PART I
ITEM 1: BUSINESS
The following Business Section contains
forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and other factors including the risk factors set forth in Part I,
Item 1A of this annual report. Unless the content requires otherwise, references to “ARIAD,” “company,” “we,” “our,” and “us,” in this annual report refer to ARIAD Pharmaceuticals, Inc. and our
subsidiaries.
Overview
ARIAD is a global oncology company whose vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover,
develop and commercialize small-molecule drugs to treat cancer in patients with the greatest unmet medical need – aggressive cancers where current therapies are inadequate.
Our first approved cancer medicine, Iclusig
®
(ponatinib), and our product candidates, AP26113 and ridaforolimus, were discovered internally by our scientists based on our expertise in computational and
structure-based drug design. Ridaforolimus is being developed for cardiovascular indications by Medinol, Ltd., or Medinol, and ICON Medical Corp., or ICON, pursuant to license agreements entered into in 2005 and 2007, respectively.
Iclusig (ponatinib)
Iclusig is a
tyrosine kinase inhibitor, or TKI, which is approved in the United States and Europe for the treatment of adult patients with chronic myeloid leukemia, or CML, and Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL.
Background of CML and Ph+ ALL
CML is a rare form of leukemia that is characterized by an excessive and unregulated production of white blood cells by the bone marrow due to a genetic
abnormality that produces the BCR-ABL protein. After a chronic phase of production of too many white blood cells, CML typically evolves to the more aggressive phases referred to as accelerated phase and blast phase. Ph+ ALL is a subtype of acute
lymphoblastic leukemia that carries the Ph+ chromosome that produces BCR-ABL. It has a more aggressive course than CML and is often treated with a combination of chemotherapy and tyrosine kinase inhibitors. The BCR-ABL protein is expressed in both
of these diseases.
According to the National Cancer Institute, approximately 5,000 new cases of CML and 1,800 new cases of Ph+ ALL are
diagnosed each year in the United States. CML and Ph+ ALL patients treated with TKIs can develop resistance or intolerance over time to these therapies. Iclusig was designed by ARIAD scientists to inhibit the BCR-ABL protein, including
drug-resistant mutants that arise during treatment. Iclusig is the only approved TKI that is currently known to demonstrate activity against the T315I gatekeeper mutation of BCR-ABL, the most common mutation occurring in approximately 10 percent of
patients with drug resistance.
United States
Initial Regulatory Approval in December 2012
On December 14, 2012, we obtained
accelerated approval from the U.S. Food and Drug Administration, or FDA, to sell Iclusig. Iclusig was initially approved in the United States for the treatment of adult patients with chronic, accelerated or blast phase CML who are resistant or
intolerant to prior TKI therapy, and the treatment of adult patients with Ph+ ALL who are resistant or intolerant to prior TKI therapy. We
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commenced sales and marketing of Iclusig in the United States in the first quarter of 2013 through a limited number of specialty pharmacies and specialty distributors and we charged approximately
$115,000, on a wholesale basis, for an annual supply of the approved dose of Iclusig. The recommended dose of Iclusig is a 45mg tablet taken once daily, with or without food. As discussed below, on October 31, 2013, we temporarily suspended
marketing and commercial distribution of Iclusig in the United States due to safety concerns raised by the FDA, and in December 2013, the FDA approved revised prescribing information for Iclusig. We resumed marketing and commercial distribution of
Iclusig in the United States in January 2014.
The FDA approval of Iclusig in December 2012 was based on results from the pivotal Phase 2 PACE
(
P
onatinib Ph+
A
LL and
C
ML
E
valuation) trial in patients with CML or Ph+ ALL who were resistant or intolerant to prior TKI therapy, or who had the T315I mutation of BCR-ABL. In that trial, Iclusig demonstrated robust
anti-leukemic activity, with 54 percent of chronic-phase CML patients, including 70 percent of patients with the T315I mutation, achieving a major cytogenetic response, or MCyR, which was the primary endpoint of the PACE trial for chronic-phase
patients. A MCyR means that 35 percent or less of the cells in a patient’s bone marrow test positive for the Philadelphia chromosome. In patients with advanced disease, 52 percent of accelerated-phase CML patients, 31 percent of blast-phase CML
patients and 41 percent of Ph+ ALL patients achieved a major hematologic response, or MaHR, to Iclusig. MaHR was the primary endpoint in the trial for patients with advanced disease. A MaHR, as measured through the counting of white blood cells in
blood and bone marrow, means that either a complete hematologic response has occurred or there is no evidence of leukemia. The most common non-hematologic adverse reactions reported (greater than or equal to 20 percent) were hypertension, rash,
abdominal pain, fatigue, headache, dry skin, constipation, arthralgia, nausea, and pyrexia. Hematologic adverse reactions included thrombocytopenia, anemia, neutropenia, lymphopenia, and leukopenia.
At the time of its approval in December 2012, the full prescribing information for Iclusig included a boxed warning specifying that arterial thrombosis
and hepatotoxicity had occurred in some patients during clinical trials of Iclusig. Specifically, the warning indicated that cardiovascular, cerebrovascular, and peripheral vascular thrombosis, including fatal myocardial infarction and stroke,
occurred in Iclusig-treated patients; that serious arterial thrombosis occurred in 8 percent of Iclusig-treated patients; and that hepatotoxicity, liver failure and death occurred in Iclusig-treated patients.
Regulatory Actions in the Fourth Quarter of 2013
On October 9, 2013, we announced results of our review of updated clinical data from the PACE trial of Iclusig and actions that we were taking following consultations with the FDA. In the review of
the clinical data, with a median follow up of 24 months, serious arterial thrombosis occurred in 11.8 percent of Iclusig-treated patients, compared to 8 percent after 11 months of follow-up reflected in the then-current U.S. prescribing information.
In addition, at 24 months, serious venous occlusion occurred in 2.9 percent of Iclusig-treated patients, compared to 2.2 percent in the then-current U.S. prescribing information. Based upon our review and the FDA consultations, we paused patient
enrollment in all clinical trials of Iclusig and the FDA placed a partial clinical hold on all additional patient enrollment in clinical trials of Iclusig. Except with respect to the Phase 3 EPIC clinical trial in adult patients with newly diagnosed
CML in the chronic phase, which was discontinued in October 2013 as discussed under “Pipeline” below, patients receiving Iclusig in clinical trials continue on therapy and reductions in Iclusig dose from 45mg daily, the approved dosage,
are being implemented or considered on a trial-by-trial basis for patients. Before being able to restart enrollment, we expect that the eligibility criteria for Iclusig trials will be modified. We also sent a written communication to health care
providers and informed the European Medicines Agency, or EMA, and other regulatory agencies of the actions described above.
The FDA issued
several Drug Safety Communications during the fourth quarter of 2013, which noted an increasing frequency of reports of serious and life-threatening blood clots and severe narrowing of blood vessels (arteries and veins) of patients taking Iclusig,
and recommended that health care professionals should consider for each patient whether the benefits of Iclusig treatment are likely to exceed the risks of treatment.
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On October 31, 2013, we announced that we were temporarily suspending the marketing and commercial
distribution of Iclusig in the United States while we negotiated updates to the United States prescribing information for Iclusig and implementation of a risk mitigation strategy with the FDA. Our actions were taken in response to a request by the
FDA.
Re-approval and Resumption of Marketing and Commercial Distribution
On December 20, 2013, we announced that the FDA had approved revised U.S. Prescribing Information, or USPI, and a Risk Evaluation and Mitigation Strategy, or REMS, for Iclusig that allowed for
immediate resumption of the marketing and commercial distribution of Iclusig. Iclusig is now approved in the United States for the treatment of adult patients with:
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T315I-positive CML (chronic phase, accelerated phase, or blast phase) or T315I-positive Ph+ ALL, and
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Chronic phase, accelerated phase, or blast phase CML or Ph+ ALL for whom no other tyrosine-kinase inhibitor therapy is indicated.
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The FDA granted approval of the revised USPI based on its review of the Iclusig clinical trial data, including 24-month
follow-up of the PACE trial. The boxed warning has been revised to alert patients and healthcare professionals to the risk of vascular occlusive events and includes a new warning for heart failure. In addition, neuropathy and ocular toxicity have
been added as warnings, and dose reduction recommendations have been strengthened. We also agreed to additional post-marketing requirements as described further below. The starting dose of Iclusig remains 45mg daily. On January 17, 2014, we
announced that we had resumed marketing and commercial distribution of Iclusig in the United States through an exclusive specialty pharmacy with a wholesale price of approximately $125,000 for an annual supply of the approved dose of Iclusig.
On November 1, 2013, when marketing and commercial distribution of Iclusig was temporarily suspended in the United States, there were
approximately 640 patients receiving Iclusig obtained through commercial channels in the United States. Between that time and January 17, 2014, when Iclusig was re-launched, the drug was made available through emergency and single-patient
investigational new drug (IND) applications, which were reviewed and approved by the FDA on a case-by-case basis. The FDA approved more than 370 INDs during that period, and more than 300 patients received Iclusig at no cost through this process. We
expect most of these patients, many of whom received a three-month supply of Iclusig, to transition from the IND program to commercial supply by the end of the first quarter of 2014. As of January 17, 2014, the Iclusig IND program was no longer
accepting new patients.
In addition to focusing our efforts on the re-launch of Iclusig in the United States, in 2014, we plan to invest in
studies designed to better understand the safety profile of Iclusig in resistant and intolerant CML and Ph+ ALL patients with the objective of improving the balance of benefit and risk for these patients as post-marketing commitments. We expect that
these studies will include a randomized clinical trial of Iclusig in this patient population to evaluate multiple dose levels and we expect to begin this trial in the second half of 2014. Our post-marketing commitments with regulatory authorities
also include a pharmacovigilance study and a prospective observational study of safety events.
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International Markets
On July 2, 2013, we announced the granting of our marketing authorization for Iclusig by the European Commission, or EC, as an orphan medicinal product for two indications:
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The treatment of adult patients with chronic phase, accelerated phase or blast phase CML who are resistant to dasatinib or nilotinib; who are
intolerant to dasatinib or nilotinib and for whom subsequent treatment with imatinib is not clinically appropriate; or who have the T315I mutation, and
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The treatment of adult patients with Ph+ ALL who are resistant to dasatinib; who are intolerant to dasatinib and for whom subsequent treatment with
imatinib is not clinically appropriate; or who have the T315I mutation.
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We began to obtain pricing and reimbursement
approvals in certain European countries in the second half of 2013 and began selling Iclusig in those countries. In 2013, the price charged for an annual supply of Iclusig in these European countries was approximately 80% of the price charged in the
United States, on a wholesale basis.
Based upon our announcements and actions taken in October 2013, concerning the safety, marketing and
commercial distribution, and further clinical development of Iclusig in the United States, we engaged in discussions with the European Medicines Agency, or EMA, regarding potentially revised prescribing information for Iclusig. On November 8,
2013, the EMA announced that Iclusig’s product information should be updated to include strengthened warnings for cardiovascular risk and guidance on optimizing the patient’s cardiovascular therapy before starting treatment. In addition,
the EMA has commenced an in-depth review, known as an Article 20 referral, of the benefits and risks of Iclusig to better understand the nature, frequency and severity of events obstructing the arteries or veins, the potential mechanism that leads
to these side effects and whether there needs to be a revision in the dosing recommendation for Iclusig. We expect the results of this review in mid-2014.
We have also filed marketing authorization applications for Iclusig in Switzerland (which was approved in February 2014), Canada and Australia and plan to file for marketing authorization for Iclusig with
regulatory authorities in Japan. Each of these regulatory authorities has its own processes and timelines for the review and approval of marketing authorization applications and such reviews are ongoing at this time. We are discussing the
updated Iclusig clinical data with these other foreign regulatory agencies.
Commercial Strategy and Impact on Operations
Our long-term strategy includes the commercialization of Iclusig and future products in the United States, Europe and other selected
territories worldwide. In 2012 and 2013, we prepared for, and implemented, the commercial launch of Iclusig in the United States and Europe. In the United States, this included establishing an experienced and trained sales force and other
professional staff necessary for an effective launch, implementing systems and processes to support launch, developing tools and materials to be utilized during the commercialization of Iclusig and other activities, and arranging for Iclusig to be
provided for patients through a network of specialty pharmacies and specialty distributors. In the United States, in connection with the initial launch of Iclusig, we hired an experienced hematology/oncology team of approximately 60 professionals,
including experienced account specialists, regional business directors, corporate account directors and medical science liaisons, who targeted the approximate 5,000 physicians who generate the majority of TKI prescriptions.
In Europe, we established operations with headquarters in Switzerland and hired management and other key personnel who have been building our business
infrastructure and capabilities in Europe. We established early-access programs for Iclusig in Europe and established the supply chain in key markets. We hired country-level personnel in key markets in Europe to build company and brand awareness
upon approval, while managing the local country pricing and reimbursement process.
In November 2013, following the decision to suspend the
marketing and commercial distribution of Iclusig in the United States, we announced a reduction in our work force in the United States and other actions to significantly reduce operating expenses and extend our cash runway. We eliminated
approximately 40 percent of the US workforce. In addition to personnel-related expense
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reductions, we implemented reductions in expenses related to marketing and commercial distribution of Iclusig in the United States, development and manufacturing activities for Iclusig, including
reductions related to the discontinuation of the EPIC clinical trial discussed under “Pipeline” below and certain other trials, as well as AP26113, and reductions in expenses for discovery research and general and administrative
activities.
With the resumption of marketing and commercial distribution of Iclusig in the United States in January 2014, we have
re-established key operating processes and systems and hired key personnel to implement the re-launch. Given the revised indication statement for Iclusig in the United States, we plan to distribute Iclusig in the United States through an exclusive
specialty pharmacy, Biologics, Inc., and manage the marketing and distribution with fewer personnel and lower operating expenses than was required to support the original indication statement and launch in 2013. In January 2014, we entered into an
exclusive Master Services Agreement and related statements of work with Biologics, Inc. to provide for the distribution of Iclusig in the United States to patients, physicians, health care providers and payers, including management of all data
reporting, patient access and support services and our copay program. The term of the agreement is for one year with two automatically renewing one year extensions unless terminated earlier by either party. The agreement may be terminated by either
party on 30 days’ notice, upon the bankruptcy or insolvency of either party, or upon a party’s breach that is not cured within specified periods.
In January 2014, we also entered into an exclusive agreement with a specialty pharmacy in Australia to provide for the marketing and distribution of Iclusig in Australia and New Zealand. The term of the
agreement is seven years from first commercial sale of Iclusig in the territory following reimbursement approval. We expect to receive marketing approval and to launch Iclusig in Australia in the fourth quarter of 2014.
Competition
Novartis and
Bristol-Myers Squibb, the current leading marketers of TKI’s to treat CML and Ph+ ALL, have reported combined annual revenues in 2013 of nearly $6 billion for these drugs. The worldwide market for these therapies is growing annually. It is
estimated that the markets in the United States and Europe account for about 70 percent of those revenues, with Japan accounting for an additional 10 percent. The number of newly diagnosed patients in these three geographies was estimated to be
approximately 13,000 in 2013 and is expected to grow to approximately 14,000 in five years, based on data from third-party healthcare information providers. Through chronic treatment of their disease with available TKIs, we estimate that most of
these patients will benefit from one or more therapies for over a decade. We believe that the majority of patients will likely switch therapies in the course of managing this chronic disease due to resistance or intolerance. We estimate that there
are approximately 3,100 patients in the United States, 3,800 patients in Europe and 600 patients in Japan with CML and Ph+ ALL who will become resistant or intolerant to their existing TKI therapy in 2014, based on healthcare information providers
and published data from clinical trials for existing CML therapies. Of the 3,100 U.S. patients, we believe that, under the revised USPI, approximately 1,300 patients will be eligible for Iclusig therapy. Our ability to successfully compete with
these other products in the United States, Europe and any other markets where Iclusig is approved will depend on, among other factors, the impact of updated clinical and safety data and a revised indication statement in the United States for
Iclusig, the results of on-going reviews of Iclusig data by regulatory authorities in Europe and other countries, the effectiveness of our commercial strategy for marketing Iclusig in each of these jurisdictions, including pricing and reimbursement
strategies, the impact of changes to prescribing information and the implementation of a risk management strategy, and the acceptance of Iclusig by patients, the medical community and third-party payors in the United States and Europe, as well as
other risks described in the “Risk Factors” set forth in Part I, Item 1A of this Annual Report.
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Pipeline
Our product pipeline currently consists of three product candidates – Iclusig (for which we plan to seek approval in additional cancer indications and in additional countries), AP26113 and
ridaforolimus.
Iclusig (for Additional Indications and Regions)
In July 2012, we initiated a randomized Phase 3 clinical trial of ponatinib, referred to as the EPIC (
E
valuation of
P
onatinib versus
I
matinib in
C
hronic Myeloid Leukemia)
trial, in adult patients with newly diagnosed CML in the chronic phase. We believed that approval in newly diagnosed patients, if achieved, would significantly expand the patient population and associated revenues from sales of Iclusig in CML
patients. The trial was 50% enrolled in September 2013. However, on October 18, 2013, based upon the assessment of the clinical trial data discussed above and further discussions with the FDA, we announced the discontinuation of this trial.
Patients in the EPIC trial were removed from treatment in the trial and transferred to the care of their physician. Other clinical trials of Iclusig remain on partial clinical hold by the FDA, and we intend to address the FDA’s clinical hold
concerns in order to enable additional patient enrollment in these studies.
In August 2012, we initiated a multi-center Phase 1/2 clinical
trial in Japan of Iclusig in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ ALL and have failed prior treatment with TKIs. This trial is designed to establish the recommended dose for Iclusig and
confirm its anti-leukemic activity in Japanese patients. We expect that this trial should provide the incremental data needed for regulatory approval of Iclusig in resistant or intolerant patients in Japan. The trial is fully enrolled. The primary
endpoint for chronic-phase CML patients is MCyR. The primary endpoint for accelerated and blast phase CML patients and for Ph+ ALL patients is MaHR.
In January 2013, we announced an agreement with Newcastle University, U.K., on behalf of the U.K. National Cancer Research Institute, or NCRI, to collaborate on a multi-center, randomized Phase 3 trial,
named SPIRIT 3, to assess the impact of switching patients with CML being treated with a first-line TKI, upon suboptimal response or treatment failure, to Iclusig. The SPIRIT 3 trial is designed as a randomized, two-arm, multi-center trial that
compares MMR at three years in newly diagnosed patients treated with imatinib to those treated with nilotinib, when patients are “rescued” with Iclusig upon suboptimal response at three or 12 months or treatment failure. Based upon our
announcements and actions in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States, this trial has been delayed.
In June 2013, we initiated a Phase 2 clinical trial of Iclusig in adult patients with metastatic and/or resectable gastrointestinal stromal tumors, or
GIST. This trial is designed to provide initial clinical data evaluating the efficacy and safety of Iclusig in patients with GIST following failure of prior TKI therapy. The trial is an open label, multicenter trial that will enroll approximately 45
patients. This trial remains on partial clinical hold by the FDA. We are currently addressing, with the FDA, the lifting of the partial clinical hold and expect to resume and complete enrollment in this trial in 2014.
In addition, Iclusig is being studied in various investigator-sponsored trials in settings including first line and second line CML, acute myeloid
leukemia or AML, non-small cell lung cancer or NSCLC, and medullary thyroid cancer or MTC. The FDA’s partial clinical hold has been lifted on the MTC trial and we expect the clinical hold will be lifted on the other trials in 2014. We expect to
initiate additional investigator-sponsored clinical trials in 2014 in indications including Ph+ ALL, blast phase CML, AML and endometrial cancer.
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AP26113
AP26113 is an investigational inhibitor of anaplastic lymphoma kinase, or ALK. In non-clinical studies, AP26113 also demonstrated that it can inhibit epidermal growth factor receptor, or EGFR, and c-ros
oncogene-1, or ROS1. All of these kinases are clinically validated targets in NSCLC.
We initiated patient enrollment in a Phase 1/2 clinical
trial of AP26113 in the third quarter of 2011. The protocol is designed to enroll approximately 50 to 60 patients in the Phase 1 portion of the trial and approximately 125 patients in the Phase 2 portion of the trial. We began enrollment in the
Phase 2 portion of the trial in the second quarter of 2013. In September 2013, we announced updated clinical results from the ongoing Phase 1/2 clinical trial. The study results show robust anti-tumor activity in patients with TKI-naïve and
crizotinib-resistant ALK-positive NSCLC, including in patients with brain metastases after crizotinib treatment. Crizotinib is the currently available first-generation ALK inhibitor. We plan to commence a pivotal trial of AP26113 in the first
quarter of 2014 in ALK-positive NSCLC patients who are resistant to crizotinib, following confirmation of the safety and efficacy profile of the selected dose of AP26113 in the ongoing phase 1/2 clinical trial. We have decided to focus our
development efforts on ALK-positive NSCLC patients, both treatment naïve and resistant, and those with CNS activity. We will no longer enroll EGFR, ROS1, or other patients in the ongoing Phase 1/2 clinical trial.
We estimate that currently there are approximately 14,200 ALK-positive patients with advanced and metastatic NSCLC in the United States, Europe and
Japan, based on healthcare information providers, who would be potentially eligible for treatment with AP26113, if it were approved.
Ridaforolimus
Ridaforolimus is
an investigational inhibitor of the mammalian target of rapamycin, or mTOR, that we discovered and developed internally and later licensed in 2010 to Merck & Co., Inc., or Merck, for oncology applications. Under the license agreement, Merck
is responsible for all activities and funds all of the costs related to the development, manufacturing and commercialization of ridaforolimus in oncology. In the third quarter of 2011, Merck filed in the United States and Europe for regulatory
approval of ridaforolimus as a maintenance therapy for patients with metastatic soft-tissue and bone sarcomas who had a favorable response to chemotherapy. In June 2012, the FDA issued a complete response letter regarding the New Drug Application,
or NDA, filed by Merck, stating that the FDA could not approve the application in its present form and that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. In
November 2012, Merck announced that it had formally notified the EMA of Merck’s decision to withdraw the marketing authorization application, or MAA, for ridaforolimus, because the data available to date and provided in the MAA were not
sufficient to permit licensure of ridaforolimus in the European Union for the maintenance treatment of patients with soft tissue sarcoma or primary malignant bone tumor. In its announcement, Merck stated that it was studying ridaforolimus in
combination with other drugs in other tumor types and that it is committed to the ongoing clinical trials of ridaforolimus. On February 20, 2014, we received notice from Merck that it is terminating the license agreement. Per the terms of the
license agreement, this termination will become effective nine months from the date of the notice at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to us.
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Potential Cardiovascular Indications of Ridaforolimus
As an mTOR inhibitor, ridaforolimus has also been shown in preclinical studies to block the proliferation and migration of vascular smooth muscle cells,
the primary cause of narrowing and blockage of injured arteries, and is an analog of sirolimus, another mTOR inhibitor that has been approved for use in drug-eluting stents. Clinical studies have found lower reblockage rates in patients treated with
stents that deliver small-molecule drugs, such as sirolimus, everolimus or paclitaxel, a cytotoxic agent, locally to the site of vascular injury. Such stents have become the standard of care for many patients undergoing interventional procedures to
open narrowed coronary arteries.
We entered into a non-exclusive license agreement with Medinol Ltd., or Medinol, a
leading innovator in stent technology, in January 2005, pursuant to which Medinol agreed to develop and commercialize stents and other medical devices to deliver ridaforolimus to prevent restenosis, or reblockage, of injured vessels following
interventions in which stents are used in conjunction with balloon angioplasty. In January 2014, we and Medinol announced the initiation of two registration trials in the United States and other countries of Medinol’s NIRsupreme
TM
Ridaforolimus-Eluting Coronary Stent System incorporating
ridaforolimus. The two NIRsupreme clinical trials are randomized, single-blind, global studies which will take place in the United States, Europe, Israel and Canada and plan to enroll approximately 2,200 patients with coronary artery disease.
Drug-eluting stents are now implanted in over 425,000 patients yearly in the United States.
The commencement of patient enrollment in
Medinol’s clinical trials, along with the submission of an investigational device exemption, or IDE, to the FDA, triggers milestone payments to us of $3.8 million, expected in 2014. We are eligible to receive additional regulatory, clinical and
commercial milestones of up to $34.8 million, if two products are developed, plus royalties on worldwide sales of approved products. We are responsible for supplying ridaforolimus to Medinol, and Medinol is responsible for the development and
commercialization of the medical devices delivering ridaforolimus.
We also entered into a license agreement with ICON Medical Corp., or ICON,
an emerging medical device company, in October 2007, to also develop and commercialize stents and other medical devices to deliver ridaforolimus to prevent restenosis, or reblockage, of injured vessels following interventions in which stents are
used in conjunction with balloon angioplasty. We have retained the right to enter into one additional non-exclusive license agreement, in addition to the licenses granted to Medinol and ICON, to develop and commercialize medical devices delivering
ridaforolimus for use in vascular disease. ICON is still involved in the preclinical stages of development of these medical devices. There can be no assurance that we will receive any additional payments under these agreements.
Our Discovery Programs
Our research and
development programs are focused on discovering and developing small-molecule drugs that regulate cell signaling for the treatment of cancer. Many of the critical functions of cells, such as cell growth, differentiation, gene transcription,
metabolism, motility and survival, are dependent on signals carried back and forth from the cell surface to the nucleus and within the cell through a system of molecular pathways. When disrupted or over-stimulated, such pathways may trigger diseases
such as cancer. Our research focuses on exploring cell-signaling pathways, identifying their role in specific cancers and cancer subtypes, and discovering drug candidates to treat those cancers by interfering with the aberrant signaling pathways of
cells. The specific cellular proteins blocked by our product candidates have been well characterized and validated as cancer targets. Iclusig and our product candidates, AP26113 and ridaforolimus, have been developed in-house through the integrated
use of structure-based drug design and computational chemistry, and their targets have been validated with techniques such as functional genomics, proteomics, and chemical genetics.
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Our Intellectual Property
Patents and other intellectual property rights are essential to our business. In general, we file patent applications to protect our technology, inventions and improvements to our inventions that we
consider to be patentable and important to our business.
We solely own the following patents and patent applications for our product
candidates:
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Iclusig, our pan BCR-ABL inhibitor, is protected by composition of matter claims of U.S. Patent No. 8,114,874, which expires on December 22, 2026,
and corresponding international counterparts;
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AP26113, our dual ALK/EGFR kinase inhibitor, is covered by composition of matter claims of a pending U.S. patent application, which, if granted, is
expected to expire in 2029, and corresponding international counterparts; and
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Ridaforolimus, our mTOR inhibitor licensed to Merck, is protected by composition of matter claims of U.S. Patent No. 7,091,213, which expires on
February 3, 2023, and corresponding international counterparts.
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In addition to the composition of matter patents and
patent applications mentioned above, we also own other patents and patent applications covering manufacturing processes, formulations and uses that may provide additional protection of the respective product or product candidate.
The remainder of our patent portfolio is focused primarily on inventions involving additional classes of chemical compounds, the mTOR gene, and the
components, configurations and use of our ARGENT regulation technologies, which we out-licensed in 2011 and are no longer pursuing internally.
We also rely on unpatented trade secrets and proprietary know-how, some of which is not believed to be adequately protectable through patents. In order
to protect our trade secrets, we enter into confidentiality agreements with our employees, consultants, investigators, clinical trial sites, contractors, collaborators and other third parties to whom we disclose confidential information, although
protection of trade secrets is generally recognized as challenging.
Our Licenses to Third Parties
Our Collaboration and License Agreements with Merck
In July 2007, we entered into a collaboration agreement with Merck for the joint global development, manufacture and commercialization of ridaforolimus for use in cancer, referred to as the Collaboration
Agreement. In May 2010, we entered into an amended and restated agreement with Merck, referred to as the License Agreement, which replaced the Collaboration Agreement, and a related supply agreement.
Under the terms of the License Agreement, we granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and
Merck assumed responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and agreed to fund 100 percent of all ridaforolimus costs incurred after January 1, 2010. The License Agreement
provided that Merck would develop ridaforolimus in multiple oncology indications. If ridaforolimus received regulatory approval, Merck would be responsible for selling ridaforolimus worldwide and would pay us tiered double-digit royalties on global
net sales.
Under the License Agreement, Merck paid us an initial up-front fee of $50 million in the second quarter of 2010 and a $25 million
milestone payment in the third quarter of 2011, for acceptance of an MAA in Europe, which was subsequently withdrawn by Merck in November 2012. On February 20, 2014, we received notice from Merck that it is terminating the license agreement.
Per the terms of the license agreement, this termination will become effective nine months from the date of the notice at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to us.
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Our Stent Collaborations
In January 2005, we entered into a license agreement with Medinol and in October 2007 we entered into a license agreement with ICON, to develop and commercialize ridaforolimus-eluting stents and other
medical devices to prevent restenosis, or reblockage, of injured vessels following interventions in which stents are used in conjunction with balloon angioplasty. Under these agreements, we granted to each of Medinol and ICON a non-exclusive,
world-wide, royalty-bearing license, under our patents and technology relating to ridaforolimus, to develop, manufacture and sell the stents and certain other medical devices that deliver ridaforolimus. We are responsible for supplying Medinol and
ICON with, and they have agreed to purchase from us, certain quantities of ridaforolimus for use in its development, manufacture and sale of the stents and other medical devices.
The agreement with Medinol provides for the payment by Medinol to us of up to $39.3 million, which includes an upfront license fee and payments based upon achievement of development, regulatory and
commercial milestones, if two products are developed. Through December 31, 2013, we have received $750,000 under the agreement. With the initiation of two registration trials and the filing of an IDE with the FDA announced in January 2014, we
expect to receive, during 2014, $3.8 million in milestone payments under the agreement. In addition, we are eligible to receive tiered single-digit royalties based on various minimum levels of stents or other medical devices sold under the
agreement. As of December 31, 2013, no products have been approved by regulatory authorities for sale under this agreement.
The
agreement with ICON provides for the payment by ICON to us of up to $27.4 million based upon achievement of certain clinical, regulatory and commercial milestones, if two products are developed. Through December 31, 2013, we have received no
such payments under the agreement. In addition, we are eligible to receive single-digit royalties based on net sales of stents or other medical devices sold under the agreement. As of December 31, 2013, no products have been approved by
regulatory authorities for sale under this agreement. Concurrent with the execution of the license agreement with ICON, we received shares of ICON common stock equal to an ownership interest in ICON of less than 10 percent and certain other rights,
including maintenance, anti-dilution and registration rights.
The terms of both the Medinol and ICON agreements extend to the later to occur
of the expiration of our patents relating to the rights licensed to Medinol or ICON under the agreement or 15 years after the first commercial sale of a product. The agreements may be terminated by either party for breach following the failure to
cure after a 90-day cure period. In addition, Medinol or ICON may terminate their respective agreements upon 30 days’ notice to us upon certain events, including if it determines, in its reasonable business judgment, that it is no longer in its
business interest to continue the development of a medical device to deliver ridaforolimus. We may terminate the agreements upon 30 days’ notice to Medinol or ICON, if we determine that it is no longer in our business interest to continue our
development and regulatory approval efforts with respect to ridaforolimus.
Licenses Related to ARGENT Technology
In 2011, we executed three exclusive out-license agreements for separate aspects of our ARGENT cell-signaling regulation technology, which we are no
longer pursuing internally. The licenses to these non-core assets provide us with a combination of equity ownership in the licensees, upfront payments, ongoing fees for supply of certain research reagents, and potential milestone and royalty
payments linked to clinical, regulatory and sales achievements of the licensees. These out-license arrangements allow us to focus primarily on the development and commercialization of our core compounds, and we do not currently believe that these
license agreements are material to our business or that any payments that could be received under these agreements would be material to our results of operations or financial position.
The ARGENT technology platform combines chemistry and genetics to allow specific cell-signaling and gene-expression events to be chemically activated in whole animals and cultured cells. The
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technology platform includes a portfolio of distinct small-molecule “dimerizer” compounds optimized for specific applications. Dimerizers bring specific proteins together in cells. The
technology allows intracellular processes to be controlled with small molecules, which may be useful in the development of therapeutic vaccines and gene and cell therapy products, and which provide versatile tools for applications in cell biology,
functional genomics and drug-discovery research. The technology is being developed to treat human disease through cancer vaccines, cell therapy and gene therapy, in each case featuring small-molecule regulation of cellular activation.
Initial clinical proof of concept has already been demonstrated by the licensees for two product candidates, which utilize our small-molecule dimerizer
drug AP1903, in patients with prostate cancer and in patients with hematologic malignancies who have undergone hematopoietic stem cell transplants. AP1903 was discovered and developed by ARIAD scientists.
Research and Development Spending
During each of the three years ended December 31, 2013, 2012 and 2011, we spent approximately $162.9 million, $144.7 million and $77.7 million,
respectively, on our research and development activities.
Manufacturing
Iclusig and our drug candidates and preclinical compounds are small molecules that can be readily synthesized by processes that we have developed. We are able to manufacture in-house the quantities of our
product candidates necessary for certain preclinical studies. We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of Iclusig or our product candidates. We contract with third-party manufacturers
to assist in the development and optimization of our manufacturing processes and methods and to supply our product candidates in sufficient bulk quantities and in suitable dosage forms for use in our clinical trials. We also expect to continue to
depend on third-party manufacturers for the supply of our products for commercialization in the United States, Europe and other territories in which we may sell Iclusig.
Iclusig and AP26113 are produced by an established manufacturing process using conventional organic chemical synthesis. The production of Iclusig and AP26113 is based on technology that we believe is
proprietary to us. We have established relationships with third parties for the manufacture of Iclusig clinical and commercial supply and have existing agreements for our supply of drug substance, drug product and distribution.
Ridaforolimus is produced by an established manufacturing process using conventional synthetic and natural-product fermentation techniques. The
production of ridaforolimus is based in part on technology that we believe is proprietary to us. Pursuant to our License Agreement with Merck, Merck is responsible for supplying the active pharmaceutical ingredient used in ridaforolimus drug product
and the finished drug product. Merck may sub-license this technology to contract manufacturers to enable them to manufacture ridaforolimus for Merck’s and our use, including use by our medical device collaborators. Upon termination of the
license agreement in November 2014, all rights to ridaforolimus will be returned to us and we will be responsible for all manufacturing required for any continued development of the drug candidate.
Contract manufacturers are subject to extensive governmental regulation and we depend on them to manufacture Iclusig and our product candidates in
accordance with the FDA’s current good manufacturing practice regulations, or cGMPs. We have an established quality assurance program designed to ensure that our contract manufacturers produce our compounds in accordance with cGMPs, and other
applicable domestic and foreign regulations. We believe that our current contractors comply with such regulations.
Competition
The pharmaceutical and biotechnology industries are intensely competitive. We compete directly and indirectly with other pharmaceutical
companies, biotechnology companies and academic and research
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organizations, many of whom have greater resources than us. We compete with companies who have products on the market or in development in the same class or for the same indications as our
product candidates. We may also compete with organizations that are developing similar technology platforms.
In the area of oncology,
pharmaceutical and biotechnology companies such as Amgen Inc., AstraZeneca PLC, Bristol-Myers Squibb Company, Celgene Corporation, Eli Lilly and Company, the Roche Group, GlaxoSmithKline plc, Johnson & Johnson, Merck, Merck KGaA, Novartis
AG, Pfizer, Inc., Sanofi-Aventis, Takeda Pharmaceutical Co., Ltd., and Teva Pharmaceutical Industries Ltd. are developing and marketing drugs to treat cancer.
Bristol-Myers Squibb, Novartis and Pfizer are currently marketing TKIs for the treatment of patients with CML that compete with Iclusig. Novartis’ imatinib is marketed in the first-line setting, and
Bristol-Myers Squibb’s dasatinib and Novartis’ nilotinib are marketed for patients in the first-line setting, as well as in those who have failed imatinib therapy. These drugs generated nearly $6 billion in revenues during 2013, according
to reported results from Bristol-Myers Squibb and Novartis. In the resistance/intolerance market, Teva’s omacetaxine mepesuccinate, a non-TKI, was recently approved in the United States and Pfizer’s bosutinib was recently approved in the
United States and the European Union. These products compete with Iclusig. In Asia, Il-Yang Pharmaceutical recently gained approval in South Korea for radotinib, a locally developed TKI for the treatment of CML patients. We cannot be certain that
Iclusig will be commercially successful. In addition to the other challenges related to a company launching its first commercial drug, we will face competition from these other TKIs that are currently approved for the treatment of CML patients and
any new products that may be approved. While we believe that Iclusig has a competitive commercial profile compared to the existing TKI therapies on the market, our current estimates of the potential competitiveness of Iclusig compared to existing
TKI therapies and the revenues that Iclusig could generate in future periods are subject to various risks and uncertainties, including those set forth in “Risk Factors” in Part I, Item 1A of this Annual Report under the caption
“Risks relating to the development and commercialization of our products and product candidates.”
Several companies have ALK
inhibitors in various stages of development that could compete with AP26113. Pfizer has obtained approval for and is currently marketing crizotinib for patients with ALK-positive non-small cell lung cancer. Novartis, Chugai Pharmaceutical Co., the
Roche Group, Tesaro, Xcovery and Astellas also have ALK inhibitors in development.
Pfizer and Novartis are developing mTOR inhibitors for use
in cancer that could compete with ridaforolimus. Pfizer’s mTOR inhibitor, temsirolimus, and Novartis’ mTOR inhibitor, everolimus, are both approved to treat patients with advanced kidney cancer. In addition, everolimus is approved to treat
patients with several additional types of cancer, including advanced neuroendocrine tumors of pancreatic origin, subependymal giant cell astrocytoma associated with tuberous sclerosis, and advanced hormone receptor-positive, HER2-negative breast
cancer in postmenopausal women in combination with exemestane, after failure of treatment with letrozole or anastrozole.
We may also
experience competition from companies that have acquired or may acquire technology from companies, universities, and other research institutions. As these companies develop their technologies, they may develop proprietary positions that may
materially and adversely affect us.
Government Regulation and Product Approval
Governmental authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the
research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing and export and import of products such as Iclusig and those we are developing. Our
product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States and by the EMA through the MAA process before they may be legally marketed in Europe. Our product candidates will be
subject to similar requirements in other countries prior to marketing in
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those countries. The process of obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, requires
the expenditure of substantial time and financial resources.
United States Drug Development Process
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. Failure to comply
with the applicable U.S. requirements at any time during the product development process or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on
the applicant. These sanctions could include:
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refusal to approve pending applications;
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withdrawal of an approval;
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imposition of a clinical hold;
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total or partial suspension of production or distribution; or
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injunctions, fines, disgorgement, or civil or criminal penalties.
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The process required by the FDA before a drug may be marketed in the United States generally involves the following:
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completion of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory Practices, or GLPs, or other applicable
regulations;
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submission to the FDA of an Investigational New Drug Application, or IND, which must become effective before human clinical trials may begin;
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performance of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCPs, and other applicable requirements to
establish the safety and efficacy of the proposed drug for its intended use;
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submission to the FDA of an NDA;
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with
current Good Manufacturing Practices, or cGMP, to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
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FDA review and approval of the NDA.
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As part of the IND, an IND sponsor must submit to the FDA the results of preclinical tests, which may include laboratory evaluations and animal studies, together with manufacturing information and
analytical data, and the proposed clinical protocol for the first phase of the clinical trial of the drug. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical
trial on a “clinical hold” because of safety concerns or perceived procedural deficiencies. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials may begin. A clinical hold may be imposed
by the FDA at any time during the life of an IND, and may affect one or more specific studies or all studies conducted under the IND.
All
clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP’s. They must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject selection
and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually.
Sponsors also must timely report to FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigation brochure, or any findings from
other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug. An institutional review board, or IRB, must also review and approve each new clinical protocol and patient informed consent form prior to
commencement of the corresponding clinical trial at
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each institution where a trial is to be performed. Protocols detail, among other things, the objectives of the study, dosing procedures, subject selection and exclusion criteria, and the
parameters to be used to monitor patient safety.
Human clinical trials are typically conducted in three sequential phases that may overlap or
be combined:
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Phase 1:
The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing is
often conducted in patients.
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Phase 2:
Clinical trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, to
preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
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Phase 3:
Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at
geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide, if appropriate, an adequate basis for product labeling.
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Human clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may
suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at
its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.
During the development of a new drug, sponsors are given an opportunity to meet with the FDA at certain points. These points may be prior to submission of an IND, at the end of Phase 2, and before an NDA
is submitted. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the end-of-Phase 2 meeting to
discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trial that they believe will support approval of the new drug.
Concurrent with clinical trials, sponsors usually complete additional animal safety studies and also develop additional information about the chemistry and physical characteristics of the drug and
finalize a process for manufacturing commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug and the manufacturer must develop methods
for testing the quality, purity and potency of the drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over
its proposed shelf-life.
If a drug is intended to treat a serious or life threatening condition for which there is an unmet medical need, a
company may request that the FDA consider the drug for a fast track development program at the time of submitting its IND or at any time prior to receiving marketing approval. The fast track program is designed to facilitate the development and
expedite the review of a new drug for the treatment of specific conditions. If the FDA agrees that the drug meets the criteria for fast track development for treatment of one or more conditions, it will grant fast track status.
Orphan Drug Designation and Approval
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition which is defined as one affecting fewer than 200,000 individuals in the United
States or more than 200,000 individuals where there is no reasonable expectation that the product
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development cost will be recovered from product sales in the United States. Orphan drug designation must be requested before submitting an NDA and does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process.
If an orphan drug-designated product subsequently receives the first FDA approval
for the disease for which it was designed, the product will be entitled to seven years of product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication, except in very limited
circumstances, for seven years. Early in 2013, we received orphan drug exclusivity approval of Iclusig for the treatment of adult patients with chronic, accelerated or blast phase CML, who are resistant or intolerant to prior TKI therapy, and the
treatment of adult patients with Ph+ ALL who are resistant or intolerant to prior TKI therapy. This seven year exclusivity period began on December 14, 2012, the date of approval of our NDA.
United States Drug Review and Approval Processes
The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed
labeling, and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product.
The FDA
reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted
with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.
Once the
submission is accepted for filing, the FDA begins an in-depth and substantive review. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is
cGMP-compliant. The FDA may seek advice and a recommendation from an external advisory committee as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it
generally follows such recommendations. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested. The FDA may refuse to approve an NDA if the applicable regulatory criteria are not
satisfied or may require submission of additional clinical or other data and information which, upon agency review and interpretation, may or may not be deemed by the FDA to satisfy the criteria for approval. The FDA may also issue a “complete
response” letter, which may require additional clinical or other data or impose other conditions that must be met in order to secure final approval of the NDA.
NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. In addition, products studied
for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval and may be approved on the basis of adequate and
well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than survival or irreversible
morbidity. In such a situation, a drug may be approved based on a Phase 2 pivotal trial, as was the case with Iclusig. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and
well-controlled post-marketing clinical trials. Priority review and accelerated approval do not change the standards for approval, but may expedite the approval process.
Expedited Review and Approval
The FDA has various programs, including Fast Track,
Breakthrough Therapy designation, priority review, and accelerated approval, which are intended to expedite or simplify the process for reviewing drugs,
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and/or provide for the approval of a drug on the basis of a surrogate endpoint. Even if a drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets
the conditions for qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address
unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or
conditions and fill unmet medical needs. Priority review is designed to give drugs that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared to a standard review
time of ten months.
Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate
early and frequent meetings with a sponsor of a Fast Track designated drug and expedite review of the application for a drug designated for priority review. Accelerated approval, which is described in Subpart H of 21 Code of Federal Regulations Part
314, provides for an earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet medical need based on a surrogate endpoint. A surrogate endpoint is a laboratory measurement or
physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of a product candidate receiving accelerated approval perform post-marketing
clinical trials.
In the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law in July 2012, Congress
encouraged the FDA to utilize innovative and flexible approaches to the assessment of products under accelerated approval. The law required the FDA to issue related draft guidance within a year after the law’s enactment and also promulgate
confirming regulatory changes. In June 2013, the FDA published a draft Guidance for Industry entitled, “Expedited Programs for Serious Conditions––Drugs and Biologics” which provides guidance on FDA programs that are intended to
facilitate and expedite development and review of new drugs as well as threshold criteria generally applicable to concluding that a drug is a candidate for these expedited development and review programs. In addition to the Fast Track, accelerated
approval and priority review programs discussed above, the FDA also provided guidance on a new program for Breakthrough Therapy designation. A request for Breakthrough Therapy designation should be submitted concurrently with, or as an amendment to
an IND. The FDA has already granted this designation to over 30 new drugs. We filed for Breakthrough Therapy designation for AP26113 in ALK-positive NSCLC. Due to the relatively short follow-up of many of the ALK-positive patients treated with
AP26113 at that time, our request was not granted by the FDA.
Risk Evaluation and Mitigation Strategy
The Food and Drug Administration Amendments Act of 2007, or FDAAA, created a new section of the FDCA which authorizes the FDA to require a risk evaluation
and mitigation strategy, or REMS, when necessary to ensure that the benefits of a drug outweigh the risks. The FDA may require, among other things, that an applicant develop a Medication Guide for distribution to each patient when the drug is
dispensed, a communication plan to health care providers, and other elements to insure safe use, or ETASUs. Medication Guides may be safety-related, addressing serious risk(s) (relative to benefits) of which patients should be made aware, and/or
efficacy-related, when patient adherence to directions for use is crucial to the drug’s effectiveness. Since the enactment of FDAAA, the FDA has considered any new Medication Guide (or safety-related changes to an existing Medication Guide) to
be part of a REMS. However, the FDA has the authority to determine, based on the risks of a drug and public health concern, whether a Medication Guide should be required as part of a REMS and may decide the Medication Guide should be required as
labeling but not part of a REMS if the FDA determines that a REMS is not necessary to ensure the benefits of the drug outweigh its risks. Depending on the known or anticipated risks, the ETASU may require prescribers to have specific experience,
pharmacies, practitioners or healthcare settings that dispense the drug to be specially certified and patients receiving the drug to be regularly monitored or enrolled in a registry. In addition, the drug’s sponsor may be required to take
reasonable steps to monitor and evaluate those in the healthcare system responsible for implementing ETASU measures. All REMS include a timetable for assessments and may be modified as necessary.
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As part of our discussions with the FDA in December 2013 to allow us to resume marketing and commercial
distribution of Iclusig in the United States, we have implemented a REMS for Iclusig.
Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of FDA approval of the use of Iclusig and our product candidates, some of our U.S.
patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as
compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The
patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent
applicable to an approved drug is eligible for the extension and the application for extension must be made prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the
application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent life beyond their current expiration date, depending on the
expected length of clinical trials and other factors involved in the submission of the relevant NDA.
Market exclusivity provisions under the
FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical
entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the
FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required
for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to
an approved NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages
or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and
three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and
well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Pediatric Exclusivity and Pediatric Use
Under the Best Pharmaceuticals for Children Act, or BPCA, certain drugs may obtain an additional six months of exclusivity, if the
sponsor submits information requested in writing by the FDA, or a Written Request, relating to the use of the active moiety of the drug in children. The FDA may not issue a Written Request for studies on unapproved or approved indications or where
it determines that information relating to the use of a drug in a pediatric population, or part of the pediatric population, may not produce health benefits in that population.
To receive the six-month pediatric market exclusivity, we would have to receive a Written Request from the FDA, conduct the requested studies in accordance with a written agreement with the FDA or, if
there is no written agreement, in accordance with commonly accepted scientific principles, and submit reports of the studies. A Written Request may include studies for indications that are not currently in the labeling
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if the FDA determines that such information will benefit the public health. The FDA will accept the reports upon its determination that the studies were conducted in accordance with and are
responsive to the original Written Request or commonly accepted scientific principles, as appropriate, and that the reports comply with the FDA’s filing requirements. We have not received a Written Request for such pediatric studies, although
we may ask the FDA to issue a Written Request for such studies in the future.
In addition, the Pediatric Research Equity Act, or PREA,
requires a sponsor to conduct pediatric studies for most drugs and biologicals, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs, biologics license
applications and supplements thereto, must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must address the safety and effectiveness of the product for the claimed indications in all
relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all of the pediatric
subpopulations. A deferral may be granted for several reasons, including a finding that the drug or biologic is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be
collected before the pediatric studies begin. After April 2013, the FDA must send a non-compliance letter to any sponsor that fails to submit the required assessment, to keep a deferral current or to submit a request for approval of a pediatric
formulation.
As part of the FDASIA, Congress made a few revisions to BPCA and PREA, which were slated to expire on September 30, 2012,
and made both laws permanent.
Approval or Clearance of Medical Devices
The basic regulatory requirements that manufacturers of medical devices distributed in the United States must comply with are:
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510(k) premarket notification, unless exempt, or premarket approval application, or PMA
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Establishment registration
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Quality system regulation
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Medical Device Reporting
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The FDA classifies medical devices into one of three classes based on the perceived level of associated risk. Regulatory control and related requirements
increase from Class I to Class III. Before most new devices can be introduced, their manufacturers must obtain marketing clearance through either a premarket notification under Section 510(k) of the FDCA or approval of a PMA.
Drug-eluting stents are classified as Class III devices and must be the subject of an approved PMA before they may be marketed. A PMA must be supported
by more detailed scientific evidence including clinical data to demonstrate the safety and efficacy of the device. If the device is determined to present a significant risk, the manufacturer must submit an investigational device exemption, or IDE,
prior to commencing clinical trials. If the FDA approves the IDE and the institutional review boards, or IRBs, at the institution at which the clinical trials will be performed approve the clinical protocol and related materials, clinical trials may
begin. Upon completion of the clinical trials, and assuming that the results indicate that the product is safe and effective for its intended purpose, the sponsor will then submit a PMA.
PMA approval requires, among other things, the submission of valid scientific evidence in the form of preclinical and clinical data, and a preapproval inspection to determine if the manufacturing facility
complies with quality systems/current good manufacturing practices, or QS/cGMP, under the regulation that governs the design and all elements of the manufacture, control and documentation of devices.
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Post-Approval Requirements
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. Later discovery of
previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and
the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.
Any drug
products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things:
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record-keeping requirements;
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reporting of adverse experiences with the drug;
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providing the FDA with updated safety and efficacy information;
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drug sampling and distribution requirements;
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notifying the FDA and gaining its approval of specified manufacturing or labeling changes; and
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complying with FDA promotion and advertising requirements.
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Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject
to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws.
We rely, and expect to
continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production
or distribution, or require substantial resources to correct.
From time to time, legislation is drafted, introduced and passed in Congress
that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that
may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.
Foreign Regulation
In addition
to regulations in the United States, we are subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by
the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that
required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
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Under European Union regulatory systems, a company may submit marketing authorization applications either
under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative disorders or diabetes and optional for those
medicines which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under
this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessments report, each member state must decide whether to recognize
approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.
As in the United States, the EMA may grant orphan drug status for specific indications if the request is made before an MAA is made. The EMA considers an
orphan medicinal product to be one that affects less than five of every 10,000 people in the European Union. A company whose application for orphan drug designation in the European Union is approved is eligible to receive, among other benefits,
regulatory assistance in preparing the marketing application, protocol assistance and reduced application fees. Orphan drugs in the European Union also enjoy economic and marketing benefits, including up to ten years of market exclusivity for the
approved indication, unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product.
ATU
In 2012, the French Health Products Safety Agency, or Afssaps, granted us an
Autorisation Temporaire d’Utilisation, or Temporary Authorization for Use, or ATU, for Iclusig in France for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. Under an ATU, the Afssaps
allows the use of a drug in France before marketing approval has been obtained in France in order to treat serious or rare diseases for which no other treatment is available in that country. Afssaps will only grant an ATU where the benefit of the
product outweighs the risk. An ATU is granted for one year and may be renewed. An ATU may be modified, suspended, or withdrawn for reasons of public health or if the conditions under which the ATU was granted are no longer met. The ATU for Iclusig
automatically concluded on September 30, 2013, three months following the grant of marketing authorization of Iclusig by the EC. We continue to distribute Iclusig to patients in France under regulatory provisions that allow such use prior to
pricing and reimbursement approval.
Reimbursement
Sales of Iclusig and any of our product candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government health
programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. These third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of
healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing
cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in
jurisdictions with existing controls and measures, could further limit our net revenue. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after
approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, imposes requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part
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D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D prescription drug plan sponsors
are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within
each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive
marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental
payors.
The American Recovery and Reinvestment Act of 2009 provides for funding for the federal government to compare the effectiveness of
different treatments for the same illness. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, such a result is a likely outcome of the law and thus it is unclear
what if any effect the research will have on the sales of our product candidates, if any such product or the condition that it is intended to treat is the subject of a study.
The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010, collectively, the Affordable Care Act or ACA, enacted in March 2010, are expected
to have a significant impact on the health care industry. ACA is expected to expand coverage for the uninsured while at the same time contain overall healthcare costs. With regard to pharmaceutical products, among other things, ACA is expected to
expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. We cannot predict the impact of ACA on pharmaceutical companies as many of the ACA
reforms require the promulgation of detailed regulations implementing the statutory provisions which are currently being drafted. In addition, although the United States Supreme Court recently upheld the constitutionality of most of the ACA, some
states have indicated that they intend to not implement certain sections of the ACA, and some members of the U.S. Congress are still working to repeal the ACA. These challenges add to the uncertainty of the legislative changes enacted as part of
ACA.
We expect that there will continue to be a number of federal and state proposals to implement governmental pricing controls and limit
the growth of healthcare costs, including the cost of prescription drugs. At the present time, Medicare is prohibited from negotiating directly with pharmaceutical companies for drugs. The adoption of other legislative or regulatory proposals could
have a material adverse effect on our business, financial condition and profitability.
In addition, in some foreign countries, the proposed
pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of
medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a
system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will
allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.
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Other United States Regulations
Pharmaceutical companies also are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws, and the reporting of
payments to physicians and teaching hospitals.
Anti-Kickback Laws
U.S. federal laws prohibit fraud and abuse involving state and federal health care programs, such as Medicare and Medicaid. These laws are interpreted broadly and enforced aggressively by various state
and federal agencies, including the Centers for Medicare & Medicaid Services, or CMS, the Department of Justice, the Office of Inspector General for the Department of Health and Human Services and various state agencies. These anti-kickback
laws prohibit, among other things, knowingly and willfully offering, paying, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for
or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program. Remuneration is broadly defined to include anything of value, such as cash payments, gifts or gift certificates, discounts, or the
furnishing of services, supplies or equipment. The anti-kickback laws are broad and prohibit many arrangements and practices that are lawful in businesses outside of the health care industry.
The penalties for violating the anti-kickback laws can be severe. The sanctions include criminal and civil penalties, and possible exclusion from the federal health care programs. Many states have adopted
laws similar to the federal anti-kickback laws, and some apply to items and services reimbursable by any payor, including third-party payors.
State and Federal Prohibitions on False Claims
The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal
government. Under the False Claims Act, a person acts knowingly if he has actual knowledge of the information or acts in deliberate ignorance or in reckless disregard of the truth or falsity of the information. Specific intent to defraud is not
required. Provisions of the False Claims Act allow a private individual to bring an action on behalf of the federal government and to share in any amounts paid by the defendant to the government in connection with the action. The number of filings
under these provisions has increased significantly in recent years. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties
for each false claim. Conduct that violates the False Claims Act may also lead to exclusion from the federal health care programs. Given the number of claims likely to be at issue, potential damages under the False Claims Act for even a single
inappropriate arrangement could be significant. In addition, various states have enacted similar laws modeled after the False Claims Act that apply to items and services reimbursed under Medicaid and other state health care programs, and, in several
states, such laws apply to claims submitted to all payors.
Federal Prohibitions on Health Care Fraud and False Statements Related to
Health Care Matters
Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996,
or HIPAA, and state laws, there are numerous regulations for protecting the privacy and security of protected health information. Additional administrative simplification provisions created the following new federal crimes: health care fraud, false
statements relating to health care matters, theft or embezzlement in connection with a health benefit program and obstruction of criminal investigation of health care offenses. The health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including a private insurer. The false statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false,
fictitious, or fraudulent statement in connection with the delivery of or payment for health care benefits, items, or services. The theft or embezzlement statute prohibits knowingly and willfully
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embezzling, stealing or otherwise converting or misapplying the money or property of a health care benefit program. The obstruction of criminal investigations of health care offenses statute
prohibits willfully preventing, obstructing, misleading or delaying the communication of information and records relating to a violation of a federal health care offense to a criminal investigator. A violation of any of these laws is a felony and
may result in fines, or exclusion from the federal health care programs.
The Physician Payment Sunshine Act
The Physician Payment Sunshine Act, or Sunshine Act, which was enacted as part of ACA, requires applicable manufacturers of drugs, devices, biologicals,
or medical supplies covered under Medicare, Medicaid or the Children’s Health Insurance Program, to report annually to the Secretary of the Department of Health and Human Services payments or other transfers of value made by that entity, or by
a third party as directed by that entity, to physicians and teaching hospitals, or to third parties on behalf of physicians or teaching hospitals, during the course of the preceding calendar year. The Final Rule implementing the Sunshine Act,
published on February 8, 2013, requires data collection on payments to begin on August 1, 2013. The first annual report, comprised of data collected from August 1, 2013 to December 31, 2013, is due March 31, 2014. Failure to
comply with the reporting requirements can result in significant civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum per annual report of $150,000) and from
$10,000 to $100,000 for each knowing failure to report (up to a maximum per annual report of $1 million). We are required to collect data on these payments and report such payments.
Our Employees
As of December 31, 2013, we had 307 employees, of whom more than half
held
post-graduate
professional, medical or science degrees. Of these employees, 227 were based in the United States and 80 were based in Europe. During 2013, we hired new employees across the Company to
support the commercial launch of Iclusig in the United States and Europe and expanded research and development activities. In November 2013, we eliminated approximately 155 positions in the United States as a consequence of the temporary suspension
of marketing and commercial distribution of Iclusig in the United States. In January 2014, in connection with the resumption of marketing and commercial distribution of Iclusig in the United States, we began to hire additional personnel necessary to
support commercial activities in the United States. We also expect to hire additional personnel in 2014 in Europe to support the expanding marketing and distribution of Iclusig in selected countries throughout Europe. We have entered into
confidentiality, assignment of inventions and non-disclosure agreements with all of our employees and non-competition agreements with all of our senior level employees. None of our employees are covered by a collective bargaining agreement, and we
consider relations with our employees to be good.
Our Company
ARIAD was organized as a Delaware corporation in April 1991. Our principal executive offices are located at 26 Landsdowne Street, Cambridge, Massachusetts 02139-4234, and our telephone number is
(617) 494-0400. We maintain an internet website at http://www.ariad.com, the contents of which are not incorporated herein. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and all amendments to
such reports are made available free of charge through www.sec.gov and the Investor Relations section of our website as soon as reasonably practicable after they have been electronically filed with or furnished to the United States Securities and
Exchange Commission, or SEC.
ARIAD, the ARIAD logo and Iclusig are our registered trademarks. ARGENT is our trademark. Other service marks,
trademarks and trade names appearing in this report are the property of their respective owners.
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ITEM 1A: RISK FACTORS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE THOSE THAT WE CURRENTLY BELIEVE MAY MATERIALLY AFFECT OUR COMPANY. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, THEY MAY MATERIALLY HARM OUR BUSINESS, OUR FINANCIAL CONDITION AND OUR RESULTS OF OPERATIONS.
Risks relating to the
development and commercialization of our products and product candidates
We depend heavily on the commercial
success of our first new cancer medicine, Iclusig
®
(ponatinib), which was approved for sale in the United States in December 2012 and the European Union in July 2013.
Marketing and commercial distribution of Iclusig was temporarily suspended in the United States during the fourth quarter of 2013 as a result of safety concerns. Marketing and commercial distribution of Iclusig resumed in January 2014 with revised
prescribing information and an updated boxed warning. If we do not achieve commercial success with Iclusig, our business, results of operations and financial condition will suffer, and we will be dependent on the success of our other product
candidates.
We obtained accelerated approval from the U.S. Food and Drug Administration, or FDA, on December 14, 2012, to sell
our first new cancer medicine, Iclusig, for the treatment of adult patients with chronic, accelerated or blast phase chronic myeloid leukemia (CML) that is resistant or intolerant to prior tyrosine kinase inhibitor (TKI) therapy or Philadelphia
chromosome-positive acute lymphoblastic leukemia (Ph+ ALL) that is resistant or intolerant to prior TKI therapy. When Iclusig was approved by the FDA, its United States prescribing information, or USPI, included a boxed warning concerning arterial
thrombosis, hepatotoxicity and other precautions. We commenced sales and marketing of Iclusig in the United States in January 2013.
In
October 2013, we suspended marketing and commercial distribution of Iclusig in the United States based on the FDA’s concerns about updated safety data from the pivotal PACE trial of Iclusig. In addition, our clinical trials for Iclusig were
placed on partial clinical hold and we discontinued our Phase 3 EPIC trial of Iclusig in adult patients with newly diagnosed CML in the chronic phase. In December 2013, the FDA approved revised USPI, a risk evaluation and mitigation strategy, and a
revised box warning, allowing us to resume marketing and commercial distribution, which we commenced in January 2014. Iclusig is now indicated for adult patients with T315I-positive CML (chronic phase, accelerated phase, or blast phase) or
T315I-positive Ph+ ALL, and chronic phase, accelerated phase, or blast phase CML or Ph+ ALL for whom no other TKI therapy is indicated.
Iclusig has also been approved for marketing and commercial distribution in the European Union. On July 2, 2013, we announced that the European
Commission had granted marketing authorization for Iclusig in the European Union, and we commenced sales efforts in certain European countries in 2013. In November 2013, the European Medicines Agency, or EMA, announced the continued availability of
Iclusig for certain adult patients with CML and Ph+ ALL with revised authorized indications and recommendations on measures to reduce safety risk, including the risk of occlusive vascular events. In addition, the EMA has commenced an in-depth review
of the benefits and risks of Iclusig, and we expect the results of this review in mid-2014.
Prior to the approval of Iclusig, we had not
marketed a therapeutic product. We had no significant revenues from product sales in 2012 and $45.2 million in revenues from product sales in 2013. We expect that a majority of our total revenues in the next several years will be attributable to
sales of Iclusig. We cannot be certain that Iclusig will be commercially successful. In addition to the other challenges related to a company launching its first commercial drug, we have faced the challenges of having Iclusig removed from the market
in the United States in the fourth quarter of 2013 and re-launching the drug in the first quarter of 2014 with revised prescribing information that reduces the addressable patient population and an updated box warning. In addition, we face intense
competition from other TKIs that are currently approved for the treatment of patients with CML, such as nilotinib marketed by Novartis, dasatinib marketed by Bristol-Myers Squibb, bosutinib marketed by Pfizer and omacetaxine mepesuccinate
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marketed by Teva Pharmaceutical Industries. Moreover, the FDA, EMA or other regulatory authorities could take additional actions in the future that could further reduce the commercial potential
of Iclusig. If we do not achieve commercial success with Iclusig, our business, results of operations and financial condition will suffer, and we will be dependent on the success of our other product candidates.
The commercial success of Iclusig depends on numerous factors, some of which are outside our control. If one or more of these factors negatively
affects sales of Iclusig, our business, results of operations and financial condition will be materially harmed.
Our future sales of
Iclusig depend on numerous factors, including:
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the impact of the changes required by the FDA in the USPI that reduce the addressable patient population and any changes that may be required by the
EMA following its review of the risks and benefits of Iclusig, along with any additional changes that may be required in the future;
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the safety profile of Iclusig, including whether previously unknown side-effects or increased incidence or severity of known side-effects, as compared
to those seen during development, are identified with the increased use of Iclusig after approval, such as we announced in the fourth quarter of 2013;
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competition from other TKIs, which compete with Iclusig on the basis of, among other things, efficacy, cost, breadth of approved use and the safety and
side-effect profile;
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competition from any additional products for the treatment of CML that are approved by the FDA, the EMA and other regulatory authorities in the future;
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the effectiveness of our commercial strategy for marketing Iclusig and our execution of that strategy, including our pricing strategy and the
effectiveness of our efforts to obtain adequate third-party reimbursements;
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receipt of regulatory approvals for Iclusig, and any applicable pricing and reimbursement approvals, in Europe, Japan and other countries or
territories outside of the United States and the European Union;
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the acceptance of Iclusig by patients, the medical community and third-party payors, particularly following the temporary suspension of commercial
distribution in the fourth quarter of 2013 and the updated prescribing information, including a revised boxed warning;
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results from clinical trials and the receipt of regulatory approvals in any other indications that we may decide to pursue in blood cancers and solid
tumors; and
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our ability to meet the demand for commercial supplies of Iclusig and to maintain and successfully monitor commercial manufacturing arrangements for
Iclusig with third-party manufacturers to ensure they meet our standards and those of regulatory authorities, which extensively regulate and monitor pharmaceutical manufacturing facilities.
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While we believe that Iclusig is an important medicine for patients with resistant or intolerant Philadelphia-positive leukemias, our current estimates
of the revenues that Iclusig could generate in future periods have changed as a result of our announcements in the fourth quarter of 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the
United States and may change further based upon the above factors, and could be wrong. If our revenues, market share and/or other indicators of market acceptance for Iclusig do not meet the expectations of investors or public market analysts, the
market price of our common stock would likely decline, as occurred in October 2013, when our stock price declined by 87%, from $17.14 per share before our announcements to a low of
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$2.15 per share following the announcements. In addition, if one or more of the factors above negatively affects sales of Iclusig, our business, results of operations and financial condition will
be materially harmed.
We have never marketed a drug prior to Iclusig, and if we are unable to maintain an effective and specialized
sales force and marketing infrastructure, we will not be able to commercialize Iclusig successfully.
In order to successfully
commercialize Iclusig, we built a marketing organization and a specialized sales force for Iclusig and commenced marketing and commercial distribution of Iclusig in the United States in January 2013. In addition, in Europe, we have established
operations with headquarters in Switzerland and have commenced sales efforts in certain European countries. However, in November 2013, we implemented a significant reduction in workforce, amounting to approximately 40% of our employees in the United
States, including commercial sales force positions and other commercial positions in the United States, following the suspension of marketing and commercial distribution of Iclusig in the United States. As we begin to resume these activities, we
have recruited and hired additional personnel to commercialize Iclusig in the United States.
Factors that may hinder our ability to
successfully market and commercially distribute Iclusig include:
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inability to recruit, retain and effectively manage adequate numbers of effective sales and marketing personnel, particularly in light of our workforce
reduction in the fourth quarter of 2013;
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inability to maintain relationships with the single specialty pharmacy with whom we have contracted for distribution of Iclusig in the United States
and our other distributors, suppliers and manufacturers;
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inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products, particularly following the
suspension of marketing and commercial distribution of Iclusig in the United States in the fourth quarter of 2013 and the resumption in the first quarter of 2014 with revised prescribing information and a revised boxed warning;
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lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies that have more
extensive product lines; and
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unforeseen delays, costs and expenses associated with maintaining our international capabilities, including our international sales and marketing
organization and international supply chain and pricing and reimbursement capabilities.
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If we are unable to rebuild our
sales force and marketing capability for Iclusig in the United States and further build and sustain our sales force for Iclusig in the European Union, we may not be able to generate sufficient product revenue, may generate increased expenses and may
never become profitable.
We will need to continue to expend significant time and resources to train our Iclusig sales forces in the United
States and the European Union to be credible, persuasive and compliant in discussing Iclusig with the specialists treating the patients indicated under the product’s label. We will also need to continue to train our sales force to ensure that a
consistent and appropriate message about Iclusig is being delivered to our potential customers, including new information in response to the developments that we announced in the fourth quarter of 2013. In addition, if we are unable to effectively
train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits and risks of Iclusig and its proper administration, our ability to
successfully commercialize Iclusig could be diminished, which would have a material adverse effect on our business, results of operations and financial condition.
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If Iclusig and any of our product candidates are not accepted by patients, physicians and third-party
payors, we will not be successful.
Our success is dependent on the commercial acceptance of Iclusig and any of our other product
candidates that may be approved. Iclusig and any other approved product candidates may not achieve market acceptance among patients, physicians or third-party payors, even if we have obtained necessary regulatory and any applicable pricing and
reimbursement approvals. Physicians and health care payors may conclude that Iclusig or our product candidates are not as safe and/or effective as competing therapies or are not as attractive based on a cost and risk/benefit analysis as alternative
treatments. For example, physicians may elect not to prescribe our drugs, and patients may elect not to request or take them for a variety of reasons, including lower demonstrated or perceived clinical safety and efficacy compared to other drugs;
prevalence and severity of adverse events or other side effects; lack of cost-effectiveness; lack of reimbursement availability from third-party payors; a decision to wait for the approval of other therapies that are believed to have significant
advantages over our drugs and drug candidates; convenience and ease of administration; other potential advantages of alternative treatment methods; or ineffective marketing and distribution support. We expect that the revised prescribing information
for Iclusig and our announcements in the fourth quarter of 2013 concerning Iclusig’s safety, marketing and commercial distribution may cause physicians and other health care providers to reduce the recommended use of Iclusig.
We believe that recommendations by physicians and acceptance by health care payors will be essential for market acceptance of Iclusig and our product
candidates. If Iclusig fails to achieve market acceptance, or our product candidates are approved and fail to achieve market acceptance, we will not be able to generate revenues sufficient to be successful.
Competing drugs or technologies may render some or all of our products or future products noncompetitive or obsolete.
Many well-known pharmaceutical, healthcare and biotechnology companies, which have substantially greater capital, research and development capabilities
and experience, are presently engaged in one or more of the following activities:
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developing products based on computational and structure-based drug design;
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conducting research and development programs focused on the same biological targets or for the treatment of the various disease indications on which we
are focused; and
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manufacturing, marketing and selling pharmaceutical or medical device products for treatment of diseases in all of the various disease indications in
which we or our current or possible future collaborators are focused.
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Some of these entities already have competitive
products on the market or product candidates in clinical trials or in more advanced preclinical studies than we do. Many of these entities also have substantially greater research, development, manufacturing and marketing resources and experience
than us.
For example, Iclusig currently competes with existing therapies that are approved for the treatment of patients with CML who are
resistant or intolerant to prior TKI therapies, such as nilotinib marketed by Novartis, dasatinib marketed by Bristol-Myers Squibb, bosutinib marketed by Pfizer and omacetaxine mepesuccinate marketed by Teva Pharmaceutical Industries. Based on the
revised USPI for Iclusig approved by the FDA in December 2013, Iclusig may only be promoted for treatment of adult patients with T315I-positive CML and Ph+ ALL and patients for whom no other TKI therapy is indicated, which we expect will result in
lower revenues from sales of Iclusig in future periods than we initially anticipated when the drug was approved in December 2012.
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Competing drugs or technologies may render some or all of our products or future products noncompetitive or
obsolete, and we may not be able to make the enhancements to our products necessary to compete successfully with newly emerging drug products. Competing products on the market or in development may also lead us and our collaborators to revise or
cease development of our product candidates in one or more indications for commercial reasons, even where clinical data may be promising. If we are unable to successfully compete in our chosen markets, we will not become profitable.
In order to execute our business plan and achieve the full commercial potential of Iclusig, we intend to seek regulatory approval to commercialize
Iclusig outside of the United States and the European Union and to seek approval of additional therapeutic indications and lines of therapy. If we are not successful in these efforts, our business, results of operations and financial condition could
be materially harmed.
Based on sales of existing TKIs for the treatment of CML, we believe that there are commercial opportunities for
the use of Iclusig globally in additional therapeutic indications and in additional lines of therapy, and we are pursuing these opportunities. We have filed marking authorization applications for Iclusig in Switzerland (which was approved in
February 2014), Canada and Australia and plan to file for marketing authorization for Iclusig with regulatory authorities in Japan. However, we are in discussions with the regulatory authorities regarding our announcements in the fourth quarter of
2013 concerning the safety of Iclusig, which could delay, limit or even potentially prevent the approval of Iclusig in these countries.
We
also believe that Iclusig has potential applications beyond CML in other blood cancers and solid tumors, such as gastrointestinal stromal tumors, or GIST, acute myeloid leukemia and certain forms of non-small cell lung cancer, or NSCLC. In June
2013, we announced the initiation of a Phase 2 open-label, multicenter trial to evaluate the efficacy and safety of Iclusig in adult patients with metastatic and/or unresectable GIST, following failure of prior TKI therapy. However, this trial
remains on partial clinical hold following our announcements in the fourth quarter of 2013 regarding additional safety data.
If we are not
successful in obtaining regulatory approval of Iclusig in additional foreign countries and in additional indications and lines of therapy, our business, results of operations and financial condition could be materially harmed.
We may not succeed in developing, receiving regulatory approval and generating product revenues from our product candidate AP26113 or any other
product candidates, which would materially harm our business, results of operations and financial condition.
As with all scientific
endeavors, we face much trial and error, and we and our collaborators may fail at numerous stages along the way, which could prevent us and our collaborators from successfully developing, obtaining approval for and marketing our product candidate
AP26113 and any other product candidates. Factors that could affect the timing and the ability to obtain additional regulatory approvals and to achieve market acceptance and gain market share for AP26113 and any other product candidates include,
among others:
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dose and dosage regimen;
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the ability to obtain timely and sufficient patient enrollment in clinical trials;
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the risk of occurrence of adverse events and other side effects in patients participating in clinical trials;
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the attainment of clinical data that is sufficient to support regulatory approval;
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the ability to manufacture sufficient quantities of product candidates at commercially reasonable costs;
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the ability to fund commercial development and to build or access a sales force in the marketplace for that product candidate;
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the ability to successfully differentiate product candidates from competitive products;
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the ability to educate physicians and build awareness about our product candidates; and
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the ability to sell, market and distribute such product candidates.
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We may not receive regulatory approvals within the timeframes we anticipate, or at all, and ultimately we may not succeed in developing or commercializing additional products which will generate revenues
for our company. If we are not successful in developing our product candidates, obtaining regulatory approvals and marketing any approved products, our business, results of operations and financial condition will be materially harmed.
Positive results from earlier stage clinical trials may not be replicated in later-stage clinical trials, increased adverse events or safety issues
could arise, or regulatory authorities may conclude that clinical data from later-stage clinical trials are not sufficient to support approval or that data from post-approval clinical trials are not sufficient to support broader use of drugs after
approval. Regulatory authorities may require changes in the permitted usage of any approved products.
A number of companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials or following regulatory approval even after achieving promising results in earlier-stage development. Accordingly, the results to date from
preclinical studies and clinical trials for Iclusig and AP26113 may not be predictive of the results to be obtained from ongoing or future clinical trials. In addition, regulatory authorities may conclude that data generated from later-stage
clinical trials are not sufficient to support approval, or that data obtained following approval may require changes to be made in the permitted usage of any approved products. For example, although we were able to obtain accelerated approval for
Iclusig on the basis of data from our pivotal Phase 2 PACE trial without conducting a Phase 3 trial, and we believe that similar prospects for regulatory approval exist for AP26113, we may be required to conduct more clinical trials for AP26113 than
we currently anticipate. Moreover, we announced in October 2013 updated data from the PACE trial, in which it was observed that with a median follow up of 24 months, serious arterial thrombosis occurred in 11.8% of Iclusig-treated patients, compared
to 8% after 11 months of follow-up reflected in the then-current USPI. Based on this and other follow-up data, marketing and commercial distribution of Iclusig was suspended in October 2013 and, following discussions with the FDA, was permitted to
resume in December 2013 with revised prescribing information and a revised boxed warning. The updated prescribing information for Iclusig reduces the addressable patient population for whom Iclusig is indicated, which we expect will negatively
impact future revenues associated with Iclusig compared to revenues anticipated based on the label that was initially approved in December 2012.
If positive results from earlier stage trials are not replicated in later-stage trials, if increased adverse events or safety issues arise, if we or our collaborators are required to conduct additional
clinical trials or other testing of our product candidates beyond those currently contemplated, or if the permitted usage of Iclusig or any of our other product candidates that are approved is constrained or withdrawn by the FDA or other regulatory
authorities, we or our collaborators may be delayed in obtaining, or may not be able to obtain or maintain, marketing approval for these products, and we may lose the opportunity to generate product revenues or to earn additional development or
regulatory milestones or royalties. Furthermore, potential competitive commercial factors and our resources may influence future decisions and directions by us or our collaborators on which clinical indications to pursue and when.
Risks relating to our financial position and capital requirements
We have incurred significant losses to date and may never be profitable.
We have
incurred significant losses since our formation in 1991, and had an accumulated deficit of $1.1 billion at December 31, 2013. Our losses have resulted principally from costs incurred in research and development of Iclusig and our product
candidates AP26113 and ridaforolimus (prior to our license agreement with Merck), from our discovery research activities and from general and administrative costs, including costs incurred to prosecute and protect our intellectual property. In
addition, we have incurred
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significant expenses in building a commercial organization to market, sell and distribute Iclusig and our other products upon potential regulatory approval in the United States, Europe and other
select markets, worldwide. It is likely that we will incur significant operating losses for the foreseeable future, as we continue our research and development activities and re-build our sales and marketing organization to market Iclusig and in
anticipation of obtaining regulatory approval to market AP26113, which approval may never occur. If our losses continue and we and our existing collaborators or potential future collaborators are unable to successfully develop, commercialize,
manufacture and market Iclusig, AP26113, ridaforolimus and any other product candidates and/or we are unable to enter into additional collaboration agreements or licenses for our intellectual property, we may never generate sufficient revenues to
achieve profitability. Even if we and our collaborators are able to commercialize products and we are able to enter into collaboration agreements or licenses in the future, we may never generate sufficient revenues to have profitable operations.
Insufficient funding may jeopardize our research and development programs and may require us to reduce our operations or prevent
commercialization of our products and technologies.
We have funded our operations to date primarily through sales of equity securities
and, to a lesser extent, by the incurrence of debt from commercial lenders, the receipt of upfront and milestone payments from Merck since July 2007, and product revenues generated by sales of Iclusig beginning in 2013.
As of December 31, 2013, we had cash and cash equivalents totaling $237.2 million. Of this amount, $15 million is maintained as minimum balance
requirements related to our bank term loan and $17.1 million was in accounts held by our international subsidiaries. We expect that our cash and cash equivalents as of December 31, 2013 will be sufficient to fund our operations to mid-2015. We
will, however, require substantial additional funding for our research and development programs (including pre-clinical development and clinical trials), for the pursuit of regulatory approvals and for establishing or maintaining manufacturing,
distribution, marketing and sales capabilities related to Iclusig, AP26113 and any other product candidates that may be approved. We will also require funding for our other operating expenses (including intellectual property protection and
enforcement and litigation) as well as capital expenditures to maintain and improve our facilities, equipment and systems and provide for our business.
We may from time to time access funding by issuing common stock or other securities in private placements or public offerings. We are currently a “well-known seasoned issuer,” or WKSI, pursuant
to rules of the U.S. Securities and Exchange Commission, or SEC, and have an active registration statement that allows us to sell additional shares of our common stock and other securities. We may also from time to time seek additional funding from
technology licensing, or the issuance of debt or other structured funding alternatives. However, such additional funding may not be available at all, or on terms acceptable to us.
If we are not able to secure the significant funding which is required to maintain our operations or continue to fund current or future research and development programs at their current levels or at
levels that may be required in the future, we may be required to reduce our operations or to delay, scale back, eliminate or terminate commercialization or further clinical development of Iclusig or clinical trials for one or more of our product
candidates. In addition, we may be required to enter into licenses, settlements or other arrangements with third parties on terms that may be unfavorable to us or to sell, license or relinquish rights to develop or commercialize our product
candidates, approved products, technologies or intellectual property.
Our ability to use net operating loss and tax credit
carryforwards to offset future taxable income may be limited in the future if we do not have sufficient taxable income or due to ownership changes that have occurred or may occur in the future.
As of December 31, 2013, we had tax assets, including net operating loss carryforwards, or NOLs, of $498.7 million in the United States and $122.0
million in foreign territories and U.S. federal research tax credits of $25.9 million, which could be used in certain circumstances to offset our future taxable income or
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otherwise payable taxes and therefore reduce our federal and state income tax liabilities. Based on current income tax rates, if fully utilized, our NOLs and other carryforwards could provide a
benefit to us of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon our ability to comply with the rules relating to the preservation and use of NOLs and the amount of our otherwise
taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOLs permanently. Consequently, our ability to use the tax benefits associated with our NOLs
will depend significantly on our success in generating income from Iclusig and any other product candidates that may be approved.
Additionally, if we undergo an ownership change, the NOLs and tax credit carryforwards would be subject to an annual limit on the amount of the taxable
income that may be offset by our NOLs generated prior to the ownership change, and we may be unable to use a significant portion or all of our NOLs to offset taxable income. In general, under Sections 382 and 383 of the Internal Revenue Code of
1986, as amended, or the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain other tax assets to offset future taxable income. In
general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). An
ownership change could limit our ability to utilize our NOL and tax credit carryforwards for taxable years including or following such “ownership change”. Since our October 2013 announcements concerning the safety, marketing and commercial
distribution and further clinical development of Iclusig in the United States, 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 high trading volume, there may be a
shift of ownership amongst certain of our stockholders that could result in an ownership change, under Section 382 of the Internal Revenue Code. Limitations imposed on the ability to use NOLs and tax credits to offset future taxable income
could require us to pay U.S. federal income taxes earlier than would otherwise be required if such limitations were not in effect and could cause such NOLs and tax credits to expire unused, in each case reducing or eliminating the benefit of such
NOLs and tax credits. Similar rules and limitations may apply for state income tax purposes. We have adopted a shareholder rights plan in the form of a Section 382 Rights Plan with the intention of reducing the likelihood of an ownership
change. However, we cannot be sure that these measures will be effective in deterring or preventing such an ownership change.
Raising
additional capital by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights.
We may seek to raise the additional capital necessary to fund our operations through public or private equity offerings, debt financings, and
collaboration and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of such securities may
include liquidation or other preferences that adversely affect our stockholders’ rights or, in the case of debt securities, require us to pay interest that would reduce our cash flows from operations or comply with certain covenants that could
restrict our operations. If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not
favorable to us.
Forecasting sales of Iclusig may be difficult and revenue recognition may be deferred. If our revenue projections are
inaccurate or revenue is deferred, our business may be harmed and our future prospects may be adversely affected.
Iclusig may not be
adopted rapidly, or at all, by physicians. Factors that can affect the rate of adoption and that can increase the difficulty of forecasting sales include the following:
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cautionary prescribing behavior, confusion or other concerns regarding the safety and risk-benefit of Iclusig, particularly following our announcements
in the fourth quarter of 2013 concerning the safety, marketing and commercial distribution of Iclusig in the United States and the revised prescribing information and boxed warning for Iclusig approved by the FDA in December 2013;
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decisions that may be made by physicians regarding dosing of patients with Iclusig in response to safety concerns or adverse events;
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difficulty in identifying appropriate patients for treatment with Iclusig;
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the cost and availability of reimbursement for the product;
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other aspects of physician education;
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treatment guidelines issued by government and non-government agencies;
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types of cancer for which the product is approved;
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timing of market entry relative to competitive products;
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availability of alternative therapies;
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price of our product relative to alternative therapies, including generic versions of our product, or generic versions of innovative products that
compete with our product;
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patients’ reliance on patient assistance programs, under which we provide free drug;
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rates of returns and rebates;
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uncertainty of launch trajectory;
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the ability of our third-party manufacturers to manufacture and deliver Iclusig in commercially sufficient quantities;
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the ability of our single specialty pharmacy distributor to process orders in a timely manner and satisfy its other obligations to us;
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the extent of marketing efforts by us and any third-party agents retained by us; and
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side effects or unfavorable publicity concerning our products or similar products.
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The extent to which any of these or other factors individually or in the aggregate may impact future sales of Iclusig is uncertain and difficult to
predict. Our management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results. This may lead to
inefficiencies and increased difficulties in operational planning. If our revenues from Iclusig sales are lower than we anticipate or revenue is deferred, we will incur costs in the short term that will result in losses that are unavoidable. A
shortfall in our revenue would have a direct impact on our cash flow and on our business generally. In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.
Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must
exercise judgment in selecting and applying
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many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our
financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially
different results than would have been reported under a different alternative.
Certain accounting policies are critical to the presentation
of our financial condition and results of operations. The preparation of our financial statements requires us to make significant estimates, assumptions and judgments that affect the amounts of assets, liabilities, revenues and expenses and related
disclosures. Significant estimates that may be made by us include assumptions used in the determination of revenue recognition, accrued product development expenses, inventory, leased buildings under construction and stock-based compensation.
Although we base our estimates and judgments on historical experience, our interpretation of existing accounting literature and on various other assumptions that we believe to be reasonable under the circumstances, if our assumptions prove to be
materially incorrect, actual results may differ materially from these estimates.
Significant additional losses or insufficient funding
may cause us to default on certain covenants of our loan documents.
At December 31, 2013, we had $9.1 million outstanding under a
term loan agreement with a bank. Pursuant to this loan agreement, we are required to maintain certain financial and non-financial covenants, including minimum cash, cash equivalents and investments of $15 million, a default of any of which would
allow the bank to demand payment of its loan. We currently have sufficient liquidity to fund payment of this loan if demand for payment were made. However, if we do not receive sufficient revenues from our collaborations and licenses or from any
sales of our products, or if we are unable to raise adequate financing to fund continuing operations or otherwise to refinance our loan, we may not be able to maintain compliance with loan covenants, may be required to pay off the loan and may be
required to reduce our spending on operations.
Risks relating to our reliance on third parties
We depend on third-party manufacturers, including sole source suppliers, to manufacture Iclusig and our product candidates and the materials we
require for our clinical trials. We may not be able to maintain these relationships and could experience supply disruptions outside of our control.
We rely on a network of third-party manufacturers to manufacture and supply Iclusig for commercial sale and post-approval clinical trials, and our drug candidates for clinical trials and any commercial
sales if they are approved. As a result of our reliance on these third-party manufacturers and suppliers, including sole source suppliers of certain components of Iclusig and our product candidates, we could be subject to significant supply
disruptions. Our supply chain for sourcing raw materials and manufacturing drug product ready for distribution is a multi-step endeavor. Third-party contract manufacturers supply us with raw materials, and contract manufacturers in the United States
convert these raw materials into drug substance and convert the drug substance into final dosage form. Establishing and managing this supply chain requires a significant financial commitment and the creation and maintenance of numerous third-party
contractual relationships. Although we attempt to effectively manage the business relationships with companies in our supply chain, we do not have control over their operations.
We require a supply of Iclusig for sale in the United States and Europe, and we will require a supply of Iclusig for sale in other markets if we obtain additional marketing approvals. We currently rely,
and expect to continue to rely, on sole source third-party manufacturers to produce starting materials, drug substance, and final drug product, and to package and label Iclusig and our product candidates, until we enter into arrangements with
additional or alternative suppliers. While we have identified and expect to qualify and engage back-up third-party manufacturers as additional or alternative suppliers for the commercial supply of Iclusig, we currently do not have such arrangements
in place. Moreover, some of these alternative manufacturers will have to be approved by the FDA before we can use them for
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manufacturing Iclusig. It is also possible that supplies of materials that cannot be second-sourced can be managed with inventory planning. There can be no assurance, however, that failure of any
of our original sole source third party manufacturers to meet our commercial demands for Iclusig in a timely manner, or our failure to engage qualified additional or back-up suppliers for the commercial supply of Iclusig, would not have a material
adverse effect on commercialization of Iclusig and our business.
Supply disruptions may result from a number of factors, including shortages
in product raw materials, labor or technical difficulties, regulatory inspections or restrictions, shipping or customs delays or any other performance failure by any third-party manufacturer on which we rely. Any supply disruptions could disrupt
sales of Iclusig and/or the timing of our clinical trials, which could have a material adverse impact on our business. Furthermore, we may be required to modify our production methods to permit us to economically manufacture our drugs for sale and
our drug candidates for clinical trials. These modifications may require us to re-evaluate our resources and the resources of our third-party manufacturers, which could result in abrupt changes in our production methods and supplies.
In the course of providing its services, a contract manufacturer may develop process technology related to the manufacture of our products or drug
candidates that the manufacturer owns, either independently or jointly with us. This would increase our reliance on that manufacturer or require us to obtain a license from that manufacturer in order to have Iclusig or our drug candidates
manufactured by other suppliers utilizing the same process.
The failure of our third party manufacturers to meet our commercial demands for
Iclusig in a timely manner, or our failure to engage qualified additional or back-up suppliers for the commercial supply of Iclusig, would have a material adverse effect on our business, results of operations and financial position.
We rely on a sole specialty pharmacy for distribution of Iclusig in the United States, and the loss of that specialty pharmacy or its failure to
distribute Iclusig effectively would adversely affect sales of Iclusig.
In January 2014 we announced that Biologics, Inc. will serve
as the sole specialty pharmacy for distribution of Iclusig in the United States. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions, which often require a high level of patient
education and ongoing management. The use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:
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not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our
products;
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reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support our products;
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not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;
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be unable to satisfy financial obligations to us or others; or
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addition, our agreement with Biologics may be terminated by either party on 30 days’ notice. If our sole specialty pharmacy does not fulfill its contractual obligations to us, or refuses or fails to adequately serve patients, or the agreement
is terminated without adequate notice, shipments of Iclusig, and associated revenues, would be adversely affected. In addition, we expect that it may take a significant amount of time if we were required to change our specialty pharmacy.
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We have limited experience in conducting clinical trials and are dependent upon the ability of third
parties, including contract research organizations, collaborative academic groups, clinical trial sites and investigators, to conduct or to assist us in conducting clinical trials for our product candidates.
Notwithstanding our successful development of Iclusig to date, we have limited experience compared to many other biopharmaceutical companies in designing,
initiating, conducting and monitoring the clinical trials necessary to obtain regulatory approval of our product candidates. We are currently conducting clinical trials of Iclusig and of AP26113. We are dependent upon our ability and/or the ability
of our collaborators, licensees, contract research organizations, clinical trial sites and investigators to successfully design, initiate, conduct and monitor clinical trials. Failure by us or any of these parties to timely and effectively initiate,
conduct and monitor our clinical trials could significantly delay or materially impair our ability to complete clinical trials and/or obtain regulatory approval of our product candidates and, consequently, could delay or materially impair our
ability to generate revenues from them.
If any collaborator or licensee terminates its agreement with us or fails to perform its
obligations under its agreement with us, or fails to comply with applicable law, the development and commercialization of our product candidates could be delayed or terminated.
Our current or future collaborations and licenses may not result in product candidates that are scientifically or commercially successful or result in the development or commercialization of any product
candidates. In addition, disputes may arise in the future with respect to the ownership of rights to technology or product candidates developed with collaborators and licensees, which could have an adverse effect on our ability to develop and
commercialize any affected product candidate.
Our current collaboration and license agreements allow, and we expect that any future
collaborations and licenses will allow, either party to terminate the agreement for specified material breaches by the other party. If a collaborator or licensee terminates its agreement with us, for breach or otherwise, it may be difficult for us
to attract new collaborators or licensees and could adversely affect how we are perceived in the business and financial communities. In addition, a collaborator or licensee could determine that it is in its financial interest to:
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pursue alternative technologies or develop alternative products, either on its own or jointly with others, that may be competitive with the products on
which it is collaborating with us or has licensed from us, which could affect its commitment to us;
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pursue higher-priority programs or change the focus of its development programs, which could affect the collaborator’s or licensee’s
commitment to us; or
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choose to devote fewer resources to the marketing of our product candidates, if any are approved for marketing, than it does for product candidates of
its own development.
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If any of these events occur, the development and commercialization of one or more of our product
candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.
Risks relating to our intellectual property
If our patents do not protect Iclusig or
our product candidates, our exclusive commercial rights in the product or product candidate could be compromised, and if any of our approved drugs or product candidates infringe third-party patents, we could be subject to litigation and substantial
liabilities.
We have numerous issued patents and patent applications pending in the United States, as well as counterparts in other
countries. Our success will depend, in significant part, on our ability to obtain and maintain United States and foreign patent protection for Iclusig and our product candidates, their manufacture and uses; to preserve our trade secrets; and to
operate without infringing the proprietary
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rights of third parties. In particular, we believe that composition-of-matter claims are the most significant patent claims for companies in our segment of the pharmaceutical industry that focus
on small molecule drug candidates that are new chemical compounds. While we have patents or patent applications with composition-of-matter claims for Iclusig and each of our product candidates, only a portion of these patents have been granted to
date. We cannot be certain that any patents will issue from our patent applications or, even if patents issue or have issued, that the issued claims will provide us with any significant protection against competitive products or otherwise be
valuable commercially.
Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering
pharmaceutical inventions and the scope of claims made under these patents, our ability to maintain, obtain and enforce patents is uncertain and involves complex legal and factual questions. U.S. and foreign patent applications typically are
maintained in confidence for a period of time after they initially are filed with the applicable patent office. Similarly, publication of discoveries in the scientific literature often lag behind actual discoveries. Consequently, we cannot be
certain that we or our licensors were the first to invent, or the first to file patent applications covering Iclusig, our product candidates or their manufacture or use.
Third parties, including a number of our competitors, have developed competing and/or complementary technologies upon which patent applications have been filed and patents have been granted. These
third-party technologies concern in part compounds, compositions, methods of use and production of such compounds and compositions, targets, genes and gene mutations, and the use of such targets, genes and gene mutations to identify drug candidates
and develop companion diagnostic methods and corresponding kits. Third-party intellectual property protecting such technologies that are related to our business may cover or conflict with our patent applications, technologies or product candidates
as well as those of complementary businesses which our business relies upon. Such conflicts could limit the scope of the patents that we may be able to obtain or may result in the denial of our patent applications. If a third party were to obtain
intellectual property protection for any of the foregoing, we may be required to challenge such protection, terminate or modify our programs impacted by such protection or obtain licenses from such third parties, which might not be available on
acceptable terms. Also, if a third party were to introduce a product into the market which we believe infringes our patents, we may be required to enforce our patent rights or seek to obtain an injunction or other relief, which could be
time-consuming and expensive.
Our patents may be challenged by third parties, in connection with a third party’s Abbreviated New Drug
Application, or ANDA, or otherwise, resulting in the patent being deemed invalid, unenforceable or narrowed in scope, which could compromise the scope or duration of our exclusive rights in the relevant product. An ANDA can be filed as early as four
years after FDA approval of a drug. Other challenges to a patent may be mounted without regard to the date of an FDA approval. Also, our pending patent applications may not issue, and we may not receive any additional patents. Our patents as issued
or as subsequently limited by any litigation might not contain claims that are sufficiently broad to prevent others from circumventing our patent protection and utilizing our technologies. For instance, the issued patents relating to Iclusig and our
product candidates may be limited to a particular molecule or molecules and may not cover similar molecules that have similar clinical properties. Consequently, our competitors may independently develop competing products that do not infringe our
patents or other intellectual property.
The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent
as in the United States and other companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or are otherwise precluded from effectively protecting our
intellectual property rights in foreign jurisdictions, our business could be substantially harmed.
Because of the extensive time required for
development, testing and regulatory review of a drug candidate, it is possible that, before any of our drug candidates can be commercialized, any related patent
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may expire or remain in force for only a short period following commercialization of our drug candidates, thereby reducing any advantages of the patent. To the extent our approved drugs or drug
candidates are not commercialized significantly ahead of the expiration date of any applicable patent, or to the extent we have no other patent protection on such approved drugs or drug candidates, those drugs and drug candidates would not be
protected by patents, and we would then need to rely solely on other types of exclusivity, such as orphan drug exclusivity and other types of regulatory exclusivity available under the Food, Drug and Cosmetic Act.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology, and
other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such as our employees,
collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also have entered into confidentiality and invention or patent assignment agreements with our employees
and our consultants. Any of these parties may breach the agreements and disclose our proprietary information, and we may not have adequate remedies for any such breach. Enforcing a claim that a party illegally disclosed or misappropriated a trade
secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be
lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any our trade secrets were to be disclosed to or independently developed by a
competitor, our competitive position could be harmed.
Risks relating to our operations
Our cost-reducing measures may not result in anticipated savings, could disrupt our business and could yield unintended consequences, which could
have a material adverse effect on our business, results of operations and financial condition.
We have implemented significant cost
savings measures to mitigate the financial impact of our announcements in the fourth quarter of 2013 concerning the safety, marketing and commercial distribution of, and revised prescribing information for, Iclusig. These measures included a
substantial reduction of our workforce in November 2013, amounting to approximately 40% of our employees in the United States, and an ongoing realignment of our cost structure. As part of our reduction in workforce, we eliminated commercial sales
force positions for Iclusig and also eliminated positions in research and development and support functions. Although we have recruited additional personnel to commercialize Iclusig in the United States in connection with our resumption of marketing
and commercial distribution in January 2014, the earlier reduction in our workforce may limit our ability to complete all of our corporate objectives. In addition, we could be required to implement further workforce and expense reductions in the
future. Further workforce and expense reductions could result in reduced progress on our internal programs.
The cost-reducing measures taken
by us could yield unintended consequences, such as distraction of our management and employees, the inability to retain and attract new employees, business disruption, a negative impact on morale among remaining employees, attrition beyond our
planned reduction in workforce and reduced employee productivity, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, employees, whether or not directly affected by a
reduction, may seek future employment with our business partners or our competitors. Any failure to attract or retain qualified personnel could prevent us from successfully developing and commercializing Iclusig and our product candidates in the
future. In addition, our reductions in personnel may subject us to risks of litigation, which could result in substantial cost. We cannot guarantee that the cost reduction measures, or other measures we may take in the future, will result in the
expected cost savings, or that any cost savings will be unaccompanied by these or other unintended consequences.
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If we fail to manage the size of our workforce and other resources effectively, our business may
suffer.
The number of our employees more than doubled in the past two years as we built out the commercial organization that is
responsible for the commercialization of Iclusig in the United States and Europe, but was then reduced by approximately 40% of our employees in the United States in the fourth quarter of 2013 in connection with our announcements concerning the
updated safety, marketing and commercial distribution and further clinical development of Iclusig.
We have also entered into a new lease to
move our corporate headquarters and laboratory facilities to two buildings being constructed by the landlord at 75 Binney Street and 125 Binney Street in Cambridge, Massachusetts. We had planned to move into the new buildings in early 2015. However,
in light of our announcements in the fourth quarter of 2013 concerning Iclusig, we are re-assessing our occupancy plans related to this and our other properties. As a result, plans and drawings for the tenant improvements for the Binney Street
facility have not been approved by us and have not, at this time, been completed and submitted in accordance with the timelines specified in the lease. If delay of submission of plans and drawings in accordance with the timelines specified in the
lease results in a delay in the occupancy date for the facility, we may be required to commence rent payments for the facility prior to occupancy. We are currently in discussions with the landlord regarding revisions to our plans, the timelines
related to submission of such plans and other matters in the lease.
In addition, because our drug discovery and development activities are
highly technical in nature, we require the services of highly qualified and trained scientists who have the skills necessary to conduct these activities. We need to attract and retain employees with experience in these fields. We face intense
competition for our personnel from our competitors, our collaborators and other companies throughout our industry. The growth of local biotechnology companies and the expansion of major pharmaceutical companies into the Cambridge, Massachusetts area
have increased competition for the available pool of skilled employees, especially in technical fields, and the high cost of living in the Cambridge area makes it difficult to attract employees from other parts of the country to these areas.
We must respond effectively to these demands and manage our internal organization to accommodate our anticipated needs. If we are unable to
manage the size of our workforce and our other resources effectively, there could be a material adverse effect on our business, results of operations and financial condition.
We are currently subject to securities class action litigation and derivative litigation and may be subject to similar or other litigation such as products liability litigation in the future.
The market price of our common stock declined significantly following our October 2013 announcements concerning the safety, marketing
and commercial distribution and further clinical development of Iclusig in the United States. Class action lawsuits have been filed alleging, among other things, that we and certain of our officers violated federal securities laws by making
allegedly material misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in our public disclosures. The plaintiffs seek unspecified monetary damages on behalf of the putative class and an award of costs
and expenses, including attorney’s fees.
In addition, in November and December 2013, purported derivative lawsuits were filed alleging
that our directors and certain of our officers breached their fiduciary duties related to the clinical development and commercialization of Iclusig and by making misrepresentations regarding the safety and commercial marketability of Iclusig. The
lawsuits also assert claims for unjust enrichment and corporate waste, and for misappropriation of information and insider trading by the officers named as defendants. The plaintiffs seek unspecified monetary damages, changes in our corporate
governance policies and internal procedures, restitution and disgorgement from the individually named defendants, and an award of costs and expenses, including attorney’s fees.
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While we believe we have meritorious defenses, we cannot predict the outcome of these lawsuits. We believe
that there may be additional suits or proceedings brought in the future. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal
resources on our business activities, and we cannot predict how long it may take to resolve these matters. In addition, we may incur substantial legal fees and costs in connection with litigation. Although we have insurance, coverage could be denied
or prove to be insufficient. We are not currently able to estimate the possible cost to us from these lawsuits, as they are currently at an early stage and we cannot be certain how long it may take to resolve these matters or the possible amount of
any damages that we may be required to pay. We have not established any reserves for any potential liability relating to these lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary
damages. A decision adverse to our interests on these actions could result in the payment of substantial damages and could have a material adverse effect on our business, results of operations and financial condition. In addition, the uncertainty of
the currently pending lawsuits could lead to more volatility in our stock price.
Likewise, if product liability lawsuits are brought against
us for injuries or deaths allegedly due to patients’ adverse reactions to Iclusig, we may be subject to additional liability. In any event, a potential product liability lawsuit would require significant financial and management resources.
Regardless of the outcome, product liability claims may result in injury to our reputation, withdrawal of clinical trial participants, significant costs, diversion of management’s attention and resources, substantial monetary awards, loss of
revenue, and additional distractions from our efforts to resume marketing and commercial distribution of Iclusig in the United States. Although we have product liability insurance, coverage could be denied or prove to be insufficient. We may not be
able to renew or retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims, which could also impact the resumption of marketing and commercial distribution of Iclusig in the United
States.
Our business has a substantial risk of product liability claims. If we are unable to obtain appropriate levels of insurance,
product liability claims could adversely affect our business.
Our business exposes us to potential product liability risks inherent in
the testing, manufacturing, marketing and sale of pharmaceutical products. Prior to obtaining regulatory approval to market our products, we or our collaborators are required to test such products in human clinical trials at health care institutions
pursuant to agreements which indemnify such institutions in case of harm caused to patients by our products. We may not be able to avoid significant product liability exposure resulting from use of our products. We have product liability insurance
and clinical trial insurance in amounts that we believe are adequate to cover this risk. However, our insurance may not provide adequate coverage against potential liabilities. If a claim is brought against us, we might be required to pay legal and
other expenses to defend the claim, as well as pay uncovered damages awards resulting from a claim brought successfully against us and these damages could be significant and have a material adverse effect on our financial condition. Furthermore,
whether or not we are ultimately successful in defending any such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result.
Risks associated with operating in foreign countries could materially adversely affect our business.
We have expanded our operations into Europe in order to market Iclusig internationally. In addition, we have manufacturing, collaborative and clinical
trial relationships outside the United States. Consequently, we are, and will continue to be, subject to risks related to operating in foreign countries. Risks associated with conducting operations in foreign countries include:
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differing regulatory requirements for drug approvals and regulation of approved drugs in foreign countries;
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changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign taxes, including withholding of payroll taxes;
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foreign currency fluctuations, which could result in increased operating expenses or reduced revenues, and other obligations incident to doing business
or operating in another country;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geo-political actions, including war and terrorism.
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These and other risks associated with our international operations could materially adversely affect our business.
In addition, our international operations are subject to regulation under United States law. For example, the Foreign Corrupt Practices Act prohibits
United States companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. In many countries, the health care professionals we regularly
interact with may meet the definition of a foreign government official for purposes of the Foreign Corrupt Practices Act. We are also subject to import and export control laws. Failure to comply with domestic or foreign laws could result in various
adverse consequences, including the possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, the imposition of civil or criminal sanctions, the prosecution of executives
overseeing our international operations and corresponding adverse publicity and negative perception of our company in foreign countries.
The loss of key members of our scientific and management staff could delay and may prevent the achievement of our research, development and
business objectives.
We are substantially dependent on our key officers and members of our staff responsible for areas such as drug
development, clinical trials, regulatory affairs, drug discovery, manufacturing, commercial operations, business development and intellectual property protection and licensing. As we continue to expand our capabilities in connection with the launch
of Iclusig and in anticipation of the possible launch of any additional commercial products, a loss of key personnel or a failure to properly integrate new personnel could be disruptive. While we have entered into employment agreements with all of
our executive officers, these officers may terminate their employment with us at any time. The value to employees of stock-related benefits that vest over time, such as options and restricted stock units, will be significantly affected by movements
in our stock price that we cannot control, and may at any point in time be insufficient to counteract more lucrative offers from other companies. The loss of, and failure to promptly replace, any member of our management team could significantly
delay and may prevent the achievement of our research, development and business objectives.
If we do not comply with laws regulating
the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development
efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and
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disposing of these materials comply with the standards prescribed by state, federal and foreign regulations, the risk of accidental contamination or injury from these materials cannot be
eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these
materials, this insurance may not provide adequate coverage against potential liabilities. We maintain insurance to cover pollution conditions or other extraordinary or unanticipated events relating to our use and disposal of hazardous materials
that we believe is appropriate based on the small amount of hazardous materials we generate. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply
with, and substantial fines or penalties if we violate, any of these laws or regulations.
A breakdown or breach of our information
technology systems could subject us to liability or interrupt the operation of our business.
We rely upon our information technology
systems and infrastructure for our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, data privacy breaches by employees and others who access our
systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. There can be no assurance that our management or diligence efforts will prevent breakdowns or breaches in our systems that could adversely affect
our business.
Risks relating to regulatory approvals, pricing and reimbursement
The manufacture, distribution and sale of Iclusig are subject to significant regulatory oversight and restrictions. Regulatory authorities may
require the use of a risk mitigation strategy such as the Risk Evaluation and Mitigation Strategy (REMS) required by the FDA for Iclusig. These restrictions and requirements subject us to increased risks and uncertainties, any of which could
negatively impact sales of Iclusig.
In connection with the approval to resume marketing and commercial distribution of Iclusig in the
United States in December 2013, the FDA required us to implement a Risk Evaluation and Mitigation Strategy, or REMS. The objective of the REMS program is to inform prescribers of the risk of vascular occlusion associated with Iclusig and of the
revised USPI. The REMS program includes letters to physicians and professional societies, a fact sheet and information that will be communicated through professional journals and displayed at scientific meetings. In addition, we have agreed to
fulfill a series of post-marketing requirements beginning in 2014 to better understand the risks of vascular occlusion and to further explore various doses of Iclusig, including enhanced assessment and prospective observation of patients with
vascular occlusive events, continued follow-up monitoring of patients from our Iclusig trials, and a randomized multi-arm trial to characterize a range of Iclusig doses and safe use.
Any REMS required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of Iclusig, all of which
could lead to lower sales volume and revenue. As required by the FDA and other regulatory agencies, the information that we collect while implementing our REMS could result in further required changes to the Iclusig label and prescribing information
or require us to take other actions that could have an adverse effect on Iclusig’s commercial success, which would have a material adverse effect on our business, financial condition and results of operations.
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Clinical trials for our product candidates are expensive and time consuming, may take longer than we
expect or may not be completed at all, and their outcome is uncertain.
We and our collaborators are currently conducting multiple
clinical trials for our clinical product candidates, and we and our collaborators expect to commence additional trials of Iclusig and our product candidates in the future. Each of our clinical trials requires the investment of substantial expense
and time and the timing of the commencement, continuation and completion of these clinical trials may be subject to significant delays attributable to various causes, including scheduling conflicts with participating clinicians and clinical
institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, failure of patients to complete the clinical trial, delay in or failure to obtain IRB approval to conduct a clinical trial at a prospective site,
shortages of available drug supply, or the imposition of a clinical hold by regulatory agencies, such as the partial clinical hold the FDA imposed on additional patient enrollment in all clinical trials of Iclusig in October 2013. Patient enrollment
is a function of many factors, including the size of the target patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative
established or investigational treatments.
We depend on medical institutions and clinical research organizations, or CROs, to conduct our
clinical trials in compliance with FDA and other applicable requirements and guidelines, often referred to as Good Clinical Practices, and to the extent they fail to enroll patients for our clinical trials, are delayed for a significant time in
achieving full enrollment, or fail to follow proper procedures, we may be affected by increased costs, program delays or both, which may harm our business. In addition, we conduct clinical trials in foreign countries which may subject us to further
delays and expenses as a result of increased drug shipment costs, additional regulatory requirements and the need to engage foreign CROs, as well as expose us to risks associated with less experienced clinical investigators who are unknown to the
FDA, different standards of medical care, and fluctuating foreign currency exchange rates.
Clinical trials must be conducted in accordance
with Good Clinical Practices and are subject to oversight by the FDA, other foreign governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product
candidates produced under current Good Manufacturing Practices, or cGMP, conditions. We, the FDA, the EMA or other foreign governmental agencies could delay, suspend or halt our clinical trials of a product candidate for numerous reasons, including:
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deficiencies in the conduct of the clinical trial, including failure to conduct the clinical trial in accordance with regulatory requirements or
clinical protocols;
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the product candidate may have unforeseen adverse side effects, including fatalities, or a determination may be made that a clinical trial presents
unacceptable health risks, such as was reflected in our announcement in October 2013 that the FDA had imposed a partial clinical hold on all clinical trials for Iclusig following our review of additional clinical data from the PACE trial showing
that a higher percentage of patients taking Iclusig had experienced serious arterial thrombosis and serious venous occlusion after a median of 24 months of follow-up;
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the time required to determine whether the product candidate is effective may be longer than expected;
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the product candidate may not be more effective than current therapies;
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the quality or stability of the product candidate may fall below acceptable standards;
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our inability to produce or obtain sufficient quantities of the product candidate to complete the trials;
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our inability to obtain IRB approval to conduct a clinical trial at a prospective site;
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lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct
additional trials and studies and increased expenses associated with the services of our CROs and other third parties;
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our inability to recruit and enroll patients to participate in clinical trials for reasons including competition from other clinical trial programs for
the same or similar indications; or
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our inability to retain patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of
efficacy or personal issues, or who are lost to further follow-up.
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In addition, clinical trial results are frequently
susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse medical events, including patient fatalities that may be attributable to our product candidates, during a
clinical trial could cause it to be redone or terminated. Further, some of our clinical trials may be overseen by an independent data monitoring committee, or DMC, and a DMC may recommend a delay or suspension in one or more of these trials due to
safety or futility findings based on events occurring during a clinical trial.
If clinical trials of any of our product candidates fail, we
or our collaborators may not be able to obtain marketing approval for the product candidate that is the subject of the failed clinical trials. The FDA and foreign regulatory agencies could also require additional clinical trials before or after
granting of marketing approval for any products, which could result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market after
initially obtaining marketing approval. Our failure, or the failure of our collaborators, to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent obtaining marketing approval of the
product candidate and, after obtaining marketing approval, data from post-approval studies could result in the product being withdrawn from the market, either of which would likely have a material adverse effect on our business.
Iclusig and each of our product candidates will remain subject to ongoing regulatory review even if they receive marketing approval. If we or our
collaborators or contractors fail to comply with applicable regulations, we or they may be subject to enforcement action that could adversely affect us.
We and our collaborators and contractors will continue to be subject to extensive regulation by the FDA and other regulatory authorities even after our product candidates are approved. We and our
collaborators and contractors will continue to be subject to FDA requirements governing, among other things, the manufacture, packaging, sale, promotion, adverse event reporting, storage and recordkeeping of our approved products. For example, in
October 2013, the FDA placed a partial clinical hold on all clinical trials of Iclusig and, at the request of the FDA, we suspended marketing and commercial distribution of Iclusig in the United States following our review of additional clinical
data from the pivotal PACE trial of Iclusig. The FDA has also issued Drug Safety Communications concerning Iclusig and is investigating the drug to further understand its risks and potential patient populations in which the benefits of the drug may
outweigh the risks. Additionally, the EMA and FDA announced in November 2013 and December 2013, respectively, that the approved indications for Iclusig should be narrowed and its product information should be updated to include strengthened
warnings.
If we or any of our collaborators fails to comply with the requirements of the FDA and other U.S. or foreign governmental or
regulatory authorities with jurisdiction over our products or operations or previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we or our collaborator could be subject to administrative or
judicially imposed sanctions, including warning letters; civil or criminal penalties; fines; injunctions; product seizures or detentions; import bans; voluntary or mandatory product recalls; suspension or withdrawal of regulatory approvals; total or
partial suspension of production; and refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.
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We may not be able to obtain government regulatory approval to market our product candidates.
Other than Iclusig, none of our product candidates has been approved for commercialization in any country. Prior to commercialization,
each product candidate will be subject to an extensive and lengthy review process in the United States and in other countries. We or our collaborators may not be able to obtain regulatory approval for any product candidates, or even if approval is
obtained, the labeling for such products may place restrictions on their use that could materially impact the marketability and profitability of those products. Satisfaction of regulatory requirements, which includes satisfying the FDA and foreign
regulatory authorities that the product is both safe and effective for its intended uses, typically takes several years or more depending upon the type, complexity, novelty and safety profile of the product and requires the expenditure of
substantial resources. Uncertainty with respect to meeting the regulatory requirements governing our product candidates may result in excessive costs or extensive delays in the regulatory review process.
We will not be able to sell our product candidates if we or our third-party manufacturers fail to comply with current good manufacturing practice
requirements.
Before approving any of our product candidates, the FDA will inspect the facility or facilities at which the drug
product is manufactured and will not approve the drug candidate unless it is satisfied with our or our third-party manufacturer’s compliance with cGMPs. The manufacturing of our product candidates must comply with cGMP requirements of the FDA
and similar requirements of regulatory agencies in other countries. These requirements govern, among other things, manufacturing, quality control and documentation procedures. We, or any third-party manufacturer of our product candidates, may not be
able to comply with these requirements, which would prevent us from obtaining approval for commercialization of our products. Material changes to the manufacturing processes or a change in manufacturer of products after approvals have been granted
are also subject to review and approval by the FDA or other regulatory agencies. Following approval, such facilities are subject to continuing FDA and foreign regulatory requirements including inspections and failure to comply with cGMPs or similar
regulations could result in regulatory action including market withdrawals and recalls.
Government and other third-party payors seek to
contain costs of health care through legislative and other means. If they fail to provide coverage and adequate reimbursement rates for our products, our revenues will be harmed.
In both domestic and foreign markets, sales of products depend in part upon the availability of reimbursement from third-party payors. Third-party payors include government health programs such as
Medicare and Medicaid, managed care providers, and private health insurers. Governments and other third-party payors continually try to contain or reduce the costs of health care through various means. For example, in certain foreign markets,
pricing of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. The
Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010, collectively, the Affordable Care Act or ACA, will require discounts under the Medicare drug benefit program and increases the
rebates paid by pharmaceutical companies on drugs covered by Medicaid. In addition, the ACA imposes an annual fee, which will increase annually, on sales by branded pharmaceutical manufacturers. The financial impact of these discounts, increased
rebates and fees and the other provisions of the ACA on our business is unclear, and there can be no assurance that our business will not be materially harmed by future implementation of the ACA.
In addition, third-party payors are increasingly attempting to contain health care costs by demanding price discounts or rebates and limiting both the
types and variety of drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not cover or provide adequate payment for our products. We may have to conduct post-marketing studies in order to demonstrate the
cost-effectiveness of Iclusig or any other of our future drugs to such payors’ satisfaction.
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Such studies might require us to commit a significant amount of management’s time and financial and
other resources. Our products might not ultimately be considered cost-effective. Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product
development.
Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on
payments allowed for lower-cost products that already are reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or imperfections in Medicare or Medicaid data used to
calculate these rates. Net prices for products are often reduced by mandatory discounts or rebates required by government health care programs or by privately-negotiated discounts. Moreover, the United States federal government, state governments
and private payors frequently pursue actions against pharmaceutical companies alleging that the companies have overstated prices in order to inflate reimbursement rates. Any such action could adversely affect the pricing of and the commercial
success of our products.
Any legislation or regulatory changes or relaxation of laws that restrict imports of drugs from other countries also
could reduce the net price we receive for our products.
If we market any of our products in a manner that violates federal or state
health care laws, including fraud and abuse laws, laws prohibiting off-label promotion, disclosure laws or other similar laws, we may be subject to civil or criminal penalties.
We are subject to health care “fraud and abuse” laws, such as the federal False Claims Act and the anti-kickback provisions of the federal Social Security Act, laws prohibiting off-label product
promotion and other similar state and federal laws and regulations. While we have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and the promotion
of a culture of compliance, if we are found not to be in full compliance with these laws our business could be materially harmed.
The federal
anti-kickback law prohibits knowingly and willfully offering, paying, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the ordering, furnishing, arranging
for or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program, such as Medicare or Medicaid. The federal statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, patients, purchasers and formulary managers on the other hand, and therefore constrains our marketing practices and our various service arrangements with physicians, including physicians who make
clinical decisions to use our products. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that
involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny or penalty if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a
false statement to get a false claim paid. Pharmaceutical companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free product to customers with the expectation that the
customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in promotion for uses that the FDA has not approved,
known as “off-label” uses, that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated “best price” information to the Medicaid Rebate Program.
Although physicians are permitted to, based on their medical judgment, prescribe products for indications other than those cleared or approved by the
FDA, manufacturers are prohibited from promoting their products for such off-label uses. We market Iclusig for the treatment of adult patients with T315I-positive
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CML (chronic phase, accelerated phase, or blast phase) or T315I-positive Ph+ ALL and chronic phase, accelerated phase, or blast phase CML or Ph+ ALL for whom no other TKI therapy is indicated,
and provide promotional materials to physicians regarding the use of Iclusig in these patient populations. If the FDA determines that our promotional materials or other activities constitute off-label promotion, it could request that we modify our
promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. It also is possible that other federal, state or foreign
enforcement authorities might take action if they believe that the alleged improper promotion led to the submission and payment of claims for an off-label use, which could result in significant fines or penalties under other statutory authorities,
such as laws prohibiting false claims for reimbursement. Even if it is later determined we were not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our actions and have to divert significant
management resources from other matters.
Also applicable to some of our practices is the Health Insurance Portability and Accountability Act
of 1996, or HIPAA, and its implementing regulations, which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters and which also imposes
certain regulatory and contractual requirements regarding the privacy, security and transmission of individually identifiable health information.
The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state
programs, or, in several states, apply regardless of the payor. In addition, certain states have laws governing the privacy of certain health information, which may differ from each other in significant ways and often are not preempted by HIPAA,
complicating compliance efforts. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a pharmaceutical manufacturer’s products from reimbursement under government programs and criminal fines. Even if
we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our business.
In recent years, several states and localities, including California, the District of Columbia, Maine, Minnesota, Nevada, New Mexico, Vermont and West
Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, health care
provider, or HCP payments and other activities. Similar legislation is being considered in other states. Additionally, as part of the ACA, the federal government has enacted the Physician Payment Sunshine provisions. The Physician Payment Sunshine
provisions which were enacted in February 2013 and require pharmaceutical manufacturers to publicly report gifts and payments made to physicians and teaching hospitals beginning in March 2014. Many of these requirements are new and the penalties for
failure to comply with these requirements will be significant. If we are found not to be in full compliance with these laws, we could face enforcement action, fines and other penalties, and could receive adverse publicity.
The ACA also includes various provisions designed to strengthen significantly fraud and abuse enforcement, such as increased funding for enforcement
efforts and the lowering of the intent requirement of the federal anti-kickback statute and criminal health care fraud statute such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it.
If our past or present operations are found to be in violation of any such laws or any other governmental regulations that may apply to us,
we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from federal health care programs and/or the curtailment or restructuring of our operations. The risk of our being found in violation of these laws is
increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are subject to a variety of interpretations. Any action against us for violation of these laws, even if we
successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
46
The sales and marketing practices of our industry have been the subject of increased scrutiny from federal
and state government agencies, and we believe that this trend will continue. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our
management’s attention from the operation of our business.
Future health care reform measures could hinder or prevent commercial
success of our drugs and drug candidates.
The U.S. federal government and other governments have shown significant interest in
pursuing health care reform. Any government-adopted reform measures could adversely affect the pricing of health care products, including our approved product and/or any future product candidates approved for sale. The continuing efforts of
governments, insurance companies, managed care organizations and other payors for health care products to contain or reduce health care costs may adversely affect our ability to set prices we believe are fair for our products or any drugs we may
develop and commercialize.
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions,
relating to health care availability, methods of delivery or payment for drugs, or sales, marketing or pricing, may limit our potential revenues, and we may need to revise our research and development or commercialization programs. The pricing and
reimbursement environment may change in the future and become more challenging for any of several reasons, including policies advanced by the U.S. government, new health care legislation or fiscal challenges faced by government health administration
authorities. Specifically, in the United States and in some foreign jurisdictions there have been a number of legislative and regulatory proposals and initiatives to change the health care system in ways that could affect our ability to sell
products. Some of these proposed and implemented reforms could result in reduced reimbursement rates for our current or future products, which would adversely affect our business, operations and financial results. As discussed above, the recently
enacted ACA may have far reaching consequences for companies like us. As a result of this new legislation, substantial changes could be made to the current system for paying for health care in the United States, including changes made in order to
extend medical benefits to those who currently lack health insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursement. If reimbursement
for our products is substantially less than we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely affected.
Further federal and state proposals and health care reforms in and outside of the United States could limit the prices that can be charged for our
products and may further limit our commercial opportunity. Our results of operations could be materially adversely affected by the ACA, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future
legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future.
47
Risks relating to our common stock
Results of our operations, new clinical and safety data, FDA actions, general market conditions for biotechnology stocks and other factors could result in a sudden change in the value of our stock.
As a biopharmaceutical company, we continue to experience significant volatility in the price of our common stock. In the twelve
months ended December 31, 2013, our stock price ranged from a high of $23.00 per share to a low of $2.15 per share. In connection with our October 2013 announcements concerning the safety, marketing and commercial distribution and further
clinical development of Iclusig in the United States, our stock price declined by 87%, from $17.14 per share before the announcements to a low of $2.15 per share following the announcements. Some of the many factors that could contribute to such
volatility include:
|
|
•
|
|
actual or anticipated results of our commercialization and development of Iclusig in light of our announcements in the fourth quarter of 2013
concerning the revised prescribing information and safety, marketing and commercial distribution and further clinical development of Iclusig;
|
|
|
•
|
|
our plans for seeking marketing approval and the expected timing of any regulatory approvals of our product candidates, including approval of Iclusig
outside of the United States and the European Union;
|
|
|
•
|
|
additional actual or anticipated actions taken by regulatory agencies that may impact Iclusig and our product candidates;
|
|
|
•
|
|
evidence of the safety or efficacy of Iclusig and our product candidates, including additional data on serious arterial thrombosis and serious venous
occlusion of CML patients being treated with Iclusig or the occurrence of other serious adverse events;
|
|
|
•
|
|
litigation, including the securities class action and derivative lawsuits pending against us and certain of our officers;
|
|
|
•
|
|
announcements regarding results and timing of preclinical studies and clinical trials for our product candidates;
|
|
|
•
|
|
announcements of financial results and other operating performance measures, including product revenues;
|
|
|
•
|
|
our funding resources and requirements, including announcements of new equity or debt financings;
|
|
|
•
|
|
the timing of our receipt of, or our failure to receive, future milestones under our license agreements with our stent collaborators;
|
|
|
•
|
|
announcements regarding existing collaborations or new collaborations or our failure to enter into collaborations;
|
|
|
•
|
|
announcements regarding product developments or regulatory approvals obtained by companies developing competing products;
|
|
|
•
|
|
announcements of technological innovations or new therapeutic product candidates;
|
|
|
•
|
|
developments relating to intellectual property rights, including licensing, litigation and governmental regulation;
|
|
|
•
|
|
healthcare or cost-containment legislation and public policy pronouncements;
|
|
|
•
|
|
sales of our common stock by us, our insiders or our other stockholders;
|
|
|
•
|
|
market conditions for biopharmaceutical stocks in general; and
|
|
|
•
|
|
general economic and market conditions.
|
The stock markets, and the markets for biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may realize less than, or lose all of, their investment.
48
Anti-takeover provisions of Delaware law, provisions in our charter and bylaws and our shareholder
rights plan could delay, discourage or make more difficult a third-party acquisition of control of us.
Because we are a Delaware
corporation, the certain provisions of Delaware law could delay, discourage or make more difficult a third-party acquisition of control of us, even if the change in control would be beneficial to stockholders or the stockholders regard it as such.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits certain “business combination” transactions (as defined in Section 203) with an “interested stockholder”
(defined in Section 203 as a 15 percent or greater stockholder) for a period of three years after a stockholder becomes an “interested stockholder”, unless the attaining of “interested stockholder” status or the transaction
is pre-approved by our board of directors, the transaction results in the attainment of at least an 85 percent ownership level by an acquirer or the transaction is later approved by our board of directors and by our stockholders by at least a 66 2/3
percent vote of our stockholders other than the “interested stockholder”, each as specifically provided in Section 203.
In
addition, because our board of directors is a classified board, as described below, Section 141(k)(1) of the DGCL provides that directors may only be removed by the stockholders and then only for “cause”. Further,
Section 242(b)(1) of the DGCL provides that amendment of our certificate of incorporation requires that the amendment be determined by the board of directors to be advisable and be submitted by our board of directors to our stockholders for
action by them and then approved by our stockholders holding a majority of the outstanding shares of our common stock.
Our certificate of
incorporation and our bylaws, each as currently in effect, also contain certain provisions that may delay, discourage or make more difficult a third-party acquisition of control of us:
|
|
•
|
|
a classified board of directors, with three classes of directors, each serving for a staggered three-year term, such that not all members of the board
of directors may be elected at one time;
|
|
|
•
|
|
the authorized number of directors may be changed only by resolution of the board of directors;
|
|
|
•
|
|
any vacancies on the board of directors may only be filled by a majority of the directors then serving, although not a quorum, and not by the
stockholders;
|
|
|
•
|
|
the ability of the board of directors to issue preferred stock that could dilute the stock ownership of a potential unsolicited acquirer and so
possibly hinder an acquisition of control of us that is not approved by our board of directors, including through the use of preferred stock in connection with a shareholder rights plan which we could adopt by action of the board of directors;
|
|
|
•
|
|
record date-setting provisions for annual and special meetings of stockholders and actions by written consent, provisions regulating the conduct of
meetings of stockholders and action by written consent, and “advance notice” timing and informational requirements for stockholder nominations to our board of directors at stockholder meetings or for stockholder proposals that can be acted
on at stockholder meetings or by written consent; and
|
|
|
•
|
|
the inability of our stockholders to call a special meeting of stockholders, the limitation of matters to be acted upon at an annual meeting of
stockholders to those matters proposed by the Company or properly brought before the meeting and the limitation of matters to be acted upon at a special meeting of stockholders to matters which we place on the agenda for the meeting.
|
We have adopted a shareholder rights plan in the form of a Section 382 Rights Plan, designed to help protect and
preserve our substantial tax attributes primarily associated with our NOLs and research tax credits under Sections 382 and 383 of the Internal Revenue Code and related U.S. Treasury regulations. Although this is not the purpose of the
Section 382 Rights Plan, it could have the effect of making it uneconomical for a third party to acquire us on a hostile basis.
49
These provisions of the DGCL, our certificate of incorporation and bylaws, and our Section 382 Rights
Plan may delay, discourage or make more difficult certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the current market price, and might limit the ability of our stockholders to approve
transactions that they think may be in their best interest.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
We have leased approximately 100,000 square feet of laboratory and office space at 26 Landsdowne Street,
Cambridge, Massachusetts through July 2019, with two five-year renewal options. In May 2012, we entered into a three-year operating lease agreement for an additional 26,000 square feet of office space in Cambridge, Massachusetts. We also have a
short-term lease for approximately 4,500 square feet of office space in Lausanne, Switzerland.
We have entered into a long-term lease for
approximately 386,000 square feet of laboratory and office space in two adjacent, connected buildings under construction in Cambridge, Massachusetts, which is expected to be available for occupancy in early 2015. The lease has a term of 15 years
with options to renew for three terms of five years each. In connection with this lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, engineering, and construction of tenant improvements for the
leased facility. The tenant improvements will be in accordance with our plans and include fit-out of the buildings to construct appropriate laboratory and office space, subject to approval by the landlord. Given our involvement in the design of
tenant improvements for the leased facility, the lease establishes dates by which we are required to submit plans and drawings for tenant improvements consistent with the timeline for completion of the construction, including tenant improvements,
and readiness of the facility for occupancy. In connection with the partial clinical hold of Iclusig imposed by the FDA and the temporary suspension of marketing and commercial distribution of Iclusig in the United States in October 2013, plans and
drawings for the tenant improvements for this facility have not been approved by us and have not, at this time, been completed and submitted in accordance with the timelines specified in the lease. If delay of submission of plans and drawings in
accordance with the timelines specified in the lease results in a delay in the occupancy date for the facility, we may be required to commence rent payments for the facility prior to occupancy. We are currently in discussions with the landlord
regarding revisions to our plans, the timelines related to submission of such plans and other matters in the lease.
We have also entered into
a long-term lease for approximately 22,000 square feet of office space in a building in Lausanne, Switzerland, which we occupied in early 2014 and will serve as our European headquarters. We believe that any additional space we may require will be
available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
On October 10, 2013, October 17, 2013, December 3, 2013 and December 6, 2013, purported shareholder class actions, styled
Jimmy Wang v. ARIAD Pharmaceuticals, Inc., et al.
,
James L. Burch v. ARIAD Pharmaceuticals, Inc., et al.
,
Greater Pennsylvania Carpenters’ Pension Fund v. ARIAD Pharmaceuticals, Inc., et al
, and
Nabil Elmachtoub v. ARIAD
Pharmaceuticals, Inc., et al
, respectively, were filed in the United States District Court for the District of Massachusetts (the District Court), naming us and certain of our officers as defendants. The lawsuits allege that we made material
misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in our public disclosures during the period from December 12, 2011 through October 8, 2013 or October 17, 2013, in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On January 9, 2014, the District Court consolidated the actions and appointed lead plaintiffs. On February 18, 2014, the
50
lead plaintiffs filed an amended complaint as contemplated by the order of the District Court. The amended complaint extends the class period for the Securities Exchange Act claims through
October 30, 2013. In addition, plaintiffs allege that certain of our officers, present and former directors and certain underwriters made material misrepresentations and/or omissions of material fact regarding clinical and safety data for
Iclusig in connection with our January 24, 2013 follow-on public offering of common stock in violation of Sections 11 and 15 of the Securities Act of 1933, as amended. The plaintiffs seek unspecified monetary damages on behalf of the putative
class and an award of costs and expenses, including attorney’s fees.
On November 6, 2013, a purported derivative lawsuit, styled
Yu Liang v. ARIAD Pharmaceuticals, Inc., et al.,
was filed in the United States District Court for the District of Massachusetts (the District Court), on behalf of us naming our directors and certain of our officers as defendants. On
December 6, 2013, an additional purported derivative lawsuit, styled
Arkady Livitz v. Harvey J. Berger, et al
, was filed in the District Court. The lawsuits allege that our directors and certain of our officers breached their fiduciary
duties related to the clinical development and commercialization of Iclusig and by making misrepresentations regarding the safety and commercial marketability of Iclusig. The lawsuits also assert claims for unjust enrichment and corporate waste, and
for misappropriation of information and insider trading by the officers named as defendants. On January 23, 2014, the District Court consolidated the actions. On February 3, 2014, plaintiffs designated the
Yu Liang
complaint as the
operative complaint as contemplated by the order of the District Court. The plaintiffs seek unspecified monetary damages, changes in our corporate governance policies and internal procedures, restitution and disgorgement from the individually named
defendants, and an award of costs and expenses, including attorney fees.
Additional complaints may be filed against us and our directors and
officers related to our disclosures and announcements concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States.
We believe that these actions are without merit. At this time, no assessment can be made as to the likely outcome of these lawsuits or whether the outcome will be material to us.
ITEM 4: MINE SAFETY DISCLOSURES
None.
51
PART II
|
ITEM 5:
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information
Our common stock is
traded on the NASDAQ Global Select Market under the symbol “ARIA”. The following table sets forth the high and low sales prices of our common stock as quoted on this market for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2013:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
22.49
|
|
|
$
|
17.15
|
|
|
Second Quarter
|
|
|
20.32
|
|
|
|
15.35
|
|
|
Third Quarter
|
|
|
23.00
|
|
|
|
16.95
|
|
|
Fourth Quarter
|
|
|
19.18
|
|
|
|
2.15
|
|
|
|
|
|
|
2012:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
16.76
|
|
|
$
|
12.26
|
|
|
Second Quarter
|
|
|
18.10
|
|
|
|
14.10
|
|
|
Third Quarter
|
|
|
24.36
|
|
|
|
16.61
|
|
|
Fourth Quarter
|
|
|
25.40
|
|
|
|
18.83
|
|
On February 24, 2014, the last reported sale price of our common stock was $8.63 per share.
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock since December 31, 2008, with the total cumulative return of the NASDAQ
Biotechnology Index and the Russell 3000
®
Index, in each of which ARIAD is listed. The Russell 3000 Index
measures the stock performance of the largest 3,000 U.S. companies representing approximately 98 percent of the investable U.S. equity market. Since the Russell 3000 Index is specifically designed to provide a comprehensive, unbiased and stable
barometer of the broad stock market, we believe it is a meaningful index against which to compare our stock price performance.
The price of a
share of common stock is based upon the closing price per share as quoted on NASDAQ on the last trading day of the year shown. The graph lines merely connect year-end values and do not reflect fluctuations between those dates. The comparison assumes
$100 was invested on December 31, 2008 in our common stock and in each of the foregoing indices. We did not declare or pay any dividends during the comparison period. The stock price performance as shown in the graph below is not necessarily
indicative of future stock price performance.
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
ARIAD Pharmaceuticals, Inc.
|
|
|
100.00
|
|
|
|
268.24
|
|
|
|
600.00
|
|
|
|
1,441.18
|
|
|
|
2,256.47
|
|
|
|
802.35
|
|
|
Nasdaq Biotechnology Index
|
|
|
100.00
|
|
|
|
115.63
|
|
|
|
132.98
|
|
|
|
148.69
|
|
|
|
196.12
|
|
|
|
324.80
|
|
|
Russell 3000 Index
|
|
|
100.00
|
|
|
|
125.22
|
|
|
|
156.90
|
|
|
|
148.35
|
|
|
|
170.06
|
|
|
|
232.98
|
|
The performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating
by reference this Form 10-K into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such information by reference, and shall not otherwise
be deemed filed under such acts.
Stockholders
As of February 24, 2014, the approximate number of holders of record of our common stock was 333.
Dividends
We have not declared or paid dividends on our common stock in the past and do
not intend to declare or pay such dividends in the foreseeable future. Our long-term debt agreement prohibits the payment of cash dividends.
Unregistered Sales of Securities
Not
applicable.
Issuer Purchases of Equity Securities
Not applicable.
53
|
ITEM 6:
|
SELECTED FINANCIAL DATA
|
The selected
financial data set forth below as of December 31, 2013, 2012, 2011, 2010 and 2009 and for each of the years then ended have been derived from the audited consolidated financial statements of the Company, of which the financial statements as of
December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 are included elsewhere in this Annual Report on Form 10-K. The information set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements, and the notes thereto, and other financial information included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
In thousands, except per share data
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
45,238
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
License and collaboration revenue
(1)
|
|
|
296
|
|
|
|
514
|
|
|
|
25,189
|
|
|
|
174,460
|
|
|
|
8,302
|
|
|
Service revenue
(1)
|
|
|
27
|
|
|
|
44
|
|
|
|
111
|
|
|
|
4,520
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
45,561
|
|
|
|
558
|
|
|
|
25,300
|
|
|
|
178,980
|
|
|
|
8,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
9,612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Research and development expense
|
|
|
162,900
|
|
|
|
144,709
|
|
|
|
77,743
|
|
|
|
57,985
|
|
|
|
63,447
|
|
|
Selling, general and administrative expense
|
|
|
146,615
|
|
|
|
60,909
|
|
|
|
24,380
|
|
|
|
16,095
|
|
|
|
16,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
319,127
|
|
|
|
205,618
|
|
|
|
102,123
|
|
|
|
74,080
|
|
|
|
80,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(273,566
|
)
|
|
|
(205,060
|
)
|
|
|
(76,823
|
)
|
|
|
104,900
|
|
|
|
(72,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(23
|
)
|
|
|
41
|
|
|
|
(65
|
)
|
|
|
(120
|
)
|
|
|
(171
|
)
|
|
Revaluation of warrant liability
(2)
|
|
|
—
|
|
|
|
(15,924
|
)
|
|
|
(46,715
|
)
|
|
|
(19,532
|
)
|
|
|
(7,804
|
)
|
|
Foreign exchange gain (loss)
|
|
|
(130
|
)
|
|
|
71
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(153
|
)
|
|
|
(15,812
|
)
|
|
|
(46,780
|
)
|
|
|
(19,652
|
)
|
|
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(274,158
|
)
|
|
$
|
(220,872
|
)
|
|
$
|
(123,603
|
)
|
|
$
|
85,248
|
|
|
$
|
(80,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic
|
|
$
|
(1.49
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
0.75
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- diluted
|
|
$
|
(1.49
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
0.74
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common
stock outstanding - basic
|
|
|
183,575
|
|
|
|
164,964
|
|
|
|
132,375
|
|
|
|
113,020
|
|
|
|
93,330
|
|
|
- diluted
|
|
|
183,575
|
|
|
|
164,964
|
|
|
|
132,375
|
|
|
|
114,734
|
|
|
|
93,330
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
237,179
|
|
|
$
|
164,414
|
|
|
$
|
306,256
|
|
|
$
|
103,630
|
|
|
$
|
40,362
|
|
|
Working capital
|
|
|
172,769
|
|
|
|
119,484
|
|
|
|
282,195
|
|
|
|
88,775
|
|
|
|
8,212
|
|
|
Total assets
|
|
|
370,894
|
|
|
|
180,193
|
|
|
|
320,712
|
|
|
|
120,030
|
|
|
|
65,010
|
|
|
Long-term debt, capital lease and facility lease obligations
|
|
|
104,312
|
|
|
|
9,100
|
|
|
|
11,215
|
|
|
|
8,294
|
|
|
|
142
|
|
|
Warrant liability
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
58,639
|
|
|
|
28,815
|
|
|
|
11,363
|
|
|
Accumulated deficit
|
|
|
(1,051,993
|
)
|
|
|
(777,835
|
)
|
|
|
(556,963
|
)
|
|
|
(433,360
|
)
|
|
|
(518,608
|
)
|
|
Stockholders’ equity (deficit)
|
|
|
185,517
|
|
|
|
112,851
|
|
|
|
220,141
|
|
|
|
64,076
|
|
|
|
(89,016
|
)
|
|
(1)
|
During 2010, we modified our collaboration agreement with Merck and entered into a license agreement, as described in Note 2 to the consolidated
financial statements. As a result of this modification, additional payments were received and deferred revenue was recognized. Pursuant to the license agreement, we provided services to Merck, recognized as service revenue.
|
54
|
(2)
|
In 2009, we issued warrants that were accounted for as a derivative liability. The change in fair value of outstanding warrants was recorded in our
consolidated statements of operations. Upon exercise of all remaining warrants in January and February 2012, the balance of the warrant liability was credited to stockholders’ equity and the liability was eliminated. See Note 11 to the
consolidated financial statements.
|
55
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The information set forth below should be read in conjunction with the audited consolidated financial statements, and the notes thereto, and other financial information included herein.
Overview
ARIAD is a global oncology
company whose vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest unmet medical need –
aggressive cancers where current therapies are inadequate.
Our first approved cancer medication, Iclusig
®
(ponatinib), and our product candidates, AP26113 and ridaforolimus, were discovered internally by our scientists
based on our expertise in computational and structure-based drug design. Ridaforolimus is being developed for cardiovascular indications by Medinol, Ltd., or Medinol, and ICON Medical Corp., or ICON, pursuant to license agreements entered into in
2005 and 2007, respectively.
Iclusig (ponatinib)
United States
On December 14, 2012, we obtained accelerated approval from the
U.S. Food and Drug Administration, or FDA, to sell our first new cancer medicine, Iclusig. Iclusig is a tyrosine kinase inhibitor, or TKI, that was initially approved in the United States for the treatment of adult patients with chronic,
accelerated or blast phase chronic myeloid leukemia, or CML, who were resistant or intolerant to prior TKI therapy, and the treatment of adult patients with Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL, who were
resistant or intolerant to prior TKI therapy. The approved United States prescribing information, or USPI, included a boxed warning specifying that arterial thrombosis and hepatoxicity had occurred in some patients during clinical trials of Iclusig.
We commenced sales and marketing of Iclusig in the United States in the first quarter of 2013 through a limited number of specialty pharmacies and specialty distributors and we charged approximately $115,000, on a wholesale basis, for an annual
supply of the approved dose of Iclusig.
On October 9, 2013, we announced results of our review of updated clinical data from the pivotal
PACE (
P
onatinib Ph+
A
LL and
C
ML
E
valuation) clinical trial of Iclusig and our actions following consultations with the FDA. In the review of the clinical data, with a median follow up of 24 months, serious arterial
thrombosis occurred in 11.8% of Iclusig-treated patients, compared to 8% after 11 months of follow-up reflected in the previously approved USPI. In addition, at 24 months, serious venous occlusion occurred in 2.9% of Iclusig-treated patients,
compared to 2.2% in the previously approved USPI. Based upon our review and the FDA consultations, we paused patient enrollment in all clinical trials of Iclusig and the FDA placed a partial clinical hold on all additional patient enrollment in
clinical trials of Iclusig.
On October 31, 2013, in response to a request by the FDA, we announced that we temporarily suspended the
marketing and commercial distribution of Iclusig in the United States while we negotiated updates to the USPI for Iclusig and the implementation of a risk mitigation strategy with the FDA.
On December 20, 2013, we announced that the FDA had approved revised USPI and a Risk Evaluation and Mitigation Strategy, or REMS, that allowed for the immediate resumption of the marketing and
commercial distribution of Iclusig. Iclusig is now approved in the United States for the treatment of adult patients with:
|
|
•
|
|
T315I-positive CML (chronic phase, accelerated phase, or blast phase) or T315I-positive Ph+ ALL, and
|
56
|
|
•
|
|
Chronic phase, accelerated phase, or blast phase CML or Ph+ ALL for whom no other tyrosine-kinase inhibitor therapy is indicated.
|
The FDA granted approval of the revised USPI based on its review of the Iclusig clinical trial data, including 24-month
follow-up of the PACE trial. The boxed warning has been revised to alert patients and healthcare professionals to the risk of vascular occlusive events and includes a new warning for heart failure. In addition, neuropathy and ocular toxicity have
been added as warnings, and dose reduction recommendations have been strengthened. We also agreed to additional post-marketing requirements as described further below. The starting dose of Iclusig remains 45mg daily. On January 17, 2014, we
announced that we had resumed marketing and distribution of Iclusig in the United States through an exclusive specialty pharmacy with a wholesale price of approximately $125,000 for an annual supply of the approved dose of Iclusig.
In addition to focusing our efforts on the re-launch of Iclusig in the United States, in 2014, we plan to invest in studies designed to better understand
the safety profile of Iclusig in resistant and intolerant CML and Ph+ ALL patients, with the objective of improving the balance of benefit and risk for these patients as post-marketing commitments. We expect that these studies will include a
randomized clinical trial of Iclusig in this patient population to evaluate multiple dose levels, and we expect to begin this trial in the second half of 2014. Our post-marketing commitments with regulatory authorities also include a
pharmacovigilance study and a prospective observational study of safety events.
Except as noted below with respect to the EPIC clinical trial
of Iclusig, patients receiving Iclusig in clinical trials continue on therapy and reductions in Iclusig dose from 45mg daily, the approved dosage, are being implemented or considered on a trial-by-trial basis for patients. Before being able to
restart enrollment, we expect that the eligibility criteria for the various Iclusig trials will also need to be modified. On December 20, 2013, we announced that the partial clinical hold was lifted for a trial of Iclusig for the treatment of
medullary thyroid cancer. We expect that the partial clinical hold will be lifted for other Iclusig trials in 2014.
In November 2013,
following the decision to suspend the marketing and commercial distribution of Iclusig in the United States, we announced a reduction in our work force in the United States and other actions to significantly reduce operating expenses and extend our
cash runway. We eliminated approximately 40 percent of the U.S. workforce. In addition to personnel-related expense reductions, we implemented reductions in expenses related to marketing and commercial distribution of Iclusig in the United States,
development and manufacturing activities for Iclusig, including reductions related to the discontinuation of the EPIC clinical trial discussed below and certain other trials, as well as AP26113, and reductions in expenses for discovery research and
general and administrative activities.
International Markets
In 2012, we established operations in Europe, with headquarters in Switzerland, in preparation for the European approval of Iclusig. We hired management and other key personnel in Switzerland and other
selected countries in Europe. We established early-access programs for Iclusig in Europe, established the supply chain in key markets and implemented initial pricing and reimbursement activities in various countries.
On July 2, 2013, we announced the granting of our marketing authorization for Iclusig by the European Commission, or EC, as an orphan medicinal
product for two indications:
|
|
•
|
|
The treatment of adult patients with chronic phase, accelerated phase or blast phase CML who are resistant to dasatinib or nilotinib; who are
intolerant to dasatinib or nilotinib and for whom subsequent treatment with imatinib is not clinically appropriate; or who have the T315I mutation, and
|
57
|
|
•
|
|
The treatment of adult patients with Ph+ ALL who are resistant to dasatinib; who are intolerant to dasatinib and for whom subsequent treatment with
imatinib is not clinically appropriate; or who have the T315I mutation.
|
We began to obtain pricing and reimbursement
approvals in certain European countries in 2013 and began selling Iclusig in those countries. In 2013, the price charged for an annual supply of Iclusig in these European countries was approximately 80% of the price charged in the United States, on
a wholesale basis.
Based upon the announcements and actions taken in October 2013 concerning the safety, marketing and commercial
distribution, and further clinical development of Iclusig in the United States, we engaged in discussions with the European Medicines Agency, or EMA, regarding revised prescribing information for Iclusig. On November 8, 2013, the EMA announced
that Iclusig’s product information should be updated to include strengthened warnings for cardiovascular risk and guidance on optimizing the patient’s cardiovascular therapy before starting treatment. In addition, the EMA has commenced an
in-depth review, known as an Article 20 referral, of the benefits and risks of Iclusig to better understand the nature, frequency and severity of events obstructing the arteries or veins, the potential mechanism that leads to these side effects and
whether there needs to be a revision in the dosing recommendation for Iclusig. We expect the results of this review in mid-2014.
We have also
filed marketing authorization applications for Iclusig in Switzerland (which was approved in February 2014), Canada and Australia and plan to file for marketing authorization for Iclusig with regulatory authorities in Japan. Each of these
regulatory authorities has its own processes and timelines for the review and approval of marketing authorization applications and such reviews are ongoing at this time. We are discussing the announcements regarding updated Iclusig clinical data
with these other foreign regulatory agencies.
Other Development Matters
In July 2012, we initiated a randomized Phase 3 clinical trial, the EPIC trial, of ponatinib, in adult patients with newly diagnosed CML in the chronic
phase. However, in October 2013, based upon the assessment of the clinical trial data discussed above and further discussions with the FDA, we announced the discontinuation of this trial.
In August 2012, we initiated a multi-center Phase 1/2 clinical trial in Japan of Iclusig in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ ALL and have
failed prior treatment with TKIs. The trial is fully enrolled. In January 2013, we announced an agreement with Newcastle University, U.K., on behalf of the U.K. National Cancer Research Institute, or NCRI, to collaborate on a multi-center,
randomized Phase 3 investigator sponsored trial, named SPIRIT 3. This trial is designed to assess the impact of switching CML patients treated with a first-line TKI to Iclusig, upon suboptimal response or treatment failure. Based upon our
announcements and actions in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States, this trial has been delayed.
We are also developing Iclusig in other blood cancers and solid tumors, such as gastrointestinal stromal tumors, or GIST, acute myeloid leukemia and
certain forms of non-small cell lung cancer, or NSCLC. In June 2013, we announced the initiation of a Phase 2 trial to evaluate the efficacy and safety of Iclusig in adult patients with metastatic and/or unresectable GIST, following failure of prior
TKI therapy. This trial remains on partial clinical hold by the FDA and we intend to address the FDA’s clinical hold concerns in order to initiate further enrollment.
In addition, Iclusig is being studied in various investigator-sponsored trials in indications including first line and second line CML, acute myeloid leukemia or AML, non-small cell lung cancer or NSCLC,
and medullary thyroid cancer or MTC. The FDA’s partial clinical hold has been lifted on the MTC trial and we expect the clinical hold will be lifted on the other trials in 2014. We expect to initiate additional investigator-sponsored clinical
trials in 2014 in indications including Ph+ ALL, blast phase CML, AML and endometrial cancer.
58
AP26113
AP26113 is an investigational inhibitor of anaplastic lymphoma kinase, or ALK. In non-clinical studies, AP26113 also demonstrated that it inhibits epidermal growth factor receptor, or EGFR, and c-ros
oncogene-1, or ROS1. All of these kinases are clinically validated targets in NSCLC.
We initiated patient enrollment in a Phase 1/2 clinical
trial of AP26113 in the third quarter of 2011. The protocol was designed to enroll approximately 50 to 60 patients in the Phase 1 portion of the trial and approximately 125 patients in the Phase 2 portion of the trial. We began enrollment in the
Phase 2 portion of the trial in the second quarter of 2013. In September 2013, we announced updated clinical results from the ongoing Phase 1/2 clinical trial. The study results show robust anti-tumor activity in patients with TKI-naïve and
crizotinib-resistant ALK-positive NSCLC, including in patients with brain metastases after crizotinib treatment. Crizotinib is the currently available first-generation ALK inhibitor.
We plan to commence a pivotal trial of AP26113 in the first quarter of 2014 in ALK-positive NSCLC patients who are resistant to crizotinib, following confirmation of the safety and efficacy profile of the
selected dose of AP26113 in the ongoing phase 1/2 clinical trial. We have decided to focus our development efforts on ALK-positive NSCLC patients, both treatment naïve and resistant, and those with CNS activity. We will no longer enroll EGFR,
ROS1, or other patients in the ongoing Phase 1/2 clinical trial.
Ridaforolimus
Ridaforolimus is an investigational inhibitor of the mammalian target of rapamycin, or mTOR, that we discovered and developed internally and later
licensed in 2010 to Merck & Co., Inc., or Merck. Under the license agreement, Merck was responsible for all activities related to the development, manufacture and commercialization of ridaforolimus and funds 100 percent of all ridaforolimus
costs incurred after January 1, 2010. The agreement provided that Merck would develop ridaforolimus in multiple oncology indications. On February 20, 2014, we received notice from Merck that it is terminating the license agreement,
which termination will become effective nine months from the date of the notice and at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to us.
We also have license agreements with Medinol and ICON under which these companies are pursuing the development of stents and other medical devices to deliver ridaforolimus to prevent restenosis, or
reblockage of injured vessels following interventions in which stents are used in connection with balloon angioplasty.
We are responsible for
supplying Medinol and ICON with, and they have agreed to purchase from us, certain quantities of ridaforolimus for use in their development, manufacture and sale of the stents and other medical devices. Each of these licenses provide for potential
milestone payments to us based on achievement of specified development, regulatory and/or sales objectives as well as royalty payments upon commercialization of products. There can be no assurance that any future payments will be received under
these license agreements.
On January 14, 2014, we jointly announced with Medinol the initiation of two registration trials of
Medinol’s stent system that incorporates ridaforolimus. The two trials are randomized, single-blind, global studies. The studies will enroll approximately 2,200 patients with coronary artery disease. Under the terms of our agreement with
Medinol, the commencement of enrollment in the clinical trials, along with the submission of an investigational device exemption, or IDE, with the FDA, will trigger milestone payments to us of $3.8 million, expected in 2014, with the potential for
additional regulatory, clinical and sales milestones, as well as royalties on product sales.
59
Critical Accounting Policies and Estimates
Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, accrued product development expenses, inventory, leased
buildings under construction and stock-based compensation.
Revenue Recognition
Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists;
(2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the revenue recognition criteria are not met, we defer the recognition of revenue by
recording deferred revenue until such time that all criteria are met.
Product Revenue, net
We commercially launched Iclusig in the United States on January 3, 2013 and in certain European countries in the second half of 2013. As noted
above, in the fourth quarter of 2013, we temporarily suspended the marketing and commercial distribution of Iclusig in the United States. In January 2014, we resumed marketing and commercial distribution of Iclusig in the United States under the
revised USPI and the REMS program.
Through October 31, 2013, we sold Iclusig in the United States through a limited number of specialty
distributors and specialty pharmacies. Title and risk of loss transferred upon receipt of Iclusig by these customers. Specialty pharmacies dispensed Iclusig directly to patients in fulfillment of prescriptions. Specialty distributors sold Iclusig to
hospital pharmacies and community practice pharmacies, referred to as healthcare providers, for treatment of patients. We provided the right of return to customers in the United States for unopened product for a limited time before and after its
expiration date. Iclusig’s shelf-life in the United States is eighteen months for 15mg tablets and twelve months for 45mg tablets, measured from date of manufacture. In the United States, we deferred the recognition of revenue until Iclusig was
sold to the healthcare providers or dispensed to the patients. Revenue recognition was deferred due to the inherent uncertainties in estimating future returns of Iclusig from our United States customers, due to factors such as estimated product
demand and the limited shelf life of Iclusig. Upon the temporary suspension of marketing and commercial distribution in the United States in the fourth quarter of 2013, we terminated our existing contracts with these specialty distributors and
specialty pharmacies and we accepted product returns of Iclusig from these customers. The majority of these product returns related to product held by specialty distributors and specialty pharmacies that had not yet been sold to patients or
recognized as revenue. As a result, these returns were recorded as a reduction of accounts receivable and deferred revenue. For customers that had already paid for delivered product, a liability was recorded in other current liabilities. Upon
receiving approval to resume marketing and commercial distribution in the United States, we revised our distribution strategy and plan to sell Iclusig through one exclusive specialty pharmacy who will distribute Iclusig to customers.
In Europe, we sell Iclusig to retail pharmacies and hospital pharmacies that dispense product directly to patients. These customers are provided with a
limited right of return, such as instances of damaged product, and the criteria for revenue recognition is met at the time of shipment to these customers provided all other revenue recognition criteria are met.
Product revenues are recorded net of estimated gross to net deductions, including government-mandated rebates and chargebacks, distribution fees and
other deductions. Reserves are established for these deductions and actual amounts incurred are offset against applicable reserves. We reflect these reserves as either a reduction in the related account receivable from the customer or as an accrued
liability, depending on the nature of the deduction. These reserves are based on management’s estimates that consider payor mix in target markets, industry benchmarks and experience to date. These estimates involve a high degree of judgment and
are periodically reviewed and adjusted as necessary.
60
We have individual contracts or standard terms of sale with our customers and delivery occurs when a
customer receives Iclusig. We evaluate the creditworthiness of each of our customers to determine whether collection is reasonably assured and have determined that all of our customers are creditworthy. In order to conclude that the price is fixed
or determinable, we must be able to calculate our gross product revenues from our customers and reasonably estimate our net product revenues. Our gross product revenues are based on the fixed wholesale acquisition cost for Iclusig that we charge our
customers. We estimate our net product revenues by deducting from our gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government and private payor rebates,
chargebacks and discounts, such as Medicare and Medicaid reimbursements in the United States, and (iii) estimated costs of incentives offered to certain indirect customers including patients. These gross to net deductions, and in particular the
estimates for rebates, chargebacks and discounts, require us to make significant judgments that materially affect our recognition of net product revenues related to Iclusig.
Trade Allowances:
We provide invoice discounts on Iclusig sales to certain of our customers for prompt payment and pay fees for certain services, such as fees for certain data that customers
provide to us. We expect our customers to earn these discounts and fees, and therefore deduct these discounts and fees from our gross product revenues when revenue is recognized.
Rebates, Chargebacks and Discounts:
In the United States, we contract with Medicare, Medicaid, other government agencies and
various private organizations (collectively, payors) to make Iclusig, when commercially available, eligible for purchase by, or for partial or full reimbursement from, such payors. We estimate the rebates, chargebacks and discounts we will provide
to payors and deduct these estimated amounts from our gross product revenue at the time the revenue is recognized. We estimate rebates, chargebacks and discounts based on (1) the contractual terms of agreements in place with payors,
(2) the government-mandated discounts applicable to government-funded programs, and (3) the estimated payor mix. Government rebates that are invoiced directly to us are recorded in accrued liabilities on our consolidated balance sheet. For
qualified programs that can purchase our product at a lower contractual government or commercial price, the customers charge back to us the difference between their acquisition cost and the lower contractual government or commercial price, which we
record as an allowance against accounts receivable on our consolidated balance sheet. In Europe, we are subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These
rebates and discounts are recorded when revenue is recognized and included in accrued liabilities on our consolidated balance sheet.
The value of the rebates, chargebacks and discounts provided to third-party payors per course of treatment vary significantly and are based on government-mandated discounts and our arrangements with other
third-party payors. In the United States, typically, government-mandated discounts are significantly larger than discounts provided to other third-party payors. In order to estimate our total rebates, chargebacks and discounts, we estimate the
percentage of prescriptions that will be covered by each third-party payor, which is referred to as the payor mix. In order to estimate the payor mix for Iclusig, we used both (i) information obtained from our customers and third parties
regarding the payor mix for Iclusig and (ii) historical industry information regarding the payor mix for competitive products. We track available information regarding changes, if any, to the payor mix for Iclusig, to our contractual terms with
third-party payors and to applicable governmental programs and regulations. If necessary, we adjust our estimated rebates, chargebacks and discounts based on new information, including information regarding actual rebates, chargebacks and discounts
for Iclusig, as it becomes available. If we increased our estimate of the percentage of patients receiving Iclusig covered by third-party payors entitled to government-mandated discounts by five percentage points, our United States net product
revenues would have decreased by approximately 1.2% in 2013. In the European countries where we currently sell Iclusig, rebates, as applicable, are fixed percentages of product sales.
61
Other Incentives:
Other incentives that we offer include co-pay assistance for
our patients and distribution fees offered to our customers. Our co-pay assistance programs assist commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. Our co-pay assistance
program is intended to reduce each participating patient’s portion of the financial responsibility for Iclusig’s purchase price to a specified dollar amount. In each period, we record the amount of co-pay assistance provided to eligible
patients based on the terms of the program.
Patients in Europe are also being treated with Iclusig in the framework of clinical trials and
related studies and in named patient programs. In 2012, the French regulatory authority granted an
Autorisation Temporaire d’Utilisation
(ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and
Ph+ ALL under a nominative program on a patient-by-patient basis. We began shipping Iclusig under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met (including a fixed or determinable price),
all amounts received under this program (approximately $8.8 million as of December 31, 2013) have not been recorded as revenue. This program concluded on September 30, 2013 and all outstanding amounts have been received. Upon completion of
this program, we became eligible to ship Iclusig directly to customers in France as of October 1, 2013. These shipments have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or determinable. These
shipments totaled $4.1 million for the period from October 1, 2013 to December 31, 2013, of which $1.8 million was received as of December 31, 2013. We will record these shipments, as well as shipments under the ATU program, as
revenue once the price is fixed or determinable.
Accrued Product Development Expenses
We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and
agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our consolidated statements of
operations and are reflected in accrued product development expenses on our consolidated balance sheet. At December 31, 2013, we reported accrued product development expenses of $16.7 million on our consolidated balance sheet.
Our estimates of services performed or progress achieved are based on all available information we have from reports, correspondence and discussions with
our vendors. Our estimates of accrued expenses based on such information require judgment. Actual costs may vary from such estimates. When such variances become known, we adjust our expenses accordingly.
Inventory
Inventory costs
consist of costs related to the manufacturing of Iclusig, which are primarily the costs of contract manufacturing. We value our inventory at the lower of cost or market. We determine the cost of our inventory on a specific identification basis. If
we identify excess, obsolete or unsalable items, inventory is written down to net realizable value in the period in which it is identified. Estimates of excess inventory consider inventory levels, our projected sales of the product for the
foreseeable future and the estimated shelf-lives of our inventory components. At the time of launch in the United States, Iclusig 15mg tablets had a shelf-life of twelve months, which has subsequently been extended to eighteen months, and Iclusig
45mg tablets have a shelf-life of twelve months. In Europe, the shelf-life of both 15mg and 45mg tablets is twenty-four months. Inventory that is not expected to be used within one year is recorded as a non-current asset.
Prior to receiving approval from the FDA in December 2012 to sell Iclusig, we expensed all costs incurred related to the manufacture of Iclusig as
research and development costs because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for our Company of regulatory approval of drug
candidates. Accordingly,
62
the manufacturing costs for Iclusig included in our cost of product revenue for 2013 are significantly lower than full manufacturing cost, as most of these costs have been recorded as research
and development expenses in prior periods.
As a result of the temporary suspension of Iclusig in the United States and the revised USPI,
which reduces the addressable patient population for whom Iclusig is currently indicated, the current commercial opportunity for Iclusig has been reduced from what was expected under the previously approved USPI. Due to this expected decrease in
demand for Iclusig, in the fourth quarter of 2013, we assessed the need for an inventory write-down for excess inventory for our inventory on hand at December 31, 2013. This review included all components of inventory, including raw materials,
work-in-process and finished goods inventory. Inventory balances on hand were compared to the expected uses of inventory in the foreseeable future, taking into account the estimated future global demand for Iclusig as well as the estimated
shelf-life of our inventory components. From this analysis, we determined that approximately $7.1 million of our inventory was excess at December 31, 2013 and we recorded a charge to cost of product revenue to write down inventory for this
amount in the fourth quarter of 2013. In connection with this review, we also charged $1.3 million of vendor advances to cost of product revenue as the advances relate to future inventory production that will result in excess inventory. In addition,
during 2013 we also wrote down finished goods that will expire and not be sold. Our total charges for 2013 for excess inventory, as well as finished goods inventory that will expire before it is sold, was approximately $8.9 million. Total inventory
on hand at December 31, 2013 was approximately $3.4 million.
As we re-launch Iclusig in the United States in 2014, there is no assurance
that we will be successful in commercializing Iclusig in the United States, in Europe or in other territories where we await regulatory approval or have yet to file for regulatory approval. In addition, the outcome of the EMA’s review of
Iclusig is uncertain. We expect that the developments announced in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States and the EMA’s review will adversely
impact our efforts to commercialize Iclusig in patients with CML and Ph+ ALL. Our ability to obtain product revenue from the sales of Iclusig will depend on our ability to continue to commercialize Iclusig in the United States and in Europe and
other territories, as well as the success of our efforts to develop Iclusig in other patient populations and cancers. If we are not successful in generating sufficient levels of sales from Iclusig, additional inventory write-downs may be required.
In addition, we may incur additional inventory costs as we complete planned production runs related to qualification of new manufacturing processes or vendors in the future.
Due to the inventory costs that were recorded as research and development expenses as well as the write-down of inventory, we expect that our cost of inventory sold in the future will be significantly
less than full manufacturing cost. The time period over which this reduced-cost inventory is consumed will depend on a number of factors, including the amount of future sales of Iclusig in the United States and in Europe, the ultimate use of this
inventory in either commercial sales, clinical development or other research activities and the ability to utilize inventory prior to its expiration date. We expect that as this reduced-cost inventory is used in the future, the cost of product
revenue, before consideration of any future required inventory write-downs or reserves, will be in the low single digits as a percentage of net product revenue.
For 2013, our cost of product revenue would have been approximately $10.0 million, if the related costs were not previously expensed as research and development expenses prior to receiving FDA approval.
Leased Buildings Under Construction
In January 2013, we entered into a lease agreement for approximately 244,000 square feet of laboratory and office space in two adjacent, connected buildings which are under construction in Cambridge,
Massachusetts. Construction is expected to be completed in early 2015. Under the terms of the original lease, we leased all of the rentable space in one of the two buildings and a portion of the available space in the second building. In September
2013, we entered into a lease amendment to lease all of the remaining space, approximately 142,000 square feet, in the second building, for an aggregate of 386,000 square feet in both buildings. The terms of the lease amendment were consistent with
the terms of the original lease.
63
In connection with this lease, the landlord is providing a tenant improvement allowance for the costs
associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be in accordance with our plans and include fit-out of the building to construct appropriate laboratory and office
space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, we are obligated to fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant
improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, we are the deemed owner of the buildings during the construction period.
As construction progresses, we record the project construction costs incurred as an asset, which reflects estimated replacement cost, along with a
corresponding facility lease obligation, on the consolidated balance sheet for the total amount of project costs incurred whether funded by us or the landlord. Upon completion of the buildings, we will determine if the asset and corresponding
financing obligation should continue to be carried on our consolidated balance sheet under the accounting guidance. Based on the current terms of the lease, we expect to continue to be the deemed owner of the buildings upon completion of the
construction period.
Given our involvement in the design of tenant improvements for the leased facility, the lease establishes dates by which
we are required to submit plans and drawings for tenant improvements consistent with the timeline for completion of the construction, including tenant improvements, and readiness of the facility for occupancy. In connection with the partial clinical
hold of Iclusig imposed by the FDA and the temporary suspension of marketing and commercial distribution of Iclusig in the United States in October 2013, plans and drawings for the tenant improvements for this facility have not been approved by us
and have not at this time, been completed and submitted in accordance with the timelines specified in the lease. If delay of submission of plans and drawings in accordance with the timelines specified in the lease results in a delay in the occupancy
date for the facility, we may be required to commence rent payments for the facility prior to occupancy. We are currently in discussions with the landlord regarding revisions to our plans, the timelines related to submission of such plans and other
matters in the lease.
Stock-Based Compensation Expense
Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award if performance and service
conditions are expected to be achieved. We use the Black-Scholes option-pricing model to estimate the fair value of stock options. Option valuation models require the input of assumptions, including the expected life of the stock-based awards, the
estimated stock price volatility, the risk-free interest rate, and the expected dividend yield. Estimated volatility is based on a combination of historical and implied volatility. Expected life is based on our historical experience. The risk-free
interest rate is based on U.S. Treasury interest rates with terms consistent with the expected life of the stock-based award. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current
plans to do so in the future. The forfeiture rate is based upon historical experience. We adjust the estimated forfeiture rate based upon our actual experience. In addition, we have performance based awards that are valued at the fair value of
shares as of the grant date and compensation expense is recognized based on the number of shares expected to vest under the terms of the award under which they are granted, if performance conditions are expected to be met. The determination of
whether the performance condition will be met requires significant judgment, including estimating the probability and timing of future events. Compensation cost for certain awards may increase by up to 60% of the cost estimated at target award
levels based upon the eventual outcome of the performance conditions. We recognized stock compensation expense of $2.6 million as of December 31, 2013 for performance awards that are expected to vest in the future.
64
Results of Operations
For the Years Ended December 31, 2013 and 2012
Revenue
Our revenues for 2013, as compared to 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/
(decrease)
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
|
Product revenue, net
|
|
$
|
45,238
|
|
|
$
|
—
|
|
|
$
|
45,238
|
|
|
License revenue
|
|
|
296
|
|
|
|
514
|
|
|
|
(218
|
)
|
|
Service revenue
|
|
|
27
|
|
|
|
44
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,561
|
|
|
$
|
558
|
|
|
$
|
45,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in product revenue, net reflects the commercial launch of Iclusig, our first approved cancer medicine, in
the United States and in Europe in 2013. Prior to the temporary suspension of marketing and commercial distribution of Iclusig in the United States in the fourth quarter of 2013, we recognized revenue on a sell-through basis. In Europe, we generally
recognize revenue upon shipment to our customers. Product revenue is reduced by certain gross to net deductions. In 2013, these gross to net deductions, as a percentage of gross revenue, were approximately 8.7% and related to reductions in the
United States including government-related discounts, as well as government-mandated rebates in Europe.
We expect that our product revenue
will increase in 2014 compared to 2013 due primarily to increasing sales of Iclusig in Europe as we obtain pricing and reimbursement approval in various countries in Europe during the year. Although we have resumed marketing and commercial
distribution of Iclusig in the United States in January 2014, the revised USPI reduces the addressable patient population which we expect will adversely impact our sales of Iclusig in the United States. Our ability to obtain product revenue from
sales of Iclusig will depend on the impact of the changes to the USPI and the implementation of a REMS program, the effectiveness of our commercial strategy for marketing Iclusig in the United States, including pricing and reimbursement strategies,
the outcome of the EMA’s review of Iclusig, the acceptance of Iclusig by patients, the medical community and third party payors in the United States and Europe, as well as the success of our efforts to develop Iclusig in other patient
populations and cancers. There can be no assurance that we will be successful in our continuing commercialization of Iclusig in the United States or Europe or the receipt of satisfactory pricing and reimbursement approvals in Europe, or that we will
be able to obtain additional regulatory approvals and new sources of product revenue.
We recognized $296,000 of license revenue in 2013,
pursuant to a license agreement related to our ARGENT technology in accordance with our revenue recognition policy. Revenue in 2012 also consisted of $514,000 of license revenue related to our ARGENT technology.
65
Operating Expenses
Cost of Product Revenue
Our cost of product revenue relates to sales of Iclusig upon
commercial launch in the United States commencing in January 2013 and in certain European countries in the second half of 2013. For 2013, our cost of product revenue totaled $9.6 million and included the following:
|
|
|
|
|
|
|
In thousands
|
|
Year Ended
December 31,
2013
|
|
|
Inventory cost of Iclusig sold
|
|
$
|
183
|
|
|
Shipping and handling costs
|
|
|
572
|
|
|
Inventory reserves/write-downs
|
|
|
8,857
|
|
|
|
|
|
|
|
|
|
|
$
|
9,612
|
|
|
|
|
|
|
|
Prior to receiving regulatory approval for Iclusig from the FDA in December 2012, we expensed as research and development
costs all costs incurred in the manufacturing of Iclusig to be sold upon commercialization. For Iclusig sold in 2013, the majority of manufacturing costs incurred had previously been expensed. Therefore, the cost of inventory sold included limited
manufacturing costs and the cost of packaging and labeling for commercial sales. If product-related costs had not previously been expensed as research and development prior to receiving FDA approval, the cost to produce the Iclusig sold would have
been approximately $594,000 and total cost of product revenue would have been approximately $10.0 million in 2013.
Due to the temporary
suspension of U.S. marketing and commercial distribution and the expected decrease in demand for Iclusig, we assessed the need for an inventory write-down for excess inventory for our inventory on hand at December 31, 2013. This review included
all components of inventory, including raw materials, work-in-process and finished goods inventory. Inventory balances on hand were compared to the expected uses of inventory in the foreseeable future, taking into account the estimated future global
demand for Iclusig as well as the estimated shelf-life of our inventory components. From this analysis, we determined that approximately $7.1 million of our inventory was excess at December 31, 2013 and we recorded a charge to cost of product
revenue to write down inventory in the fourth quarter of 2013. In connection with this review, we also charged $1.3 million of vendor advances to cost of product revenue as the advances relate to future inventory production that will result in
excess inventory. In addition, during 2013 we also wrote down finished goods that will expire and not be sold. Our total charges for 2013 for excess inventory, as well as finished goods inventory that will expire before it is sold, was approximately
$8.9 million.
Research and Development Expenses
Research and development expenses increased by $18.2 million, or 13 percent, to $162.9 million in 2013, compared to $144.7 million in 2012, for the reasons set forth below.
The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous
governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:
|
|
•
|
|
preclinical toxicology, pharmacology and metabolism studies, as well as
in vivo
efficacy studies in relevant animal models of disease;
|
|
|
•
|
|
manufacturing of drug product for preclinical studies and clinical trials and ultimately for commercial supply;
|
|
|
•
|
|
submission of the results of preclinical studies and information regarding manufacturing and control and proposed clinical protocol to the FDA in an
Investigational New Drug application, or IND (or similar filings with regulatory agencies outside the United States);
|
|
|
•
|
|
conduct of clinical trials designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and
|
66
|
|
•
|
|
submission of all the results of testing to the FDA in a New Drug Application, or NDA (or similar filings with regulatory agencies outside the United
States).
|
Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing,
we may commence commercial marketing and distribution of the product.
We group our research and development, or R&D, expenses into two
major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct and manage clinical trials, to develop manufacturing processes and manufacture product candidates, to
conduct laboratory studies and similar costs related to our clinical programs. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services,
to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to our clinical programs as well as our preclinical studies and discovery research efforts. Product
candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.
Our R&D expenses for 2013, as compared to 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/
(decrease)
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
|
Direct external expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iclusig
|
|
$
|
59,593
|
|
|
$
|
54,588
|
|
|
$
|
5,005
|
|
|
AP26113
|
|
|
17,439
|
|
|
|
6,034
|
|
|
|
11,405
|
|
|
All other R&D expenses
|
|
|
85,868
|
|
|
|
84,087
|
|
|
|
1,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162,900
|
|
|
$
|
144,709
|
|
|
$
|
18,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2013 and 2012, our clinical programs consisted of (i) Iclusig, our pan BCR-ABL inhibitor, and (ii) AP26113,
our ALK inhibitor.
Direct external expenses for Iclusig were $59.6 million in 2013, an increase of $5.0 million, or 9%, as compared to 2012.
The increase is due primarily to an increase in clinical trial costs of $13.6 million which was due to increases related to ongoing treatment of patients in existing and new trials, including the EPIC trial and the related comparator drug purchases,
our Phase 2 GIST trial, our Phase 1/2 clinical trial of Iclusig in Japan, our pediatric trial of Iclusig, and increased costs associated with investigator-sponsored trials, offset by a decrease in costs related to our Phase 2 PACE clinical trial as
treatment of patients and other related activities decreased in 2013 compared to 2012. As noted above, we announced the discontinuation of the EPIC trial in October 2013 and a pause on additional patient enrollment, as well as a partial FDA clinical
hold, for all other Iclusig trials. The increase in the clinical trial costs was offset, in part, by a decrease in contract manufacturing costs of $5.9 million, and a decrease in other non-clinical support costs of $2.2 million. Contract
manufacturing costs decreased as costs to manufacture Iclusig in 2013 are now being capitalized in inventory while such costs in 2012, prior to the FDA approval of Iclusig, were included in research and development expense. Non-clinical support
costs decreased due primarily to the completion of the regulatory filings in support of the Iclusig NDA and in support of the initiation of the Phase 1/2 clinical trial in Japan.
Direct external expenses for AP26113 were $17.4 million in 2013, an increase of $11.4 million, or 189%, as compared to 2012. The increase in expenses for AP26113 was due primarily to an increase in
clinical trial costs related to the initiation of additional trials and an increase in contract manufacturing costs due to the manufacture of additional material to supply the Phase 1/2 clinical trial and readiness to support additional trials.
All other R&D expenses increased by $1.8 million, or 2%, in 2013, as compared to 2012. This increase was primarily due to an increase in
personnel costs of $7.4 million, due to higher compensation and related costs from an increase in the number of employees to support expanding R&D activities and costs associated with the employee workforce reduction in the fourth quarter of
2013, an
67
increase in lab expenses of $1.2 million, related to increased discovery efforts, and an increase in general and other expenses of $861,000 related to travel expenses and training costs. These
increases were offset primarily by a decrease in professional fees of $3.9 million and a decrease in intellectual property costs of $3.6 million due primarily to an impairment charge recorded for ridaforolimus technology in 2012.
On November 7, 2013, we reduced our United States workforce, including personnel in research and development, following the temporary suspension of
marketing and commercial distribution of Iclusig in the United States. As a result of these actions, our future research and development activities will focus on key research and development activities for Iclusig, AP26113 and discovery research. We
expect that our direct external expenses for Iclusig will decrease in 2014 compared to 2013, primarily due to a reduction in clinical trial and manufacturing related costs. We expect direct external expenses for AP26113 will increase in 2014
compared to 2013 as we focus our resources primarily on the pivotal trial that is planned to begin in the first quarter of 2014. All other R&D expenses in 2014 compared to 2013 are expected to decrease due to the impact of our restructuring
actions and as we focus our resources on key research and development activities and discovery research efforts.
The successful development
of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our products or product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to
receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval or could result in label warnings related to or recalls of
approved products. As noted above, in October 2013, we announced the results of our review of updated clinical data from the pivotal PACE trial of Iclusig and actions that we took following consultations with the FDA, including a pause in patient
enrollment, a partial clinical hold by the FDA, product label changes, and the discontinuation of the EPIC trial. We expect that these developments will adversely impact our efforts to further develop and commercialize Iclusig in CML and Ph+ ALL
patients, and our ability to obtain sources of product revenue from the successful development our product candidates will depend on, among other things, our efforts to develop Iclusig in other patient populations and cancers, as well as the success
of AP26113 and any other product candidates. Other risks associated with our products and product candidates are described in the section entitled “Risk Factors” in this report.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased by $85.7 million, or 141 percent, to $146.6 million in 2013, compared to $60.9 million in 2012. This increase was due primarily to an increase in personnel costs of $43.4 million related primarily to compensation and related costs
associated with an increase in the number of employees, including sales and marketing related personnel to support the commercial launch of Iclusig, expanding business activities in the United States and in Europe during 2013 and costs associated
with the employee workforce reduction that occurred in the fourth quarter of 2013; an increase in professional services of $23.5 million due to corporate and commercial development initiatives supporting the launch of Iclusig; an increase in general
expenses of $10.4 million primarily related to increases in technology costs and travel costs in support of the launch of Iclusig; and an increase in overhead and other expenses of $6.1 million primarily related to increased office, overhead and
administrative expenses incurred to support the commercial operations associated with the launch of Iclusig.
On November 7, 2013, as a
consequence of our announcements and events in October 2013, as discussed above, we reduced our United States workforce including United States sales force positions and additional selling, general and administrative positions. We expect that
selling, general and administrative costs will decrease in 2014 compared to 2013 as a result of the restructuring actions taken and other cost reduction initiatives, offset by costs that we will incur related to the re-launch of Iclusig.
We expect that operating expenses in total, will decrease in 2014 compared to 2013 as a result of these restructuring actions and other cost reduction
initiatives. The actual amount of operating expenses will
68
depend on, among other things, costs related to the re-launch of Iclusig in the United States, the outcome of the EMA’s review of Iclusig, discussions with other regulatory agencies
regarding our review of the PACE clinical data, the status of regulatory reviews and timing of potential pricing and reimbursement approvals of Iclusig in Europe, costs related to commercialization of Iclusig in Europe, cost savings from our
restructuring efforts, the progress of our product development programs, including on-going and planned clinical trials, results of continuing non-clinical studies and the costs of product and process development activities and product
manufacturing.
Other Income (Expense)
Interest Income/Expense
Interest income decreased to $130,000 in 2013 from $240,000 in
2012, as a result of a lower average balance of funds invested in 2013.
Interest expense decreased to $153,000 in 2013 from $199,000 in 2012
as a result of lower average borrowings in 2013.
Foreign Exchange Gain (Loss)
We recognized net foreign exchange transaction losses of $130,000 in 2013 compared to net foreign exchange gains of $71,000 in 2012. The gains and losses are a result of our expansion into Europe as we
carry accounts denominated in foreign currencies.
Provision for Income Taxes
Our provision for income taxes for 2013 was $439,000 and reflects estimated taxes for state taxes and taxable income associated with certain foreign
subsidiaries. There was no provision for income taxes in 2012.
Operating Results
We reported a loss from operations of $273.6 million in 2013 compared to a loss from operations of $205.1 million in 2012, an increase of $68.5 million,
or 33 percent. We also reported a net loss of $274.2 million in 2013, compared to a net loss of $220.9 million in 2012, an increase in net loss of $53.3 million or 24 percent, and a net loss per share of $1.49 and $1.34, respectively. The increase
in net loss is largely due to the increase in our operating expenses described above offset in part by product revenue related to the commercial launch of Iclusig in January 2013. Our results of operations for 2014 will vary from those of 2013 and
actual results will depend on a number of factors, including our ability to successfully re-launch and commercialize Iclusig in the United States, the outcome of the EMA’s review of Iclusig, our discussions with other regulatory agencies
regarding our review of the PACE clinical data, the status of pricing and reimbursement approvals and commercialization in Europe, the progress of our product development programs, ongoing employee and related personnel costs, the progress of our
discovery research programs, the impact of any commercial and business development activities and other factors. The extent of changes in our results of operations will also depend on the sufficiency of funds on hand or available from time to time,
which will influence the amount we will spend on operations and capital expenditures and the development timelines for our product candidates.
For the Years Ended December 31, 2012 and 2011
Revenue
We recorded total revenue of $558,000 for the year ended December 31,
2012, compared to $25.3 million for the year ended December 31, 2011. Total revenue in 2012 consisted primarily of license revenue pursuant to a license agreement related to our ARGENT technology. Total revenue in 2011 consisted
69
primarily of a $25 million milestone payment received pursuant to our license agreement with Merck for the acceptance of an application for regulatory approval in Europe of ridaforolimus for the
treatment of patients with sarcoma, which was subsequently withdrawn by Merck in November 2012.
Operating Expenses
Research and Development Expenses
Our
R&D expenses for 2012 as compared to 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
Increase
/
(decrease)
|
|
|
In thousands
|
|
2012
|
|
|
2011
|
|
|
|
Direct external expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iclusig
|
|
$
|
54,588
|
|
|
$
|
32,392
|
|
|
$
|
22,196
|
|
|
AP26113
|
|
|
6,034
|
|
|
|
4,120
|
|
|
|
1,914
|
|
|
All other R&D expenses
|
|
|
84,087
|
|
|
|
41,231
|
|
|
|
42,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144,709
|
|
|
$
|
77,743
|
|
|
$
|
66,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2012 and 2011, our clinical programs consisted of (i) Iclusig, and (ii) AP26113, for which we filed an IND
in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011.
Direct external expenses for Iclusig were $54.6 million
in 2012, an increase of $22.2 million, or 69 percent, compared to 2011 expenses of $32.4 million. The increase was due to an increase in clinical trial costs of $13.3 million, contract manufacturing costs of $3.3 million and supporting non-clinical
costs of $5.6 million. Clinical trial costs increased primarily due to ongoing treatment of patients in our pivotal Phase 2 PACE clinical trial and increased enrollment and treatment of patients in our Phase 3 EPIC clinical trial in newly diagnosed
CML patients, including purchases of the comparator drug, imatinib, for use in this trial, as well as costs related to initiation of a Phase 1/2 clinical trial of Iclusig in Japan, offset in part by a decrease in costs of our on-going Phase 1
clinical trial as treatment of patients and other activities in this trial decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to
support regulatory filings for Iclusig, as well as the production of Iclusig for use in our clinical trials and provided for initial commercial supply in anticipation of regulatory approval of Iclusig. Supporting non-clinical costs increased due
primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene. We collaborated with MolecularMD Corp. to establish this
companion diagnostic test and MolecularMD filed a PreMarketing Approval (PMA) application with the FDA. In September 2012, we and MolecularMD announced the voluntary withdrawal of the PMA following advice from the FDA that the FDA no longer
considered this test to be a companion diagnostic test for ponatinib.
Direct external expenses for AP26113 were $6.0 million for 2012, an
increase of $1.9 million, or 46 percent, compared to 2011 expenses of $4.1 million, of which $2.2 million were included in clinical programs and $1.9 million were included in preclinical programs. The increase in expenses for AP26113 was due to an
increase in clinical trial costs of $0.5 million and an increase of $2.0 million in contract manufacturing cost, offset in part by a decrease in supporting non-clinical costs of $0.6 million. The increase in clinical trial costs was due to costs of
the Phase 1/2 clinical trial initiated in the third quarter of 2011. The increase in contract manufacturing costs was due to the manufacture of additional material to supply the Phase 1/2 clinical trial and investment in product and process
development. The decrease in supporting non-clinical costs was due primarily to the completion in 2011 of toxicology studies required for filing of the IND.
All other R&D expenses increased by $42.9 million, or 104 percent, to $84.1 million in 2012, as compared to $41.2 million in 2011. This increase was primarily due to an increase in personnel costs of
$19.8 million, related primarily to an increase in the number of employees to support expanding R&D activities, overall increases in compensation for employees and an increase in recruiting costs; an increase in professional services of $6.2
million due primarily to initiatives to upgrade systems and technology used in our
70
business; an increase in stock-based compensation expense of $6.1 million as a result of the impact of a significant increase in the market value of our common stock on the value of stock-based
compensation awards in 2011 and 2012, as well as the vesting of previously awarded performance share units triggered by the approval of Iclusig by the FDA in December 2012; an impairment charge related to ridaforolimus intangible assets of $4.8
million; an increase in rent expense of $2.2 million as a result of an amendment to our existing building lease and a new lease agreement for additional space; an increase in general expenses of $2.6 million, including technology support costs and
travel costs associated with our expanded R&D workforce; and an increase in lab expenses of $1.6 million.
General and Administrative
Expenses
General and administrative expenses increased by $36.5 million, or 150 percent, to $60.9 million in 2012, compared to $24.4
million in 2011. This increase was due primarily to an increase in personnel costs of $15.7 million related primarily to an increase in the number of employees, including sales related personnel, to support expanding business activities and to
prepare for commercial launch of Iclusig, overall increases in compensation for existing employees and an increase in recruiting costs; an increase in professional services of $10.2 million as a result of an increase in corporate and commercial
development initiatives to plan and prepare for the commercial launch of Iclusig; an increase in stock-based compensation expense of $6.6 million due to the impact of a significant increase in the market value of our common stock on the value of
stock-based compensation awards in 2011 and 2012, as well as the vesting of previously awarded performance share units triggered by the approval of Iclusig by the FDA in December 2012; an increase in general expenses of $2.4 million primarily
related to increased travel costs as we prepared for regulatory approval and commercial launch of Iclusig; and an increase in overhead and other expenses of $1.8 million primarily related to insurance costs, taxes and other miscellaneous costs.
Other Income/Expense
Interest Income
Interest income
increased by 44 percent to $240,000 in 2012 from $167,000 in 2011, as a result of a higher average balance of funds invested in 2012.
Interest Expense
Interest expense
decreased by 14 percent to $199,000 in 2012 from $232,000 in 2011, as a result of lower average borrowings in 2012.
Revaluation of Warrant
Liability
In the first quarter of 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds
to us of approximately $12.5 million. During the first quarter of 2012, the value of the warrant liability on our consolidated balance sheet was adjusted, resulting in a non-cash charge of $15.9 million for the year ended December 31, 2012, due
primarily to the increase in the market price of our common stock from December 31, 2011 to the dates the warrants were exercised. The revaluation of our warrant liability in 2011 resulted in a non-cash charge of $46.7 million. Upon exercise of
those remaining warrants, the balance of the warrant liability and the associated exercise proceeds were credited to stockholders’ equity and the liability was eliminated.
Operating Results
We reported a loss from operations of $205.1 million in 2012
compared to a loss from operations of $76.8 million in 2011, an increase of $128.3 million, or 167 percent. We also reported a net loss of $220.9 million in 2012, compared to a net loss of $123.6 million in the corresponding period in 2011, an
increase in net loss of $97.3 million or 79 percent, and a net loss per share of $1.34 for 2012 compared to $0.93 for 2011. The increase in net loss is largely due to the decrease in revenue and the increase in our operating expenses described
above, offset in part by the decrease in charges related to the revaluation of our warrant liability of $30.8 million in 2012, as compared to 2011.
71
Selected Quarterly Financial Data
Summarized unaudited quarterly financial data are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
In thousands, except per share amounts
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
(a)
|
|
|
Total revenue
|
|
$
|
6,464
|
|
|
$
|
14,011
|
|
|
$
|
16,732
|
|
|
$
|
8,354
|
|
|
Gross profit (loss)
|
|
|
6,195
|
|
|
|
13,783
|
|
|
|
16,317
|
|
|
|
(346
|
)
|
|
Net loss
|
|
|
(64,670
|
)
|
|
|
(68,985
|
)
|
|
|
(66,339
|
)
|
|
|
(74,164
|
)
|
|
Net loss per share – basic and diluted
|
|
|
(0.36
|
)
|
|
|
(0.37
|
)
|
|
|
(0.36
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
2012
|
|
|
In thousands, except per share amounts
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total revenue
|
|
$
|
81
|
|
|
$
|
318
|
|
|
$
|
85
|
|
|
$
|
74
|
|
|
Net loss
|
|
|
(55,894
|
)
|
|
|
(51,312
|
)
|
|
|
(53,213
|
)
|
|
|
(60,453
|
)
|
|
Net loss per share – basic and diluted
|
|
|
(0.35
|
)
|
|
|
(0.31
|
)
|
|
|
(0.32
|
)
|
|
|
(0.36
|
)
|
|
(a)
|
Our results for
the fourth quarter of 2013 include expenses related to the write-down of excess inventory and vendor advances of $8.5 million and restructuring charges of $4.8 million.
|
Liquidity and Capital Resources
We have financed our operations and investments to date
primarily through sales of our common stock in public and private offerings, through the receipt of up-front and milestone payments from collaborations and licenses with pharmaceutical and biotechnology companies and, to a lesser extent, through
issuances of our common stock pursuant to our equity incentive and employee stock purchase plans, supplemented by the borrowing of long-term debt from commercial lenders. We sell securities and incur debt when the terms of such transactions are
deemed favorable to us and as necessary to fund our current and projected cash needs. We seek to balance the level of cash, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of
uncertainty relative to the availability of funding on favorable terms. In October 2013, in connection with the temporary suspension of marketing and commercial distribution of Iclusig in the United States and other announcements that we made, our
market capitalization declined significantly, by approximately $2.8 billion, or 87%. In the fourth quarter of 2013, we revised our operating plan and implemented steps to reduce our expenses in order to extend our existing cash and cash equivalents
further than we had previously projected. These steps included a reduction in our United States workforce of approximately 40% that we announced on November 7, 2013. Positions were eliminated in our commercial, research and development and
administrative functions. We also took actions to significantly lower our operating expenses in 2014 and in the future, including reductions in research and development expenses by focusing on key activities in the Iclusig and AP26113 development
programs and discovery research, and reductions in general and administrative expenses associated with the reductions in commercial and research and development activities.
With the launch of Iclusig in 2013, we began generating product revenues that have contributed to our cash flows. However, our cash flows generated by sales of Iclusig are not currently sufficient to fund
operations and we will need to seek additional sources to fund our operations.
72
For the purpose of the following discussion, our funds consist of cash, cash equivalents and marketable
securities as follows:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Cash and cash equivalents
|
|
$
|
237,179
|
|
|
$
|
119,379
|
|
|
Marketable securities
|
|
|
—
|
|
|
|
45,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237,179
|
|
|
$
|
164,414
|
|
|
|
|
|
|
|
|
|
|
|
We manage our marketable securities portfolio to maintain liquidity for payment of our obligations and to maximize
yields. We purchase marketable securities to enhance our yield on invested funds and when such amounts are not needed for near-term payment of obligations. We generally hold our marketable securities to maturity. Upon maturity of such marketable
securities, a portion may be retained as cash to provide for payment of current obligations while the remainder will be reinvested in accordance with our investment policy. During 2013, there were no purchases of marketable securities and proceeds
from maturities of marketable securities were $45.0 million. During 2012, we purchased marketable securities in the amount of $89.6 million and realized proceeds of $44.5 million from maturities of marketable securities. A total of $17.1 million of
our cash and cash equivalents as of December 31, 2013 is held by various international subsidiaries and $15.0 million is required to be held as a minimum balance under the loan agreement with our commercial lender.
Our balance sheet at December 31, 2013 includes property and equipment, net of $108.8 million, which represents an increase of $101.1 million from
December 31, 2012. The increase is primarily due to the accounting, as described below, for our lease of new laboratory and office space in Cambridge, Massachusetts. In January 2013, we entered into a lease agreement for approximately 244,000
square feet of laboratory and office space in two adjacent, connected buildings which are under construction in Cambridge, Massachusetts, and construction is expected to be completed in early 2015. Under the terms of the original lease, we leased
all of the rentable space in one of the two buildings and a portion of the available space in the second building. In September 2013, we entered into a lease amendment to lease all of the remaining space, approximately 142,000 square feet, in the
second building, that was not previously committed to lease. The terms of the lease amendment were consistent with the terms of the original lease. Under the relevant accounting guidance, we are the deemed owner for the project during the
construction period and accordingly, we record the project construction costs as an asset ($99.4 million at December 31, 2013) and a corresponding facility lease obligation. In connection with the lease, the landlord is providing a tenant
improvement allowance for the costs associated with the design, engineering and construction of tenant improvements. To the extent that the related costs exceed the allowance, we will be responsible to fund such excess. We do not anticipate any
funding requirements in 2014. Any future funding requirements will be dependent on design, engineering and construction work, which will develop over time. As construction continues on the facility, the asset and corresponding facility lease
obligation will continue to increase. Given our involvement in the design of tenant improvements for the leased facility, the lease establishes dates by which we are required to submit plans and drawings for tenant improvements consistent with the
timeline for completion of the construction, including tenant improvements, and readiness of the facility for occupancy. In connection with the partial clinical hold of Iclusig imposed by the FDA and the temporary suspension of marketing and
commercial distribution of Iclusig in the United States in October 2013, plans and drawings for the tenant improvements for this facility have not been approved by us and have not, at this time, been completed and submitted in accordance with the
timelines specified in the lease. If delay of submission of plans and drawings in accordance with the timelines specified in the lease results in a delay in the occupancy date for the facility, we may be required to commence rent payments for the
facility prior to occupancy. We are currently in discussions with the landlord regarding revisions to our plans, the timelines related to submission of such plans and other matters in the lease.
Our balance sheet at December 31, 2013 includes other current assets of $6.0 million, an increase of $2.1 million from December 31, 2012, which
was primarily due to an increase in prepaid costs for insurance due to the expansion of our business and commercial costs supporting the launch of Iclusig as well as advances to vendors related to clinical trial activities.
73
In connection with the commercial launch of Iclusig in 2013 in both the United States and Europe, we began
to capitalize inventory, ship product to customers and recognize revenue from sales of Iclusig. As a result of these activities, at December 31, 2013, our accounts receivable balance increased to $1.3 million and inventory increased to $3.4
million, inclusive of the current and non-current portions of inventory.
Sources of Funds
During the years ended December 31, 2013, 2012 and 2011, our sources of cash were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Sales/issuances of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In common stock offerings
|
|
$
|
310,037
|
|
|
$
|
—
|
|
|
$
|
243,058
|
|
|
Pursuant to warrant exercises
|
|
|
—
|
|
|
|
12,483
|
|
|
|
8,080
|
|
|
Pursuant to stock option and purchase plans
|
|
|
6,284
|
|
|
|
10,511
|
|
|
|
4,791
|
|
|
Proceeds from long-term borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
4,375
|
|
|
Reimbursement of amounts related to facility lease obligation
|
|
|
2,741
|
|
|
|
—
|
|
|
|
—
|
|
|
Milestone payment from Merck, included in cash used in operating activities
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
319,062
|
|
|
$
|
22,994
|
|
|
$
|
285,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of funding we raise through sales of our common stock or other securities depends on many factors, including,
but not limited to, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.
On February 25, 2009, we sold 14,378,698 shares of our common stock in a registered direct offering to institutional investors, at a purchase price
of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional 10,784,024 shares of our common stock exercisable at a price of $2.15 per share in cash or
pursuant to the net exercise provisions of the warrants. During the year ended December 31, 2011, a total of 3,757,767 warrants were exercised for proceeds to us of approximately $8.1 million. During the three-month period ended March 31,
2012, all 5,805,843 warrants that remained outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million.
On December 20, 2011, we sold 24,725,000 shares of our common stock in an underwritten public offering at a purchase price of $10.42 per share. Net proceeds of this offering, after underwriting
discounts and commissions and expenses, were approximately $243.1 million.
On January 29, 2013, we sold 16,489,893 shares of our common
stock in an underwritten public offering at a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $310.0 million.
We have filed shelf registration statements with the U.S. Securities and Exchange Commission, or SEC, from time to time, to register shares of our common
stock and other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate. Under SEC rules, we currently qualify as a “well-known seasoned issuer,” which allows us to file shelf
registration statements to register an unspecified amount of securities that are effective upon filing. On December 14, 2011, we filed such a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock,
preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This registration
statement was effective upon filing and will remain in effect for up to three years from filing.
74
Uses of Funds
The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt and to invest in our property and equipment as needed for our
business. Our uses of cash during the years ended December 31, 2013, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Net cash used in operating activities
|
|
$
|
221,882
|
|
|
$
|
153,681
|
|
|
$
|
53,262
|
|
|
Adjusted for milestone payment from Merck
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net cash used in operating activities
|
|
|
221,882
|
|
|
|
153,681
|
|
|
|
78,262
|
|
|
Repayment of long-term borrowings and capital leases
|
|
|
2,115
|
|
|
|
1,454
|
|
|
|
1,466
|
|
|
Change in restricted cash
|
|
|
10,319
|
|
|
|
289
|
|
|
|
—
|
|
|
Investment in intangible assets
|
|
|
—
|
|
|
|
633
|
|
|
|
671
|
|
|
Investment in property and equipment
|
|
|
8,543
|
|
|
|
4,424
|
|
|
|
1,452
|
|
|
Payment of tax withholding obligations related to stock compensation
|
|
|
3,363
|
|
|
|
4,336
|
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,222
|
|
|
$
|
164,817
|
|
|
$
|
82,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses and working
capital requirements. As noted previously, our net loss for 2013 increased by $53.3 million as compared to 2012, due primarily to the overall increases in operating expenses offset in part by increases in revenue, due to the launch of Iclusig in
2013, and a reduction in the non-cash charge for revaluation of our warrant liability of $15.9 million in 2012. Our net cash used in operating activities increased by $68.2 million in 2013 as compared to 2012, reflecting overall increases in
operating expenses, decreases in non-cash adjustments and a decrease in working capital items, offset in part by increased revenue due to the launch of Iclusig in 2013. Another significant use of cash in 2013 compared to 2012 was an increase in
restricted cash held as collateral for a letter of credit associated with the lease we executed in January 2013, and amended in September 2013, for new laboratory and office space.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2013, we maintained outstanding letters of credit of $11.4 million in accordance with the terms of our existing leases for our office and
laboratory space, our new lease for office and laboratory space under construction, and for other purposes.
75
Contractual Obligations
We have substantial fixed contractual obligations under our long-term debt agreement, lease agreements, employment agreements, purchase commitments and benefit plans. These non-cancellable contractual
obligations were comprised of the following as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Total
|
|
|
Payments Due By Period
|
|
|
|
|
In
2014
|
|
|
2015
through
2017
|
|
|
2018
through
2019
|
|
|
After
2019
|
|
|
Long-term debt
|
|
$
|
9,100
|
|
|
$
|
4,200
|
|
|
$
|
4,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Lease agreements
|
|
|
493,305
|
|
|
|
7,848
|
|
|
|
60,934
|
|
|
|
72,629
|
|
|
|
351,894
|
|
|
Employment agreements
|
|
|
7,347
|
|
|
|
6,689
|
|
|
|
658
|
|
|
|
—
|
|
|
|
—
|
|
|
Purchase commitments
|
|
|
33,809
|
|
|
|
2,704
|
|
|
|
19,744
|
|
|
|
5,736
|
|
|
|
5,625
|
|
|
Other long-term obligations
|
|
|
4,613
|
|
|
|
2,585
|
|
|
|
2,028
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed contractual obligations
|
|
$
|
548,174
|
|
|
$
|
24,026
|
|
|
$
|
88,264
|
|
|
$
|
78,365
|
|
|
$
|
357,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of scheduled principal payments on such debt. Interest on our long-term debt is based on variable
interest rates. Assuming a constant interest rate of 1.42 percent, our average interest rate on our debt at December 31, 2013, over the remaining term of the debt, our interest expense would total approximately $148,000 in 2014 and 2015.
Leases consist of payments to be made on our building leases in Cambridge, Massachusetts and Lausanne, Switzerland, including future lease
commitments related to leases executed for office and laboratory space in two buildings currently under construction in Cambridge and office space in a building in Lausanne that completed construction in early 2014. The minimum non-cancelable
payments for the facility being constructed in Cambridge are included in the table above and include amounts related to the original lease and the lease amendment. We are the deemed owner for accounting purposes and have recognized a financing
obligation associated with the cost of the buildings incurred to date for the buildings under construction in Cambridge, Massachusetts. In addition to minimum lease payments, the leases require us to pay additional amounts for our share of taxes,
insurance, maintenance and operating expenses, which are not included in the above table. Employment agreements represent base salary payments under agreements with officers. Purchase commitments represent non-cancelable contractual commitments
associated with certain clinical trial activities. Other long-term obligations are comprised primarily of our obligations under our deferred executive compensation plan and our liability for unrecognized tax positions, which is classified in 2016.
Liquidity
At
December 31, 2013, we had cash and cash equivalents totaling $237.2 million and working capital of $172.8 million, compared to cash, cash equivalents and marketable securities totaling $164.4 million and working capital of $119.5 million at
December 31, 2012. Of the $237.2 million of cash and cash equivalents at December 31, 2013, $15.0 million is maintained as a minimum balance requirement related to our bank term loan and $17.1 million was in accounts held by our
international subsidiaries. For 2013, we reported a net loss of $274.2 million and cash used in operating activities of $221.9 million. Based on our recently revised operating plan and our restructuring activities announced on November 7, 2013,
we believe that our cash and cash equivalents at December 31, 2013, together with anticipated sales of Iclusig, will be sufficient to fund our operations to mid-2015. This revised operating plan does not assume any capital-raising activities or
other financing transactions.
During the past year, we have invested significant amounts in personnel, processes and systems related to the
commercialization of Iclusig in the United States and Europe, including the hiring and training of an experienced sales force and other professional staff necessary for a product launch, the implementation of systems and processes to support the
launch, the development of tools and materials being used in the launch and other activities. Due to the temporary suspension of Iclusig in the United States, we also incurred expenses related to a workforce reduction in the fourth quarter of 2013.
As noted above, in the fourth quarter of 2013, we temporarily suspended the marketing and commercial distribution of Iclusig in the United
States. As we re-launch Iclusig in the United States in 2014, there is no
76
assurance that we will be successful in commercializing Iclusig in the United States, in Europe or in other territories where we await regulatory approval or have yet to file for regulatory
approval. In addition, the outcome of the EMA’s review of Iclusig is uncertain. We expect that the developments announced in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig
in the United States and the EMA’s review will adversely impact our efforts to commercialize Iclusig in CML and Ph+ ALL patients, and our ability to obtain product revenue will depend on our ability to continue to commercialize Iclusig in the
United States, Europe and other territories, the success of our efforts to develop Iclusig in other patient populations and cancers, as well as the success of AP26113 and any other product candidates. If we are not successful in generating
sufficient levels of sales from Iclusig and/or obtaining additional regulatory approvals, we will need to raise additional funding and/or further revise our operating plans in order to conserve cash to fund our operations.
We have historically incurred operating losses and net losses related to our research and development activities. Although we have discontinued the EPIC
trial of Iclusig in CML patients and the majority of our Iclusig trials are on partial clinical hold, we are still currently conducting a number of clinical trials for Iclusig, including the Phase 2 clinical trial for Iclusig in adult patients with
metastatic and/or unresectable GIST that we announced in June 2013 and we intend to initiate further enrollment if the partial clinical hold is lifted. For AP26113, we plan to commence a pivotal trial of AP26113 in ALK-positive NSCLC patients in the
first quarter of 2014. We also plan to continue to invest in discovery research and add to our pipeline of product candidates through these activities. While we plan to continue these research and development activities, we expect that our total
research and development activities will decrease in 2014 compared to 2013 due to the impact of the reduction in the size of our workforce and as we focus on key research and development activities and discovery research efforts. We also expect that
our selling, general and administrative expenses will decrease in 2014 compared to 2013 as a result of the restructuring actions we have taken and other cost reduction initiatives. There are many factors that will affect our level of spending on
these activities, our ability to successfully commercialize Iclusig in the United States and Europe, the results of the EMA’s review of Iclusig, the impact of the FDA’s partial clinical hold on Iclusig trials, the number, size and
complexity of, and rate of enrollment of patients in our continued or future clinical trials for Iclusig and AP26113, the extent of other development activities for Iclusig and AP26113, the progress of our preclinical and discovery research
programs, the status of regulatory reviews and timing of potential additional regulatory approvals and commercial launch of Iclusig in additional countries in Europe and other markets and of our other product candidates, the size of the workforce
and required systems and infrastructure necessary to support commercialization of Iclusig and our product candidates in multiple markets and other factors.
Under our license agreements with Medinol and ICON, we are eligible to receive milestone payments based on achievement of specified development, regulatory and/or sales objectives as well as royalty
payments upon commercialization of products. The commencement of patient enrollment in Medinol’s clinical trials, along with the submission of an investigational device exemption, or IDE, with the FDA, will trigger milestone payments to us of
$3.8 million, expected in 2014. There can be no assurance that future regulatory approvals will be obtained or that we will receive any additional milestone or other payments under these license agreements.
Until such time, if ever, that we generate revenues from sales of Iclusig and our product candidates sufficient to fund operations, we plan to continue
to fund our operations by issuing common stock, debt or other securities in one or more public or private offerings, as market conditions permit, or through the incurrence of additional debt from commercial lenders or other financing transactions.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely
affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring
dividends.
77
There can be no assurance that additional funds will be available when we need them on terms that are
acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate our commercialization of Iclusig; (2) delay, limit, reduce or terminate preclinical
studies, clinical trials or other clinical development activities for one or more of our approved products or product candidates; (3) delay, limit, reduce or terminate our discovery research or preclinical development activities; or
(4) enter into licenses or other arrangements with third parties on terms that may be unfavorable to us or sell, license or relinquish rights to develop or commercialize our product candidates, approved products, technologies or intellectual
property.
Recently Adopted or Issued Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
. ASU 2013-11
requires, unless certain conditions exists, an unrecognized tax benefit or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to
a tax loss or a tax credit carryforward. We will apply this standard beginning January 1, 2014. The adoption of the standard is not expected to have a material impact on our consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.
We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, and money market accounts. Depending on our level of available funds and our expected cash
requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund
our liquidity needs and may not in any case exceed three years. These securities are classified as available-for-sale.
At December 31,
2013, as our available funds are invested solely in cash and cash equivalents and we do not have significant market risk related to interest rate movements.
At December 31, 2013, we had $9.1 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR + 1.25 percent to 2.25 percent. This note is sensitive to interest
rate risk. In the event of a hypothetical 10 percent increase in the interest rate on which the loan is based (14 basis points at December 31, 2013), we would incur approximately $11,000 of additional interest expense per year based on expected
balances over the next twelve months.
Certain Factors That May Affect Future Results of Operations
The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make
informed investment decisions. This Annual Report on Form 10-K contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Annual
Report, and they may also be made a part of this Annual Report by reference to other documents filed with the SEC, which is known as “incorporation by reference.” Such statements in connection with any discussion of future operating or
financial performance are identified by use of words such as “may,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms
of similar meaning. Such statements are based on management’s expectations and are subject to certain factors, risks and uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those
expressed or implied by such forward-looking statements. These risks and uncertainties
78
include, but are not limited to, our ability to successfully commercialize and generate profits from sales of Iclusig; competition from alternative therapies and the acceptance of Iclusig by
patients, physicians and third-party payors, particularly in light of changes to the product label in December 2013; our ability to obtain approval for Iclusig outside of the United States and in additional countries in Europe and in additional
indications; difficulties in forecasting sales or recognizing revenues for Iclusig; our reliance on third-party manufacturers, including sole-source suppliers, and on specialty pharmacies and/or specialty distributors for the distribution of
Iclusig; the impact of adverse events or additional safety data, such as our announcements in October 2013 concerning a partial clinical hold of trials of Iclusig, safety warnings from the FDA, discontinuation of the EPIC trial and the temporary
suspension of marketing and commercial distribution of Iclusig in the United States; preclinical data and early-stage clinical data that may not be replicated in later-stage clinical studies or the receipt of additional adverse data as more patients
are treated; the costs associated with our research, development, manufacturing and other activities; the conduct and results of preclinical and clinical studies of our product candidates; difficulties or delays in obtaining or maintaining
regulatory approvals to market products; the timing of development and potential market opportunity for our products and product candidates; our reliance on our strategic partners, licensees and other key parties for the successful development,
manufacturing and commercialization of our product candidates; the adequacy of our capital resources and the availability of additional funding; patent protection and third-party intellectual property claims; our failure to comply with extensive
regulatory requirements; the occurrence of serious adverse events in patients being treated with Iclusig or our product candidates; the ability to manage our growth effectively; litigation, including our pending securities class action and
derivative lawsuits; our operations in foreign countries; future capital needs; risks related to key employees, markets, economic conditions, health care reform, prices and reimbursement rates; and other factors. Please also see the discussion under
“Risk Factors” in Part I, Item 1A appearing elsewhere in this Annual Report on Form 10-K for more details regarding these and other risks.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report or in any document incorporated by reference
might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference in this Annual Report. We are not under
any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any
person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
79
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.
Cambridge, Massachusetts
We have audited the
accompanying consolidated balance sheets of ARIAD Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ARIAD Pharmaceuticals, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria established in
Internal
Control—Integrated Framework
(
1992
) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2014 expressed an unqualified opinion on the Company’s internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 3, 2014
80
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In thousands, except share and per share data
|
|
2013
|
|
|
2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
237,179
|
|
|
$
|
119,379
|
|
|
Marketable securities
|
|
|
—
|
|
|
|
45,035
|
|
|
Accounts receivable
|
|
|
1,305
|
|
|
|
—
|
|
|
Inventory
|
|
|
419
|
|
|
|
6
|
|
|
Other current assets
|
|
|
6,043
|
|
|
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
244,946
|
|
|
|
168,350
|
|
|
Restricted cash
|
|
|
11,357
|
|
|
|
1,038
|
|
|
Property and equipment, net
|
|
|
108,777
|
|
|
|
7,681
|
|
|
Intangible and other assets, net
|
|
|
5,814
|
|
|
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
370,894
|
|
|
$
|
180,193
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,363
|
|
|
$
|
8,267
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
4,200
|
|
|
|
2,115
|
|
|
Accrued compensation and benefits
|
|
|
12,778
|
|
|
|
11,865
|
|
|
Accrued product development expenses
|
|
|
16,740
|
|
|
|
14,061
|
|
|
Other accrued expenses
|
|
|
8,977
|
|
|
|
8,096
|
|
|
Current portion of deferred executive compensation
|
|
|
2,511
|
|
|
|
3,533
|
|
|
Current portion of deferred revenue
|
|
|
472
|
|
|
|
231
|
|
|
Other current liabilities
|
|
|
15,136
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
72,177
|
|
|
|
48,866
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
4,900
|
|
|
|
9,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term facility lease obligation
|
|
|
99,412
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
8,580
|
|
|
|
6,870
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
308
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred executive compensation
|
|
|
—
|
|
|
|
1,968
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 10)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, authorized 10,000,000 shares, none issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, authorized 450,000,000 shares in 2013 and 240,000,000 in 2012; shares issued and outstanding
185,896,080 shares in 2013 and 167,075,758 shares in 2012
|
|
|
186
|
|
|
|
167
|
|
|
Additional paid-in capital
|
|
|
1,238,859
|
|
|
|
890,499
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,535
|
)
|
|
|
20
|
|
|
Accumulated deficit
|
|
|
(1,051,993
|
)
|
|
|
(777,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
185,517
|
|
|
|
112,851
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
370,894
|
|
|
$
|
180,193
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
81
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
In thousands, except per share data
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
45,238
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
License and collaboration revenue
|
|
|
296
|
|
|
|
514
|
|
|
|
25,189
|
|
|
Service revenue
|
|
|
27
|
|
|
|
44
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
45,561
|
|
|
|
558
|
|
|
|
25,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
9,612
|
|
|
|
—
|
|
|
|
—
|
|
|
Research and development expense
|
|
|
162,900
|
|
|
|
144,709
|
|
|
|
77,743
|
|
|
Selling, general and administrative expense
|
|
|
146,615
|
|
|
|
60,909
|
|
|
|
24,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
319,127
|
|
|
|
205,618
|
|
|
|
102,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(273,566
|
)
|
|
|
(205,060
|
)
|
|
|
(76,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
130
|
|
|
|
240
|
|
|
|
167
|
|
|
Interest expense
|
|
|
(153
|
)
|
|
|
(199
|
)
|
|
|
(232
|
)
|
|
Revaluation of warrant liability
|
|
|
—
|
|
|
|
(15,924
|
)
|
|
|
(46,715
|
)
|
|
Foreign exchange gain (loss)
|
|
|
(130
|
)
|
|
|
71
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(153
|
)
|
|
|
(15,812
|
)
|
|
|
(46,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(273,719
|
)
|
|
|
(220,872
|
)
|
|
|
(123,603
|
)
|
|
Provision for income taxes
|
|
|
439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(274,158
|
)
|
|
$
|
(220,872
|
)
|
|
$
|
(123,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(1.49
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding – basic and diluted
|
|
|
183,575
|
|
|
|
164,964
|
|
|
|
132,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Net loss
|
|
$
|
(274,158
|
)
|
|
$
|
(220,872
|
)
|
|
$
|
(123,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (reclassification adjustment) on marketable securities
|
|
|
(20
|
)
|
|
|
20
|
|
|
|
—
|
|
|
Cumulative translation adjustment
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Defined benefit pension obligation
|
|
|
(1,495
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(1,555
|
)
|
|
|
20
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(275,713
|
)
|
|
$
|
(220,852
|
)
|
|
$
|
(123,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
82
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
In thousands, except share data
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
Balance, January 1, 2011
|
|
|
126,942,431
|
|
|
$
|
127
|
|
|
$
|
497,309
|
|
|
$
|
—
|
|
|
$
|
(433,360
|
)
|
|
$
|
64,076
|
|
|
Issuance of shares pursuant to ARIAD stock plans
|
|
|
2,183,504
|
|
|
|
2
|
|
|
|
4,789
|
|
|
|
|
|
|
|
|
|
|
|
4,791
|
|
|
Issuance of common stock, net of issuance costs
|
|
|
24,725,000
|
|
|
|
25
|
|
|
|
243,033
|
|
|
|
|
|
|
|
|
|
|
|
243,058
|
|
|
Issuance of common stock from warrant exercise
|
|
|
3,757,767
|
|
|
|
4
|
|
|
|
24,967
|
|
|
|
|
|
|
|
|
|
|
|
24,971
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,675
|
|
|
|
|
|
|
|
|
|
|
|
7,675
|
|
|
Payments of tax withholding obligations related to stock compensation
|
|
|
|
|
|
|
|
|
|
|
(827
|
)
|
|
|
|
|
|
|
|
|
|
|
(827
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,603
|
)
|
|
|
(123,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
157,608,702
|
|
|
|
158
|
|
|
|
776,946
|
|
|
|
—
|
|
|
|
(556,963
|
)
|
|
|
220,141
|
|
|
Issuance of shares pursuant to ARIAD stock plans
|
|
|
3,661,213
|
|
|
|
3
|
|
|
|
10,508
|
|
|
|
|
|
|
|
|
|
|
|
10,511
|
|
|
Issuance of common stock from warrant exercise
|
|
|
5,805,843
|
|
|
|
6
|
|
|
|
87,040
|
|
|
|
|
|
|
|
|
|
|
|
87,046
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
20,341
|
|
|
|
|
|
|
|
|
|
|
|
20,341
|
|
|
Payments of tax withholding obligations related to stock compensation
|
|
|
|
|
|
|
|
|
|
|
(4,336
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,336
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220,872
|
)
|
|
|
(220,872
|
)
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
167,075,758
|
|
|
|
167
|
|
|
|
890,499
|
|
|
|
20
|
|
|
|
(777,835
|
)
|
|
|
112,851
|
|
|
Issuance of shares pursuant to ARIAD stock plans
|
|
|
2,330,429
|
|
|
|
2
|
|
|
|
6,282
|
|
|
|
|
|
|
|
|
|
|
|
6,284
|
|
|
Issuance of common stock, net of issuance costs
|
|
|
16,489,893
|
|
|
|
17
|
|
|
|
310,020
|
|
|
|
|
|
|
|
|
|
|
|
310,037
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
35,421
|
|
|
|
|
|
|
|
|
|
|
|
35,421
|
|
|
Payments of tax withholding obligations related to stock compensation
|
|
|
|
|
|
|
|
|
|
|
(3,363
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,363
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274,158
|
)
|
|
|
(274,158
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
185,896,080
|
|
|
$
|
186
|
|
|
$
|
1,238,859
|
|
|
$
|
(1,535
|
)
|
|
$
|
(1,051,993
|
)
|
|
$
|
185,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
83
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(274,158
|
)
|
|
$
|
(220,872
|
)
|
|
$
|
(123,603
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment charges
|
|
|
4,136
|
|
|
|
8,307
|
|
|
|
4,614
|
|
|
Stock-based compensation
|
|
|
35,421
|
|
|
|
20,341
|
|
|
|
7,675
|
|
|
Deferred executive compensation expense
|
|
|
963
|
|
|
|
2,810
|
|
|
|
1,719
|
|
|
Revaluation of warrant liability
|
|
|
—
|
|
|
|
15,924
|
|
|
|
46,715
|
|
|
Increase (decrease) from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,305
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Inventory
|
|
|
(413
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other current assets
|
|
|
(2,113
|
)
|
|
|
(4,714
|
)
|
|
|
228
|
|
|
Other assets
|
|
|
(2,714
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Accounts payable
|
|
|
2,478
|
|
|
|
2,664
|
|
|
|
2,394
|
|
|
Accrued compensation and benefits
|
|
|
913
|
|
|
|
10,656
|
|
|
|
82
|
|
|
Accrued product development expenses
|
|
|
2,679
|
|
|
|
2,113
|
|
|
|
3,759
|
|
|
Other accrued expenses
|
|
|
1,340
|
|
|
|
4,669
|
|
|
|
1,271
|
|
|
Other liabilities
|
|
|
14,834
|
|
|
|
5,714
|
|
|
|
1,660
|
|
|
Deferred revenue
|
|
|
10
|
|
|
|
(230
|
)
|
|
|
999
|
|
|
Deferred executive compensation paid
|
|
|
(3,953
|
)
|
|
|
(1,063
|
)
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(221,882
|
)
|
|
|
(153,681
|
)
|
|
|
(53,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of marketable securities
|
|
|
—
|
|
|
|
(89,554
|
)
|
|
|
—
|
|
|
Proceeds from maturities of marketable securities
|
|
|
45,000
|
|
|
|
44,500
|
|
|
|
—
|
|
|
Change in restricted cash
|
|
|
(10,319
|
)
|
|
|
(289
|
)
|
|
|
—
|
|
|
Investment in property and equipment
|
|
|
(8,543
|
)
|
|
|
(4,424
|
)
|
|
|
(1,452
|
)
|
|
Investment in intangible assets
|
|
|
—
|
|
|
|
(633
|
)
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
26,138
|
|
|
|
(50,400
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
4,375
|
|
|
Repayment of long-term borrowings
|
|
|
(2,100
|
)
|
|
|
(1,400
|
)
|
|
|
(1,400
|
)
|
|
Principal payments under capital lease obligations
|
|
|
(15
|
)
|
|
|
(54
|
)
|
|
|
(66
|
)
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
310,037
|
|
|
|
—
|
|
|
|
243,058
|
|
|
Reimbursements of amounts related to facility lease obligation
|
|
|
2,741
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from issuance of common stock pursuant to warrants
|
|
|
—
|
|
|
|
12,483
|
|
|
|
8,080
|
|
|
Proceeds from issuance of common stock pursuant to stock option and purchase plans
|
|
|
6,284
|
|
|
|
10,511
|
|
|
|
4,791
|
|
|
Payment of tax withholding obligations related to stock compensation
|
|
|
(3,363
|
)
|
|
|
(4,336
|
)
|
|
|
(827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
313,584
|
|
|
|
17,204
|
|
|
|
258,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
117,800
|
|
|
|
(186,877
|
)
|
|
|
202,626
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
119,379
|
|
|
|
306,256
|
|
|
|
103,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
237,179
|
|
|
$
|
119,379
|
|
|
$
|
306,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
153
|
|
|
$
|
206
|
|
|
$
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of construction-in-progress related to facility lease obligation
|
|
$
|
96,671
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transaction – property and equipment included in accounts payable or accruals
|
|
$
|
738
|
|
|
$
|
579
|
|
|
$
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
84
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
ARIAD is a global oncology company whose vision is to transform the lives of cancer patients with breakthrough medicines. The Company’s mission is to
discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest unmet medical need – aggressive cancers where current therapies are inadequate.
In addition to commercializing Iclusig
®
(ponatinib), the Company is developing Iclusig for approval in additional countries and cancer indications and has two other product candidates in development,
AP26113 and ridaforolimus. AP26113 is being studied in patients with advanced solid tumors, including non-small cell lung cancer. Ridaforolimus is being developed for cardiovascular indications by Medinol, Ltd. and ICON Medical Corp. In addition to
its clinical development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.
In December 2012, the Company obtained accelerated approval from the U.S. Food and Drug Administration (“FDA”) to sell its first new cancer
medicine, Iclusig, and commenced sales and marketing of Iclusig in the United States in January 2013. Iclusig is approved for the treatment of adult patients with chronic myeloid leukemia (“CML”) and Philadelphia chromosome-positive acute
lymphoblastic leukemia (“Ph+ ALL”). On July 2, 2013, the Company announced that the European Commission granted marketing authorization for Iclusig in the European Union. The Company commenced sales efforts in certain European
countries in the second half of 2013. Accordingly, the Company’s financial statements for 2013 include product revenue and other transactions related to commercialization that did not exist in prior years.
On October 9, 2013, the Company announced results of its review of updated clinical data from the pivotal PACE (
P
onatinib Ph+
A
LL and
C
ML
E
valuation) trial of Iclusig and actions that it was taking following consultations with the FDA. Based upon its review and the FDA consultations, the Company paused patient enrollment in all clinical trials of Iclusig and the FDA
placed a partial clinical hold on all additional patient enrollment in clinical trials of Iclusig. In response to a request by the FDA, on October 31, 2013, the Company announced that it temporarily suspended the marketing and commercial
distribution of Iclusig in the United States. On December 20, 2013, the Company announced that the FDA approved revised U.S. prescribing information, or USPI, and a Risk Evaluation and Mitigation Strategy, or REMS, that allowed for the
immediate resumption of marketing and commercial distribution of Iclusig. Sales of Iclusig in the United States resumed in January 2014.
The
Company’s current operating plan includes the impact of the re-launch of Iclusig in the United States. Based on this operating plan, the Company believes that its cash and cash equivalents at December 31, 2013, together with anticipated sales
of Iclusig, will be sufficient to fund operations into 2015. The operating plan does not assume any capital-raising activities or other financing transactions. Until such time that revenue is sufficient to fund operations, the Company plans to
continue to fund operations, as necessary, through capital raising or other financing transactions.
Principles of Consolidation
The consolidated financial statements include the accounts of ARIAD Pharmaceuticals, Inc. and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Foreign Currency
A subsidiary’s functional currency is the currency of the primary economic environment in which the subsidiary operates; normally, that is the
currency of the environment in which a subsidiary primarily generates and expends cash. In making the determination of the appropriate functional currency for a subsidiary, the Company considers cash flow indictors, local market indicators,
financing indicators and the subsidiary’s relationship with both the parent company and other subsidiaries. For subsidiaries that are primarily a direct and integral component or extension of the parent entity’s operations, the U.S. dollar
is the functional currency.
85
For foreign subsidiaries that transact in functional currency other than the U.S. dollar, assets and
liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign exchange rate for the period. Adjustments resulting from the translation of the financial statements of
the Company’s foreign subsidiaries into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. For foreign subsidiaries
where the functional currency is the U.S. dollar, monetary assets and liabilities are re-measured into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are re-measured into U.S. dollars at
historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period.
The net total
of realized and unrealized transaction gains and losses was a loss of $194,000 in 2013.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported amounts and disclosure of revenue and expenses during the
reporting period. Significant estimates included in the Company’s financial statements include estimates associated with revenue recognition and the related adjustments, research and development accruals, inventory, leased buildings under
construction and stock-based compensation. Actual results could differ from those estimates.
Reclassifications
In the consolidated balance sheet as of December 31, 2012, inventory has been separately presented and amounts due under license agreement has been
aggregated with other current assets in order to conform with current year presentation. In addition, amounts due under license and collaboration agreements and other current assets in the consolidated statement of cash flows for 2012 and 2011 have
been aggregated. None of the reclassifications were significant.
Cash Equivalents
Cash equivalents include short-term, highly liquid investments, with remaining maturities at the date of purchase of 90 days or less, and money market
accounts.
Restricted Cash
Restricted cash consists of cash balances held as collateral for outstanding letters of credit related to the lease of the Company’s laboratory and
office facilities, for a letter of credit related to the lease agreement entered into in January 2013, and amended in September 2013, for lab and office space in a new facility under construction in Cambridge, Massachusetts and for other purposes.
Marketable Securities
Marketable securities consist of United States government and agency-backed debt securities. The Company classifies these marketable debt securities as
available-for-sale at fair value. The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations. The Company uses the specific identification method as a basis for determining
cost and calculating realized gains and losses with respect to marketable debt securities.
86
Inventory
The Company outsources the manufacturing of Iclusig and uses contract manufacturers that produce the raw and intermediate materials used in the production of Iclusig as well as the finished product. The
Company currently has one supplier qualified for each step in the manufacturing process and is in the process of qualifying additional suppliers for certain steps of the production process of Iclusig. Accordingly, the Company has concentration risk
associated with its manufacturing process and relies on its currently approved contract manufacturers for supply of its product.
In
connection with production of inventory, the Company may be required to provide payments to vendors in advance of production. These amounts are included in other current assets on the accompanying consolidated balance sheets.
Inventory is composed of raw materials, intermediate materials, which are classified as work-in-process, and finished goods, which are goods that are
available for sale. The Company records inventory at the lower of cost or market. The Company determines the cost of its inventory on a specific identification basis. If the Company identifies excess, obsolete or unsalable items, it writes down its
inventory to its net realizable value in the period it is identified. These adjustments are recorded based upon various factors, including the level of product manufactured by the Company, the level of product in the distribution channel, current
and projected demand for the foreseeable future and the expected shelf-life of the inventory components. Inventory that is not expected to be used within one year is included in other assets, net, on the accompanying consolidated balance sheets.
Prior to receiving approval from the FDA on December 14, 2012 to sell Iclusig, the Company expensed all costs incurred related to the
manufacture of Iclusig as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory
approval of drug candidates.
Shipping and handling costs for product shipments are recorded as incurred in cost of product revenue along with
costs associated with manufacturing the product sold and any inventory reserves or write-downs.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (3 to
10 years). Leasehold improvements and assets under capital leases are amortized over the shorter of their useful lives or lease term using the straight-line method.
In connection with a lease for a facility being constructed in Cambridge, Massachusetts, the landlord is providing the Company with a tenant improvement allowance for the costs associated with the design,
engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be constructed in accordance with the Company’s plans and include fit-out of the buildings to construct appropriate laboratory and office
space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant
improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company is the deemed owner of the buildings during the construction period.
As construction progresses, the Company records the project construction costs incurred as an asset, along with a corresponding facility lease
obligation, on the consolidated balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the buildings, the Company will determine if the asset and corresponding financing
obligation should continue to be carried on its consolidated balance sheet under the accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completion of the
construction period.
87
Intangible Assets
Intangible assets consist primarily of purchased technology and capitalized patent and license costs. The cost of purchased technology, patents and patent applications, costs incurred in filing patents
and certain license fees are capitalized when recovery of the costs is probable. Capitalized costs related to purchased technology are amortized over the estimated useful life of the technology. Capitalized costs related to issued patents are
amortized over a period not to exceed seventeen years or the remaining life of the patent, whichever is shorter, using the straight-line method. Capitalized license fees are amortized over the periods to which they relate. In addition, capitalized
costs are expensed when it becomes determinable that the related patents, patent applications or technology will not be pursued.
Impairment of Long-Lived Assets
The
Company reviews its long-lived assets, including the above-mentioned intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets.
Accrued Rent
The Company recognizes rent expense for leases with increasing annual rents on a straight-line basis over the term of the lease. The amount of rent
expense in excess of cash payments is classified as accrued rent. Any lease incentives received are deferred and amortized over the term of the lease. At December 31, 2013 and 2012, the amount of accrued rent is $5.1 million and $5.0 million,
respectively. Of these amounts, at December 31, 2013 and 2012, $4.6 million and $4.7 million, respectively, are included in other long-term liabilities, with the remaining $0.5 million and $0.3 million as of December 31, 2013 and 2012,
respectively, included in other current liabilities.
Revenue Recognition
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably
assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable,
consideration received is allocated to the separate units of accounting based on the relative selling price of each deliverable and the appropriate revenue recognition principles are applied to each unit.
Product Revenue, Net
Commencing in
January 2013, the Company sold Iclusig in the United States to a limited number of specialty pharmacies, which dispensed the product directly to patients, and specialty distributors, which in turn sold the product to hospital pharmacies and
community practice pharmacies (collectively, healthcare providers) for the treatment of patients. In Europe, the Company sells Iclusig to retail pharmacies and hospital pharmacies which dispense product directly to patients. These specialty
pharmacies, specialty distributors, retail pharmacies and hospital pharmacies are referred to as the Company’s customers.
During 2013,
the Company provided the right of return to customers in the United States for unopened product for a limited time before and after its expiration date. European customers are provided the right
88
to return product only in limited circumstances, such as instances of damaged product. Given the Company’s limited sales history for Iclusig and the inherent uncertainties in estimating
product returns, the Company determined that the shipments of Iclusig to its United States customers in 2013 did not meet the criteria for revenue recognition at the time of shipment. Accordingly, the Company recognized revenue when the product was
sold through by its United States customers, provided all other revenue recognition criteria were met. The Company invoiced its United States customers upon shipment of Iclusig to them and recorded accounts receivable, with a corresponding liability
for deferred revenue, equal to the gross invoice price. The Company then recognized revenue when Iclusig was sold through, either when the specialty distributors shipped product to healthcare providers or when specialty pharmacies dispensed product
directly to the patient. Healthcare providers to whom specialty distributors sold Iclusig held limited inventory that was designated for patients, thereby limiting the risk of return. For European customers, who are provided with a limited right of
return, the criteria for revenue recognition is met at the time of shipment and revenue is recognized at that time, provided all other revenue recognition criteria are met.
In connection with the temporary suspension of Iclusig described above, the Company terminated its existing contracts with specialty pharmacies and specialty distributors in the United States. In
addition, the Company accepted product returns for Iclusig in connection with the temporary suspension. These returns primarily related to Iclusig held by specialty pharmacies and specialty distributors for which revenue had not been recognized.
Returns for which revenue had been previously recognized were not significant. At December 31, 2013, the Company owed approximately $4.2 million to former customers in the United States which had paid for product purchases and committed to
return those purchases in connection with the temporary suspension of Iclusig. This amount is included within other current liabilities on the consolidated balance sheet as of December 31, 2013.
The Company has written contracts or standard terms of sale with each of its customers and delivery occurs when the customer receives Iclusig. The
Company evaluates the creditworthiness of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed or determinable, the Company must be able to (i) calculate its gross product revenues
from the sales to its customers and (ii) reasonably estimate its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company charges its customers for Iclusig. The Company
estimates its net product revenues by deducting from its gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government and private payor rebates, chargebacks and
discounts, such as Medicare and Medicaid reimbursements in the United States, and (iii) estimated costs of incentives offered to certain indirect customers including patients. These deductions from gross revenue to determine net revenue are
also referred to as gross to net deductions.
Trade Allowances:
The Company provides invoice discounts on Iclusig
sales to certain of its customers for prompt payment and pays fees for certain distribution services, such as fees for certain data that its customers provide to the Company. The Company deducts the full amount of these discounts and fees from its
gross product revenues at the time such discounts and fees are earned by such customers.
Rebates, Chargebacks and
Discounts:
In the United States, the Company contracts with Medicare, Medicaid, other government agencies and various private organizations (collectively, payors) to make Iclusig, when commercially available, eligible for purchase by, or for
partial or full reimbursement from, such payors. The Company estimates the rebates, chargebacks and discounts it will provide to payors and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The
Company’s estimates of rebates, chargebacks and discounts are based on (1) the contractual terms of agreements in place with payors, (2) the government-mandated discounts applicable to government-funded programs, and (3) the
estimated payor mix. Government rebates that are invoiced directly to the Company are recorded in other accrued expenses on the consolidated balance sheet. For qualified programs that can purchase the Company’s products at a lower contractual
government or commercial price, the customers charge back to the Company the
89
difference between their acquisition cost and the lower contractual government or commercial price, which the Company records as an allowance against accounts receivable on the consolidated
balance sheet. In Europe, the Company is subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These rebates and discounts are recorded in other accrued expenses on
the consolidated balance sheet.
Other Incentives:
Other incentives that the Company offers to indirect customers
include co-pay assistance rebates provided by the Company to commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to
reduce each participating patient’s portion of the financial responsibility for Iclusig’s purchase price to a specified dollar amount. In each period, the Company records the amount of co-pay assistance provided to eligible patients based
on the terms of the program.
The following table summarizes activity in each of the above product revenue allowances and reserve categories
for 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Trade
Allowances
|
|
|
Rebates,
Chargebacks
and
Discounts
|
|
|
Other
Incentives/
Returns
|
|
|
Total
|
|
|
Balance, January 1, 2013
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Provision
|
|
|
1,158
|
|
|
|
2,721
|
|
|
|
180
|
|
|
|
4,059
|
|
|
Payments or credits
|
|
|
(1,140
|
)
|
|
|
(2,206
|
)
|
|
|
(103
|
)
|
|
|
(3,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
$
|
18
|
|
|
$
|
515
|
|
|
$
|
77
|
|
|
$
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserves above, included in the Company’s consolidated balance sheets are summarized as follows:
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2013
|
|
|
Reductions of accounts receivable
|
|
$
|
64
|
|
|
Other accrued expenses
|
|
|
546
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
610
|
|
|
|
|
|
|
|
Patients in Europe are also being treated with Iclusig in the framework of clinical trials and related studies and in
named patient programs. In 2012, the French regulatory authority granted an
Autorisation Temporaire d’Utilisation
(ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a
nominative program on a patient-by-patient basis. The Company began shipping Iclusig under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met (including a fixed or determinable price), all
amounts received under this program (approximately $8.8 million as of December 31, 2013) have not been recorded as revenue. This program concluded on September 30, 2013 and all outstanding amounts have been received. Upon completion of
this program, the Company became eligible to ship Iclusig directly to customers in France as of October 1, 2013. These shipments have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or
determinable. These shipments totaled $4.1 million for the period from October 1, 2013 to December 31, 2013, of which $1.8 million was received as of December 31, 2013. The Company will record these shipments, as well as shipments
under the ATU program, as revenue once the price is fixed or determinable.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash held
at financial institutions. The Company believes that such customers and financial institutions are of high credit quality. As of December 31, 2013, a portion of the Company’s cash and cash equivalent accounts were concentrated at a single
financial institution, which potentially exposes the Company to credit risks. The Company does not believe that there is significant risk of non-performance by the financial institution and the Company’s cash on deposit at this financial
institution is fully liquid.
90
For the year-ended December 31, 2013, three individual customers accounted for 24 percent, 15 percent
and 13 percent of net product revenue, respectively. As of December 31, 2013, two individual customers accounted for 15 percent and 13 percent of accounts receivable, respectively. No other customer accounted for more than 10 percent of net
product revenue or accounts receivable.
Revenues in 2012 and 2011 primarily related to one license agreement discussed in Note 2.
Advertising Costs
In connection with
the commercial launch of Iclusig during 2013, the Company began incurring advertising costs. Advertising costs are expensed as incurred. For the year ended December 31, 2013, advertising costs totaled $1.0 million.
Income Taxes
The Company accounts for
income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement basis and the income tax
basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax computations are based on enacted tax laws and rates applicable to the years in which the differences are expected to affect
taxable income. A valuation allowance is established when it is necessary to reduce deferred income tax assets to the amount that is considered to be more-likely-than-not realizable.
The Company does not recognize a tax benefit unless it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Any
interest and penalties on uncertain tax positions are included within the tax provision.
Stock-Based Compensation
The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to
purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a
straight-line basis over the requisite service period, which generally equals the vesting period.
Executive Compensation Plan
The Company has an unfunded deferred executive compensation plan that defers the payment of annual bonus awards to officers to future
periods as specified in each award. The value of the awards is indexed to the value of specified mutual funds. The Company accrues a liability based on the value of the awards ratably over the vesting period. The recorded balances of such awards are
increased or decreased based on the actual total return and quoted market prices of the specified mutual funds.
Segment Reporting and
Geographic Information
The Company organizes itself into one operating segment reporting to the Chief Executive Officer.
In 2013, product revenue from customers outside the United States totaled 9%. All other product, license and collaboration and service revenues in 2013,
2012, and 2011 were generated within the United States. Long lived assets outside the United States were insignificant for all periods presented.
91
Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to
identify matters that require additional disclosure.
On January 14, 2014, the Company jointly announced with Medinol Ltd., the
initiation of two registration trials of Medinol’s stent system that incorporates ridaforolimus. The commencement of enrollment in the clinical trials, along with the submission of an investigational device exemption with the FDA, will trigger
milestone payments to the Company of $3.8 million, expected in 2014.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a
Tax Credit Carryforward Exists
. ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset
for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. The Company will apply this standard beginning January 1, 2014. The adoption of the standard is not expected to have a material impact on the
Company’s consolidated financial statements.
2. Collaboration and License Agreements with Merck & Co., Inc.
In July 2007, the Company entered into a collaboration agreement with Merck & Co., Inc., or Merck, for the joint global
development, manufacture and commercialization of ridaforolimus, the Company’s investigational oral mTOR inhibitor, for use in cancer (the “Collaboration Agreement”). In May 2010, the Company entered into an amended and restated
agreement with Merck for ridaforolimus (the “License Agreement”), which replaced the Collaboration Agreement. These agreements are described below.
The Collaboration Agreement (July 2007 to May 2010)
Under the terms of the Collaboration
Agreement, as in effect until May 4, 2010, Merck and the Company were conducting a broad-based development program for the use of ridaforolimus in multiple types of cancer. Each party funded 50 percent of global development costs incurred.
Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007 and milestone payments of $53.5 million through May 4, 2010, based on the achievement of specified clinical and
regulatory events.
The License Agreement (May 2010 to present)
Under the terms of the License Agreement, the Company granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and Merck assumed full responsibility for all
activities related to the development, manufacture and commercialization of ridaforolimus and agreed to fund 100 percent of all ridaforolimus costs incurred after January 1, 2010. The License Agreement provided that Merck would develop
ridaforolimus in multiple oncology indications. If ridaforolimus received regulatory approval, Merck would be responsible for selling ridaforolimus worldwide, and would pay the Company tiered double-digit royalties on global net sales.
Under the License Agreement, in 2010 Merck paid the Company an initial up-front fee of $50 million and approximately $12.8 million for its share of costs
incurred in the period from January 1, 2010 to May 4, 2010 related to development, manufacture and commercial activities for ridaforolimus in accordance with the cost-sharing provisions of the Collaboration Agreement as in effect during
that period. In addition, in 2011, Merck paid the Company a $25 million milestone payment for the acceptance of the marketing authorization application in Europe for the sarcoma indication, which was subsequently withdrawn by Merck in November 2012.
92
For the years ended December 31, 2013, 2012 and 2011, the Company recorded service revenue of
approximately $27,000, $44,000 and $111,000, respectively. The cost of such services is reflected in operating expenses in the year in which they were incurred. License revenue that is not related to the Merck arrangement is not material in any of
the years presented.
On February 20, 2014, the Company received notice from Merck that it is terminating the license agreement. Per the
terms of the license agreement, this termination will become effective nine months from the date of the notice at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to the Company.
3. Marketable Securities
The Company has classified its marketable securities as available-for-sale and, accordingly, carries such securities at fair value.
At December 31, 2013, the Company had no marketable securities.
At December 31, 2012, all of the Company’s marketable securities consisted of United States government or agency securities, all of which matured within 12 months. At December 31, 2012, the
aggregate fair value and amortized cost of the Company’s marketable securities were $45,035,000 and $45,015,000, respectively. Gross unrealized gains were $20,000 at December 31, 2012 and are included in accumulated other comprehensive
income (loss) in the consolidated balance sheets.
4. Inventory
All of the Company’s inventories relate to the manufacturing of Iclusig. The following table sets forth the Company’s
inventories as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Raw materials
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Work in process
|
|
|
3,170
|
|
|
|
—
|
|
|
Finished goods
|
|
|
234
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,404
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
419
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion included in Other assets, net
|
|
$
|
2,985
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Upon approval of Iclusig by the FDA on December 14, 2012, the Company began capitalizing inventory costs for Iclusig
manufactured in preparation for the product launch in the United States. In periods prior to December 14, 2012, the Company expensed costs associated with Iclusig, including raw materials, work-in-process and finished goods, as development
expenses. The Company has not capitalized inventory costs related to its other drug development programs. Non-current inventory consists of work-in-process inventory that was manufactured in order to provide adequate supply of Iclusig in the United
States and Europe and to support continued clinical development.
Due to the temporary suspension of Iclusig in the United States and the
decrease in expected demand for Iclusig under the revised USPI, the Company assessed the need for an inventory write-down for excess inventory for its inventory on hand at December 31, 2013. This review included all components of inventory,
including raw materials, work-in-process and finished goods inventory. Inventory balances on hand were compared to the expected uses of inventory in the future, taking into account the estimated future global demand for Iclusig in the foreseeable
future, as well as the estimated shelf-life of the
93
Company’s inventory components. From this analysis, the Company determined that approximately $7.1 million of its inventory was excess at December 31, 2013 and recorded a charge to cost
of product revenue to write down inventory in the fourth quarter of 2013. In addition, during 2013 the Company also wrote down finished goods that will expire and not be sold. Total charges for 2013 for excess inventory, as well as finished goods
inventory that will expire before it is sold, was approximately $7.6 million.
In connection with this review, the Company also charged $1.3
million of vendor advances to cost of product revenue as the advances relate to future inventory production that will result in excess inventory.
5. Property and Equipment, Net
Property and equipment, net, was comprised of the following at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Leasehold improvements
|
|
$
|
25,714
|
|
|
$
|
24,020
|
|
|
Construction in progress
|
|
|
99,908
|
|
|
|
—
|
|
|
Equipment and furniture
|
|
|
23,466
|
|
|
|
19,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,088
|
|
|
|
43,896
|
|
|
Less accumulated depreciation and amortization
|
|
|
(40,311
|
)
|
|
|
(36,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,777
|
|
|
$
|
7,681
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the Company has recorded construction in progress and a facility lease obligation of $99.4
million related to a lease for a new facility under construction in Cambridge, Massachusetts. See Note 10 for further information.
Depreciation and amortization expense for the years ended December 31, 2013, 2012 and 2011 was $4.1 million, $2.8 million and $2.8 million,
respectively.
6. Intangible and Other Assets, Net
Intangible and other assets, net, were comprised of the following at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Capitalized patent and license costs
|
|
$
|
5,975
|
|
|
$
|
5,975
|
|
|
Less accumulated amortization
|
|
|
(5,007
|
)
|
|
|
(4,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968
|
|
|
|
993
|
|
|
Inventory, non-current
|
|
|
2,985
|
|
|
|
—
|
|
|
Other assets
|
|
|
1,861
|
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,814
|
|
|
$
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $25,000, $218,000 and $1.7 million in 2013, 2012 and 2011, respectively.
The weighted average amortization period for intangible assets was 17.0 years, 17.0 years and 14.9 years in 2013, 2012 and 2011, respectively. The estimated future amortization expense is $28,000 per year for 2014, 2015, 2016, 2017, and 2018 and
$828,000 thereafter.
For the years ended December 31, 2012 and 2011, the Company recorded charges to operating expenses of $5.2 million
and $312,000, respectively, to reflect impairment of the carrying value of certain capitalized patents and licenses or purchased technology. In 2012
,
the Company recorded a charge of $4.8 million to reflect impairment of the carrying value of
intangible assets associated with ridaforolimus, following the decision in June 2012 by the FDA not to approve the NDA filed by Merck for the treatment of patients with soft tissue or bone sarcomas. The impairment of the carrying value of intangible
assets was based on management’s assessment of the uncertainty related to the timing and amount of future cash flows anticipated from these assets. No impairment charges were recorded in 2013.
94
7. Other Current Liabilities
Other current liabilities consisted of the following at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Amounts received in advance of revenue recognition
|
|
$
|
10,434
|
|
|
$
|
—
|
|
|
Amounts due to former customers
|
|
|
4,172
|
|
|
|
—
|
|
|
Other
|
|
|
530
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,136
|
|
|
$
|
698
|
|
|
|
|
|
|
|
|
|
|
|
Amounts received in advance of revenue recognition consists of payments received from customers in France. Amounts due to
former customers consists of amounts due to former customers for product returns.
8. Long-term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations were comprised of the following at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Bank term loan
|
|
$
|
9,100
|
|
|
$
|
11,200
|
|
|
Capital lease obligations
|
|
|
—
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,100
|
|
|
|
11,215
|
|
|
Less current portion
|
|
|
(4,200
|
)
|
|
|
(2,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,900
|
|
|
$
|
9,100
|
|
|
|
|
|
|
|
|
|
|
|
The term loan provides for quarterly payments of principal and interest with final scheduled maturity on
December 31, 2015. The loan bears interest at LIBOR plus 1.25 to 2.25 percent, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate. The effective interest on the
loan was 1.42 percent at December 31, 2013. The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. The loan requires the Company to maintain a
minimum of $15.0 million in unrestricted cash, cash equivalents and investments. The loan also contains certain covenants that restrict additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of
common stock.
The future scheduled principal payments due under the term loan were as follows at December 31, 2013:
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
Year ended December 31:
|
|
|
|
|
|
2014
|
|
$
|
4,200
|
|
|
2015
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
9,100
|
|
|
Less current portion
|
|
|
(4,200
|
)
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
4,900
|
|
|
|
|
|
|
|
95
9. Executive Compensation Plan
Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards ratably over
the vesting period. The grant date values of awards made in 2012 and 2011 were $1.1 million and $1.6 million, respectively. There were no awards in 2013. The net expense for this plan was $963,000, $2.8 million and $1.7 million in 2013, 2012 and
2011, respectively. The estimated future expense for unvested awards based on the value at December 31, 2013 is $74,000 for 2014.
10. Leases, Licensed Technology and Other Commitments
Facility Leases
The
Company conducts the majority of its operations in a 100,000 square foot office and laboratory facility under a non-cancelable operating lease that extends to July 2019 with two consecutive five-year renewal options. The Company maintains an
outstanding letter of credit of $1.4 million in accordance with the terms of the amended lease. In May 2012, the Company entered into a three-year operating lease agreement for an additional 26,000 square feet of office space. Future non-cancelable
minimum annual rental payments through July 2020 under these leases are $6.7 million in 2014, $6.2 million in 2015, $5.5 million in 2016, $5.6 million in 2017, $5.7 million in 2018 and $3.3 million thereafter.
Binney Street, Cambridge, Massachusetts
In January 2013, the Company entered into a lease agreement for approximately 244,000 square feet of laboratory and office space in two adjacent,
connected buildings which are under construction in Cambridge, Massachusetts. Construction is expected to be completed in early 2015. Under the terms of the original lease, the Company leased all of the rentable space in one of the two buildings and
a portion of the available space in the second building. In September 2013, the Company entered into a lease amendment to lease all of the remaining space, approximately 142,000 square feet, in the second building, for an aggregate of 386,000 square
feet in both buildings. The terms of the lease amendment were consistent with the terms of the original lease.
In connection with this lease,
the landlord is providing a tenant improvement allowance for the costs associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be in accordance with the Company’s
plans and include fit-out of the buildings to construct appropriate laboratory and office space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to
fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company
is the deemed owner of the buildings during the construction period.
As construction progresses, the Company records the project construction
costs incurred as an asset, along with a corresponding facility lease obligation, on the consolidated balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the buildings, the
Company will determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the accounting guidance. Based on the current terms of the lease, the Company expects to continue to be
the deemed owner of the buildings upon completion of the construction period.
The initial term of the lease is for 15 years from substantial
completion of the buildings with options to renew for three terms of five years each at market-based rates. The base rent is subject to increases over the term of the lease. Based on the original and amended leased space, the non-cancelable minimum
annual lease payments for the annual periods beginning upon commencement of the lease are $5.3 million, $8.4 million, $26.6 million, $30.4 million and $30.9 million in the first five years of the lease and $347.1 million in total thereafter, plus
the Company’s share of the facility operating expenses and other costs that are reimbursable to the landlord under the lease.
96
In January 2013, the Company established a letter of credit as security for the lease of $5.8 million upon
signing of the lease, which is supported by restricted cash. In connection with the lease amendment, the Company increased the letter of credit to $9.2 million in October 2013.
Lausanne, Switzerland
In January 2013, the Company entered into a lease agreement for
approximately 22,000 square feet of office space in a building then under construction in Lausanne, Switzerland, which the Company occupied in 2014. The term of the lease is for ten years, with options for extension of the term and an early
termination at the Company’s option after five years. Non-cancelable minimum annual lease payments are expected to be approximately $1.1 million in 2014, 2015, 2016 and 2017, $1.2 million in 2018 and $5.9 million in total thereafter.
Total rent expense for 2013, 2012 and 2011 was $6.1 million, $5.9 million and $2.0 million, respectively. Total future non-cancelable minimum
annual rental payments for the leases described above as well as other Company leases, for the next five years and thereafter is $7.8 million, $12.6 million, $15.0 million, $33.3 million, $37.2 million and $387.3 million, respectively.
Licensed Technology
The Company has
entered into agreements with several universities under the terms of which the Company has received exclusive licenses to technology and intellectual property. The agreements, which are generally cancelable by the Company, provide for the payment of
license fees and/or minimum payments, which are generally creditable against future royalties. Fees paid by the Company amounted to $145,000 in each of 2013, 2012 and 2011, and are expected to amount to $235,000 in each of 2014 and 2015, $55,000 in
2016, $50,000 in each of 2017 and 2018, and $35,000 in 2019. In addition, the agreements provide for payments upon the achievement of certain milestones in product development. The agreements also require the Company to fund certain costs associated
with the filing and prosecution of patent applications.
Other Commitments
The Company has entered into employment agreements with twenty officers of the Company. The agreements for these officers have remaining terms as of December 31, 2013 through the end of 2014,
providing for aggregate base salaries of $6.7 million for 2014.
11. Stockholders’ Equity and Warrants
Preferred Stock
The
Company has authorized 10,000,000 shares of preferred stock which the Board of Directors is authorized to designate and issue in different series. In connection with the Section 382 Rights Plan discussed below, the Company designated 500,000
shares of preferred stock as Series A Junior Participating Preferred Stock (the “Series A Junior Preferred Stock”). The Series A Junior Preferred Stock, when and if issued, has certain rights and privileges including rights to dividends,
voting rights and preferential rights in the event of a liquidation of the Company. Each share of Series A Junior Preferred Stock participates in dividends and voting rights on a 1,000 to 1 basis with each share of common stock.
97
Common Stock and Warrants
On June 20, 2013, following stockholder approval, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, to increase the number of authorized shares of the
Company’s common stock from 240,000,000 to 450,000,000 shares.
On February 25, 2009, the Company sold 14,378,698 shares of its
common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional
10,784,024 shares of the Company’s common stock exercisable at a price of $2.15 per share in cash or pursuant to the net exercise provisions of the warrants. The warrants became exercisable on August 25, 2009 and were scheduled to expire
on February 25, 2012 if not exercised by that date. During the year ended December 31, 2010, 1,220,414 warrants were exercised for proceeds to the Company of approximately $2.6 million. During the year ended December 31, 2011, a total
of 3,757,767 warrants were exercised for proceeds to the Company of approximately $8.1 million. In 2012, the remaining 5,805,843 warrants were exercised for proceeds to the Company of approximately $12.5 million. Prior to exercise, the warrant
liability was recorded at fair value, with the adjustment to carrying value recognized in earnings. Upon exercise, the sum of the fair value of the exercised warrants and the proceeds received were credited to additional paid-in-capital and totaled
$87.0 million in 2012. Upon the exercise of these remaining warrants, the balance of the warrant liability was credited to stockholders’ equity and the liability was eliminated.
On December 20, 2011, the Company sold 24,725,000 shares of its common stock in an underwritten public offering at a purchase price of $10.42 per share. Net proceeds of this offering, after
underwriting discounts and commissions and expenses, were approximately $243.1 million.
On January 29, 2013, the Company sold 16,489,893
shares of its common stock in an underwritten public offering at a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $310.0 million.
On December 14, 2011, the Company filed a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock,
preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This registration
statement was effective upon filing and will remain in effect for up to three years from filing.
Section 382 Rights Plan
On November 1, 2013, the Company announced that the Company’s Board of Directors adopted a shareholder rights plan in the form
of a Section 382 Rights Plan designed to preserve the Company’s tax assets. As a part of the plan, on October 31, 2013, the Company’s Board of Directors declared a dividend of one Series A Junior Preferred Stock fractional share
purchase right for each share of the Company’s common stock outstanding as of November 11, 2013. Effective on November 1, 2013, if any group or person acquires 4.99% or more of the Company’s outstanding shares of common stock, or
if a group or person that already owns 4.99% or more of the Company’s common stock acquires additional shares representing 0.5% or more of the Company’s common stock, then, subject to certain exceptions, there would be a triggering event
under the plan. The rights would then separate from the Company’s common stock and would be adjusted to become exercisable to purchase 1/1000 share of the Company’s Series A Junior Preferred Stock having a market value equal to twice the
exercise price of $20.00, resulting in significant dilution in the ownership interest of the acquiring person or group. The Company’s Board of Directors has the discretion to exempt any acquisition of the Company’s common stock from the
provisions of the plan and has the ability to terminate the plan prior to a triggering event.
98
12. Fair Value of Financial Instruments
The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that
would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements may be classified based on the amount of subjectivity associated with the
inputs to fair valuation of these assets and liabilities using the following three levels:
Level 1—Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated
inputs).
Level 3—Unobservable inputs that reflect the Company’s estimates of the assumptions that market
participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
As of December 31, 2013, the Company did not hold any assets recorded at fair value. The following table presents information about the Company’s marketable securities as of December 31,
2012 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
In thousands
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Marketable securities
|
|
$
|
45,035
|
|
|
$
|
—
|
|
|
$
|
45,035
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, the Company’s marketable securities were carried at fair value. The marketable securities
consisted of U.S. government or government backed securities with remaining maturities of less than one year. Marketable securities are classified as Level 2 in the fair value hierarchy as their prices are based on observable inputs but not for
identical securities. Therefore, their fair value is based on observable inputs other than quoted prices included within Level 1.
For 2012
and 2011, the fair value of warrants was determined using the Black-Scholes option valuation model. The increase in the fair value of the warrants was recognized in other income (expense) in the consolidated statements of operations. The changes in
the fair value of the warrant liability for the years ended December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2012
|
|
|
2011
|
|
|
Balance, beginning of the year:
|
|
$
|
58,639
|
|
|
$
|
28,815
|
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
Revaluation of warrants
|
|
|
15,924
|
|
|
|
46,715
|
|
|
Exercise of warrants
|
|
|
(74,563
|
)
|
|
|
(16,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
—
|
|
|
$
|
58,639
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013 and 2012, the carrying amounts of cash equivalents, accounts payable and accrued liabilities
approximate fair value because of their short-term nature. The carrying amount of the Company’s bank term loan approximates fair value due to its variable interest rate and other terms. All
99
such measurements are Level 2 measurements in the fair value hierarchy. The Company’s obligation under its executive compensation plan is based in part on the current fair market value of
specified mutual funds, which is therefore stated at its estimated fair value. The carrying amount of the Company’s leased buildings under construction in Cambridge, Massachusetts and the related long term facility lease obligation reflect
replacement cost, which approximates fair value. This measurement is a Level 3 fair value measurement.
13. Stock Compensation
ARIAD Stock Option and Stock Plans
The Company’s 2001 and 2006 stock option and stock plans (the “Plans”) provide for the awarding of nonqualified and incentive stock options, stock grants, restricted stock units,
performance share units and other equity-based awards to officers, directors, employees and consultants of the Company. Stock options become exercisable as specified in the related option certificate, typically over a three or four-year period, and
expire ten years from the date of grant. Stock grants, restricted stock units and performance share units provide the recipient with ownership of common stock subject to terms of vesting, any rights the Company may have to repurchase the shares
granted or other restrictions. The 2001 Plan has no shares remaining available for grant, although existing stock options granted under this Plan remain outstanding. As of December 31, 2013, there were 8,079,200 shares available for awards
under the 2006 Plan. The Company generally issues new shares upon the exercise or vesting of stock plan awards.
Employee Stock Purchase
Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan (“ESPP”) and reserved 500,000 shares of common stock for
issuance under this plan. In June 2008, the ESPP was amended to reserve an additional 500,000 shares of common stock for issuance, and in June 2009, the plan was further amended to reserve an additional 750,000 shares of common stock for issuance.
Under this plan, substantially all of the Company’s employees may, through payroll withholdings, purchase shares of the Company’s common stock at a price of 85 percent of the lesser of the fair market value at the beginning or end of each
three-month withholding period. In 2013, 2012 and 2011, 101,300, 66,531 and 87,331 shares of common stock were issued under the plan, respectively. Compensation cost is equal to the fair value of the discount on the date of grant and is recognized
as compensation in the period of purchase.
Stock-Based Compensation
The Company’s statements of operations included total compensation cost from awards under the Plans and purchases under the ESPP for the years ended December 31, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Compensation cost from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
16,364
|
|
|
$
|
10,626
|
|
|
$
|
2,893
|
|
|
Stock and stock units
|
|
|
18,458
|
|
|
|
9,467
|
|
|
|
4,601
|
|
|
Purchases of common stock at a discount
|
|
|
599
|
|
|
|
248
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,421
|
|
|
$
|
20,341
|
|
|
$
|
7,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
15,150
|
|
|
$
|
9,846
|
|
|
$
|
3,782
|
|
|
Selling, general and administrative expense
|
|
|
20,271
|
|
|
|
10,495
|
|
|
|
3,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,421
|
|
|
$
|
20,341
|
|
|
$
|
7,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over three or four years
and have contractual terms of ten years. Stock options are valued using the Black-Scholes option valuation model and compensation cost is recognized based on such fair value over the period of vesting on a straight-line basis.
100
The following table summarizes information about stock options as of and for the years ended
December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Weighted average fair value of options granted, per share
|
|
$
|
8.38
|
|
|
$
|
13.04
|
|
|
$
|
5.80
|
|
|
Total cash received from exercises of stock options
|
|
|
4,847
|
|
|
|
9,677
|
|
|
|
4,648
|
|
|
Total intrinsic value of stock options exercised
|
|
|
13,829
|
|
|
|
27,572
|
|
|
|
5,169
|
|
The weighted average fair value of options granted in the years ended December 31, 2013, 2012 and 2011, reflect the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Expected life of options granted
(in years)
|
|
|
6.9
|
|
|
|
7.1
|
|
|
|
7.5
|
|
|
Expected volatility
|
|
|
76
|
%
|
|
|
76
|
%
|
|
|
75
|
%
|
|
Risk-free rate
|
|
|
1.74
|
%
|
|
|
1.32
|
%
|
|
|
2.53
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The expected life assumption is based on an analysis of historical behavior of participants related to options awarded
over time. The expected volatility assumption is based on an average of the historical volatility and the implied volatility of the Company’s common stock, derived from an analysis of historical traded and quoted options on the Company’s
common stock. The risk-free rate is based on the forward U.S. Treasury yield curve. The expected dividends reflect the Company’s current and expected future policy for dividends on its common stock.
Stock option activity under the Company’s stock plans for the year ended December 31, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
Options outstanding, January 1, 2013
|
|
|
8,228,334
|
|
|
$
|
10.20
|
|
|
Granted
|
|
|
4,732,275
|
|
|
$
|
13.10
|
|
|
Forfeited
|
|
|
(1,597,853
|
)
|
|
$
|
17.92
|
|
|
Exercised
|
|
|
(983,088
|
)
|
|
$
|
4.93
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2013
|
|
|
10,379,668
|
|
|
$
|
10.83
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Options
Vested and
Expected
To
Vest
|
|
|
Number of options
|
|
|
10,379,668
|
|
|
|
4,489,008
|
|
|
|
10,188,693
|
|
|
Weighted average exercise price per share
|
|
$
|
10.83
|
|
|
$
|
7.86
|
|
|
$
|
10.73
|
|
|
Aggregate intrinsic value
(in 000’s)
|
|
$
|
11,240
|
|
|
$
|
6,886
|
|
|
$
|
11,217
|
|
|
Weighted average remaining contractual term
(years
)
|
|
|
6.98
|
|
|
|
4.18
|
|
|
|
6.94
|
|
Options expected to vest consist of options scheduled to vest in the future less expected forfeitures.
101
At December 31, 2013, total unrecognized compensation cost related to non-vested stock options
outstanding amounted to $39.0 million. That cost is expected to be recognized over a weighted-average period of 2.6 years.
Stock and Stock
Unit Grants
Stock and stock unit grants carry restrictions as to resale for periods of time or vesting provisions over time are based on
the achievement of performance measures as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite
service period, vesting period or period during which restrictions remain on the common stock or stock units granted.
Stock and stock unit
activity under the Company’s stock plans for the year ended December 31, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
|
Outstanding, January 1, 2013
|
|
|
1,903,445
|
|
|
$
|
9.55
|
|
|
Granted / awarded
|
|
|
1,798,448
|
|
|
$
|
15.24
|
|
|
Forfeited
|
|
|
(209,986
|
)
|
|
$
|
16.05
|
|
|
Vested or restrictions lapsed
|
|
|
(1,444,307
|
)
|
|
$
|
9.12
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
2,047,600
|
|
|
$
|
14.18
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of stock and stock unit awards that vested in 2013, 2012 and 2011 was $25.5 million, $27.8 million
and $8.0 million, respectively. The total unrecognized compensation expense for restricted shares or units that have been granted or are probable to be awarded was $18.6 million at December 31, 2013 and will be recognized over 1.9 years on a
weighted average basis.
Included in stock and stock units outstanding in the above table are (i) 173,500 performance share units,
awarded in April 2011, that vested in December 2013, one year after the FDA approval of Iclusig in December 2012, and (ii) performance share units awarded in March 2012 of which 274,400 vested upon the achievement of the performance condition,
marketing authorization of Iclusig by the European Commission in July 2013, and 258,400 that will vest annually, in equal increments, over the next two years on the anniversary date of the achievement of the performance condition.
Stock and stock units outstanding above also include 333,000 performance share units awarded in 2013. The number of shares that may vest, if any, related
to the 2013 performance share unit awards is dependent on the achievement, and timing of the achievement, of the performance criteria defined for the award. The compensation cost for such performance-based stock awards will be based on the awards
that ultimately vest and the grant date fair value of those awards. The Company begins to recognize compensation expense related to performance share units when achievement of the performance condition is probable. In 2013, the Company concluded
that it was probable that the performance condition related to the 2013 performance share unit awards would be met. The performance condition is based upon continued success in specific research and development initiatives. The total compensation
expense for these performance share units may be up to 60% higher if the performance condition for this award is met prior to December 31, 2014.
14. Net Loss Per Share
Basic net loss per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net loss
per share amounts is computed based on the weighted-average number of common shares outstanding plus the dilutive effect, if any, of potential common shares. The computation of potential common shares has been performed using the treasury stock
method.
102
The calculation of net loss and the number of shares used to compute basic and diluted earnings per share
for the years ended December 31, 2013, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Net loss
|
|
$
|
(274,158
|
)
|
|
$
|
(220,872
|
)
|
|
$
|
(123,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
183,575
|
|
|
|
164,964
|
|
|
|
132,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(1.49
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2013, 2012 and 2011, the following potentially dilutive securities were not
included in the computation of net loss per share because the effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Stock options
|
|
|
10,380
|
|
|
|
8,228
|
|
|
|
7,381
|
|
|
Restricted stock and restricted stock units
|
|
|
2,048
|
|
|
|
1,903
|
|
|
|
2,785
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
5,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,428
|
|
|
|
10,131
|
|
|
|
15,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for the year-ended December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Net Unrealized
Gains
(reclassification
adjustment) on
Marketable
Securities
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Defined
Benefit
Pension
Obligation
|
|
|
Total
|
|
|
Balance, January 1, 2013
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
Reclassification adjustment
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
(40
|
)
|
|
|
(1,495
|
)
|
|
|
(1,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
$
|
—
|
|
|
$
|
(40
|
)
|
|
$
|
(1,495
|
)
|
|
$
|
(1,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Income Taxes
The Company is subject to U.S. federal and various state corporate income taxes as well as taxes in foreign jurisdictions where
subsidiaries have been established. Loss before provision for income taxes and the provision for income taxes consist of the following for the years ended December 31, 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Loss before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(192,998
|
)
|
|
$
|
(182,974
|
)
|
|
$
|
(123,603
|
)
|
|
Foreign
|
|
|
(80,721
|
)
|
|
|
(37,898
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(273,719
|
)
|
|
$
|
(220,872
|
)
|
|
$
|
(123,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
216
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign
|
|
|
223
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
The Company did not incur a deferred income tax provision or benefit in 2013, 2012 or 2011.
A reconciliation of the federal statutory corporate income tax rate to the effective income tax rate for the years ended December 31, 2013, 2012 and
2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
Statutory federal income tax rate
|
|
|
(35
|
)%
|
|
|
(35
|
)%
|
|
|
(35
|
)%
|
|
State income tax rate, net of federal benefit
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
Revaluation of warrant liability
|
|
|
—
|
|
|
|
3
|
|
|
|
13
|
|
|
Other permanent differences
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Foreign rate differential
|
|
|
9
|
|
|
|
6
|
|
|
|
—
|
|
|
Change in valuation allowance
|
|
|
28
|
|
|
|
31
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred income taxes were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
$
|
388
|
|
|
$
|
398
|
|
|
Unrealized currency gain
|
|
|
10,892
|
|
|
|
7,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
11,280
|
|
|
|
7,728
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
166,951
|
|
|
|
96,997
|
|
|
Federal and state tax credit carryovers
|
|
|
28,645
|
|
|
|
19,654
|
|
|
Depreciation
|
|
|
3,607
|
|
|
|
4,785
|
|
|
Stock-based compensation
|
|
|
7,780
|
|
|
|
5,491
|
|
|
Other
|
|
|
7,977
|
|
|
|
3,703
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
214,960
|
|
|
|
130,630
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
203,680
|
|
|
|
122,902
|
|
|
Valuation allowance
|
|
|
(203,680
|
)
|
|
|
(122,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
104
At December 31, 2013, the Company had available estimated net operating loss carryforwards and research
and development credit carryforwards for federal, foreign and state tax reporting purposes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Expiring if not
utilized
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Net operating loss carryforwards:
|
|
|
|
|
|
Federal
|
|
$
|
498,728
|
|
|
|
2024 through 2033
|
|
|
State
|
|
$
|
90,329
|
|
|
|
2033
|
|
|
Foreign
|
|
$
|
122,031
|
|
|
|
2021
|
|
|
Research and development credit carryforwards:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
25,882
|
|
|
|
2018 through 2033
|
|
|
State
|
|
$
|
4,388
|
|
|
|
2005 through 2028
|
|
Included in the federal net operating loss carryforwards above is approximately $50.3 million related to stock-based
compensation tax deductions in excess of book compensation expense which will be credited to additional paid-in-capital when such reductions reduce taxes payable. Although these net operating losses are included in the carryforwards above, they are
not reflected in the table of deferred tax assets as the excess tax benefits are not yet realized.
During 2012, the Company transferred
certain intellectual property rights related to Iclusig to its wholly-owned subsidiary in Switzerland. Although the transfer of intellectual property rights between consolidated entities did not result in any gain in the consolidated results of
operations, the Company generated a taxable gain in the U.S. that is substantially offset by existing tax loss and credit carryforwards. Any taxes incurred related to the intercompany transactions are treated as a prepaid tax in the Company’s
consolidated balance sheet and amortized to income tax expense over the life of the intellectual property. The amount of tax amortized to the provision for income taxes for the year ended December 31, 2013 is approximately $150,000.
Since the Company has not yet achieved sustained profitable operations, management believes its deferred tax assets do not satisfy the more likely than
not realization criteria and has recorded a valuation allowance for all deferred tax assets as of December 31, 2013 and 2012. The valuation allowance increased by $80.8 million in 2013, decreased by $70.5 million in 2012, and increased by $28.5
million in 2011.
The Company does not recognize a tax benefit unless it is more likely than not that the tax position will be sustained upon
examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized for these positions is measured at the largest amount of benefit that is
greater than 50 percent likelihood of being realized upon ultimate settlement. Deferred tax assets that do not meet these recognition criteria are not recorded and the Company recognizes a liability for uncertain tax positions that may result in tax
payments. The Company recognizes interest and penalties as a component of the provision for incomes taxes. In 2013, the Company recorded approximately $65,000 of interest expense as a component of the provision for income taxes.
105
In 2013, the Company’s uncertain tax positions increased to approximately $24.7 million, related to
certain uncertain tax benefits that arose in 2013 and 2012. Of this amount, the Company has reduced its deferred tax assets and associated valuation allowance by $19.2 million and recorded a long-term liability of $2.0 million. If such unrecognized
tax benefits were realized and not subject to valuation allowances, the Company would recognize a tax benefit of $21.2 million. No uncertain tax positions are expected to be resolved within the next twelve months. A reconciliation of the reserve for
uncertain tax benefits (including state tax matters without federal benefits) is as follows:
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
2012
|
|
|
Uncertain tax positions, beginning of the year:
|
|
$
|
24,404
|
|
|
$
|
—
|
|
|
Gross increases – tax positions in current period
|
|
|
249
|
|
|
|
24,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions, end of year
|
|
$
|
24,653
|
|
|
$
|
24,404
|
|
|
|
|
|
|
|
|
|
|
|
Due to the Company’s historical net operating loss position, the Company’s U.S. federal and Massachusetts tax
returns remain open to examination for three years after the Company utilizes that year’s net operating loss carryforward. The Company’s earliest year which generated a net operating loss included in the Company’s current net
operating loss carryforward is 2004 for U.S. federal tax purposes. The Company’s Massachusetts state tax returns from 2009 to 2012 remain open to examination. All tax years for foreign subsidiaries are also open to audit in their respective
jurisdictions.
17. Restructuring Actions
In the fourth quarter of fiscal 2013, the Company incurred expenses of $4.8 million associated with employee workforce reductions of
approximately 155 positions, designed to reduce the Company’s operating expenses and extend its cash runway. The Company recorded $2.2 million of the employee separation costs in research and development expense and $2.6 million in selling,
general and administrative expense. A rollforward of the restructuring liability for 2013 is as follows:
|
|
|
|
|
|
|
In thousands
|
|
2013
|
|
|
Balance, January 1, 2013
|
|
$
|
—
|
|
|
Charges
|
|
|
4,751
|
|
|
Amounts paid
|
|
|
(2,531
|
)
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
$
|
2,220
|
|
|
|
|
|
|
|
The $2.2 million restructuring liability at December 31, 2013 is expected to be paid through the third quarter of
fiscal 2014. On the accompanying consolidated balance sheet at December 31, 2013, the restructuring liability balance of $2.2 million was classified as a component of accrued compensation and benefits.
18. Defined Benefit Pension Obligation
On March 1, 2013, the Company established a defined benefit pension plan for employees in its Switzerland subsidiary. The plan
provides benefits to employees upon retirement, death or disability. The Company uses December 31 as the year-end measurement date for this plan.
106
Summarized information regarding changes in the plan obligations and plan assets, the funded status and the
amounts recorded as of December 31, 2013 is as follows:
|
|
|
|
|
|
|
In thousands
|
|
|
Changes in benefit obligation
|
|
|
|
|
|
Benefit obligation at plan establishment
|
|
$
|
5,621
|
|
|
Service cost
|
|
|
994
|
|
|
Interest cost
|
|
|
105
|
|
|
Plan participants’ contributions
|
|
|
283
|
|
|
Actuarial gain
|
|
|
(192
|
)
|
|
Benefits received
|
|
|
1,065
|
|
|
|
|
|
|
|
|
Benefit obligation as of December 31, 2013
|
|
|
7,876
|
|
|
|
|
|
|
|
|
Changes in plan assets
|
|
|
|
|
|
Fair value of plan assets at plan establishment
|
|
|
3,853
|
|
|
Actual return on plan assets
|
|
|
77
|
|
|
Employer contributions
|
|
|
720
|
|
|
Plan participants’ contributions
|
|
|
283
|
|
|
Benefits received
|
|
|
1,065
|
|
|
|
|
|
|
|
|
Fair value of plan assets as of December 31, 2013
|
|
|
5,998
|
|
|
|
|
|
|
|
|
Unfunded liability as of December 31, 2013
|
|
$
|
1,878
|
|
|
|
|
|
|
|
This unfunded liability is recognized in other long-term liabilities in the accompanying consolidated balance sheet as of
December 31, 2013.
The projected benefit obligation, the accumulated benefit obligation and the fair value of the plan assets as of
December 31, 2013 were as follows:
|
|
|
|
|
|
|
In thousands
|
|
|
Projected benefit obligation
|
|
$
|
7,876
|
|
|
Accumulated benefit obligation
|
|
$
|
7,947
|
|
|
Fair value of plan assets
|
|
$
|
5,998
|
|
The net periodic benefit cost for the defined benefit pension plan for the year ended December 31, 2013 was as
follows:
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
Service cost
|
|
$
|
994
|
|
|
Interest cost
|
|
|
105
|
|
|
Expected return on plan assets
|
|
|
(85
|
)
|
|
Amortization of prior service cost
|
|
|
134
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,148
|
|
|
|
|
|
|
|
107
Other changes in the plan assets and the benefit obligation that are recognized in accumulated other
comprehensive income (loss) and other comprehensive loss for the year ended December 31, 2013 were as follows:
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
Establishment of plan
|
|
$
|
(1,768
|
)
|
|
Net gain
|
|
|
139
|
|
|
Amortization of prior service cost
|
|
|
134
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,495
|
)
|
|
|
|
|
|
|
The prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive
income (loss) into net periodic benefit cost over the next fiscal year is $161,000.
The assumptions used to determine the benefit obligation
at December 31, 2013 were as follows:
|
|
|
|
|
|
|
Discount rate
|
|
|
2.25
|
%
|
|
Rate of compensation increase
|
|
|
1.50
|
%
|
The assumptions used to determine net periodic benefit costs for 2013 were as follows:
|
|
|
|
|
|
|
Discount rate
|
|
|
2.00
|
%
|
|
Expected long-term return on plan assets
|
|
|
2.00
|
%
|
|
Rate of compensation increase
|
|
|
1.50
|
%
|
The assets of the plan are held in a collective investment account. All plan investments are classified as level 2 within
the fair value hierarchy.
The Company expects to contribute $942,000 to its defined benefit pension plan in 2014.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
2014
|
|
$
|
370
|
|
|
2015
|
|
|
423
|
|
|
2016
|
|
|
456
|
|
|
2017
|
|
|
486
|
|
|
2018
|
|
|
509
|
|
|
2019 - 2023
|
|
|
2,631
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,875
|
|
|
|
|
|
|
|
19. Litigation
On October 10, 2013, October 17, 2013, December 3, 2013 and December 6, 2013, purported shareholder class
actions, styled
Jimmy Wang v. ARIAD Pharmaceuticals, Inc., et al.
,
James L. Burch v. ARIAD Pharmaceuticals, Inc., et al.
,
Greater Pennsylvania Carpenters’ Pension Fund v. ARIAD Pharmaceuticals, Inc., et al
, and
Nabil
Elmachtoub v. ARIAD Pharmaceuticals, Inc., et al
, respectively, were filed in the United States District Court for the District of Massachusetts (the “District Court”), naming the Company and certain of
108
its officers as defendants. The lawsuits allege that the Company made material misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in its public
disclosures during the period from December 12, 2011 through October 8, 2013 or October 17, 2013, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On
January 9, 2014, the District Court consolidated the actions and appointed lead plaintiffs. On February 18, 2014, the lead plaintiffs filed an amended complaint as contemplated by the order of the District Court. The amended complaint
extends the class period for the Securities Exchange Act claims through October 30, 2013. In addition, plaintiffs allege that certain of the Company’s officers, present and former directors and certain underwriters made material
misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in connection with the Company’s January 24, 2013 follow-on public offering of common stock in violation of Sections 11 and 15 of the
Securities Act of 1933, as amended. The plaintiffs seek unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees.
On November 6, 2013, a purported derivative lawsuit, styled
Yu Liang v. ARIAD Pharmaceuticals, Inc., et al.,
was filed in the United States District Court for the District of Massachusetts
(the “District Court”), on behalf of the Company naming its directors and certain of its officers as defendants. On December 6, 2013, an additional purported derivative lawsuit, styled
Arkady Livitz v. Harvey J. Berger, et al
,
was filed in the District Court. The lawsuits allege that the Company’s directors and certain of its officers breached their fiduciary duties related to the clinical development and commercialization of Iclusig and by making misrepresentations
regarding the safety and commercial marketability of Iclusig. The lawsuits also assert claims for unjust enrichment and corporate waste, and for misappropriation of information and insider trading by the officers named as defendants. On
January 23, 2014, the District Court consolidated the actions. On February 3, 2014, plaintiffs designated the
Yu Liang
complaint as the operative complaint as contemplated by the order of the District Court. The plaintiffs seek
unspecified monetary damages, changes in the Company’s corporate governance policies and internal procedures, restitution and disgorgement from the individually named defendants, and an award of costs and expenses, including attorney fees.
Additional complaints may be filed against the Company and its directors and officers related to the Company’s disclosures and
announcements concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States.
The Company believes that these actions are without merit. At this time, no assessment can be made as to the likely outcome of these lawsuits or whether
the outcome will be material to the Company.
From time to time, the Company may be subject to various claims and legal proceedings. If the
potential loss from any claim, asserted or unasserted, or legal proceedings is considered probable and the amount is reasonably estimated, the Company will accrue a liability for the estimated loss.
|
ITEM 9:
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
|
ITEM 9A:
|
CONTROLS AND PROCEDURES
|
(a)
Evaluation of Disclosure Controls and Procedures.
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15
and 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective at the reasonable
assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure, particularly during the period in which this Annual Report on Form 10-K was being prepared.
109
(b)
Changes in Internal Controls.
There were no changes in our internal control over financial
reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation
and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework
(
1992
). Based on our assessment we believe that, as of December 31, 2013, the Company’s internal
control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, the independent registered public
accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2013, which is included below.
110
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.
Cambridge,
Massachusetts
We have audited the internal control over financial reporting of ARIAD Pharmaceuticals, Inc. and subsidiaries (the
“Company”) as of December 31, 2013, based on criteria established in
Internal Control—Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based
on the criteria established in
Internal Control—Integrated Framework
(
1992
) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended
December 31, 2013 of the Company and our report dated March 3, 2014 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Boston,
Massachusetts
March 3, 2014
111
|
ITEM 9B:
|
OTHER INFORMATION
|
On January 21,
2014, we entered into an exclusive Master Services Agreement and related statements of work with Biologics, Inc., a specialty pharmacy based in Cary, North Carolina, to provide for the distribution of Iclusig in the United States to patients,
physicians, health care providers and payers, including management of all data reporting, patient access and support services and our copay program. The term of the agreement is for one year with two automatically renewing one year extensions unless
terminated earlier by either party. The agreement may be terminated by either party on 30 days’ notice, upon the bankruptcy or insolvency of either party, or upon a party’s breach that is not cured within specified periods. A copy of the
Master Services Agreement and related statements of work are filed with this Annual Report as Exhibit 10.12 and are incorporated herein by reference.
112