ORKA

Business Context and Reporting Period

Company: Nuvelo, Inc. (formerly Hyseq Pharmaceuticals, Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2004
Industry: Biopharmaceutical (Cardiovascular and Oncology therapeutics)

Nuvelo is a clinical-stage biopharmaceutical company focused on the discovery, development, and commercialization of therapeutics for acute cardiovascular indications and cancer. The company has no significant product sales revenue and operates at a loss. Its strategy relies on advancing three primary drug candidates through clinical trials and securing strategic partnerships.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Contract revenues dropped to $0.2 million in 2004 from $1.0 million in 2003, primarily due to the lack of deferred revenue recognition from the 2001 Affymetrix settlement that was recognized in 2003.
• Increased R&D Spend: R&D expenses increased by 33% ($10.0 million) to $40.0 million. This was driven by $7.0 million in upfront fees for new licenses (Dendreon and Archemix) and increased clinical trial costs, partially offset by savings from shutting down Variagenics operations.
• Decreased G&A Spend: G&A expenses decreased by 42% ($6.4 million) to $8.7 million, largely due to the elimination of rent and option termination expenses related to the Humboldt Court facility and savings from the Variagenics shutdown.
• Discontinued Operations: The company sold its subsidiary, Callida Genomics, Inc., in December 2004. Results are reported as discontinued operations, contributing a loss of $3.5 million for the year.
• Liquidity Improvement: Cash and short-term investments increased by $16.4 million to $50.6 million, fueled by a $69.5 million public offering in March 2004.

Guidance, Outlook, and Risks

Outlook and Pipeline

• Alfimeprase (Lead Candidate): Completed Phase 2 trials for acute peripheral arterial occlusion (PAO) and catheter occlusion. Phase 3 trials (NAPA-2) are expected to initiate in Q1 2005 for PAO and H2 2005 for catheter occlusion.
• rNAPc2: Phase 2a trial for acute coronary syndromes (ACS) is ongoing; enrollment expected to complete in H1 2005.
• ARC183: Phase 1 trial for coronary artery bypass graft (CABG) surgery initiated in August 2004; enrollment expected to complete in H1 2005.
• Capital Needs: The company expects to incur significant losses in 2005 due to clinical development costs. A $5.0 million milestone payment to Amgen is expected in Q1 2005 upon dosing the first patient in the Phase 3 trial.

Recent Financing

In February 2005 (subsequent to year-end), Nuvelo raised approximately $68.3 million in a public offering. Management believes this, combined with existing cash reserves, is sufficient to fund operations through 2006.

Risks and Contingencies

• Profitability: The company has an accumulated deficit of $256.0 million and does not expect to be profitable in the foreseeable future.
• Collaboration Milestones: Future milestone payments under current agreements could total $74.5 million if all milestones are achieved. Only $5.0 million is expected in 2005.
• Lease Obligations: The company has significant remaining lease obligations ($46.2 million) for its Sunnyvale facility. A new lease for a San Carlos headquarters was signed in January 2005, potentially leading to impairment charges on the old facility.
• Regulatory Approval: Success depends on obtaining FDA approval for drug candidates, which is uncertain and costly.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $50.6 million (year-end) plus $68.3 million (Feb 2005) cash balance against the projected burn rate for 2005-2006, specifically accounting for the $5.0 million Amgen milestone and Phase 3 trial costs.
• Alfimeprase Phase 3 Initiation: Confirm the start date of the NAPA-2 Phase 3 trials in Q1 2005, as this triggers the $5.0 million payment to Amgen.
• Lease Impairment: Monitor Q1 2005 financials for potential impairment charges related to the leasehold improvements at the 985 Almanor Avenue facility following the new San Carlos lease.
• Collaboration Milestones: Track progress on rNAPc2 and ARC183 to assess the risk of future milestone payments totaling up to $69.5 million (excluding Amgen).
• Stock-Based Compensation: Note the impending adoption of SFAS 123(R) in Q3 2005, which will require expensing stock options and likely increase reported net losses.