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January
12, 2011
Ms.
Christine Allen
Staff
Accountant
United
States Securities and Exchange Commission
Division
of Corporation Finance
100 F
Street, N. E.
Washington,
D.C. 20549
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RE:
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Adherex
Technologies, Inc.
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10-K for
the Year Ended December 31, 2009
Definitive Proxy Statement on Schedule
14A
Form 10Qs for Quarterly Periods Ended
March 31, 2010, June 30, 2010 and September30, 2010
File No.
001-32295
Dear Ms.
Allen:
This
letter responds to the comments (the “Staff Letter”) of the staff (“Staff”) of
the United States Securities and Exchange Commission (the “Commission”) to
Adherex Technologies, Inc.’s (“the Company” or “us”) filings of Form 10-K for
Fiscal Year Ended December 31, 2009, Definitive Proxy Statement on Schedule 14A,
Forms 10-Q for Quarterly Periods Ended March 31, 2010, June 30, 2010 and
September 30, 2010.
To
facilitate the Staff’s review, we have set forth below the comments contained in
the Staff Letter and, in italics set forth immediate following the comment, our
response thereto.
Form 10-K for the Year Ended
December 31, 2009
Item 1.
Business
Corporate Relationships,
page 4
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
1. Please
revise your disclosure that would expand your description of the development and
license agreement with GlaxoSmithKline (GSK) in order to describe the term and
termination provisions. Also, please disclose the range of royalties
that you may be required to pay GSK.
We
will amend our Form 10-K for the fiscal year ended December 31,
2009 to expand our description of the development and license
agreement with GSK in order to describe the term and termination provisions, as
well as disclose the range of royalties that we may be required to pay to GSK as
set forth below. We note supplementally that the following disclosure omits
information set forth in certain portions of the development and license
agreement with GSK, as amended, which has been granted confidential treatment by
the Commission. Our amended disclosure will include the
following:
On
July 14, 2005, we entered into a development and license agreement with
GlaxoSmithKline, or GSK. The agreement included the in-license by our
Company of GSK’s oncology product, eniluracil, and an option for GSK to license
ADH-1. As part of the transaction, GSK invested $3.0 million in our
Company's common stock. On October 11, 2006, the GSK option to
license ADH-1 expired unexercised. Under the terms of the agreement
relating to eniluracil, we received an exclusive license to develop eniluracil
for all indications and GSK retained options to buy-back and assume development
of the compound at various points in time. On March 1, 2007, the GSK
agreement was amended and we purchased all of GSK’s remaining buy-back options
for a fee of $1.0 million. As a result of the amendment to the GSK
agreement, we now may be required to pay GSK development and sales milestones
and royalties. Specifically, if we file a New Drug Application, or
NDA, with the Food and Drug Administration, or FDA, we may be required to pay
development milestones of $5.0 million to GSK. Additionally,
depending upon whether the NDA is approved by the FDA and whether eniluracil
becomes a commercial success, we may be required to pay up to an additional
$70.0 million in development and sales milestones for the initially approved
indication. If we pursue other indications, we may also be required
to pay up to an additional $15 million to GSK for each FDA-approved
indication. The GSK agreement continues until terminated by either party in the
event of an uncured breach by the breaching party after 60 days prior
written notice.
Item 9A. Controls
and Procedures
Management's Report on
Internal Control over Financial Reporting, page
29
2. Your disclosure appears to
repeat your conclusion on the effectiveness of your disclosure controls and
procedures. Also Management’s Report does not contain all of the language
required by Item 308T(a) of Regulation S-K. Please revise to include the
following:
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·
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A
statement of management’s responsibility for establishing and maintaining
adequate internal control over financial reporting that refers to the
correct Exchange Act Rules;
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·
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A
statement identifying the framework used by management to evaluate the
effectiveness of your internal control over financial reporting;
and,
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501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
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·
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Management’s
assessment of the effectiveness of your internal control over financial
reporting as of the end of your most recent fiscal year, including a
statement as to whether or not internal control over financial reporting
is effective.
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We
will amend our Form 10-K for the year ended December 31, 2009 to remove the
duplicative language regarding disclosure controls and procedures and to add the
following disclosure required by Item 308T(a) of Regulation S-K as
follows:
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. The Company’s
internal control over financial reporting is a process, under the supervision of
the Chief Executive Officer and the Chief Financial Officer, designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external purposes in
accordance with United States generally accepted accounting principles
(GAAP). The Company’s management conducted an assessment of the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. Based on the aforementioned criteria,
our management concluded in its assessment of internal control over financial
reporting that our internal control procedures, as of December 31, 2009, were
effective.
3. Please
tell us why management’s failure to provide a complete report on internal
control over financial reporting does not impact its conclusion regarding the
effectiveness of the company’s disclosure controls and procedures as of the end
of the fiscal year.
In
light of the Commission’s comment number 2 set forth in the Staff Letter and our
failure to provide a complete report on internal controls over financial
reporting, management has concluded that its disclosure controls and
procedures for the period ended December 31, 2009 were
ineffective. Accordingly, we will amend our Form 10-K for
such period to revise our disclosure as follows:
In
connection with the preparation of this annual report on Form 10-K/A, an
evaluation was carried out by the Company’s management, with the participation
of the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(“Exchange Act”)) as of December 31, 2009. Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms and that such information is
accumulated and communicated to management, including the Chief Executive
Officer and the Chief Financial Officer, to allow timely decisions regarding
required disclosures. In designing and evaluating our disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives. Based on that
evaluation, the Company’s management concluded, as of the end of the period
covered by this report, that the Company’s disclosure controls and procedures
were not effective as a result of management’s incomplete report on internal
controls over financial reporting in this annual report on Form 10-K, as
originally filed.
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
Exhibits 31.1 and
31.2
4. Please
revise your certifications provided in your Form 10-K and your first and second
quarter fiscal 2010 Forms 10-Q to be worded exactly as required by Item 601
(b)(3 1) of Regulation S-K. In this regard, please ensure you address the
following items:
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·
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Refer
to paragraph 3 where you refer to “this quarterly report”. Remove the
report descriptions “annual” or “quarterly,” as appropriate, from all
certifications except for the first
paragraph.
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·
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Include
the language related to internal controls over financial reporting in the
introductory section of paragraph
4.
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Revise
the parenthetical language in paragraph 4d to refer to the “fourth
quarter” in the case of an annual report and not the “third
quarter.”
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We
will amend our Form 10-K and our first and second quarter fiscal 2010 Forms 10-Q
to include revised certifications worded exactly as required by Item 601(b)(31)
of Regulation S-K.
Definitive Proxy Statement
on Schedule 14A
Ordinary Matters, page
7
5. Please
revise your disclosure describing for each director the particular experience,
skills, qualifications and attributes that led you to conclude that each of the
directors should serve on your Board. See Item 401(e)(1) of
Regulation S-K.
We
undertake to revise our disclosure in our future filings to describe for each
director the particular experience, skills, qualifications and attributes that
led us to conclude that each of the directors should serve on our
Board. Our revised disclosure will include the
following:
Robert
W. Butts
Mr.
Butts has served as a director of Adherex since April 2007. Mr. Butts
is the immediate past Co-Founder and Portfolio Manager of Southpoint Capital
Advisors LP, a private investment partnership with more than $1 billion in
assets under management. Prior to Southpoint, Mr. Butts was an analyst for
Greenlight Capital, a value-oriented hedge fund. He began his career as a
financial analyst in the mergers and acquisitions group at Merrill Lynch.
Mr. Butts graduated from Amherst College, where he earned a Bachelor of
Science degree with a triple major in mathematics, physics and
chemistry. As a result of these and other professional experiences,
Mr. Butts has financial expertise and experience with the Company as it has
developed within the drug development industry and, as such, is able to provide
the Company with unique insight and guidance.
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
Robert
C. Andrade
Mr.
Andrade has served as a director of Adherex since July 2009 and Chief Financial
Officer since September 2009. Mr. Andrade is a General Partner at
DCML, a private investment partnership. Prior to DCML, Mr. Andrade
was a portfolio manager for Millennium Partners and a securities analyst for
Caxton Associates. He began his career as a financial analyst at Bear
Stearns. Mr. Andrade graduated from University of Southern
California, where he earned a Masters of Arts degree and Bachelor of Arts degree
in economics. As a result of these and other professional experiences, Mr.
Andrade possesses particular knowledge and experience in financial analysis and
capital markets that strengthen the Board’s collective qualifications, skills,
and experience.
William
G. Breen
Mr.
Breen has served as a director of Adherex since April 2007. Mr. Breen
has served as President of William G. Breen and Associates since
1999. From 1988 to 1999, he held various positions at Simware Inc., a
producer of internetworking and connectivity software, including Chairman,
President and Chief Executive Officer. Prior to Simware, Mr. Breen
was Senior Vice President, Operations at Cognos Inc. and Vice President,
Operations at Computel Systems Ltd. Mr. Breen has served on numerous
Boards of Directors and began his career at IBM in 1966 following graduation
from the University of Waterloo in Science. As a result of these and other
professional experiences, Mr. Breen possesses particular financial and
management expertise which strengthens the Board’s collective qualifications,
skills, and experience.
Claudio
F. Bussandri, B.Eng, MBA
Mr.
Bussandri has served as a director of Adherex since April 2007. Mr.
Bussandri is the immediate past CEO of McKesson Canada, a leading provider of
logistics and products and services in the Canadian health care
marketplace. Prior to his tenure at McKesson, Mr. Bussandri was
President of Lantic Sugar Limited and has held senior executive positions at
Nabisco Brands Limited of Canada and Coffee Club Companies. Mr.
Bussandri graduated from McGill University with a Bachelor of Engineering
(Mechanical), and subsequently obtained an MBA. Mr. Bussandri is a
member of the Board of Directors of the McGill University Health Centre (MUHC),
of the Executive Committee of the MUHC Foundation and of the Canadian Council of
Chief Executives (CCCE). He is past Chairman of the Board of the Montreal
Children Hospital Foundation, former Chairman of CAPDM and of the Food and
Consumer Products Manufacturers of Canada. As a result of these and other
professional experiences, Mr. Bussandri possesses particular
healthcare industry knowledge and experience which strengthens the Board’s
collective qualifications, skills, and experience.
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 •
www.adherex.com
David
Lieberman
Mr.
Lieberman is an analyst at Southpoint Capital Advisors LP, a private investment
partnership with more than $1 billion in assets under management. Prior to
Southpoint, Mr. Lieberman was an analyst for Tiedemann Investment Group. Mr.
Lieberman graduated from University of Pennsylvania, The Wharton School, where
he earned a Bachelor of Science degree in economics. In addition to his
financial and investment background, as a designee of one of the Company’s
largest investors, he brings to the Board the perspective of a major
stakeholder.
Rostislav
Raykov
Mr.
Raykov has served as a director of Adherex since July 2009 and Chief Executive
Officer since July 2009. Mr. Raykov is a General Partner at DCML, a
private investment partnership. Prior to DCML, Mr. Raykov was a
portfolio manager for Alchem Investment Partners and John Levin & Co.
He began his career as a financial analyst at Bear Stearns. Mr.
Raykov graduated from University of North Carolina at Chapel Hill, where he
earned a Bachelor of Science degree in business administration. As a result of
these and other professional experiences, Mr. Raykov has financial expertise and
experience with the Company as it has developed within the drug development
industry and, as such, is able to provide the Company with unique insight and
guidance.
Honourable
Arthur T. Porter, P.C., MD, MBA
Dr.
Porter has served as a director of Adherex since February 2004. Dr.
Porter has served as the Director General and Chief Executive Officer of the
McGill University Health Centre since January 2004, is a Councilor of the Privy
Council for Canada and a member of the Security Intelligence Review Committee
(SIRC) for Canada. Dr. Porter was the President and Chief Executive
Officer of the Detroit Medical Center from 1999 to 2003. From 1991 to
1998, Dr. Porter served as the Chief of the Gershenson Radiation Oncology Center
at Harper Hospital, Radiation Oncologist-in-Chief at the Detroit Medical
Center. He has also served as Senior Radiation Oncologist at the
Cross Cancer Institute in Edmonton, Alberta and Associate Professor in the
Faculty of Medicine at the University of Alberta, Chief of the Department of
Radiation Oncology at the London Regional Cancer Centre and Chairman of the
Department of Oncology at Victoria Hospital Corporation. Dr. Porter
serves as a director of Munder Funds and Air Canada. As a result of
these and other professional experiences, Dr. Porter possesses particular
healthcare industry knowledge and experience which strengthens the Board’s
collective qualifications, skills, and experience.
6. Please
revise your disclosure that complies with the requirements of Item 407(h) of
Regulation S-K. Specifically, please state why you have chosen to separate the
positions of Chairman of the Board of Directors and Chief Executive Officer and
why it is you believe this leadership structure is the most appropriate one for
you at this time. In addition, please provide a description of how your Board
administers its risk oversight function, e.g. whether it does so directly or by
acting through one of its committees. The mandate of the Board of Directors that
is included as Exhibit A to your proxy statement is not specific on this
point.
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
We
will revise our disclosure in our future filings to include the information
required by Item 407(h) of Regulation S-K as follows:
Board
Leadership Structure
The
Company’s board of directors has chosen to separate the positions of Chief
Executive Officer and Chairman of the board. Keeping these positions separate
allows the Company’s Chief Executive Officer to focus on developing and
implementing the Company’s business plans and supervising the Company’s
day-to-day operations and allows the Company’s Chairman to lead the board of
directors in its oversight and advisory roles. Because of the many
responsibilities of the board of directors and the significant time and effort
required by each of the Chairman and the Chief Executive Officer to perform
their respective duties, the Company believes that having separate persons in
these roles enhances the ability of each to discharge those duties effectively
and, as a corollary, enhances the Company’s prospects for success. The board of
directors also believes that having separate positions
provides a clear delineation of responsibilities for each position and fosters
greater accountability of management.
Risk Oversight
The
Board of Directors has an active role, as a whole and also at the committee
level, in overseeing the identification and management of our principal risks.
The Board of Directors regularly receives reports from senior management on
areas of material risk to our Company, including our credit,
liquidity, operational, legal and regulatory risks. In carrying out its
responsibilities under its charter, the Audit Committee reviews our major
financial risk exposures and the steps management has taken to monitor and
control such exposures, and it also meets periodically with management to
discuss policies with respect to risk assessment and risk management. In
addition, the Compensation Committee oversees the management of risks relating
to our executive and non-executive compensation plans and arrangements, and the
Governance Committee manages risks associated with the independence of the Board
of Directors and potential conflicts of interest. While each committee oversees
certain risks and the management of such risks, the entire Board of Directors is
regularly informed through committee reports about such risks.
Form 10-Q for Quarterly
Period Ended March 31, 2010, as amended
7. Your
explanatory note discloses the amendment was filed solely to reflect that it has
been reviewed by your independent auditors. However, Note 2 to the interim
financial statements and the Cautionary Statement in MD&A states that the
Company’s independent auditor has not performed a review of these financial
statements. Please amend your filing to remove this language in Note 2 and in
MD&A. Also, since you have stated that the interim financial statements have
been reviewed by an independent public accountant, a report of the accountant on
the review must be filed with the interim financial statements. Refer to Rule
8-03 of Regulation S-X and your requirement to file Exhibit 15 if the review
report included in the Form 10-Q is incorporated by reference into a
registration statement.
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
We
will amend our Form 10-Q/A for the Quarterly Period Ended March 31, 2010, to
remove the explanatory note and make any conforming changes to the
MD&A Cautionary Note and Note 2 to the interim financial statements to
eliminate references to the absence of a review of the interim financial
statements by the Company’s independent auditor. We respectfully
submit that, after giving effect to these amendments to the Form 10Q/A, we are
not required to filed a report of the accountant on the review with the Form
10-Q/A pursuant to Rule 8-03 of Regulation S-X. We supplementally
note that the Company does not have any registration statements for which such a
report would be incorporated by reference.
Form 10-Q for Quarterly
Period Ended June 30, 2010
Item 4. Controls and
Procedures, page 19
8. You
state that “we have evaluated the effectiveness of our disclosure controls and
procedures...” and, “based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have identified two material weaknesses in our internal
control over financial reporting.” Based on this disclosure it appears your
Chief Executive Officer and Chief Financial Officer have concluded that your
disclosure controls and procedures are not effective as of the end of the period
covered by this report but you have not stated this conclusion in your
disclosure. Please revise your disclosure to provide management’s conclusion on
the effectiveness of your disclosure controls and procedures as required by Item
307 of Regulation S-K. This comment also applies to your disclosure in your Form
10-Q for the quarterly period ended September 30, 2010.
We
will amend our Form 10-Qs for the quarters ended June 30, 2010 and September 30,
2010 to add language that specifically states management’s conclusion that our
disclosure controls and procedures were ineffective as of such
periods.
9. You
also disclose that you do not expect to be able to provide remedial actions for
your internal weaknesses until you secure additional financial
resources. Please tell us what remedial actions you have undertaken
to date and clarify why additional financial resources are necessary beyond
those from the private placement in April 2010 in order to implement remedial
actions.
Subsequent
to the filing of the 4.02 8-K filing by the Company on November 2, 2010, the
Company took remedial actions for our internal weaknesses by contracting
additional personnel with experience in the application of U.S. GAAP financial
accounting and reporting requirements in order to assist management in its
financial accounting and reporting functions. We believe that this
has helped remedy, but has not eliminated, a control deficiency
that resulted from having one person performing all of our accounting and
financial reporting duties.
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
To
finance our continuing operations, we will need to raise additional funds beyond
those from the private placement in April 2010, because, as disclosed on page 1
of our Form 10-K for the year ended December 31, 2009, there remains
substantial uncertainty of our ability to continue as a going concern and the
failure to obtain such funds might require us to further delay, scale back or
eliminate certain research and development studies, consider business
combinations, or even shut down some, or all, of our operations.
Once we are able to secure such additional financing, we anticipate hiring
additional personnel with appropriate technical accounting knowledge,
experience, and training in the application of U.S. GAAP to supplement our
current accounting staff.
10. Further,
it appears that these weaknesses in your internal control over financial
reporting have existed prior to June 30, 2010. Please explain to us why
management believes that your disclosure controls and procedures were effective
at December 31, 2009 and March 31, 2010 considering the incomplete management
annual report on internal control over financial reporting and the Item 4.02
8-k.
Please
see our response to Staff Letter comment 3 set forth above regarding
management’s conclusion on the effectiveness of disclosure controls and
procedures as of December 31, 2009.
With
respect to management’s conclusions regarding the effectiveness of disclosure
controls and procedures as of March 31, 2010, we respectfully submit that no
further amendment to our Form 10-Q for the period ended March 31, 2010 is
necessary in light of our proposed amendments to Form 10-K as described in our
response to Staff Letter comment 2. Additionally, item 308T(a) of
Regulation S-K and Part I, Item 4T of Form 10-Q provide that management is
only required to provide its report on the registrant’s internal controls on an
annual basis and, pursuant to Item 308T(b) of Regulation S-K, there were no
changes that materially affected our internal control over financial reporting
during the quarter ended March 31, 2010. Furthermore, to the best of
management’s knowledge, the restatement of the financials for the three and six
month period ended June 30, 2010 as disclosed in the Item 4.02 Form 8-K,
were not attributable to, and did not affect, the interim financial statements
for the quarterly period ended March 31, 2010. As such, management's
conclusions on the effectiveness of our disclosure controls and procedures for
the March 31, 2010 Form 10-Q were not impacted by such restatement.
The
Company acknowledges that:
•
The Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
•
Staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing;
and
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com
•
The Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
If you
have any questions, please call the undersigned at 919-636-5013.
Sincerely
/s/
Robert Andrade
Chief
Financial Officer
501
Eastowne Drive, Suite 140 • Chapel Hill, North Carolina • 27514
Tel:
(919) 636-4530 • Fax: (704) 625-3832 • www.adherex.com