Biota Pharmaceuticals, Inc. - FORM 10-K - XML - IDEA: XBRL DOCUMENT - March 14, 2012

NOTE 1 BUSINESS AND ORGANIZATION

We are a biopharmaceutical company that has focused on the development of vaccines addressing unmet medical needs, including nicotine addiction. We have sought to leverage our experience and knowledge in powering the human immune system to target these serious unmet medical needs. We have been incorporated in Delaware since 1969 and our operations are located in Rockville, Maryland.

Our sole remaining product currently in development is NicVAX^® [Nicotine Conjugate Vaccine], an innovative and proprietary investigational vaccine for the treatment of nicotine addiction and prevention of smoking relapse based on patented technology. We suffered a significant setback in 2011 when NicVAX did not achieve the primary endpoint in two Phase III efficacy trials conducted in the U.S. As a result, in November of 2011, we retained Piper Jaffray & Co. (Piper Jaffray) to assist with the exploration of strategic alternatives available to the company. This includes, but is not limited to, the sale, license or merger of all or part of the company or its assets, joint ventures, strategic alliances, recapitalization, or liquidation, and the process is ongoing. As of December 31, 2011, our remaining assets include the following: (i) $96.4 million of cash, cash equivalents and marketable securities, (ii) the potential residual value of NicVAX as well next-generation nicotine vaccine which was licensed to GlaxoSmithKline Biologicals S.A. (GSK) in 2010, (iii) the potential royalty from Phoslyra which was sold to Fresenius USA Manufacturing, Inc. (Fresenius) in 2006, and (iv) the potential value of our net operating losses (NOLs).

In the first quarter of 2010 we granted to GSK (i) an option to exclusively license NicVAX on a worldwide basis and (ii) a license to develop follow-on next-generation nicotine vaccines using our intellectual property combined with GSK proprietary technology including GSK proprietary adjuvants. GSK has not indicated that it is stopping the development of the next generation nicotine vaccine. If GSK continues to develop the next generation nicotine vaccine, we may be eligible to receive milestones and royalties from that program. We continue to support an investigator initiated Phase IIb trial in the Netherlands of NicVAX in combination with Pfizer's varenicline or Chantix^®/Champix, the results of which are expected in the second half of 2012.

The smoking cessation market is estimated to exceed $4 billion annually and is currently considered to be a largely unmet medical need. Nicotine is a non-immunogenic small molecule that, upon inhalation into the lungs, quickly passes into the bloodstream and subsequently reaches the brain by crossing the blood-brain barrier. Once in the brain, the nicotine binds to specific nicotine receptors resulting in the release of substances, such as dopamine, a chemical which triggers the highly addictive pleasurable effects experienced by smokers and users of other nicotine products. NicVAX is designed to stimulate the immune system to produce highly specific antibodies that bind to nicotine in the bloodstream. A nicotine molecule attached to specific antibodies is too large to cross the blood-brain barrier and thus is unable to reach the receptors in the brain thereby reducing the pleasure experienced by the smoker making it easier to quit.

In March 2010, we closed an exclusive worldwide option and licensing agreement with GSK for NicVAX as well as for the development of follow-on nicotine addiction vaccines. Upon closing, we received a $40 million initial payment. Under the terms of the agreement, we granted to GSK (i) an option to obtain an exclusive worldwide license to develop, commercialize and manufacture NicVAX as it currently exists, as well as certain potential alternative forms of NicVAX together with an adjuvant other than a GSK proprietary adjuvant and/or with different presentation, dosage or administration (NicVAX Alternatives), and (ii) an exclusive worldwide license to develop, commercialize and manufacture certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives). In addition to the $40 million received at closing, we are eligible to receive under the agreement up to $290 million in potential regulatory, development and sales milestones for any next generation nicotine vaccines. We are also eligible to receive royalties on global sales of any next generation of nicotine vaccines. Notwithstanding the failure to achieve the primary endpoint in the two Phase III trials, if GSK was to exercise its option under the agreement for NicVAX and any NicVAX alternatives, it will pay us $58 million upon exercise plus certain potential milestones and royalties over time.

During 2011 we completed our obligations to continue to develop PentaStaph™ [Pentavalent S.aureus Vaccine] under contract for GSK. PentaStaph is a new pentavalent vaccine designed to prevent S.aureus infections including those infections caused by the most dangerous antibiotic-resistant strains of S.aureus. In August 2009, we entered into an Asset Purchase Agreement (APA) with GSK for the sale of PentaStaph for a total consideration of $46 million including a $20 million up-front payment upon closing and $26 million payable upon achievement of certain milestones. The PentaStaph sale closed in November 2009, and we received payment from GSK of $21.5 million representing the up-front payment of $20 million, an additional $1 million for the sale of our Staphylococcus epidermidis vaccine program and an additional $0.5 million for transfer of certain specified materials. We also agreed to a Transition Services Agreement (TSA) to help GSK advance the program while in parallel transferring the technology to GSK. In 2011 we completed all of the efforts required of us from GSK under contract for PentaStaph. As a result, we have received the full $26 million in potential milestone payments, $5 million in 2011 and $21 million in 2010.