SEC Company Response from CURIS INC (CRIS) (CIK 0001108205) (CRIS) — Nov 28, 2005
CURIS INC (CRIS) (CIK 0001108205)
Date: Nov. 28, 2005 · CIK: 0001108205 · Accession: 0001193125-05-232356
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-30347
Referenced dates: November 18, 2005, November 9, 2005
Letter
Securities and Exchange Commission Division of Corporation Finance Attention: Joseph Roesler Re: Curis, Inc. Form 10-K for Fiscal Year Ended December 31, 2004 (“Form 10-K”) Form 10-Q for Quarter Ended March 31, 2005 (“Form 10-Q”) File No. 000-30347
Dear Mr. Roesler:
On behalf of Curis, Inc. (“Curis” or the “Company”), set forth below are the Company’s responses to comments contained in a letter dated November 18, 2005 (the “November Letter”) from Jim B. Rosenberg, of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Mr. Michael P. Gray, Vice President of Finance and Chief Financial Officer of Curis relating to the Company’s Form 10-K and Form 10-Q. The response contained herein is based upon information provided to Wilmer Cutler Pickering Hale and Dorr LLP by the Company. The response is keyed to the numbering of the comments in the November Letter and to the headings used in the November Letter.
Form 10-K for the year ended December 31, 2003
Genentech Collaboration Accounting
1. Refer to comment 1. We note you plan to revise your accounting in future periods. From our telephone conversations, we understood that the correction of this accounting policy had no impact on historical periods. Please tell us if our understanding is correct.
Response:
The Company confirms to the Staff that the revisions to its accounting policies discussed in Response No. 1 of the Company’s letter to the Staff dated November 9, 2005 have no impact on historical periods.
BALTIMORE BEIJING BERLIN BOSTON BRUSSELS LONDON MUNICH
NEW YORK NORTHERN VIRGINIA OXFORD PALO ALTO WALTHAM WASHINGTON
Securities and Exchange Commission
November 23, 2005
Page 2
2. We note that your proposed disclosure on page A-2 no longer addresses how you account for a multiple element arrangement that represents a single unit of accounting if that arrangement contains performance obligations that are not on a best efforts basis. If you enter into such arrangements, please revise your proposed accounting policy disclosure to address them.
Response:
The Company does not currently have any revenue-generating arrangements that contain performance obligations that are not on a best efforts basis and does not anticipate that it would have any such arrangements in future periods. Accordingly, the Company determined to eliminate such disclosure. However, if the Company were to enter into such an arrangement in a future period, the Company would modify the disclosures relating to its revenue recognition policy to address such arrangement.
3. Refer to the discussion of substantive milestones on page A-3. We understood from telephone discussions with you that if a performance bonus does not meet the conditions described on page A-3, then the resulting payment would not be considered a substantive milestone and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and recognized over that unit’s performance period using either the relative performance or straight-line methods, as applicable, described on page A-2. We also understood from those telephone discussions that if an arrangement contained multiple performance bonuses and you determined that a performance bonus was not a substantive milestone, this determination would prevent you from concluding that subsequent performance bonuses were substantive milestones and as a result those performance bonuses would also be considered part of the consideration for the single unit of accounting. Please tell us if our understanding is correct and consider the need to clarify your proposed disclosure.
Response:
The Company confirms to the Staff its position that if a performance bonus does not meet the conditions described on page A-3, then the resulting payment would not be considered a substantive milestone and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and recognized over that unit’s performance period using either the relative performance or straight-line methods. The Company has further clarified this accounting policy in Note 1 (Revenue Recognition) (“Note 1”), which is attached hereto as Exhibit A. The Company also confirms that if an arrangement contains performance bonus payments and one of the performance bonus
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payments is not deemed to be substantive milestone, then subsequent performance bonus payments would be considered part of the consideration for the single unit of accounting.
4. We note from the revised disclosure that you propose on page A-8 of your response that the performance period you use to recognize revenue (i.e. June 2003 through June 2011) only includes Curis’ steering committee performance obligations as they relate to the first product discovered for each of basal cell carcinoma and Hedgehog. However, we also note from the revised disclosure you propose that the Genentech June 2003 Collaboration is not limited to the first product discovered for each of basal cell and Hedgehog, but also covers other drugs and that Curis’ steering committee performance obligations extend beyond the first product discovered for each of basal cell and Hedgehog. Because Curis has asserted that its participation in the steering committee is a right to participate and not an obligation to participate only when a drug is in the manufacturing and selling phase, please clarify for us why the performance period would exclude Curis’ obligation to participate in the steering committee while research and development is ongoing under the arrangement subsequent to the first product approved in both the basal cell and Hedgehog.
Response:
The Company believes that its obligation to serve on the steering committee will constitute a substantive performance obligation until such time as the first product candidates based on the Hedgehog antagonist technology receive FDA approval. The Company currently estimates that FDA regulatory approval for its current Hedgehog antagonist product candidates under the collaboration will occur in June 2011, which is approximately eight years after the June 2003 initiation of the collaboration. The Company currently has two Hedgehog antagonist product candidates under development. The first is a topically-applied Hedgehog antagonist for the treatment of basal cell carcinoma, which is currently in phase I clinical trials. The Company is also currently developing a systemically-administered Hedgehog antagonist for the treatment of other solid tumors under the collaboration. This second compound is in pre-clinical development and the Company currently expects a Hedgehog antagonist for the treatment of other solid tumor cancers may enter clinical testing in 2006.
Although the Company is contractually obligated to serve on the steering committee during any ongoing research and development, the Company believes that after the first two product candidates under the collaboration are FDA approved the Company’s steering committee service would be inconsequential or perfunctory and would therefore not constitute a substantive performance obligation. The Company believes that its
Securities and Exchange Commission
November 23, 2005
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involvement in the steering committees is presently a substantive performance obligation because the Company currently possesses greater knowledge and understanding of its Hedgehog antagonist technology than Genentech and Genentech is currently utilizing the steering committee process as a means to gain a fuller understanding of this technology. The Company believes that by June 2011, the estimated approval date for the first two product candidates, through the significant engagement of Genentech’s own resources in the development process, Genentech’s expertise in the Hedgehog antagonist technologies and the related clinical development of these technologies will be as substantial as, if not greater than, that of the Company. By June 2011, the Company believes Genentech will have the required knowledge to singly develop any Hedgehog antagonist product candidate without the need for Curis’ substantive involvement. Accordingly, the Company does not believe its service on the steering committee would thereafter constitute a substantive performance obligation.
The Company cannot currently definitively conclude if there will be follow-on topical or systemic Hedgehog antagonist compounds after its estimated first FDA approvals in June 2011, or if thereafter Genentech will test the first topical or systemic Hedgehog antagonist compounds that receive regulatory approval in another cancer indication(s). However, as indicated above, the Company does not believe its steering committee service obligations with respect to such future product candidates would be substantive because Genentech could advance such compounds without Curis’ involvement. The Company has further revised its disclosures in Section 4(a)(ii) of Note 4 (Research and Development Collaborations Entered Into prior to January 1, 2005) (“Note 4”), which is attached hereto as Exhibit A, in order to clarify the basis for the estimates it has made with respect to the performance period.
5. Base on our telephone conversation, we confirm our understanding that you plan to further revise your disclosure to clarify the following points:
a. See the last paragraph on page A-1. You will clarify that you analyze multiple element arrangements, such as license and development arrangements, to determine whether the deliverables, which often include a license and performance obligations such as research and steering committee services, can be separated or whether they must be account for as a single unit of accounting.
b. See the last paragraph on page A-2. You will clarify that if the Company is involved in a steering committee as part of a multiple element arrangement that is
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accounted for as a single unit of accounting, the Company assesses whether its involvement constitutes a performance obligation or a right to participate.
c. See the first paragraph on page A-9. You will clarify that you believe the clinical development and drug approval milestones under the Genentech June 2003 collaboration are substantive milestones because they meet all of the conditions described in your policy.
Response:
In response to this comment, the Company has further revised its disclosures in Notes 1 and 4. The Company has attached such disclosures hereto as Exhibit A. Please be advised that for purposes of the Company’s response to this comment as well as comment Nos. 3 and 4 above, the attached Exhibit A has been marked against the Exhibit A attached to the Company’s response letter to the Staff dated November 9, 2005. The Company intends to include the revised Notes 1 and 4 in future filings.
If you require any additional information, please telephone the undersigned at the telephone number indicated above.
Sincerely,
/s/ Cynthia T. Mazareas
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CORRESP 1 filename1.htm SEC Response Letter Cynthia T. Mazareas VIA FACSIMILE 60 STATE STREET BOSTON, MA 02109 November 23, 2005 +1 617 526 6393 +1 617 526 5000 fax Securities and Exchange Commission cynthia.mazareas@wilmerhale.com Division of Corporation Finance Judiciary Plaza 450 Fifth Street, N.W. Washington, DC 20549 Attention: Joseph Roesler Re: Curis, Inc. Form 10-K for Fiscal Year Ended December 31, 2004 (“Form 10-K”) Form 10-Q for Quarter Ended March 31, 2005 (“Form 10-Q”) File No. 000-30347 Dear Mr. Roesler: On behalf of Curis, Inc. (“Curis” or the “Company”), set forth below are the Company’s responses to comments contained in a letter dated November 18, 2005 (the “November Letter”) from Jim B. Rosenberg, of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Mr. Michael P. Gray, Vice President of Finance and Chief Financial Officer of Curis relating to the Company’s Form 10-K and Form 10-Q. The response contained herein is based upon information provided to Wilmer Cutler Pickering Hale and Dorr LLP by the Company. The response is keyed to the numbering of the comments in the November Letter and to the headings used in the November Letter. Form 10-K for the year ended December 31, 2003 Genentech Collaboration Accounting 1. Refer to comment 1. We note you plan to revise your accounting in future periods. From our telephone conversations, we understood that the correction of this accounting policy had no impact on historical periods. Please tell us if our understanding is correct. Response: The Company confirms to the Staff that the revisions to its accounting policies discussed in Response No. 1 of the Company’s letter to the Staff dated November 9, 2005 have no impact on historical periods. BALTIMORE BEIJING BERLIN BOSTON BRUSSELS LONDON MUNICH NEW YORK NORTHERN VIRGINIA OXFORD PALO ALTO WALTHAM WASHINGTON Securities and Exchange Commission November 23, 2005 Page 2 2. We note that your proposed disclosure on page A-2 no longer addresses how you account for a multiple element arrangement that represents a single unit of accounting if that arrangement contains performance obligations that are not on a best efforts basis. If you enter into such arrangements, please revise your proposed accounting policy disclosure to address them. Response: The Company does not currently have any revenue-generating arrangements that contain performance obligations that are not on a best efforts basis and does not anticipate that it would have any such arrangements in future periods. Accordingly, the Company determined to eliminate such disclosure. However, if the Company were to enter into such an arrangement in a future period, the Company would modify the disclosures relating to its revenue recognition policy to address such arrangement. 3. Refer to the discussion of substantive milestones on page A-3. We understood from telephone discussions with you that if a performance bonus does not meet the conditions described on page A-3, then the resulting payment would not be considered a substantive milestone and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and recognized over that unit’s performance period using either the relative performance or straight-line methods, as applicable, described on page A-2. We also understood from those telephone discussions that if an arrangement contained multiple performance bonuses and you determined that a performance bonus was not a substantive milestone, this determination would prevent you from concluding that subsequent performance bonuses were substantive milestones and as a result those performance bonuses would also be considered part of the consideration for the single unit of accounting. Please tell us if our understanding is correct and consider the need to clarify your proposed disclosure. Response: The Company confirms to the Staff its position that if a performance bonus does not meet the conditions described on page A-3, then the resulting payment would not be considered a substantive milestone and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and recognized over that unit’s performance period using either the relative performance or straight-line methods. The Company has further clarified this accounting policy in Note 1 (Revenue Recognition) (“Note 1”), which is attached hereto as Exhibit A. The Company also confirms that if an arrangement contains performance bonus payments and one of the performance bonus Securities and Exchange Commission November 23, 2005 Page 3 payments is not deemed to be substantive milestone, then subsequent performance bonus payments would be considered part of the consideration for the single unit of accounting. 4. We note from the revised disclosure that you propose on page A-8 of your response that the performance period you use to recognize revenue (i.e. June 2003 through June 2011) only includes Curis’ steering committee performance obligations as they relate to the first product discovered for each of basal cell carcinoma and Hedgehog. However, we also note from the revised disclosure you propose that the Genentech June 2003 Collaboration is not limited to the first product discovered for each of basal cell and Hedgehog, but also covers other drugs and that Curis’ steering committee performance obligations extend beyond the first product discovered for each of basal cell and Hedgehog. Because Curis has asserted that its participation in the steering committee is a right to participate and not an obligation to participate only when a drug is in the manufacturing and selling phase, please clarify for us why the performance period would exclude Curis’ obligation to participate in the steering committee while research and development is ongoing under the arrangement subsequent to the first product approved in both the basal cell and Hedgehog. Response: The Company believes that its obligation to serve on the steering committee will constitute a substantive performance obligation until such time as the first product candidates based on the Hedgehog antagonist technology receive FDA approval. The Company currently estimates that FDA regulatory approval for its current Hedgehog antagonist product candidates under the collaboration will occur in June 2011, which is approximately eight years after the June 2003 initiation of the collaboration. The Company currently has two Hedgehog antagonist product candidates under development. The first is a topically-applied Hedgehog antagonist for the treatment of basal cell carcinoma, which is currently in phase I clinical trials. The Company is also currently developing a systemically-administered Hedgehog antagonist for the treatment of other solid tumors under the collaboration. This second compound is in pre-clinical development and the Company currently expects a Hedgehog antagonist for the treatment of other solid tumor cancers may enter clinical testing in 2006. Although the Company is contractually obligated to serve on the steering committee during any ongoing research and development, the Company believes that after the first two product candidates under the collaboration are FDA approved the Company’s steering committee service would be inconsequential or perfunctory and would therefore not constitute a substantive performance obligation. The Company believes that its Securities and Exchange Commission November 23, 2005 Page 4 involvement in the steering committees is presently a substantive performance obligation because the Company currently possesses greater knowledge and understanding of its Hedgehog antagonist technology than Genentech and Genentech is currently utilizing the steering committee process as a means to gain a fuller understanding of this technology. The Company believes that by June 2011, the estimated approval date for the first two product candidates, through the significant engagement of Genentech’s own resources in the development process, Genentech’s expertise in the Hedgehog antagonist technologies and the related clinical development of these technologies will be as substantial as, if not greater than, that of the Company. By June 2011, the Company believes Genentech will have the required knowledge to singly develop any Hedgehog antagonist product candidate without the need for Curis’ substantive involvement. Accordingly, the Company does not believe its service on the steering committee would thereafter constitute a substantive performance obligation. The Company cannot currently definitively conclude if there will be follow-on topical or systemic Hedgehog antagonist compounds after its estimated first FDA approvals in June 2011, or if thereafter Genentech will test the first topical or systemic Hedgehog antagonist compounds that receive regulatory approval in another cancer indication(s). However, as indicated above, the Company does not believe its steering committee service obligations with respect to such future product candidates would be substantive because Genentech could advance such compounds without Curis’ involvement. The Company has further revised its disclosures in Section 4(a)(ii) of Note 4 (Research and Development Collaborations Entered Into prior to January 1, 2005) (“Note 4”), which is attached hereto as Exhibit A, in order to clarify the basis for the estimates it has made with respect to the performance period. 5. Base on our telephone conversation, we confirm our understanding that you plan to further revise your disclosure to clarify the following points: a. See the last paragraph on page A-1. You will clarify that you analyze multiple element arrangements, such as license and development arrangements, to determine whether the deliverables, which often include a license and performance obligations such as research and steering committee services, can be separated or whether they must be account for as a single unit of accounting. b. See the last paragraph on page A-2. You will clarify that if the Company is involved in a steering committee as part of a multiple element arrangement that is Securities and Exchange Commission November 23, 2005 Page 5 accounted for as a single unit of accounting, the Company assesses whether its involvement constitutes a performance obligation or a right to participate. c. See the first paragraph on page A-9. You will clarify that you believe the clinical development and drug approval milestones under the Genentech June 2003 collaboration are substantive milestones because they meet all of the conditions described in your policy. Response: In response to this comment, the Company has further revised its disclosures in Notes 1 and 4. The Company has attached such disclosures hereto as Exhibit A. Please be advised that for purposes of the Company’s response to this comment as well as comment Nos. 3 and 4 above, the attached Exhibit A has been marked against the Exhibit A attached to the Company’s response letter to the Staff dated November 9, 2005. The Company intends to include the revised Notes 1 and 4 in future filings. If you require any additional information, please telephone the undersigned at the telephone number indicated above. Sincerely, /s/ Cynthia T. Mazareas Cynthia T. Mazareas Cc: Michael P. Gray Exhibit A (1) REVENUE RECOGNITION During the third quarter of 2005, the Company updated its disclosure relating to its revenue recognition policies that were previously presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. In addition, in the third quarter of 2005, the Company recorded adjustments identified during the preparation of the financial statements for the quarter to correct errors in recording the fair value of shares issued in connection with our collaborations with Genentech and Wyeth. The shares were valued using a price based on a trailing average of closing prices, pursuant to the terms of the stock purchase agreements. The Company has determined that it should have valued the shares using the quoted market price on the dates of issuance and, as a result, additional paid-in capital was understated and deferred revenues were overstated. The effects of these adjustments was to increase additional paid-in-capital by $1,629,000, decrease noncurrent deferred revenue by $1,169,000 and to reverse $460,000 of revenue in the third quarter of 2005 to correct for the cumulative overstatement of revenues from June 2003 through June 30, 2005. The impact of these errors, if recorded in the periods to which they related, would not effect the net loss per share previously reported by the Company for any prior year or quarter, nor otherwise have a material impact on previously reported financial information. In addition, the Company does not believe that the impact of these adjustments is material to the financial statements for the quarter ended September 30, 2005 or to the projected results of operations for the year ending December 31, 2005. The Company’s business strategy includes entering into collaborative license and development agreements with biotechnology and pharmaceutical companies for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include non-refundable license fees, funding of research and development, payments based upon achievement of clinical development milestones and royalties on product sales. The Company follows the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104 (SAB No. 104), Revenue Recognition, Emerging Issues Task Force (EITF) Issue No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple Deliverables, EITF Issue No. 99-19 (EITF 99-19), Reporting Revenue Gross as a Principal Versus Net as an Agent, and EITF Issue No. 01-9 (EITF 01-9), Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). Non-refundable license fees are recognized as revenue when the Company has a contractual right to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably assured and the Company has no further performance obligations under the license agreement. Multiple element arrangements, such as license and development arrangements are analyzed to determine whether the deliverables, which often include a license and performance obligations such as research and steering committee services, can be separated or whether they must be accounted for as a single unit of accounting in accordance with EITF 00-21. The Company recognizes up-front license payments as revenue upon delivery of the license only if the license has standalone value and the fair value of the undelivered performance obligations, A-1 typically including research or steering committee services, can be determined. If the fair value of the undelivered performance obligations can be determined, such obligations would then be accounted for separately as performed. If the license is considered to either (i) not have standalone value or (ii) have standalone value but the fair value of any of the undelivered performance obligations cannot be determined, the arrangement would then be accounted for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. Whenever the Company determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue will be recognized. Revenue will be recognized using e