Item 1. Financial Statements
AFFYMAX, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2013
|
|
2012
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
6,852
|
|
|
$
|
68,265
|
|
Short-term investments
|
—
|
|
|
9,717
|
|
Receivable from Takeda
|
—
|
|
|
18,365
|
|
Deferred tax assets
|
—
|
|
|
363
|
|
Prepaid expenses
|
591
|
|
|
2,731
|
|
Other current assets
|
—
|
|
|
3,069
|
|
Total current assets
|
7,443
|
|
|
102,510
|
|
Property and equipment, net
|
—
|
|
|
2,981
|
|
Restricted cash
|
—
|
|
|
1,135
|
|
Long-term investments
|
—
|
|
|
2,323
|
|
Deferred tax assets, net of current
|
7,240
|
|
|
6,876
|
|
Other assets
|
862
|
|
|
2,392
|
|
Total assets
|
$
|
15,545
|
|
|
$
|
118,217
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
157
|
|
|
$
|
6,591
|
|
Accrued liabilities
|
828
|
|
|
52,522
|
|
Accrued clinical trial expenses
|
—
|
|
|
2,844
|
|
Deposit from Takeda
|
—
|
|
|
559
|
|
Advance from Takeda
|
8,189
|
|
|
27,715
|
|
Notes payable, current
|
—
|
|
|
8,844
|
|
Total current liabilities
|
9,174
|
|
|
99,075
|
|
Long-term income tax liability
|
7,240
|
|
|
10,062
|
|
Other long-term liabilities
|
—
|
|
|
799
|
|
Total liabilities
|
16,414
|
|
|
109,936
|
|
Commitments and contingencies
(Note 9)
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding
|
—
|
|
|
—
|
|
Common stock: $0.001 par value, 100,000,000 shares authorized, 37,490,137 and 37,369,717 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
|
37
|
|
|
37
|
|
Additional paid-in capital
|
555,802
|
|
|
551,959
|
|
Accumulated deficit
|
(556,706
|
)
|
|
(543,713
|
)
|
Accumulated other comprehensive loss
|
(2
|
)
|
|
(2
|
)
|
Total stockholders’ equity (deficit)
|
(869
|
)
|
|
8,281
|
|
Total liabilities and stockholders’ equity
|
$
|
15,545
|
|
|
$
|
118,217
|
|
The accompanying notes are an integral part of these condensed financial statements.
AFFYMAX, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(Unaudited)
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|
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|
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|
|
|
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Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Revenue:
|
|
|
|
|
|
|
|
Collaboration revenue
|
$
|
—
|
|
|
$
|
13,603
|
|
|
$
|
1,364
|
|
|
$
|
79,562
|
|
License and royalty revenue
|
—
|
|
|
4
|
|
|
5
|
|
|
9
|
|
Total revenue
|
—
|
|
|
13,607
|
|
|
1,369
|
|
|
79,571
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research and development
|
(166
|
)
|
|
11,416
|
|
|
11,805
|
|
|
40,486
|
|
Selling, general and administrative
|
1,886
|
|
|
26,181
|
|
|
26,740
|
|
|
62,936
|
|
Collaboration cost reimbursement
|
|
|
|
|
(43,451
|
)
|
|
—
|
|
Impairment (gain on disposal) of prepaid expenses, fixed assets and intangible assets
|
(166
|
)
|
|
—
|
|
|
4,414
|
|
|
—
|
|
Restructuring charge
|
138
|
|
|
—
|
|
|
15,478
|
|
|
—
|
|
Total operating expenses
|
1,692
|
|
|
37,597
|
|
|
14,986
|
|
|
103,422
|
|
Loss from operations
|
(1,692
|
)
|
|
(23,990
|
)
|
|
(13,617
|
)
|
|
(23,851
|
)
|
Interest income
|
—
|
|
|
23
|
|
|
21
|
|
|
56
|
|
Interest expense
|
—
|
|
|
(668
|
)
|
|
(1,565
|
)
|
|
(1,316
|
)
|
Other income (expense), net
|
—
|
|
|
(3
|
)
|
|
10
|
|
|
(29
|
)
|
Loss before provision for income taxes
|
(1,692
|
)
|
|
(24,638
|
)
|
|
(15,151
|
)
|
|
(25,140
|
)
|
(Benefit) provision for income taxes
|
—
|
|
|
—
|
|
|
(2,158
|
)
|
|
1
|
|
Net loss
|
$
|
(1,692
|
)
|
|
$
|
(24,638
|
)
|
|
$(12,993)
|
|
$(25,141)
|
Net loss per share:
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
$
|
(0.05
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.70
|
)
|
Weighted-average shares used in computing basic and diluted net loss per share
|
|
|
|
|
|
|
|
Basic and diluted
|
37,490
|
|
|
36,350
|
|
|
37,483
|
|
|
36,067
|
|
Total comprehensive loss
|
$
|
(1,692
|
)
|
|
$
|
(24,641
|
)
|
|
$
|
(12,993
|
)
|
|
$
|
(25,158
|
)
|
The accompanying notes are an integral part of these condensed financial statements.
AFFYMAX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2013
|
|
2012
|
Cash flows from operating activities
|
|
|
|
Net loss
|
$
|
(12,993
|
)
|
|
$
|
(25,141
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
Collaboration cost reimbursement
|
(41,777
|
)
|
|
—
|
|
Impairment of prepaid expenses, fixed assets and intangible assets
|
4,414
|
|
|
—
|
|
Noncash restructuring charge
|
331
|
|
|
—
|
|
Depreciation and amortization
|
574
|
|
|
1,450
|
|
Amortization of premium on investments
|
2
|
|
|
75
|
|
Stock-based compensation expense
|
3,572
|
|
|
7,987
|
|
Loss (gain) on disposal of property and equipment
|
(704
|
)
|
|
30
|
|
Noncash interest expense
|
812
|
|
|
513
|
|
Changes in operating assets and liabilities:
|
|
|
|
Receivable from Takeda
|
18,365
|
|
|
(96
|
)
|
Inventory
|
—
|
|
|
(2,040
|
)
|
Prepaid expenses and other current assets
|
3,661
|
|
|
(5,225
|
)
|
Other assets
|
220
|
|
|
236
|
|
Accounts payable
|
(6,435
|
)
|
|
2,825
|
|
Accrued liabilities
|
(29,763
|
)
|
|
4,015
|
|
Accrued clinical trial expenses
|
(2,844
|
)
|
|
(865
|
)
|
Deferred revenue
|
—
|
|
|
7,212
|
|
Deposit from Takeda
|
(559
|
)
|
|
(1,438
|
)
|
Long-term income tax liability
|
(2,159
|
)
|
|
102
|
|
Other long-term liabilities
|
(799
|
)
|
|
(444
|
)
|
Net cash used in operating activities
|
(66,082
|
)
|
|
(10,804
|
)
|
Cash flows from investing activities
|
|
|
|
Purchases of property and equipment
|
—
|
|
|
(1,215
|
)
|
Purchase of intellectual property license
|
—
|
|
|
(2,500
|
)
|
Purchases of investments
|
—
|
|
|
(9,676
|
)
|
Proceeds from maturities of investments
|
13,173
|
|
|
44,065
|
|
Proceeds from sale of property and equipment
|
1,225
|
|
|
25
|
|
Net cash provided by investing activities
|
14,398
|
|
|
30,699
|
|
Cash flows from financing activities
|
|
|
|
Proceeds from issuance of common stock upon exercise of stock options
|
271
|
|
|
4,495
|
|
Proceeds from issuance of common stock under employee stock purchase plan
|
—
|
|
|
440
|
|
Proceeds from note payable
|
—
|
|
|
10,000
|
|
Repayment of note payable
|
(10,000
|
)
|
|
—
|
|
Net cash (used in) provided by financing activities
|
(9,729
|
)
|
|
14,935
|
|
Net (decrease) increase in cash and cash equivalents
|
(61,413
|
)
|
|
34,830
|
|
Cash and cash equivalents at beginning of the period
|
68,265
|
|
|
54,339
|
|
Cash and cash equivalents at end of the period
|
$
|
6,852
|
|
|
$
|
89,169
|
|
Supplemental schedule of non-cash financing activities:
|
|
|
|
Warrants issued in connection with notes payable
|
$
|
—
|
|
|
$
|
1,394
|
|
Advance from Takeda
|
$
|
—
|
|
|
$
|
2,676
|
|
The accompanying notes are an integral part of these condensed financial statements.
AFFYMAX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1.
The Company
Affymax, Inc., a Delaware corporation, was incorporated in July 2001. We are a biopharmaceutical company in the process of restructuring operations. In March 2012, the U.S. Food and Drug Administration, or FDA, approved our first and only product, OMONTYS® (peginesatide) Injection for the treatment of anemia due to chronic kidney disease in adult patients on dialysis. OMONTYS is a synthetic, peptide-based erythropoiesis stimulating agent, or ESA, designed to stimulate production of red blood cells and has been the only once-monthly ESA available to the adult dialysis patient population in the U.S. We co-commercialized OMONTYS with our collaboration partner, Takeda Pharmaceutical Company Limited, or Takeda during 2012 until February 2013, when we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of safety concerns. Effective April 1, 2013, we entered into an amendment of our collaboration with Takeda pursuant to which Takeda assumed full responsibility for OMONTYS, including responsibility for the ongoing recall and investigation with the FDA, and we granted them an exclusive worldwide license to OMONTYS in consideration for potential milestones and royalties.
We have experienced significant operating losses since inception. The recall of OMONTYS has severely harmed our business, financial condition, and prospects as a going concern and even with the transition of responsibilities effectuated by the Takeda amendment and the reductions in force, these planned cost reductions may not be sufficient to continue as a going concern. We continue to take steps to reduce our outstanding obligations to third parties, and are dependent on those efforts to continue operations even in the near term, which may not be successful. The recall has also limited our access to funds. We may be unable to continue our operations or to succeed in the existing and potential future litigation, particularly with the reductions in force and in view of our limited resources and funds. We may explore various strategic alternatives, including a sale of the Company or our assets or a corporate merger. We are considering all possible alternatives, including further restructuring activities, wind-down of operations or bankruptcy proceedings. As of
September 30, 2013
, we had an accumulated deficit of
$556.7 million
.
Product Recall
On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of post marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. As a result of the voluntary recall of OMONTYS, all marketing activities were suspended and we have also suspended or terminated manufacturing activities.
Restructuring and Impairment
In March 2013, we commenced a restructuring plan to reduce operating costs, which included a reduction in force of approximately
305
employees. As of September 30, 2013 there are four employees remaining. We incurred approximately
$15.5 million
in restructuring charges for the nine months ended September 30, 2013, all of which are related to expenditures for one-time employee termination benefits (see Note 11 of the Notes to Condensed Financial Statements). As a result of this restructuring and the recall, we also recorded impairment changes with respect to our property and equipment and intangible assets related to our license from Janssen Biotech, Inc. (a subsidiary of Johnson & Johnson) and certain of its affiliated companies, collectively referred to as Janssen, in the first quarter of 2013 (see Note 4 of the Notes to Condensed Financial Statements).
Effective April 1, 2013, we and Takeda, collectively the Parties, entered into the Fourth Amendment, or the Amendment, to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the Parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. This Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA. The arrangement with Takeda including the Amendment is referred to as the Arrangement.
The Amendment effectuated a transfer of product and regulatory responsibilities, including the OMONTYS New Drug Application, or NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to
$180.0 million
which consists of the following: (a)
$10.0 million
is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b)
$10.0 million
and another
$10.0 million
relates to U.S. sales-based milestones, and (c)
$150.0 million
relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of
$5.0 million
payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S. As of September 30, 2013, we have retained a liability for an advance from Takeda on our condensed balance sheet of approximately
$8.2 million
, which Takeda may offset a percentage of future royalty and milestone payments due to us, if any against the advance recorded (see Note 3 of the Notes to Condensed Financial Statements).
In April 2013, as part of our efforts to restructure our operations in order to reduce costs, in addition to our reduction in force, we engaged an experienced restructuring firm, The Brenner Group, Inc. With the engagement of the restructuring firm, we terminated the employment of our remaining executive officers, including our former Chief Executive Officer and Chief Financial Officer.
Going Concern
Because we have not made an irrevocable decision to liquidate, the accompanying condensed financial statements have been prepared under the assumption of a going concern basis that contemplates the realization of assets and liabilities in the ordinary course of business. Operating losses have been incurred each year since inception, resulting in an accumulated deficit of
$556.7 million
as of
September 30, 2013
.
Nearly all of our revenues to date have come from our collaboration with Takeda. As a result of the February 23, 2013 nationwide voluntary recall of OMONTYS and the suspension of all marketing activities, there is significant uncertainty as to whether we will have sufficient existing cash to fund our operations for the next 12 months. Our liabilities exceed our assets. Given our limited resources, there is no assurance that we will be able to reduce our operating expenses enough to meet our existing and future obligations and conduct ongoing operations.
If we do not have sufficient funds to continue operations, we could be required to liquidate our assets, seek bankruptcy protection or other alternatives. Any failure to dispel any continuing doubts about our ability to continue as a going concern could adversely affect our ability to enter into collaborative relationships with business partners.
These matters
raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.
2.
Summary of Significant Accounting Policies
Basis of Presentation
Our accompanying condensed financial statements have been prepared following the requirements of the Securities and Exchange Commission, or SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted. The condensed financial statements are unaudited and reflect all adjustments, consisting of only normal recurring adjustments, which, in the opinion of management, are necessary to fairly state the financial position at, and the results of operations and cash flows for, the interim periods presented. The financial information included herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012, which includes our audited financial statements and the notes thereto.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in the condensed financial statements and accompanying notes may not be indicative of the results for the full year or any future period.
Concentration of Risk
Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents and investments. We deposit excess cash in accounts with major financial institutions in the U.S. Deposits in these banks may exceed the amount of insurance provided on such deposits. We have not experienced any realized losses on our deposits of cash and cash equivalents.
Our future revenue is based on only one source of product-related revenue, OMONTYS. If Takeda is not successful in identifying the cause and is unable or unwilling to reintroduce OMONTYS, we have no prospects for other sources of revenue.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Collaboration Revenue
We recognize revenue for contracts entered into prior to 2011 in accordance with the SEC Staff Bulletin No. 101,
Revenue Recognition in Financial Statement
s, as amended by Staff Accounting Bulletin or SAB, No. 104,
Revision of Topic 13
and Accounting Standards Codification or ASC, 605-25,
Multiple Element Arrangements
. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting as defined in the authoritative guidance for revenue arrangements with multiple deliverables. Application of this guidance requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship. We continue to follow the guidance of ASC 605-25 to determine whether the components of the Arrangement represent separate units of accounting. To determine if a delivered item can be treated as a separate unit of accounting, we evaluate (1) if the delivered item(s) has value to Takeda on a standalone basis; (2) there is objective and reliable evidence of fair value of the undelivered item(s) and (3) if a general right of return exists for the delivered item (e.g. contingencies), delivery or performance of the undelivered item(s) is considered probable and is substantially within the control of the Company. We recognize revenue for contracts entered into or materially modified after January 1, 2011, in accordance with Accounting Standards Update, or ASU, No. 2009-13,
Multiple Deliverable Revenue Arrangements
. This update amends the guidance on accounting for arrangements with multiple deliverables to require that each deliverable be evaluated to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. This update also establishes a selling price hierarchy for determining how to allocate arrangement consideration to identified units of accounting. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, or VSOE, if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and the estimated selling price of identified units of accounting for new or modified agreements.
We account for our Arrangement with Takeda under ASC 605-25 and through the date of the recall, had been operating in the commercialization period as defined in the Arrangement. Before the recall, we were performing commercialization services such as promotions and marketing as well as development work related to OMONTYS post approval. In return for these services, we received a 50/50 share of operating profit from the sale and distribution of OMONTYS (as described below), certain milestone payments and contingent payments due under the Arrangement. We also received reimbursement of costs for commercial and development costs as described in the Arrangement. Prior to approval of OMONTYS, our primary source of revenue consisted of milestone payments and Takeda’s reimbursement of commercialization and development costs.
In addition to the profit sharing and reimbursement of the costs described above, the Arrangement provides us the potential to earn substantive at risk milestone payments upon achievement of contractual criteria (see Note 3 of Notes to Financial Statements). However, timing and amounts of these milestones are highly uncertain due to the recall.
During the commercialization period, our obligations included ongoing regulatory work to obtain and maintain FDA approval and commercialization efforts related to our product launch and promotion and marketing of OMONTYS.
For each source of collaboration revenue, we apply the following revenue recognition model:
|
|
•
|
Expense reimbursement revenue.
Revenues related to reimbursements by Takeda of third-party development expenses (70/30 split per the Arrangement) and commercialization expenses (shared 50/50 according to the Arrangement) are recognized as revenue in the period the related costs are incurred. Revenues related to reimbursement of costs of full-time equivalents, or FTEs, engaged in development related activities such as post-marketing studies, are recognized as revenue in the period the related costs are incurred. Such reimbursement is based on contractually negotiated reimbursement rates for each FTE as specified in the Arrangement. Subsequent to the launch of OMONTYS and recognition of product revenue by Takeda, reimbursement of commercialization expenses and development costs (both FTE and out of pocket costs) associated with post-marketing development activities, is incorporated into the profit equalization revenue as required under the Arrangement in order to effect the 50/50 profit split, as described below. As part of the Amendment with Takeda, both Parties agreed that they will no longer share expenses related to third-party development (70/30 split) and commercialization (50/50 split) as of April 1, 2013. Except for certain transition services that we performed in April 2013 for full reimbursement of
$0.5 million
, any expenses incurred by either us or Takeda after April 1, 2013 shall be the responsibility of the respective party and neither us or Takeda has the obligation to share expenses with each other.
|
|
|
•
|
Profit equalization revenue/loss.
Subsequent to the launch of OMONTYS and prior to the Amendment, as to the recognition of product revenue by Takeda, Takeda allocates the quarterly profit equalization revenue/loss to us in order to effect the 50/50 profit/loss split from the sale of OMONTYS, as called for by the Arrangement. Profit equalization revenue/loss is calculated as the amount required so that the profit or loss realized by both us and Takeda on the product equates to
50%
of the total product profit or loss. Total product profit or loss on OMONTYS is calculated on a quarterly basis as gross product sales recorded by Takeda less the following deductions also recorded by Takeda: rebates and discounts, cost of goods, and other gross-to-net adjustments incurred by Takeda; royalty expenses incurred by us, commercialization expenses (FTE related and out of pocket costs) incurred by both Takeda and us, and certain development costs associated with post-marketing development activities (FTE related and out of pocket costs) incurred by both Takeda and us. Profit equalization revenue is recognized as revenue in the period product revenue is recognized by Takeda. As a result of the voluntary recall of OMONTYS in February 2013, all marketing activities were suspended. As part of the Amendment with Takeda, the profit equalization revenue for the three months ended March 31, 2013 will be the final profit equalization payment under the Arrangement. Upon signing the Amendment with Takeda, the economics of the collaboration changed from a profit sharing arrangement to a milestone and royalty-based compensation structure to us, effective April 1, 2013.
|
|
|
•
|
Milestone revenue.
We account for milestones under ASU No. 2010-17,
Milestone Method of Revenue Recognition
. Under the milestone method, contingent consideration received from the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved, which we believe is more consistent with the substance of our performance under the collaboration. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the entity. A milestone is substantive if the consideration earned from the achievement of the milestone is consistent with our performance required to achieve the milestone or the increase in value to the collaboration resulting from our performance, relates solely to our past performance, and is reasonable relative to all of the other deliverables and payments within the collaboration. Although we are eligible to receive future milestones from Takeda, timing and amounts of future milestone payments, if any are highly uncertain due to the recall.
|
Below is a summary of the components of our collaboration revenue for the three and nine months ended
September 30, 2013
, and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2013
|
|
Nine months ended September 30, 2013
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Profit equalization payment
|
$
|
—
|
|
|
$
|
10,377
|
|
|
$
|
5
|
|
|
$
|
13,048
|
|
Milestone payments
|
—
|
|
|
2,250
|
|
|
—
|
|
|
60,250
|
|
Revenue previously deferred related to API
|
—
|
|
|
441
|
|
|
—
|
|
|
441
|
|
Net expense reimbursement after CAPM
|
—
|
|
|
535
|
|
|
1,364
|
|
|
5,823
|
|
Total collaboration revenue
|
$
|
—
|
|
|
$
|
13,603
|
|
|
$
|
1,369
|
|
|
$
|
79,562
|
|
License and Royalty Revenue
Royalties are recognized as earned in accordance with contract terms, when third party results are reported and collectability is reasonably assured. Royalties received under agreements that were acquired by us in the 2001 spin out from GlaxoSmithKline or Glaxo are recorded net of the
50%
that we are required to remit to Glaxo.
If Takeda decides to reintroduce OMONTYS, which is highly uncertain, we are eligible to receive potential milestones and royalties. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S.
Inventory
We value our inventories at the lower of cost or net realizable value which is contractually determined in our collaboration with Takeda to be our cost plus a markup. We determine the cost of inventory using the specific identification method. We record active pharmaceutical ingredient, or API, as inventory when the title transfers to us from the contract manufacturing organization, or CMO, until the point of acceptance by Takeda. We initiate orders for API with our CMOs based on forecasts from Takeda. To date, all orders have generally commenced once there was a contractual commitment for the API from Takeda.
We analyze our inventory levels quarterly and write down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value, as well as any inventory quantities in excess of expected requirements. Any expired inventory is disposed of and the related costs are recognized as expense. The voluntary recall of OMONTYS in February 2013 impacted the recoverability of our inventories based on assumptions about expected demand and net realizable value. In the December 31, 2012 balance sheet, given the significant uncertainty of demand following the recall, we had written down our API inventory and prepayments made to our CMOs to the net realizable value of
zero
. We also established an accrual for estimated losses on firm inventory purchase commitments by applying the same lower of cost or market approach that is used to value inventory. As of March 31, 2013 this accrued commitment was
$32.9 million
. However, in the second quarter, we were able to settle these obligations for
$11.0 million
resulting in a favorable adjustment to our operating results of
$21.9 million
in the quarter ended June 30, 2013. As of September 30, 2013, there was no remaining accrued balance.
We expense costs relating to the production of API as research and development or R&D expense in the period incurred until we receive FDA approval for a new product or product configuration and began to capitalize the subsequent inventory costs relating to that product or product configuration. Prior to approval of OMONTYS for commercial sale in March 2012 by the FDA, we had expensed all costs associated with the production of API as R&D expense. Subsequent to receiving FDA approval of OMONTYS, we commenced capitalization of third party costs which are incurred to manufacture the API used in the production of OMONTYS.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are calculated using the straight-line method over the estimated useful lives of the assets, generally
three
to
five
years. Assets under capital lease and leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the related lease. Maintenance and repairs are charged to operations as incurred. All equipment was
determined to be held for sale in May 2013 and accordingly no further depreciation was recorded after that determination. Equipment categorized as held for sale on the balance sheet at May 31, 2013 had a net book value of
$0.5 million
. All equipment other than computers retained for data storage was sold as of June 30, 2013 and the carrying value of equipment was reduced to zero upon completion of the sale.
Valuation of Long-Lived Assets, Prepaids and Other Assets
We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping's carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by comparing the difference between the asset grouping's carrying value and its fair value. Fair value is the price that would be received from selling an asset in an orderly transaction between market participants at the measurement date. Long-lived assets such as intangible assets and property, plant and equipment are considered non-financial assets, and are recorded at fair value only when an impairment charge is recognized. The recall of OMONTYS was considered to be an impairment indicator for certain assets. We evaluated the recoverability of our assets and determined that certain assets were impaired. We recorded impairment charges for the nine months ended September 30, 2013 of
$4.4 million
. These charges are reflected in the statement of comprehensive income (loss) under the caption "Impairment (gain on disposal) of prepaid expenses, fixed assets, and intangible assets."
Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for potential common shares.
Diluted net loss per share is computed similarly to basic net loss per share, except that the denominator is increased to include all dilutive potential common shares using the treasury stock method. For purposes of this calculation, options to purchase common stock, common stock issuable pursuant to the 2006 Employee Stock Purchase Plan, restricted stock units, or RSUs, and warrants are considered to be potential common shares and are only included in the calculation of diluted (loss) income per share when their effect is dilutive.
The following shares were excluded in the computation of diluted net loss per common share for the periods presented because including them would have an anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2013
|
|
Nine months ended September 30, 2013
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Options to purchase common stock
|
1,893
|
|
|
5,311
|
|
|
1,893
|
|
|
5,311
|
|
|
Common stock issuable pursuant to the 2006 Employee Stock Purchase Plan
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
|
Restricted stock units
|
—
|
|
|
317
|
|
|
—
|
|
|
317
|
|
|
Warrant to purchase common stock
|
424
|
|
|
504
|
|
|
424
|
|
|
504
|
|
|
Stock-Based Compensation
We account for equity instruments issued to employees and directors under the authoritative guidance for share-based payments.
The equity instruments we most typically grant are stock options and RSUs. Stock options are valued using the Black-Scholes valuation model while the fair value of RSUs is equivalent to the market value of the equivalent number of shares of common stock on the date of grant. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest or do not vest as a result of employee terminations prior to vest.
We have issued stock options to non-employees. We account for equity instruments issued to non-employees in accordance with the authoritative guidance for equity-based payments to non-employees, using a fair value approach.
During the quarter ended June 30, 2013, we terminated the Employee Stock Purchase Plan and the Restricted Stock Award Plan.
3.
Development and Commercialization Agreements with Takeda
We entered into
two
separate collaboration agreements with Takeda in February 2006 and June 2006 related to the co-development and co-commercialization of OMONTYS, which have been combined for accounting purposes due to their proximity of negotiation. We previously amended these arrangements in November 2011 concurrent with the settlement and license agreement, or Settlement and License Agreement, with Janssen (see further discussion below and Note 4 of Notes to Condensed Financial Statements).
On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of postmarketing reports regarding safety concerns, including anaphylaxis. As a result of the voluntary recall of OMONTYS, all marketing activities were suspended. Effective April 1, 2013, we and Takeda entered into the Amendment to the February 2006 and June 2006 agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we had granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. The Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA.
The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. With the transfer of responsibilities and the NDA, Takeda is responsible for continuing the investigation but there can be no assurance as to when and if a solution will be identified.
Collaboration revenue reported on our statement of comprehensive income (loss) consists of the nonrefundable upfront license fees, reimbursement for the sale of API net of costs incurred, net reimbursement of certain development and commercial expenses, revenues from product profit sharing, and milestone payments. We recognized
$0.0 million
and
$13.6 million
of collaboration revenue during the three months ended
September 30, 2013
and
2012
, respectively. The amount receivable from Takeda as of
September 30, 2013
and December 31, 2012 was
$0.0 million
and
$18.4 million
, respectively.
Development and Commercialization of OMONTYS in the U.S. Prior to the April 2013 Amendment
Prior to the Amendment, Takeda bore responsibility for
70%
of all third-party expenses related to U.S. development and
50%
of all third party expenses related to U.S. commercialization. Certain employee-related expenses supporting the commercialization of OMONTYS in the U.S. were also shared equally. In addition, costs of certain employees in clinical, regulatory and other development functions supporting any post-marketing development activities such as additional clinical trials required by the FDA as a condition of the approval of OMONTYS in March 2012 or other activities separately agreed to by the parties in the U.S. were shared equally. As part of the Amendment between us and Takeda, both Parties agreed that they will no longer share expenses related to third-party development (70/30 split) and commercialization (50/50 split) as of April 1, 2013. Any expenses incurred by either us or Takeda after April 1, 2013 shall be the responsibility of the respective party and neither us or Takeda has the right to share expenses with each other.
In February 2012, as contemplated under the Arrangement, we and Takeda entered into a Co-Promotion Agreement to further specify and formalize terms and conditions relating to the joint U.S. commercialization activities for OMONTYS including a corporate governance structure and division of roles and responsibilities between us and Takeda, including deployment of resources. Prior to the Amendment, we were responsible for deployment of the sales force and the medical affairs field force but shared marketing, account management and payor reimbursement related activities with Takeda. Takeda was responsible for manufacturing and distribution of the finished drug product to the customer and recorded product sales of
OMONTYS. Specifically, Takeda had sole responsibility for handling all returns, order processing, invoicing and collection of receivables with regard to sales of OMONTYS. Takeda also had the rights and responsibility for establishing and modifying terms and conditions with respect to the sale of OMONTYS in the U.S., including pricing discounts available to third party payers, price adjustments and other allowable discounts and allowances. In addition, as we and Takeda split profits 50/50 in the U.S., the Co-Promotion Agreement provided further detail relating to the treatment of FTE expenses used to calculate eligible commercial expenses incurred by us and Takeda thereunder. Consistent with the terms of the Arrangement, Takeda retained final decision making authority with respect to terms related to pricing and contracting and responsibility for distribution activities.
Prior to the Amendment, while Takeda was responsible for the sale of OMONTYS and accordingly Takeda recorded product revenue, we and Takeda shared equally in the net profits and losses of those sales of OMONTYS in the U.S. In determining the OMONTYS net profit or loss, OMONTYS product revenue was reduced by rebates and discounts, cost of goods, and other gross-to-net adjustments incurred by Takeda; royalty expense incurred by us, commercialization expenses (FTE related and out of pocket costs) incurred by both Takeda and us, and certain development costs associated with post-marketing development activities (FTE related and out of pocket costs) incurred by both Takeda and us. We reviewed the revenue, related deductions and expenses provided by Takeda and prepared an invoice to Takeda for our portion of the OMONTYS net profit after factoring in applicable costs incurred by us and Takeda at the end of each quarter. The profit equalization amount was recognized as revenue in the period the product sales occurred and product revenue was recognized by Takeda.
As a result of the voluntary recall of OMONTYS in February 2013, all marketing activities were suspended. As part of the Amendment with Takeda, the profit equalization revenue for the six months ended June 30, 2013 was the final profit equalization payment under the Arrangement. Upon signing the Amendment with Takeda, the economics of the collaboration changed from a profit sharing arrangement to a milestone and royalty-based compensation structure to us, effective April 1, 2013.
Development and Commercialization of OMONTYS outside of the U.S.
In February 2006, we granted an exclusive license to Takeda for development and commercialization of OMONTYS in Japan. In December 2011, Takeda announced that it had decided not to commercialize OMONTYS in Japan. We and Takeda have explored other options for the commercialization rights for OMONTYS in the Japanese market, including potentially licensing it to a third party. If Takeda or its licensee is successful in clinical development and regulatory milestones, we are eligible to receive contingent payments from Takeda which aggregate up to
$33.0 million
relating to the Japan renal program and
$5.0 million
for a third indication that neither we or Takeda is pursuing. Per the terms of the Amendment, the Japan agreement was terminated.
In June 2006, Takeda subsequently received an exclusive license to develop and commercialize the product outside of the U.S. Takeda bears all costs for product clinical development in support of regulatory approval for all territories outside the U.S. and will pay us a variable royalty based on annual net sales of the product outside the U.S. In February 2012, Takeda announced the acceptance for assessment from the European Medicines Agency or EMA of a Marketing Authorization Application or MAA for OMONTYS for the treatment of symptomatic anemia associated with chronic kidney disease in adult patients on dialysis. The application is currently under review by that agency.
Launch Allowance
As noted above, Takeda bore responsibility for
50%
of all third party expenses related to the commercialization of OMONTYS in the U.S. Takeda also provided a launch allowance to help fund the initial costs associated with preparing to launch under which it committed to fund the first
$20.0 million
of U.S. commercial expenses incurred in total by us and Takeda. Amounts received under the launch allowance are non-refundable; under the Amendment, however, Takeda is entitled to deduct up to
8%
f
rom any future payments made to us under the royalty or milestone provisions
until they have recouped an amount equal to
$11.0 million
(
$10.0 million
plus a
$1.0 million
fixed amount that represents interest). As of
September 30, 2013
, our liability balance under the launch allowance is
$8.2 million
.
Milestones
During 2012, we earned the following milestone payments from Takeda: a
$50.0 million
milestone upon FDA approval of OMONTYS in the dialysis indication, a
$5.0 million
milestone upon acceptance for review of the MAA, filing for OMONTYS
by the EMA, and a
$3.0
million and
$2.3
million milestone related to an amendment to the Arrangement or the November 2011 Amendment, described below.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We provided transition support to Takeda through April 30, 2013. After April 30, 2013 we have no performance obligations under our agreement with Takeda. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential contingent payments in the form of commercial milestone payments totaling up to
$180.0 million
, which consist of the following: (a)
$10.0 million
is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.: (b)
$10.0 million
and another
$10.0 million
relates to U.S. sales-based milestones, and (c)
$150.0 million
relates to sales-based milestones outside of the U.S. as disclosed below but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of
$5.0 million
payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S. The
$150.0 million
of sales-based milestones consists of milestones of
$10.0 million
,
$20.0 million
,
$30.0 million
,
$40.0 million
and
$50.0 million
for worldwide net sales reached and recorded by Takeda during a fiscal year of the arrangement of
$0.5 billion
,
$1.0 billion
,
$1.5 billion
,
$2.0 billion
and
$3.0 billion
, respectively. Although we are eligible to receive future milestones from Takeda, timing and amounts of future milestone payments, if any, are highly uncertain due to the recall.
API Supply Agreement
In November 2011, as contemplated under the Arrangement, we and Takeda executed a Commercial API Supply Agreement. Under the terms of the API Supply Agreement, we were responsible for the manufacture and supply of all quantities of API to be used in the development and commercialization of OMONTYS worldwide. Takeda reimbursed us for our cost of API plus
20%
. Takeda was responsible for the fill and finish steps in the manufacture of OMONTYS worldwide under the Arrangement. As of
December 31, 2012
we had a balance of
$19.8 million
recorded as an Advance from Takeda which was related to deferred revenue on API shipped to Takeda. As a result of the recall and the impairment charges recorded on the OMONTYS inventory during 2012, the remaining balance of deferred revenue was reversed as of June 30, 2013.
Impairment of Inventory and Firm Purchase Commitments
Prior to the voluntary recall, we initiated orders for API with our CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally had commenced once there was a contractual commitment for the API from Takeda. In the quarter ended June 30, 2013 we settled these obligations for less than the contractual amounts. We made a total of
$11.0 million
in payments to settle our obligations to three CMOs and recorded a favorable adjustment to our operating results of
$21.9 million
.
In addition to the binding CMO purchase commitments, we also had
$10.4 million
in inventory and prepayments made to our CMOs on our balance sheet as of December 31, 2012. As a result of the inability to sell OMONTYS and the uncertainty of future revenues, we have written down our API inventory and prepayments for API being produced by our CMOs to a net realizable value of zero and recorded a
$10.4 million
impairment charge related to this writedown during the year ended December 31, 2012. Of the total
$45.0 million
charge for impairment of inventory and loss on CMO purchase commitments recorded in 2012, we recorded a benefit of $23.1 million in the first quarter of 2013, primarily related to the collaboration cost reimbursement under the Takeda Q1 profit equalization payment. As a result of the fourth Amendment, Takeda assumed full responsibility for OMONTYS. This includes the ongoing investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction. Reintroduction would be possible only if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.
Cost of Recall
As a result of the fourth Amendment, Takeda assumed full responsibility for OMONTYS. This includes the ongoing investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction. Reintroduction would be possible only if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.
The total costs of recalling the product were primarily composed of costs to a third-party to gather, store, and return the product to Takeda, of which
$1.1 million
was incurred in the first quarter of 2013. Our portion of the expense was
$0.6 million
which we were charged as a part of the Q1 profit equalization payment in the first quarter of 2013.
Takeda capitalizes inventory costs associated with the production of OMONTYS and enters into purchase commitments for goods associated with this manufacturing. The write down or write off of such inventory and any charges for purchase commitments by Takeda was subject to the profit equalization revenue or loss calculation of the Arrangement. Takeda included inventory write down charges of
$31.8 million
for the cost of inventory on hand at Takeda as of March 31, 2013 in the Q1 profit equalization payment. Our portion of this write down was
$15.9 million
and was previously reserved for as of December 31, 2012 as a part of our Advance from Takeda liability. With respect to purchase commitments, Takeda requested reimbursement for a portion of the costs associated with Takeda's firm purchase commitment of
$9.3 million
with Baxter for pre-filled syringes. Our exposure was limited to the portion of the Baxter agreement that relates to the U.S. We had no liability related to the E.U. or Japan because in those countries we receive only a royalty on product sales and the collaboration profit split did not apply to operations in those countries. The amount of our exposure was
$0.7 million
which was included in the Q1 profit equalization payment in the first quarter of 2013.
In the first quarter of 2013, Takeda recorded an impairment charge for certain long lived assets associated with OMONTYS. Under the profit/loss equalization we were responsible for half of these charges. Our exposure related to this impairment was
$6.2 million
. This amount was charged to us as a part of the Q1 profit equalization payment in the first quarter of 2013.
November 2011 Amendment
In November 2011, concurrent with the execution of the Settlement and License Agreement with Janssen, we and Takeda entered into an amendment to the Arrangement. Under the terms of this amendment, Takeda agreed to pay up to
$6.5 million
in additional milestones to us in consideration of the upfront and milestone payments we are required to make to Janssen under the Settlement and License Agreement. Approximately
$5.3 million
of these milestones were earned based on regulatory and commercial events in the U.S. and the remaining
$1.3 million
tied to regulatory events in the E.U, which was eliminated as part of the Amendment. We recognized
$3.0 million
of these milestones in the first quarter of 2012 as it was earned as a result of FDA approval in March 2012.
4.
Contractual Arrangements
Our License, Manufacturing and Supply Agreement with Nektar
In April 2004, we entered into a License, Manufacturing and Supply Agreement with Nektar Therapeutics AL Corporation, or Nektar, under which we obtained from Nektar a worldwide, non-exclusive license, with limited rights to grant sublicenses, under certain intellectual property covering pegylation technology to manufacture, develop and commercialize OMONTYS. The license we obtained consists of a license under intellectual property owned by Nektar and a sublicense under intellectual property owned by Enzon Pharmaceuticals, Inc., or Enzon, licensed to Nektar pursuant to a cross-license agreement between Nektar, Inhale Therapeutic Systems, Inc. and Enzon.
In consideration of the license grant, we agreed to pay royalties on the sales of OMONTYS, which began with the launch of the product in the U.S. in 2012; sales of the product were suspended on February 26, 2013. We also agreed to pay base milestones plus possible additional milestones in connection with our partnering activities relating to OMONTYS or merger and acquisition activities. As of
September 30, 2013
, no further milestone obligations remain.
Contract Manufacturing Organization (CMO) Settlements
We initiated orders for API with our CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally commenced once there was a contractual commitment for the API from Takeda. As of December 31, 2012, we had future purchase commitments amounting to
$34.6 million
. These future commitments were comprised of
$5.8 million
for firm purchase commitments of PEG, and the remaining
$28.8 million
of manufacturing obligations relate to API, and were based on firm demand forecasts from Takeda. We paid
$1.7 million
in payments to our CMOs in our first quarter 2013 which reduced the accrual balance to
$32.9 million
.
We finalized settlement agreements with the CMOs in the second quarter of 2013 and made a total of
$11.0 million
in payments resulting in a favorable adjustment to our second quarter 2013 operating results of
$21.9 million
.
Settlement and License Agreement with Janssen
In November 2011, we entered into the Settlement and License Agreement with Janssen under which we obtained a non-exclusive license to the intellectual property in dispute, a covenant not to sue and a release of all claims associated with the
arbitration and dispute. The Settlement and License Agreement also provides for the dismissal of all pending proceedings. The Settlement and License Agreement required us to make
two
fixed payments to Janssen,
$6.0 million
, which was paid in December 2011, and
$2.0 million
, which was paid in June 2012. Upon execution of the Settlement and License Agreement in the fourth quarter of 2011, we recorded
$8.0 million
of R&D expense relating to the fixed payments. The Settlement and License Agreement also required us to make a
$2.5 million
milestone payment to Janssen upon FDA regulatory approval of OMONTYS, and requires us to make a
$2.5 million
milestone payment to Janssen upon regulatory approval of OMONTYS in the first major European country. Upon FDA approval in March 2012, we capitalized
$2.5 million
related to the first milestone payment during the first quarter of 2012 as another asset. The resulting asset was to be be amortized over the expected life of the related patent family, the last-expiring patent of which expires in June 2016. This
$2.5 million
milestone payment was paid to Janssen in April 2012. During the nine months ended September 30, 2013, as a result of the recall, we recorded a
$1.9 million
impairment charge related to this asset, bringing the asset value to
zero
.
In addition, Janssen will be entitled to low, single-digit royalties on sales of OMONTYS in Europe, Japan and certain other countries outside of the United States until mid-2016. This royalty payment is not reimbursable under our Arrangement with Takeda.
5. Balance Sheet Components
Property and Equipment, Net
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2013
|
|
2012
|
|
Leasehold improvements
|
$
|
—
|
|
|
$
|
2,501
|
|
|
Equipment
|
—
|
|
|
9,794
|
|
|
Software
|
—
|
|
|
3,064
|
|
|
Construction in progress
|
—
|
|
|
9
|
|
|
|
—
|
|
|
15,368
|
|
|
Less: Accumulated depreciation and amortization
|
—
|
|
|
(12,387
|
)
|
|
|
$
|
—
|
|
|
$
|
2,981
|
|
|
Depreciation and amortization expense for the nine months ended September 30, 2013 and 2012 was
$0.6 million
and
$1.5 million
, respectively. In addition to the expense noted above, we also incurred
$1.9 million
in impairment charges for the nine months ended September 30, 2013. In May of 2013 management committed to a plan to sell all of the company's property and equipment. The assets were classified as held for sale and depreciation expense was recorded through May 15, 2013. The assets were sold in June of 2013 for
$1.1 million
. The book value of the assets sold was
$0.5 million
and a gain of
$0.6 million
was recorded in the three months ended June 30, 2013. In the three months ended September 30, 2013 additional proceeds of $0.1 million were received resulting in a total gain on the sale of assets of $0.7 million for the nine months ended September 30, 2013.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Accrued potential losses related to firm purchase commitments
(1)
|
$
|
—
|
|
|
$
|
34,599
|
|
|
Restructuring accrual
(2)
|
587
|
|
|
—
|
|
|
Compensation-related expenses
|
—
|
|
|
12,837
|
|
|
SG&A related costs
|
241
|
|
|
3,633
|
|
|
R&D related costs
|
—
|
|
|
830
|
|
|
Other
|
—
|
|
|
623
|
|
|
|
$
|
828
|
|
|
$
|
52,522
|
|
|
(1) See Note 3 of Notes to Condensed Financial Statements.
(2) See Note 11 of Notes to Condensed Financial Statements.
6.
Investments
We held no investments as of September 30, 2013. A summary of our investments outstanding as of December 31, 2012 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
1,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,300
|
|
Corporate debt securities
|
8,416
|
|
|
1
|
|
|
—
|
|
|
8,417
|
|
Total short-term investments
|
$
|
9,716
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
9,717
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
2,326
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
2,323
|
|
Total long-term investments
|
$
|
2,326
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
2,323
|
|
.
7. Fair Value Measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and available for sale securities. The fair value of these assets was determined based on a three-tier hierarchy under the authoritative guidance for fair value measurements and disclosures that prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1 — observable inputs such as quoted prices in active markets.
|
|
|
•
|
Level 2 — inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.
|
|
|
•
|
Level 3 — unobservable inputs in which there is little or no market data, which would require us to develop our own assumptions.
|
The types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities. The valuation technique we used to measure fair value of our Level 1 money market securities is a market approach, using prices and other relevant information generated by market transactions involving identical securities. The types of investments that are generally classified within Level 2 of the fair value hierarchy include corporate securities, certificates of
deposits and U.S. government securities. The valuation technique we used to measure fair value of our Level 2 investments is a market approach, under which we review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical investments was not available, we used market pricing and other observable market inputs for similar investments obtained from various third party data providers. These inputs represent quoted prices for similar investments in active markets or these inputs have been derived from observable market data.
Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The fair value of the notes payable are based on the present value of expected future cash flows, assumptions about current interest rates and the creditworthiness of Affymax. Market risk associated with our fixed rate debt relates to the potential reduction in fair value. The carrying amounts of our notes payable approximate fair value.
The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their relatively short maturities, and low market interest rates if applicable.
We held no assets or liabilities as of September 30, 2013 which were remeasured to fair value on a recurring basis.
The following table presents as of December 31, 2012 our investments measured at fair value on a recurring basis classified by the fair value measurements and disclosures valuation hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
Fair Value Measurements Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Money market funds
|
$
|
45,999
|
|
|
$
|
45,999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
1,300
|
|
|
$
|
—
|
|
|
$
|
1,300
|
|
|
$
|
—
|
|
Corporate debt securities
|
8,417
|
|
|
—
|
|
|
8,417
|
|
|
—
|
|
Total short-term investments
|
$
|
9,717
|
|
|
$
|
—
|
|
|
$
|
9,717
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Long term investments:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
2,323
|
|
|
$
|
—
|
|
|
$
|
2,323
|
|
|
$
|
—
|
|
Total long-term investments
|
$
|
2,323
|
|
|
$
|
—
|
|
|
$
|
2,323
|
|
|
$
|
—
|
|
In conjunction with the product recall and related restructuring activities, management evaluated our property and equipment and committed to a plan to sell all non-essential equipment. Equipment and leasehold improvements were categorized as held for sale in May 2013 and sold in June 2013. No equipment or other fixed assets remain on the balance sheet at September 30, 2013.
8.
Loan and Security Agreement and Repayment
In March 2012, we entered into a loan and security agreement, or the Loan Agreement, with Oxford Finance LLC and Silicon Valley Bank, or, collectively, the Lenders, under which we borrowed
$10.0 million
.
On April 3, 2013, we entered into a Letter Agreement, under which (i) we paid all amounts due and owing so as to discharge our obligations thereunder which totaled
$9.8 million
including remaining principal, interest, final payment and prepayment fees, (ii) we waived any rights to seek additional credit extensions or unfunded commitments under the Loan Agreement, and (iii) the security interest granted to Lenders relating to substantially all of our assets, other than our intellectual property, was terminated. As of September 30, 2013, we had no remaining notes payable outstanding.
9. Commitments and Contingencies
Legal Proceedings
On February 27, 2013, a securities class action complaint was filed in the United States District Court for the Northern District of California, naming as defendants Affymax, Inc. or the Company, certain of its officers, Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals U.S.A., Inc. and Takeda Global Research & Development Center, Inc. A second complaint naming the same defendants was filed on March 6, 2013. On May 2, 2013, the securities class action complaint that was filed on February 27, 2013 was voluntarily dismissed by the plaintiff. On May 21, 2013, the Court appointed a lead plaintiff in the remaining securities class action complaint. On July 22, 2013, an amended class action complaint was filed on behalf of purported stockholders of the Company, naming as defendants the Company and certain of its former officers. The amended complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connection with allegedly false and misleading statements made by the defendants regarding OMONTYS and the Company's business practices, financial projections and other disclosures between August 8, 2012 and February 22, 2013, or the Class Period. The plaintiff seeks to represent a class comprised of purchasers of the Company's common stock during the Class Period and seeks damages, costs and expenses and such other relief as determined by the Court. On September 20, 2013, the Company and the individual defendants filed a motion to dismiss the consolidated amended complaint. The hearing on the motion to dismiss is set for January 14, 2014.
On March 19, 2013, and March 29, 2013, respectively,
two
derivative lawsuits were filed purportedly on behalf of the Company in California Superior Court for the County of Santa Clara naming certain of our current and former officers and directors as defendants (the “State Court Derivative Action”). The lawsuits allege that the certain of the Company's officers and directors breached their fiduciary duties related to the clinical trials for OMONTYS and for representations regarding the Company's business health which was tied to the success of OMONTYS. The lawsuits also assert claims for unjust enrichment and corporate waste. On May 31, 2013, the Court consolidated the two actions and appointed lead plaintiff. On June 11, 2013, lead plaintiff designated the complaint filed on March 29, 2013 as the operative complaint. On August 6, 2013, the Court stayed the derivative action pending the outcome of the motion to dismiss in the securities class action.
On August 19, 2013, another derivative lawsuit was filed purportedly on behalf of the Company in the United States District Court for the Northern District of California naming certain of our current and former officers and directors as defendants (the “Federal Derivative Action”). The lawsuit’s allegations are substantially similar to the allegations in the State Court Derivative Action. On October 9, 2013, the parties stipulated to stay the Federal Derivative Action pending the outcome of the motion to dismiss in the securities class action.
We believe that we have meritorious defenses and intend to defend these lawsuits vigorously. However, these lawsuits are subject to inherent uncertainties, the actual cost may be significant, and we may not prevail. We believe we are entitled to coverage under our relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.
Additionally, in light of the recall, a product liability claim could potentially arise, although no claim has been filed to date.
We assess litigation to determine if an unfavorable outcome would lead to a probable loss or reasonable possible loss, which could be estimated. We accrue for losses that are both probable and reasonably estimable. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range. In the cases where we believe that a reasonable possible loss exists, we disclose the facts and circumstances of the litigation, including an estimable range, if possible. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonable possible loss.
Accordingly,
no
loss accrual has been established for the above.
While it is not possible to accurately predict or determine the eventual outcome of these matters, an adverse determination in one or more of these matters currently pending could have a material adverse effect on our financial condition, results of operations or cash flows.
10.
Stock-Based Compensation
During the nine months ended September 30, 2013, we terminated substantially all of our employees. Upon termination, the difference between the expected forfeiture rate and the actual forfeiture rate was adjusted in the recognition of the stock-based compensation, and resulted in an offset to expense for some groups of employees. Stock-based compensation was recorded in the statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Research and development
|
$
|
—
|
|
|
$
|
1,086
|
|
|
$
|
825
|
|
|
$
|
3,240
|
|
Selling, general and administrative
|
499
|
|
|
1,719
|
|
|
2,747
|
|
|
4,747
|
|
Total
|
$
|
499
|
|
|
$
|
2,805
|
|
|
$
|
3,572
|
|
|
$
|
7,987
|
|
We granted the following stock options, RSUs and performance RSUs, or PRSUs to employees as follows:
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2013
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
Per Share
|
Stock options
|
888,778
|
|
|
$
|
15.79
|
|
Restricted stock units
|
331,195
|
|
|
$
|
19.42
|
|
Performance restricted stock units
|
62,000
|
|
|
$
|
19.43
|
|
Stock Option and Restricted Stock Unit Activity
The following tables summarize information about stock option and RSU activity for the nine months ended
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Exercise Price
(Per Share)(1)
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)(2)
|
Stock Options:
|
|
|
|
|
|
|
|
Balances at December 31, 2012
|
4,857,536
|
|
|
$
|
13.49
|
|
|
|
|
|
|
Granted
|
888,778
|
|
|
18.83
|
|
|
|
|
|
|
Exercised
|
(30,918
|
)
|
|
8.77
|
|
|
|
|
|
|
Forfeited
|
(2,889,025
|
)
|
|
13.35
|
|
|
|
|
|
|
Cancelled
|
(933,724
|
)
|
|
13.08
|
|
|
|
|
|
|
Balances at September 30, 2013
|
1,892,647
|
|
|
$
|
16.49
|
|
|
3.71
|
$
|
—
|
|
Options exercisable at September 30, 2013
|
1,549,755
|
|
|
$
|
17.50
|
|
|
2.76
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant Date Fair Value
(Per Share)(1)
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)(2)
|
Restricted Stock Units:
|
|
|
|
|
|
|
|
Balances at December 31, 2012
|
296,723
|
|
|
$
|
7.54
|
|
|
|
|
|
|
Granted (time-based)
|
393,195
|
|
|
19.42
|
|
|
|
|
|
|
Vested
|
(89,502
|
)
|
|
7.58
|
|
|
|
|
|
|
Forfeited
|
(600,416
|
)
|
|
15.19
|
|
|
|
|
|
|
Balances at September 30, 2013
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
_______________________________________________________________________________
|
|
(1)
|
The weighted average price per share is determined using exercise price per share for stock options and fair value per share on grant date for restricted stock units.
|
|
|
(2)
|
The aggregate intrinsic value is calculated as:
|
|
|
•
|
For options: the difference between the exercise price of the option and the fair value of our common stock for in-the-money options at
September 30, 2013
.
|
|
|
•
|
For restricted stock units: the difference between the grant date fair value of the unit and the fair value of our common stock for in-the-money units at
September 30, 2013
.
|
11.
Restructuring Charge
2013 Restructuring
On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of post marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. As a result of the voluntary recall of OMONTYS, all marketing activities were suspended and we have also suspended or terminated manufacturing activities.
In March 2013, we began implementing plans to restructure our operations in order to reduce operating costs and focus on the OMONTYS safety and other related FDA issues associated with the recall of the product. As of June 30, 2013, in addition to transitioning many of the ongoing activities to our collaborator, Takeda, we completed a reduction in force of almost all our personnel, including all of our commercial and medical affairs field forces as well as other employees throughout the organization. We have recorded
$15.5 million
in restructuring charges related to the workforce reduction and facilities during the first nine months of 2013.
The following table summarizes the accrual balance and utilization by type for the restructuring (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
Related
|
|
Employee
Related
|
|
Total
|
Balance at December 31, 2012
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring charges accrued
|
2,500
|
|
|
13,841
|
|
|
16,341
|
|
Adjustments
|
—
|
|
|
214
|
|
|
214
|
|
Cash payments
|
(2,500
|
)
|
|
(13,451
|
)
|
|
(15,951
|
)
|
Accretion
|
(17
|
)
|
|
—
|
|
|
(17
|
)
|
Balance at September 30, 2013
|
$
|
(17
|
)
|
|
$
|
604
|
|
|
$
|
587
|
|
In April 2013, as part of our efforts to restructure our operations in order to reduce costs, in addition to our reduction in force, we engaged an experienced restructuring firm, The Brenner Group. With the engagement of the restructuring firm, we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer.
12. Provision for Income Taxes
We are subject to federal and state income taxes. While we did generate net income during the second quarter of 2013 due to significant non-recurring adjustments to impairment charges, we anticipate being in a net operating loss position for 2013 and therefore have not recorded any federal or state taxes, other than the minimum statutory California tax, related to the current period for the three and nine months ended September 30, 2013. We did however record a
$2.2 million
tax benefit for a lapse in statute of limitations on a previously reserved uncertain state and federal tax positions. We did not record any tax liability for the nine months ended September 30, 2012 other than the minimum statutory California tax due to the anticipated tax loss position for the year ended December 31, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2012.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “intend”, “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “estimate,” “future” and similar expressions intended to identify forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q under Item 1A “Risk Factors,” and in “Management's Discussion and Analysis of Financial Conditions and Results of Operations” in Part I, Item 2 of this Form 10-Q. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Overview
Affymax, Inc., a Delaware corporation, was incorporated in July 2001. We are a biopharmaceutical company in the process of restructuring operations. In March 2012, the U.S. Food and Drug Administration, or FDA, approved the Company’s first and only product, OMONTYS® (peginesatide) Injection for the treatment of anemia due to chronic kidney disease in adult patients on dialysis. OMONTYS is a synthetic, peptide-based erythropoiesis stimulating agent, or ESA, designed to stimulate production of red blood cells and has been the only once-monthly ESA available to the adult dialysis patient population in the U.S. We co-commercialized OMONTYS with our collaboration partner, Takeda Pharmaceutical Company Limited, or Takeda during 2012 until February 2013, when we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of safety concerns. Effective April 1, 2013, we entered into an amendment of our collaboration with Takeda pursuant to which Takeda assumed full responsibility for OMONTYS, including responsibility for the ongoing recall and investigation with the FDA, and we granted them an exclusive license to OMONTYS in consideration for potential royalties and milestones.
Restructuring
In March 2013, we began implementing plans to restructure our operations in order to reduce operating costs and focus on the OMONTYS safety and other related FDA issues associated with the recall of the product. As of September 30, 2013, in addition to transitioning many of the ongoing activities to our collaborator, Takeda, we have completed a reduction in force of almost all our personnel, including all of our commercial and medical affairs field forces as well as other employees throughout the organization. We have recorded $15.5 million in restructuring charges related to the workforce reduction during the nine months ended September 30, 2013. As a result of this restructuring and the recall, we also recorded impairment charges of $4.4 million with respect to our property and equipment and intangible assets related to our license from Janssen Biotech, Inc. (a
subsidiary of Johnson & Johnson) and certain of its affiliated companies, collectively referred to as Janssen, in the nine months ended September 30, 2013.
In April 2013, as part of our efforts to restructure our operations in order to reduce costs, in addition to our reduction in force, we engaged an experienced restructuring firm, The Brenner Group, Inc. With the engagement of the restructuring firm, we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer.
Takeda Amendment
Effective April 1, 2013, we and Takeda, collectively the Parties, entered into the Fourth Amendment, or the Amendment, to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we have granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. This Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA. The arrangement with Takeda including the Amendment is referred to as the Arrangement.
The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS New Drug Application, or NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to
$180.0 million
which consists of the following: (a)
$10.0 million
is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b)
$10.0 million
and another
$10.0 million
relates to U.S. sales-based milestones, and (c)
$150.0 million
relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5.0 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S.
In 2012, we co-commercialized OMONTYS with Takeda. The commercial launch of the product occurred in April 2012. To commercialize OMONTYS, we established commercial and medical affairs infrastructures in 2012. The functions of our commercial and medical affairs infrastructures included marketing and sales, medical education, coverage and reimbursement and account management.
In 2012, we marketed our product primarily to dialysis organizations. Associated costs are included in selling, general and administrative costs or SG&A, in our accompanying financial statements.
In 2012, Takeda was responsible for account management, pricing and contracting. Specifically, Takeda had sole responsibility for invoicing and collection of receivables with regard to sales of OMONTYS. Takeda also had the rights and responsibility for establishing and modifying terms and conditions with customers with respect to the sale of OMONTYS in the U.S., including pricing discounts available to third-party payors, price adjustments and other allowable discounts and allowances. Both parties also had shared responsibilities such as joint marketing activities, business analytics and account management allocated by customer segments.
Prior to the Amendment, outside of the U.S., Takeda holds an exclusive license to develop and commercialize OMONTYS and has primary responsibility for filing regulatory submissions and obtaining product approvals in those territories.
Loan Agreement
In March 2012, we entered into a loan and security agreement, or the Loan Agreement, with Oxford Finance LLC and Silicon Valley Bank, or, collectively, the Lenders, under which we borrowed $10.0 million. On April 3, 2013, we entered into a letter agreement, or Letter Agreement, relating to the Loan Agreement with the Lenders. Pursuant to the terms of the Letter Agreement: (i) we paid all amounts due and owing so as to discharge our obligations thereunder which totaled
$9.8 million
including remaining principal, interest, final payment and prepayment fees, (ii) we waived any rights to seek additional credit extensions or unfunded commitments under the Loan Agreement, and (iii) the security interest granted to Lenders relating to substantially all of our assets, other than our intellectual property, was terminated. As of September 30, 2013, we have no amounts outstanding or owing on the Loan Agreement.
Litigation
On February 27, 2013, a securities class action complaint was filed in the United States District Court for the Northern District of California, naming as defendants Affymax, Inc. or the Company, certain of its officers, Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals U.S.A., Inc. and Takeda Global Research & Development Center, Inc. A second complaint naming the same defendants was filed on March 6, 2013. On May 2, 2013, the securities class action complaint that was filed on February 27, 2013 was voluntarily dismissed by the plaintiff. On May 21, 2013, the Court appointed a lead plaintiff in the remaining securities class action complaint. On July 22, 2013, an amended class action complaint was filed on behalf of purported stockholders of the Company, naming as defendants the Company and certain of its former officers. The amended complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connection with allegedly false and misleading statements made by the defendants regarding OMONTYS and the Company's business practices, financial projections and other disclosures between August 8, 2012 and February 22, 2013, or the Class Period. The plaintiff seeks to represent a class comprised of purchasers of the Company's common stock during the Class Period and seeks damages, costs and expenses and such other relief as determined by the Court.
On September 20, 2013, the Company and the individual defendants filed a motion to dismiss the consolidated amended complaint. The hearing on the motion to dismiss is set for January 14, 2014.
On March 19, 2013 and March 29, 2013, respectively, two derivative lawsuits were filed purportedly on behalf of the Company in California Superior Court for the County of Santa Clara naming certain of our current and former officers and directors as defendants (the “State Court Derivative Action”). The lawsuits allege that certain of the Company's officers and directors breached their fiduciary duties related to the clinical trials for OMONTYS and for representations regarding the Company's business health, which was tied to the success of OMONTYS. The lawsuits also assert claims for unjust enrichment and corporate waste. On May 31, 2013, the Court consolidated the two actions and appointed lead plaintiff. On June 11, 2013, lead plaintiff designated the complaint filed on March 29, 2012 as the operative complaint. On August 6, 2013, the Court stayed the derivative action pending the outcome of the motion to dismiss in the securities class action.
On August 19, 2013, another derivative lawsuit was filed purportedly on behalf of the Company in the United States District Court for the Northern District of California naming certain of our current and former officers and directors as defendants (the “Federal Derivative Action”). The lawsuit’s allegations are substantially similar to the allegations in the State Court Derivative Action. On October 9, 2013, the parties stipulated to stay the Federal Derivative Action pending the outcome of the motion to dismiss in the securities class action.
Additional complaints may be filed against us and our directors and officers related to our recall of OMONTYS. Our management believes that we have meritorious defenses and intends to defend these lawsuits vigorously. However, these lawsuits are subject to inherent uncertainties, the actual cost may be significant, and we may not prevail. We believe we are entitled to coverage under our relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.
Financial Outlook
We have experienced significant operating losses since inception. We expect to continue to incur operating losses. Our only source of potential proceeds are milestone payments from Takeda related to a reintroduction of OMONTYS which is highly uncertain. We may never generate additional revenues and, even if we do generate revenue in the future, we may never achieve or sustain profitability. We have funded our operations primarily through the sale of equity securities, reimbursement for development expenses and active pharmaceutical ingredient or API, production, license fees, milestone payments and profit equalization revenue from Takeda, issuance of notes payable, capital lease financings, interest earned on investments and limited license fees and royalties from licensing intellectual property. As of
September 30, 2013
, we had an accumulated
deficit of
$556.7 million
. All of our revenue has been derived almost exclusively from collaboration revenue from Takeda. Collaboration revenue consists of milestone payments, profit equalization revenue related to our share of product profit or loss on OMONTYS, reimbursement of development and commercialization expenses, and revenue for API under our agreements with Takeda or collectively, the Arrangement. We derived most of our collaboration revenue in 2012 from milestone payments and profit equalization revenue. From inception to September 30, 2013, we have received
$122.0 million
of upfront license fees,
$115.3 million
in milestone payments and
$300.2 million
related to the profit equalization revenue, the reimbursement of development and commercialization expenses and purchase of API under our Arrangement with Takeda.
Our operations have consumed substantial amounts of cash since our inception. As a result of the February 23, 2013 nationwide voluntary recall of OMONTYS and the suspension of all marketing activities, there is significant uncertainty as to whether we will have sufficient existing cash, cash equivalents and investments to fund our operations for the next 12 months. Our liabilities exceed our assets. While we continue to reduce cash outflows, there is no assurance that we have sufficient resources remaining to meet existing and future obligations in a timely manner.
If Takeda is unable to reintroduce the product or we are unable to obtain additional funding in the near future, our cash resources will rapidly be depleted and we will be required to further reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to liquidate our assets, seek bankruptcy protection or other alternatives, and it is likely that investors will lose all or some of their investment in us. Any failure to dispel any continuing doubts about our ability to continue as a going concern make it more difficult to obtain required financing on favorable terms or at all, negatively affect the market price of our common stock and could otherwise have a material adverse effect on our business, financial condition and results of operations.
If Takeda is unable to rapidly identify and rectify the causes of the safety concerns to the satisfaction of the FDA, which is highly uncertain, OMONTYS may be permanently withdrawn from the market. As a result, we may be unable to continue our operations. In order to reintroduce OMONTYS, Takeda would have to complete their ongoing thorough investigation, identify the causes of the safety concerns and provide a suitable plan to the FDA for approval. Accordingly, there can be no assurance that Takeda can address the safety concerns and meet the requirements of the FDA for reintroduction. Moreover, even if OMONTYS could be reintroduced, the commercial prospects for this product may be permanently diminished and the product may no longer be commercially viable.
If Takeda is unable to identify quickly the causes of the OMONTYS safety concerns or raise additional funds when required or on acceptable terms, we may have to:
|
|
•
|
discontinue operations;
|
|
|
•
|
relinquish some or all of our existing rights to OMONTYS milestones, royalties or other existing rights; or
|
|
|
•
|
pursue alternatives such as sale of the Company or its assets, a corporate merger, wind-down of operations or even bankruptcy proceedings.
|
The recall of OMONTYS has severely harmed our business, financial condition and prospects as a going concern. The recall has also limited our access to funds and the resources that may be required in order to address the safety concerns. If Takeda is not able to reintroduce OMONTYS, this will result in elimination of revenue in future periods. Even if Takeda is successful in reintroducing and commercializing OMONTYS in the future, there can be no assurance that revenues will ramp up rapidly enough to offset operating expenses. Further challenges or delays to potential reintroduction and commercialization of OMONTYS may require us to raise additional funding to continue operations. We may seek to raise additional funds through public or
private financing, strategic partnerships or other arrangements; however, such sources of funds may not be available to us at all. Even if available, any additional equity financing would be dilutive to stockholders and debt financing, if available, may involve restrictive covenants that may limit our ability to conduct our business and increase our risk of defaults. Market conditions may significantly limit our ability to raise funds such that there can be no assurance we can raise the additional funds to support our continuing operations, and funding may not be available to us on acceptable terms, or at all.
Results of Operations
Revenue
During the commercialization period, which commenced in June 2011 and continued through April 30, 2013 we received reimbursement for certain collaboration expenses. Takeda bore responsibility for 70% of third-party expenses related to U.S. development and 50% of third party expenses related to the commercialization of OMONTYS in the U.S. incurred by us and we were responsible for the reciprocal amount of development and commercialization expenses. Certain employee-related expenses supporting preparation for commercialization of OMONTYS in the U.S. were also shared equally. Such employee-related costs included the cost of certain employees that are required to commercialize OMONTYS such as field sales representatives, sales operations, medical science liaisons, nurse educators, conversion specialists, national accounts managers and reimbursement specialists. In addition, costs of employees in clinical, regulatory and other development functions supporting any post-marketing development activity required by the FDA or separately agreed to by the parties in the U.S. were generally shared equally.
OMONTYS sales by Takeda commenced in September 2012. Subsequent to the launch of OMONTYS and recognition of product revenue by Takeda, our collaboration revenue consisted of profit equalization revenue generated from our Arrangement with Takeda, milestone payments, reimbursements of certain eligible development and commercial expenses, net of Takeda's own eligible expenses, and revenue previously deferred related to payments we received associated with previously expensed API, which have been sold by Takeda. Revenue from profit equalization was calculated on a quarterly basis as the amount required so that the profit or loss realized by both Affymax and Takeda on OMONTYS equated to 50% of the total product profit or loss. Total product profit or loss on OMONTYS was calculated as gross product sales recorded by Takeda, less the following deductions recorded by Takeda: rebates and discounts, cost of goods and other gross-to-net adjustments incurred by Takeda, royalty expense incurred by us, commercialization expenses (full-time equivalents or FTE, related and out of pocket costs) incurred by both Takeda and us, and certain development costs associated with post-marketing development activities (FTE related and out of pocket costs) incurred by both Takeda and us.
Revenue as compared to the prior year is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Collaboration revenue
|
$
|
—
|
|
|
$
|
13,603
|
|
|
(100
|
)%
|
|
$
|
1,364
|
|
|
$
|
79,562
|
|
|
(98
|
)%
|
License and royalty revenue
|
—
|
|
|
4
|
|
|
(100
|
)%
|
|
5
|
|
|
9
|
|
|
—
|
|
Total revenue
|
$
|
—
|
|
|
$
|
13,607
|
|
|
(100
|
)%
|
|
$
|
1,369
|
|
|
$
|
79,571
|
|
|
(98
|
)%
|
Revenue decreased
$13.6 million
from
$13.6 million
for the three months ended September 30, 2012 to
$0.0 million
for the three months ended September 30, 2013. The decrease in collaboration revenue for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was primarily due to suspension of all marketing activities, as a result of the product recall of OMONTYS. During the nine months ended September 30, 2012, we recognized $60.3 million in milestone payments from Takeda related to FDA approval of OMONTYS, the European Medicines Agency, or EMA’s acceptance for review of the Marketing Authorization Application or MAA submitted by Takeda.
The following table presents our collaboration revenue, by revenue type, for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Milestone payments
|
$
|
—
|
|
|
$
|
2,250
|
|
|
$
|
—
|
|
|
$
|
60,250
|
|
Net expense reimbursement after CAPM
|
—
|
|
|
535
|
|
|
1,364
|
|
|
5,823
|
|
Total collaboration revenue
|
$
|
—
|
|
|
$
|
2,785
|
|
|
$
|
1,364
|
|
|
$
|
66,073
|
|
______________________________________________________
On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of post marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. As a result of the voluntary recall of OMONTYS, all marketing activities were suspended.
Effective April 1, 2013, we and Takeda or the Parties, entered into the Amendment, to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we have granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment,
dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. This Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA.
The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda agreed to reimburse us for certain personnel costs to assist in the transition and investigation activities for the month of April in order to support the transition. We recognized revenues of $525,000 in the three months ended June 30, 2012 related to the transition and investigation activities. Takeda agreed to reimburse us for certain personnel costs to assist in the transition and investigation activities for the month of April in order to support the transition. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to
$180.0 million
which consists of the following: (a)
$10.0 million
is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b)
$10.0 million
and another
$10.0 million
relates to U.S. sales-based milestones, and (c)
$150.0 million
relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S.
Cost of Manufacturing API for the Collaboration
The cost of manufacturing API is not reflected in our statement of comprehensive (loss) income as we were reimbursed by Takeda for all costs we incurred with third parties. At the time of FDA approval in March 2012, we had produced approximately $20.5 million of commercial grade API that had been expensed previously as R&D expenses. As of December 31, 2012, we had a remaining balance of $
19.8 million
in deferred revenue related to previously expensed API shipped to Takeda. As a result of the recall, the remaining balance of deferred revenue has been reversed during the nine months ended September 30, 2013.
Research and Development Expenses
The major components of R&D expenses include clinical trial expenses, consulting and other third-party costs, API manufacturing costs incurred prior to FDA approval, salaries and employee benefits, license fees paid to third parties for use of their intellectual property, supplies and allocations of various overhead and occupancy costs. Clinical trial expenses include, but are not limited to, contract research organization, or CRO, and investigator fees, site costs, comparator drug costs and clinical research organization costs. All R&D expenses are expensed as incurred. R&D expenses, as compared to the prior year are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended
September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Research and development expenses
|
$
|
(166
|
)
|
|
$
|
11,416
|
|
|
(101
|
)%
|
|
$
|
11,805
|
|
|
$
|
40,486
|
|
|
(71
|
)%
|
R&D expenses declined $
11.6 million
from 2012 to 2013. The decrease in R&D expenses in 2013 compared to 2012 was primarily due to reduced costs resulting from the reduction of development activities related to OMONTYS. This was partially offset by ongoing clinical trial activity on our Phase 3b trial, and a Phase 2 study in Pure Red Cell Aplasia, or PRCA patients. The negative expense (credit balance) in the third quarter of 2013 was due to settlement of previously accrued R&D expenses for amounts lower than the accrued amount.
The Amendment with Takeda effectuated a transfer of regulatory responsibilities, including the OMONTYS NDA, and all manufacturing, and development responsibilities from us to Takeda. As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.We expect research and development expenses to be immaterial in future quarters as we are no longer undertaking any research and development activities.
Selling, General and Administrative Expenses
SG&A expenses consist principally of salaries, employee benefits, consulting, professional fees for legal, auditing and tax services, marketing and commercial support for OMONTYS, allocation for overhead and occupancy costs and royalty expense. SG&A, expenses as compared to the prior year are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Selling, general and administrative expenses
|
$
|
1,886
|
|
|
$
|
26,181
|
|
|
(93
|
)%
|
|
$
|
26,740
|
|
|
$
|
62,936
|
|
|
(58
|
)%
|
SG&A expenses decreased $
24.3 million
from the third quarter of 2012 to the third quarter of 2013. The decrease in SG&A expenses in 2013 compared to 2012 was primarily due the recall of OMONTYS and our subsequent cost reduction efforts, including the reduction in force of nearly all of our employees.
As a result of the voluntary recall of OMONTYS, all product was recalled and all marketing activities were suspended. As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We expect selling, general and administrative expenses for the foreseeable future to include a lower level of salaries, benefits, and professional fees to maintain the corporate administrative responsibilities.
Collaboration Cost Reimbursement
Collaboration cost reimbursement as compared to the prior year are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Collaboration cost reimbursement
|
|
|
|
|
—
|
|
$
|
(43,451
|
)
|
|
—
|
|
—
|
Prior to the Amendment, we initiated orders for API with our contract manufacturing organizations, or CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally have commenced once there was a contractual commitment for the API from Takeda. As a result of the inability to sell OMONTYS and the uncertainty of future revenues, we have written down our API inventory and prepayments for API being produced by our CMOs to a net realizable value of zero and recorded a
$10.4 million
impairment charge related to this write-down during the year ended December 31, 2012. We have also recorded a
$34.6 million
loss on firm purchase commitments by applying the same lower of cost or market approach that is used to value inventory during the same period. Of the total $45.0 million charge for impairment of inventory and loss on CMO purchase commitments recorded at year end, we recorded a benefit of $20.4 million in the quarter ended March 30, 2013, primarily related to the Takeda Q1 profit equalization payment. Related to the $45.0 million charge for impairment of inventory and loss on CMO purchase commitments in 2012, we had the right under the Arrangement to submit to Takeda for reimbursement for a portion of such expenses. However because we had not presented such amounts to Takeda for reimbursement, and such reimbursements would be subject to Takeda's approval, we had not recorded a receivable for such amounts as of December 31, 2012.
In the three months ended June 30, 2013, we settled our future purchase commitments with our CMOs. We originally recorded a CMO liability of $32.9 million comprised of $5.4 million for firm purchase commitments of PEG, and the remaining $27.5 million of manufacturing obligations relate to API. We were able to settle these obligations for $11.0 million less than the contractual amounts, and realized favorable adjustments to our operating results of $21.9 million.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.
Impairment (Gain on Disposal) of Prepaid Expenses, Fixed Assets and Intangible Assets
Impairment of prepaid expenses, fixed assets and intangible assets and percentage changes as compared to the prior year are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Impairment (gain on disposal) of prepaid expenses, fixed assets and intangible assets
|
$
|
(166
|
)
|
|
$
|
—
|
|
|
—
|
|
$
|
4,414
|
|
|
$
|
—
|
|
|
—
|
As a result of the product recall and related restructuring activities that occurred in the quarter ended March 31, 2013, we incurred impairment charges of $5.1 million. The impairment related to our prepaid expenses, fixed assets and our intangible assets related to our license with Janssen was $1.3 million, $1.9 million and $1.9 million respectively during the first quarter of 2013. In the quarter ended September 30, 2013 we received an additional $0.1 million in proceeds from the sale of our property and equipment and for the nine months ended September 30, 2013 we have realized a total gain upon the sale of property and equipment of $0.7 million.
Restructuring Charges
Restructuring charges and percentage changes as compared to the prior year are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Restructuring charges
|
$
|
138
|
|
|
$
|
—
|
|
|
NM
|
|
$
|
15,478
|
|
|
$
|
—
|
|
|
NM
|
Beginning in March 2013, we undertook plans to reorganize our operations in order to reduce operating costs and focus on the OMONTYS safety and other related FDA issues associated with the recall of the product. By June 30, 2013, in addition to transitioning most activities to our collaborator, Takeda, we completed a reduction in force of most of our remaining employees, including all of our commercial and medical affairs field forces as well as other employees throughout the organization and we engaged an experienced restructuring firm, The Brenner Group. With the engagement of the restructuring firm, we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer. We have incurred $15.5 million in restructuring charges related to the workforce reduction during the nine months ended September 30, 2013.
In June 2013 we moved our remaining four employees into new offices in Cupertino, California and vacated all of our previous office buildings in Palo Alto, California. In the quarter ended June 30, 2013, we recorded an expense of $2.5 million related to the termination of use of our previous office buildings. In August 2013 we signed an agreement with our landlord for payment of that amount. The payment, made in August 2013, included forfeiture of our deposit of $50,000, release of a letter of credit for $1.1 million and cash payment of $1.4 million. Cash collateral for the letter of credit was held by our bank and shown as restricted cash on our balance sheet. This cash was used to fund release of the letter of credit. Expense in the third quarter of 2013 consists of $50,000 expense related to the lease termination forfeiture of our deposit, and $88,000 in local property tax related to now disposed of property.
Interest Income (Expense), Net
Interest income (expense), net as compared to prior years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Percent Change
|
|
Nine Months Ended September 30,
|
|
Percent Change
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
|
Interest income
|
$
|
—
|
|
|
$
|
23
|
|
|
(100
|
)%
|
|
$
|
21
|
|
|
$
|
56
|
|
|
(63
|
)%
|
Interest expense
|
—
|
|
|
(668
|
)
|
|
(100
|
)%
|
|
(1,565
|
)
|
|
(1,316
|
)
|
|
19
|
%
|
Interest income (expense), net
|
$
|
—
|
|
|
$
|
(645
|
)
|
|
(100
|
)%
|
|
$
|
(1,544
|
)
|
|
$
|
(1,260
|
)
|
|
23
|
%
|
There was no interest expense recorded in the quarter ended September 30, 2013, all notes payable to lenders were paid in the quarter ended June 30, 2013.
On April 3, 2013, we entered into a Letter Agreement, relating to the Loan Agreement, with the Lenders. Pursuant to the terms of the Letter Agreement: (i) we paid all amounts due and owing so as to discharge our obligations thereunder which totaled
$9.8 million
including remaining principal, interest, final payment and prepayment fees, (ii) we waived any rights to seek additional credit extensions or unfunded commitments under the Loan Agreement, and (iii) the security interest granted to Lenders relating to substantially all of our assets, other than our intellectual property, was terminated. In the nine months ended September 30, 2013, we recorded interest expense of $1.1 million related to the repayment of the debt.
As of September30, 2013, there are no amounts due and owing under the Loan Agreement.
Provision for Income Taxes
We are subject to federal and state income taxes. While we did generate net income during the second quarter of 2013 due to significant non-recurring adjustments to impairment charges, we anticipate being in a net operating loss position for 2013 and therefore have not recorded any federal or state taxes, other than the minimum statutory California tax, related to the current period for the three and nine months ended September 30, 2013. We did however record a $2.2 million tax benefit for a lapse in statute of limitations on a previously reserved uncertain state and federal tax positions in the second quarter of 2013. We did not record any tax liability for the nine months ended September 30, 2012 other than the minimum statutory California tax due to the anticipated tax loss position for the year ended December 31, 2012.
Liquidity and Capital Resources
Our cash, cash equivalents, and investments at
September 30, 2013
and
December 31, 2012
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31
|
|
2013
|
|
2012
|
Cash and cash equivalents
|
$
|
6,852
|
|
|
$
|
68,265
|
|
Short-term investments
|
$
|
—
|
|
|
$
|
9,717
|
|
Long-term investments
|
$
|
—
|
|
|
$
|
2,323
|
|
As of September 30, 2013, we had
$6.9 million
in cash and cash equivalents. Our cash is held on deposit with our bank. As of
September 30, 2013
, we had no debt .
Working Capital (Deficit).
Working capital (deficit) was $
(1.7) million
at September 30, 2013, a decrease of $
5.2 million
from working capital as of December 31, 2012.
As a result of the February 23, 2013 nationwide voluntary recall of OMONTYS and the suspension of all marketing activities, there is significant uncertainty as to whether we will have sufficient existing cash to fund our operations for the next 12 months. Our liabilities exceed our assets. Given our limited resources, there is no assurance that we will be able to reduce our operating expenses enough to meet our existing and future obligations. We currently believe we have sufficient funds to continue through the second quarter of 2014, though that is uncertain.
If Takeda is not able to reintroduce the product or we are not able to obtain additional funding in the near future, our cash resources will rapidly be depleted and we will be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships. If we do not have sufficient funds to continue operations, we could be required to liquidate our assets, including
relinquish some or all of our existing rights to OMONTYS,
seek bankruptcy protection or other alternatives and it is likely that investors will lose all or some of their investment in us. Any failure to dispel any continuing doubts about our ability to continue as a going concern could adversely affect our ability to enter into collaborative relationships with business partners, make it more difficult to obtain required financing on favorable terms or at all, negatively affect the market price of our common stock and could otherwise have a material adverse effect on our business, financial condition and results of operations.
In March 2013, we undertook plans to reorganize our operations in order to reduce operating costs and focus on the OMONTYS safety and other related FDA issues associated with the recall of the product. In addition to transitioning many of the ongoing activities to our collaborator, Takeda, we undertook a reduction in force of almost all of our employees, including our commercial and medical affairs field forces as well as other employees throughout the organization. We incurred approximately $15.5 million of restructuring charges related to the workforce reduction during the nine months ended September 30, 2013. As a result of this restructuring and the recall, we also recorded impairment changes of $4.4 million with respect to our prepaid expenses, property and equipment and intangible assets related to our license from Janssen in the nine months ended September 30, 2013.
Beginning in April 2013, in an effort to restructure our operations and reduce costs, we commenced a process to notify substantially all our workforce of estimated dates of separation and we engaged an experienced restructuring firm, The Brenner Group, Inc.. With the engagement of the restructuring firm, we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer.
Effective April 1, 2013, we and Takeda, collectively the Parties, entered into the Amendment to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we have granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. The Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA.
The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to
$180.0 million
which consists of the following: (a)
$10.0 million
is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b)
$10.0 million
and another
$10.0 million
relates to U.S. sales-based milestones, and (c)
$150.0 million
relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S.
In view of our limited resources and funds, we plan to explore various strategic alternatives, including a sale of the Company or our assets or a corporate merger. We are considering all possible alternatives, including further restructuring activities, wind-down of operations or even bankruptcy proceedings. If the recall is not lifted and Takeda is not able to reintroduce OMONTYS, this will result in a severe decrease to our revenue in future periods. Even if Takeda is successful in reintroducing and commercializing OMONTYS in the future, there can be no assurance that revenues will ramp up rapidly enough to offset operating losses and repayment of debts. Further challenges or delays to potential reintroduction and commercialization of OMONTYS may require us to raise additional funding to successfully reintroduce and commercialize OMONTYS. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing would be dilutive to stockholders and debt financing, if available, may involve restrictive covenants that may limit our ability to conduct our business and increase our risk of defaults. The market may take into consideration of the recent recall of OMONTYS, which recall is described under the caption “OMONTYS Voluntary
Recall” in “Item 1. Business” of our Annual Report on Form 10-K which may negatively affect our ability to obtain additional funding. Market conditions may significantly limit our ability to raise funds such that there can be no assurance we can raise the additional funds to support our continuing operations, and successfully reintroduce and commercialize OMONTYS, and funding may not be available to us on acceptable terms, or at all.
Our independent registered public accounting firm, in their most recent audit report, expressed substantial doubt about our ability to continue as a going concern.
Since our inception, we have financed our operations through sale of capital stock, license fees, milestone payments, reimbursement for development and commercial expenses, profit equalization revenue for OMONTYS, and manufacturing costs from collaborative partners, issuance of notes payable, capital lease financing, interest earned on investments and limited license fees and royalties from licensing intellectual property. From inception through September 30, 2013, we have received net proceeds of
$458.8 million
from the issuance of equity securities, including
$53.6 million
in net proceeds from the sale of
9,745,762
shares of our common stock in a secondary public offering in March 2011.
Following our announcement of the voluntary recall of OMONTYS in February 2013, there has been an extremely high volume of trading of our stock, and a significant drop in the value of our stock. As a result of the large trading volume, there may be a shift of ownership amongst our 5% stockholders that could result in an ownership change, under Section 382 of the Internal Revenue Code of 1986, as amended. Under Section 382, a corporation that undergoes an ownership change, as defined by the Internal Revenue Code, may be subject to significant limitations on its ability to utilize its net operating losses or NOLs, and tax credits accumulated prior to the ownership change to offset future taxable income or tax liabilities. At September 30, 2013, deferred tax assets were offset by a valuation allowance except to the extent of possible taxable income in an earlier period.
Financing Agreements
Loan Agreement.
In March 2012, we entered into the Loan Agreement, with the Lenders, under which we borrowed $10.0 million. On April 3, 2013, we entered into a Letter Agreement, relating to the Loan Agreement dated March 26, 2012, with the Lenders. Pursuant to the terms of the Letter Agreement: (i) we paid all amounts due and owing so as to discharge our obligations thereunder totaling
$9.8 million
including remaining principal, interest, final payment and prepayment fees, (ii) we waived any rights to seek additional credit extensions or unfunded commitments under the Loan Agreement, and (iii) the security interest granted to Lenders relating to substantially all of our assets, other than our intellectual property, was terminated. As of September 30, 2013, we have no amounts outstanding or owing on the Loan Agreement.
Funding from our Collaboration Partner
We have received cumulative amounts of
$122.0 million
of upfront license fees,
$115.3 million
in milestone payments and
$300.2 million
related to profit equalization revenue, the reimbursement of development and commercialization expenses and purchase of API under our Arrangement with Takeda.
In early 2013 and in consultation with the FDA, we and Takeda voluntarily recalled OMONTYS nationwide from the market as a result of post-marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. In connection with the recall, we and Takeda suspended all promotional and marketing activities for OMONTYS. Effective April 1, 2013, we and Takeda, and collectively the Parties, entered into the Amendment, to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we have granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013, and is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA.
The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.
Eligible Profit Equalization Profit and Loss from our Collaboration Partner.
As part of the Amendment between us and Takeda, both Parties agreed that they will no longer share expenses related to third-party development (70/30 split) and commercialization (50/50 split) as of April 1, 2013. Any expenses incurred by either us or Takeda after April 1, 2013 shall be the responsibility of the respective party and neither us or Takeda has the right to share expenses with each other.
As a result of the voluntary recall of OMONTYS in February 2013, all marketing activities were suspended. As part of the Amendment with Takeda, the profit equalization revenue for the three months ended March 31, 2013 was the final profit equalization payment under the Arrangement. Upon signing the Amendment with Takeda, the economics of the collaboration changed from a profit sharing arrangement to a milestone and royalty-based compensation structure to us, effective April 1, 2013.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.
Profit Equalization Revenue/Loss.
As part of the Amendment with Takeda, the profit equalization revenue for the three months ended March 31, 2013 will be the final profit equalization payment under the Arrangement. Upon signing the Amendment with Takeda, the economics of the collaboration changed from a profit sharing arrangement to a milestone and royalty-based compensation structure to us, effective April 1, 2013.
Launch Allowance
. Takeda funded the first $20.0 million of U.S. commercial expenses. Amounts received under the launch allowance are non-refundable. As part of the launch allowance, under the Amendment, Takeda is entitled to deduct up to
8%
f
rom any payments made to us under the royalty and milestone provision
until they have recouped an amount equal to $11.0 million (see Note 3 of Notes to Condensed Financial Statements). To date, Takeda deducted a total of $2.8 million against the profit equalization. Future royalties, if any, may be offset against the launch allowance of $8.2 million which is classified as Advance from Takeda in the condensed balance sheet.
API Payments.
Under the terms of the API Supply Agreement, we are responsible for the manufacture and supply of all quantities of API to be used in the development and commercialization of OMONTYS worldwide. Takeda reimburses us for our cost of API plus 20%. As of
December 31, 2012
we had a remaining balance of
$19.8 million
recorded as an Advance from Takeda which is related to deferred revenue on API shipped to Takeda. As a result of the recall and the impairment charges recorded on the OMONTYS inventory during 2012, the remaining balance of deferred revenue has been reversed as of September 30, 2013.
Milestone Payments.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to
$180.0 million
consisting of the following: (a)
$10.0 million
is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b)
$10.0 million
and another
$10.0 million
relates to U.S. sales-based milestones, and (c)
$150.0 million
relates to sales-based milestones outside of the U.S. as disclosed below but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of
13%
to
17%
with respect to net sales in the U.S. and in the range of
13%
to
24%
depending on the level of net sales by Takeda worldwide outside of the U.S. Although we are eligible to receive future milestones from Takeda, timing and amounts of future milestone payments, if any, are highly uncertain due to the recall.
Expense Reimbursement Payments.
Through March 31, 2013, we were eligible to receive reimbursement from Takeda for 70% of all third-party expenses related to U.S. development in the U.S. (See Note 3 of Notes to Condensed Financial Statements). As part of the Amendment between us and Takeda, both Parties agreed that they will no longer share expenses related to third-party development (70/30 split) and commercialization (50/50 split) as of April 1, 2013. Any expenses incurred by either us or Takeda after April 1, 2013 shall be the responsibility of the respective party and neither us or Takeda has the obligation to share expenses with each other.
Settlement and License Agreement
In November 2011, we entered into the Settlement and License Agreement with Janssen, which required us to make two fixed payments to Janssen of $6.0 million, which was paid in December 2011, and $2.0 million which was paid in June 2012. The Settlement and License Agreement required us to make a $2.5 million milestone payment to Janssen upon FDA regulatory approval of OMONTYS, and requires us to make a $2.5 million milestone payment to Janssen upon regulatory approval of OMONTYS in the first major European country. In addition, Janssen will be entitled to royalties on sales of OMONTYS in Europe, Japan and certain other countries outside of the U.S. until mid-2016. Upon execution of the Settlement and License Agreement in the fourth quarter of 2011, we recorded $8.0 million of R&D expense relating to the fixed payments. Upon FDA approval of OMONTYS in March 2012, we capitalized $2.5 million related to the first milestone payment during the first quarter of 2012. The resulting asset will be amortized over the expected life of the related patent family, the last-expiring patent of which expires in June 2016. This $2.5 million milestone payment to Janssen was paid in April 2012. As a result of the product recall and related restructuring activities that occurred in March 2013, we incurred impairment charges of $1.9 million related to our license with Janssen during the nine months ended September 30, 2013.
Concurrent with the execution of the Settlement and License Agreement, we and Takeda entered into an amendment to the Arrangement. Under the terms of this amendment, Takeda agreed to pay up to $6.5 million in additional milestones to us in consideration of the upfront and milestone payments that we are required to make to Janssen under the Settlement and License Agreement (see Note 4 of Notes to Condensed Financial Statements). These milestones were substantive and at risk at the time that we entered into the amendment with Takeda. $5.25 million of these milestones were earned based on regulatory and commercial events in the U.S. and the remaining $1.25 million tied to regulatory events in the E.U., which was eliminated as part of the Amendment. During the first quarter of 2012, $3.0 million of these milestones had been earned as a result of FDA approval of OMONTYS, which we received payment in the second quarter of 2012. In July 2012, we earned an additional $2.25 million milestone as a result of commercial progress on the OMONTYS product launch, which was recognized as revenue in the third quarter of 2012. There are no royalties to Janssen on U.S. sales of OMONTYS, but we are solely responsible for the royalty payment to Janssen on sales of OMONTYS in certain regions outside the U.S. when and if it is approved in those regions.
Contract Manufacturing Organization (CMO) Settlements
We initiated orders for API with our CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally commenced once there was a contractual commitment for the API from Takeda. As of December 31, 2012, we had future purchase commitments amounting to $34.6 million. These future commitments were comprised of $5.8 million for firm purchase commitments of PEG, and the remaining $28.8 million of manufacturing obligations relate to API, and were based on firm demand forecasts from Takeda. We paid $1.7 million in payments to our CMOs in the first quarter of 2013 which reduced the accrual balance to $32.9 million
.
We finalized settlement agreements with the CMOs in the second quarter of 2013 and made a total of $11.0 million in payments resulting in a favorable adjustment to our operating results of $21.9 million.
Cash Flows During the Nine Months Ended September 30, 2013 and 2012
In summary, our cash flows for the periods presented are as follows (in thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2013
|
|
2012
|
Net cash provided by (used in) operating activities
|
$
|
(66,082
|
)
|
|
$
|
(10,804
|
)
|
Net cash provided by investing activities
|
14,398
|
|
|
30,699
|
|
Net cash provided by (used in) financing activities
|
(9,729
|
)
|
|
14,935
|
|
Net cash used in operating activities for the nine months ended September 30, 2013 and 2012 was
$66.1 million
and
$10.8 million
, respectively. Net cash used in operations for the nine months ended September 30, 2013 reflects our net loss, non-cash credit related to collaboration cost reimbursement and changes in accrued liabilities associated with compensation related accruals partially offset by the benefit of payments received from Takeda related to profit equalization revenue, and reimbursement for development and commercial expense and purchases of API by Takeda. Net cash used in operating activities for the nine months ended September 30, 2012 was primarily due to changes in our receivable to Takeda as a result of the achievement of milestones related to FDA approval of OMONTYS which had not yet been received and changes in other assets related to OMONTYS intellectual property rights and warrant costs associated with our notes payable. These were offset by our
net income for the nine months, non-cash expenses associated with depreciation and stock compensation expense and an increase in Advance from Takeda.
Net cash provided by investing activities for the nine months ended September 30, 2013 of
$14.4 million
was due to proceeds from maturities of investments of $4.8 million, proceeds from the sale of securities of $7.2 million, proceeds from the sale of property and equipment of $1.2 million and change in restricted cash of $1.1 million . Net cash provided by investing activities for the nine months ended September 30, 2012 of
$30.7 million
was primarily due to proceeds from maturities of investments partially offset by purchases of property and equipment.
Net cash used in financing activities for the nine months ended September 30, 2013 was primarily attributable to repayment of our note payable of
$10.0 million
partially offset by proceeds of
$0.3 million
received from the issuance of common stock upon exercise of stock options. Net cash provided by financing activities for the nine months ended September 30, 2012 was primarily attributable to proceeds of
$10.0 million
received from the issuance of a notes payable and $4.5 million received from the issuance of common stock upon exercise of stock options.
In early 2013 and in consultation with the FDA, we and Takeda, voluntarily recalled OMONTYS nationwide from the market as a result of post-marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. In connection with the recall, we and Takeda suspended all promotional and marketing activities for OMONTYS. If Takeda is unable to identify and rectify the causes of the safety concerns to the satisfaction of the FDA, OMONTYS may be withdrawn from the market and we may be unable to continue our operations as a going concern.
Contractual Obligations and Significant Commitments
Our future contractual obligations, including financing costs, at
September 30, 2013
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
|
Total
|
|
2013
|
|
2014 - 2015
|
|
2016 -2017
|
|
Thereafter
|
Operating lease obligations (1)
|
$
|
28
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total fixed contractual obligations
|
$
|
28
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
________________________________
(1)
Relates primarily to minimum lease payments for lease of our offices in Cupertino, California which expires in March 2014. In June 2013 we moved our remaining four employees into the offices in Cupertino, California and vacated all of our facilities in Palo Alto, California. We recorded an expense of $2.5 million related to the termination of use of our previous office buildings. In August 2013 we sign an agreement with our landlord for payment of that amount. The payment included forfeiture of our deposit of $50,000, release of a letter of credit for $1.1 million and cash payment of $1.4 million. Cash collateral for the letter of credit was held by our bank and shown as restricted cash on our balance sheet. This cash was used to fund release of the letter of credit.
Contract Manufacturing Organization (CMO) Settlements
We initiated orders for API with our CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally commenced once there was a contractual commitment for the API from Takeda. As of December 31, 2012, we had future purchase commitments amounting to $34.6 million. These future commitments were comprised of $5.8 million for firm purchase commitments of PEG, and the remaining $28.8 million of manufacturing obligations relate to API, and were based on firm demand forecasts from Takeda. We paid $1.7 million in payments to our CMOs in the first quarter of 2013 which reduced the accrual balance to $32.9 million
.
We finalized settlement agreements with the CMOs in the June 2012 and made a total of $11.0 million in payments resulting in a favorable adjustment to our operating results of $21.9 million.
Going Concern
Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The lack of financial resources due to the recall of OMONTYS
raises substantial doubt about our ability to continue as a going concern.
The condensed financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Off-Balance Sheet Arrangements
At
September 30, 2013
, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Securities and Exchange Commission, or SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these condensed financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to impairment of long-lived assets, restructuring charges, revenue recognition and clinical development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.
Our critical accounting policies and the use of estimates are consistent with those noted in our Annual Report on Form 10-K for the year ended December 31, 2012 except as noted below:
2013 Restructuring
On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of post marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. As a result of the voluntary recall of OMONTYS, all marketing activities were suspended and we have also suspended or terminated manufacturing activities.
In March 2013, we commenced a re-organization plan to reduce operating costs and focus on the OMONTYS safety and other related FDA issues associated with the recall of the product. The reorganization plan included a reduction in force of approximately
305
employees (almost all of our workforce) which included our commercial and medical affairs field organizations as well as other officers and employees. We incurred $15.5 million in restructuring charges, all of which are related to expenditures for one-time employee termination benefits. We incurred all of these charges during the nine months ended September 30, 2013.
In April 2013, as part of our efforts to restructure our operations in order to reduce costs, in addition to our reduction in force, we engaged an experienced restructuring firm, The Brenner Group. With the engagement of the restructuring firm, we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer.
In June 2013, we ceased use of our leased facilities and recorded an accrual for lease exit costs of $2.5 million. In August 2013 we signed an agreement with our landlord for payment of that amount. The payment, made in August 2013, included forfeiture of our deposit of $50,000, release of a letter of credit for $1.1million and cash payment of $1.4 million. Cash collateral for the letter of credit was held by our bank and shown as restricted cash on our balance sheet. This cash was used to fund release of the letter of credit.
Recent Accounting Pronouncements
There are no recent accounting pronouncements which are expected to have a material effect on our financial condition or results of operations.