. We believe that the data presented at ASCO, together with the Phase 1 results, provide support for additional clinical studies in ovarian cancer and other forms of cancer. We are currently assessing strategies for additional trials with our clinical trial investigators and consultants. Our partner in China, Selected Value Therapeutics, has exercised its licensing option and is currently working with us to finalize the license agreement so that they can advance development in the China region. There is no assurance that we will be able to conduct further clinical trials and development without significant additional funding. ENMD-2076 is a novel orally-active, Aurora A/angiogenic kinase inhibitor with potent activity against Aurora A and multiple tyrosine kinases linked to cancer and inflammatory diseases. ENMD-2076 is relatively selective for the Aurora A isoform in comparison to Aurora B. Aurora kinases are key regulators of the process of mitosis, or cell division, and are often over-expressed in human cancers. ENMD-2076 exerts its effects through multiple mechanisms of action, including anti-proliferative activity and the inhibition of angiogenesis. ENMD-2076 has demonstrated significant, dose-dependent preclinical activity as a single agent, including tumor regression, in multiple xenograft models (e.g. breast, colon, leukemia), as well as activity towards ex vivo-treated human leukemia patient cells. ENMD-2076 has received orphan drug designation for the treatment of ovarian cancer, multiple myeloma and acute myeloid leukemia ("AML"). 13 -------------------------------------------------------------------------------- ENMD-2076 is our only program currently under active clinical evaluation. This prioritization allows us to direct the majority of our resources to the clinical development of ENMD-2076. However, we also own or have exclusive rights to intellectual property for our other therapeutic candidates. So that we can continue to accelerate the development of ENMD-2076, we do not intend to initiate additional new studies for these programs unless additional significant financing becomes available to us. Our other therapeutic candidates include MKC-1, an oral cell-cycle inhibitor with activity against the mTOR pathway that has completed multiple Phase 2 clinical trials for cancer, and ENMD-1198, a novel anti-mitotic agent that has completed a Phase 1 study in advanced cancers. We also have an approved Investigational New Drug Application (IND) for the use of Panzem® in rheumatoid arthritis (RA) treatment. All of our candidates are multi-mechanism and affect multiple pathways necessary for tumor growth. We have incurred substantial operating losses since our inception due in large part to expenditures for our research and development activities. At June 30, 2011, we had an accumulated deficit of $378.5 million. We expect to continue to incur expenses, resulting in operating losses, for the foreseeable future due to, among other factors, our continuing clinical trials, planned future clinical trials, and other anticipated research and development activities. Based on current plans, we expect our current available cash and cash equivalents to meet our cash requirements into the first quarter of fiscal 2012. Therefore, there exists substantial doubt about our ability to continue as a going concern. We will require significant additional funding by the first quarter of fiscal 2012 to fund operations. If we are able to secure additional financing beyond our current resources, such additional financing would allow us to support, and accelerate the development of, the clinical trials for ENMD-2076. We intend to augment our cash and cash equivalent balances as of June 30, 2011 by pursuing other forms of capital infusion, including strategic alliances or collaborative development opportunities with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our product candidate that we intend to pursue to commercialization. However, there can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all. Additional funds raised by issuing equity securities may result in dilution to existing shareholders. If we fail to obtain additional capital by the first quarter of fiscal 2012, or enter into collaboration agreements with development partners to finance our clinical trials, we may be required to delay, scale back, or eliminate our clinical program. CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of our financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Our critical accounting policies, including the items in our financial statements requiring significant estimates and judgments, are as follows: 14 -------------------------------------------------------------------------------- - Going Concern - A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. As a result of our operational losses and the potential that we may be unable to meet our cash requirements for the next twelve months, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial statements on a going concern basis, if we do not receive additional funding, our ability to continue as a going concern may be impacted. Our consolidated financial statements included in this Quarterly Report on Form 10-Q do not reflect any adjustments that might specifically result from the outcome of this uncertainty. - Revenue Recognition - We recognize revenue in accordance with the provisions of authoritative guidance issued, whereby revenue is not recognized until it is realized or realizable and earned. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectibility is reasonably assured. - Royalty Revenue - Royalties from licenses are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured. We expect that the majority of our 2011 revenues will be from royalties on the sale of Thalomid®, which we will recognize when earned. In 2004, certain provisions of a purchase agreement dated June 14, 2001 by and between Bioventure Investments kft ("Bioventure") and the Company were satisfied and, as a result, beginning in 2005 we became entitled to share in the royalty payments received by Royalty Pharma Finance Trust, successor to Bioventure, on annual Thalomid® sales above a certain threshold. Based on the licensing agreement royalty formula, annual royalty sharing commences when net royalties received by Royalty Pharma exceeds $15,375,000, which equates to approximately $225 million in Thalomid® annual sales. - The Company is also eligible to receive royalties from Oxford Biomedica, PLC based on a portion of the net sales of products developed for the treatment of ophthalmic (eye) diseases based in part on Endostatin. We received our first royalty in the amount of $368,000 under this agreement in 2009, a portion of which was paid to Children's Medical Center Corporation under the Company's original Endostatin license agreement with Children's. We did not receive any additional payment from Oxford Biomedica, PLC in 2010. We do not expect to receive additional payments from Oxford Biomedica, PLC in 2011. - Royalty payments, if any, are recorded as revenue when received and/or when collectibility is reasonably assured. - Research and Development - Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with preclinical testing and clinical trials of our product candidates, including the costs of manufacturing drug substance and drug product, regulatory maintenance costs, and facilities expenses. Research and development costs are expensed as incurred. 15-------------------------------------------------------------------------------- - Expenses for Clinical Trials - Expenses for clinical trials are incurred from planning through patient enrollment to reporting of the data. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and based on clinical data collection and management. Costs that are associated with patient enrollment are recognized as each patient in the clinical trial completes the enrollment process. Estimated clinical trial costs related to enrollment can vary based on numerous factors, including expected number of patients in trials, the number of patients that do not complete participation in a trial, and when a patient drops out of a trial. Costs that are based on clinical data collection and management are recognized in the reporting period in which services are provided. In the event of early termination of a clinical trial, we would accrue an amount based on estimates of the remaining non-cancelable obligations associated with winding down the clinical trial. - Stock-Based Compensation - All share-based payment transactions are recognized in the financial statements at their fair values. Using the straight-line expense attribution method over the requisite service period, which is generally the option vesting term of three years, share-based compensation expense recognized for the six months ended June 30, 2011 and 2010 totaled approximately $534,000 and $231,000, respectively. The determination of fair value of stock-based payment awards on the date of grant using the Black-Scholes model is affected by our stock price, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected forfeiture rate and expected term of stock options and our expected stock price volatility over the term of the awards. Changes in the assumptions can materially affect the fair value estimates. Any future changes to our share-based compensation strategy or programs would likely affect the amount of compensation expense recognized. RESULTS OF OPERATIONS For the Three and Six Months Ended June 30, 2011 and June 30, 2010. Revenues. Our 2011 revenues will likely result solely from Celgene's sale of Thalomid®. We earn royalties once sales of Thalomid exceed approximately $225 million annually, pursuant to a 2001 agreement with Royalty Pharma, as noted above. Thalomid® is distributed and sold by Celgene Corporation and/or its affiliates, and thus, we have no control over sales of Thalomid® or the amount, if any, of royalty payments we will receive. We recorded royalty revenue of $8,852 during the three and six month periods ended June 30, 2011. This royalty related to certain sales by Celgene of Thalomid in 2010 that were not reported to Royalty Pharma until the second quarter of 2011, at which time we received our share of the applicable royalty payment. We do not expect to record any additional revenue in fiscal 2011 until the fourth quarter. Research and Development Expenses. Our research and development expenses for the three and six months ended June 30, 2011 totaled $950,000 and $2,348,000, respectively. Research and development expenses for the corresponding 2010 periods were $1,011,000 and $1,855,000, respectively. 16 -------------------------------------------------------------------------------- Reflected in our R&D expenses totaling $950,000 for the three-month period ended June 30, 2011 are direct project costs of $679,000 for ENMD-2076, $18,000 for Panzem® oncology, $7,000 for ENMD-1198 and $16,000 for MKC-1. The 2010 research and development expenses for the comparable period included $722,000 for ENMD-2076, $22,000 for Panzem® oncology, $22,000 for ENMD-1198 and $7,000 for MKC-1. Research and development expenses totaling $2,348,000 for the six-month period ended June 30, 2011 include direct project costs of $1,768,000 related to ENMD-2076, $43,000 related to Panzem® oncology, $17,000 related to ENMD-1198 and $25,000 for MKC-1. The 2010 research and development expenses for the comparable period included $1,525,000 for ENMD-2076, $50,000 for Panzem®, and $34,000 for ENMD-1198. Additionally, during the six-month period ended June 30, 2010, we wrote off approximately $268,000 of costs previously accrued for patients enrolled in MKC-1 clinical trials that wound down before all cycles of treatment were completed. The decrease in research and development costs in the three month period ended June 30, 2011, as compared to the same period in 2010, relates to fewer patients added during the 2011 period and increased costs during the 2010 period to due to the start of the Phase 2 trials in 2010. The overall increase in research and development costs in the six-month period ended June 30, 2011, as compared to the same period in 2010, reflects increased costs associated with the clinical development of ENMD-2076 as we continued to enroll patients during 2011, in addition to the MKC-1 cost write off of $268,000 during the three months ended March 31, 2010. At June 30, 2011, accumulated direct project expenses for Panzem® oncology were $54,404,000; direct ENMD-1198 project expenses totaled $13,222,000; and, since acquired, accumulated direct project expenses for ENMD-2076 totaled $19,951,000 and for MKC-1, accumulated project expenses totaled $10,164,000. Our research and development expenses also include non-cash stock-based compensation totaling $20,000 and $96,000, respectively, for the three and six months ended June 30, 2011 and $9,000 and $19,000 for the respective corresponding 2010 periods. The increase in stock-based compensation expense is related to stock options granted in January 2011. The balance of our research and development expenditures includes facility costs and other departmental overhead, and expenditures related to the non-clinical support of our programs. We expect our research and development expenses in 2011 to be primarily for the ENMD-2076 program. We expect our ENMD-2076 expenses in 2011 to remain consistent or increase depending on the availability of additional financial resources and our clinical development plan. Additional financial resources would enable us to accelerate and expand the breadth of our ENMD-2076 Phase 2 program. We will continue to conduct research on ENMD-2076 in order to comply with stipulations made by the FDA, as well as to increase understanding of the mechanism of action and toxicity parameters of ENMD-2076 and its metabolites. Completion of clinical development may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines: ESTIMATED CLINICAL COMPLETION PHASE PERIOD Phase 1 1-2 Years Phase 2 2-3 Years Phase 3 2-4 Years 17-------------------------------------------------------------------------------- The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following: - the number of patients that ultimately participate in the trial; - the duration of patient follow-up that seems appropriate in view of the results; - the number of clinical sites included in the trials; and - the length of time required to enroll suitable patient subjects. We test our potential product candidates in numerous preclinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain indications in order to focus our resources on more promising indications. Our proprietary product candidates have also not yet achieved regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, regulatory agencies must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Our business strategy includes being opportunistic with collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our capital requirements. As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. There can be no assurance that we will be able to successfully access external sources of financing in the future. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. 18 -------------------------------------------------------------------------------- Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with internal and contract preclinical testing and clinical trials of our product candidates, including the costs of manufacturing drug substance and drug product, regulatory maintenance costs, and facilities expenses. Research and development expenses decreased to $950,000 during the three months ended June 30, 2011 from $1,011,000 for the corresponding period in 2010. Research and development expenses increased to $2,348,000 during the six months ended June 30, 2011 from $1,855,000 for the corresponding period in 2010. Expenditures during the three and six months ended June 30, 2011 were specifically impacted by the following: - Outside Services - In the three-month period ended June 30, 2011, we expended $12,000 on outside service activities versus $6,000 in the same 2010 period. For the six-month period ended June 30, 2011 outside services are $47,000 compared to $11,000 for the same 2010 period. The increase in 2011 as compared to 2010 reflects an increase in outsourced services related to the development of ENMD-2076. - Clinical Trial Costs - Clinical trial costs, which include clinical site fees, monitoring costs and data management costs, decreased to $331,000 in the three months ended June 30, 2011 from $445,000 in the three-month period ended June 30, 2010. The decrease during this period relates to fewer patients added during the 2011 period and increased costs during the 2010 period to due to the start of the Phase 2 trials in 2010. Clinical trial costs for the six-month period ended June 30, 2011 increased to $775,000 from $466,000 for the comparable 2010 period. The increase relates primarily to our focus on the increase in clinical development of ENMD-2076 in the 2011 period, in addition to the reduction of patient costs for cycles of treatment that were not completed in trials that have wound down in discontinued programs in the 2010 period. - Contract Manufacturing Costs - The costs of manufacturing the material used in clinical trials for our product candidates is reflected in contract manufacturing. These costs include bulk manufacturing, encapsulation and fill and finish services, product release costs and storage fees. Contract manufacturing costs for the three months ended June 30, 2011 increased by $35,000 compared to the same period in 2010. For the six-month period ended June 30, 2011, manufacturing costs increased to $217,000 from $150,000 for the comparable 2010 period. The increase reflects the encapsulation costs for ENMD-2076 that were incurred in 2011, plus a credit received in 2010 reflecting a reduction in the scope of previously contracted compatibility, formulation development and GMP manufacture of ENMD-2076. - Personnel Costs - Personnel costs increased to $323,000 in the three-month period ended June 30, 2011 from $315,000 in the corresponding 2010 period. For the six-month period, personnel costs increased in 2011 to $715,000 from $660,000 for the corresponding 2010 period. The increase is attributable to the $77,000 increase in non-cash stock-based compensation expense primarily related to stock options granted in 2011. - Also reflected in our 2011 research and development expenses for the three-month period ended June 30, 2011 are patent costs of $145,000 and facility and related expenses of $48,000. In the corresponding 2010 period, these expenses totaled $94,000 and $51,000, respectively. For the six-month period ended June 30, 2011, patent costs were $306,000 and facility and related expenses were $101,000. In the corresponding 2010 period, these expenses totaled $197,000 and $108,000, respectively. Patent costs during the three and six months ended June 30, 2011 increased primarily due to higher costs associated with the execution of our intellectual property strategy, including maintaining our patent portfolio and expanding our patent protection internationally. 19-------------------------------------------------------------------------------- General and Administrative Expenses. General and administrative expenses include compensation and other expenses related to finance, business development and administrative personnel, professional services and facilities. General and administrative expenses decreased to $720,000 in the three-month period ended June 30, 2011 from $771,000 in the corresponding 2010 period. For the six-month period, general and administrative expenses increased in 2011 to $1,973,000 from $1,822,000 for the corresponding 2010 period. This increase is attributable to the $226,000 increase in non-cash stock-based compensation expense primarily related to stock options granted in 2011, offset by lower salary and rent expenses. Interest Expense. Our term loan from General Electric Capital Corporation, pursuant to a transaction in September 2007, was fully paid on January 3, 2011, and accordingly there was no interest expense recorded for the three and six month periods ended June 30, 2011. Interest expense for the three and six month periods ended June 30, 2010 was approximately $169,000 and $390,000, respectively (including $15,079 and $35,550 of non-cash interest, respectively). Dividends on Series A Convertible Preferred Stock. The Consolidated Statement of Operations for the three and six-month periods ended June 30, 2011 and 2010 reflect a dividend of $251,250 and $502,500, respectively, relating to Series A Convertible Preferred Stock held by Celgene pursuant to a Securities Purchase Agreement dated December 31, 2002. The holders of Series A Preferred Stock accumulate dividends at an annual rate of 6% and will participate in dividends declared and paid on our common stock, if any. All accumulated dividends must be paid before any dividends may be declared or paid on the common stock. The Company has no plans to pay any dividends in the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES To date, we have been engaged primarily in research and development activities. As a result, we have incurred and expect to continue to incur operating losses in 2011 and the foreseeable future before we commercialize any products. Based on our current plans, we expect our current available cash and cash equivalents to meet our cash requirements into the first quarter of fiscal 2012. If we are able to secure additional financing beyond our current resources, such additional financing would allow us to support, and accelerate the development of, the clinical trials for ENMD-2076. As of June 30, 2011, the Company has operating and liquidity concerns and plans to continue to pursue opportunities to raise additional capital to fund its operating needs. We did not include any adjustments to the consolidated financial statements included in this Quarterly Report on Form 10-Q to reflect the possible future effects that may result from the uncertainty of our ability to continue as a going concern because we believe that we will continue to be a financially sound and viable business, continuing to conduct clinical trials for, and further development of, ENMD-2076 and provide value to our shareholders. We will require significant additional funding by the first quarter of fiscal 2012 to fund our planned operations. We intend to augment our cash and cash equivalent balances by pursuing other methods of raising capital, including strategic alliances or collaborative development opportunities with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our potential product candidates that we intend to pursue to commercialization. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, to raise further financing, we may need to relinquish rights to certain of our existing product candidates, or products we would otherwise seek to develop or commercialize on our own, or to license the rights to our product candidates on terms that are not favorable to us. 20 -------------------------------------------------------------------------------- We intend to explore one or more of the following alternatives to raise additional capital so that the Company can continue as a going concern: · selling additional equity securities; · out-licensing product candidates to one or more corporate partners; · monetizing our Thalomid® royalty payment stream; · completing an outright sale of non-priority assets; and/or · engaging in one or more strategic transactions. We also will consider additional actions to reduce our expenses. There can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all. If additional funds are raised by issuing equity securities, dilution to existing shareholders may result, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we fail to obtain additional capital when needed, we may be required to delay or scale back our Phase 2 plans for ENMD-2076. At June 30, 2011, we had cash and cash equivalents of $3,800,820 with working capital of $2,694,506. On June 28, 2011, we entered into a standby equity distribution agreement (the "SEDA"), with YA Global Master SPV Ltd. ("YA Global"), a fund managed by Yorkville Advisors, LLC ("Yorkville"). Under the SEDA, the Company has the option, at its sole discretion, to sell, from time to time, up to $7.5 million of common stock to YA Global during the three-year term of the SEDA, and YA Global is obligated to purchase such shares. Concurrent with the signing of the SEDA, we agreed to sell shares to YA Global and received gross proceeds of $1.1 million on June 29, 2011. Between June 29 and August 5, 2011, we issued an aggregate of 600,412 shares to YA Global in settlement of the initial $1.1 million drawdown. The number of shares issued each week, and the purchase price for such shares, in settlement of the initial $1.1 million drawdown were determined in accordance with the SEDA. There can be no assurance that we will draw down all, or any portion of, the remaining $6.4 million available under the SEDA. Future drawdowns, if any, may be limited by the future trading volume of our common stock, and by SEC and Nasdaq regulations. The SEDA permits us to terminate the agreement at any time, subject to the advance notice provision, and to pursue any other financing alternatives available to the Company. As of the date of this Quarterly Report on Form 10-Q, we have not requested any additional drawdowns under the SEDA. 21 -------------------------------------------------------------------------------- In January 2006, we acquired Miikana Therapeutics, a private biotechnology company. We acquired certain drug candidates in connection with the acquisition, including the lead molecule in the Aurora Kinase Program, ENMD-2076, which advanced into clinical development in 2008. ENMD-2076 is a kinase inhibitor with activity towards Aurora A and multiple other kinases linked to promoting cancer. Dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million to the former Miikana stockholders payable in stock or cash, at the Company's discretion. In June 2008, 233,100 shares of common stock were issued to the former Miikana stockholders as consideration for the satisfaction of the milestone payment. Under the terms of the merger agreement, dosing of the first patient in a Phase 2 trial in April 2010 triggered an additional purchase price adjustment milestone payment of $3 million, which we paid by issuing 403,550 shares of our common stock. Under the terms of the merger agreement, the former shareholders if Miikana may, upon the satisfaction of certain milestones primarily relating to ENMD-2076, receive up to $13 million of potential payments. We do not expect any further milestones to be achieved in 2011. Through the Miikana acquisition, we also acquired rights to MKC-1, a Phase 2 clinical candidate licensed from Roche by Miikana in April 2005. Under the terms of the agreement, Roche may be entitled to receive future payments upon successful attainment of certain clinical, regulatory and commercialization milestones; however, since ENMD-2076 is the only program currently under active clinical evaluation, we do not expect to trigger any of these milestone payments during the remainder of fiscal 2011. We expect that the majority, if not all, of our 2011 revenues will continue to be from royalties on the sales of Thalomid®. Thalomid® is sold by a third-party and is subject to competition from other products and generic drugs, and we have no control over such party's sales efforts or the resources devoted to Thalomid® sales. In 2010 and 2009, we received royalty-sharing revenue in the amount of $3,449,000 and $4,990,000, respectively. There can be no assurance as to future sales trends of Thalomid® and the amount of revenue we will receive and record in 2011. Based upon the trend of declining sales over the past two years, together with recent publicly disclosed information from Celgene Corporation regarding sales of Thalomid®, we expect annual sales of Thalomid® in 2011 to continue to decrease, which will result in a reduction in our revenues in 2011. As we continue to incur costs for the clinical investigation and development activities of ENMD-2076 during the remainder of fiscal 2011, such a reduction in our royalty revenue would have a material adverse effect on both our short-term and long-term liquidity if we are unable to obtain other financial resources to replace the anticipated decrease in Thalomid® royalty revenues. There is no assurance that the amount of royalty-sharing revenues received for fiscal 2011 will be similar to amounts received during prior fiscal years. In addition, under our licensing agreement with Oxford BioMedica, PLC and Oxford BioMedica (UK) Limited Oxford, we are entitled to receive payments upon the achievement of certain milestones with respect to the development of gene therapies for ophthalmic (eye) diseases. In connection with the announced 2009 collaboration between Oxford BioMedica and Sanofi Aventis which included certain compounds (RetinoStat® and EncorStat®) that are governed by our licensing agreement, we received $368,000 from Oxford BioMedica in 2009, $74,000 of which we paid to Children's Medical Center Corporation under our agreement with Children's Medical Center Corporation. The $368,000 payment represented the Company's share of the upfront payment received by Oxford BioMedica after division among third-party product technologies. No payments were received in 2010 from this licensing agreement and we do not expect to receive any payments during the remainder of fiscal 2011. However, we do not control the drug development efforts of Oxford or Sanofi and have no information or control over when or whether any milestones will be reached that would result in additional payments to us. 22 -------------------------------------------------------------------------------- Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development and clinical activities. If adequate funds are not available through either the capital markets, strategic alliances, or collaborators, we may be required to delay, reduce the scope of or eliminate our research, development or clinical program efforts relating to ENMD-2076, effect additional changes to our facilities or personnel, or obtain funds through other arrangements that may require us to relinquish some of our assets or rights to certain of our existing or future technologies, product candidates, or products on terms not favorable to us. INFLATION AND INTEREST RATE CHANGES Management does not believe that our working capital needs are sensitive to inflation and changes in interest rates. |