UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014March 31, 2015
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periodperiods from to
Commission File Number: 001-36172
ARIAD Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 22-3106987 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
26 Landsdowne Street, Cambridge, Massachusetts 02139
(Address of principal executive offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (617) 494-0400
Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report: Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrant’s common stock outstanding as of October 31, 2014April 30, 2015 was 187,212,428.188,561,850.
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PART I. | 1 | |||||
ITEM 1. | 1 | |||||
Condensed Consolidated Balance Sheets – | 1 | |||||
2 | ||||||
Notes to Unaudited Condensed Consolidated Financial Statements | ||||||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||
ITEM 3. | ||||||
ITEM 4. | ||||||
PART II. | ||||||
ITEM 1. | ||||||
ITEM 1A. | ||||||
ITEM 6. | ||||||
PART I. | FINANCIAL INFORMATION |
ITEM 1. | UNAUDITED FINANCIAL STATEMENTS |
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share data | September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | ||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 273,451 | $ | 237,179 | $ | 304,016 | $ | 352,688 | ||||||||
Accounts receivable | 7,262 | 1,305 | ||||||||||||||
Accounts receivable, net | 11,269 | 8,397 | ||||||||||||||
Inventory | 969 | 419 | 704 | 979 | ||||||||||||
Other current assets | 7,705 | 6,043 | 24,918 | 23,578 | ||||||||||||
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Total current assets | 289,387 | 244,946 | 340,907 | 385,642 | ||||||||||||
Restricted cash | 11,326 | 11,357 | 11,320 | 11,308 | ||||||||||||
Property and equipment, net | 178,602 | 108,777 | 224,380 | 203,027 | ||||||||||||
Intangible and other assets, net | 4,377 | 5,814 | 3,844 | 3,893 | ||||||||||||
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Total assets | $ | 483,692 | $ | 370,894 | $ | 580,451 | $ | 603,870 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 10,680 | $ | 11,363 | $ | 13,679 | $ | 10,819 | ||||||||
Current portion of long-term debt | — | 4,200 | ||||||||||||||
Current portion of long-term facility lease obligation | 4,971 | — | 6,595 | 6,707 | ||||||||||||
Accrued compensation and benefits | 14,427 | 12,778 | 8,278 | 21,095 | ||||||||||||
Accrued product development expenses | 13,793 | 16,740 | 17,514 | 13,958 | ||||||||||||
Other accrued expenses | 10,098 | 8,977 | 14,906 | 11,514 | ||||||||||||
Current portion of deferred executive compensation | — | 2,511 | ||||||||||||||
Current portion of deferred revenue | 2,090 | 472 | 7,057 | 8,075 | ||||||||||||
Other current liabilities | 16,807 | 15,136 | 17,791 | 17,830 | ||||||||||||
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Total current liabilities | 72,866 | 72,177 | 85,820 | 89,998 | ||||||||||||
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Convertible 3.625% senior notes, net | 154,991 | — | ||||||||||||||
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Other long-term debt | — | 4,900 | ||||||||||||||
Long-term debt | 158,872 | 156,908 | ||||||||||||||
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Long-term facility lease obligation | 166,277 | 99,412 | 210,843 | 189,320 | ||||||||||||
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Other long-term liabilities | 8,331 | 8,580 | 11,295 | 11,338 | ||||||||||||
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Deferred revenue | 135 | 308 | 75,558 | 75,505 | ||||||||||||
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Commitments and contingencies (note 9) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $.01 par value; authorized 10,000,000 shares, none issued and outstanding | ||||||||||||||||
Common stock, $.001 par value; authorized, 450,000,000 shares in 2014 and 2013; issued and outstanding, 187,141,895 shares in 2014 and 185,611,272 shares in 2013 | 187 | 186 | ||||||||||||||
Preferred stock, $.01 par value; authorized 10,000,000 shares, none issued and outstanding Common stock, $.001 par value; authorized, 450,000,000 shares in 2015 and 2014; issued and outstanding, 188,367,784 shares in 2015 and 187,294,094 shares in 2014 | 188 | 187 | ||||||||||||||
Additional paid-in capital | 1,291,040 | 1,238,859 | 1,309,018 | 1,299,394 | ||||||||||||
Accumulated other comprehensive income (loss) | (1,291 | ) | (1,535 | ) | ||||||||||||
Accumulated other comprehensive loss | (3,872 | ) | (4,185 | ) | ||||||||||||
Accumulated deficit | (1,208,844 | ) | (1,051,993 | ) | (1,267,271 | ) | (1,214,595 | ) | ||||||||
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Total stockholders’ equity | 81,092 | 185,517 | 38,063 | 80,801 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 483,692 | $ | 370,894 | $ | 580,451 | $ | 603,870 | ||||||||
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See notes to unaudited condensed consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In thousands, except per share data | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Product revenue, net | $ | 14,499 | $ | 16,658 | $ | 34,371 | $ | 36,956 | $ | 23,901 | $ | 7,992 | ||||||||||||
License revenue | 183 | 66 | 4,203 | 228 | ||||||||||||||||||||
Service revenue | — | 8 | 3 | 24 | ||||||||||||||||||||
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License, collaboration, and other revenue | 90 | 3,790 | ||||||||||||||||||||||
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Total revenue | 14,682 | 16,732 | 38,577 | 37,208 | 23,991 | �� | 11,782 | |||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||
Cost of product revenue | 594 | 415 | 4,277 | 913 | 695 | 1,288 | ||||||||||||||||||
Research and development expense | 27,600 | 45,145 | 87,948 | 127,076 | 39,444 | 28,554 | ||||||||||||||||||
Selling, general and administrative expense | 33,622 | 37,395 | 99,411 | 108,977 | 33,550 | 31,591 | ||||||||||||||||||
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Total operating expenses | 61,816 | 82,955 | 191,636 | 236,966 | 73,689 | 61,433 | ||||||||||||||||||
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Loss from operations | (47,134 | ) | (66,223 | ) | (153,059 | ) | (199,758 | ) | (49,698 | ) | (49,651 | ) | ||||||||||||
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Other income (expense): | ||||||||||||||||||||||||
Other income (expense), net: | ||||||||||||||||||||||||
Interest income | 19 | 40 | 63 | 120 | 19 | 22 | ||||||||||||||||||
Interest expense | (3,720 | ) | (37 | ) | (4,312 | ) | (118 | ) | (3,856 | ) | (33 | ) | ||||||||||||
Foreign exchange gain (loss) | 881 | (9 | ) | 836 | 16 | 1,073 | (41 | ) | ||||||||||||||||
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Other income (expense), net | (2,820 | ) | (6 | ) | (3,413 | ) | 18 | (2,764 | ) | (52 | ) | |||||||||||||
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Loss before provision for income taxes | (49,954 | ) | (66,229 | ) | (156,472 | ) | (199,740 | ) | (52,462 | ) | (49,703 | ) | ||||||||||||
Provision for income taxes | 154 | 110 | 379 | 255 | 214 | 119 | ||||||||||||||||||
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Net loss | $ | (50,108 | ) | $ | (66,339 | ) | $ | (156,851 | ) | $ | (199,995 | ) | $ | (52,676 | ) | $ | (49,822 | ) | ||||||
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Net loss per share – basic and diluted | $ | (0.27 | ) | $ | (0.36 | ) | $ | (0.84 | ) | $ | (1.09 | ) | $ | (0.28 | ) | $ | (0.27 | ) | ||||||
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Weighted-average number of shares of common stock outstanding – basic and diluted | 187,034 | 185,238 | 186,703 | 182,859 | 187,837 | 186,252 | ||||||||||||||||||
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See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE LOSS
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In thousands | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
Net loss | $ | (50,108 | ) | $ | (66,339 | ) | $ | (156,851 | ) | $ | (199,995 | ) | $ | (52,676 | ) | $ | (49,822 | ) | ||||||
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Other comprehensive income (loss): | ||||||||||||||||||||||||
Net unrealized gains (losses) on marketable securities | — | (5 | ) | — | (17 | ) | ||||||||||||||||||
Cumulative translation adjustment | 120 | (4 | ) | 122 | (30 | ) | 236 | (1 | ) | |||||||||||||||
Amortization of prior service cost included in net periodic pension cost | 40 | — | 122 | — | ||||||||||||||||||||
Defined benefit pension obligation | 77 | 41 | ||||||||||||||||||||||
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Other comprehensive income (loss) | 160 | (9 | ) | 244 | (47 | ) | 313 | 40 | ||||||||||||||||
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Comprehensive loss | $ | (49,948 | ) | $ | (66,348 | ) | $ | (156,607 | ) | $ | (200,042 | ) | $ | (52,363 | ) | $ | (49,782 | ) | ||||||
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See notes to unaudited condensed consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
In thousands | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (156,851 | ) | $ | (199,995 | ) | $ | (52,676 | ) | $ | (49,822 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation, amortization and impairment charges | 6,079 | 2,847 | 2,859 | 1,297 | ||||||||||||
Stock-based compensation | 24,583 | 28,559 | 8,434 | 8,496 | ||||||||||||
Deferred executive compensation expense | 119 | 803 | — | 117 | ||||||||||||
Increase (decrease) from: | ||||||||||||||||
Accounts receivable | (5,957 | ) | (7,024 | ) | (2,872 | ) | (2,936 | ) | ||||||||
Inventory | 1,549 | (571 | ) | 274 | (61 | ) | ||||||||||
Other current assets | (1,661 | ) | (6,570 | ) | (1,338 | ) | (5,258 | ) | ||||||||
Other assets | 103 | (7,538 | ) | 7 | 466 | |||||||||||
Accounts payable | (166 | ) | 7,101 | 2,465 | 2,449 | |||||||||||
Accrued compensation and benefits | 1,649 | 1,216 | (12,817 | ) | (3,864 | ) | ||||||||||
Current portion of long-term facility lease obligation | (112 | ) | — | |||||||||||||
Accrued product development expenses | (2,947 | ) | 3,261 | 3,556 | (1,254 | ) | ||||||||||
Other accrued expenses | 1,154 | 1,722 | 2,996 | (809 | ) | |||||||||||
Other liabilities | 1,602 | 5,085 | (4 | ) | (728 | ) | ||||||||||
Deferred revenue | 1,445 | 4,744 | (966 | ) | 1,225 | |||||||||||
Deferred executive compensation paid | (2,631 | ) | (3,953 | ) | — | (1,727 | ) | |||||||||
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Net cash used in operating activities | (131,930 | ) | (170,313 | ) | (50,194 | ) | (52,409 | ) | ||||||||
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Cash flows from investing activities: | ||||||||||||||||
Proceeds from maturities of marketable securities | — | 35,000 | ||||||||||||||
Change in restricted cash | — | (6,133 | ) | |||||||||||||
Investment in property and equipment | (2,475 | ) | (5,624 | ) | (754 | ) | (1,706 | ) | ||||||||
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Net cash provided by (used in) investing activities | (2,475 | ) | 23,243 | |||||||||||||
Net cash used in investing activities | (754 | ) | (1,706 | ) | ||||||||||||
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Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of convertible debt | 192,921 | — | ||||||||||||||
Proceeds from the issuance of warrants | 27,580 | — | ||||||||||||||
Purchase of convertible bond hedges | (43,220 | ) | — | |||||||||||||
Repayment of long-term borrowings | (9,100 | ) | (1,575 | ) | — | (1,050 | ) | |||||||||
Principal payments under capital lease obligation | — | (15 | ) | |||||||||||||
Proceeds from issuance of common stock, net of issuance costs | — | 310,037 | ||||||||||||||
Proceeds under lease financing obligation | — | 1,294 | ||||||||||||||
Reimbursements of amounts related to facility lease obligation | 861 | — | ||||||||||||||
Proceeds from issuance of common stock pursuant to stock option and purchase plans | 3,059 | 5,632 | 1,320 | 1,358 | ||||||||||||
Payment of tax withholding obligations related to stock compensation | (716 | ) | (3,216 | ) | (130 | ) | (398 | ) | ||||||||
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Net cash provided by financing activities | 170,524 | 312,157 | ||||||||||||||
Net cash provided by (used in) financing activities | 2,051 | (90 | ) | |||||||||||||
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Effect of exchange rates on cash | 153 | (30 | ) | 225 | (1 | ) | ||||||||||
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Net increase in cash and cash equivalents | 36,272 | 165,057 | ||||||||||||||
Net decrease in cash and cash equivalents | (48,672 | ) | (54,206 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 237,179 | 119,379 | 352,688 | 237,179 | ||||||||||||
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Cash and cash equivalents, end of period | $ | 273,451 | $ | 284,436 | $ | 304,016 | $ | 182,973 | ||||||||
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Supplemental non-cash investing and financing disclosure: | ||||||||||||||||
Supplemental disclosures: | ||||||||||||||||
Capitalization of construction-in-progress related to facility lease obligation | $ | 71,818 | $ | 66,728 | $ | 20,662 | $ | 21,452 | ||||||||
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Investment in property and equipment included in accounts payable or accruals | $ | 187 | $ | 1,217 | $ | 1,090 | $ | 88 | ||||||||
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See notes to unaudited condensed consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Business
Nature of Business
ARIAD is a global oncology company focused on transformingwhose 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’s lead cancer medicine isIn addition to commercializing Iclusig® (ponatinib) which is approved in the United States, Europe and Europe forother territories, the treatment of adult patients with chronic myeloid leukemia (“CML”) and Philadelphia chromosome-positive acute lymphoblastic leukemia (“Ph+ ALL”). The Company is pursuing regulatorydeveloping Iclusig for approval of Iclusig in additional geographiescountries and developing Iclusig infor additional cancer indications. The Company hasis also developing two other product candidates, in development, AP26113brigatinib (AP26113) and ridaforolimus. AP26113AP32788. Brigatinib is being studied in patients with advanced solid tumors, including non-small cell lung cancer. The Company is conducting a pivotal Phase 2 clinical trial of AP26113 in patients with locally advanced or metatastic non-small cell lung cancer. RidaforolimusAP32788 is being developed for the treatment of non-small cell lung cancer and other solid tumors. Ridaforolimus, a compound that the Company discovered internally and subsequently out-licensed to Medinol, Ltd. (“Medinol”), is being developed by Medinol for use on cardiovasculardrug-eluting stents and other medical devices by Medinol, Ltd. and ICON Medical Corp.devices. 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.
Following regulatory approvals, the Company commenced sales and marketing2. Significant Accounting Policies
Principles of Iclusig in the United States in January 2013 and in Europe in the second half of 2013.
On October 9, 2013, the Company announced results of its review of updated clinical data from the pivotal PACE (Ponatinib Ph+ALL andCMLEvaluation) trial of Iclusig and actions that it was taking following consultations with the U.S. Food and Drug Administration (“FDA”). Based upon its review and the FDA consultations, the Company paused patient enrollment in all clinical trials of Iclusig and the FDA placed a partial clinical hold on all new patient enrollment in clinical trials of Iclusig. In response to a request by the FDA, on October 31, 2013, the Company announced that it temporarily suspended the marketing and commercial distribution of Iclusig in the United States. On December 20, 2013, the Company announced that the FDA approved revised U.S. prescribing information (“USPI”), and a Risk Evaluation and Mitigation Strategy (“REMS”), that allowed for the immediate resumption of marketing and commercial distribution of Iclusig. Sales of Iclusig in the United States resumed in January 2014.
Based upon the announcements and actions taken in October 2013 noted above, the Company engaged in discussions with the European Medicines Agency (“EMA”), regarding potentially revised prescribing information for Iclusig. On November 8, 2013, the EMA announced that Iclusig’s product information should be updated to include strengthened warnings for cardiovascular risk and guidance on optimizing the patient’s cardiovascular therapy before starting treatment. In addition, the EMA commenced an in-depth review, known as an Article 20 referral, of the benefits and risks of Iclusig to better understand the nature, frequency and severity of events obstructing the arteries or veins, the potential mechanism that leads to these side effects and whether there needs to be a revision in the European prescribing information for Iclusig. In October 2014, the Pharmacovigilance Risk Assessment Committee (“PRAC”) of the EMA concluded its review of Iclusig under the Article 20 referral procedure and recommended that Iclusig continue to be used in Europe in accordance with its already approved indications. Other recommendations made by the PRAC related to the Iclusig Summary of Medicinal Product Characteristics, or SmPC, include (1) patient monitoring for response according to standard clinical guidelines, (2) consideration of Iclusig dose-reduction following achievement of major cytogenetic response with subsequent monitoring of response, and (3) consideration of Iclusig discontinuation if a complete haematologic response has not been achieved by three months. Further information is provided
indicating that the risk of vascular occlusive events is likely dose-related. An update of the Warning and Precautions and Undesirable Effects sections is also provided for inclusion in the Iclusig SmPC. PRAC’s recommendation was considered and adopted by the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA in October 2014. The European Comission is expected to issue a final legally binding decision on Iclusig in December 2014 which will be valid throughout the European Union.
Basis of PresentationConsolidation
In the opinion of the Company’s management, the accompanyingThe unaudited condensed consolidated financial statements contain all adjustments (consistinginclude 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. In making the determination of the appropriate functional currency for a subsidiary, the Company considers cash flow indicators, local market indicators, financing indicators and the subsidiary’s relationship with both the parent company and other subsidiaries. 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 that transact in functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign exchange rate for the period. Adjustments resulting from the translation of a normal and recurring nature) necessary to present fairly the financial position asstatements of September 30, 2014, the resultsCompany’s foreign subsidiaries into U.S. dollars are excluded from the determination of operationsnet loss and are recorded in accumulated other comprehensive loss, a separate component of stockholders’ equity. For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are re-measured into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are re-measured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period.
The net total of unrealized transaction gains and losses was a gain of $1.1 million and a loss of $41,000 for the three-month and nine-monththree- month periods ended September 30,March 31, 2015 and 2014, and 2013 and the cash flows for the nine-month periods ended September 30, 2014 and 2013, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2013 Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes were derived from the audited financial statements included in the 2013 Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2014 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.respectively.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAPgenerally accepted accounting principles (“GAAP”) 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. Significant estimates included in the Company’s financial statements include estimates associated with revenue recognition and the related adjustments, research and development accruals, inventory, reserves, stock-based compensation and leased buildings under construction.construction and stock-based compensation. Actual results could differ from those estimates.
ReclassificationsCash Equivalents
InCash equivalents include short-term, highly liquid investments, with remaining maturities at the condensed consolidated statementdate of cash flows for the nine months ended September 30, 2014, vendor advances have been aggregated with other current assets. This reclassification was not material.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. At September 30, 2014, the Company’s restricted cash balance was $11.3 million, which includes $9.2 million established as security for a letter of credit related to the lease agreement entered into in January 2013, and amended in September 2013, for lab and office space in a new facilityincluding those currently under construction in Cambridge, Massachusetts.Massachusetts and for other purposes.
Accounts Receivable
The Company extends credit to customers based on its evaluation of the customer’s financial condition. The Company records receivables for all billings when amounts are due under standard terms. Accounts receivable are stated at amounts due net of applicable prompt pay discounts and other contractual
adjustments as well as an allowance for doubtful accounts. The Company assesses the need for an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the customer’s ability to pay its obligation and the condition of the general economy and the industry as a whole. The Company will write-offwrite off accounts receivable when the Company determines that they are uncollectible.
InventoriesInventory
The Company outsources the manufacturing of Iclusig and uses contract manufacturers that produce the raw and intermediate materials used in the production of Iclusig as well as the finished product. The Company currently has one supplier qualified for each step in the manufacturing process and is in the process of qualifying additional suppliers.suppliers for certain steps of the production process of Iclusig. Accordingly, the Company has concentration risk associated with its manufacturing process and relies on its currently approved contract manufacturers for supply of its product.
In order to support production of inventory, the Company may be required to provide payments to vendors in advance of production. These amounts are included in “other current assets” on the accompanying condensed consolidated balance sheets.
Inventories areInventory is composed of raw materials, intermediate materials, which are classified as work-in-process, and finished goods, which are goods that are available for sale. The Company states inventoriesrecords inventory at the lower of cost or net realizable value.market. The Company determines the cost of its inventoriesinventory on a specific identification basis. IfThe Company evaluates its inventory balances quarterly and if the Company identifies excess, obsolete or unsalable items,inventory, it writes down its inventory to its net realizable value in the period in which the impairmentit is identified. These adjustments are recorded based upon various factors, related to the product, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand for the foreseeable future and the expected shelf-life of the product. Inventoriesinventory components. The Company recorded such adjustments of $217,000 and $1.0 million for the three-month periods ended March 31, 2015 and 2014, respectively, which are recorded as a component of cost of product revenue in the accompanying condensed consolidated statements of operations. Inventory that areis not expected to be used within one year areis included in “otherother assets, net”net, on the accompanying condensed consolidated balance sheets.
Prior to receiving approval from the FDA on December 14, 2012 to sell Iclusig, 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.sheet.
Shipping and handling costs for product shipments are recorded as incurred in cost of product revenue along with costs associated with manufacturing the product sold and any inventory reserves or write-downs.
Intangible Assets
Intangible 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.
Revenue Recognition
Revenue is recognized when there isthe four basic criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists,exists; (2) delivery has occurred or services have been rendered,rendered; (3) the pricefee is fixed or determinable; and determinable and collection(4) collectability is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certainWhen the revenue recognition criteria are not met, including whetherwe defer the delivered element has stand-alone value to the customer. When deliverablesrecognition of revenue by recording deferred revenue until such time that all criteria 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.met.
Product Revenue, Net
From the launch of Iclusig in January 2013 until its temporary suspension in October 2013, theThe Company soldsells Iclusig in the United States to a limited number ofsingle specialty pharmacies, which dispensed the product directly to patients, and specialty distributors, which in turn sold the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of
patients. Commencing with the re-launch of Iclusig in January 2014, the Company now sells Iclusig in the United States through an exclusive relationship withpharmacy, Biologics, Inc. (“Biologics”), a specialty pharmacy.. Biologics dispenses the productIclusig directly to patients. In Europe, the Company sells Iclusig to retail pharmacies and hospital pharmacies, which dispense productIclusig directly to patients. Biologics and theseThese specialty pharmacies, retail pharmacies and hospital pharmacies are referred to as the Company’s customers.
customers. The Company provides the right of return to customers in the United States for unopened product for a limited time before and after its expiration date. European customers are provided the right to return product only in limited circumstances, such as damaged product. Given the Company’s limited sales history for Iclusig and the inherent uncertainties in estimatingRevenue is generally recognized when product returns,is delivered, assuming the Company has determined that the shipments of Iclusig to its United States customers, thus far, do not meet the criteria for revenue recognition at the time of shipment. The Company invoices Biologics upon shipment of Iclusig and records accounts receivable, with a corresponding liability for deferred revenue equal to the gross invoice price. The Company then recognizes revenue, assuming all other revenue recognition criteria have been met, when Iclusig is sold through, which occurs when Biologics dispenses Iclusig directly to the patient.can estimate potential returns. For European customers, who are provided with a limited right of return, the criteria for revenue recognition is met at the time of shipment and revenue is recognized at that time, provided all other revenue recognition criteria are met.
In connection Prior to 2015, with the temporary suspension of marketingCompany’s limited sales history for Iclusig and commercial distributionthe inherent uncertainties in estimating product returns, the Company had determined that the shipments of Iclusig in October 2013,to its United States customers did not meet the criteria for revenue recognition at the time of shipment. For periods prior to the quarter ended March 31, 2015, the Company terminated its then existing contracts with specialty pharmacies and specialty distributorsrecognized revenue in the United States. In addition,States, assuming all revenue recognition criteria had been met, when Iclusig was sold by Biologics to patients. During the quarter ended March 31, 2015, the Company acceptedconcluded that it now had sufficient experience to estimate returns in the United States, as a result of over two years of sales experience. Accordingly, during the quarter ended March 31, 2015, the Company commenced recognizing revenue in the United States on delivery of Iclusig to Biologics and recognized a one-time net product returns for Iclusig in connection withrevenue increase of $1.2 million as a result of the temporary suspension. These returns primarily related to Iclusig held by specialty pharmacies and specialty distributors for which revenue had not yet been recognized.change.
The Company has written contracts or standard terms of sale with each of its customers and delivery occurs when the customer receives Iclusig. The Company evaluates the creditworthiness of each of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed and determinable, the Company must be able to (i) calculate its gross product revenues from the sales to its customers and (ii) reasonably estimate its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company charges its customers for Iclusig. The Company estimates its net product revenues by deducting from its gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicare and Medicaid reimbursements in the United States, (iii) estimated product returns and (iii)(iv) estimated costs of incentives offered to certain indirect customers including patients. These deductions from gross revenue to determine net revenue are also referred to as gross to net deductions.
Trade Allowances: The Company provides invoice discounts on Iclusig sales to certain of its customers for prompt payment and pays fees for certain distribution services, such as fees for certain data that its customers provide to the Company. The Company deducts the full amount of these discounts and fees from its gross product revenues at the time such discounts and fees are earned by such customers.
Rebates, Chargebacks and Discounts: In the United States, the Company contracts with Medicare, Medicaid, and other government agencies (collectively, “payers”) to make Iclusig eligible for purchase by, or for partial or full reimbursement from, such payers. The Company estimates the rebates, chargebacks and discounts it will provide to payers and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of rebates, chargebacks and discounts are based on (1) the contractual terms of agreements in place with payers, (2) the government-mandated discounts applicable to government funded programs, and (3) the estimated payer mix. Government rebates that are invoiced directly to the Company are recorded in accrued liabilities on the condensed consolidated balance sheet. In Europe, the
Company is subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These rebates and discounts are recorded in accrued expenses on the condensed consolidated balance sheet.
Other Incentives:Adjustments: Other incentives that theadjustments to gross revenue include co-pay assistance and product returns. The Company offers to indirect customers include co-pay assistance rebates provided by the Company to commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s portion of the financial responsibility for Iclusig’s purchase price to a specified dollar amount. In each period, the Company records the amount of co-pay assistance provided to eligible patients based on the terms of the program. Other incentives inThe Company provides the nine month period ended September 30, 2014 include product returns fromright of return to customers related to the temporary suspension of marketing and distribution of Iclusig in the United States.States for unopened product for a limited time before and after its expiration date. European customers are provided the right to return product only in limited circumstances, such as damaged product. In addition, the Company is contractually obligated to ship product with specific remaining shelf life prior to expiry per its distribution agreements.
The following table summarizes the activity in each of the above product revenue allowances and reserve categories for the nine-monththree-month period ended September 30, 2014:March 31, 2015:
In thousands | Trade Allowances | Rebates, Chargebacks and Discounts | Other Incentives | Total | ||||||||||||
Balance, January 1, 2014 | $ | 18 | $ | 515 | $ | 77 | $ | 610 | ||||||||
Provision | 126 | 685 | 389 | 1,200 | ||||||||||||
Payments or credits | (101 | ) | (539 | ) | (188 | ) | (828 | ) | ||||||||
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Balance, March 31, 2014 | 43 | 661 | 278 | 982 | ||||||||||||
Provision | 176 | 628 | 134 | 938 | ||||||||||||
Payments or credits | (167 | ) | (476 | ) | (377 | ) | (1,020 | ) | ||||||||
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Balance, June 30, 2014 | 52 | 813 | 35 | 900 | ||||||||||||
Provision | 195 | 954 | 221 | 1,370 | ||||||||||||
Payments or credits | (192 | ) | (534 | ) | (82 | ) | (808 | ) | ||||||||
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Balance, September 30, 2014 | $ | 55 | $ | 1,233 | $ | 174 | $ | 1,462 | ||||||||
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The reserves above, included in the Company’s condensed consolidated balance sheets are summarized as follows:
In thousands | September 30, 2014 | December 31, 2013 | ||||||
Reductions of accounts receivable | $ | — | $ | 64 | ||||
Component of other accrued expenses | 1,462 | 546 | ||||||
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Total | $ | 1,462 | $ | 610 | ||||
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In thousands | Trade Allowances | Rebates, Chargebacks and Discounts | Other Adjustments | Total | ||||||||||||
Balance, January 1, 2015 | $ | 72 | $ | 2,095 | $ | 360 | $ | 2,527 | ||||||||
Provision | 255 | 2,097 | 218 | 2,570 | ||||||||||||
Payments or credits | (228 | ) | (1,645 | ) | (158 | ) | (2,031 | ) | ||||||||
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Balance, March 31, 2015 | $ | 99 | $ | 2,547 | $ | 420 | $ | 3,066 | ||||||||
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In 2012, prior to the Company obtaining marketing authorization for Iclusig in Europe, the French regulatory authority granted anAutorisation 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 Iclusig under this program during the year ended December 31, 2012. This program concluded on September 30, 2013. Upon completion of the ATUthis program, the Company became eligible to ship Iclusig directly to customers in France as of October 1, 2013. Shipments under these programs have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or determinable.
The price of Iclusig in France will become fixed or determinable upon completion of pricing and reimbursement negotiations, which is expected in the firstsecond half of 2015. At that time, the Company will record revenue related to cumulative shipments as of that date in France, net of any amounts that will be refunded to the health authority based on the results of the pricing and reimbursement negotiations.
The aggregate gross selling price of the shipments under these programs amounted to $17.3$18.3 million through September 30, 2014, including $1.7 million for the three-month period ended September 30, 2014,March 31, 2015, of which $16.0$17.1 million was received as of September 30, 2014.March 31, 2015.
License Revenue
The Company generates revenue from license and collaboration agreements with third parties related to use of the Company’s technology and/or development and commercialization of products. Such agreements typically include payment to the Company of non-refundable upfront license fees, regulatory, clinical and commercial milestone payments, payment for services or supply of product and royalty payments on net sales. 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. For arrangements with multiple elements, where the Company determines there is one unit of accounting, revenue associated with up-front payments will be recognized over the period beginning with the commencement of the final deliverable in the arrangement and over a period reflective of the Company’s longest obligation period within the arrangement on a straight-line-basis.
At the inception of each agreement that includes milestone payments, the Company evaluates whether each milestone is substantive on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether:
In making this assessment, the Company evaluates factors such as the clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required, and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement. The Company recognizes revenues related to substantive milestones in full in the period in which the substantive milestone is achieved. If a milestone payment is not considered substantive, the Company recognizes the applicable milestone over the remaining period of performance.
The Company will recognize royalty revenue, if any, based upon actual and estimated net sales by the licensee of licensed products in licensed territories, and in the period the sales in the licensed territories occur.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash held at financial institutions. The Company believes that such customers and financial institutions are of high credit quality. As of September 30, 2014,March 31, 2015, a portion of the Company’s cash and cash equivalent accounts were concentrated at a single financial institution, which potentially exposes the Company to credit risks. The Company does not believe that there is significant risk of non-performance by the financial institution and the Company’s cash on deposit at this financial institution is fully liquid.
For the three-month and nine-month periodsperiod ended September 30, 2014, BiologicsMarch 31, 2015, one individual customer accounted for 72 percent and 6777 percent of net product revenue, respectively.revenue. As of September 30, 2014, BiologicsMarch 31, 2015, one individual customer accounted for 7573 percent of accounts receivable. For the three-month period ended March 31, 2014, one individual customer accounted for 58 percent of net product revenue. As of March 31, 2014, one customer accounted for 67 percent of accounts receivable. No other customer accounted for more than 10 percent of net product revenue for either 2015 or 2014 or accounts receivable.receivable as of either March 31, 2015 or 2014.
Segment Reporting and Geographic Information
The Company organizes itself into one operating segment reporting to the Chief Executive Officer.
For the three-month period ended September 30, 2013, three individual customers accounted for 24 percent, 14 percent and 14 percent of net product revenue, respectively. For the nine-month period ended September 30, 2013, three individual customers accounted for 24 percent, 15 percent, and 14 percent of net product revenue, respectively. As of September 30, 2013, four individual customers accounted for 21 percent, 17 percent, 14 percent, and 10 percent of accounts receivable, respectively. No other customer accounted for more than 10 percent of net product revenue or accounts receivable.
Geographic Information
For the three-month and nine-month periods ended September 30,March 31, 2015 and 2014, product revenue from customers outside the United States totaled 28%22 percent and 33%,42 percent of the Company’s consolidated product revenue, respectively with 17%10 percent and 22% of product revenue,31 percent, respectively, representing product revenue from customers in Germany. For the three-month and nine-month periods ended September 30, 2013, product revenue from customers outside the United States totaled 6% and 3%, respectively, with 5% and 2% of product revenue, respectively, representing product revenue from customers in Germany.
Long lived assets outside the United States as of September 30, 2014 weretotaled $1.4 million at March 31, 2015 and were not material as of December$1.3 million at March 31, 2013.2014.
3. License and Service RevenueCollaboration Agreements
Otsuka Pharmaceutical Co. Ltd
The Company generates 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.
In January 2005,On December 22, 2014, the Company entered into a non-exclusivecollaboration agreement (the “Collaboration Agreement”) with Otsuka Pharmaceutical Co., Ltd. (“Otsuka”) pursuant to which Otsuka will commercialize and further develop Iclusig in Japan, China, South Korea, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam (the “Territory”).
Key provisions of the Collaboration Agreement include the following:
Following approvals in each country, Otsuka will market and sell Iclusig and record sales. Otsuka is not allowed to manufacture bulk product, but must purchase its supply from the Company. Otsuka will be responsible for medical affairs activities, determining pricing and reimbursement and all commercial activities in the Territory. With respect to the JDCC, each party has ultimate decision making authority with respect to a specified limited set of issues, and for all other issues, the matter must be resolved by consensus or by an expedited arbitration process.
In consideration for the licenses and other rights contained in the Collaboration Agreement, Otsuka paid the Company a non-refundable upfront payment of $77.5 million, less a refundable withholding tax in Japan of $15.8 million, and has agreed to pay the Company future milestone payments upon obtaining further regulatory approvals in the Territory. Otsuka will pay royalties based on a percentage of net sales in each country until the later of (i) the expiry date of the composition patent in each country, (ii) the expiration of any orphan drug exclusivity period or other statutory designation that provides similar exclusivity, or (iii) 10 years after the date of first commercial sale in such country. Otsuka will also pay for the supply of Iclusig purchased from the Company at a price based on a percentage of net sales in each country.
The Collaboration Agreement continues until the later of (x) the expiration of all royalty obligations in the Territory, or (y) the last sale by Otsuka in the Territory, or the last to expire patent in the Territory which is currently expected to be 2029. Under certain conditions, the Collaboration Agreement may be terminated by either party, in which case the Company would receive all rights to the regulatory filings related to Iclusig at our request, and the licenses granted to Otsuka would be terminated.
For accounting purposes, because Otsuka’s ability to access the value of the distribution rights in the license absent the delivery of the other elements of the arrangement, in particular the manufacturing deliverables which remain within the Company’s control, the Company has concluded that the licenses and other deliverables do not have standalone value, and have combined all deliverables into a single unit of accounting. The nonrefundable upfront cash payment has been recorded as deferred revenue on our balance sheet and will be recognized as revenue on a straight-line basis over the estimated term (currently estimated to extend through 2029), anticipated to begin in the second quarter of 2015, the point at which the Company has commenced providing all elements included in the Collaboration Agreement.
The upfront payment was subject to a Japan withholding tax of $15.8 million which was remitted by Otsuka to the Japanese tax authorities. The Company has determined that the release of those funds to the Company is probable and therefore has recorded a receivable for such amounts with an offsetting amount included in deferred revenue as of March 31, 2015. The Company received the $15.8 million from the Japanese tax authorities in April of 2015.
Medinol Ltd.
The Company entered into an agreement with Medinol Ltd. (“Medinol”), a leading innovator in stent technology,2005 pursuant to which the Company granted to Medinol agreeda non-exclusive, world-wide, royalty-bearing license, under its patents and technology, to develop, manufacture and commercializesell stents and other medical devices to deliver the Company’s mTOR inhibitor, ridaforolimus, to prevent restenosis, or reblockage of injured vessels following interventionsstent-assisted angioplasty. The term of the license agreement extends to the later to occur of the expiration of the Company’s patents relating to the rights granted to Medinol under the license agreement or fifteen years after the first commercial sale of a product developed under the agreement.
Medinol is required under the license agreement to use commercially reasonable efforts to develop products. The Company is required under a related supply agreement to use commercially reasonable efforts to supply agreed-upon quantities of ridaforolimus to Medinol, and Medinol shall purchase such supply of ridaforolimus from the Company, for the development, manufacture and sale of products. The supply agreement is coterminous with the license agreement. These agreements may be terminated by either party for breach after a 90-day cure period. In addition, Medinol may terminate the agreements upon 30-day notice to the Company upon certain events, including if it determines, in which stents are usedits reasonable business judgment, that it is not in conjunctionits business interest to continue the development of any product, and the Company may terminate the agreements upon 30-day notice to Medinol, if it determines that it is not in its business interest to continue development and regulatory approval efforts with balloon angioplasty. Duringrespect to ridaforolimus.
The license agreement provides for the three-month period ended March 31,payment by Medinol to the Company of an upfront license fee, payments based on achievement of development, regulatory and commercial milestones and royalties based on commercial sale of products developed under the agreement. In January 2014, the Medinol initiated two registration trials of its NIRsupreme™ Ridaforolimus-Eluting Coronary Stent System. The
commencement of patient enrollment in Medinol’sthese clinical trials along with the submission of an investigational device exemption or IDE, towith the FDA triggered milestone payments to the Company of $3.8 million. These milestones were$3.75 million, which are recorded as license revenue upon achievement.
ICON Medical Corp.
On February 20, 2014,In 2007, the Company received notice from Merck & Co.entered into an agreement with ICON Medical Corp. (“ICON”), Inc. (“Merck”) that it is terminatingsimilar to the licenseMedinol agreement, betweenpursuant to which the two partiesCompany granted to ICON a non-exclusive, world-wide, royalty-bearing license to develop, manufacture and commercializesell stents and other medical devices to deliver ridaforolimus to prevent reblockage of injured vessels following stent-assisted angioplasty. In March 2015, the Company terminated this agreement. As of March 31, 2015, no products had been approved for oncology indications. Persale resulting from this agreement and the terms of the license agreement,Company had not received any milestone or other payments from ICON pursuant to this termination will become effective nine months from the date of the notice (November 20, 2014), at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to the Company.agreement.
4. Inventory
All of the Company’s inventories relate to the manufacturing of Iclusig. The following table sets forth the Company’s inventories as of September 30, 2014March 31, 2015 and December 31, 2013:2014:
In thousands | September 30, 2014 | December 31, 2013 | 2015 | 2014 | ||||||||||||
Raw materials | $ | — | $ | — | $ | — | $ | — | ||||||||
Work in process | 885 | 3,170 | 447 | 460 | ||||||||||||
Finished goods | 969 | 234 | 704 | 979 | ||||||||||||
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Total | 1,854 | 3,404 | ||||||||||||||
1,151 | 1,439 | |||||||||||||||
Current portion | (969 | ) | (419 | ) | (704 | ) | (979 | ) | ||||||||
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Non-current portion included in “intangible and other assets, net” | $ | 885 | $ | 2,985 | ||||||||||||
Non-current portion included in intangible and other assets, net | $ | 447 | $ | 460 | ||||||||||||
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Upon approval of Iclusig by the FDA on December 14, 2012, the Company began capitalizing inventory costs for Iclusig manufactured in preparation for the product launch in the United States. In periods prior to December 14, 2012, the Company expensed costs associated with Iclusig, including raw materials, work in process and finished goods, as development expenses. The Company has not capitalized inventory costs related to its other drug development programs. Non-current inventory consists primarily of raw materials and work-in-process which were purchased orinventory that was manufactured in order to provide adequate supply of Iclusig in the United States and Europe and to support continued clinical development.
5. Property and Equipment, Net
Property and equipment, net, was comprised of the following at September 30, 2014March 31, 2015 and December 31, 2013:2014:
In thousands | September 30, 2014 | December 31, 2013 | 2015 | 2014 | ||||||||||||
Leasehold improvements | $ | 21,942 | $ | 25,714 | $ | 22,546 | $ | 22,315 | ||||||||
Construction in progress | 217,820 | 196,027 | ||||||||||||||
Equipment and furniture | 24,487 | 23,466 | 23,694 | 23,511 | ||||||||||||
Construction in progress | 171,304 | 99,908 | ||||||||||||||
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217,733 | 149,088 | 264,060 | 241,853 | |||||||||||||
Less accumulated depreciation and amortization | (39,131 | ) | (40,311 | ) | (39,680 | ) | (38,826 | ) | ||||||||
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$ | 178,602 | $ | 108,777 | $ | 224,380 | $ | 203,027 | |||||||||
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As of September 30,March 31, 2015 and December 31, 2014, the Company has recorded construction in progress and a facility lease obligation of $171.3$217.4 million and $196.0 million, respectively, related to a lease for a new facility under construction in Cambridge, Massachusetts. See Note 9 for further information.
Depreciation and amortization expense was $1.3 million and $1.1 million for the three-month periods ended September,March 31, 2015 and 2014 and 2013, respectively, and $3.9was $0.9 million, and $2.8$1.3 million, for the nine-month periods ended September 30, 2014respectively.
6. Intangible and 2013, respectively.Other Assets, Net
Intangible and other assets, net, were comprised of the following at September 30, 2014March 31, 2015 and December 31, 2013:2014:
In thousands | September 30, 2014 | December 31, 2013 | 2015 | 2014 | ||||||||||||
Capitalized patent and license costs | $ | 5,975 | $ | 5,975 | $ | 5,975 | $ | 5,975 | ||||||||
Less accumulated amortization | (5,028 | ) | (5,007 | ) | (5,044 | ) | (5,036 | ) | ||||||||
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947 | 968 | 931 | 939 | |||||||||||||
Inventory, non-current | 885 | 2,985 | 447 | 460 | ||||||||||||
Other assets | 2,545 | 1,861 | 2,466 | 2,494 | ||||||||||||
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$ | 4,377 | $ | 5,814 | $ | 3,844 | $ | 3,893 | |||||||||
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7. Other Current Liabilities
Other current liabilities were comprisedconsisted of the following at September 30, 2014March 31, 2015 and December 31, 2013:2014:
In thousands | September 30, 2014 | December 31, 2013 | 2015 | 2014 | ||||||||||||
Amounts received in advance of revenue recognition | $ | 16,071 | $ | 10,434 | $ | 17,179 | $ | 17,186 | ||||||||
Amounts due to former customers | 195 | 4,172 | 111 | 122 | ||||||||||||
Other | 541 | 530 | 501 | 522 | ||||||||||||
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Total | $ | 17,791 | $ | 17,830 | ||||||||||||
$ | 16,807 | $ | 15,136 |
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Amounts received in advance of revenue recognition consists of payments received from customers in France. Amounts due to former customers consistsconsist of amounts due for product returns.
8. Long-term Debt
3.625%3.625 percent Convertible Notes due 2019
On June 17, 2014, the Company issued $200.0 million aggregate principal amount of 3.625%3.625 percent convertible senior notes due 2019 (the “convertible notes”). The Company received net proceeds of $192.9 million from the sale of the convertible notes, after deducting fees of $6.0 million and expenses of $1.1 million. At the same time, the Company used $43.2 million of the net proceeds from the sale of the convertible notes to pay the cost of the convertible bond hedges, as described below, after suchwhich cost was partially offset by $27.6 million in proceeds to the Company from the sale of warrants in the warrant transactions also described below.
The convertible notes are governed by the terms of an indenture between the Company, as issuer, and Wells Fargo Bank, National Association, as the trustee. The convertible notes are senior unsecured obligations and bear interest at a rate of 3.625%3.625 percent per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2014. The convertible notes will mature on June 15, 2019, unless earlier repurchased or converted. The convertible notes will beare convertible, subject to adjustment as described below, into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of approximately 107.5095 shares of common stock per $1,000 principal amount of the convertible notes, which corresponds to an initial conversion price of approximately $9.30 per share of
the Company’s common stock and represents a conversion premium of approximately 32.5%32.5 percent based on the last reported sale price of the Company’s common stock of $7.02 on June 11, 2014, the date the notes offering was priced. The principal amount of the notes exceeded thetheir if-converted value as of September 30, 2014.March 31, 2015.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. At any time prior to the close of business on the business day immediately preceding December 15, 2018, holders may convert their convertible notes at their option only under the following circumstances:
On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their convertible notes, in multiples of $1,000 principal amount, at their option regardless of the foregoing circumstances. Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of common stock, or a combination thereof, at its election.
If a make-whole fundamental change, as described in the indenture, occurs and a holder elects to convert its convertible notes in connection with such make-whole fundamental change, such holder may be entitled to an increase in the conversion rate as described in the indenture.
The Company may not redeem the convertible notes prior to the maturity date and no “sinking fund” is provided for the convertible notes, which means that the Company is not required to periodically redeem or retire the convertible notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the convertible notes may require the Company to repurchase for cash all or part of their convertible notes at a repurchase price equal to 100%100 percent of the principal amount of the convertible notes to be repurchased, plus accrued and unpaid interest.
The indenture does not contain any financial or maintenance covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The indenture contains customary terms and covenants and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company or any of its significant subsidiaries) occurs and is continuing, the trustee by notice to us,the Company, or the holders of at least 25%25 percent in principal amount of the outstanding convertible notes by written notice to the Company and the trustee, may declare 100%100 percent of the principal and accrued and unpaid interest, if any, on all of the convertible notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company or any of its significant subsidiaries, 100%100 percent of the principal of and accrued and unpaid interest, if any, on all of the
convertible notes will become due and payable automatically. Notwithstanding the foregoing, the indenture provides that, to the extent the Company elects and for up to 180 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the indenture consists exclusively of the right to receive additional interest on the convertible notes.
In accordance with accounting guidance for debt with conversion and other options, the Company separately accountsaccounted for the liability and equity components of the convertible notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to the Company’s ability to settle the convertible notes in cash, common stock or a combination of cash and common stock, at the Company’s option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The equity component of the convertible notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the convertible notes and the fair value of the liability of the convertible notes on their date of issuance. The excess of the principal amount of the liability component over its carrying amount, or debt discount, is amortized to interest expense using the effective interest method over the five year life of the convertible notes. The approximate remaining discount amortization period as of September 30, 2014March 31, 2015 was 56.550.5 months. The equity component will not be remeasured for changes in fair value as long as it continues to meet the conditions for equity classification.
The outstanding convertible note balances as of September 30,March 31, 2015 and December 31, 2014 consisted of the following:
In thousands | September 30, 2014 | 2015 | 2014 | |||||||||
Liability component: | ||||||||||||
Principal | $ | 200,000 | $ | 200,000 | $ | 200,000 | ||||||
Less: debt discount, net | 45,009 | (41,128 | ) | (43,092 | ) | |||||||
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Net carrying amount | $ | 154,991 | $ | 158,872 | $ | 156,908 | ||||||
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Equity component | $ | 40,896 | ||||||||||
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In connection with the issuance of the convertible notes, the Company incurred approximately $1.1 million of debt issuance costs, which primarily consisted of legal, accounting and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $1.1 million of debt issuance costs, $254,000 was allocated to the equity component and recorded as a reduction to additional paid-in capital and $825,000 was allocated to the liability component and recorded in other assets on the balance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the convertible notes using the effective interest method.
The Company determined the expected life of the debt was equal to the five-year term on the convertible notes. The effective interest rate on the liability component was 9.625%9.625 percent for the period from the date of issuance through September 30, 2014.March 31, 2015. The following table sets forth total interest expense recognized related to the convertible notes during for the three-month and nine-month periodsperiod ended September 30, 2014:March 31, 2015.
In thousands | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | ||||||||||
Contractual interest expense | $ | 1,812 | $ | 2,074 | $ | 1,857 | ||||||
Amortization of debt discount | 1,872 | 2,141 | 1,965 | |||||||||
Amortization of debt issuance costs | 33 | 38 | 34 | |||||||||
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Total interest expense | $ | 3,717 | $ | 4,253 | $ | 3,856 | ||||||
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Convertible Bond Hedge and Warrant Transactions
In connection with the pricing of the convertible notes and in order to reduce the potential dilution to the Company’s common stock and/or offset any cash payments in excess of the principal amount due upon conversion of the convertible notes, on June 12, 2014, the Company entered into convertible note hedge transactions covering approximately 21.5 million shares of the Company’s common stock underlying the $200.0 million aggregate principal amount of the convertible notes with JPMorgan Chase Bank, National Association, an affiliate of JPMorgan Securities LLC (the “Counter Party”). The convertible bond hedges have an exercise price of approximately $9.30 per share, subject to adjustment upon certain events, and are exercisable when and if the convertible notes are converted. Upon conversion of the convertible notes, if the price of the Company’s common stock is above the exercise price of the convertible bond hedges, the Counter Party will deliver shares of the Company’s common stock and/or cash with an aggregate value approximately equal to the difference between the price of the Company’s common stock at the conversion date and the exercise price, multiplied by the number of shares of the Company’s common stock related to the convertible bond hedges being exercised. The convertible bond hedges are separate transactions entered into by the Company and are not part of the terms of the convertible notes or the warrants, discussed below. Holders of the convertible notes will not have any rights with respect to the convertible bond hedges. The Company paid $43.2 million for these convertible bond hedges and recorded this amount as a reduction to additional paid-in capital.
At the same time, the Company also entered into separate warrant transactions with the Counter Party relating to, in the aggregate, approximately 21.5 million shares of the Company’s common stock underlying the $200.0 million aggregate principal amount of the convertible notes. The initial exercise price of the warrants is $12.00 per share, subject to adjustment upon certain events, which is approximately 70%70 percent above the last reported sale price of the Company’s common stock of $7.02 per share on June 11, 2014. Upon exercise, the Company will deliver shares of the Company’s common stock and /or cash with an aggregate value equal to the excess of the price of the Company’s common stock on the exercise date and the exercise price, multiplied by the number of shares, of the Company’s common stock underlying the exercise. The warrants will be exercisable and will expire in equal installments for a period of 100 trading days beginning on September 15, 2019. The warrants were issued to the Counter Party pursuant to the exemption from registration set forth in Section 4(a)(2) of the Securities Act. The Company received $27.6 million for these warrants and recorded this amount as an increase to additional paid-in capital.
Aside from the initial payment of a $43.2 million premium to the Counter Party under the convertible bond hedges, which cost is partially offset by the receipt of a $27.6 million premium under the warrants, the Company is not required to make any cash payments to the Counter Party under the convertible bond hedges and will not receive any proceeds if the warrants are exercised.
9. Leases, Licensed Technology and Other Long Term DebtCommitments
Other long-term debt consisted of the following at September 30, 2014 and December 31, 2013:
In thousands | September 30, 2014 | December 31, 2013 | ||||||
Bank term loan | $ | — | $ | 9,100 | ||||
Less current portion | — | (4,200 | ) | |||||
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$ | — | $ | 4,900 | |||||
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The bank term loan provided for quarterly payments of principal and interest with final scheduled maturity on December 31, 2015. The loan bore 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 loan was secured by a lien on all assets of the Company excluding intellectual property, which the Company agreed not to pledge to any other party. The loan required the Company to maintain a minimum of $15.0 million in unrestricted cash, cash equivalents and investments. The loan also contained certain covenants that restricted additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of common stock. The term loan was paid in full on June 17, 2014.
Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards made under the plan ratably over the vesting period. There were no awards in 2013, and 2014. The net expense for this plan was $0 and $119,000 for the three-month periods ended September 30, 2014 and 2013, respectively, and $119,000 and $803,000 for the nine-month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014, all amounts previously deferred under this plan have been paid out.
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 $1.4 million 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. Future non-cancelable minimum annual rental payments through July 2019 under these leases are approximately $1.8$4.9 million in 2014, $6.7 millionremaining in 2015, $5.9 million in 2016, $6.0 million in 2017, $6.1 million in 2018 and $3.6 million in total thereafter.2019.
Binney Street, Cambridge, Massachusetts
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 which are under construction in Cambridge, Massachusetts. Under the terms of the original lease, the Company leased all of the rentable space in one of the two buildings and a portion of the available space in the second building. In September 2013, the Company entered into a lease amendment to lease all of the remaining space, approximately 142,000 square feet, in the second building, for an aggregate of 386,000 square feet in both buildings. The terms of the lease amendment were consistent with the terms of the original lease. Construction of the core and shell of the building is expected to bewas completed in earlyMarch 2015 at which time, constructionpursuant to a second amendment to the lease in March 2015, the Company commenced making lease payments. Construction of tenant improvements in the building will commence.commence now that the core and shell have been completed. Construction of the tenant improvements is expected to be completed in late 2015 or earlythe first half of 2016.
In connection with this lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be in accordance with the Company’s plans and include fit-out of the
buildings to construct appropriate laboratory and office space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company is the deemed owner of the buildings during the construction period.
As construction progresses, the Company records the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on the consolidated balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the buildings, the Company will determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the appropriate accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completion of the construction period. As of September 30, 2014,March 31, 2015, the Company has recorded construction in progress and a facility lease obligation of $171.3$217.8 million and $217.4 million, respectively, (including the current portion of the obligation of $5.0 million)$6.6 million included in current liabilities).
The initial term of the lease is for 15 years from substantial completion of the buildings with options to renew for three terms of five years each at market-based rates. The base rent is subject to increases over the term of the lease. Based on the original and amended leased space, the non-cancelable minimum annual lease payments for the annual periods beginning upon commencement of the lease are $5.3$4.8 million, $8.4$8.9 million, $26.6 million, $30.4 million and $30.9 million in the first five years of the lease and $347.1 million in total thereafter, plus the Company’s share of the facility operating expenses and other costs that are reimbursable to the landlord under the lease. The Company has the right to sublease portions of the space and is currently planning to sublease approximately 170,000 square feet of the total of 386,000 square feet available.
The Company maintains a letter of credit as security for the lease of $9.2 million, which is supported by restricted cash.
Lausanne, Switzerland
In January 2013, the Company entered into a lease agreement for approximately 22,000 square feet of office space in a building, which the Company occupied in 2014. The term of the lease is for ten years, with options for extension of the term and an early termination at the Company’s option after five years. Future non-cancelable minimum annual lease payments under thistheir lease are expected to be approximately $261,000$0.8 million remaining in 2014,2015, $1.0 million in 2016, $1.1 million in 2015, 2016, 2017, 2018, 2019 and 2018 and $5.5$4.3 million in total thereafter.
Total rent expense for the leases described above as well as other Company leases for the three-month and nine-month periods ended September 30,March 31, 2015 and 2014 and 2013 was $1.9 million, and $1.5 million, respectively, and $5.7 million and $4.4$1.9 million, respectively. Contingent rent expense for the three-month and nine-month periods ended September 30,March 31, 2015 and 2014 and 2013 was $167,000$199,000 and $186,000, respectively, and $519,000 and $526,000, respectively. Total future non-cancelable minimum annual rental payments for the leases described above as well as other Company leases, for the next five years and thereafter are $2.3$11.1 million, $14.0 million, $15.6$16.1 million, $33.7 million, $37.6 million, $35.6 million and $387.2$351.5 million, respectively, not including any offset from potential sublease payments.respectively.
Other Commitments
The Company has entered into employment agreements with each of the officers of the Company. The agreements for these officers have remaining terms as of March 31, 2015 extending through the end of 2016 or 2017, providing for aggregate base salaries of $6.2 million for 2015, $8.3 million for 2016 and $0.8 million for 2017.
10. Stockholders’ Equity
Changes in Stockholders’ Equity
The changes in stockholders’ equity for the three-month period ended March 31, 2015 were as follows:
Common Stock | Additional Paid-in Capital | Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||
$ in thousands | Shares | Amount | ||||||||||||||||||||||
Balance, January 1, 2015 | 187,294,094 | $ | 187 | $ | 1,299,394 | $ | (4,185 | ) | $ | (1,214,595 | ) | $ | 80,801 | |||||||||||
Issuance of common stock pursuant to ARIAD stock plans | 1,073,690 | 1 | 1,320 | 1,321 | ||||||||||||||||||||
Stock-based compensation | 8,434 | 8,434 | ||||||||||||||||||||||
Payment of tax withholding obligations related to stock-based compensation | (130 | ) | (130 | ) | ||||||||||||||||||||
Other comprehensive income | 313 | 313 | ||||||||||||||||||||||
Net loss | (52,676 | ) | (52,676 | ) | ||||||||||||||||||||
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Balance, March 31, 2015 | 188,367,784 | $ | 188 | $ | 1,309,018 | $ | (3,872 | ) | $ | (1,267,271 | ) | $ | 38,063 | |||||||||||
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11. 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 the 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.
At March 31, 2015 and December 31, 2014, the carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. All such measurements are Level 2 measurements in the fair value hierarchy. The fair value of the convertible notes, which differs from their carrying value, is influenced by interest rates and stock price and stock price volatility and is determined by prices for the convertible notes observed in market trading. The market for trading of the convertible notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the convertible notes, face value of $200 million, was $230 million at March 31, 2015.
12. Stock Compensation
ARIAD Stock Option and Stock Plans
The Company’s 2001, 2006 and 2014 stock option and stock plans (the “Plans”) provide for the award 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 three or 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 and 2006 Plans have no shares remaining available for grant, although existing stock options granted under these Plans remain outstanding. As of March 31, 2015, there were 11,786,706 shares available for awards under the 2015 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 (“ESPP”) and reserved 500,000 shares of common stock for issuance under this plan. The ESPP was amended in June 2008 to reserve an additional 500,000 shares of common stock for issuance and the plan was further amended in 2009 and in June 2014 to reserve an additional 750,000 shares of common stock for issuance pursuant to each of those amendments. 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. For the three-month period ended March 31, 2015 and 2014, 72,379, and 69,161 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’s statements of operations included total compensation cost from awards under the Plans and purchases under the ESPP for the three-month periods ended March 31, 2015 and 2014, as follows:
In thousands | 2015 | 2014 | ||||||
Compensation cost from: | ||||||||
Stock options | $ | 4,241 | $ | 4,680 | ||||
Stock and stock units | 4,067 | 3,649 | ||||||
Purchases of common stock at a discount | 126 | 167 | ||||||
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$ | 8,434 | $ | 8,496 | |||||
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Compensation cost included in: | ||||||||
Research and development expense | $ | 3,816 | $ | 3,708 | ||||
Selling, general and administrative expense | 4,618 | 4,788 | ||||||
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$ | 8,434 | $ | 8,496 | |||||
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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 three or 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.
Stock option activity under the Company’s stock plans for the three-month period ended March 31, 2015 was as follows:
Number of shares | Weighted Average Exercise Price Per Share | |||||||
Options outstanding, January 1, 2015 | 10,148,087 | $ | 10.09 | |||||
Granted | 519,255 | $ | 7.22 | |||||
Forfeited | (182,904 | ) | $ | 8.19 | ||||
Exercised | (366,730 | ) | $ | 5.85 | ||||
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Options outstanding, March 31, 2015 | 10,117,708 | |||||||
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Stock and Stock Unit Grants
Stock and stock unit grants carry restrictions as to resale for periods of time or vesting provisions over time 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 three-month period ended March 31, 2015 was as follows:
Number of shares | Weighted Average Exercise Price Per Share | |||||||
Options outstanding, January 1, 2015 | 3,503,153 | $ | 9.97 | |||||
Granted / awarded | 1,242,650 | $ | 8.05 | |||||
Forfeited | (11,254 | ) | $ | 6.04 | ||||
Vested or restrictions lapsed | (802,126 | ) | $ | 9.54 | ||||
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Options outstanding, March 31, 2015 | 3,932,423 | |||||||
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The total fair value of stock and stock unit awards that vested as of March 31, 2015 and 2014 was $5.7 million and $2.7 million, respectively. The total unrecognized compensation expense for restricted shares or units that have been granted and are probable to become vested was $16.5 million at March 31, 2015 and will be recognized over 1.7 years on a weighted average basis.
Stock and stock units outstanding in the above table include 121,200 performance share units which were earned upon the granting of marketing authorization of Iclusig by the European Commission in July 2013. These performance share units will vest in July 2015.
Stock and stock units outstanding in the table above also include 316,000 performance share units awarded in 2013. The number of shares that may vest, if any, related to the 2013 performance share unit awards is dependent on the achievement, and timing of the achievement, of the performance criteria defined for the award. The compensation cost for such performance-based stock awards will be 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 performance share units when achievement of the performance condition is probable. The Company has concluded that it is probable that the performance condition related to the 2013 performance share unit awards would be met. The performance condition is based upon continued success in specific research and development initiatives.
Stock and stock units outstanding in the above table as of March 31, 2015 also include 997,000 and 47,000 performance share units awarded on January 31, 2014 and June 25, 2014, respectively. The vesting of fifty percent of the award is dependent upon the achievement of specific commercial objectives by the end of 2015 and the vesting of the remainder is dependent upon the achievement, and timing of the achievement, of specific research and development objectives. The Company has concluded that it is probable that these performance conditions will be met. The total compensation expense for the portion related to the research and development objectives may be up to 60 percent higher depending on the timing of the achievement of the specific performance objectives.
13. Net Loss Per Share
Basic net loss per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net loss per share amounts have been computed based on the weighted-average number of common shares outstanding plus the dilutive effect, if any, of potential common shares. The computation of potential common shares has been performed using the treasury stock method. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same.
The calculation of net loss and the number of shares used to compute basic and diluted earnings per share for the three-month periods ended March 31, 2015 and 2014 are as follows:
In thousands, except per share amounts | 2015 | 2014 | ||||||
Net loss | $ | (52,676 | ) | $ | (49,822 | ) | ||
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Weighted average shares outstanding – basic and diluted | 187,837 | 186,252 | ||||||
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Net loss per share – basic and diluted | $ | (0.28 | ) | $ | (0.27 | ) | ||
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14. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for three-month period ended March 31, 2015 were as follows:
In thousands | Cumulative Translation Adjustment | Defined Benefit Pension Obligation | Total | |||||||||
Balance, January 1, 2015 | $ | 174 | $ | (4,359 | ) | $ | (4,185 | ) | ||||
Other comprehensive income | 236 | 77 | 313 | |||||||||
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Balance, March 31, 2015 | $ | 410 | $ | (4,282 | ) | $ | (3,872 | ) | ||||
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15. Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized.
The Company’s tax provision reflects that the Company has an international corporate structure and certain subsidiaries are profitable on a stand-alone basis. Accordingly, a tax provision is reflected for the taxes incurred in such jurisdictions. In addition, the Company has recognized a prepaid tax related to the tax consequences arising from intercompany transactions and is amortizing such prepaid tax over the period that the assets transferred are being amortized. The total provision for income taxes for the three-month and nine-month periods ended September 30,March 31, 2015 and 2014 was $154,000$214,000 and $379,000,$119,000, respectively.
The Company does not recognize a tax benefit for uncertain tax positions unless it is more likely than not that the 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 that is recorded for these positions is measured at the largest amount of cumulative benefit that has greater than a 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. If such unrecognized tax benefits were realized and not subject to valuation allowances, the entire amount would impact the tax provision. No uncertain tax positions are expected to be resolved within the next twelve months.
Common Stock
On January 29, 2013, During 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 expenses, were approximately $310.0 million.
On December 14, 2011, the Company filed a shelf registration statement with the Securities and Exchange Commission (“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.
Changes in Stockholders’ Equity
The changes in stockholders’ equity for the nine-monththree-month period ended September 30, 2014 were as follows:
Additional Paid-in Capital | Other Comprehensive Income (Loss) | Accumulated Deficit | ||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||
$ in thousands | Shares | Amount | Total | |||||||||||||||||||||
Balance, January 1, 2014 | 185,896,080 | $ | 186 | $ | 1,238,859 | $ | (1,535 | ) | $ | (1,051,993 | ) | $ | 185,517 | |||||||||||
Issuance of common stock pursuant to ARIAD stock plans | 1,245,815 | 1 | 3,058 | 3,059 | ||||||||||||||||||||
Stock-based compensation | 24,583 | 24,583 | ||||||||||||||||||||||
Payment of tax withholding obligations related to stock-based compensation | (716 | ) | (716 | ) | ||||||||||||||||||||
Equity component of convertible debt | 40,896 | 40,896 | ||||||||||||||||||||||
Purchase of convertible bond hedge | (43,220 | ) | (43,220 | ) | ||||||||||||||||||||
Sale of warrants | 27,580 | 27,580 | ||||||||||||||||||||||
Net loss | 244 | (156,851 | ) | (156,607 | ) | |||||||||||||||||||
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Balance, September 30, 2014 | 187,141,895 | $ | 187 | $ | 1,291,040 | $ | (1,291 | ) | $ | (1,208,844 | ) | $ | 81,092 | |||||||||||
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The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based onMarch 31, 2015, 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 the 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, includingInternal Revenue Service completed its own data.
As of September 30, 2014 and December 31, 2013, the Company did not hold any assets recorded at fair value.
At September 30, 2014 and December 31, 2013 the carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The carrying amountaudit of the Company’s bank term loan at December 31, 2013 approximated fair value due to its variable interest rate2012 U.S. federal income tax return, and other terms. All such measurements are Level 2 measurements in the fair value hierarchy. The carrying amount of the Company’s leased buildings under construction in Cambridge, Massachusetts and the related long-term facility lease obligation reflect replacement cost, which approximates fair value. This measurement isissued a Level 3 fair value measurement. The fair value of the convertible notes, which
differs from their carrying value, is influenced by interest rates and stock price and stock price volatility and is determined by prices for the convertible notes observed in market trading, which are Level 2 inputs. The estimated fair value of the convertible notes, face value of $200 million, was $184.5 million at September 30, 2014.
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 three-month and nine-month periods ended September 30, 2014 and 2013, as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Compensation cost from: | ||||||||||||||||
Stock options | $ | 3,583 | $ | 4,935 | $ | 12,427 | $ | 13,047 | ||||||||
Stock and stock units | 3,961 | 3,553 | 11,787 | 15,147 | ||||||||||||
Purchases of common stock at a discount | 94 | 142 | 369 | 365 | ||||||||||||
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$ | 7,638 | $ | 8,630 | $ | 24,583 | $ | 28,559 | |||||||||
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Compensation cost included in: | ||||||||||||||||
Research and development expenses | $ | 3,229 | $ | 3,913 | $ | 10,570 | $ | 12,329 | ||||||||
Selling, general and administrative expenses | 4,409 | 4,717 | 14,013 | 16,230 | ||||||||||||
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$ | 7,638 | $ | 8,630 | $ | 24,583 | $ | 28,559 | |||||||||
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Stock Options
Stock options are granted with an exercise price equal“no-change” letter indicating that no adjustments would be made to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over three or 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.return as filed.
Stock option activity under the Company’s stock plans for the nine-month period ended September 30, 2014 was as follows:16. Restructuring Actions
Number of Shares | Weighted Average Exercise Price Per Share | |||||||
Options outstanding, January 1, 2014 | 10,379,668 | $ | 10.83 | |||||
Granted | 1,493,560 | $ | 7.35 | |||||
Forfeited | (1,333,975 | ) | $ | 13.83 | ||||
Exercised | (632,521 | ) | $ | 4.44 | ||||
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Options outstanding, September 30, 2014 | 9,906,732 | $ | 10.31 | |||||
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Stock and Stock Unit Grants
Stock and stock unit grants carry restrictions as to resale for periods of time or vesting provisions over time 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 nine-month period ended September 30, 2014 was as follows:
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding, January 1, 2014 | 2,047,600 | $ | 14.18 | |||||
Granted/Awarded | 2,479,500 | $ | 7.35 | |||||
Forfeited | (269,668 | ) | $ | 9.33 | ||||
Vested or restrictions lapsed | (646,313 | ) | $ | 13.55 | ||||
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Outstanding, September 30, 2014 | 3,611,119 | $ | 9.96 | |||||
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Included in stock and stock units outstanding in the above table as of September 30, 2014 are 258,400 performance share units that will vest annually, in equal increments, over the next two years on the anniversary date of the achievement of the performance condition, which was the marketing authorization of Iclusig by the European Commission that occurred in July 2013.
Stock and stock units outstanding in the above table as of September 30, 2014 also include 333,000 performance share units awarded in 2013. The number of shares that may vest, if any, related to the 2013 performance share unit awards is dependent on the achievement, and timing of the achievement, of the performance criteria defined for the award. The compensation cost for such performance-based stock awards will be 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 performance share units when achievement of the performance condition is probable. The Company has concluded that it is probable that the performance condition related to the 2013 performance share unit awards will be met. The performance condition is based upon continued success in specific research and development initiatives. The total compensation expense for these performance share units may be up to 60% higher if the performance condition for this award is met prior to December 31, 2014.
Stock and stock units outstanding in the above table as of September 30, 2014 also include 1,066,000 performance share units awarded on January 31, 2014. The vesting of fifty percent of the award is dependent upon the achievement of specific commercial objectives by the end of 2015 and the vesting of the remainder is dependent upon the achievement, and timing of the achievement, of specific research and development objectives. The Company has concluded that it is probable that these performance conditions will be met. The total compensation expense for the portion related to the research and development objectives may be up to 60% higher depending on the timing of the achievement of the specific performance objectives.
The changes in accumulated other comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2014 were as follows:
In thousands | Cumulative Translation Adjustment | Defined Benefit Pension Obligation | Total | |||||||||
Balance, July 1, 2014 | $ | (38 | ) | $ | (1,413 | ) | $ | (1,451 | ) | |||
Other comprehensive losses | 120 | 40 | 160 | |||||||||
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Balance, September 30, 2014 | $ | 82 | $ | (1,373 | ) | $ | (1,291 | ) | ||||
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In thousands | Cumulative Translation Adjustment | Defined Benefit Pension Obligation | Total | |||||||||
Balance, January 1, 2014 | $ | (40 | ) | $ | (1,495 | ) | $ | (1,535 | ) | |||
Other comprehensive losses | 122 | 122 | 244 | |||||||||
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Balance, September 30, 2014 | $ | 82 | $ | (1,373 | ) | $ | (1,291 | ) | ||||
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Basic net loss per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net 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. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same.
The calculation of net loss and the number of shares used to compute basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2014 and 2013 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands, except per share data | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (50,108 | ) | $ | (66,339 | ) | $ | (156,851 | ) | $ | (199,995 | ) | ||||
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Net loss per share – basic and diluted | $ | (0.27 | ) | $ | (0.36 | ) | $ | (0.84 | ) | $ | (1.09 | ) | ||||
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Weighted average shares – basic and diluted | 187,034 | 185,238 | 186,703 | 182,859 | ||||||||||||
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In the fourthfirst quarter of fiscal 2013,2014, the Company incurred expenses of $4.8 million associated with an employee workforce reductionreductions of approximately 155 positions, that was designed to reduce the Company’s operating expenses and extend its cash runway. The Company recorded $2.2 million of the employee separation costs in research and development expense and $2.6 million in selling, general and administrative expense in the three-month period end December 31, 2013.
A rollforward of the restructuring liability for the nine-month period ended September 30, 2014 is as follows:
In thousands | ||||
Balance, January 1, 2014 | $ | 2,220 | ||
Charges | — | |||
Amounts paid | (2,220 | ) | ||
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Balance, September 30, 2014 | $ | — | ||
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expense. The restructuring charges were paid by the end of June 30, 2014. On the accompanying condensed consolidated balance sheets, the restructuring liability balance was classified as a component of accrued compensation and benefits.
17. Defined Benefit Pension Obligation
On March 1, 2013, theThe Company establishedmaintains a defined benefit pension plan for employees in its Switzerland subsidiary. The plan provides benefits to employees upon retirement, death or disability.
The net periodic benefit cost for the defined benefit pension plan for the three-month and nine-month periods ended September 30,March 31, 2015 and 2014 was as follows:
In thousands | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | 2015 | 2014 | ||||||||||||
Service cost | $ | 234 | $ | 761 | $ | 448 | $ | 288 | ||||||||
Interest cost | 40 | 119 | 50 | 43 | ||||||||||||
Expected return on plan assets | (34 | ) | (101 | ) | (37 | ) | (37 | ) | ||||||||
Amortization of prior service cost | 37 | 110 | 77 | 41 | ||||||||||||
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Net periodic benefit cost | $ | 277 | $ | 889 | $ | 538 | $ | 335 | ||||||||
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The net periodic benefit costs and contributions to the plan for the nine-month period ended September 30, 2014 were not material.
The Company expects to contribute $942,000$1.6 million in total to the plan in 2014.2015.
18. Litigation
On October 10, 2013, October 17, 2013, December 3, 2013 and December 6, 2013, purported shareholder class actions, styled Jimmy Wang v. ARIAD Pharmaceuticals, Inc., et al., James L. Burch v. ARIAD Pharmaceuticals, Inc., et al., Greater Pennsylvania Carpenters’ Pension Fund v. ARIAD Pharmaceuticals, Inc., et al, and Nabil Elmachtoub v. ARIAD Pharmaceuticals, Inc., et al, respectively, were filed in the United States District Court for the District of Massachusetts (the “District Court”), naming the Company and certain of its officers as defendants. The lawsuits allege that the defendants made material misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in its public disclosures during the period from December 12, 2011 through October 8, 2013 or October 17, 2013, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On January 9, 2014, the District Court consolidated the actions and appointed lead plaintiffs. On February 18, 2014, the lead plaintiffs filed an amended complaint as contemplated by the order of the District Court. The amended complaint extends the class period for the Securities Exchange Act claims through October 30, 2013. In addition, plaintiffs allege that certain of the Company’s officers, directors and certain underwriters made material misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in connection with the Company’s January 24, 2013 follow-on public offering of common stock in violation of Sections 11 and 15 of the Securities Act of 1933, as amended. The plaintiffs seek unspecified monetary damages on behalf of the putative class and an award of costs and
expenses, including attorney’s fees. On April 14, 2014, the defendants and the underwriters filed separate motions to dismiss the amended complaint. On June 10, 2014, the District Court heard oral argument on the motion to dismiss. On March 24, 2015, the District Court granted the defendants’ and the underwriters’ motions to dismiss but has not yet ruled on them.the plaintiffs’ amended complaint in these consolidated actions. On April 21, 2015, the plaintiffs filed an appeal of the District Court’s decision to grant the motions to dismiss with the United States Court of Appeals for the First Circuit.
On November 6, 2013, a purported derivative lawsuit, styled Yu Liang v. ARIAD Pharmaceuticals, Inc., et al., was filed in the United States District Court for the District of Massachusetts (the “District Court”), on behalf of the Company naming its directors and certain of its officers as defendants. On December 6, 2013, an additional purported derivative lawsuit, styled Arkady Livitz v. Harvey J. Berger, et al, was filed in the District Court. The lawsuits allege that the Company’s directors and certain of its officers breached their fiduciary duties related to the clinical development and commercialization of Iclusig and by making misrepresentations regarding the safety and commercial marketability of Iclusig. The lawsuits also assert claims for unjust enrichment and corporate waste, and for misappropriation of information and insider trading by the officers named as defendants. On January 23, 2014, the District Court consolidated the actions. On February 3, 2014, the plaintiffs designated the Yu Liang complaint as the operative complaint as contemplated by the order of the District Court. The plaintiffs seek unspecified monetary damages, changes in the Company’s corporate governance policies and internal procedures, restitution and disgorgement from the individually named defendants, and an award of costs and expenses, including attorney fees. On March 5, 2014, the defendants filed a motion to dismiss the complaint. In response, on March 26, 2014, the plaintiffs filed an amended complaint. On April 23, 2014, the defendants filed a motion to dismiss the amended complaint. On July 23, 2014, the District Court heard oral argument on the motion to dismiss. On March 9, 2015, the District Court granted the defendants’ motion to dismiss but has not ruled on it.the plaintiffs’ amended complaint in these consolidated actions. On April 16, 2015, the plaintiffs filed an appeal of the District Court’s decision to grant the motion to dismiss with the United States Court of Appeals for the First Circuit.
On March 11, 2015, a product liability lawsuit, styledThomas Montalbano, Jr. v. ARIAD Pharmaceuticals, Inc., was filed in the United States District Court for the Southern District of Florida naming the Company as defendant. The lawsuit alleges that the Company’s cancer medicine Iclusig was defective, dangerous and lacked adequate warnings when the plaintiff used it from July to August 2013. The plaintiff seeks unspecified monetary damages, punitive damages and an award of costs and expenses, including attorney’s fees.
The Company believes that all these actions are without merit. Also, the Company believes that any liability in the Montalbano lawsuit would be covered by the Company’s product liability insurance. At this time, the Company has not recorded a liability related to damages in connection with these matters because it believes that any potential loss is not currently probable or reasonably estimable under U.S. GAAP. In addition, due to the early stages of the matters described above, the Company cannot reasonably estimate the possible loss or range of loss, if any, that may result from these matters.
From time to time, the Company may be subject to various claims and legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceedings is considered probable and the amount is reasonably estimated, the Company will accrue a liability for the estimated loss.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. The Company has adopted the provisions of this standard beginning January 1, 2014. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In October 2014, the Company entered into an agreement with Bellicum Pharmaceuticals, Inc. (“Bellicum”) to restructure and amend an existing license agreement between the companies for the Company’s cell-signaling technology. The restructured agreement gives Bellicum a worldwide exclusive license, with the right to sublicense, to the Company’s cell-signaling technology for broad use in human cell therapies for all diseases. Under the terms of the agreement, the Company will receive $50 million, payable in three installments ($15 million paid upon execution of the agreement, $20 million due by June 30, 2015 and $15 million due by June 30, 2016) in exchange for granting Bellicum a fully paid-up license to this technology and return of shares of Bellicum common stock owned by the Company upon receipt of the second installment payment.
The second and third installment payments may be accelerated under certain circumstances and can be prepaid at any time. The agreement can be terminated by either party upon a specified uncured material breach of the agreement and by the Company upon Bellicum’s failure to make the installment payments after specified dates.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information set forth below should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto included herein, as well as our audited consolidated financial statements, and the notes thereto, containedincluded in our Annual Report on Form 10-K for the year ended December 31, 2013. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and our subsidiaries unless the context requires otherwise.2014.
Overview
ARIAD is a global oncology company focused on transforming 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.
Our first approved cancer medicine is Iclusig® (ponatinib), which is approved in the United States and Europe for the treatment of adult patients with chronic myeloid leukemia, or CML, and Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL. We are pursuing regulatory approval of Iclusigfocused on value-driving investments in additional geographiescommercialization, research and development, and new business development initiatives that we expect will lead to sustained profitability beginning in 2018 and increased shareholder value.
We are currently commercializing or developing Iclusig in additional cancer indications. We have twothe following three products and product candidates:
• | Iclusig® (ponatinib) is our first approved cancer medicine, which we are commercializing in the United States, Europe and other territories for the treatment of certain patients with rare forms of leukemia. |
• | Brigatinib (previously known as AP26113) is our most advanced drug candidate, which we are developing for the treatment of certain patients with a form of non-small cell lung cancer, or NSCLC. |
• | AP32788 is our most recent, internally discovered drug candidate. In December 2014, we nominated AP32788 for clinical development. We are conducting studies necessary to support the filing of an investigational new drug application, or IND, which we expect to submit in 2015. |
These products and product candidates complement our earlier discovery of ridaforolimus, which we have out-licensed for development in development, AP26113 and ridaforolimus. AP26113 is being studied in patients with advanced solid tumors, including non-small cell lung cancer. Ridaforolimus is being developed for use on cardiovasculardrug-eluting stents and other medical devices by Medinol, Ltd.for cardiovascular indications, and rimiducid (AP1903), or Medinol, and ICON Medical Corp., or ICON. In addition to our clinical development programs,which we have a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicatedout-licensed for development in cancer.
Iclusig andnovel cellular immunotherapies. All of our product candidates AP26113 and ridaforolimus,that we are developing or have out-licensed were discovered internally by our scientists based on our expertise in computational chemistry and structure-based drug design.
Recent Developments
The following information updatesOn April 29, 2015, we announced the decision of our previousfounder, Harvey J. Berger, M.D., to retire as Chairman, Chief Executive Officer and President of the Company upon the appointment of his permanent successor or December 31, 2015, whichever is earlier. During the transition period pending Dr. Berger’s retirement, as well as after a new Chief Executive Officer joins the Company, we expect that our Board will be engaged in a review of our strategic and operating plans, and it is possible that changes to our near- and long-term objectives will be adopted. We cannot anticipate at this time what changes, if any, will result from that review. Accordingly, the disclosures in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annualthis Quarterly Report on Form 10-K10-Q relate to our currently existing strategic and operating plans. All forward-looking statements with respect to our plans, operations, programs, anticipated performance, etc. are provided subject to this known uncertainty, which could cause actual results to differ materially.
Iclusig (ponatinib)
Commercialization
As noted above, Iclusig is approved in the United States, Europe and other territories for the year ended December 31, 2013treatment of certain patients with chronic myeloid leukemia, or CML, and Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL.
In the United States, we are distributing Iclusig through a single specialty pharmacy. We employ an experienced and trained sales force and other professional staff, including account specialists, regional business directors, corporate account directors and medical science liaisons, who target the approximate 5,000 physicians who generate the majority of tyrosine kinase inhibitors (“TKI”), prescriptions for patients with CML and patients with PH+ ALL in the United States.
In Europe, we are now selling Iclusig in Germany, the United Kingdom, Austria, the Netherlands, Norway, Sweden, Switzerland, and Italy. In addition, we are distributing Iclusig to patients in France prior to pricing and reimbursement approval as updatedpermitted under French regulations. Full pricing and reimbursement approvals in France and other European countries are expected by the end of 2015. In total, we anticipate that Iclusig will be available for sale in 16 European countries by the end of 2015.
We have established headquarters for our disclosuresEuropean operations in Part II, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Switzerland where we manage all aspects of our subsequent Quarterly Reports on Form 10-Q.business in Europe, including sales and marketing, distribution and supply chain, regulatory, medical affairs and supporting functions. We employ personnel in key countries in Europe to build company and brand awareness, manage the local country pricing and reimbursement process and sell Iclusig upon obtaining all necessary approvals.
In 2013,order to provide for access to Iclusig in countries where we do not employ personnel, we enter into relationships with distributors in such countries. These distributorship arrangements provide for the European Medicines Agency, or EMA, commenced an in-depth review, known as an Article 20 referral,exclusive right to sell and distribute Iclusig in a specific territory for a specified period of the benefitstime in exchange for fees and riskspayments related to purchase of Iclusig from us and/or sales of Iclusig in the territory. In December 2014, we entered into an agreement with Angelini Pharma, through its Austrian subsidiary, CSC Pharmaceuticals, whereby it will distribute Iclusig in countries in central and eastern Europe.
In territories outside the United States and Europe, we provide for the sale and distribution of Iclusig through partnership or distributorship arrangements. In December 2014, we entered into a co-development and commercialization agreement with Otsuka Pharmaceutical Co., Ltd., or Otsuka, under which Otsuka has exclusive rights to commercialize Iclusig in Japan and nine other Asian countries and will fund future clinical development in those countries. We expect to file for marketing approval in Japan in collaboration with Otsuka in the second half of 2015. In Australia, we obtained marketing approval for Iclusig in November 2014 and will distribute Iclusig through Specialised Therapeutics Australia Pty Ltd, under a distribution agreement we entered into in January 2014 that covers Australia and New Zealand. In Israel, we entered into a distribution agreement with Medison Pharma Ltd. in August 2014 and obtained marketing approval in March 2015. We have also obtained marketing approval for Iclusig in Canada and are preparing for commercial launch in that country.
Ongoing Development of Iclusig
Initial approval of Iclusig in the United States and Europe was based on results from the pivotal Phase 2 PACE clinical trial in patients with CML or Ph+ ALL who were resistant or intolerant to prior TKI therapy, or who had the T315I mutation of BCR-ABL. The PACE trial is fully enrolled and we continue to treat and follow patients in this trial who continue to respond to treatment. We also continue to treat and follow patients in our first, Phase 1 clinical trial of Iclusig in heavily pre-treated patients with resistant or intolerant CML or Ph+ALL, which was initiated in 2008; our Phase 2 clinical trial in CML patients in Japan; and our Phase 2 clinical trial in patients with gastrointestinal stromal tumors. In addition, Iclusig is being studied in ongoing investigator-sponsored trials in settings including first line and second line CML, acute myeloid leukemia, or AML, non-small cell lung cancer, or NSCLC, and medullary thyroid cancer, or MTC. Our development of Iclusig also includes ongoing activities in manufacturing, quality, safety and regulatory functions.
In 2015, we plan to initiate studies designed to better understand the nature, frequencysafety profile of Iclusig in resistant and severityintolerant CML and Ph+ ALL patients, with the objective of events obstructingimproving the arteries or veins,balance of benefit and risk for these patients as post-marketing commitments, as well as studies designed to evaluate its use in earlier lines of therapy. These studies include:
In addition, we expect that additional investigator-sponsored clinical trials will be initiated in 2015 in various indications.
Brigatinib (AP26113)
Brigatinib (AP26113) is an investigational inhibitor of anaplastic lymphoma kinase, or ALK. ALK was first identified as a chromosomal rearrangement in anaplastic large-cell lymphoma, or ALCL. Genetic studies indicate that abnormal expression of ALK is a key driver of certain types of non-small cell lung cancer, or NSCLC, and neuroblastomas, as well as ALCL. Since ALK is generally not expressed in normal adult tissues, it represents a highly promising molecular target for cancer therapy.
We are currently conducting a Phase 1/2 clinical trial of brigatinib, which we initiated in 2011. The primary objectives of the Phase 1 portion of the trial were to determine the maximum tolerated dose and the recommended dose for further study and to characterize its reviewsafety and preliminary anti-tumor activity. The primary purpose of Iclusig under the Article 20 referral procedurePhase 2 portion of the trial is to evaluate the efficacy of brigatinib in patients with TKI-naïve and recommendedcrizotinib-resistant ALK-positive NSCLC, including in patients with brain metastases after crizotinib treatment. Results of this trial to date show robust anti-tumor activity in patients with TKI-naïve and crizotinib-resistant ALK-positive NSCLC, including in patients with brain metastases after crizotinib treatment. Crizotinib is the currently available first-generation ALK inhibitor.
We commenced a pivotal trial of brigatinib in the first quarter of 2014 in patients with locally advanced or metastatic NSCLC who were previously treated with crizotinib. The ALTA trial is designed to determine the safety and efficacy of brigatinib in refractory ALK+ NSCLC patients. We anticipate that Iclusigthe results of the ALTA trial will form the basis for our application for initial regulatory approval. We expect to achieve full patient enrollment in the ALTA trial in the third quarter of 2015 and to file for approval of brigatinib in the United States in 2016.
Our development of brigatinib also includes key product and process development activities to support our clinical trials as well as the anticipated filing of an NDA and potential commercial launch of the product, quality and stability studies and pharmacovigilance and regulatory activities.
We are currently pursuing a partnership to co-develop and co-commercialize brigatinib. We expect that such a partnership, if entered into, would allow us to continue to beleverage our existing infrastructure and capabilities, as well as support a randomized, first-line trial of brigatinib vs. crizotinib in ALK+ NSCLC. A partnership may also support the exploration of new combination therapies in lung cancer that include brigatinib and other approved and unapproved medicines.
AP32788
At the end of 2014, we nominated our next internally discovered development candidate, AP32788. This orally active TKI has a unique profile against a validated class of mutated targets in non-small cell lung cancer and certain other solid tumors and may address an unmet medical need. We are currently performing pharmacology, toxicology and other studies necessary to support the filing of an investigational new drug (IND) application for AP32788 that we expect to file in 2015. We expect to begin a Phase 1/2 proof-of-concept trial in 2016.
Ridaforolimus
We previously entered into license agreements with Medinol and ICON pursuant to which they agreed to develop drug-eluting stents and other medical devices to deliver ridaforolimus to prevent restenosis, or reblockage, of injured vessels following interventions in which stents are used in Europeconjunction with balloon angioplasty. In 2014, Medinol initiated two registration trials in accordance withthe United States and other countries of its already approved indications. Other recommendations made by the PRAC relatedNIRsupremeTM Ridaforolimus-Eluting Coronary Stent System incorporating ridaforolimus and submitted an investigational device exemption, or IDE, to the Iclusig SummaryFDA. These actions triggered milestone payments to us of Medicinal Product Characteristics,$3.8 million in 2014. As of March 2015, we had not received any milestone or SmPC, include (1) patient monitoringother payments from ICON pursuant to its agreement. In March 2015, we terminated our agreement with ICON.
In 2010, we entered into an amended and restated agreement with Merck & Co., Inc., or Merck, for response accordingthe development of ridaforolimus for oncology applications. In February 2014, we received notice from Merck that it was terminating the license agreement. This termination became effective in November 2014 at which time all rights to standard clinical guidelines, (2) considerationridaforolimus in oncology licensed to Merck were returned to us.
Our Discovery Programs
Our research and development programs are focused on discovering and developing small-molecule drugs that regulate cell signaling for the treatment of Iclusig dose-reduction following achievement of major cytogenetic response with subsequent monitoring of response, and (3) consideration of Iclusig discontinuation if a complete haematologic response has not been achieved by three months. Further information is provided indicating that the risk of vascular occlusive events is likely dose-related. An updatecancer. Many of the Warningcritical functions of cells, such as cell growth, differentiation, gene transcription, metabolism, motility and Precautionssurvival, are dependent on signals carried back and Undesirable Effects sections is also provided for inclusionforth from the cell surface to the nucleus and within the cell through a system of molecular pathways. When disrupted or over-stimulated, such pathways may trigger diseases such as cancer. Our research focuses on exploring cell-signaling pathways, identifying their role in specific cancers and cancer subtypes, and discovering drug candidates to treat those cancers by interfering with the aberrant signaling pathways of cells. The specific cellular proteins blocked by our product candidates have been well characterized as cancer targets. Iclusig, SmPC. PRAC’s recommendation was consideredbrigatinib, AP32788 and adopted byridaforolimus were each discovered internally through the Committee for Medicinal Products for Human Use, or CHMP,integrated use of the EMA in October 2014. The European Comission is expected to issue a final legally binding decision on Iclusig in December 2014 which will be valid throughout the European Union.structure-based drug design and computational chemistry, and their targets have been validated with techniques such as functional genomics, proteomics, and chemical genetics.
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, accrued product development expenses, inventory, leased buildings under construction and stock-based compensation expense. We evaluate our estimates, judgments and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of our critical accounting policies and estimates, read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2013,2014. There have been no changes in those policies or in the method of developing the estimates used to apply those policies, except as updated by the following:discussed below.
Revenue Recognition
Revenue is recognized when the four basic criteria for revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are met.
Product Revenue, netNet
Through October 31, 2013, we soldWe sell Iclusig in the United States throughto a limited number of specialty distributors and specialty pharmacies. Upon receiving approval to resume marketing and commercial distribution of Iclusig in the United States in January 2014, we began selling Iclusig through an exclusivesingle specialty pharmacy, Biologics, Inc., or Biologics. (“Biologics”). Biologics dispenses Iclusig directly to patients in fulfillment of prescriptions. We record a receivable from the shipment of productpatients. In Europe, we sell Iclusig to Biologics once titleretail pharmacies and risk of loss is transferred.hospital pharmacies, which dispense Iclusig directly to patients. We provide the right of return to Biologicscustomers in the United States for unopened product for a limited time before and after its expiration date. InEuropean customers are provided the United States, we deferright to return product only in limited circumstances, such as damaged product. Revenue is generally recognized when product is delivered, assuming the recognitionCompany can estimate potential returns. For European customers, who are provided with a limited right of revenue until Iclusig is dispensed by Biologics toreturn, the patient. Revenuecriteria for revenue recognition is deferred duemet at the time of shipment and revenue is recognized at that time, provided all other revenue recognition criteria are met. Prior to 2015, with our limited sales history for Iclusig and the inherent uncertainties in estimating futureproduct returns, we had determined that the shipments of Iclusig including estimatedto its United States customers did not meet the criteria for revenue recognition at the time of shipment. For periods prior to the quarter ended March 31, 2015, we recognized revenue in the United States, assuming all revenue recognition criteria had been met, when Iclusig was sold by Biologics to patients. During the quarter ended March 31, 2015, we concluded that we had sufficient experience to estimate returns in the United States, as a result of over two years of sales experience. Accordingly, during the quarter ended March 31, 2015, the Company commenced recognizing revenue in the United States on delivery of Iclusig to Biologics and recognized a one-time net product demand and the limited shelf liferevenue increase of Iclusig.
Rebates, Chargebacks and Discounts
If we increased our estimate$1.2 million as a result of the percentage of patients receiving Iclusig covered by third-party payors entitled to government-mandated discounts by five percentage points, our United States net product revenues would decrease by approximately 1 percent in the nine-month period ended September 30, 2014.
Accrued Product Development Expenses
At September 30, 2014, we reported accrued product development expenses of $13.8 million on our condensed consolidated balance sheet.
Stock-Based Compensation Expense
We recognized stock-based compensation expense of $7.6 million and $24.6 million in the three-month and nine-month periods ended September 30, 2014, respectively, for performance awards that are expected to vest in the future.change.
Results of Operations
For the three months ended September 30,Three Months Ended March 31, 2015 and 2014 and 2013
Revenue
On January 20,Our revenues for the three-month period ended March 31, 2015, as compared to the corresponding period in 2014, we resumed marketingwere as follows:
Three Months Ended March 31, | Increase/ | |||||||||||
In thousands | 2015 | 2014 | (decrease) | |||||||||
Product revenue, net | $ | 23,901 | $ | 7,992 | $ | 15,909 | ||||||
License, collaboration and other revenue | 90 | 3,790 | (3,700 | ) | ||||||||
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Total revenue | $ | 23,991 | $ | 11,782 | $ | 12,209 | ||||||
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Product revenue is stated net of adjustments for trade allowances, rebates, chargebacks and commercial distribution ofdiscounts and other incentives, summarized as follows:
Three Months Ended March 31, | Increase/ | |||||||||||
In thousands | 2015 | 2014 | (decrease) | |||||||||
Trade allowances | $ | 255 | $ | 126 | $ | 129 | ||||||
Rebates, chargebacks and discounts | 2,097 | 685 | 1,412 | |||||||||
Other incentives | 218 | 389 | (171 | ) | ||||||||
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Total adjustments | $ | 2,570 | $ | 1,200 | $ | 1,370 | ||||||
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Gross product revenue | $ | 26,471 | $ | 9,192 | $ | 17,279 | ||||||
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Percentage of gross product revenue | 9.7 | % | 13.1 | % | ||||||||
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The increase in product revenue reflects increasing demand for Iclusig in the United States through an exclusive specialty pharmacy, Biologics, with a wholesale price of approximately $125,000 for
an annual supply of the approved dose of Iclusig. The price charged for an annual supply of Iclusig in Europe is approximately 75% of the current price charged in the United States, on a wholesale basis.and Europe. In the United States, we recognizenet product revenue onincreased from $4.7 million in the three-month period ended March 31, 2014 to $18.7 million in the corresponding period in 2015 due to an increase in units sold of 179% and the impact of a sell-through basis.9% price increase in February 2015. In Europe, we recognizenet product revenue upon shipmentincreased from $3.3 million in the three-month period ended March 31, 2014 to our customers, provided that all other revenue recognition criteria are met.$5.2 million in the corresponding period in 2015, due to expanded access in additional countries and the positive completion of a regulatory review of the safety of Iclusig in late 2014. Product revenue is reduced by certain gross to net deductions. Our revenues forFor the three-month period ended September 30, 2014,March 31, 2015, gross to net deductions, as a percentage of gross revenue, were approximately 9.7 percent as compared to 13.1 percent for the corresponding period in 2014. The decrease primarily related to product returns in the three-month period ended March 31, 2014 of $279,000 related to the product suspension in 2013, were as follows:
Three Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Product revenue, net | $ | 14,499 | $ | 16,658 | $ | (2,159 | ) | |||||
License revenue | 183 | 66 | 117 | |||||||||
Service revenue | — | 8 | (8 | ) | ||||||||
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$ | 14,682 | $ | 16,732 | $ | (2,050 | ) | ||||||
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Adjustments for trade allowances, rebates, chargebacks and discounts and other incentivesU.S. government payor adjustments recorded in that reduced gross product revenues are summarized as follows:quarter of $315,000.
Three Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Trade allowances | $ | 195 | $ | 409 | $ | (214 | ) | |||||
Rebates, chargebacks and discounts | 954 | 1,100 | (146 | ) | ||||||||
Other incentives | 221 | 29 | 192 | |||||||||
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Total adjustments | $ | 1,370 | $ | 1,538 | $ | (168 | ) | |||||
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Gross product revenue | $ | 15,869 | $ | 18,196 | $ | (2,327 | ) | |||||
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Percentage of gross product revenue | 8.6 | % | 8.4 | % | ||||||||
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The decrease in netWe expect that our product revenue reflects a decreasewill continue to increase in units shipped2015 compared to 2014 due primarily to increasing acceptance of and demand for Iclusig, as well as pricing adjustments, in the United States, due toand increasing sales of Iclusig in Europe as we obtain pricing and reimbursement approval in various countries in Europe during the decreased demand associated with the revised U.S. prescribing information for Iclusig. This decrease was offset in part by an 8% price increase in the United States in the first quarter of 2014 that accompaniedyear. With the re-launch of Iclusig in the United States in January 2014, we have re-established marketing and bydistribution activities that have driven increasing product revenue that we expect will continue in 2015 and beyond. In Europe, our growth in revenues is dependent on the successful completion of pricing and reimbursement negotiations in countries throughout Europe. We currently have pricing and reimbursement approval in eight countries in Europe and expect to receive approval and formally launch commercial distribution in an additional eight to twelve countries in Europe in 2015, which we expect will drive additional increases in Iclusig product revenue. In addition, we have obtained marketing approval for Iclusig in Europe following Europe commercial launchAustralia, Israel and Canada, and expect to file for approval in Japan in the second half of 2013.2015. In these and other territories, we plan to rely on partnerships and distribution arrangements to make Iclusig available in these markets to patients. Actual revenues will be subject to the outcome of pricing and reimbursement negotiations in Europe and the ultimate resolution of pricing negotiations and refunds in France.
We recognized $183,000 of licenseLicense revenue in the three months ended September 30, 2014, pursuant to license agreements related to ridaforolimus and our ARGENT technology, in accordance with our revenue recognition policy.
We expect product revenue will increase in the final fiscal quarter of 2014 compared todecreased for the three-month period ended September 30,March 31, 2015 compared to the corresponding period in 2014 as we continueby approximately $3.7 million. This was related to market and distribute Iclusig in the United States and Europe. We also expect$3.8 million of license revenue inreceived pursuant to our license agreement with Medinol for the final fiscal quarterdevelopment of 2014 will increase compared toridaforolimus eluting stents in the three-month period ended September 30, 2014 reflectingMarch 31, 2014.
We expect our license revenue will increase during the impactremainder of 2015 due primarily to initiating revenue recognition of the up-front payment of $77.5 million received from our collaboration agreement we entered into with Bellicum Pharmaceuticals, Inc.Otsuka effective in October 2014 to restructure the licenseDecember 2014. No revenue has been recognized on this agreement between the parties for our cell-signaling technology, as described in Note 20 to the accompanying financial statements.of March 31, 2015.
Operating Expenses
Cost of Product Revenue
Our cost of product revenue relates to sales of Iclusig in the United States and in Europe. Our cost of product revenue for the three-month period ended September 30, 2014,March 31, 2015 as compared to the corresponding period in 2013, consists of the following:2014, was as follows:
Three Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Inventory cost of Iclusig sold | $ | 130 | $ | 96 | $ | 34 | ||||||
Shipping and handling costs | 104 | 159 | (55 | ) | ||||||||
Provision for excess inventory | 360 | 160 | 200 | |||||||||
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$ | 594 | $ | 415 | $ | 179 | |||||||
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Inventory cost of Iclusig sold Shipping and handling costs Inventory reserves/write-downs Prior to receiving regulatory approval for Iclusig from the FDA in December 2012, we expensed, as research and development costs, all costs incurred in the manufacturing of Iclusig to be sold upon commercialization. In addition, in the fourth quarter of 2013, we wrote down significant amounts of inventory that we estimated to be excess inventory. For Iclusig sold in the three-month period ended September 30, 2014, a small percentage of manufacturing costs incurred had previously been expensed. Therefore, the cost of inventory sold included limited manufacturing costs and the cost of packaging and labeling for commercial sales. If product related costs had not previously been expensed as research and development prior to receiving FDA approval or written-off, the cost to produce the Iclusig sold would have been approximately $139,000 and $240,000 respectively, and total cost of product revenue would have been approximately $603,000 and $563,000 respectively, during the three-month periods ended September 30, 2014 and 2013. Three Months Ended
March 31, Increase/
(decrease) In thousands 2015 2014 $ 263 $ 76 $ 187 215 199 16 217 1,013 (796 ) $ 695 $ 1,288 $ (593 )
Cost of product revenue for the three-month periods ended September 30, 2014 and 2013 also includes a provision for excess inventory of $360,000 and $160,000 respectively. During the three-month period ended September 30, 2014, the provision was due to inventory produced during the quarter in accordance with minimum lot size requirements that was deemed to be excess upon receipt of the inventory and for units that are not expected to be sold.
Research and Development Expenses
Research and development expenses decreasedincreased by $17.5$10.9 million, or 39%38 percent, to $27.6$39.4 million infor the three-month period ended September 30, 2014,March 31, 2015, compared to $45.1$28.6 million infor the correspondingthree-month period in 2013,ended March 31, 2014, for the reasons set forth below.
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:
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 and manage clinical trials, to develop manufacturing processes and manufacture product candidates, to conduct laboratory studies and similar costs related to our clinical programs. These costs are accumulated and tracked by product or 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 programs as well as our preclinical studies and discovery research efforts. 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 the three-month period ended September 30, 2014,March 31, 2015 as compared to the corresponding period in 2013,2014, were as follows:
Three Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Direct external expenses: | ||||||||||||
Iclusig | $ | 5,144 | $ | 18,296 | $ | (13,152 | ) | |||||
AP26113 | 3,548 | 5,555 | (2,007 | ) | ||||||||
All other R&D expenses | 18,908 | 21,294 | (2,386 | ) | ||||||||
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$ | 27,600 | $ | 45,145 | $ | (17,545 | ) | ||||||
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In 2014 and 2013, our clinical programs consisted of (i) Iclusig, our pan BCR-ABL inhibitor, and (ii) AP26113, our ALK inhibitor.
Three Months Ended March 31, | Increase/ (decrease) | |||||||||||
In thousands | 2015 | 2014 | ||||||||||
Direct external expenses: | ||||||||||||
Iclusig | $ | 6,229 | $ | 6,524 | $ | (295 | ) | |||||
Brigatinib | 8,761 | 3,240 | 5,521 | |||||||||
All other R&D expenses | 24,454 | 18,790 | 5,664 | |||||||||
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$ | 39,444 | $ | 28,554 | $ | 10,890 | |||||||
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Direct external expenses for Iclusig were $5.1$6.2 million in the three-month period ended September 30, 2014,March 31, 2015, a decrease of $13.2 million$295,000, or four percent, as compared to the corresponding period in 2013.2014. The decrease is primarily due to decreasesa decrease in clinical trial costs of $5.2$2.8 million, offset in part by increases in contract manufacturing costs of $7.2$1.1 million and other costs of $800,000.$1.5 million. The decrease in clinical trial costs relates primarily to the discontinuation of the Phase 3 EPIC trial in October 2013, the impact of clinical holds placed on certain trials, including investigator sponsored trials, and decreasing activities in the Phase 2 PACE trial.trial and other trials. The decreaseincrease in manufacturing costs was duerelates to the completion of large scale process development activities for Iclusig at a contract manufacturer. The increase in other costs relates to the conduct of other studies to assess the safety profile and risk factors associated with cardio vascular occlusive events.
Direct external expenses for brigatinib were $8.8 million in the three-month period ended March 31, 2015, an increase of $5.5 million, or 170 percent, as compared to the corresponding period in 2014. The increase in expenses for brigatinib was due primarily to increases in clinical trial costs of $2.1 million, in contract manufacturing costs of $2.7 million and $709,000 in other supporting costs. The increase in clinical trial costs relates primarily to increasing enrollment in the ALTA pivotal Phase 2 trial for brigatinib. Contract manufacturing costs increased due to activities related to process development and qualification, as well as drug development and validation activities to support preparation of agency filings for this product candidate. Other costs decreasedincreased due to reduction in stability and other studiescosts related to usetoxicology studies in support of new manufacturers for Iclusig.the program.
We expect that our quarterly direct external R&D expenses for Iclusig will increase inover the final fiscal quarterremainder of 2014 as compared to the three-month period ended September 30, 20142015 as we continue to invest in Iclusig and our product candidates’ brigatinib and AP32788. We continue to treat moreand follow patients in our ongoingon-going clinical trials initiateof Iclusig and plan to commence additional clinical trials in 2015 designed to better understand the safety profile of Iclusig and to evaluate its use in earlier lines of therapy, as well as conduct additional studies to support continued development of Iclusig.
Direct external expenses for AP26113 were $3.5 million For brigatinib, we continue to treat and follow patients in the three-month period ended September 30, 2014, a decrease of $2.0 million as compared to the corresponding period in 2013. The decrease in expenses for AP26113 was due primarily to decreases of $256,000 in clinical trial costs, $1.2 million in contract manufacturing costs and $509,000 in other supporting costs. Clinical trial costs decreased due to completion or wind-down of severalour Phase 1/2 clinical trials, offset in part by an increase in costs related to on-going enrollment in the ALTA pivotal trial for AP26113, which we initiated in March 2014. Contract manufacturing costs decreased due to decreased process development and validation activities. We expect that our direct external expenses for AP26113 will increase in the final fiscal quarter of 2014 as compared to the three-month period ended September 30, 2014 as we continue to enroll patients in the ALTA pivotal trial, for AP26113 and plan to conduct additional studies to support continued development and potential regulatory approval of AP26113.brigatinib. For AP32788, which we recently nominated as our next development candidate, we plan to conduct various studies that are necessary to support the filing of an investigational new drug application with the FDA.
All other R&D expenses decreasedincreased by $2.5$5.7 million or 30 percent, in the three-month period ended September 30, 2014,March 31, 2015 as compared to the corresponding period in 2013.2014. This decreaseincrease was due to a decrease in personnel expenses of $2.5 million, primarily related to a decrease in salaries of $1.5 million, due to the reduction in workforce in the United States in November 2013, and a decrease in stock-based compensation expense of $801,000 due to the workforce reduction and lower values attributable to current stock-based compensation grants. These decreases were offset in part by an increase in professional fees of $364,000 due primarily to an increase in managed services for systemspersonnel costs of $2.8 million as well as increases in professional and technology support.general expenses of $2.4 million. Personnel costs increased due to an increase in number of employees to support the development activities of our product and product candidates. Professional and general costs increased due to increasing activities to support regulatory filings in multiple jurisdictions and related increase in travel. We expect that all other R&D expenses will remain consistentincrease over the remainder of 2015 due to increased expenses in the final fiscal quartersupport of 2014 as compared to the three-month period ended September 30, 2014.additional clinical trials and increased other pre-clinical activities.
The successful development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our products or 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 expect that the negative developments related to Iclusig in 2013 will adversely impact our efforts to further develop and commercialize Iclusig in CML and Ph+ ALL patients. Our ability to obtain sources of product revenue from the successful development of our product candidates will depend on, among other things, our efforts to develop Iclusig in other patient populations and cancers, as well as the success of AP26113brigatinib, AP32788 and any other product candidates.candidates, if any. Other risks associated with our products and product candidates are described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013,2014, as updated in our subsequent periodic and current reports filed with the SEC.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreasedincreased by $3.8$2.0 million, or 10%6 percent, to $33.6 million in the three-month period ended September 30, 2014,March 31, 2015, compared to $37.4$31.6 million in the corresponding period in 2013. Personnel expenses decreased2014. Expenses for outside professional services increased by $1.5$1.1 million in the three-month period ending September 30, 2014ended March 31, 2015 as compared to the corresponding period in 2013,2014 primarily due to the impact of the reduction in our workforce in the United States announced in the fourth quarter of 2013, offset in part by an increase in personnel expenses in Europe as we added personnel in connection with the launch of Iclusig in various European countries starting in the second half of 2013. Expenses for professional services decreased by $2.4 million in the three-month period ended September 30, 2014 compared to the corresponding period in 2013 reflecting a reduction in sales and marketing initiatives and other consulting services of $3.6 million, that supported initial commercial launch of Iclusig in the United States in the first three quarters of 2013 offset in part by an increase in legal expenses related toand other consulting services associated with ongoing litigation matters and annual proxy and corporate compliance matters. The decreases were offset in part by increases inGeneral and other expenses ofincreased $1.1 million dueas a result of activities required to increased medical affairs initiativestrack and monitor safety events related to Iclusig. We expect that our selling, general and administrative expenses will increase inremain at approximately the final fiscal quartersame level on a quarterly basis over the remainder of 2014 as we continue to invest in the re-launch of Iclusig in the United States and the commercialization of Iclusig in Europe.2015.
We expect that our operating expenses in total will increase over the remainder of 2015 as described in the final fiscal quarter of 2014 for the reasons describedsections above. The actual amount of any increase in operating expenses will depend on, among other things, costs related to commercialization of Iclusig in the United States and Europe, the progress of our product development programs including on-goingthe initiation of and newincreases in enrollment in our clinical trials results of continuing non-clinicalIclusig and brigatinib, the status of pre-clinical studies of AP32788, costs related to regulatory requirements and the costs offilings for Iclusig and our other product candidates, and process developmentrelated supporting activities and product manufacturing.costs.
Other Income (Expense)
Interest Income/Expense
Interest income decreased to $19,000 in the three-month period ended September 30, 2014March 31, 2015 from $40,000$22,000 in the corresponding period in 2013,2014, as a result of a lower average balance ofdecreases in yields for invested funds during 2014.cash balances.
Interest expense increased to $3.7$3.9 million in the three-month period ended September 30, 2014March 31, 2015 from $37,000$33,000 in the corresponding period in 20132014 as a result of interest expense related to ourthe issuance of $200 million in convertible note issuance completednotes in June 2014, offsetincluding coupon interest of $1.8 million and amortization of debt discount of $2.0 million in part by the payoff of our bank term loan in June 2014.2015.
Foreign Exchange Gain (Loss)
We recognized net foreign exchange transaction gains of $881,000 in$1.1 million for the three-month period ended September 30, 20142015 compared to net foreign exchange losses of $9,000$41,000 in the corresponding period in 2013.2014. The gains and losses are a result of the impact of fluctuationsour operations in exchange rate onEurope as we carry accounts denominated in foreign currencies.currencies and are caused by changes in exchange rates during these periods.
Provision for Income Taxes
Our provision for income taxes for the three-month period ended September 30, 20142015 was $154,000$214,000, compared to $110,000$119,000 in the corresponding period in 2013,2014 and reflects estimated expenses for state taxes forand taxes associated with certain foreign subsidiaries.
Operating Results
We reported a loss from operations of $47.1$49.7 million infor the three-month period ended September 30, 2014March 31, 2015 compared to a loss from operations of $66.2$49.7 million infor the correspondingthree-month period in 2013, a decrease of $19.1 million, or 29 percent.ended March 31, 2014. We also reported a net loss of $50.1$52.7 million infor the three-month period ended September 30, 2014,March 31, 2015, compared to a net loss of $66.3$49.8 million infor the correspondingthree-month period in 2013, a decreaseended March 31, 2014 , an increase in net loss of $16.2$2.9 million or 246 percent, and a net loss per share of $0.27$(0.28) and $0.36,$(0.27), respectively. The decreaseincrease in net loss for 2015 is largely due to the decreasean increase in our operating expenses of $12.8 million consisting primarily of an increase of approximately $10.9 million in research and development expenses, and an increase of $3.8 million in interest expense, offset in part by an increase in revenue of $12.2 million, all as described above. We expect that ourOur results of operations for the final fiscal quarterremaining quarters of 20142015 will vary from those of the quarter ended September 30, 2014March 31, 2015 and actual results will depend on a number of factors, including the success of our commercialization efforts forability to successfully grow Iclusig product revenue in the United States, Europe and Europe,other territories, the final outcomestatus of the EMA’s review of Iclusig,pricing and reimbursement approvals in Europe, the progress of our product development programs, increases or decreases in number of employeesongoing employee and related personnel costs, increases in costs associated with commercial launch of Iclusig, the progress of our discovery research programs, our ability to secure a partnership to co-develop and co-commercialize brigatinib and the impact of any commercial and business development activities, and other factors.
For the nine months ended September 30, 2014 and 2013
Revenue
Our revenues for the nine-month period ended September 30, 2014, as compared to the corresponding period in 2013, were as follows:
Nine Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Product revenue, net | $ | 34,371 | $ | 36,956 | $ | (2,585 | ) | |||||
License revenue | 4,203 | 228 | 3,975 | |||||||||
Service revenue | 3 | 24 | (21 | ) | ||||||||
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$ | 38,577 | $ | 37,208 | $ | 1,369 | |||||||
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Adjustments for trade allowances, rebates, chargebacks and discounts and other incentives that reduced gross product revenues are summarized as follows:
Nine Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Trade allowances | $ | 497 | $ | 1,026 | $ | (529 | ) | |||||
Rebates, chargebacks and discounts | 2,267 | 2,198 | 69 | |||||||||
Other incentives | 744 | 96 | 648 | |||||||||
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Total adjustments | $ | 3,508 | $ | 3,320 | $ | 188 | ||||||
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Gross product revenue | $ | 37,879 | $ | 40,276 | $ | (2,397 | ) | |||||
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Percentage of gross product revenue | 9.3 | % | 8.2 | % | ||||||||
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The decrease in net product revenue reflects a decrease in gross revenue resulting from a decrease in units shipped in the United States due to the decreased demand associated with the revised U.S. prescribing information for Iclusig. This decrease was offset in part by an 8% price increase in the United States in the first quarter of 2014 that accompanied the re-launch of Iclusig in the United States and by revenues of Iclusig in Europe following Europe commercial launch in the second half of 2013.
We recognized $4.2 million of license revenue in the nine months ended September 30, 2014, pursuant to license agreements related to ridaforolimus and our ARGENT technology, in accordance with our revenue recognition policy. On January 14, 2014, we jointly announced with Medinol the initiation of two registration trials of Medinol’s stent system that incorporates ridaforolimus. Under the terms of our agreement with Medinol, the commencement of enrollment in Medinol’s clinical trials, along with Medinol’s submission of an investigational device exemption, or IDE, with the FDA, trigged milestone payments to us of $3.8 million that were recorded as license revenue in the first quarter of 2014.
Operating Expenses
Cost of Product Revenue
Our cost of product revenue for the nine-month period ended September 30, 2014, as compared to the corresponding period in 2013, includes the following:
Nine Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Inventory cost of Iclusig sold | $ | 292 | $ | 137 | $ | 155 | ||||||
Shipping and handling costs | 445 | 374 | 71 | |||||||||
Provision for excess inventory | 3,540 | 402 | 3,138 | |||||||||
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$ | 4,277 | $ | 913 | $ | 3,364 | |||||||
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For Iclusig sold in the nine-month periods ended September 30, 2014 and 2013, the majority of manufacturing costs incurred had previously been expensed. Therefore, the cost of inventory sold included limited manufacturing costs and the cost of packaging and labeling for commercial sales. If product related costs had not previously been expensed as research and development prior to receiving FDA approval or written-off, the cost to produce the Iclusig sold would have been approximately $769,000 and $510,000 respectively, and total cost of product revenue would have been approximately $4.8 million and $1.3 million, respectively, during the nine-month periods ended September 30, 2014 and 2013.
Cost of product revenue for the nine-month periods ended September 30, 2014 and 2013 also included a provision for excess inventory of $3.5 million and $402,000, respectively. During the nine-month period ended September 30, 2014, the provision was due to inventory produced during the period in accordance with minimum lot size requirements that was deemed to be excess upon receipt of the inventory and for units that are not expected to be sold.
Research and Development Expenses
Research and development expenses decreased by $39.1 million, or 31 percent, to $87.9 million in the nine-month period ended September 30, 2014, compared to $127.1 million in the corresponding period in 2013, as follows:
Nine Months Ended September 30, | Increase/ | |||||||||||
In thousands | 2014 | 2013 | (decrease) | |||||||||
Direct external expenses: | ||||||||||||
Iclusig | $ | 18,930 | $ | 49,419 | $ | (30,489 | ) | |||||
AP26113 | 12,125 | 11,086 | 1,039 | |||||||||
All other R&D expenses | 56,893 | 66,571 | (9,678 | ) | ||||||||
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$ | 87,948 | $ | 127,076 | $ | (39,128 | ) | ||||||
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Direct external expenses for Iclusig were $18.9 million in the nine-month period ended September 30, 2014, a decrease of $30.5 million as compared to the corresponding period in 2013. The decrease is due to a decrease in clinical trial costs of $28.1 million and other costs of $2.4 million. The decreases in clinical trial costs relates primarily to the discontinuation of the Phase 3 EPIC trial and a pediatric trial in October 2013, the impact of clinical holds placedcosts and potential sub-leasing activity for our building currently under construction in Cambridge, Massachusetts and other factors. The extent of changes in our results of operations will also depend on certain trials including investigator sponsored trialsthe sufficiency of funds on hand or available from time to time, which will influence the amount we will spend on operations and decreasing activities incapital expenditures and the Phase 2 PACE trial. Other costs decreaseddevelopment timelines for our product candidates.
Liquidity and Capital Resources
At March 31, 2015, we had cash and cash equivalents totaling $304.0 million and working capital of $255.1 million, compared to cash and cash equivalents totaling $353.7 million and working capital of $296.6 million at December 31, 2014. These decreases are due to reductionsour results of operations for the quarter ended March 31, 2015 as described above. Of the $304.0 million of cash and cash equivalents at March 31, 2015, $10.4 million was in or refunds of certain regulatory fees and completion of certain toxicology studies.
Direct external expenses for AP26113 were $12.1 million inaccounts held by our international subsidiaries. For the nine-monththree-month period ended September 30, 2014, an increase of $1.0 million as compared to the corresponding period in 2013. The increase in expenses for AP26113 was due primarily to an increase of $3.9 million in clinical trial costs offset in part by a decrease in contract manufacturing costs of $2.3 million. Clinical trial costs increased primarily due to activities and costs related to initiation of enrollment in the ALTA pivotal Phase 2 trial for AP26113. The decrease in contract manufacturing costs of $2.3 million was primarily due to decreased activities in process and formulation development of AP26113 as compared to 2013.
All other R&D expenses decreased by $9.7 million in the nine-month period ended September 30, 2014, as compared to the corresponding period in 2013. This decrease was due to a decrease in personnel costs of $8.6 million as well as decreases in general expenses of $1.2 million and lab expenses of $868,000 due to the reduction in workforce in the United States in November 2013. These decreases were offset in part by an increase in overhead expenses of $1.3 million due primarily to increased facility and related expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $9.6 million, or 9 percent, to $99.4 million in the nine-month period ended September 30, 2014, compared to $109.0 million in the corresponding period in 2013. Personnel expenses decreased by $4.0 million in the nine-month period ended September 30, 2014 as compared to the corresponding period in 2013, primarily due to the impact of the reduction of our workforce in the United States announced in the fourth quarter of 2013, offset in part by an increase in personnel expenses in Europe asMarch 31, 2015, we added personnel in connection with the launch of Iclusig in various European countries starting in the second half of 2013. Expenses for outside professional services decreased by $7.4 million in the nine-month period ended September 30, 2014 compared to the corresponding period in 2013 reflecting a reduction in sales and marketing initiatives and other consulting services that supported initial commercial launch of Iclusig in the United States in the first nine months of 2013, offset in part by an increase in legal expenses related to litigation matters. Overhead expenses increased by $1.7 million in the nine-month period ended September 30, 2014 as compared to the corresponding period in 2013, primarily due to increases in facility-related costs in Europe.
Other Income (Expense)
Interest Income/Expense
Interest income decreased to $63,000 in the nine-month period ended September 30, 2014 from $120,000 in the corresponding period in 2013, as a result of a lower average balance of funds invested.
Interest expense increased to $4.3 million in the nine-month period ended September 30, 2014 from $118,000 in the corresponding period in 2013 as a result of interest expense related to our $200 million convertible note issuance completed in June 2014 offset in part by the payoff of our bank term loan in June 2014.
Foreign Exchange Gain (Loss)
We recognized net foreign exchange transaction gains of $836,000 in the nine-month period ended September 30, 2014 compared to gains of $16,000 in the corresponding period in 2013. The gains are a result of the impact of fluctuations in exchange rates on accounts denominated in foreign currencies.
Provision for Income Taxes
Our provision for income taxes for the nine-month period ended September 30, 2014 was $379,000 compared to $255,000 in the corresponding period in 2013, and reflects estimated taxes for certain foreign subsidiaries.
Operating Results
We reported a loss from operations of $153.1 million in the nine-month period ended September 30, 2014 compared to a loss from operations of $199.8 million in the corresponding period in 2013, a decrease of $46.7 million, or 23 percent. We also reported a net loss of $156.9$52.7 million and cash used in operating activities of $50.2 million. We expect to continue to incur losses on a quarterly basis until we can substantially increase revenues as a result of increased sales of Iclusig and potential future regulatory approvals of our product candidates, the nine-month period ended September 30, 2014, comparedtiming of which are uncertain. However, pursuant to a net lossour current operating plan, we are focused on investments in commercialization, research and development, and new business development initiatives that we expect will lead to sustained profitability in 2018.
Our balance sheet at March 31, 2015 includes property and equipment of $200.0$224.4 million, in the corresponding period in 2013, a decrease in net losswhich represents an increase of $43.1$21.4 million or 22 percent, and a net loss per share of $0.84 and $1.09, respectively.from December 31, 2014. The decrease in net lossincrease is largelyprimarily due to the decreaseaccounting, as described earlier, for our lease of new laboratory and office space in our operating expensestwo adjacent, connected buildings currently under construction in Cambridge, Massachusetts. Construction of the core and shell of the buildings was completed in March 2015 at which time we commenced making lease payments. Construction of tenant improvements is expected to be completed in the first half of 2016, at which time we expect to occupy the buildings. Under the relevant accounting guidance, we are the deemed owner for the project during the construction periods and accordingly, we record the project construction costs as well as increases in license revenues described above.an asset $217.8 million and a corresponding facility lease obligation of $217.4 million at March 31, 2015. As construction continues on the facility, the asset and corresponding facility lease obligation will continue to increase.
Liquidity and Capital ResourcesSources of Funds
We have financed our operations and investments to date primarily through sales of our common stock and notes convertible into common stocknotes in public and private offerings, through the receipt of up-frontupfront 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 equity incentive 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.
With the sales of Iclusig in the United States from January through October 2013 and commencing again in January 2014 as well as sales in Europe since the second half of 2013, we have generated product revenues that have contributed to our cash flows. However, our cash flows generated from sales of Iclusig are not currently sufficient to fund operations and we will need to seek additionalrely on funding from other sources to fund our operations.
We intend to rely on our existing cash and cash equivalents, cash flows from sales of Iclusig and funding from new collaborative agreements or strategic alliances, as our primary sources of liquidity. In the near-term, we expect cash flows from sales of Iclusig to increase as we continue to increase the number of patients that are treated with Iclusig and launch the product in new markets. In addition, we are currently pursuing a partnership arrangement to co-develop and co-commercialize brigatinib. We expect that such an agreement will further improve our liquidity, allow us to continue to leverage our existing infrastructure and capabilities, and support key development activities. We believe that these and similar non-dilutive funding transactions will provide necessary resources until such time that we generate revenues from sales of Iclusig and our product candidates sufficient to fund operations.
Uses of Funds
The primary uses of our cash are to fund our operations and working capital. Our balance sheet at September 30,uses of cash during the three-month periods ended March 31, 2015 and 2014 includes propertywere as follows:
Three Months Ended March 31, | ||||||||
In thousands | 2015 | 2014 | ||||||
Net cash used in operating activities | $ | 50,194 | $ | 52,409 | ||||
Investment in property and equipment | 754 | 1,706 | ||||||
Re-payment of long-term borrowings | — | 1,050 | ||||||
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$ | 50,948 | $ | 55,165 | |||||
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The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses, deferred revenue and equipment,working capital requirements. As noted previously, our net of $178.6loss in the three-month period ended March 31, 2015 increased by $2.9 million which represents an increase of $69.8 million from December 31, 2013. The increase is primarily dueas compared to the accounting, as described below,corresponding period in 2014. However, our net cash used in operating activities for the three-month period ended March 31, 2015 decreased by $2.2 million compared to the corresponding period in 2014 due primarily to changes in working capital requirements.
We currently occupy facilities in Cambridge, Massachusetts and Switzerland from which we conduct and manage our lease of new laboratory and officebusiness. We also plan to occupy space in Cambridge, Massachusetts. In connection withMassachusetts currently under construction. We had planned to move into the new buildings in early 2015. However, in light of our announcements in the fourth quarter of 2013 concerning Iclusig, we re-assessed our current and future need for space in Cambridge and expect to require less space than previously planned. We could not terminate the new lease without substantial cost, and we would have been required to make substantial expenditures to make necessary improvements to our existing facilities. We are, therefore, planning to sub-lease approximately 170,000 square feet of the 386,000 square feet of the space comprising the new buildings. If we are not successful in subleasing this space, our cost of the space we occupy will increase. The landlord is providingcompleted construction of the core and shell of the buildings in March 2015 at which time lease payments commenced. Tenant improvements and the fit-out of the facility have started and are expected to be completed in the second quarter of 2016. The landlord has provided a tenant improvement allowance for the costs associated with the design, engineering and construction of tenant improvements.such costs. To the extent that the relatedsuch costs exceed the allowance, we will be responsible to fundfor funding such excess.
Liquidity
We do not anticipate any significant funding requirements in 2014. Any future funding requirements will be dependent on design, engineeringincur substantial operating expenses to conduct research and construction work, which will develop over time. As construction continues on the facility, the assetdevelopment and corresponding facility lease obligation will continue to increase. Givencommercialization activities and operate our involvement in the design of tenant improvements for the leased facility, the lease establishes dates by which we are required to submit plans and drawings for tenant improvements consistent with the timeline for completion of the construction, including tenant improvements, and readiness of the facility for occupancy. In connection with the partial clinical hold of Iclusig imposed by the FDA and the temporary suspension of marketing and commercial distribution of Iclusig in the United States in October 2013, plans and drawings for the tenant improvements for this facility have not been approved by us and have not, at this time, been completed and submitted in accordance with the timelines specified in the lease. The delay of the submission of plans and drawings in accordance with the timelines specified in the lease will result in a delay in the completion of tenant improvements. Under the terms of the lease, if a delay in the completion of the tenant improvements results in a delay in the occupancy date for the facility, we will be required to commence rent payments for the facility prior to occupancy. We are currently in discussions with the landlord regarding revisions to our plans, the timelines related to submission of such plans and the completion of the tenant improvements and other matters in the lease.business. In addition, we havemust pay interest on the right to sublease portions of the space and are currently planning to sublease approximately 170,000 square feet of the total 386,000 square feet available.
Sources of Funds
For the nine months ended September 30, 2014 and 2013, our sources of funds were as follows:
Nine Months Ended September 30, | ||||||||
In thousands | 2014 | 2013 | ||||||
Issuance of convertible debt and related transactions, net | $ | 177,281 | $ | — | ||||
Sales/issuances of common stock: | ||||||||
In common stock offerings | — | 310,037 | ||||||
Pursuant to stock option and purchase plans | 3,059 | 5,632 | ||||||
Proceeds under lease financing obligations | — | 1,294 | ||||||
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$ | 180,340 | $ | 316,963 | |||||
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The amount of funding we raise through sales of our common stock or other securities depends on many factors, including, but not limited to, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.
In June 2014, we sold $200 million aggregate principal amount of convertible notes we issued in June 2014 and will be required to investors through JPMorgan Securities, LLC and other initial purchasers in a private placement to qualified institutional buyers pursuant to Rule 144A underrepay the Securities Act of 1933, as amended. Net proceeds of this offering were approximately $177.3 million after deducting fees and expenses of approximately $7.1 million and the cost of convertible bond hedges of $15.6 million (after such cost was partially offset by the proceeds to us from the sale of warrants). Detailsprincipal amount of the convertible notes in June 2019, or earlier in specified circumstances, if the bond hedges and the warrantsnotes are included in Note 7, “Long term debt”, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
On January 29, 2013, we sold 16,489,893not converted into shares of our common stock in an underwritten public offering atstock. We also have a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discountssubstantial facility lease obligation, as noted above. We expect that cash flows from Iclusig together with our current cash and commissionscash equivalents and expenses, were approximately $310.0 million.funding we expect to receive from new collaborative agreements or strategic alliances will be sufficient to fund our operations for the foreseeable future.
We have filed shelf registration statements with the U.S. Securities and Exchange Commission, or SEC, from time to time, to register sharesThe adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenue generated by Iclusig, our ability to enter into a partnership to co-develop and co-commercialize brigatinib and the amount of funding generated from such partnership, the potential introduction of one or more of our other drug candidates to the market, and the number, breadth, cost and prospects of our research and development programs.
To the extent that product revenues or non-dilutive funding transactions are not sufficient to fund our operations, we may seek to fund our operations by issuing common stock, anddebt or other securities for sale, giving usin one or more public or private offerings, as market conditions permit, or through the opportunity to raise funding when neededincurrence of additional debt from commercial lenders or otherwise considered appropriate.other financing transactions. 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,filing, giving us the opportunity to raise funding when needed or otherwise considered appropriate. To the extent that we filed such a shelf registration statement withraise additional capital through the SEC for the issuancesale of an unspecified amount of common stock, preferred stock, various series ofequity or convertible debt securities, and/the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or warrantsother 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 purchase anytake specific actions, such as incurring debt, making capital expenditures or declaring dividends. In addition, we may raise additional capital through securing new collaborative agreements or other methods of such securities, either individually or in units, from timefinancing. We will continue to time at pricesmanage our capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile.
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 determined at the timerequired to: (1) delay, limit, reduce or terminate our commercialization of any such offering. This registration statement was effective upon filing and will remain in effectIclusig; (2) delay, limit, reduce or terminate preclinical studies, clinical trials or other clinical development activities for up to three years from filing.
Uses of Funds
The primary usesone or more of our cash areapproved products or product candidates; (3) delay, limit, reduce or terminate our discovery research or preclinical development activities; or (4) enter into licenses or other arrangements with third parties on terms that may be unfavorable to fundus or sell, license or relinquish rights to develop or commercialize our operations and working capital requirements and, to a lesser degree, to repay our long-term debt and to invest in our property and equipment as needed for our business. For the nine-month periods ended September 30, 2014 and 2013, our uses of cash were as follows:
Nine Months Ended September 30, | ||||||||
In thousands | 2014 | 2013 | ||||||
Net cash used in operating activities | $ | 131,930 | $ | 170,313 | ||||
Repayment of long-term borrowings and capital leases | 9,100 | 1,590 | ||||||
Increase in restricted cash | — | 6,133 | ||||||
Investment in property and equipment | 2,475 | 5,624 | ||||||
Payment of tax withholding obligations related to stock compensation | 716 | 3,216 | ||||||
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$ | 144,221 | $ | 186,876 | |||||
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The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses and working capital requirements. As noted above, our net loss for the nine-month period ended September 30, 2014 decreased by $43.1 million, as compared to the corresponding period in 2013, due primarily to the overall decrease in operating expenses of $45.3 million. Our net cash used in operating activities decreased by $38.4 million in the nine-month period ended September 30, 2014 as compared to the corresponding period in 2013, primarily reflecting the decrease in net loss offset in part by a decrease in working capital requirements.product candidates, approved products, technologies or intellectual property.
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 September 30, 2014,March 31, 2015, we maintained outstanding letters of credit of $11.3 million in accordance with the terms of our existing leases for our office and laboratory facilities,space, our new lease for office and laboratory space under construction, and for other purposes.
Contractual Obligations
We have substantial fixed contractual obligations under the $200 million aggregate principal amount of convertible notes issued in June 2014,our long-term debt agreement, lease agreements, employment agreements, purchase commitments and benefit plans. These non-cancellable contractual obligations were comprised of the following as of September 30, 2014:March 31, 2015:
Payments Due By Period | Payments Due By Periods | |||||||||||||||||||||||||||||||||||||||
In thousands | Total | In 2014 | 2015 through 2017 | 2018 through 2019 | After 2019 | Total | In 2015 | 2016 through 2018 | 2019 through 2020 | After 2020 | ||||||||||||||||||||||||||||||
Long term debt | $ | 236,512 | $ | 3,887 | $ | 21,750 | $ | 210,875 | $ | — | ||||||||||||||||||||||||||||||
Long-term debt | $ | 240,479 | $ | 7,552 | $ | 22,052 | $ | 210,875 | $ | — | ||||||||||||||||||||||||||||||
Lease agreements | 490,347 | 2,302 | 63,273 | 73,183 | 351,589 | 485,573 | 11,085 | 87,364 | 68,150 | 318,974 | ||||||||||||||||||||||||||||||
Employment agreements | 17,467 | 1,999 | 15,468 | — | — | 15,315 | 6,209 | 9,106 | — | — | ||||||||||||||||||||||||||||||
Purchase commitments | 37,443 | 2,714 | 22,081 | 3,750 | 8,898 | 39,932 | 2,221 | 22,361 | 5,877 | 9,473 | ||||||||||||||||||||||||||||||
Other long-term obligations | 3,053 | — | 2,718 | 185 | 150 | 6,133 | 55 | 5,843 | 135 | 100 | ||||||||||||||||||||||||||||||
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Total fixed contractual obligations | $ | 784,822 | $ | 10,902 | $ | 125,290 | $ | 287,993 | $ | 360,637 | $ | 787,432 | $ | 27,122 | $ | 146,726 | $ | 285,037 | $ | 328,547 | ||||||||||||||||||||
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Long-term debt reflects the payment at maturity of our $200 million of convertible notes issued in June 20142015 and due on June 15, 2019.2020. Interest on this debt accrues at a rate of 3.625%3.625 percent of the principal, or $7.25 million, annually and is payable in arrears in December and June of each year. We may not redeem the convertible notes prior to the maturity date and no “sinking fund” is provided for the convertible notes, which means that we are not required to periodically redeem or retire the convertible notes. Upon the occurrence of certain fundamental changes involving our company, holders of the convertible notes may require us to repurchase for cash all or part of their convertible notes at a repurchase price equal to 100%100 percent of the principal amount of the convertible notes to be repurchased, plus accrued and unpaid interest.
Leases consist of payments to be made on our building leases in Cambridge, Massachusetts and Lausanne, Switzerland, including future lease commitments related to leases executed for office and laboratory space in two buildings currently under construction in Cambridge.Cambridge and office space in a building in Lausanne that completed construction in early 2014. The minimum non-cancelable payments for the facility being constructed in Cambridge are included in the table above and include amounts related to the original lease and the lease amendment. We are the deemed owner for accounting purposes and have recognized a financing obligation associated with the cost of the buildings incurred to date for the buildings under construction in Cambridge, Massachusetts. In addition to minimum lease payments, the leases require us to pay additional amounts for our share of taxes, insurance, maintenance and operating expenses, which are not included in the above table. Employment agreements represent base salary payments under agreements with officers. Purchase commitments represent non-cancelable contractual commitments associated with certain clinical trial activities. Other long-term obligations are comprised primarily of our liability for unrecognized tax positions, which is classified in 2016, and our annual license commitments.
Liquidity
At September 30, 2014, we had cash and cash equivalents totaling $273.5 million and working capital of $216.5 million, comparedexpected to cash and cash equivalents totaling $237.2 million and working capital of $172.8 million at December 31, 2013. Of the $273.5 million of cash and cash equivalents at September 30, 2014, $15.5 million was in accounts heldbe determined by our international subsidiaries. For the nine-month period ended September 30, 2014, we reported a net loss of $156.9 million and cash used in operating activities of $131.9 million. Based on our current operating plan, we believe that our cash and cash equivalents at September 30, 2014, together with anticipated sales of Iclusig, will be sufficient to fund our operations into the second half of 2016. This operating plan does not assume any further capital-raising activities or commercial transactions such as partnerships or distributorships.
There is no assurance that we will be successful in commercializing Iclusig in the United States, in Europe or in other territories where we await regulatory approval or have yet to file for regulatory approval. We expect that the developments announced in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States (and the EMA’s review of Iclusig) will continue to adversely impact our efforts to commercialize Iclusig in CML and Ph+ ALL patients, and our ability to obtain product revenue will depend on our ability to continue to commercialize Iclusig in the United States, Europe and other territories, the success of our efforts to develop Iclusig in other patient populations and cancers, as well as the success of AP26113 and any other product candidates. If we are not successful in generating sufficient levels of sales from Iclusig and/or obtaining additional regulatory approvals, we will need to raise additional funding and/or 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. Although our R&D expenses have decreased in 2014 when compared to 2013, such decreases were due primarily to the impact of developments announced in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig on the timing of initiation and enrollment of patients in new and ongoing clinical trials of Iclusig and related costs. We expect that the lifting of the partial clinical holds previously placed on our clinical trials as well as the initiation of new studies will cause our R&D expenses for Iclusig to increase. For AP26113, we initiated enrollment in the ALTA pivotal trial of AP26113 in ALK-positive NSCLC patients in the first quarter of 2014. We also plan to continue to invest in discovery research and add to our pipeline of product candidates through these activities. We expect that our total research and development expenses will increase during the final fiscal quarter of 2014, compared to the quarter ended September 30, 2014, and into 2015 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 and AP26113. We also expect that our selling, general and administrative expenses will increase during the final fiscal quarter of 2014, compared to the quarter ended September 30, 2014, and into 2015, as a result of the increased expenses related to supporting the marketing and distribution of Iclusig in the United States and Europe. There are many factors that will affect our level of spending on these activities, including our ability to successfully commercialize Iclusig in the United States and Europe, the number, size and complexity of, and rate of enrollment of patients in our continued or future 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 additional regulatory approvals and commercial launch of Iclusig in additional countries 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.
In October 2014, we entered into an agreement with Bellicum Pharmacetuicals, Inc., or Bellicum, to restructure and amend an existing license agreement between the companies for our cell-signaling technology as described in Note 20 to the accompanying financial statements. Under the terms of the agreement, we received a $15 million payment upon execution of the agreement and Bellicum agreed to pay us an additional $20 million by June 30, 2015 and $15 million by June 30, 2016 in exchange for granting Bellicum a fully paid-up license to this technology, return of shares of Bellicum common stock we own upon receipt of the second payment, and other consideration. Receipt of these payments will depend on Bellicum’s ability to raise additional funding and there can be no assurance that such payments will be made.
Under our license agreements with Medinol and ICON, we are eligible to receive milestone payments based on achievement of specified development, regulatory and/or sales objectives as well as royalty payments upon commercialization of products. The commencement of patient enrollment in Medinol’s clinical trials, along with Medinol’s submission of an investigational device exemption, or IDE, with the FDA, triggered milestone payments to us of $3.8 million in the first quarter of 2014. There can be no assurance that future regulatory approvals will be obtained or that we will receive any additional milestone or other payments under these license agreements.
Until such time, if ever, that we generate revenues from sales of Iclusig and our product candidates 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 or through the incurrence of additional debt from commercial lenders or other financing transactions. 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 or any pre-commercialization or commercialization 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.
Securities Litigation Reform Act
Safe harbor statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements in connection with any discussion of future operating or financial performance are identified by the 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 meet anticipated clinical trial commencement, enrollment and completion dates for our products and product candidates and to move new development candidates into the clinic; our ability to secure a partnership for brigatinib (AP26113); difficulties or delays in obtaining regulatory and pricing and reimbursement approvals to market our products; our ability to successfully commercialize and generate profits from sales of Iclusig; competition from alternative therapies, and acceptance of Iclusig by patients, physicians and third-party payors, particularly in light of changes to the product label; our ability to obtain approval for Iclusig outside of the United States and in additional countries in Europe and in additional indications; difficulties in forecasting sales or recognizing revenues for Iclusig; our reliance on the performance of third-party manufacturers including sole-source suppliers, and/orand specialty pharmacies and/or specialty distributors for the distribution of Iclusig ;Iclusig; the impactoccurrence of adverse safety events or additional safety data, such aswith our announcements in October 2013 concerning a partial clinical hold of trials of Iclusig, safety warnings from the FDA, discontinuation of the EPIC trialproducts and the temporary suspension of marketing and commercial distribution of Iclusig in the United States; the results of the EMA’s review of the benefits and risks of Iclusig;product candidates; preclinical data and early-stage clinical data that may not be replicated in later-stage clinical studies or the receipt of additional adverse data as more patients are treated;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 or maintaining regulatory approvals to market products; the timing of development and potential market opportunity for our products and 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 dilutive effective of conversions of some or all of our convertible notes due 2019, our ability to repay or refinance the notes, if not previously converted, and other impacts on our business, results of operations, financial condition or stock price as a result of this indebtedness and the related convertible note hedging and warrant transactions; 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; litigation, including our pending securities class action and derivative lawsuits; 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 detailed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013,2014, and any updates to those risk factors contained in our subsequent periodic and current reports filed with the U.S. Securities and Exchange Commission. The information contained in this document is believed to be current as of the date of original issue. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.
ITEM 3. | 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.
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. At September 30, 2014,March 31, 2015 our available funds are invested solely in cash and cash equivalents and we do not have significant market risk related to interest rate movements.
As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro, Swiss Franc and British Pound against the U.S. dollar. The current exposures arise primarily from cash, accounts receivable, intercompany receivables, payables and inventories. Both positive and negative affects to our net revenues from international product sales from movements in foreign currency exchange rates are partially mitigated by the natural, opposite affect that foreign currency exchange rates have on our international operating costs and expenses.
In June 2014, we issued $200 million of convertible notes due June 15, 2019. The convertible notes have a fixed annual interest rate of 3.625%3.625 percent and we, therefore, do not have economic interest rate exposure on the convertible notes. However, the fair value of the convertible notes is exposed to interest rate risk. We do not carry the convertible notes at fair value on our balance sheet but present the fair value of the principal amount for disclosure purposes. Generally, the fair value of the convertible notes will increase as interest rates fall and decrease as interest rates rise. These convertible notes are also affected by the price and volatility of our common stock and will generally increase or decrease as the market price of our common stock changes. The estimated fair value of the $200 million face value convertible notes was $184.5$230 million at September 30, 2014.March 31, 2015.
ITEM 4. | 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 Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective 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 Quarterly Report on Form 10-Q was being prepared.
In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(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.
PART II. | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS |
There have been no material developments in the legal proceedings disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013,2014, except as updated in our Quarterly Report on Form 10-Qfollows:
Jimmy Wang v. ARIAD Pharmaceuticals, Inc., et al., James L. Burch v. ARIAD Pharmaceuticals, Inc., et al., Greater Pennsylvania Carpenters’ Pension Fund v. ARIAD Pharmaceuticals, Inc., et al, and Nabil Elmachtoub v. ARIAD Pharmaceuticals, Inc., et al.
On March 24, 2015, the United States District Court for the quarter ended June 30, 2014.District of Massachusetts, or the District Court, granted the defendants’ and the underwriters’ motions to dismiss the plaintiffs’ amended complaint in these consolidated actions. On April 21, 2015, the plaintiffs filed an appeal of the District Court’s decision to grant the motions to dismiss with the United States Court of Appeals for the First Circuit.
Yu Liang v. ARIAD Pharmaceuticals, Inc., et al.
On March 9, 2015, the District Court granted the defendants’ motion to dismiss the plaintiffs’ amended complaint in these consolidated actions. On April 16, 2015, the plaintiffs filed an appeal of the District Court’s decision to grant the motion to dismiss with the United States Court of Appeals for the First Circuit.
Thomas Montalbano, Jr. v. ARIAD Pharmaceuticals, Inc.
On March 11, 2015, a product liability lawsuit, styledThomas Montalbano, Jr. v. ARIAD Pharmaceuticals, Inc., was filed in the United States District Court for the Southern District of Florida naming the Company as defendant. The lawsuit alleges that our cancer medicine Iclusig was defective, dangerous and lacked adequate warnings when the plaintiff used it from July to August 2013. The plaintiff seeks unspecified monetary damages, punitive damages and an award of costs and expenses, including attorney’s fees.
We believe all of the actions are without merit. We also believe that any liability in the Montalbano lawsuit would be covered by our product liability insurance. At this time, we have not recorded a liability related to damages in connection with these matters because we believe that any potential loss is not currently probable or reasonably estimable under U.S. generally accepted accounting principles.
ITEM 1A. | RISK FACTORS |
There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
ITEM 6. | EXHIBITS |
10.1+ | ||
| ||
10.3+ | ||
10.4+ | ||
10.5* | Second Amendment to Lease, dated March 24, 2015, between ARIAD Pharmaceuticals, Inc. and ARE-MA REGION NO. 48, LLC (for lease at 75 Binney Street and 25 Binney Street) | |
31.1 | Certification of the Chief Executive Officer. | |
31.2 | Certification of the Chief Financial Officer. | |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following materials from ARIAD Pharmaceutical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
(+) | Management contract or compensatory plan or arrangement. |
(*) | Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions. |
ARIAD, the ARIAD logo and Iclusig are our registered trademarks and ARGENT is our trademarks. The domain name and website address www.ariad.com, and all rights thereto, are registered in the name of, and owned by, ARIAD. The information in our website is not intended to be part of this Quarterly Report on Form 10-Q. We include our website address herein only as an inactive textual reference and do not intend it to be an active link to our website.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARIAD Pharmaceuticals, Inc. | |||||||
By: | /s/ Harvey J. Berger, M.D. | ||||||
Harvey J. Berger, M.D. | |||||||
Chairman and Chief Executive Officer | |||||||
(Principal executive officer) | |||||||
By: | /s/ Edward M. Fitzgerald | ||||||
Edward M. Fitzgerald | |||||||
Executive Vice President, | |||||||
Chief Financial Officer | |||||||
Date: | May 8, 2015 | (Principal financial officer and chief accounting officer) |
Exhibit | Title | |
10.1+ | ||
| ||
10.3+ | ||
10.4+ | ||
10.5* | Second Amendment to Lease, dated March 24, 2015, between ARIAD Pharmaceuticals, Inc. and ARE-MA REGION NO. 48, LLC (for lease at 75 Binney Street and 25 Binney Street) | |
31.1 | Certification of the Chief Executive Officer. | |
31.2 | Certification of the Chief Financial Officer. | |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following materials from ARIAD Pharmaceutical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
(+) | Management contract or compensatory plan or arrangement. |
(*) | Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions. |
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