ITEM 1: BUSINESS
The following Business Section contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and other factors including the risk factors set forth in Part I, Item 1A
ITEM 1A: RISK FACTORS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE THOSE THAT WE CURRENTLY BELIEVE MAY MATERIALLY AFFECT OUR COMPANY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THEY MAY MATERIALLY HARM OUR BUSINESS, OUR FINANCIAL CONDITION AND OUR RESULTS OF OPERATIONS.
Risks relating to the development and commercialization of our products and product candidates
We will depend heavily on the commercial success of our lead product, Iclusig™ (ponatinib), which was recently approved by the FDA for sale in the United States. If we do not achieve commercial success with Iclusig, our business will suffer and our stock price will likely decline.
We obtained approval from the U.S. Food and Drug Administration, or FDA, on December 14, 2012, to sell our first new cancer medicine, Iclusig (ponatinib). We have commenced sales and marketing of Iclusig, and the medicine is now available for patients in the United States through specialty pharmacies and specialty distributors. Iclusig is a tyrosine kinase inhibitor, or TKI, that has been approved in the United States for the treatment of adult patients with chronic, accelerated or blast phase chronic myeloid leukemia, or CML, who are resistant or intolerant to prior TKI therapy, and the treatment of adult patients with Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL, who are resistant or intolerant to prior TKI therapy.
Prior to the approval of Iclusig, we had not marketed a therapeutic product. As a result, we had no significant revenues from product sales in 2012 and we expect that a majority of our total revenues in 2013 and the next several years will be attributable to sales of Iclusig.
We cannot be certain that Iclusig will be commercially successful. In addition to the other challenges related to a company launching its first commercial drug, we will face competition from other TKIs that are currently approved for the treatment of patients with CML who are resistant or intolerant to prior TKI therapies, such as nilotinib marketed by Novartis, dasatinib marketed by Bristol-Myers Squibb, bosutinib marketed by Pfizer and omacetaxine mepesuccinate marketed by Teva Pharmaceutical Industries. In addition, we are conducting clinical trials and plan to seek regulatory approval of Iclusig for the treatment of newly diagnosed CML patients who have not previously received any TKI therapy and for patients who have had a suboptimal response or who have failed to respond to prior TKI therapy. If we are able to successfully develop and obtain approval of Iclusig for these patients, we would compete with existing TKIs.
Our future sales of Iclusig depend on numerous factors, including:
•
the number of patients with CML and Ph+ ALL who do not respond to one of the existing TKI therapies or are intolerant to them, as well as the number of newly diagnosed CML patients and the number of patients who have had a suboptimal response or who have failed to respond to prior TKI therapy, assuming we are successful in obtaining regulatory approval for these patient populations;
•
competition from other TKIs, which compete with Iclusig on the basis of, among other things, efficacy, cost, breadth of approved use and side-effect profile;
•
competition from any additional products for the treatment of CML that are approved by the FDA in the future;
•
the safety profile of Iclusig, including whether previously unknown side-effects or increased incidence or severity of known side-effects as compared to those seen during development are identified with the increased use of Iclusig after approval;
•
the effectiveness of our commercial strategy for marketing Iclusig and our execution of that strategy, including our pricing strategy and the effectiveness of our efforts to obtain adequate third-party reimbursements;
•
receipt of regulatory approvals for Iclusig, and any applicable pricing and reimbursement approvals, in Europe, Japan and other countries or territories outside of the United States;
•
the acceptance of Iclusig by patients, the medical community and third-party payors;
•
results from clinical trials and the receipt of regulatory approvals in newly diagnosed CML patients and in patients who have had a suboptimal response or who have failed to respond to prior TKI therapy;
•
results from clinical trials and the receipt of regulatory approvals in any other indications that we may decide to pursue in blood cancers and solid tumors; and
•
our ability to meet the demand for commercial supplies of Iclusig and to maintain and successfully monitor commercial manufacturing arrangements for Iclusig with third-party manufacturers to ensure they meet our standards and those of regulatory authorities, including the FDA, which extensively regulate and monitor pharmaceutical manufacturing facilities.
While we believe that Iclusig has a competitive commercial profile, our current estimates of the revenues that Iclusig could generate in future periods may change based upon the above factors, and could be wrong. If our revenues, market share and/or other indicators of market acceptance of Iclusig do not meet the expectations of investors or public market analysts, the market price of our common stock would likely decline. In addition, if one or more of the factors above negatively affects Iclusig sales, our business and financial condition could be materially harmed.
We have never marketed a drug before, and if we are unable to establish and maintain an effective and specialized sales force and marketing infrastructure, we will not be able to commercialize Iclusig successfully.
In order to successfully commercialize Iclusig, we have built a marketing organization and a specialized sales force for Iclusig and have completed preparations for the commercial launch of Iclusig in the United States. We are finalizing our preparations in Europe, including efforts to expand our marketing and sales teams. In addition, we have established a European headquarters in Switzerland to lead our commercial operations in Europe, in anticipation of the approval of the marketing authorization application for Iclusig. In order to support an effective launch of any product, we have had to make and will need to continue to make significant financial commitments and devote significant effort, in particular, to recruiting individuals with experience in the sales and marketing of pharmaceutical products.
We have no prior experience in building and maintaining a commercialization infrastructure in the United States or internationally. Factors that may hinder our efforts to establish and maintain a U.S. presence and develop an international sales, marketing and distribution infrastructure include:
•
inability to recruit, retain and effectively manage adequate numbers of effective sales and marketing personnel;
•
inability to establish or maintain relationships with specialty pharmacies, wholesalers and distributors;
•
inability to establish or implement internal controls and procedures required in connection with sales of pharmaceutical products;
•
inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;
•
lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
•
unforeseen delays, costs and expenses associated with creating international capabilities, including an international sales and marketing organization and international supply chain and reimbursement capabilities.
If we are unable to establish and sustain our sales force and marketing capability for Iclusig, we may not be able to generate any product revenue, may generate increased expenses and may never become profitable.
We will need to continue to expend significant time and resources to train our Iclusig sales force to be credible, persuasive and compliant in discussing Iclusig with the specialists treating the patients indicated under label. We will also need to continue to train our sales force to ensure that a consistent and appropriate message about Iclusig is being delivered to our potential customers. In addition, if we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits and risks of Iclusig and its proper administration, our ability to successfully commercialize Iclusig could be diminished, which could have a material adverse effect on our financial condition, stock price and operations.
We may also maintain high inventory levels to mitigate risks such as variability in product demand, long lead times for manufacturing, supply interruptions of raw materials and production disruptions at our approved manufacturing sites due to contamination, equipment failure or other facility-related issues. The capital required to maintain our desired inventory levels may impact our liquidity and cash flows, and may also heighten the risk of inventory obsolescence and write-offs.
If Iclusig and any of our product candidates are not accepted by patients, physicians and third-party payors, we will not be successful.
Our success is dependent on the commercial acceptance of Iclusig and any other product candidates that may be approved. Iclusig and any other approved product candidates may not achieve market acceptance among patients, physicians or third-party payors, even if we have obtained necessary regulatory and any applicable pricing and reimbursement approvals. Physicians and health care payors may conclude that Iclusig or our product candidates are not as safe and/or effective as competing therapies or are not as attractive based on a cost/benefit analysis as alternative treatments. For example, physicians may elect not to prescribe our drugs, and patients may elect not to request or take them for a variety of reasons, including lower demonstrated or perceived clinical safety and efficacy compared to other drugs; prevalence and severity of adverse events or other side effects; lack of cost-effectiveness; lack of reimbursement availability from third-party payors; a decision to wait for the approval of other therapies that are believed to have significant advantages over our drugs and drug candidates; convenience and ease of administration; other potential advantages of alternative treatment methods; or ineffective marketing and distribution support.
In addition, physicians and other health care providers may restrict their use of Iclusig due to the inclusion of a warning which is not present in some other competitive products. The full prescribing information for Iclusig includes a boxed warning specifying that arterial thrombosis and hepatotoxicity have occurred in some patients during our clinical trials of Iclusig. Cardiovascular, cerebrovascular, and peripheral vascular thrombosis, including fatal myocardial infarction and stroke, have occurred in Iclusig-treated patients. Serious arterial thrombosis occurred in 8 percent of Iclusig-treated patients. In addition, hepatotoxicity, liver failure and death have occurred in Iclusig-treated patients.
Failure to achieve significant market acceptance of Iclusig or any future approved product candidates or to be paid an adequate amount for our products will harm our business. We believe that recommendations by physicians and acceptance by health care payors will be essential for market acceptance of Iclusig and our product candidates. If Iclusig fails to achieve market acceptance, or our product candidates are approved and fail to achieve market acceptance, we will not be able to generate revenues sufficient to be successful.
Competing drugs or technologies may render some or all of our products or future products noncompetitive or obsolete.
Many well-known pharmaceutical, healthcare and biotechnology companies, which have substantially greater capital, research and development capabilities and experience, are presently engaged in one or more of the following activities:
•
developing products based on computational and structure-based drug design;
•
conducting research and development programs focused on the same biological targets or for the treatment of the various disease indications on which we are focused; and
•
manufacturing, marketing and selling pharmaceutical or medical device products for treatment of diseases in all of the various disease indications in which we or our current or possible future collaborators are focused.
Some of these entities already have competitive products on the market or product candidates in clinical trials or in more advanced preclinical studies than we do. Many of these entities also have substantially greater research, development, manufacturing and marketing resources and experience than us.
For example, Iclusig currently competes with existing CML therapies. In addition, we are conducting clinical trials and plan to seek regulatory approval of Iclusig for the treatment of newly diagnosed CML patients and of patients who have had a suboptimal response or who have failed to respond to prior TKI therapy. If we are able to successfully develop and obtain approval of Iclusig for these CML patients, we would compete with existing CML therapies.
Competing drugs or technologies may render some or all of our products or future products noncompetitive or obsolete, and we may not be able to make the enhancements to our products necessary to compete successfully with newly emerging drug products. Competing products on the market or in development may also lead us and our collaborators to revise or cease development of our product candidates in one or more indications for commercial reasons, even where clinical data may be promising. If we are unable to successfully compete in our chosen markets, we will not become profitable.
In order to execute our business plan and achieve the full commercial potential of Iclusig, we intend to seek regulatory approval to commercialize Iclusig outside of the United States and to seek approval of additional therapeutic indications and lines of therapy.
Based on sales of existing TKIs for the treatment of CML, we believe that there are significant commercial opportunities for the use of Iclusig globally in additional therapeutic indications and in additional lines of therapy, and we are actively pursuing these opportunities. In August 2012, we filed for marketing approval of ponatinib with the EMA for patients with CML and Ph+ ALL who have become resistant or intolerant to prior TKI therapy, and we currently anticipate approval in the third quarter of 2013. In August 2012, we also initiated a multicenter Phase 1/2 clinical trial in Japan of Iclusig in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ ALL and have failed prior treatment with TKIs. We expect that this trial should provide the incremental data needed to initiate pivotal trials to obtain regulatory approval of Iclusig in resistant or intolerant patients in Japan. In July 2012, we initiated a randomized Phase 3 clinical trial of ponatinib, referred to as the EPIC trial, in adult patients with newly diagnosed CML in the chronic phase. The trial is designed to provide definitive clinical data to support regulatory approval of ponatinib in patients who have not previously received treatment for CML. We also plan to initiate additional clinical trials of Iclusig in other indications as we continue development of this product candidate.
If we are not successful in obtaining regulatory approval of ponatinib in Europe or Japan or for other indications and additional lines of therapy, the market price of our common stock could decline and our business and financial condition could be materially harmed.
We may not succeed in developing expanded or additional marketable products, receiving regulatory approval or generating product revenues.
In addition to the successful commercialization of Iclusig, our success is also dependent on our ability to successfully complete development and obtain marketing approval for Icusig in additional indications, AP26113 and our other product candidates.
As with all scientific endeavors, we face much trial and error, and we and our collaborators may fail at numerous stages along the way, which could prevent us and our collaborators from successfully developing, obtaining approval for and marketing our drug candidates. Factors that could affect the timing and the ability to obtain regulatory approval and to achieve market acceptance and gain market share for Iclusig, AP26113 and any other product candidate include, among others, product formulation, dose, dosage regimen, the ability to obtain timely and sufficient patient enrollment in clinical trials, the risk of occurrence of adverse events and other side effects in patients participating in clinical trials, the attainment of clinical data that is sufficient to support regulatory approval, the ability to manufacture sufficient quantities of product candidates at commercially reasonable costs, the ability to fund commercial development and to build or access a sales force in the marketplace, the ability to successfully differentiate product candidates from competitive products, the ability to educate physicians and build awareness about our product candidates, and the ability to sell, market and distribute such product candidates.
We may not receive regulatory approvals within the timeframes we anticipate, or at all, and ultimately we may not succeed in developing or commercializing additional products which will generate revenues for our company. If we are not successful in developing our product candidates and marketing any approved products, our business and financial condition could be materially harmed.
Positive results from earlier stage clinical trials may not be replicated in later-stage clinical trials, or regulatory authorities may conclude that clinical data from later-stage clinical trials are not sufficient to support approval.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in earlier-stage development. Accordingly, the results to date from preclinical studies and clinical trials for Iclusig and AP26113 may not be predictive of the results to be obtained from ongoing or future clinical trials. In addition, regulatory authorities may conclude that data generated from later-stage clinical trials are not sufficient to support approval. For example, although we were able to file an NDA and obtain regulatory approval for Iclusig on the basis of data from our pivotal Phase 2 PACE trial without conducting a Phase 3 trial, and we believe that a similar regulatory approval pathway could exist for AP26113, we may be required to conduct more clinical trials for AP26113 than we currently expect. If positive results from earlier stage trials are not replicated in later-stage trials, or we or our collaborators are required to conduct additional clinical trials or other testing of our product candidates beyond those currently contemplated, we or our collaborators may be delayed in obtaining, or may not be able to obtain, marketing approval for these product candidates, and we may lose the opportunity to generate product revenues or to earn additional development or regulatory milestones or royalties. Furthermore, potential competitive commercial factors may influence future decisions and directions by us or our collaborators on which clinical indications to pursue and when.
Risks relating to our financial position and capital requirements
We have incurred significant losses to date and may never be profitable.
Although we had net income in 2010 of $85.2 million, primarily attributable to our license agreement with Merck, we have incurred significant losses since our formation in 1991, and had an accumulated deficit of $777.8 million at December 31, 2012. Our losses have resulted principally from costs incurred in research and development of our product candidates, including clinical development of Iclusig, AP26113 and ridaforolimus (prior to our license with Merck), and from general and administrative costs, including costs incurred to prosecute and protect our intellectual property. In addition, we have incurred significant expenses in building a commercial organization to market, sell and distribute our products upon regulatory approval in the United States, Europe and other select markets, worldwide. It is likely that we will incur significant operating losses for the foreseeable future, as we continue our research and development activities and continue to build a sales and marketing organization to market Iclusig and in anticipation of obtaining regulatory approval to market additional product candidates, which approval
may never occur. If our losses continue and we and our existing collaborators or potential future collaborators are unable to successfully develop, commercialize, manufacture and market Iclusig and any other approved product candidates and/or we are unable to enter into additional collaboration agreements or licenses for our intellectual property, we may never generate sufficient revenues to achieve profitability. Even if we and our collaborators are able to commercialize products and we are able to enter into collaboration agreements or licenses in the future, we may never generate sufficient revenues to have profitable operations.
Insufficient funding may jeopardize our research and development programs and may require us to reduce our operations or prevent commercialization of our products and technologies.
We have funded our operations to date through sales of equity securities, the incurrence of debt from commercial lenders, the receipt of upfront and milestone payments from Merck since July 2007, and, to a limited extent, other operating revenues. Most of our operating revenue to date has been generated through previous collaborative research and development agreements and existing licenses.
As of December 31, 2012, we had cash, cash equivalents and marketable securities totaling $164.4 million. On January 29, 2013, we completed a public offering of 16,489,893 shares of our common stock for net proceeds of approximately $309.8 million. After giving effect to the net proceeds from this offering, our cash, cash equivalents and marketable securities at December 31, 2012 would have been $474.2 million. We expect that our cash, cash equivalents and marketable securities as of December 31, 2012 and the net proceeds from the public offering in January 2013 will be sufficient to fund our operations into the fourth quarter of 2014. We will, however, require substantial additional funding for our research and development programs (including pre-clinical development and clinical trials), for the pursuit of regulatory approvals and for establishing or accessing manufacturing, marketing and sales capabilities related to Iclusig and any other approved products. We will also require funding for our operating expenses (including intellectual property protection and enforcement) as well as capital expenditures to maintain and improve our facilities, equipment and systems and provide for growth and expansion of our business.
We may from time to time access funding by issuing common stock or other securities in private placements or public offerings. We are currently a “well-known seasoned issuer” pursuant to rules of the U.S. Securities and Exchange Commission, or SEC, and have an active registration statement that allows us to sell additional shares of our common stock and other securities. We may also from time to time seek additional funding from technology licensing, or the issuance of debt or other structured funding alternatives. However, such additional funding may not be available at all, or on terms acceptable to us.
If we are not able to secure the significant funding which is required to maintain our operations or continue to fund current or future research and development programs at their current levels or at levels that may be required in the future, we may be required to reduce our operations or to delay, scale back, eliminate or terminate clinical trials for one or more of our product candidates. In addition, we may be required to enter into licenses, settlements or other arrangements with third parties on terms that may be unfavorable to us or to sell, license or relinquish rights to develop or commercialize our product candidates, approved products, technologies or intellectual property.
Raising additional capital by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights.
We may seek to raise the additional capital necessary to fund our operations through public or private equity offerings, debt financings, and collaboration and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect our stockholders’ rights or, in the case of debt securities, require us to pay interest that would reduce our cash flows from operations or comply with certain covenants that could restrict our operations. If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
Forecasting sales of Iclusig may be difficult and revenue recognition may be deferred. If our revenue projections are inaccurate or revenue is deferred and our business forecasting and planning decisions are not reflected in our actual results, our business may be harmed and our future prospects may be adversely affected.
Iclusig may not be adopted rapidly, or at all, by physicians. Factors that can affect the rate of adoption and that can increase the difficulty of forecasting sales include the following:
•
physician and patient unfamiliarity with Iclusig;
•
cautionary prescribing behavior due to concerns regarding the safety and risk-benefit of Iclusig;
•
cautionary prescribing behavior due to lack of reimbursement history for Iclusig;
•
confusion and questions relating to the prescribing information;
•
difficulty in identifying appropriate patients for treatment with Iclusig;
•
the cost and availability of reimbursement for the product;
•
other aspects of physician education;
•
treatment guidelines issued by government and non-government agencies;
•
types of cancer for which the product is approved;
•
timing of market entry relative to competitive products;
•
availability of alternative therapies;
•
price of our product relative to alternative therapies, including generic versions of our product, or generic versions of innovative products that compete with our product;
•
patients’ reliance on patient assistance programs, under which we provide free drug;
•
rates of returns and rebates;
•
uncertainty of launch trajectory;
•
the ability of our third-party manufacturers to manufacture and deliver Iclusig in commercially sufficient quantities;
•
extent of marketing efforts by us and any third-party distributors or agents retained by us; and
•
side effects or unfavorable publicity concerning our products or similar products.
The extent to which any of these or other factors individually or in the aggregate may impact future sales of Iclusig is uncertain and difficult to predict. Our management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results. This may lead to inefficiencies and increased difficulties in operational planning. If our revenues from Iclusig sales are lower than we anticipate or revenue is deferred, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in our revenue would have a direct impact on our cash flow and on our business generally. In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.
Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to the presentation of our financial condition and results of operations. The preparation of our financial statements requires us to make significant estimates, assumptions and judgments that affect the amounts of assets, liabilities, revenues and expenses and related disclosures. Significant estimates that may be made by us include assumptions used in the determination of revenue recognition, fair value measurement of tangible and intangible assets, research and development expenses and stock-based compensation. Although we base our estimates and judgments on historical experience, our interpretation of existing accounting literature and on various other assumptions that we believe to be reasonable under the circumstances, if our assumptions prove to be materially incorrect, actual results may differ materially from these estimates.
Significant additional losses or insufficient funding may cause us to default on certain covenants of our loan documents.
At December 31, 2012, we had $11.2 million outstanding under a term loan agreement with a bank. Pursuant to this loan agreement, we are required to maintain certain financial and non-financial covenants, including minimum cash, cash equivalents and investments of $15 million, a default of any of which would allow the bank to demand payment of its loan. We currently have sufficient liquidity to fund payment of this loan if demand for payment were made. However, if we do not receive sufficient revenues from our collaborations and licenses or from any sales of our products, or if we are unable to raise adequate financing to fund continuing operations or otherwise to refinance our loan, we may not be able to maintain compliance with loan covenants, may be required to pay off the loan and may be required to reduce our spending on operations.
Risks relating to our reliance on third parties
We depend on third-party manufacturers, including sole source suppliers, to manufacture Iclusig and our product candidates and the materials we require for our clinical trials. We may not be able to maintain these relationships and could experience supply disruptions outside of our control.
We rely on a network of third-party manufacturers to manufacture and supply Iclusig for commercial sale and post-approval clinical trials, and our drug candidates for clinical trials and any commercial sales if they are approved. As a result of our reliance on these third-party manufacturers and suppliers, including sole source suppliers of certain components of Iclusig and our product candidates, we could be subject to significant supply disruptions. Our supply chain for sourcing raw materials and manufacturing drug product ready for distribution is a multi-step endeavor. Third-party contract manufacturers supply us with raw materials, and contract manufacturers in the United States convert these raw materials into drug substance and convert the drug substance into final dosage form. Establishing and managing this supply chain requires a significant financial commitment and the creation and maintenance of numerous third-party contractual relationships. Although we attempt to effectively manage the business relationships with companies in our supply chain, we do not have control over their operations.
We require a supply of Iclusig for sale in the United States, and we will require a supply of Iclusig for sale in international markets if we obtain marketing approvals outside of the United States. We currently rely, and expect to continue to rely, on sole source third-party manufacturers to produce starting materials, drug substance, and final drug product, and to package and label Iclusig and our product candidates, until we enter into arrangements with additional or alternative suppliers. While we have identified and expect to qualify and engage back-up third-party manufacturers as additional or alternative suppliers for the commercial supply of Iclusig, we currently do not have such arrangements in place. Moreover, some of these alternative manufacturers will have to be approved by the FDA before we can use them for manufacturing Iclusig. It is also possible that supplies of materials that cannot be second-sourced can be managed with inventory planning. There can be no assurance, however, that failure of any of our original sole source third party manufacturers to meet our commercial demands for Iclusig in a timely manner, or our failure to engage qualified additional or back-up suppliers for the commercial supply of Iclusig, would not have a material adverse effect on commercialization of Iclusig and our business.
Supply disruptions may result from a number of factors, including shortages in product raw materials, labor or technical difficulties, regulatory inspections or restrictions, shipping or customs delays or any other performance failure by any third-party manufacturer on which we rely. Any supply disruptions could disrupt sales of Iclusig and/or the timing of our clinical trials, which could have a material adverse impact on our business. Furthermore, we may be required to modify our production methods to permit us to economically manufacture our drugs for sale and our drug candidates for clinical trials. These modifications may require us to re-evaluate our resources and the resources of our third-party manufacturers, which could result in abrupt changes in our production methods and supplies.
In the course of providing its services, a contract manufacturer may develop process technology related to the manufacture of our products or drug candidates that the manufacturer owns, either independently or jointly with us. This would increase our reliance on that manufacturer or require us to obtain a license from that manufacturer in order to have Iclusig or our drug candidates manufactured by other suppliers utilizing the same process.
The failure of our third party manufacturers to meet our commercial demands for Iclusig in a timely manner, or our failure to engage qualified additional or back-up suppliers for the commercial supply of Iclusig, would have a material adverse effect on our business, results of operations and financial position.
We rely on a network of specialty pharmacies and distributors for Iclusig.
A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions, which often require a high level of patient education and ongoing management. The use of specialty pharmacies and distributors involves certain risks, including, but not limited to, risks that these specialty pharmacies and distributors will:
•
not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our products;
•
reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support our products;
•
not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;
•
be unable to satisfy financial obligations to us or others; or
•
cease operations.
We have limited experience in conducting clinical trials and are dependent upon the ability of third parties, including contract research organizations, collaborative academic groups, clinical trial sites and investigators, to conduct or to assist us in conducting clinical trials for our product candidates.
Notwithstanding our successful development of Iclusig to date, we have limited experience compared to many other biopharmaceutical companies in designing, initiating, conducting and monitoring the clinical trials necessary to obtain regulatory approval of our product candidates. We are currently conducting clinical trials of Iclusig and of AP26113. We are dependent upon our ability and/or the ability of our collaborators, licensees, contract research organizations, clinical trial sites and investigators to successfully design, initiate, conduct and monitor clinical trials. Failure by us or any of these parties to timely and effectively initiate, conduct and monitor our clinical trials could significantly delay or materially impair our ability to complete clinical trials and/or obtain regulatory approval of our product candidates and, consequently, could delay or materially impair our ability to generate revenues from them.
Because we have licensed ridaforolimus to Merck, we have no control over its development and commercialization.
We have entered into a license agreement with Merck for the development and commercialization of ridaforolimus. Among other provisions, Merck is responsible for the development of ridaforolimus in
multiple oncology indications. There can be no assurance that Merck will satisfy its obligations to develop ridaforolimus in multiple oncology indications or that it will be successful in developing and commercializing ridaforolimus. Merck’s failure to devote sufficient financial and other resources to the development plan may delay the clinical development of ridaforolimus, which could lead to the delay in payment of clinical and regulatory milestones under our agreements and may delay eventual commercialization of a product candidate and any royalties we could receive on commercial sales. If Merck is not able to develop ridaforolimus successfully in one or more oncology indications, we will not receive any additional clinical and regulatory milestones or receive any royalties under the license agreement.
If any collaborator or licensee terminates its agreement with us or fails to perform its obligations under its agreement with us, or fails to comply with applicable law, the development and commercialization of our product candidates could be delayed or terminated.
Our current or future collaborations and licenses may not result in product candidates that are scientifically or commercially successful or result in the development or commercialization of any product candidates. In addition, disputes may arise in the future with respect to the ownership of rights to technology or product candidates developed with collaborators and licensees, which could have an adverse effect on our ability to develop and commercialize any affected product candidate.
Our current collaboration and license agreements allow, and we expect that any future collaborations and licenses will allow, either party to terminate the agreement for specified material breaches by the other party. If a collaborator or licensee terminates its agreement with us, for breach or otherwise, it may be difficult for us to attract new collaborators or licensees and could adversely affect how we are perceived in the business and financial communities. In addition, a collaborator or licensee could determine that it is in its financial interest to:
•
pursue alternative technologies or develop alternative products, either on its own or jointly with others, that may be competitive with the products on which it is collaborating with us or has licensed from us, which could affect its commitment to us;
•
pursue higher-priority programs or change the focus of its development programs, which could affect the collaborator’s or licensee’s commitment to us; or
•
choose to devote fewer resources to the marketing of our product candidates, if any are approved for marketing, than it does for product candidates of its own development.
If any of these events occur, the development and commercialization of one or more of our product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.
Risks relating to our intellectual property
If our patents do not protect Iclusig or our product candidates, our exclusive commercial rights in the product or product candidate could be compromised, and if any of our approved drugs or product candidates infringe third-party patents, we could be subject to litigation and substantial liabilities.
We have numerous issued patents and patent applications pending in the United States, as well as counterparts in other countries. Our success will depend, in significant part, on our ability to obtain and maintain United States and foreign patent protection for Iclusig and our product candidates, their manufacture and uses; to preserve our trade secrets; and to operate without infringing the proprietary rights of third parties. In particular, we believe that composition-of-matter claims are the most significant patent claims for companies in our segment of the pharmaceutical industry that focus on small molecule drug candidates that are new chemical compounds. While we have patents or patent applications with composition-of-matter claims for Iclusig and each of our product candidates, only a portion of these patents have been granted to date. We cannot be certain that any patents will issue from our patent applications or, even if patents issue or have issued, that the issued claims will provide us with any significant protection against competitive products or otherwise be valuable commercially.
Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to maintain, obtain and enforce patents is uncertain and involves complex legal and factual questions. U.S. and foreign patent applications typically are maintained in confidence for a period of time after they initially are filed with the applicable patent office. Similarly, publication of discoveries in the scientific literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors were the first to invent, or the first to file patent applications covering Iclusig, our product candidates or their manufacture or use.
Third parties, including a number of our competitors, have developed competing and/or complementary technologies upon which patent applications have been filed and patents have been granted. These third-party technologies concern in part compounds, compositions, methods of use and production of such compounds and compositions, targets, genes and gene mutations, and the use of such targets, genes and gene mutations to identify drug candidates and develop companion diagnostic methods and corresponding kits. Third-party intellectual property protecting such technologies that are related to our business may cover or conflict with our patent applications, technologies or product candidates as well as those of complementary businesses which our business relies upon. Such conflicts could limit the scope of the patents that we may be able to obtain or may result in the denial of our patent applications. If a third party were to obtain intellectual property protection for any of the foregoing, we may be required to challenge such protection, terminate or modify our programs impacted by such protection or obtain licenses from such third parties, which might not be available on acceptable terms. Also, if a third party were to introduce a product into the market which we believe infringes our patents, we may be required to enforce our patent rights or seek to obtain an injunction or other relief, which could be time-consuming and expensive.
Our patents may be challenged by third parties, in connection with a third party’s Abbreviated New Drug Application, or ANDA, or otherwise, resulting in the patent being deemed invalid, unenforceable or narrowed in scope, which could compromise the scope or duration of our exclusive rights in the relevant product. An ANDA can be filed as early as four years after FDA approval of a drug. Other challenges to a patent may be mounted without regard to the date of an FDA approval. Also, our pending patent applications may not issue, and we may not receive any additional patents. Our patents as issued or as subsequently limited by any litigation might not contain claims that are sufficiently broad to prevent others from circumventing our patent protection and utilizing our technologies. For instance, the issued patents relating to Iclusig and our product candidates may be limited to a particular molecule or molecules and may not cover similar molecules that have similar clinical properties. Consequently, our competitors may independently develop competing products that do not infringe our patents or other intellectual property.
The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the United States and other companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business could be substantially harmed.
Because of the extensive time required for development, testing and regulatory review of a drug candidate, it is possible that, before any of our drug candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization of our drug candidates, thereby reducing any advantages of the patent. To the extent our approved drugs or drug candidates are not commercialized significantly ahead of the expiration date of any applicable patent, or to the extent we have no other patent protection on such approved drugs or drug candidates, those drugs and drug candidates would not be protected by patents, and we would then need to rely solely on other types of exclusivity, such as orphan drug exclusivity and other types of regulatory exclusivity available under the Food, Drug and Cosmetic Act.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology, and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such as our employees, collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also have entered into confidentiality and invention or patent assignment agreements with our employees and our consultants. Any of these parties may breach the agreements and disclose our proprietary information, and we may not have adequate remedies for any such breach. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position could be harmed.
Risks relating to our operations
If we fail to manage our growth effectively, our business may suffer.
The number of our employees increased by 114 percent in 2012, and we expect to experience additional growth in 2013. We have built out the commercial organization that is responsible for the commercial launch of Iclusig in the United States and are building out our sales capabilities in Europe to prepare for the commercial launch of Iclusig there if it receives marketing approval. However, we have no prior experience in launching a drug product, and we may experience delays or other difficulties in commencing and conducting sales and marketing activities for Iclusig, including implementing required internal controls and procedures, that would negatively impact our commercialization efforts. In addition, because our drug discovery and development activities are highly technical in nature, we require the services of highly qualified and trained scientists who have the skills necessary to conduct these activities. We need to attract and retain employees with experience in these fields. We face intense competition for our personnel from our competitors, our collaborators and other companies throughout our industry. Moreover, the growth of local biotechnology companies and the expansion of major pharmaceutical companies into the Cambridge, Massachusetts area have increased competition for the available pool of skilled employees, especially in technical fields, and the high cost of living in the Cambridge area makes it difficult to attract employees from other parts of the country to these areas. Any inability to manage growth could delay the implementation of our business plans or disrupt our operations. For example, on January 4, 2013, we entered into a new lease to move our corporate headquarters and laboratory facilities to two buildings to be constructed by the landlord at 75 Binney Street and 125 Binney Street in Cambridge, Massachusetts, which will be known as the Alexandria Center at Kendall Square. We intend to move to the new buildings once they are completed, which is currently expected to occur in early 2015. Our ability to commercialize Iclusig and achieve our research and development objectives depends on our ability to respond effectively to these demands and expand our internal organization to accommodate additional anticipated growth. If we are unable to hire qualified personnel or manage our growth effectively, there could be a material adverse effect on our business.
Our business has a substantial risk of product liability claims. If we are unable to obtain appropriate levels of insurance, product liability claims could adversely affect our business.
Our business exposes us to potential product liability risks inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. Prior to obtaining regulatory approval to market our products, we or our collaborators are required to test such products in human clinical trials at health care institutions pursuant to agreements which indemnify such institutions in case of harm caused to patients by our products. We may not be able to avoid significant product liability exposure resulting from use of our products. We have product liability insurance and clinical trial insurance in amounts that we believe are adequate to cover this risk. However, our insurance may not provide adequate coverage against potential liabilities. If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as pay uncovered damages awards resulting from a claim brought successfully against us and these damages could be significant and have a material adverse effect on our financial condition. Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result.
Risks associated with operating in foreign countries could materially adversely affect our business.
We have expanded our operations into Europe in order to market Iclusig internationally, if approved. In addition, we have manufacturing, collaborative and clinical trial relationships outside the United States. Consequently, we are, and will continue to be, subject to risks related to operating in foreign countries. Risks associated with conducting operations in foreign countries include:
•
differing regulatory requirements for drug approvals and regulation of approved drugs in foreign countries;
•
changes in tariffs, trade barriers and regulatory requirements;
•
economic weakness, including inflation, or political instability in particular foreign economies and markets;
•
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
•
foreign taxes, including withholding of payroll taxes;
•
foreign currency fluctuations, which could result in increased operating expenses or reduced revenues, and other obligations incident to doing business or operating in another country;
•
workforce uncertainty in countries where labor unrest is more common than in the United States;
•
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
•
business interruptions resulting from geo-political actions, including war and terrorism.
These and other risks associated with our international operations could materially adversely affect our business.
In addition, our international operations are subject to regulation under United States law. For example, the Foreign Corrupt Practices Act prohibits United States companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. In many countries, the health care professionals we regularly interact with may meet the definition of a foreign government official for purposes of the Foreign Corrupt Practices Act. We also are subject to import and export control laws. Failure to comply with domestic or foreign laws could result in various adverse consequences, including the possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, the imposition of civil or criminal sanctions, the prosecution of executives overseeing our international operations and corresponding adverse publicity and negative perception of our company in foreign countries.
The loss of key members of our scientific and management staff could delay and may prevent the achievement of our research, development and business objectives.
We are substantially dependent on our key officers and members of our staff responsible for areas such as drug development, clinical trials, regulatory affairs, drug discovery, manufacturing, commercial operations, business development and intellectual property protection and licensing. As we continue to expand our capabilities in connection with the launch of Iclusig and in anticipation of the possible launch of any additional commercial products, a loss of key personnel or a failure to properly integrate new personnel could be disruptive. While we have entered into employment agreements with all of our executive officers, these officers may terminate their employment with us at any time. The value to employees of stock-related benefits that vest over time, such as options and restricted stock units, will be significantly affected by movements in our stock price that we cannot control, and may at any point in time be insufficient to counteract more lucrative offers from other companies. The loss of, and failure to promptly replace, any member of our management team could significantly delay and may prevent the achievement of our research, development and business objectives.
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state, federal and foreign regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We also are subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We maintain insurance to cover pollution conditions or other extraordinary or unanticipated events relating to our use and disposal of hazardous materials that we believe is appropriate based on the small amount of hazardous materials we generate. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.
A breakdown or breach of our information technology systems could subject us to liability or interrupt the operation of our business.
We rely upon our information technology systems and infrastructure for our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. There can be no assurance that our management or diligence efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
Risks relating to regulatory approvals, pricing and reimbursement
Clinical trials for our product candidates are expensive and time consuming, may take longer than we expect or may not be completed at all, and their outcome is uncertain.
We and our collaborators are currently conducting multiple clinical trials for our clinical product candidates, and we and our collaborators expect to commence additional trials of Iclusig and our product candidates in the future. Each of our clinical trials requires the investment of substantial expense and time and the timing of the commencement, continuation and completion of these clinical trials may be subject
to significant delays attributable to various causes, including scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, failure of patients to complete the clinical trial, delay in or failure to obtain IRB approval to conduct a clinical trial at a prospective site, and shortages of available drug supply. Patient enrollment is a function of many factors, including the size of the target patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative established or investigational treatments.
We depend on medical institutions and clinical research organizations, or CROs, to conduct our clinical trials in compliance with FDA and other applicable requirements and guidelines, often referred to as Good Clinical Practices, and to the extent they fail to enroll patients for our clinical trials, are delayed for a significant time in achieving full enrollment, or fail to follow proper procedures, we may be affected by increased costs, program delays or both, which may harm our business. In addition, we conduct clinical trials in foreign countries which may subject us to further delays and expenses as a result of increased drug shipment costs, additional regulatory requirements and the need to engage foreign CROs, as well as expose us to risks associated with less experienced clinical investigators who are unknown to the FDA, different standards of medical care, and fluctuating foreign currency exchange rates.
Clinical trials must be conducted in accordance with Good Clinical Practices and are subject to oversight by the FDA, other foreign governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under current Good Manufacturing Practices, or cGMP, conditions. We, the FDA or other foreign governmental agencies could delay, suspend or halt our clinical trials of a product candidate for numerous reasons, including:
•
deficiencies in the conduct of the clinical trial, including failure to conduct the clinical trial in accordance with regulatory requirements or clinical protocols;
•
the product candidate may have unforeseen adverse side effects, including fatalities, or a determination may be made that a clinical trial presents unacceptable health risks;
•
the time required to determine whether the product candidate is effective may be longer than expected;
•
the product candidate may not be more effective than current therapies;
•
the quality or stability of the product candidate may fall below acceptable standards;
•
our inability to produce or obtain sufficient quantities of the product candidate to complete the trials;
•
our inability to obtain IRB approval to conduct a clinical trial at a prospective site;
•
lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties;
•
our inability to recruit and enroll patients to participate in clinical trials for reasons including competition from other clinical trial programs for the same or similar indications; or
•
our inability to retain patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues, or who are lost to further follow-up.
In addition, clinical trial results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse medical events, including patient fatalities that may be attributable to our product candidates, during a clinical trial could cause it to be redone or terminated. Further, some of our clinical trials may be overseen by an independent data monitoring committee, or DMC, and a DMC may recommend a delay or suspension in one or more of these trials due to safety or futility findings based on events occurring during a clinical trial.
If clinical trials of any of our product candidates fail, we or our collaborators may not be able to obtain marketing approval for the product candidate that is the subject of the failed clinical trials. The FDA and foreign regulatory agencies could also require additional clinical trials before or after granting of marketing approval for any products, which could result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market after initially obtaining marketing approval. Our failure, or the failure of our collaborators, to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent obtaining marketing approval of the product candidate and, after obtaining marketing approval, data from post-approval studies could result in the product being withdrawn from the market, either of which would likely have a material adverse effect on our business.
We may not be able to obtain government regulatory approval to market our product candidates.
Other than Iclusig, which has been approved in the United States for the treatment of adult patients with chronic, accelerated or blast phase CML who are resistant or intolerant to prior TKI therapy and the treatment of adult patients with Ph+ ALL who are resistant or intolerant to prior TKI therapy, none of our product candidates has been approved for commercialization in any country. Prior to commercialization, each product candidate will be subject to an extensive and lengthy review process in the United States and in other countries. We or our collaborators may not be able to obtain regulatory approval for any product candidates, or even if approval is obtained, the labeling for such products may place restrictions on their use that could materially impact the marketability and profitability of those products. Satisfaction of regulatory requirements, which includes satisfying the FDA and foreign regulatory authorities that the product is both safe and effective for its intended uses, typically takes several years or more depending upon the type, complexity, novelty and safety profile of the product and requires the expenditure of substantial resources. Uncertainty with respect to meeting the regulatory requirements governing our product candidates may result in excessive costs or extensive delays in the regulatory review process.
We will not be able to sell our product candidates if we or our third-party manufacturers fail to comply with current good manufacturing practice requirements.
Before approving any of our product candidates, the FDA will inspect the facility or facilities at which the drug product is manufactured and will not approve the drug candidate unless it is satisfied with our or our third-party manufacturer’s compliance with cGMPs. The manufacturing of our product candidates must comply with cGMP requirements of the FDA and similar requirements of regulatory agencies in other countries. These requirements govern, among other things, manufacturing, quality control and documentation procedures. We, or any third-party manufacturer of our product candidates, may not be able to comply with these requirements, which would prevent us from obtaining approval for commercialization of our products. Material changes to the manufacturing processes or a change in manufacturer of products after approvals have been granted are also subject to review and approval by the FDA or other regulatory agencies. Following approval, such facilities are subject to continuing FDA and foreign regulatory requirements including inspections and failure to comply with cGMPs or similar regulations could result in regulatory action including market withdrawals and recalls.
Iclusig and each of our product candidates will remain subject to ongoing regulatory review even if they receive marketing approval. If we or our collaborators or contractors fail to comply with applicable regulations, we or they may be subject to enforcement action that could adversely affect us.
We and our collaborators and contractors will continue to be subject to extensive regulation by the FDA and other regulatory authorities even after our product candidates are approved. We and our collaborators and contractors will continue to be subject to FDA requirements governing, among other things, the manufacture, packaging, sale, promotion, adverse event reporting, storage and recordkeeping of our approved products. The Commissioner of the FDA has put FDA-regulated entities on notice that they should expect to see more enforcement actions in all areas regulated by the FDA. Although we have not received any notice that we are the subject of any investigations or enforcement actions, it is possible that we may be in the future and that could have a material adverse effect on our business. We or any applicable collaborator of ours may be slow to adapt, or may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements.
If we or any applicable collaborator of ours fails to comply with the requirements of the FDA and other U.S. or foreign governmental or regulatory authorities with jurisdiction over our products or operations or previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we or our collaborator could be subject to administrative or judicially imposed sanctions, including warning letters; civil or criminal penalties; fines; injunctions; product seizures or detentions; import bans; voluntary or mandatory product recalls; suspension or withdrawal of regulatory approvals; total or partial suspension of production; and refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.
Government and other third-party payors seek to contain costs of health care through legislative and other means. If they fail to provide coverage and adequate reimbursement rates for our products, our revenues will be harmed.
In both domestic and foreign markets, sales of products depend in part upon the availability of reimbursement from third-party payors. Third-party payors include government health programs such as Medicare and Medicaid, managed care providers, and private health insurers. Governments and other third-party payors continually try to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010, collectively, the Affordable Care Act or ACA, will require discounts under the Medicare drug benefit program and increases the rebates paid by pharmaceutical companies on drugs covered by Medicaid. In addition, the ACA imposes an annual fee, which will increase annually, on sales by branded pharmaceutical manufacturers. The financial impact of these discounts, increased rebates and fees and the other provisions of the ACA on our business is unclear, and there can be no assurance that our business will not be materially harmed by future implementation of the ACA.
In addition, third-party payors are increasingly attempting to contain health care costs by demanding price discounts or rebates and limiting both the types and variety of drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not cover or provide adequate payment for our products. We may have to conduct post-marketing studies in order to demonstrate the cost-effectiveness of Iclusig or any other of our future drugs to such payors’ satisfaction.
Such studies might require us to commit a significant amount of management’s time and financial and other resources. Our products might not ultimately be considered cost-effective. Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that already are reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or imperfections in Medicare or Medicaid data used to calculate these rates. Net prices for products are often reduced by mandatory discounts or rebates required by government health care programs or by privately-negotiated discounts. Moreover, the United States federal government, state governments and private payors frequently pursue actions against pharmaceutical companies alleging that the companies have overstated prices in order to inflate reimbursement rates. Any such action could adversely affect the pricing of and the commercial success of our products.
Any legislation or regulatory changes or relaxation of laws that restrict imports of drugs from other countries also could reduce the net price we receive for our products.
If we market any of our products in a manner that violates federal or state health care laws, including fraud and abuse laws, laws prohibiting off-label promotion, disclosure laws or other similar laws, we may be subject to civil or criminal penalties.
We are subject to health care “fraud and abuse” laws, such as the federal False Claims Act and the anti-kickback provisions of the federal Social Security Act, laws prohibiting off-label product promotion and other similar state and federal laws and regulations. While we have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and the promotion of a culture of compliance, if we are found not to be in full compliance with these laws our business could be materially harmed.
The federal anti-kickback law prohibits knowingly and willfully offering, paying, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the ordering, furnishing, arranging for or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program, such as Medicare or Medicaid. The federal statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, patients, purchasers and formulary managers on the other hand, and therefore constrains our marketing practices and our various service arrangements with physicians, including physicians who make clinical decisions to use our products. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny or penalty if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Pharmaceutical companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in promotion for uses that the FDA has not approved, known as “off-label” uses, that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated “best price” information to the Medicaid Rebate Program.
Although physicians are permitted to, based on their medical judgment, prescribe products for indications other than those cleared or approved by the FDA, manufacturers are prohibited from promoting their products for such off-label uses. We market Iclusig for the treatment of adult patients with chronic, accelerated or blast phase CML who are resistant or intolerant to prior TKI therapy and adult patients with Ph+ ALL who are resistant or intolerant to prior TKI therapy, and provide promotional materials to physicians regarding the use of Iclusig in these patient populations. If the FDA determines that our promotional materials or other activities constitute off-label promotion, it could request that we modify our promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. It also is possible that other federal, state or foreign enforcement authorities might take action if they believe that the alleged improper promotion led to the submission and payment of claims for an off-label use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. Even if it is later determined we were not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our actions and have to divert significant management resources from other matters.
Also applicable to some of our practices is the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations, which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters and which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of individually identifiable health information.
The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. In addition, certain states have laws governing the privacy of certain health information, which may differ from each other in significant ways and often are not preempted by HIPAA, complicating compliance efforts. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a pharmaceutical manufacturer’s products from reimbursement under government programs and criminal fines. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our business.
In recent years, several states and localities, including California, the District of Columbia, Maine, Minnesota, Nevada, New Mexico, Vermont and West Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, health care provider, or HCP payments and other activities. Similar legislation is being considered in other states. Additionally, as part of the ACA, the federal government has enacted the Physician Payment Sunshine provisions. The Physician Payment Sunshine provisions which were enacted in February 2013 and require pharmaceutical manufacturers to publicly report gifts and payments made to physicians and teaching hospitals beginning in March 2014. Many of these requirements are new and the penalties for failure to comply with these requirements will be significant. If we are found not to be in full compliance with these laws, we could face enforcement action, fines and other penalties, and could receive adverse publicity.
The ACA also includes various provisions designed to strengthen significantly fraud and abuse enforcement, such as increased funding for enforcement efforts and the lowering of the intent requirement of the federal anti-kickback statute and criminal health care fraud statute such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it.
If our past or present operations are found to be in violation of any such laws or any other governmental regulations that may apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from federal health care programs and/or the curtailment or restructuring of our operations. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are subject to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
The sales and marketing practices of our industry have been the subject of increased scrutiny from federal and state government agencies, and we believe that this trend will continue. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
Future health care reform measures could hinder or prevent commercial success of our drugs and drug candidates.
The United States federal government and other governments have shown significant interest in pursuing health care reform. Any government-adopted reform measures could adversely affect the pricing of health care products, including our approved product and/or any future product candidates approved for sale. The continuing efforts of governments, insurance companies, managed care organizations and other payors for health care products to contain or reduce health care costs may adversely affect our ability to set prices we believe are fair for our products or any drugs we may develop and commercialize.
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, relating to health care availability, methods of delivery or payment for drugs, or sales, marketing or pricing, may limit our potential revenues, and we may need to revise our research and development or commercialization programs. The pricing and reimbursement environment may change in the future and become more challenging for any of several reasons, including policies advanced by the U.S. government, new health care legislation or fiscal challenges faced by government health administration authorities. Specifically, in the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals and initiatives to change the health care system in ways that could affect our ability to sell products. Some of these proposed and implemented reforms could result in reduced reimbursement rates for our current or future products, which would adversely affect our business, operations and financial results. As discussed above, the recently enacted ACA may have far reaching consequences for companies like us. As a result of this new legislation, substantial changes could be made to the current system for paying for health care in the United States, including changes made in order to extend medical benefits to those who currently lack health insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursement. If reimbursement for our products is substantially less than we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely affected.
Further federal and state proposals and health care reforms in and outside of the United States could limit the prices that can be charged for our products and may further limit our commercial opportunity. Our results of operations could be materially adversely affected by the ACA, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future.
Risks relating to our common stock
Results of our operations, general market conditions for biotechnology stocks and other factors could result in a sudden change in the value of our stock.
As a biopharmaceutical company which has just received regulatory approval for its first drug product, we continue to experience significant volatility in the price of our common stock. In 2012, our stock price ranged from a high of $25.40 to a low of $12.26. Some of the many factors that could contribute to such volatility include:
•
our success in commercializing Iclusig;
•
announcements regarding results and timing of preclinical studies and clinical trials for our product candidates;
•
our plans for seeking marketing approval and the expected timing of any regulatory approvals of our product candidates, including approval of Iclusig outside of the United States;
•
announcements of financial results and other operating performance measures, including product revenues during the initial period after Iclusig’s commercial launch;
•
our funding resources and requirements, including announcements of new equity or debt financings;
•
evidence of the safety or efficacy of our product candidates;
•
decisions by regulatory agencies that may impact our product candidates;
•
the timing of our receipt of, or our failure to receive, future milestones under our license agreement with Merck;
•
announcements regarding existing collaborations or new collaborations or our failure to enter into collaborations;
•
announcements regarding product developments or regulatory approvals obtained by companies developing competing products;
•
announcements of technological innovations or new therapeutic product candidates;
•
developments relating to intellectual property rights, including licensing, litigation and governmental regulation;
•
healthcare or cost-containment legislation and public policy pronouncements;
•
sales of our common stock by us, our insiders or our other stockholders;
•
market conditions for biopharmaceutical stocks in general; and
•
general economic and market conditions.
The stock markets, and the markets for biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may realize less than, or lose all of, their investment.
Anti-takeover provisions of Delaware law and provisions in our charter and bylaws could delay, discourage or make more difficult a third-party acquisition of control of us.
Because we are a Delaware corporation, the certain provisions of Delaware law could delay, discourage or make more difficult a third-party acquisition of control of us, even if the change in control would be beneficial to stockholders or the stockholders regard it as such. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits certain “business combination” transactions (as defined in Section 203) with an “interested stockholder” (defined in Section 203 as a 15 percent or greater stockholder) for a period of three years after a stockholder becomes an “interested stockholder”, unless the attaining of “interested stockholder” status or the transaction is pre-approved by our board of directors, the transaction results in the attainment of at least an 85 percent ownership level by an acquirer or the transaction is later approved by our board of directors and by our stockholders by at least a 66 2/3 percent vote of our stockholders other than the “interested stockholder”, each as specifically provided in Section 203.
In addition, because our board of directors is a classified board, as described below, Section 141(k)(1) of the DGCL provides that directors may only be removed by the stockholders and then only for “cause”. Further, Section 242(b)(1) of the DGCL provides that amendment of our certificate of incorporation requires that the amendment be determined by the board of directors to be advisable and be submitted by our board of directors to our stockholders for action by them and then approved by our stockholders holding a majority of the outstanding shares of our common stock.
Our certificate of incorporation and our bylaws, each as currently in effect, also contain certain provisions that may delay, discourage or make more difficult a third-party acquisition of control of us:
•
a classified board of directors, with three classes of directors, each serving for a staggered three-year term, such that not all members of the board of directors may be elected at one time;
•
the authorized number of directors may be changed only by resolution of the board of directors;
•
any vacancies on the board of directors may only be filled by a majority of the directors then serving, although not a quorum, and not by the stockholders;
•
the ability of the board of directors to issue preferred stock that could dilute the stock ownership of a potential unsolicited acquirer and so possibly hinder an acquisition of control of us that is not approved by our board of directors, including through the use of preferred stock in connection with a shareholder rights plan which we could adopt by action of the board of directors;
•
record date-setting provisions for annual and special meetings of stockholders and actions by written consent, provisions regulating the conduct of meetings of stockholders and action by written consent, and “advance notice” timing and informational requirements for stockholder nominations to our board of directors at stockholder meetings or for stockholder proposals that can be acted on at stockholder meetings or by written consent; and
•
the inability of our stockholders to call a special meeting of stockholders, the limitation of matters to be acted upon at an annual meeting of stockholders to those matters proposed by the Company or properly brought before the meeting and the limitation of matters to be acted upon at a special meeting of stockholders to matters which we place on the agenda for the meeting.
These provisions of the DGCL and our certificate of incorporation and our bylaws may delay, discourage or make more difficult certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the current market price, and might limit the ability of our stockholders to approve transactions that they think may be in their best interest.
ITEM 1B:
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2:
ITEM 2: PROPERTIES
We have leased approximately 100,000 square feet of laboratory and office space at 26 Landsdowne Street, Cambridge, Massachusetts through July 2019, with two five-year renewal options. In May 2012, we entered into a three-year operating lease agreement for an additional 26,000 square feet of office space in Cambridge, Massachusetts. We also have a short-term lease for approximately 4,500 square feet of office space in Lausanne, Switzerland. We have entered into a long-term lease for approximately 244,000 square feet of laboratory and office space in two adjacent, connected buildings under construction in Cambridge, Massachusetts, which is expected to be available for occupancy in early 2015 and will serve as our corporate headquarters. The lease has a term of 15 years with options to renew for three terms of five years each. We have also entered into a long-term lease for approximately 22,000 square feet of office space in a building under construction in Lausanne, Switzerland, which is expected to be available for occupancy in early 2014 and will serve as our European headquarters. We believe that any additional space we may require will be available on commercially reasonable terms.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4:
ITEM 4: MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Effective January 3, 2012, our common stock is traded on the NASDAQ Global Select Market under the symbol “ARIA”. Previously, it was traded on the NASDAQ Global Market. The following table sets forth the high and low sales prices of our common stock as quoted on these markets for the periods indicated.
On February 22, 2013, the last reported sale price of our common stock was $21.21.
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock since December 31, 2007, with the total cumulative return of the NASDAQ Biotechnology Index and the Russell 3000® Index, in each of which ARIAD is listed. The Russell 3000 Index measures the stock performance of the largest 3,000 U.S. companies representing approximately 98 percent of the investable U.S. equity market. Since the Russell 3000 Index is specifically designed to provide a comprehensive, unbiased and stable barometer of the broad stock market, we believe it is a meaningful index against which to compare our stock price performance.
The price of a share of common stock is based upon the closing price per share as quoted on the NASDAQ Global Market or the NASDAQ Global Select Market on the last trading day of the year shown. The graph lines merely connect year-end values and do not reflect fluctuations between those dates. The comparison assumes $100 was invested on December 31, 2007 in our common stock and in each of the foregoing indices. We did not declare or pay any dividends during the comparison period. The stock price performance as shown in the graph below is not necessarily indicative of future stock price performance.
The performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such acts.
Stockholders
As of February 22, 2013, the approximate number of holders of record of our common stock was 350, and the approximate total number of beneficial holders of our common stock was 59,000.
Dividends
We have not declared or paid dividends on our common stock in the past and do not intend to declare or pay such dividends in the foreseeable future. Our long-term debt agreement prohibits the payment of cash dividends.
Unregistered Sales of Securities
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 2012, 2011, 2010, 2009 and 2008 and for each of the years then ended have been derived from the audited consolidated financial statements of the Company, of which the financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 are included elsewhere in this Annual Report on Form 10-K. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements, and the notes thereto, and other financial information included herein.
(1) During 2010, we modified our collaboration agreement with Merck and entered into a license agreement. As a result of this modification, additional payments were received and deferred revenue was recognized, as further discussed in Note 2 to the consolidated financial statements. Pursuant to the license agreement, we provided services to Merck, recognized as service revenue.
(2) In 2009, we issued warrants that are accounted for as a derivative liability. The change in fair value of outstanding warrants is recorded in our consolidated statements of operations. Upon exercise of all remaining warrants in January and February 2012, the balance of the warrant liability was credited to stockholders’ equity and the liability was eliminated. See Note 9 to the consolidated financial statements.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the audited consolidated financial statements, and the notes thereto, and other financial information included herein.
Overview
ARIAD is a global oncology company whose vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need - aggressive cancers where current therapies are inadequate. We are focused on commercializing our first approved cancer medicine, Iclusig™ (ponatinib), and developing additional molecularly targeted therapies to treat patients with blood cancers and solid tumors.
Iclusig and our product candidates, AP26113 and ridaforolimus, were discovered internally by our scientists based on our expertise in computational and structure-based drug design. Ridaforolimus is being developed by Merck & Co., Inc., or Merck, pursuant to a license agreement we entered into with Merck in 2010.
Iclusig (ponatinib)
On December 14, 2012, we obtained accelerated approval from the U.S. Food and Drug Administration, or FDA, to sell our first new cancer medicine, Iclusig. Iclusig is a tyrosine kinase inhibitor, or TKI, that is approved in the United States for the treatment of adult patients with chronic, accelerated or blast phase chronic myeloid leukemia, or CML, who are resistant or intolerant to prior TKI therapy, and the treatment of adult patients with Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL, who are resistant or intolerant to prior TKI therapy.
We have commenced sales and marketing of Iclusig, and the medicine is now available for patients in the United States through specialty pharmacies and specialty distributors. We currently charge approximately $115,000, on a wholesale basis, for an annual supply of the recommended dose of Iclusig.
We have also filed for marketing authorization for Iclusig with the European Medicines Authority, or EMA, and we currently anticipate approval in the third quarter of 2013. We will need to obtain pricing and reimbursement approval in certain countries in Europe before it will be widely available for use, which approvals we anticipate obtaining beginning in 2014. We also plan to file for marketing authorization for Iclusig with regulatory authorities in other selected territories around the world, including Switzerland, Canada and Australia in the second half of 2013 and Japan in mid-2014. Each of these regulatory authorities has its own processes and timelines for the review and approval of marketing authorization applications.
We plan to commercialize Iclusig on our own in the United States and, subject to obtaining regulatory approval, in Europe and other selected territories worldwide. During the past year, we have been actively focused on preparing for the commercial launch of Iclusig in the United States, including establishing an experienced and trained sales force and other professional staff necessary for an effective launch, implementing systems and processes to support launch, developing tools and materials to be utilized during the commercialization of Iclusig and other activities, and arranging for Iclusig to be provided to patients through a network of specialty pharmacies and specialty distributors. We have also initiated operations in Europe, with headquarters in Switzerland, in preparation for potential EMA approval of Iclusig. We have hired management and other key personnel in Switzerland who are building our business infrastructure and capabilities in Europe.
We are also developing Iclusig for expanded indications in CML and in additional cancer indications. In July 2012, we initiated a randomized Phase 3 clinical trial of ponatinib, referred to as the EPIC (Evaluation of Ponatinib versus Imatinib in Chronic Myeloid Leukemia) trial, in adult patients with newly diagnosed CML in the chronic phase. We currently anticipate completion of enrollment by the end of 2013, with an interim analysis of the data in mid-2014. In August 2012, we initiated a multicenter Phase 1/2 clinical trial in Japan of Iclusig in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ ALL and have failed prior treatment with TKIs. This trial is designed to establish the recommended dose for Iclusig and confirm its anti-leukemic activity in Japanese patients. In January 2013, we announced an agreement with Newcastle University, U.K., on behalf of the U.K. National Cancer Research Institute, or NCRI, to collaborate on a multi-center, randomized Phase 3 trial, named SPIRIT 3, to assess the impact of switching patients with CML being treated with a first-line TKI, upon suboptimal response or treatment failure, to Iclusig. We expect that a total of approximately 1,000 patients will be enrolled in this trial, with enrollments beginning in the second quarter of 2013.
We believe that Iclusig has potential applications beyond CML in other blood cancers and solid tumors, such as gastrointestinal stromal tumors, or GIST, acute myeloid leukemia and certain forms of non-small cell lung cancer, or NSCLC. We plan to initiate additional clinical trials of Iclusig as we continue development of this product candidate.
AP26113
AP26113 is an investigational inhibitor of anaplastic lymphoma kinase, or ALK, epidermal growth factor receptor, or EGFR, and repressor of silencing-1, or ROS1, which are clinically validated targets in NSCLC. We initiated patient enrollment in a Phase 1/2 clinical trial of AP26113 in the third quarter of 2011. The protocol is designed to enroll approximately 50 to 60 patients in the Phase 1 portion of the trial and approximately 80 patients in the Phase 2 portion of the trial. We expect to commence the Phase 2 portion of the trial in the first half of 2013 and, subject to further discussions with the regulatory agencies, commence a pivotal trial of AP26113 in ALK-positive NSCLC patients in mid-2013 in parallel with the four cohorts of the Phase 2 portion of the trial.
Ridaforolimus
Ridaforolimus is an investigational inhibitor of the mammalian target of rapamycin, or mTOR, that we discovered and developed internally and later licensed in 2010 to Merck. Under the license agreement, Merck has assumed responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and funds 100 percent of all ridaforolimus costs incurred after January 1, 2010. The agreement provides that Merck will develop ridaforolimus in multiple oncology indications. We received an up-front payment of $50 million in 2010 and a $25 million milestone payment in 2011. Potential additional milestone payments to us include up to $289 million associated with potential regulatory filings and approvals for additional cancer indications and up to $200 million associated with the achievement of certain sales thresholds, although there can be no assurance that any future payments will be received under the agreement.
Critical Accounting Policies and Estimates
Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, the carrying value of intangible assets, accrued product development expenses, the fair value of warrants to purchase our common stock, and inventory valuation.
Revenue Recognition
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.
License and Collaboration Revenue
We have historically generated revenue from license and collaboration agreements with third parties related to use of our technology and/or development and commercialization of product candidates. Such agreements may provide for payment to us of up-front payments, periodic license payments, milestone payments and royalties. We also generated revenue from services provided under license agreements.
Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and is based on the selling price of the deliverables. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of the elements and the appropriate revenue recognition principles are applied to each unit.
The assessment of multiple element arrangements requires judgment in order to determine the appropriate units of accounting and the points in time that, or periods over which, revenue should be recognized. Regarding our Collaboration Agreement with Merck for the development, manufacture and commercialization of ridaforolimus, in effect from July 2007 to May 2010, we determined the license and development deliverables constituted one unit of accounting and, therefore, the up-front and milestone payments were deferred and recognized over the performance period. Regarding our License Agreement with Merck entered into in May 2010 that replaced the Collaboration Agreement, we determined that the license and the services were separate units of accounting, and because the fair value of the undelivered services was known, the amounts received related to the license and the services are recognized in the period in which they are received or the services are rendered. Milestone payments under the License Agreement are recognized when earned. In the year ended December 31, 2010, the Company recognized $179 million under this arrangement, which reflected the receipt of a $50 million up-front payment and a $12.8 million payment for our share of ridaforolimus costs incurred from January 1, 2010 to May 4, 2010 from Merck pursuant to the terms of the License Agreement. License and collaboration revenue in 2010 also included $111.5 million representing the recognition in 2010 of revenue deferred as of December 31, 2009, which was recognized upon execution of the License Agreement. In the year ended December 31, 2011, the Company received and recorded as revenue a $25 million milestone payment. No milestone payments were received under the agreement in the year end December 31, 2012.
Net Product Revenues
Product sales of Iclusig are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, copay assistance programs, product returns and other deductions. We reflect these estimated adjustments as either a reduction in the related account receivable from the specialty pharmacy or specialty distributor, or as an accrued liability depending on the nature of the sales deduction. We began shipping Iclusig in January 2013, and therefore we recognized no product revenues from the sale of Iclusig in the United States in the year ended December 31, 2012.
Although Iclusig has not been approved for commercial sale in the European Union by the EMA, patients are being treated with Iclusig both in the framework of our clinical trials and related studies and in named patient programs. The French regulatory authority had granted an Autorisation Temporaire d’Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of CML and Ph+ ALL under a nominative program on a patient-by-patient basis. The Company began shipping product under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met, all amounts received by or due to the Company under this program (approximately $1.1 million as of December 31, 2012) have not been recorded as revenue.
Intangible Assets
At December 31, 2012, we reported $993,000 of intangible assets, consisting of capitalized costs related primarily to purchased and issued patents and patent applications, net of accumulated amortization. The
carrying value of these intangible assets is evaluated for possible impairment, and losses are recorded when the evaluation indicates that the carrying value is not recoverable. This evaluation involves estimates of future net cash flows expected to be generated by the asset. Such estimates require judgment regarding future events and expected cash flows. Changes in these estimates, including decisions to discontinue using the technologies, could result in material changes to our balance sheet and charges to our consolidated statements of operations. If we were to abandon the ongoing development of the underlying product candidates or technologies or terminate our efforts to pursue collaborations or license agreements, or if our estimates of future net cash flows expected to be generated by the asset change, we may be required to write down or write off a portion of the carrying value of our intangible assets. In 2012, we recorded charges to operating expenses of $4.8 million in our consolidated statements of operations to reflect impairment of the intangible assets associated with ridaforolimus, our investigational oral mTOR inhibitor being developed by Merck for oncology indications pursuant to a license with the Company, following the decision in June 2012 by the FDA not to approve the NDA filed by Merck for ridaforolimus for the treatment of patients with soft tissue or bone sarcomas, stating that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. In 2010, we recorded charges of $2.4 million in our consolidated statements of operations related to the discontinuation of efforts to pursue our NF-kB technology and to the assessment of the recoverability of our ARGENT technology and certain other technologies.
Accrued Product Development Expenses
We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our consolidated statements of operations and are reflected in accrued product development expenses on our balance sheet. At December 31, 2012, we reported accrued product development expenses of $14.1 million on our balance sheet.
Our estimates of services performed or progress achieved are based on all available information we have from reports, correspondence and discussions with our vendors. Our estimates of accrued expenses based on such information require judgment. Actual costs may vary from such estimates. When such variances become known, we adjust our expenses accordingly.
Fair Value of Warrants
Warrants outstanding at December 31, 2011 to purchase 5,805,843 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of our common stock, were classified as a derivative liability. Accordingly, the fair value of the warrants was recorded on our balance sheet as a liability, and such fair value was adjusted in each financial reporting period with the adjustment to fair value reflected in our consolidated statements of operations. At December 31, 2011, we reported a warrant liability of $58.6 million on our balance sheet.
During the three-month period ended March 31, 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. Upon the exercise of these remaining warrants, the balance of the warrant liability and the proceeds received upon exercise were credited to stockholders’ equity and the liability was eliminated.
The fair value of the warrants was determined using the Black-Scholes option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes model resulted in adjustments to the fair value of the warrants recorded on our balance sheet reflected through charges or credits in our consolidated statements of operations. The primary factor in the Black-Scholes model that impacted the fair value of the warrants was the market value of our common stock on the date of the valuation.
Inventory
Inventory costs include the costs related to the manufacturing of Iclusig, including costs of contract manufacturing, quality control costs and shipping costs from the manufacturers to the final distribution warehouse. We value our inventories at the lower of cost or market. We determine the cost of our inventories on a first-in, first-out basis. If we identify excess, obsolete or unsalable items, inventories are written down to their realizable value in the period in which the impairment is identified. Estimates of excess inventory consider our projected sales of the product and the remaining shelf lives of the product.
Prior to receiving approval from the FDA in December 2012 to sell Iclusig, we expensed all costs incurred related to the manufacture of Iclusig as research and development costs because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for our Company of regulatory approval of drug candidates.
Much of the product produced prior to FDA approval is expected to be available for commercial or clinical use. Accordingly, we expect the manufacturing costs for Iclusig included in our future cost of sales to initially be insignificant, as most of these costs will have been recorded as research and development expenses in prior periods, and to increase as we begin to sell inventory that is produced after we began capitalizing Iclusig commercial inventory. We expect this lower cost to occur during the first six to twelve months of commercial sales of Iclusig; however, the time period over which this reduced-cost inventory is consumed will depend on a number of factors, including the amount of future sales, the ultimate use of this inventory in either commercial sales, clinical development or other research activities and the ability to utilize inventory prior to its expiration date. We expect that as this reduced-cost inventory is used, the cost of product sales, before consideration of any required inventory reserves, will be in the single digits as a percentage of net revenues. In addition, we may need to establish reserves for inventory in excess of our projected sales within the product’s expiration period, which may impact the cost of product sales as a percentage of net revenues.
Results of Operations
Years Ended December 31, 2012 and 2011
Revenue
We recorded total revenue of $558,000 for the year ended December 31, 2012, compared to $25.3 million for the year ended December 31, 2011. Total revenue in 2012 consisted primarily of license revenue pursuant to a license agreement related to our ARGENT technology. Total revenue in 2011 consisted primarily of a $25 million milestone payment received pursuant to our license agreement with Merck for the acceptance of an application for regulatory approval in Europe of ridaforolimus for the treatment of patients with sarcoma, which was subsequently withdrawn by Merck in November 2012.
We expect that our revenue in 2013 will increase substantially due primarily to anticipated product sales of Iclusig in the U.S. and to a much lesser degree due to an increase in license revenue pursuant to license agreements related to our ARGENT technology. Product sales of Iclusig in 2013 are dependent in part on the success of our commercialization efforts in the United States and on the status of regulatory approval for Iclusig in Europe, which we currently anticipate in the third quarter of 2013. If applicable regulatory criteria are not met, the EMA could refuse to approve our application or delay the approval of Iclusig. In addition, we will need to obtain pricing and reimbursement approval in certain countries in Europe before it will be widely available for use. We currently anticipate receiving pricing and reimbursement approvals in Europe commencing in 2014. There can be no assurance that we will be successful in commercializing Iclusig in the United States or that Iclusig will receive marketing authorization approval in the European Union.
Operating Expenses
Research and Development Expenses
Research and development expenses increased by $67.0 million, or 86 percent, to $144.7 million in 2012, compared to $77.7 million in 2011. The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:
•
preclinical toxicology, pharmacology and metabolism studies, as well as in vivo efficacy studies in relevant animal models of disease;
•
manufacturing of drug product for preclinical studies and clinical trials and ultimately for commercial supply;
•
submission of the results of preclinical studies and information regarding manufacturing and control and proposed clinical protocol to the U.S. Food and Drug Administration, or FDA, in an Investigational New Drug application, or IND (or similar filings with regulatory agencies outside the United States);
•
conduct of clinical trials designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and
•
submission of all the results of testing to the FDA in a New Drug Application, or NDA (or similar filings with regulatory agencies outside the United States).
Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing, we may commence commercial marketing and distribution of the product.
We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to our clinical and preclinical candidates as well as our discovery research efforts. Direct external expenses are further categorized as costs for clinical programs and costs for preclinical programs. Preclinical programs include product candidates undergoing toxicology, pharmacology, metabolism and efficacy studies and manufacturing process development required before testing in humans can begin. Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.
Our R&D expenses for 2012 as compared to 2011 were as follows:
In 2012 and 2011, our clinical programs consisted of (i) Iclusig (ponatinib), our pan BCR-ABL inhibitor, and (ii) AP26113, our ALK, EGFR and ROS1 inhibitor for which we filed an IND in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011.
Direct external expenses for Iclusig were $54.6 million in 2012, an increase of $22.2 million, or 69 percent, compared to 2011 expenses of $32.4 million. The increase is due to an increase in clinical trial costs of $13.3 million, contract manufacturing costs of $3.3 million and supporting non-clinical costs of $5.6 million. Clinical trial costs increased primarily due to ongoing treatment of patients in our pivotal Phase 2 PACE clinical trial and increased enrollment and treatment of patients in our Phase 3 EPIC clinical trial in newly diagnosed CML patients, including purchases of the comparator drug, imatinib, for use in this trial, as well as costs related to initiation of a Phase 1/2 clinical trial of Iclusig in Japan, offset in part by a decrease in costs of our on-going Phase 1 clinical trial as treatment of patients and other activities in this trial have decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for Iclusig, as well as the production of Iclusig for use in our clinical trials and to provide for initial commercial supply in anticipation of regulatory approval of Iclusig. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene. We collaborated with MolecularMD Corp. to establish this companion diagnostic test and MolecularMD had filed a PreMarketing Approval (PMA) application with the FDA. In September 2012, we and MolecularMD announced the voluntary withdrawal of the PMA following advice from the FDA that the FDA no longer considered this test to be a companion diagnostic test for ponatinib. We expect that our direct external expenses for Iclusig will increase in 2013 as we continue to treat more patients in our ongoing clinical trials, initiate additional clinical trials and conduct additional studies to support continued development of Iclusig.
Direct external expenses for AP26113 were $6.0 million for 2012, an increase of $1.9 million, or 46 percent, compared to 2011 expenses of $4.1 million, of which $2.2 million were included in clinical programs and $1.9 million were included in preclinical programs. The increase in expenses for AP26113 was due to an increase in clinical trial costs of $0.5 million and an increase of $2.0 million in contract manufacturing cost, offset in part by a decrease in supporting non-clinical costs of $0.6 million. The increase in clinical trial costs was due to costs of the Phase 1/2 clinical trial initiated in the third quarter of 2011. The increase in contract manufacturing costs was due to the manufacture of additional material to supply the phase 1/2 clinical trial and investment in product and process development. The decrease in supporting non-clinical costs was due primarily to the completion in 2011 of toxicology studies required for filing of the IND. We expect that our direct external expenses for AP26113 will increase in 2013 as we continue to enroll patients in our on-going clinical trial of this product candidate and conduct additional studies to support continued development and potential regulatory approval of AP26113.
All other R&D expenses increased by $42.9 million, or 104 percent, to $84.1 million in 2012, as compared to $41.2 million in 2011. This increase was primarily due to an increase in personnel costs of $19.8 million related primarily to an increase in the number of employees to support expanding R&D activities, overall increases in compensation for existing employees and an increase in recruiting costs; an increase in professional services of $6.2 million due primarily to initiatives to upgrade systems and technology used in our business; an increase in stock-based compensation expense of $6.1 million as a result of the impact
of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012 as well as the vesting of previously awarded performance share units triggered by the approval of Iclusig by the FDA in December 2012; an impairment charge related to ridaforolimus intangible assets of $4.8 million; an increase in rent expense of $2.2 million as a result of an amendment to our existing building lease and a new lease agreement for additional space; an increase in general expenses of $2.6 million, including technology support costs and travel costs associated with our expanded R&D workforce; and an increase in lab expenses of $1.6 million. We expect that all other R&D expenses will increase in 2013 to support the expanding development of Iclusig and AP26113 and our ongoing discovery research efforts.
The successful commercialization of Iclusig and development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that Iclusig will be accepted in the marketplace, as it competes against existing therapies, or any of our product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval or could result in label warnings related to or recalls of approved products. We, the FDA or other regulatory authorities may suspend clinical trials at any time if we or they believe that the subjects participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our products under development. Other risks associated with the commercialization of Iclusig and our product development programs are described in the section entitled “Risk Factors” in Part I, Item 1A of this annual report.
General and Administrative Expenses
General and administrative expenses increased by $36.5 million, or 150 percent, to $60.9 million in 2012, compared to $24.4 million in 2011. This increase was due primarily to an increase in personnel costs of $15.7 million related primarily to an increase in the number of employees, including sales related personnel to support expanding business activities and to prepare for commercial launch of Iclusig, overall increases in compensation for existing employees and an increase in recruiting costs; an increase in professional services of $10.2 million as a result of an increase in corporate and commercial development initiatives to plan and prepare for the commercial launch of Iclusig; an increase in stock-based compensation expense of $6.6 million due to the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012 as well as the vesting of previously awarded performance share units triggered by the approval of Iclusig by the FDA in December 2012; an increase in general expenses of $2.4 million primarily related to increased travel costs as we prepared for regulatory approval and commercial launch of Iclusig; and an increase in overhead and other expenses of $1.8 million primarily related to insurance costs, taxes and other miscellaneous costs. We expect that general and administrative expenses will continue to increase in 2013 as we commercialize Iclusig in the United States and prepare for commercial launch of Iclusig in Europe, including the hiring of sales, marketing and commercial operations personnel, to support the expansion of our European operations and ongoing research and development activities.
We expect that our operating expenses in total will increase substantially in 2013 for the reasons described above. Operating expenses may fluctuate from quarter to quarter. The actual amount of any increase in operating expenses will depend on, among other things, the status of regulatory review and timing of potential regulatory approval of Iclusig in Europe, the costs for commercial launch of Iclusig in the United States and potential commercial launch in Europe, the progress of our product development programs, including on-going and planned clinical trials, results of continuing non-clinical studies and the costs of product and process development activities and product manufacturing.
Other Income/Expense
Interest Income
Interest income increased by 44 percent to $240,000 in 2012 from $167,000 in 2011, as a result of a higher average balance of funds invested in 2012.
Interest Expense
Interest expense decreased by 14 percent to $199,000 in 2012 from $232,000 in 2011, as a result of lower average borrowings in 2012.
Revaluation of Warrant Liability
In the first quarter of 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. During the first quarter of 2012, the value of the warrant liability on our balance sheet was adjusted, resulting in a non-cash charge of $15.9 million for the year ended December 31, 2012, due primarily to the increase in the market price of our common stock from December 31, 2011 to the dates the warrants were exercised. The revaluation of our warrant liability in 2011 resulted in a non-cash charge of $46.7 million. Upon exercise of those remaining warrants, the balance of the warrant liability and the associated exercise proceeds were credited to stockholders’ equity and the liability was eliminated.
Operating Results
We reported a loss from operations of $205.1 million in 2012 compared to a loss from operations of $76.8 million in 2011, an increase of $128.3 million, or 167 percent. We also reported a net loss of $220.9 million in 2012, compared to a net loss of $123.6 million in the corresponding period in 2011, an increase in net loss of $97.3 million or 79 percent, and a net loss per share of $1.34 for 2012 compared to $0.93 for 2011. The increase in net loss is largely due to the decrease in revenue and the increase in our operating expenses described above, offset in part by the decrease in charges related to the revaluation of our warrant liability of $30.8 million in 2012, as compared to 2011. Although we expect to record revenue from sales of Iclusig during 2013, we expect that we will continue to incur a net loss in 2013 due to the costs associated with the initial commercialization of Iclusig in the United States and potentially in Europe and the continued development of our product candidates.
Years Ended December 31, 2011 and 2010
Revenue
We recorded total revenue of $25.3 million for the year ended December 31, 2011, compared to $179.0 million for the year ended December 31, 2010. Total revenue in 2011 consisted primarily of a $25 million milestone payment received pursuant to our license agreement with Merck for the acceptance of an application for regulatory approval in Europe of ridaforolimus for the treatment of patients with sarcoma, which was subsequently withdrawn by Merck in November 2012. Total revenue in 2010 consisted of license and collaboration revenue of $174.5 million and service revenue of $4.5 million. License and collaboration revenue in 2010 included the $50 million up-front payment and a $12.8 million payment for our share of ridaforolimus costs incurred from January 1, 2010 to May 4, 2010 from Merck pursuant to the terms of the license agreement. License and collaboration revenue in 2010 also included $111.5 million, representing the recognition in 2010 of revenue deferred as of December 31, 2009 under our accounting for the prior collaboration agreement with Merck, which was recognized upon execution of the license agreement. Service revenue of $4.5 million in the year ended December 31, 2010 consisted of transition services that we provided to Merck pursuant to the license agreement.
Operating Expenses
Research and Development Expenses
Research and development expenses increased by $19.7 million, or 34 percent, to $77.7 million in 2011, compared to $58.0 million in 2010, as follows:
In 2011, our clinical programs consisted of ponatinib and AP26113, for which we filed an IND in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011. In 2010, our clinical programs consisted of ponatinib and ridaforolimus, which we licensed to Merck in May 2010. The direct external expenses for ridaforolimus in 2010 reflect our share of the global development costs of ridaforolimus, including our share of Merck’s costs, pursuant to the cost-sharing arrangement of our collaboration with Merck in effect through May 4, 2010.
Direct external expenses for ponatinib were $32.4 million in 2011, an increase of $19.2 million, as compared to 2010. The increase is due to an increase in clinical trial costs of $10.1 million, contract manufacturing costs of $5.4 million, and supporting non-clinical costs of $3.7 million. Clinical trials costs increased primarily due to increased enrollment and treatment of patients in our pivotal Phase 2 clinical trial, offset in part by a decrease in costs of our Phase 1 clinical trial, as treatment of patients and other activities in this trial decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for this product candidate, as well as the production of ponatinib for use in our clinical trials. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify the T315I mutation of the BCR-ABL gene.
Direct external expenses for AP26113 were $4.1 million for the year ended December 31, 2011, of which $2.2 million were included in clinical programs and $1.9 million were included in preclinical programs in the table above, reflecting the transfer of this program to a clinical development status in the third quarter of 2011. Direct external expenses for AP26113 were $1.0 million for the year ended December 31, 2010, which were entirely included in preclinical programs. The increase in expenses for AP26113 was due primarily to the initiation of our Phase 1/2 clinical trial for this product candidate in the third quarter of 2011 as well as on-going product and process development initiatives and production of AP26113 for use in clinical trials.
We incurred no expenses for the development of ridaforolimus in the year ended December 31, 2011, because Merck agreed to fund 100 percent of such costs pursuant to the license agreement entered into in May 2010. Direct external expenses for ridaforolimus amounted to $8.5 million in 2010, reflecting our share of the costs of global development of this product candidate with Merck, including our share of Merck’s costs, pursuant to the cost-sharing arrangement of our collaboration with Merck in effect through May 4, 2010.
All other R&D expenses increased by $6.0 million in 2011 compared to 2010. This increase was primarily due to a decrease of $3.3 million in Merck’s reimbursement to us for our services pursuant to our collaboration agreement in effect until May 2010, an increase in professional services of $1.3 million due primarily to initiatives to upgrade systems and technology used in our business, an increase in stock-based compensation expense of $1.4 million as a result of the impact of a significant increase in the
market value of our common stock on the value of stock-based awards in 2011, an increase in rent expense of $1.6 million as a result of our amendment to our building lease and an increase in other expenses as a result of a one-time credit received in 2010 of $733,000 related to grants awarded to us by the Internal Revenue Service under the Qualified Therapeutic Discovery Project, or QTDP, program established by the U.S. Congress in March 2010 as part of the Patient Protection and Affordable Care Act. These increases were offset in part by a decrease in other personnel costs of $1.1 million due to a lower average number of employees in 2011 as compared to 2010 and a decrease in expenses related to our intellectual property, primarily due to a decrease in impairment charges of $2.1 million as we reserved or wrote off the carrying value of patents related to our NF-kB and ARGENT technologies in 2010.
General and Administrative Expenses
General and administrative expenses increased by $8.3 million, or 52 percent, from $16.1 million in 2010 to $24.4 million in 2011. This increase was due primarily to an increase in professional services of $5.3 million as a result of an increase in corporate and commercial development initiatives to plan and prepare for the potential commercial launch of ridaforolimus and ponatinib, an increase in stock-based compensation expense of $1.4 million due to the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011, a decrease of $452,000 in Merck’s reimbursement to us for our services pursuant to the Collaboration Agreement in effect until May 2010, as well as an increase in costs to recruit personnel, travel costs and other miscellaneous costs.
Other Income/Expense
Interest Income
Interest income increased by 94 percent to $167,000 in 2011 from $86,000 in 2010, as a result of a higher average balance of funds invested in 2011.
Interest Expense
Interest expense increased by 13 percent to $232,000 in 2011 from $206,000 in 2010, due to higher average borrowings in 2011.
Revaluation of Warrant Liability
The fair value of our warrant liability at December 31, 2011 was $29.8 million higher than its fair value at December 31, 2010, due to the net impact of the exercise of warrants to purchase 3,757,767 shares of our common stock during 2011 and the revaluation of our warrant liability at December 31, 2011. The revaluation of our warrant liability resulted in a non-cash charge of $46.7 million for the year ended December 31, 2011 and was due primarily to the increase in the market price of our common stock from $5.10 per share at December 31, 2010, to $12.25 per share at December 31, 2011. The revaluation of our warrant liability in 2010 resulted in a non-cash charge of $19.5 million for the year ended December 31, 2010.
Operating Results
We reported a loss from operations of $76.8 million in 2011 compared to income from operations of $104.9 million in 2010, an increase in loss of $181.7 million. This change is due primarily to the decrease in revenue as a result of the accounting impact of the license agreement entered into with Merck in May 2010 and the increase in operating expenses discussed above. We also reported a net loss of $123.6 million in 2011 compared to net income of $85.2 million in 2010, an increase in net loss of $208.8 million reflecting the change in loss from operations noted above plus the revaluation of the warrant liability.
Selected Quarterly Financial Data
Summarized unaudited quarterly financial data are as follows:
(1) In the third quarter of 2011, we earned a $25 million milestone payment from Merck as described in Note 2 to the consolidated financial statements.
Liquidity and Capital Resources
We have financed our operations and investments to date primarily through sales of our common stock in public offerings, through the receipt of up-front and milestone payments from collaborations and licenses with pharmaceutical and biotechnology companies and, to a lesser extent, through issuances of our common stock pursuant to our stock option and employee stock purchase plans, supplemented by the borrowing of long-term debt from commercial lenders. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. We seek to balance the level of cash, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms.
For the purpose of the following discussion, our funds consist of cash, cash equivalents and marketable securities as follows:
Subsequent to December 31, 2012, on January 29, 2013, we received net proceeds of approximately $309.8 million from the sale of our common stock in an underwritten public offering. After giving effect to the net proceeds from this offering, our cash, cash equivalents and marketable securities at December 31, 2012 would have been $474.2 million.
We manage our marketable securities portfolio to maintain liquidity for payment of our obligations and to enhance yields. We purchase marketable securities to enhance our yield on invested funds and when such amounts are not needed for near-term payment of obligations. Although our investments are available for sale to fund current requirements, we generally hold our marketable securities to maturity. Upon
maturity of such marketable securities, a portion may be retained as cash to provide for payment of current obligations while the remainder will be reinvested in accordance with our investment policy. In 2012, we made purchases of marketable securities in the amount of $89.6 million. In 2011, there were no purchases or sales of marketable securities. During 2012, proceeds from maturities of marketable securities were $44.5 million. During 2011, there were no proceeds from maturities of marketable securities. A total of $69.6 million of our cash and cash equivalents as of December 31, 2012 is held by various international subsidiaries.
Sources of Funds
During the years ended December 31, 2012, 2011 and 2010, our sources of funds were as follows:
Our up-front and milestone payments from Merck were received pursuant to the license agreement entered into in May 2010. These payments are included in cash provided by (used in) operating activities in our consolidated statements of cash flows for the years ended December 31, 2011 and 2010 but are presented separately in this analysis due to the non-recurring nature of these payments.
The amount of funding we seek to raise through sales of our common stock or other securities depends on many factors, including, but not limited to, our plans for and the expected costs of commercialization of Iclusig and the potential commercialization of our other product candidates, the status and progress of our product development programs and potential regulatory approvals, the expansion of our operations to support commercialization and ongoing research and development activities in the United States, Europe and other selected territories worldwide, the receipt of potential milestone payments and royalties from Merck, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.
On October 29, 2010, we sold 16,000,000 shares of our common stock in an underwritten public offering at a purchase price of $3.70 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $57.5 million.
On December 20, 2011, we sold 24,725,000 shares of our common stock in an underwritten public offering at a purchase price of $10.42 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $243.1 million.
Subsequent to December 31, 2012, on January 29, 2013, we sold 16,489,893 shares of our common stock in an underwritten public offering at a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $309.8 million.
We have filed shelf registration statements with the U.S. Securities and Exchange Commission, or SEC, from time to time, to register shares of our common stock or other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate. Under SEC rules, we currently qualify as a “well-known seasoned issuer,” which allows us to file shelf registration statements to register an unspecified amount of securities that are effective upon filing. On December 14, 2011, we
filed such a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This registration statement was effective upon filing and will remain in effect for up to three years from filing.
In January 2011, we amended our existing term loan with a bank. The amendment increased the outstanding balance of the loan from $9.6 million at December 31, 2010 to $14.0 million, extended the maturity date from March 31, 2013 to December 31, 2015, and re-set the quarterly repayment provisions, with payments increasing from 2.5 percent of the principal amount in the first quarter, commencing on March 31, 2011, to 8.75 percent of the principal amount in the final quarter, together with interest throughout the term of the loan. All other provisions of our existing loan remain in full force and effect.
Uses of Funds
The primary uses of our funds are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to invest in property and equipment as needed for our business. Our uses of cash during the years ended December 31, 2012, 2011 and 2010 were as follows:
The net cash used in operating activities is comprised of our net losses adjusted for non-cash expenses, changes in deferred revenue and working capital requirements. As noted above, our net loss for 2012 increased by $97.3 million, as compared to 2011, due primarily to the overall decrease in revenue and increases in operating expenses, offset in part by decreases in charges related to the revaluation of our warrant liability. After adjusting for the $25 million milestone payment from Merck in 2011, our net cash used in operating activities increased by $75.4 million in 2012, as compared to 2011, reflecting overall increases in operating expenses and changes in working capital. As noted above, we expect that we will incur a net loss in 2013 due to the commercialization of Iclusig in the United States and potentially in Europe and continued development of our product candidates; and that our investment in property and equipment will increase in 2013 to support growth of our R&D and general and administrative functions.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2012, we maintained outstanding letters of credit and collateral balances of $1.0 million in accordance with the terms of our long-term leases for our office and laboratory facility and for other purposes. In January 2013, we entered into a lease agreement for laboratory and office space requiring us to establish a letter of credit as security for the lease of approximately $5.8 million upon signing of the lease.
Contractual Obligations
We have substantial fixed contractual obligations under our long-term debt agreement, operating and capital lease agreements, employment agreements and benefit plans. These non-cancelable contractual obligations were comprised of the following as of December 31, 2012:
Long-term debt consists of scheduled principal payments on such debt. Interest on our long-term debt is based on variable interest rates. Assuming a constant interest rate of 1.46 percent, our average interest rate on our debt at December 31, 2012, over the remaining term of the debt, our interest expense would total approximately $150,000 in 2013 and $152,000 in the period 2014 through 2015, when the debt matures.
Leases consist of payments to be made on our lease for our office and laboratory facility, the term of which extends to July 2019, and on agreements for certain assets acquired under a capital lease which expires in 2013. In January 2013, we entered into a lease agreement for laboratory and office space in buildings under construction and expected to be available for occupancy in early 2015. Future minimum annual lease payments beginning in 2015 through 2030 under this lease which are not included in the table above are $5.2 million in 2015, $6.3 million in 2016, $16.9 million in 2017, $19.3 million in 2018 and $239.9 million thereafter. Employment agreements represent base salary payments under agreements with officers that extend for terms ranging to the end of 2013. Purchase commitments represent contractual commitments for research and development entered into in the normal course of business. Other long-term obligations are comprised primarily of our obligations under our executive deferred compensation plan and potential obligations related to uncertain tax benefits.
Liquidity
At December 31, 2012, we had cash, cash equivalents and marketable securities totaling $164.4 million and working capital of $119.5 million, compared to cash and cash equivalents totaling $306.3 million and working capital of $282.2 million at December 31, 2011. For the year ended December 31, 2012, we reported a net loss of $220.9 million and cash used in operating activities of $153.7 million. In January 2013, we sold 16,489,893 shares of our common stock in an underwritten public offering at a purchase price of $19.60 per share for net proceeds of approximately $309.8 million. After giving effect to the net proceeds from this offering, our cash, cash equivalents and marketable securities at December 31, 2012 would have been $474.2 million. Based on our current operating plan, we believe that our cash, cash equivalents and marketable securities at December 31, 2012, together with the net proceeds from our January 2013 stock offering, will be sufficient to fund our operations into the fourth quarter of 2014.
On December 14, 2012, we obtained accelerated approval from the FDA to sell Iclusig in the United States, and we commenced sales in the United States in January 2013. We have filed for marketing approval of Iclusig in Europe and expect potential approval in the third quarter of 2013. We are selling Iclusig on our own in the United States and plan to do so in Europe and other selected markets worldwide, subject to obtaining regulatory approval in such territories. During the past year, we have been preparing for commercial launch of Iclusig in the United States, including the hiring and training of an experienced sales force and other professional staff necessary for an effective launch, the implementation of systems and processes to support the launch, the development of tools and materials being used in the launch and
other activities. In Europe, we are also planning for potential marketing approval and preparing for launch of Iclusig, including the hiring of personnel to build our infrastructure and capabilities in Europe. These activities will require increased spending as we launch Iclusig in these markets. There can be no assurance that Iclusig will be commercially successful in the United States, where we are currently selling the product, or in other territories, where we await regulatory approval or have yet to file for regulatory approval. If we are not successful in generating the levels of sales we expect from Iclusig and or obtaining additional regulatory approvals, we may need to revise our operating plans in order to conserve cash to fund our operations.
We have historically incurred operating losses and net losses related to our research and development activities. We expect to continue to incur significant research and development expenses and that such expenses will increase substantially in 2013. We plan to expand our development of Iclusig and AP26113, and to conduct additional clinical trials, including the Phase 3 EPIC clinical trial of Iclusig in newly diagnosed CML patients that we initiated in 2012, and continue product and process development, manufacturing and other activities in support of these efforts. We also plan to continue to invest in discovery research and add to our pipeline of product candidates through these activities. There are many factors that will affect our level of spending on these activities, including the number, size and complexity of, and rate of enrollment of patients in, our clinical trials for Iclusig and AP26113, the extent of other development activities for Iclusig and AP26113, the progress of our preclinical and discovery research programs, the status of regulatory reviews and timing of potential regulatory approvals and commercial launch of Iclusig in Europe and other markets and of our other product candidates, the size of the workforce and required systems and infrastructure necessary to support commercialization of Iclusig and our product candidates in multiple markets and other factors.
Under our license agreement with Merck, we are eligible to receive milestone payments for specified regulatory filings and approvals to sell ridaforolimus in multiple cancer indications. In addition to milestone payments, if ridaforolimus receives regulatory approval, Merck has agreed to pay us tiered double-digit royalties on global net sales of ridaforolimus. There can be no assurance that such regulatory approvals will be obtained or that we will receive any additional milestone or other payments under our license agreement with Merck.
In addition to the license agreement with Merck, we also have existing license agreements with two companies, Medinol Ltd. and ICON Medical Corporation, for the development and commercialization of ridaforolimus-eluting stents, and other licenses of our ARGENT technology. If Medinol, ICON or the other licensees are successful in the development or commercialization of potential products or otherwise generate revenue from these licenses, we will be eligible to receive milestone payments and/or royalties on sales of products.
Until such time, if ever, that we generate revenues from sales of Iclusig and our product candidate sufficient to fund operations, we plan to continue to fund our operations by issuing common stock, debt or other securities in one or more public or private offerings, as market conditions permit, through the incurrence of additional debt from commercial lenders or through the potential receipt of milestone payments and/or royalties under our existing license agreements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends.
There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate preclinical studies, clinical trials or other clinical development activities for one or more of our approved products or product candidates; (2) delay, limit, reduce or terminate our discovery research or preclinical development activities; or (3) enter into licenses or other arrangements with third parties on terms that may be unfavorable to us or sell, license or relinquish rights to develop or commercialize our product candidates, approved products, technologies or intellectual property.
Recently Adopted or Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which requires the presentation of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011 and requires retrospective application. We adopted this ASU on January 1, 2012, and included separate consolidated statements of comprehensive income (loss).
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.
We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund our liquidity needs and may not in any case exceed three years. These securities are classified as available-for-sale.
Available-for-sale securities are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity (accumulated other comprehensive income).
Our investments are sensitive to interest rate risk. We believe, however, that the effect, if any, of reasonable possible near-term changes in interest rates on our financial position, results of operations and cash flows generally would not be material due to the short-term nature and high credit quality of these investments. In particular, at December 31, 2012, because our available funds are invested solely in securities with remaining maturities of 12 months or less, we believe that our risk of loss due to changes in interest rates is not material.
At December 31, 2012, we had $11.2 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR + 1.25 percent to 2.25 percent. This note is sensitive to interest rate risk. In the event of a hypothetical 10 percent increase in the interest rate on which the loan is based (15 basis points at December 31, 2012), we would incur approximately $15,000 of additional interest expense per year based on expected balances over the next twelve months.
Certain Factors That May Affect Future Results of Operations
The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Annual Report, and they may also be made a part of this Annual Report by reference to other documents filed with the SEC, which is known as “incorporation by reference.” Such statements in connection with any discussion of future operating or financial performance are identified by use of words such as “may,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. Such statements are based on management’s expectations and are subject to certain factors, risks and
uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to successfully launch, commercialize and generate profits from sales of Iclusig; competition from alternative therapies and the acceptance of Iclusig by patients, physicians and third-party payors; our ability to obtain approval for Iclusig outside of the United States and in additional indications; difficulties in forecasting sales or recognizing revenues for Iclusig; our reliance on third-party manufacturers, including sole-source suppliers, and on specialty pharmacies and specialty distributors for the distribution of Iclusig; preclinical data and early-stage clinical data that may not be replicated in later-stage clinical studies; the costs associated with our research, development, manufacturing and other activities; the conduct and results of preclinical and clinical studies of our product candidates; difficulties or delays in obtaining regulatory approvals to market products; the timing of development and potential market opportunity for our product candidates; our reliance on our strategic partners, licensees and other key parties for the successful development, manufacturing and commercialization of our product candidates; the adequacy of our capital resources and the availability of additional funding; patent protection and third-party intellectual property claims; our failure to comply with extensive regulatory requirements; the occurrence of serious adverse events in patients being treated with Iclusig or our product candidates; the ability to manage our growth effectively; product liability claims; our operations in foreign countries; future capital needs; risks related to key employees, markets, economic conditions, health care reform, prices and reimbursement rates; and other factors. Please also see the discussion under “Risk Factors” in Part I, Item 1A appearing elsewhere in this Annual Report on Form 10-K for more details regarding these and other risks.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference in this Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of ARIAD Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ARIAD Pharmaceuticals, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 1, 2013
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
ARIAD is a global oncology company whose vision is to transform the lives of cancer patients with breakthrough medicines. The Company’s mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need - aggressive cancers where current therapies are inadequate. The Company is focused on the commercialization of its first approved cancer medicine, Iclusig™ (ponatinib), a tyrosine kinase inhibitor (“TKI”) approved by the U.S. Food and Drug Administration (“FDA”) on December 14, 2012 for the treatment of patients with chronic myeloid leukemia (“CML”) or Philadelphia chromosome-positive acute lymphoblastic leukemia (Ph+ ALL) who are resistant or intolerant to other TKI therapies, as well as developing additional novel, molecularly targeted therapies to treat patients with blood cancers and solid tumors. The Company began shipping Iclusig in January 2013, and therefore recognized no product revenues from the sale of Iclusig in the United States in the year ended December 31, 2012.
In addition to commercializing Iclusig, the Company is developing Iclusig for approval in additional countries and cancer indications and has two other product candidates in development, AP26113 and ridaforolimus. AP26113 is being studied in a Phase 1/2 clinical trial in patients with advanced solid tumors including non-small cell lung cancer (“NSCLC”). The Company expects to commence the Phase 2 portion of the trial in the first half of 2013 and, subject to further discussions with the regulatory agencies, commence a pivotal trial of AP26113 in ALK-positive NSCLC patients in mid-2013 in parallel with the four cohorts of the Phase 2 portion of the trial. Ridaforolimus is being studied in multiple clinical trials in patients with various types of cancers by Merck & Co., Inc. (“Merck”) under a license agreement the Company entered into with Merck in 2010. Under the terms of the license agreement, Merck is responsible for all activities related to the development, manufacture, and commercialization of ridaforolimus and the Company is eligible to receive milestone and royalty payments. See Note 2. In addition to its clinical development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.
Principles of Consolidation
The consolidated financial statements include the accounts of ARIAD Pharmaceuticals, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Foreign Currency
A subsidiary’s functional currency is the currency of the primary economic environment in which the subsidiary operates; normally, that is the currency of the environment in which a subsidiary primarily generates and expends cash. For subsidiaries that are primarily a direct and integral component or extension of the parent entity’s operations, the U.S. dollar is the functional currency.
For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are remeasured into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period. The Company has established the U.S. dollar as the functional currency of subsidiaries that are holding companies and its primary European operating entity. Through December 31, 2012, the Company does not have significant subsidiary operations with the functional currency denominated as the local currency.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported amounts and disclosure of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include short-term, highly liquid investments, which consist principally of United States government and agency securities, with remaining maturities at the date of purchase of 90 days or less, and money market accounts.
Restricted Cash
Restricted cash consists of cash balances held as collateral for outstanding letters of credit related to the lease of the Company’s laboratory and office facilities and other purposes.
Marketable Securities
Marketable debt securities consist of United States government and agency backed securities. The Company classifies these marketable debt securities as available-for-sale at fair value. The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations. The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities.
Inventory
Inventory costs include the costs related to the manufacturing of drug product for Iclusig, including costs of contract manufacturing, quality control costs and shipping costs from the manufacturers to the final distribution warehouse. The Company values its inventories at the lower of cost or market. The Company determines the cost of its inventories on a first-in, first-out basis. If the Company identifies excess, obsolete or unsalable items, it writes down its inventory to its net realizable value in the period in which the impairment is first identified. Estimates of excess inventory consider the Company’s projected sales of the product and the remaining shelf lives of product. On December 14, 2012, the Company began capitalizing inventory costs for Iclusig being manufactured for commercial sale. At December 31, 2012, other current assets on the balance sheet includes capitalized inventory costs of $6,000.
Prior to receiving approval from the FDA to sell its first new cancer medicine, Iclusig, on December 14, 2012, the Company expensed all costs incurred related to the manufacture of Iclusig as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (3 to 10 years). Leasehold improvements and assets under capital leases are amortized over the shorter of their useful lives or lease term using the straight-line method.
Intangible and Other Assets
Intangible and other assets consist primarily of purchased technology and capitalized patent and license costs. The cost of purchased technology, patents and patent applications, costs incurred in filing patents and certain license fees are capitalized when recovery of the costs is probable. Capitalized costs related to purchased technology are amortized over the estimated useful life of the technology. Capitalized costs related to issued patents are amortized over a period not to exceed seventeen years or the remaining life of the patent, whichever is shorter, using the straight-line method. Capitalized license fees are amortized over the periods to which they relate. In addition, capitalized costs are expensed when it becomes determinable that the related patents, patent applications or technology will not be pursued.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including the above-mentioned intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Accrued Rent
The Company recognizes rent expense for leases with increasing annual rents on a straight-line basis over the term of the lease. The amount of rent expense in excess of cash payments is classified as accrued rent. Any lease incentives received are deferred and amortized over the term of the lease. At December 31, 2012 and 2011, the amount of accrued rent is $5.0 million and $1.7 million, respectively. Of these amounts, at December 31, 2012 and 2011, $4.7 million and $1.7 million, respectively, are included in other long-term liabilities, with the remaining $0.3 million as of December 31, 2012 included in other current liabilities.
Revenue Recognition
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of each deliverable and the appropriate revenue recognition principles are applied to each unit.
License and Collaboration Revenue
The Company has historically generated revenue from license and collaboration agreements with third parties related to use of the Company’s technology and/or development and commercialization of product candidates. Such agreements may provide for payment to the Company of up-front payments, periodic license payments, milestone payments and royalties. The Company also generates service revenue from license agreements with third parties related to internal services provided under such agreements. Service revenue is recognized as the services are delivered.
Product Revenue
On December 14, 2012, the Company obtained accelerated approval from the FDA to sell its first new cancer medicine, Iclusig. In January 2013, the Company commenced sales and marketing of Iclusig, and the medicine is now available to patients in the United States through specialty pharmacies and specialty distributors. Product sales are recorded net of estimated government-mandated rebates and chargebacks,
distribution fees, copay assistance programs, product returns and other deductions. The Company reflects these estimated adjustments as either a reduction in the related accounts receivable from the specialty pharmacy or specialty distributor, or as an accrued liability depending on the nature of the sales deduction. The Company began shipping Iclusig in January 2013, and therefore recognized no product revenues in the year ended December 31, 2012.
Although Iclusig has not been approved for commercial sale in the European Union by the European Medicines Agency, patients are being treated with Iclusig both in the framework of the Company’s clinical trials and related studies and in named patient programs. The French regulatory authority had granted an Autorisation Temporaire d’Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. The Company began shipping product under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met, all amounts received by or due to the Company under this program (approximately $1.1 million as of December 31, 2012) have not been recognized as revenue.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement basis and the income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax computations are based on enacted tax laws and rates applicable to the years in which the differences are expected to affect taxable income. A valuation allowance is established when it is necessary to reduce deferred income tax assets to the amount that is considered to be more-likely-than-not realizable.
The Company does not recognize a tax benefit unless it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Any interest and penalties on uncertain tax benefits are included within the tax provision.
Segment Reporting
The Company organizes itself into one operating segment reporting to the chief executive officer.
Stock-Based Compensation
The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.
Executive Compensation Plan
The Company has an unfunded deferred executive compensation plan that defers the payment of annual bonus awards to officers to future periods as specified in each award. The value of the awards is indexed to the value of specified mutual funds. The Company accrues a liability based on the value of the awards ratably over the vesting period. The recorded balances of such awards are increased or decreased based on the actual total return and quoted market prices of the specified mutual funds.
Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which requires the presentation of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011 and requires retrospective application. The Company adopted this ASU on January 1, 2012, and included separate consolidated statements of comprehensive income (loss).
2. Collaboration and License Agreements with Merck & Co., Inc.
In July 2007, the Company entered into a collaboration agreement with Merck for the joint global development, manufacture and commercialization of ridaforolimus, for use in cancer (the “Collaboration Agreement”). In May 2010, the Company entered into an amended and restated agreement with Merck for ridaforolimus (the “License Agreement”), which replaced the Collaboration Agreement. These agreements are described below.
The Collaboration Agreement (July 2007 to May 2010)
Under the terms of the Collaboration Agreement, as in effect until May 4, 2010, Merck and the Company were conducting a broad-based development program for the use of ridaforolimus in multiple types of cancer. Each party funded 50 percent of global development costs incurred. Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007 and milestone payments of $53.5 million through May 4, 2010, based on the achievement of specified clinical and regulatory events.
In accordance with the Company’s accounting policy, the up-front and milestone payments received were deferred and were being recognized as revenue through 2023, the estimated expiration of the patents related to the underlying technology, which was determined to be the performance period. Development costs under the Collaboration Agreement were aggregated and split between the Company and Merck in accordance with the terms of the agreement. The Company’s share of such development costs from inception of the collaboration up to May 4, 2010 was reflected in operating expenses in the Company’s consolidated statements of operations.
The License Agreement (May 2010 to present)
Under the terms of the License Agreement, the Company granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and Merck assumed full responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and agreed to fund 100 percent of all ridaforolimus costs incurred after January 1, 2010. The License Agreement provides that Merck will develop ridaforolimus in multiple oncology indications. If ridaforolimus receives regulatory approval, Merck will be responsible for selling ridaforolimus worldwide, will record global sales and has agreed to pay the Company tiered double-digit royalties on global net sales. The Company has an option to co-promote ridaforolimus with up to 20 percent of the sales effort in all indications in the United States and, in such case, the Company would be compensated by Merck for its sales efforts.
Under the License Agreement, in 2010 Merck paid the Company an initial up-front fee of $50 million and approximately $12.8 million for its share of costs incurred in the period from January 1, 2010 to May 4, 2010 related to development, manufacture and commercial activities for ridaforolimus in accordance with the cost-sharing provisions of the Collaboration Agreement as in effect during that period. In addition, Merck has agreed to pay the Company up to $514 million in regulatory and sales milestone payments, based on the successful development of ridaforolimus in multiple potential cancer indications and upon achievement of specified product sales thresholds. Through December 31, 2012, Merck has paid the Company a $25 million milestone payment for the acceptance of the marketing authorization application in Europe for the sarcoma indication, which was subsequently withdrawn by Merck in November 2012. Potential additional milestone payments include up to $289 million associated with potential regulatory filings and approvals for other cancer indications, and up to $200 million associated with the achievement of certain sales thresholds if ridaforolimus receives regulatory approval.
Pursuant to the License Agreement, all ridaforolimus activities that had been the responsibility of the Company under the Collaboration Agreement were transitioned to Merck in 2010. Merck agreed to pay the Company for its internal services at agreed upon rates and reimburse the Company for all external costs incurred in connection with transition services or research and development activities, and these services are reflected as service revenue in the Company’s consolidated statements of operations.
Accordingly, the remaining deliverables of the Company were limited to transition services for which the Company could establish fair value and all deferred revenue was recognized as of May 4, 2010. Any remaining service revenues are recognized when earned and other revenue recognition criteria are met.
The Company determined that this License Agreement was a new agreement for accounting purposes, as the economic terms and deliverables were materially modified from the prior arrangement. The Company assessed each of the deliverables related to the License Agreement against the separation criteria for multiple element arrangements and concluded that there are two units of accounting, namely the license and the transition services. The Company concluded that the license deliverable had stand-alone value, as the nature of the transition services could be provided by other vendors and there was objective and reliable evidence of the fair value of the undelivered transition services. The Company’s accounting policy for exclusive licenses is to recognize revenue when all revenue recognition criteria are met. Accordingly, the Company recognized the revenue associated with the delivered elements of the agreement in the second quarter of 2010.
The amounts recognized as license and collaboration revenue for the year ended December 31, 2010 included the following components related to the Merck agreements:
•
$50 million up-front payment pursuant to the License Agreement,
•
$12.8 million payment received from Merck pursuant to the License Agreement as payment for the Company’s 50 percent share of costs incurred from January 1, 2010 to May 4, 2010, and
•
$111.5 million representing the recognition of revenue deferred as of December 31, 2009 under the Company’s accounting for the Collaboration Agreement.
For the year ended December 31, 2011, license and collaboration revenue included the $25 million milestone payment received from Merck for acceptance of the submission of the marketing authorization application for ridaforolimus for the sarcoma indication in Europe.
For the years ended December 31, 2012, 2011 and 2010, the Company recorded service revenue of approximately $44,000, $111,000 and $4.5 million, respectively. The cost of such services is reflected in operating expenses in the period in which they were incurred. License revenue that is not related to the Merck arrangement is not material in any of the years presented.
3. Marketable Securities
The Company has classified its marketable securities as available-for-sale and, accordingly, carries such securities at fair value. At December 31, 2012, all of the Company’s marketable securities consisted of United States government or agency securities, all of which mature within the next 12 months.
At December 31, 2012, the aggregate fair value and amortized cost of the Company’s marketable securities were $45,035,000 and $45,015,000, respectively. Gross unrealized gains were $20,000 at December 31, 2012 and are included in accumulated other comprehensive income in the consolidated balance sheet.
At December 31, 2011, the Company had no marketable securities.
4. Property and Equipment, Net
Property and equipment, net, was comprised of the following at December 31:
Depreciation and amortization expense for the years ended December 31, 2012, 2011 and 2010 was $2.8 million, $2.8 million and $3.0 million, respectively.
The Company leases certain assets under capital leases having terms up to four years. Assets under capital leases included in property and equipment were as follows at December 31:
5. Intangible and Other Assets, Net
Intangible and other assets, net, were comprised of the following at December 31:
Amortization expense for intangible assets was $218,000, $1.7 million and $0.9 million in 2012, 2011 and 2010, respectively. The weighted average amortization period for intangible assets was 17.0 years, 14.9 years and 14.8 years in 2012, 2011 and 2010, respectively. The estimated future amortization expense is $22,000 per year for 2013, 2014, 2015, 2016, and 2017 and $883,000 thereafter.
For the years ended December 31, 2012, 2011 and 2010, the Company recorded charges to operating expenses of $5.2 million, $312,000 and $2.4 million, respectively, to reflect impairment of the carrying value of certain capitalized patents and licenses or purchased technology. In 2012, the Company recorded a charge of $4.8 million to reflect impairment of the carrying value of intangible assets associated with ridaforolimus, the Company’s investigational oral mTOR inhibitor being developed by Merck following the decision in June 2012 by the FDA not to approve the NDA filed by Merck for the treatment of patients with soft tissue or bone sarcomas. In 2010, the charges relate to the write-off of the carrying value of patents related to the Company’s NF-kB technology, upon unsuccessful conclusion of litigation related to this technology, and an impairment of the carrying value of the ARGENT patents and certain other patents. The impairment of the carrying value of intangible assets was based on management’s assessment of the uncertainty related to the timing and amount of future cash flows anticipated from these assets.
6. Long-term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations were comprised of the following at December 31:
The term loan provides for quarterly payments of principal and interest with final scheduled maturity on December 31, 2015. The loan bears interest at LIBOR plus 1.25 to 2.25 percent, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate. The effective interest on the loan was 1.46 percent at December 31, 2012. The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. The loan requires the Company to maintain a minimum of $15 million in unrestricted cash, cash equivalents and investments. The loan also contains certain covenants that restrict additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of common stock.
In addition, the Company leases certain equipment under capital leases with original terms of up to four years. These leases have effective interest rates ranging from 7.2 percent to 12.3 percent and are secured by the underlying leased assets.
The future scheduled principal payments due under these financing obligations were as follows at December 31, 2012:
7. Executive Compensation Plan
Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards ratably over the vesting period. The grant date values of awards made in 2012, 2011 and 2010 were $1.1 million, $1.6 million and $1.8 million, respectively. The net expense for this plan was $2.8 million, $1.7 million and $1.5 million in 2012, 2011 and 2010, respectively. The estimated future expense for unvested awards based on the value at December 31, 2012 is $558,000 and $139,000 for 2013 and 2014, respectively.
8. Leases, Licensed Technology and Other Commitments
Facility Leases
The Company conducts the majority of its operations in a 100,000 square foot office and laboratory facility under a non-cancelable operating lease that extends to July 2019 with two consecutive five-year renewal options. The Company maintains an outstanding letter of credit of $699,000 in accordance with the terms of the amended lease. In May 2012, the Company entered into a three-year operating lease agreement for an additional 26,000 square feet of office space. Rent expense, net of sublease income of $6,000 in 2012, $67,000 in 2011 and $28,000 in 2010, amounted to $5.9 million, $2.0 million and $2.1 million in 2012, 2011 and 2010, respectively. Future non-cancelable minimum annual rental payments through July 2019 under these leases are $6.5 million in 2013, $6.7 million in 2014, $6.2 million in 2015, $5.5 million in 2016, $5.6 million in 2017, and $9.0 million thereafter.
In January 2013, the Company entered into a lease agreement for approximately 244,000 square feet of laboratory and office space in two adjacent, connected buildings under construction in Cambridge, Massachusetts, which is expected to be available for occupancy in early 2015. The term of the lease will be for 15 years from substantial completion of the buildings with options to renew for three terms of five years each. The Company has rights and options to expand into additional space in the buildings through June 2014. The base rent is subject to increases over the term of the lease. Non-cancelable minimum annual lease payments for the annual periods beginning upon commencement of the lease are $5.2 million, $6.3 million, $16.9 million, $19.3 million and $19.6 million in the first five years of the lease and $220.3 million thereafter, plus the Company’s share of the facility operating expenses. The Company has established a letter of credit as security for the lease of approximately $5.8 million upon signing of the lease, which was supported by restricted cash in January 2013.
In addition, in January 2013, the Company entered into a lease agreement for approximately 22,000 square feet of office space in a building under construction in Lausanne, Switzerland, which is expected to be available for occupancy in early 2014. The term of the lease will be ten years, with options for extension of the term and an early termination at the Company’s option after five years. Non-cancelable minimum annual lease payments are expected to be approximately $1.1 million per year for the first five years of the lease and $5.8 million thereafter.
Licensed Technology
The Company has entered into agreements with several universities under the terms of which the Company has received exclusive licenses to technology and intellectual property. The agreements, which are generally cancelable by the Company, provide for the payment of license fees and/or minimum payments, which are generally creditable against future royalties. Fees paid by the Company amounted to $145,000 in each of 2012, 2011 and 2010, and are expected to amount to $145,000 in 2013 and thereafter. In addition, the agreements provide for payments upon the achievement of certain milestones in product development. The agreements also require the Company to fund certain costs associated with the filing and prosecution of patent applications.
Other Commitments
The Company has entered into various employment agreements with eighteen officers of the Company. The agreements for these officers have remaining terms as of December 31, 2012 through the end of 2013, providing for aggregate base salaries of $5.7 million for 2013.
9. Stockholders’ Equity and Warrants
Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock which the Board of Directors is authorized to designate and issue in different series.
Common Stock and Warrants
At December 31, 2012, the Company had 240,000,000 shares of common stock authorized.
On February 25, 2009, the Company sold 14,378,698 shares of its common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional 10,784,024 shares of the Company’s common stock exercisable at a price of $2.15 per share in cash or pursuant to the net exercise provisions of the warrants. The warrants became exercisable on August 25, 2009 and were scheduled to expire on February 25, 2012 if not exercised by that date. During the year ended December 31, 2010, 1,220,414 warrants were exercised for proceeds to the Company of approximately $2.6 million. During the year ended December 31, 2011, a total of 3,757,767 warrants were exercised for proceeds to the Company of approximately $8.1 million. In the first quarter of 2012, the remaining 5,805,843 warrants were exercised for proceeds to the Company of approximately $12.5 million. Prior to exercise, the warrant liability was recorded at fair value, with the adjustment to carrying value recognized in earnings. Upon exercise, the sum of the fair value of the exercised warrants and the proceeds received were credited to additional paid-in-capital and totaled $87.0 million in 2012. Upon the exercise of these remaining warrants, the balance of the warrant liability was credited to stockholders’ equity and the liability was eliminated.
On October 29, 2010, the Company sold 16,000,000 shares of its common stock in an underwritten public offering at a purchase price of $3.70 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $57.5 million.
On December 20, 2011, the Company sold 24,725,000 shares of its common stock in an underwritten public offering at a purchase price of $10.42 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $243.1 million.
Subsequent to December 31, 2012, on January 29, 2013, the Company sold 16,489,893 shares of its common stock in an underwritten public offering at a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discounts and commissions and estimated expenses, were approximately $309.8 million.
On December 14, 2011, the Company filed a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This registration statement was effective upon filing and will remain in effect for up to three years from filing.
10. Fair Value of Financial Instruments
The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements may be classified based on the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities using the following three levels:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2-Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3-Unobservable inputs that reflect the Company’s estimates of the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
The following table presents information about the Company’s assets and liabilities as of December 31, 2012 and 2011 that were measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
The Company’s marketable securities are carried at fair value. The marketable securities all consist of U.S. government or government backed securities with maturities of less than one year. Marketable securities are classified as Level 2 in the fair value hierarchy as their prices are based on observable inputs but not for identical securities. Therefore their fair value is based on observable inputs other than quoted prices included within Level 1.
The fair value of the warrants was determined using the Black-Scholes option valuation model. The increase in the fair value of the warrants was recognized in other income (expense) in the consolidated statements of operations. The changes in the fair value of the warrant liability for the years ended December 31, 2012, 2011 and 2010 were as follows:
The carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The carrying amount of the Company’s bank term loan approximates fair value due to its variable interest rate and other terms. All such measurements are Level 2 measurements in the fair value hierarchy. The Company’s obligation under its executive compensation plan is based in part on the current fair market value of specified mutual funds, which is therefore stated at its estimated fair value.
11. Stock Compensation
ARIAD Stock Option and Stock Plans
The Company’s 2001 and 2006 stock option and stock plans (the “Plans”) provide for the awarding of nonqualified and incentive stock options, stock grants, restricted stock units, performance share units and other equity-based awards to officers, directors, employees and consultants of the Company. Stock options become exercisable as specified in the related option certificate, typically over a four-year period, and expire ten years from the date of grant. Stock grants, restricted stock units and performance share units provide the recipient with ownership of common stock subject to terms of vesting, any rights the Company may have to repurchase the shares granted or other restrictions. The 2001 Plan has no shares remaining available for grant, although existing stock options granted under this Plan remain outstanding. As of December 31, 2012, there were 12,790,684 shares available for awards under the 2006 Plan. The Company generally issues new shares upon the exercise or vesting of stock plan awards.
Employee Stock Purchase Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan and reserved 500,000 shares of common stock for issuance under this plan. In June 2008, the Plan was amended to reserve an additional 500,000 shares of common stock for issuance. Under this plan, substantially all of the Company’s employees may, through payroll withholdings, purchase shares of the Company’s common stock at a price of 85 percent of the lesser of the fair market value at the beginning or end of each three-month withholding period. In 2012, 2011 and 2010, 66,531, 87,331 and 176,318 shares of common stock were issued under the plan, respectively. Compensation cost is equal to the fair value of the discount on the date of grant and is recognized as compensation in the period of purchase.
Stock-Based Compensation
The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. The Company’s statements of operations included total compensation cost from share-based payments for the years ended December 31, as follows:
Stock Options
Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over four years and have contractual terms of ten years. Stock options are valued using the Black-Scholes option valuation model and compensation cost is recognized based on such fair value over the period of vesting on a straight-line basis.
The following table summarizes information about stock options as of and for the years ended December 31, 2012, 2011 and 2010:
The weighted average fair value of options granted in the years ended December 31, 2012, 2011 and 2010, reflect the following weighted-average assumptions:
The expected life assumption is based on an analysis of historical behavior of participants related to options awarded over time. The expected volatility assumption is based on the historical implied volatility of the Company’s common stock, derived from analysis of historical traded and quoted options on the Company’s common stock over the period commensurate with the expected life of the options granted. The risk-free rate is based on the forward U.S. Treasury yield curve. The expected dividends reflect the Company’s current and expected future policy for dividends on its common stock.
Stock option activity under the Company’s stock plans for the year ended December 31, 2012 was as follows:
The following table summarizes information about stock options outstanding as of December 31, 2012:
Options expected to vest consist of options scheduled to vest in the future less expected forfeitures.
At December 31, 2012, total unrecognized compensation cost related to non-vested stock options outstanding amounted to $35.6 million. That cost is expected to be recognized over a weighted-average period of 3.2 years.
Stock and Stock Unit Grants
Stock and stock unit grants are provided to non-employee directors as compensation and generally vest or include restrictions as to resale which lapse over the service period to which the grants relate. Stock and stock unit grants to officers carry restrictions as to resale for periods of time or vesting provisions over time or based on the achievement of performance measures as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite service period, vesting period or period during which restrictions remain on the common stock or stock units granted.
Stock and stock unit activity under the Company’s stock plans for the year ended December 31, 2012 was as follows:
The total fair value of stock and stock unit awards that vested in 2012, 2011 and 2010 was $27.8 million, $8.0 million and $1.6 million, respectively. The total unrecognized compensation expense for restricted shares or units that do not include any remaining performance vesting conditions was $7.5 million at December 31, 2012 and will be recognized over 1.8 years on a weighted average basis.
Included in stock vested and stock units outstanding in the above table are 392,500 performance share units, awarded in March 2011, that vested as to 50 percent of the award upon FDA approval of Iclusig in December 2012 and the remaining 50 percent will vest one year thereafter, and 352,000 performance share units, awarded in March 2012, that will vest if the Company receives regulatory approval of Iclusig from the European Medicines Agency on or before December 31, 2016. The number of shares that may vest, if any, related to the March 2012 awards is dependent on the timing of the approval. The compensation costs for such performance-based stock awards is based on the awards that ultimately vest and the grant date fair value of those awards. The Company begins to recognize compensation expense related to these performance share units when achievement of the performance condition is probable. The unrecognized compensation related to performance vesting awards could be up to $8.5 million of compensation expense if the maximum performance metrics are achieved.
12. Net Income (Loss) Per Share
Basic net income (loss) per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net income (loss) per share amounts have been computed based on the weighted-average number of common shares outstanding plus the dilutive effect of potential common shares. The computation of potential common shares has been performed using the treasury stock method.
The calculation of net income (loss) and the number of shares used to compute basic and diluted earnings per share for the years ended December 31, 2012, 2011 and 2010 are as follows:
For the years ended December 31, 2012, 2011 and 2010, the following potentially dilutive securities were not included in the computation of net income (loss) per share because the effect would be anti-dilutive:
13. Income Taxes
The Company is subject to U.S. federal and various state corporate income taxes as well as taxes in foreign jurisdictions where subsidiaries have been established. For the years ended December 31, 2012, 2011 and 2010, the Company did not have any material federal, foreign or state income tax expense given its continued cumulative net operating losses. A reconciliation of the federal statutory corporate income tax rate to the effective income tax rate for the years ended December 31, 2012, 2011 and 2010 is as follows:
The components of deferred income taxes were as follows at December 31:
At December 31, 2012, the Company had available estimated net operating loss carryforwards and research and development credit carryforwards for federal, foreign and state tax reporting purposes as follows:
Included in the federal net operating loss carryforwards above is approximately $35.1 million related to stock-based compensation tax deductions in excess of book compensation expense which will be credited to additional paid-in-capital when such reductions reduce taxes payable. Although these net operating losses are included in the carryforwards above, they are not reflected in the table of deferred tax assets as the excess tax benefits are not yet realized.
In connection with the establishment of its European operations, the Company transferred certain intellectual property rights related to Iclusig to its wholly-owned subsidiary in Switzerland. Although the transfer of intellectual property rights between consolidated entities did not result in any gain in the consolidated results of operations, the Company generated a taxable gain in the U.S. that is substantially offset by existing tax loss and credit carryforwards. Any taxes incurred related to the intercompany transactions are treated as a prepaid tax in the Company’s consolidated balance sheet and amortized to income tax expense over the life of the intellectual property. The amount of tax amortized to income tax expense for the year ended December 31, 2012 is approximately $64,000 and is included in general and administrative expenses.
Since the Company has not yet achieved sustained profitable operations, management believes its deferred tax assets do not satisfy the more likely than not realization criteria and has recorded a valuation allowance for all deferred tax assets as of December 31, 2012 and 2011. The valuation allowance decreased in 2012 by $70.5 million, increased by $28.5 million in 2011, and increased by $21.9 million in 2010. During 2012, the Company realized tax benefits of $66.5 million due to the utilization of U.S. net operating loss carryforwards related primarily to the inclusion of a taxable gain on transfer of intellectual property rights to its subsidiary in Switzerland.
The Company does not recognize a tax benefit unless it is more likely than not that the tax position will be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized for these positions is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Deferred tax assets that do not meet these recognition criteria are not recorded and the Company recognizes a liability for uncertain tax positions that may result in tax payments. The Company recognizes interest and penalties as a component of income tax expense. Through December 31, 2012, there has been no interest or penalties included as a component of income tax expense.
In 2012, the Company’s uncertain tax positions increased to approximately $24.4 million, related to certain uncertain tax benefits that arose in 2012. Of this amount, the Company has reduced its deferred tax assets and associated valuation allowance by $19.7 million and recorded a long-term liability of $2.2 million. If such unrecognized tax benefits were realized and not subject to valuation allowances, the Company would recognize a tax benefit of $21.2 million. No uncertain tax positions are expected to be resolved within the next twelve months. A reconciliation of the reserve for uncertain tax benefits (including state tax matters without federal benefit) is as follows:
Due to the Company’s historical net operating loss position, the Company’s U.S. federal and Massachusetts tax returns remain open to examination for three years after the Company utilizes that year’s net operating loss carryforward. The Company’s earliest year which generated a net operating loss included in the Company’s current net operating loss carryforward is 2004 for U.S. federal tax purposes. The Company’s Massachusetts state tax returns from 2009 to 2012 remain open to examination. All tax years for foreign subsidiaries (predominantly beginning in 2012) are also open to audit in their respective jurisdictions.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this Annual Report on Form 10-K was being prepared.
(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of the Company 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 system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2012, which is included below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.
Cambridge, Massachusetts
We have audited the internal control over financial reporting of ARIAD Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated March 1, 2013 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 1, 2013
ITEM 9B:
ITEM 9B: OTHER INFORMATION
Not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Board of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Code of Conduct and Ethics” in the Company’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation”, “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Board of Directors” and “Compensation Practices and Policies Relating to Risk Management” in the Company’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Board of Directors” and “Certain Relationships and Related Transactions” in the Company’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) The following Consolidated Financial Statements, Notes thereto and Report of Independent Registered Public Accounting Firm have been presented in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules:
Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.
(a)(3) The Exhibits listed in the Exhibit Index are filed herewith in the manner set forth therein.
(b) See (a) (3) above.
(c) See (a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge and Commonwealth of Massachusetts on the 1st day of March, 2013.
ARIAD PHARMACEUTICALS, INC.
By:
/s/ Harvey J. Berger, M.D.
Name:
Harvey J. Berger, M.D.
Title:
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ARIAD Pharmaceuticals, Inc.
Form 10-K for the Year Ended December 31, 2012
Exhibit List
31.1
Certification of the Chief Executive Officer
X
31.2
Certification of the Chief Financial Officer
X
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
The following materials from ARIAD Pharmaceuticals, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Stockholders’ Equity (Deficit), (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.***
X
(+) Management contract or compensatory plan or arrangement.
(*) Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions.
(**) Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions.
(***) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.