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[Pharmathene
Letterhead]
February
26, 2010
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Jim
B. Rosenberg
Mary
Mast
Tabatha
Akins
Division
of Corporation Finance
United
States Securities and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20549
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Re:
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PharmAthene,
Inc.
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Form 10-K for the Year Ended December
31, 2008
Form 10-Q for the Period Ended
September 30, 2009
File No. 001-32587
Dear Mr.
Rosenberg, Ms. Mast and Ms. Akins:
By
letters dated December 22, 2009 and February 3, 2010, you provided comments on
the Annual Report on Form 10-K for the Year Ended December 31, 2008 (“2008
10-K”) and the Quarterly Report on Form 10-Q for the Period Ended September 30,
2009 (“Third Quarter 10-Q”) of PharmAthene, Inc. (the “Company”). The
Company responded to your comments of December 22, 2009 by letter dated January
22, 2010. This letter sets forth the Company’s responses to your
comments of February 3, 2010. For your convenience, we have
reproduced below in italics each comment and have provided the Company’s
response immediately below the comment.
Form
10-K for the Year Ended December 31, 2008
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page
47
Results of Operations, page
49
Acquired In-Process Research
and Development, page 52
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1.
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As
previously requested in part of our prior comment number one, please
disclose the significant appraisal assumptions, such
as:
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a.
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the
period in which material net cash inflows from significant projects are
expected to commence;
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b.
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material
anticipated changes from historical pricing, margins and expense levels;
and
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c.
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the
risk adjusted discount rate applied to the project’s cash
flows.
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February
26, 2010
Page
2
Response
In response to parts (a) and (c) of
your comment, the Company proposes to include the following disclosure under
“Acquired In-Process Research and Development” in its annual report on Form 10-K
for the year ended December 31, 2009 (the “2009 10-K”):
During
the year end December 31, 2008, the Company completed the Avecia
Acquisition. The primary asset acquired in the Avecia Acquisition was
SparVax™, a second generation rPA anthrax vaccine. The value of the
third generation anthrax vaccine acquired in the transaction was aggregated with
that of the second generation vaccine because success in developing the third
generation anthrax vaccine is contingent on the successful development of the
second generation vaccine. At the acquisition date, the aggregate
fair value of the second and third generation vaccines was estimated at $16.1
million. An income approach methodology was used to determine the
fair value of the acquired in-process research and development
asset. This approach assessed the expected cash flows, net of
expected appropriate operating expenses, generated from the acquisition date in
April 2008 through the end of 2021 (the expected life of the vaccine) using a
risk adjusted discount rate of 51%, which the Company believes is commensurate
with an early stage biodefense product development opportunity of this
nature. In connection with the transaction, the Company in 2008
recorded a charge to expense for acquired in-process research and development of
$16.1 million for these acquired research projects for which, at the acquisition
date, technological feasibility had not been established and no alternative
future use existed. No such charge was recorded in 2009.
Both
vaccines are in their early stages of development and significant remaining
research and development is required to establish the technological feasibility
of these vaccines. The cost and time required to complete the
development of these vaccines and earn FDA marketing approval is highly
uncertain and can vary significantly. During 2009, we provided the US
Government with a series of development plans for SparVax™, in response to their request
for proposal, which estimated that it would cost in excess of $300 million over
approximately 5 years to complete the development of SparVax™. No such estimates
of the advanced development costs and timeline for the third generation vaccine
have been developed.
As with
all development efforts in the biodefense industry, the development of our
second and third generation anthrax vaccines is subject to delays, as described
in “Risk Factors—Necessary
Reliance on the Animal Rule in Conducting Trials is Time-Consuming and
Expensive” and “—We
have not commercialized any products or recognized any revenues from
sales. All of our product candidates are still under development, and
there can be no assurance of successful commercialization of any of our
products.” Our development costs will increase substantially if we
experience material delays in any clinical trials or if we need to conduct more
or larger trials than planned.
February
26, 2010
Page
3
In response to part (b) of your
comment, the Company respectfully advises the Staff that, since SparVax™ and the
Company’s third generation anthrax vaccine both represented early stage product
development opportunities at their time of acquisition, and therefore had not
yet reached the stage of commercialization, no historical pricing and margin
levels existed at the time of acquisition, nor do they presently
exist. Furthermore, the Company does not have information on
historical expense levels that the vaccines’ previous owner, Avecia Biologics
Limited, incurred in connection with the vaccines and is therefore unable to
determine to what extent its own expense assumptions were different from
historical levels.
Index to Consolidated
Financial Statements, page F-1
Note 2 - Summary of
Significant Accounting Policies, F-10
Revenue Recognition, page
F-14
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2.
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Please
refer to your response to our prior comment number two. It is
still unclear what is meant by the statement “an estimate of the
applicable fees.” Please revise to clarify how the estimate of
applicable fees is determined. Further, you state “fixed fees
under cost-plus-fee contracts to be earned in proportion to the allowable
costs.” Please revise to clarify what specific drivers of the
allowable costs are used to estimate the proportion of revenues
earned.
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Response
In response to your comment, the
Company proposes to include the following disclosure under “Revenue Recognition”
in the 2009 10-K:
The
Company generates its revenue from two different types of contractual
arrangements: cost-plus-fee contracts and cost reimbursable
grants. Costs consist primarily of actual internal labor charges and
external sub-contractor costs incurred plus an allocation of applied fringe
benefits, overhead and general and administrative expenses as defined in the
contract. Revenues on cost-plus-fee contracts are recognized in an
amount equal to the costs incurred during the period plus an estimate of the
applicable fee earned. The estimate of the applicable fee earned is
determined by reference to the contract: If the contract defines the fee in terms of risk-based
milestones and specifies the fees to be earned upon the completion of each
milestone, the fee income is recognized when the related milestones are
earned. Otherwise, the Company
computes fee income earned in a given period by using a proportional performance method based on
costs incurred during the period as compared to total estimated project costs
and application of the resulting fraction to the total project fee specified in
the contract.
February
26, 2010
Page
4
If you
have any questions, or if we may be of any assistance, please do not hesitate to
contact the undersigned at (410) 269-2600 or Jeffrey Baumel or Roland Chase at
our outside counsel, Sonnenschein Nath & Rosenthal LLP, at (973)
912-7100.
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Very
truly yours,
/s/ Charles A.
Reinhart III
Charles
A. Reinhart III
Senior
Vice President and Chief Financial
Officer
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Cc:
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Jordan
P. Karp, Esq., PharmAthene, Inc.
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