UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended June 30, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 000-49839
Idenix Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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45-0478605
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer Identification No.)
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60 Hampshire Street
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02139
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Cambridge, MA
(Address of Principal Executive Offices)
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(Zip Code)
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Registrants telephone number, including area code:
(617) 995-9800
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act. Yes
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No
þ
As of July 31, 2008, the number of shares of the registrants common stock, par value
$.001 per share, outstanding was 56,421,677 shares.
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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June 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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54,062
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$
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48,260
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Restricted cash
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411
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411
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Marketable securities
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16,270
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39,862
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Receivables from related party
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1,727
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11,196
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Prepaid expenses and other current assets
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2,810
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3,990
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Total current assets
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75,280
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103,719
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Intangible asset, net
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12,968
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13,548
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Property and equipment, net
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14,873
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15,460
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Restricted cash, non-current
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750
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750
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Marketable securities, non-current
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10,308
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23,882
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Other assets
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3,102
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3,181
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Total assets
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$
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117,281
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$
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160,540
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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2,037
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$
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5,372
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Accrued expenses
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13,916
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16,437
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Deferred revenue, related party
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7,766
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8,372
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Other current liabilities
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645
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553
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Total current liabilities
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24,364
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30,734
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Long-term obligations
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18,237
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19,107
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Deferred revenue, related party, net of current portion
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34,948
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41,861
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Total liabilities
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77,549
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91,702
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Commitments and contingencies (Note 12)
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Stockholders equity:
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Common stock, $0.001 par value; 125,000,000 shares authorized at June 30, 2008
and December 31, 2007, respectively; 56,398,201 and 56,189,467 shares issued and
outstanding at June 30, 2008 and December 31, 2007, respectively
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56
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56
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Additional paid-in capital
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516,570
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506,800
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Accumulated other comprehensive income
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1,228
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738
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Accumulated deficit
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(478,122
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(438,756
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Total stockholders equity
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39,732
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68,838
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Total liabilities and stockholders equity
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$
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117,281
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$
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160,540
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Three Months Ended June 30,
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2008
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2007
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Revenues:
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Collaboration revenue related party
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$
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1,433
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$
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18,674
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Other revenue
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159
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1,058
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Total revenues
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1,592
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19,732
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Operating expenses:
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Cost of sales
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415
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167
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Research and development
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14,136
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24,570
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Selling, general and administrative
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6,651
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19,837
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Restructuring charges
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37
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Total operating expenses
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21,239
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44,574
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Loss from operations
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(19,647
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(24,842
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Investment and other income, net
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485
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1,802
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Loss before income taxes
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(19,162
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(23,040
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Income tax benefit
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256
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138
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Net loss
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$
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(18,906
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$
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(22,902
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Basic and diluted net loss per common share
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$
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(0.34
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$
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(0.41
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Shares used in computing basic and diluted net loss per common share
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56,359
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56,170
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Six Months Ended June 30,
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2008
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2007
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Revenues:
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Collaboration revenue related party
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$
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3,478
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$
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43,025
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Other revenue
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157
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1,513
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Total revenues
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3,635
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44,538
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Operating expenses:
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Cost of sales
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810
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237
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Research and development
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29,004
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47,124
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Selling, general and administrative
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14,972
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35,677
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Restructuring charges
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297
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Total operating expenses
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45,083
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83,038
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Loss from operations
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(41,448
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(38,500
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Investment and other income, net
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1,425
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3,780
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Loss before income taxes
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(40,023
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(34,720
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Income tax benefit
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657
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249
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Net loss
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$
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(39,366
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$
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(34,471
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Basic and diluted net loss per common share
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$
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(0.70
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$
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(0.61
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Shares used in computing basic and diluted net loss per common share
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56,316
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56,148
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Six Months Ended June 30,
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2008
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2007
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Cash flows from operating activities:
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Net loss
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$
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(39,366
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$
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(34,471
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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2,938
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2,188
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Stock-based compensation expense
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2,882
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4,424
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Revenue adjustment for contingently issuable shares
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3,142
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Other
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6
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(185
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Changes in operating assets and liabilities:
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Receivables from related party
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9,469
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(608
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)
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Prepaid expenses and other current assets
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1,333
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1,725
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Other assets
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700
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47
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Accounts payable
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(3,354
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(1,471
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)
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Accrued expenses
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(2,638
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)
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7,659
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Deferred revenue, related party
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(4,197
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)
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763
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Other liabilities
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(898
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)
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(919
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Net cash used in operating activities
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(29,983
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)
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(20,848
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)
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Cash flows from investing activities:
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Purchase of property and equipment
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(1,479
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(5,406
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)
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Purchases of marketable securities
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(15,145
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)
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(54,289
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)
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Sales and maturities of marketable securities
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51,877
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83,915
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Net cash provided by investing activities
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35,253
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24,220
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Cash flows from financing activities:
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Proceeds from exercise of common stock options
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423
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195
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Net cash provided by financing activities
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423
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195
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Effect of changes in exchange rates on cash and cash equivalents
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109
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12
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Net increase in cash and cash equivalents
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5,802
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3,579
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Cash and cash equivalents at beginning of period
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48,260
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55,892
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Cash and cash equivalents at end of period
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$
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54,062
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$
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59,471
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Supplemental disclosure of noncash investing and financing activities:
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Change in the value of shares of common stock contingently issuable or issued
to related party
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$
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6,465
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(34
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)
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Idenix Pharmaceuticals, Inc. (together with its consolidated subsidiaries, the Company)
is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment
of human viral and other infectious diseases with operations in the United States and in Europe.
The Companys current focus is on diseases caused by hepatitis C virus (HCV) and human
immunodeficiency virus (HIV). To date, the Company has successfully developed and received
regulatory approval for telbivudine (Tyzeka
®
/Sebivo
®
) for the treatment of chronic hepatitis B
virus (HBV) and has discovered product candidates for the treatment of HCV and HIV. The Company
currently has a non-nucleoside reverse transcriptase inhibitor (NNRTI) product candidate for the
treatment of HIV-1 in phase I/II clinical testing and a nucleoside/nucleotide prodrug product
candidate for the treatment of HCV in phase I clinical testing. The Company also has HCV discovery
programs focusing on protease inhibitors and non-nucleoside polymerase inhibitors. Three clinical
candidates have been selected from these two discovery programs and are currently undergoing
IND-enabling preclinical testing.
Effective May 8, 2003, the Company entered into a development, license and
commercialization agreement (Development and Commercialization Agreement) with Novartis Pharma
AG, or Novartis, a subsidiary of Novartis AG, under which the Company collaborates with Novartis to
develop, manufacture and commercialize product candidates which Novartis licenses from the Company.
Novartis also acquired a majority interest in the Companys outstanding stock on May 8, 2003 and
the operations of the Company have been consolidated in the financial statements of Novartis since
that date. Since May 2003, Novartis has had the ability to exercise control over the Companys
strategic direction, research and development activities and other material business decisions.
Additionally, as long as Novartis retains its majority position in the Company, Novartis, among
other things, retains the right to license any product candidate developed by the Company (Note 5).
In July 2007, the Company announced that the U.S. Food and Drug Administration (FDA) had
placed on clinical hold in the United States the Companys development program of valopicitabine
(NM283) for the treatment of HCV based on the overall risk/benefit profile observed in clinical
testing. The Company subsequently discontinued the development of valopicitabine.
In September 2007, the Company and Novartis amended the development, license and
commercialization agreement, referred to as the 2007 Amendment. Reference to the Development and
Commercialization Agreement includes the 2003 original agreement, 2007 Amendment and all prior
amendments. Pursuant to the 2007 Amendment, the Company transferred to Novartis its development,
commercialization and manufacturing rights and obligations pertaining
to telbivudine (Tyzeka
®
/Sebivo
®
) on a worldwide basis. Effective October 1, 2007, the Company began
receiving royalty payments equal to a percentage of net sales of Tyzeka
®
/Sebivo
®
, with such percentage increasing according to specified tiers of net sales. The
royalty percentage varies based upon the territory and the aggregate dollar amount of net sales. In
conjunction with the 2007 Amendment, the Company announced a restructuring of its operations in
which the Company reduced its workforce by approximately 100 positions, the majority of which had
supported the development and commercialization of Tyzeka
®
/Sebivo
®
in the
United States and Europe (Note 10). The restructuring was a strategic decision on behalf of the
Company to focus its resources on its HCV and HIV discovery and development programs.
The Company is subject to risks common to companies in the biopharmaceutical industry
including, but not limited to, the successful development of products, clinical trial uncertainty,
regulatory approval, fluctuations in operating results and financial risks, potential need for
additional funding, protection of proprietary technology and patent risks, compliance with
government regulations, dependence on key personnel and collaborative partners, competition,
technological and medical risks and management of growth. Additionally, the Companys drug
development programs and the potential commercialization of its product candidates will require
substantial cash to fund expenses that it will incur in connection with preclinical studies and
clinical trials, regulatory review and future manufacturing and sales and marketing efforts. The
Company believes that its current cash and cash equivalents and marketable securities together with
anticipated royalty payments associated with product sales of Tyzeka
®
/Sebivo
®
will be sufficient to satisfy its cash needs through late 2009. However, the Company may
need or choose to seek additional funding within this period of time.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements reflect the operations of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying condensed consolidated financial statements are unaudited and have been
prepared by the Company in accordance with accounting principles generally accepted in the United
States of America for interim reporting. Accordingly, these interim financial statements do not
include all the information and footnotes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the audited financial
statements for the year ended December 31, 2007, which are included in the Companys Annual Report
on Form 10-K filed with the Securities and Exchange Commission
7
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
(SEC) on March 14, 2008. The
interim financial statements are unaudited, but in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair statement of the financial
position and results of operations for the interim periods presented. The year-end consolidated
balance sheet data presented for comparative purposes was derived from audited financial
statements, but does not include all disclosures required by accounting principles generally
accepted in the U.S.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for any future period or the fiscal year ending December 31,
2008.
Revenue Recognition
The Company records revenue provided that there is persuasive evidence that an
arrangement exists, delivery has occurred or services have been rendered, the price is fixed or
determinable and collectability is reasonably assured.
Collaboration revenue consists of nonrefundable license fees, milestones, collaborative
research and development funding and royalties received from the Companys collaborative partners.
Where the Company has continuing performance obligations under the terms of a
collaborative arrangement, nonrefundable license fees are recognized as revenue over the expected
development period as the Company completes its performance obligations. When the Companys level
of effort is relatively constant over the performance period or no other performance pattern is
evident, the revenue is recognized on a straight-line basis. The determination of the performance
period involves judgment on the part of management. Payments received from collaborative partners
for research and development efforts by the Company are recognized as revenue over the contract
term as the related costs are incurred, net of any amounts due to the collaborative partner for
costs incurred during the period for shared development costs. Revenues from milestones related to
an arrangement under which the Company has continuing performance obligations, if deemed
substantive, are recognized as revenue upon achievement of the milestone. Milestones are considered
substantive if all of the following conditions are met: the milestone is nonrefundable; achievement
of the milestone was not reasonably assured at the inception of the arrangement; substantive effort
is involved to achieve the milestone; and the amount of the milestone appears reasonable in
relation to the effort expended. If any of these conditions is not met, the milestone payment is
deferred and recognized as revenue as the Company completes its performance obligations.
Where the Company has no continuing involvement under a collaborative arrangement, the
Company records nonrefundable license fee revenue when the Company has the contractual right to
receive the payment, in accordance with the terms of the license agreement, and records milestones
upon appropriate notification to the Company of achievement of the milestones by the collaborative
partner.
Royalty revenue consists of revenue earned under the Companys license agreement with
Novartis for sales of Tyzeka
®
/Sebivo
®
which is recognized when reported
from Novartis. Royalty revenue is equal to a percentage of Tyzeka
®
/Sebivo
®
net sales, with such percentage increasing according to specified tiers of net sales. The royalty
percentage varies based upon the territory and the aggregate dollar amount of net sales.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables
(EITF No. 00-21).
EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The provisions of EITF No.
00-21 apply to revenue arrangements entered into on or after July 1, 2003.
The Company entered into a collaboration arrangement with Novartis in May 2003. The
collaboration arrangement contemplates several joint committees in which the Company and Novartis
participate. The Company participates in these committees as a means to govern or protect its
interests. The committees span the period from early development through commercialization of
product candidates licensed by Novartis.
As a result of applying the provisions of the SECs Staff Accounting Bulletin No. 101,
Revenue Recognition,
(SAB 101) which was the applicable revenue guidance at the time the
collaboration was entered into, the Companys revenue recognition policy attributes revenue to the
development period of the product candidates licensed under the Development and Commercialization
Agreement. The Company has not attributed revenue to its involvement in the committees following
the commercialization of the licensed products as the Company has determined that its participation
on the committees as such participation relates to the commercialization of product candidates is
protective. The Companys determination is based in part on the fact that its expertise is, and has
been, the discovery and development of drugs for the treatment of human viral and other infectious
diseases. Novartis, on the other hand, has and continues to possess the considerable
commercialization expertise and infrastructure necessary for the commercialization of such product
candidates. Accordingly, the Company believes its obligation post commercialization is
inconsequential.
8
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
Marketable Securities
The Company invests its excess cash balances in short-term and long-term marketable debt
securities. The Company classifies its marketable securities with remaining final maturities of
12 months or less as current marketable securities exclusive of those categorized as cash
equivalents. The Company classifies its marketable securities with remaining final maturities
greater than 12 months as non-current marketable securities. The Company classifies all of its
marketable debt securities as available-for-sale. The Company reports available-for-sale
investments at fair value as of each balance sheet date and includes any unrealized gains and, to
the extent deemed temporary, unrealized losses in stockholders equity. Realized gains and losses
are determined using the specific identification method and are included in investment and other
income, net.
Investments are considered to be impaired when a decline in fair value below cost basis
is determined to be other than temporary. The Company evaluates whether a decline in fair value
below cost basis is other than temporary using available evidence regarding the Companys
investments. In the event that the cost basis of a security significantly exceeds its fair value,
the Company evaluates, among other factors, the duration of the period that, and extent to which,
the fair value is less than cost basis, the financial health of and business outlook for the
issuer, including industry and sector performance, and operational and financing cash flow factors,
overall market conditions and trends, and the Companys intent and ability to hold the investment.
Once a decline in fair value is determined to be other than temporary, a write-down is recorded in
the consolidated statement of operations and a new cost basis in the security is established. There
were no unrealized losses in investments which were deemed to be other than temporary during the
six months ended June 30, 2008 or June 30, 2007.
Fair Value Measurements
Financial instruments, including cash and cash equivalents, restricted cash, marketable
securities, accounts receivable, receivables from related party, accounts payable and accrued
expenses, are carried in the consolidated financial statements at amounts that approximated their
fair value as of June 30, 2008 and December 31, 2007.
Effective January 1, 2008, the Company implemented Statement of Financial Accounting
Standard (SFAS) No. 157,
Fair Value Measurements,
(SFAS No. 157) for its financial assets and
other items that are recognized or disclosed at fair value on a recurring basis. This statement,
among other things, defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. In accordance with the provisions of FASB Staff
Position (FSP) No. FAS 157-2,
Effective Date of FASB Statement No. 157,
the Company has elected
to defer implementation of SFAS No. 157 as it relates to the Companys non-financial assets and
liabilities until January 1, 2009. The Company is currently evaluating the impact on its financial
statements of the adoption of SFAS No. 157 for non-financial assets and liabilities that are
recognized or disclosed on a non-recurring basis.
SFAS No. 157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumption, SFAS No. 157 established a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
Level 1 Observable inputs such as quoted prices in active markets;
|
|
|
|
Level 2 Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
|
Level 3 Unobservable inputs in which there is little or no market data, which require the reporting entity to develop
its own assumptions.
|
With the exception of its holdings in auction rate securities, the Companys marketable
securities were valued at June 30, 2008 using information provided by a pricing service or for
investments in money market accounts, at calculated net asset values. Because the Companys
investment portfolio includes many fixed income securities that do not always trade on a daily
basis, the pricing service applied other available information as applicable through processes such
as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to
prepare evaluations. In addition, model processes were used to assess interest rate impact and
develop prepayment scenarios. These models take into consideration relevant credit information,
perceived market movements, sector news and economic events. The inputs into these models may
include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant
data.
The Companys
investments in auction rate securities, which consist of municipal or
student-loan backed debt securities, are recorded at fair value. Fair value has historically
approximated cost due to their variable interest rates, which are scheduled to reset through an
auction process every seven to 35 days. This auction mechanism is designed to allow existing
investors to roll over their holdings and continue to own their securities or liquidate their
holdings by selling their securities at par value. The Company monitors the success or failure of
the auctions. To the extent an auction fails and the securities are not liquid, the Company also
considers other
9
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
alternative inputs to determine the fair value of these securities which may not be
based on quoted market transactions. In the first six months of 2008, certain of the Companys
auction rate securities experienced failed auctions. These auction rate securities were classified
as Level 3 in accordance with SFAS No. 157 and valued at par value as of June 30, 2008. The Company
determined the fair value of these securities to be par value based on either i) recent trades and
an expected redemption of the entire security holding within the next 30 days or ii) a cash flow
model which incorporated a three-year discount period, a 3.448% per annum coupon rate, a 0.313% per
coupon payment discount rate (which integrated a liquidity discount rate, 3-year swap forward rate
and credit spread), as well as coupon history and the number of auctions as of June 30, 2008. The
Company also considered in determining fair value that its holdings in auction rate securities were
either insured by a private insurer or backed by the U.S. government and that these securities
were rated either Aa3 and AA or Aaa at June 30, 2008.
The following table is the Companys assets and liabilities measured at fair value on a
recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash equivalents
|
|
$
|
33,430
|
|
|
$
|
|
|
|
$
|
33,430
|
|
Marketable securities
|
|
|
23,958
|
|
|
|
|
|
|
|
23,958
|
|
Auction rate
securities
|
|
|
|
|
|
|
2,375
|
|
|
|
2,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,388
|
|
|
$
|
2,375
|
|
|
$
|
59,763
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a rollforward for the three and six months ended June 30, 2008 of the
Companys assets whose fair value is determined on a recurring basis using significant unobservable
inputs (Level 3):
|
|
|
|
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2007
|
|
$
|
11,050
|
|
Purchases, sales, and settlements
|
|
|
(8,675
|
)
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
Impairment included in other comprehensive income
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
2,375
|
|
|
|
|
|
In February 2007, SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities,
(SFAS No. 159) was issued. SFAS No. 159 includes an amendment of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities,
(SFAS No. 115) and permits
entities to elect, at specified election dates, to measure eligible items at fair value and
requires unrealized gains and losses on items for which the fair value option has been elected to
be reported in earnings. Effective January 1, 2008, the Company adopted SFAS No. 159 and chose not
to elect the fair value option as described in SFAS No. 159.
Share-Based Compensation
In December 2004, SFAS No. 123 (revised 2004),
Share-Based Payment,
(SFAS No. 123(R))
was issued
.
SFAS No. 123(R) requires share-based transactions for employees and directors to be
accounted for using a fair value based method that results in expense being recognized in the
Companys financial statements.
The Company recognizes compensation expense for stock options granted to non-employees in
accordance with the requirements of SFAS No. 123(R) and EITF Issue No. 96-18,
Accounting for Equity
Instruments That Are Issued to OtherThan Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
(EITF 96-18). EITF 96-18 requires such equity instruments to be recorded at
their fair value at the measurement date, which is generally the vesting date of the instruments.
Therefore, the measurement of stock-based compensation is subject to periodic adjustments as the
underlying equity instruments vest.
Income Taxes
Deferred tax assets and liabilities are recognized based on the expected future tax
consequences, using current tax rates, of temporary differences between the financial statement
carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is
applied against any net deferred tax asset if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be realized. The Company
records liabilities for tax contingencies if it is probable that the Company has incurred a tax
liability and the liability or the range of loss can be reasonably estimated.
10
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
As of January 1, 2007, the Company adopted the provisions of FASB Interpretation (FIN) No.
48,
Accounting for Uncertain Tax Positions,
(FIN No. 48) and recognizes uncertain tax positions
in the financial statements if the tax position meets a more likely than not threshold for the
benefit.
3. NET LOSS PER COMMON SHARE
The Company accounts for and discloses net loss per common share in accordance with SFAS No.
128,
Earnings Per Share
(SFAS No. 128). Under the provisions of SFAS No. 128, basic net loss per
common share is computed by dividing the net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is computed by dividing the net
loss by the weighted average number of common shares and dilutive potential common shares then
outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of
outstanding stock options (using the treasury stock method), issuance of contingently issuable
shares subject to Novartis subscription rights (see Note 5) and restricted stock awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
(in thousands, except
|
|
(in thousands, except
|
|
|
per share data)
|
|
per share data)
|
Basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(18,906
|
)
|
|
$
|
(22,902
|
)
|
|
$
|
(39,366
|
)
|
|
$
|
(34,471
|
)
|
Basic and diluted weighted average number of
common shares outstanding
|
|
|
56,359
|
|
|
|
56,170
|
|
|
|
56,316
|
|
|
|
56,148
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.61
|
)
|
The following potential common shares were excluded from the calculation of diluted net
loss per common share because their effect was anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Options
|
|
|
6,153
|
|
|
|
5,234
|
|
Contingently issuable shares to related party
|
|
|
2,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,907
|
|
|
|
5,234
|
|
|
|
|
|
|
|
|
In addition to the contingently issuable shares to related party listed in the table
above, Novartis is entitled to additional shares under its stock purchase rights which would be
anti-dilutive based on the Companys current stock price.
4. COMPREHENSIVE LOSS
For the three and six months ended June 30, 2008 and 2007, respectively, comprehensive
loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net loss
|
|
$
|
(18,906
|
)
|
|
$
|
(22,902
|
)
|
|
$
|
(39,366
|
)
|
|
$
|
(34,471
|
)
|
Changes in other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
93
|
|
|
|
42
|
|
|
|
585
|
|
|
|
82
|
|
Unrealized loss on marketable securities
|
|
|
(47
|
)
|
|
|
(10
|
)
|
|
|
(95
|
)
|
|
|
(52
|
)
|
Unrealized gain on investment
|
|
|
|
|
|
|
2,413
|
|
|
|
|
|
|
|
2,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(18,860
|
)
|
|
$
|
(20,457
|
)
|
|
$
|
(38,876
|
)
|
|
$
|
(32,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
5. NOVARTIS RELATIONSHIP
Overview
Effective May 8, 2003, the Company entered into a development, license and
commercialization agreement with Novartis. In September 2007, the Company entered into an amendment
to the Development and Commercialization Agreement, which is referred to as the 2007 Amendment.
Pursuant to the 2007 Amendment, the Company transferred to Novartis its development,
commercialization and manufacturing rights and obligations pertaining to telbivudine (Tyzeka
®
/Sebivo
®
) on a worldwide basis. Effective October 1, 2007, the Company began
receiving royalty payments equal to a percentage of net sales of Tyzeka
®
/Sebivo
®
, with such percentage increasing according to specified tiers of net sales. The
royalty percentage varies based upon the territory and the aggregate dollar amount of net sales.
Novartis is solely responsible for development and commercialization expenses relating to
telbivudine beginning on October 1, 2007. Novartis shall also be responsible for certain costs
associated with the transition of third party contracts and arrangements relating to telbivudine
and certain intellectual property prosecution and enforcement activities. Pursuant to the
Transition Services Agreement, or TSA, the Company will provide Novartis with certain services
relating to telbivudine until such period of time that is agreeable by both parties. The Company is
reimbursed by Novartis for these services.
As part of the Development and Commercialization Agreement, the Company received a
license fee of $75.0 million for its HBV product and product candidate, Tyzeka
®
/Sebivo
®
and valtorcitabine, respectively, development funding for Tyzeka
®
/Sebivo
®
and valtorcitabine and milestone payments. Potential milestone payments could
have been earned upon the achievement of certain regulatory approvals and commercial targets. In
2007, the Company received payment of $20.0 million for achieving two regulatory milestones.
As part of the Development and Commercialization Agreement, Novartis also acquired an
option to license the Companys HCV and other product candidates. Novartis agreed to pay the
Company up to $500.0 million in additional license fees and regulatory milestone payments for NM283
or related compounds. In March 2006, Novartis exercised its option to license valopicitabine, the
Companys lead HCV product candidate at that time. As a result, Novartis paid the Company a license
fee of $25.0 million in March 2006 and provided development funding for valopicitabine. In
July 2007, the Company announced that the FDA had placed on clinical hold in the United States the
Companys development program of valopicitabine for the treatment of HCV based on the overall
risk/benefit profile observed in clinical testing. The Company subsequently discontinued the
development of valopicitabine. As a result, the Company is not expected to receive any additional
license fees or milestone payments for valopicitabine from Novartis.
To date, the sum of non-refundable payments received from Novartis, totaling $117.2
million, has been recorded as license fees and is being recognized over the development period of
the licensed product candidates. The Company has received from Novartis a $25.0 million license fee
for valopicitabine, a $75.0 million license fee for Tyzeka
®
/Sebivo
®
and
valtorcitabine, offset by $0.1 million in interest costs, and a $5.0 million reimbursement for
reacquiring product rights from Sumitomo to develop and commercialize Sebivo
®
in
certain markets in Asia. The Company included this reimbursement as part of the license fee for
accounting purposes because Novartis required the repurchase of these rights as a condition to
entering into the Development and Commercialization Agreement. The Company also incurred
approximately $2.3 million in costs associated with the development of valopicitabine prior to
Novartis licensing valopicitabine in March 2006 for which Novartis reimbursed the Company. The
Company has included a $10.0 million milestone payment for the regulatory approval of Sebivo
®
in the European Union as part of the license fee for accounting purposes as the milestone
was deemed not to be substantive.
The Company reviews its assessment and judgment on a quarterly basis with respect to the
expected duration of the development period of its licensed product candidates. During the quarter
ended June 30, 2008, the Company has estimated that the performance period during which the
development of its licensed product and product candidates will be completed is a period of
approximately ten and a half years following the effective date of the Development and
Commercialization Agreement that the Company entered into with Novartis, or December 2013. The
Company is recognizing revenue on the license fee payments over this period. If the estimated
performance period changes, the Company will adjust the periodic revenue that is being recognized
and will record the remaining unrecognized license fee payments over the remaining development
period during which the Companys performance obligations will be completed. Significant judgments
and estimates are involved in determining the estimated development period and different
assumptions could yield materially different results.
In addition to the collaboration described above, Novartis purchased approximately 54% of the
Companys outstanding capital stock in May 2003 from the Companys then existing stockholders for
$255.0 million in cash, with an additional aggregate amount of up to $357.0 million contingently
payable to these stockholders if the Company achieves predetermined development milestones relating
to NM283 or related compounds. As of June 30, 2008, Novartis owned approximately 56% of the
Companys outstanding stock.
12
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
Stockholders Agreement
In connection with Novartis purchase of stock from the Companys stockholders, the
Company, Novartis and substantially all of the Companys stockholders entered into a stockholders
agreement which was amended and restated in 2004 in connection with the Companys initial public
offering of its common stock (the Stockholders Agreement). The Stockholders Agreement provides,
among other things, that the Company will use its reasonable best efforts to nominate for election
as a director at least two designees of Novartis for so long as Novartis and its affiliates own at
least 35% of the Companys voting stock and at least one designee of Novartis for so long as
Novartis and its affiliates own at least 19.4% of the Companys voting stock. As long as Novartis
and its affiliates continue to own at least 19.4% of the Companys voting stock, Novartis will have
approval rights over a number of corporate actions that the Company may take, including the
authorization or issuance of additional shares of capital stock and significant acquisitions and
dispositions.
Novartis Stock Purchase Rights
Novartis has the right to purchase, at par value of $0.001 per share, such number of
shares as is required to maintain its percentage ownership of the Companys voting stock if the
Company issues shares of capital stock in connection with the acquisition or in-licensing of
technology through the issuance of up to 5% of the Companys stock in any 24-month period. These
purchase rights of Novartis remain in effect until the earlier of: a) the date that Novartis and
its affiliates own less than 19.4% of the Companys voting stock; or b) the date that Novartis
becomes obligated to make the additional contingent payments of $357.0 million to holders of the
Companys stock who sold shares to Novartis on May 8, 2003.
If the Company issues any shares of its capital stock, other than in certain situations,
Novartis has the right to purchase such number of shares required to maintain its percentage
ownership of the Companys voting stock for the same consideration per share paid by others
acquiring the Companys stock. Upon the grant of options and stock awards under stock incentive
plans, with the exception of the 1998 Equity Incentive Plan, the fair value of the Companys common
stock that would be issuable to Novartis, less the exercise price, if any, payable by the option or
award holder, is recorded as a reduction of the license fees associated with the Novartis
collaboration. The amount is attributed proportionately between cumulative revenue recognized
through that date and the remaining amount of deferred revenue. These amounts will be adjusted
through the date that Novartis elects to purchase the shares to maintain its percentage ownership
based upon changes in the value of the Companys common stock and in Novartis percentage
ownership. These adjustments will also be attributed proportionately between cumulative revenue
recognized through the measurement date and the remaining deferred revenue.
In connection with the closing of the Companys initial public offering in July 2004,
Novartis terminated a common stock subscription right with respect to 1,399,106 shares of common
stock issuable by the Company as a result of the exercise of stock options granted after May 8,
2003 pursuant to the 1998 Equity Incentive Plan. In exchange for Novartis termination of such
right, the Company issued 1,100,000 shares of common stock to Novartis for a purchase price of
$0.001 per share. The fair value of these shares was determined to be $15.4 million at the time of
issuance. As a result of the issuance of these shares, Novartis
rights to purchase additional shares as a result of future option grants and stock issuances under the 1998 Equity
Incentive Plan were terminated, and no additional adjustments to revenue and deferred revenue will
be required. Prior to the termination of the stock subscription rights under the 1998 Equity
Incentive Plan, as the Company granted options that were subject to this stock subscription right,
the fair value of the Companys common stock that would be issuable to Novartis, less par value,
was recorded as an adjustment of the license fee and payments received from Novartis. The Company
remains subject to potential revenue adjustments relating to grants of options and stock awards
under its stock incentive plans other than the 1998 Equity Incentive Plan.
For the six months ended June 30, 2008, the impact of Novartis stock subscription rights
has reduced the license fee by $6.5 million, which has been recorded as additional paid-in capital.
Of this amount, $3.4 million has been recorded as a reduction of deferred revenue as of June 30,
2008 with the remaining amount of $3.1 million recorded as a reduction of license fee revenue. As
of June 30, 2008, the aggregate impact of Novartis stock subscription rights has reduced the
license fee by $22.1 million, which has been recorded as additional paid-in capital. Of this
amount, $9.1 has been recorded as a reduction of deferred revenue with the remaining amount of
$13.0 million as a reduction of license fee revenue.
Manufacturing and Packaging Agreements
Pursuant to a Manufacturing Agreement and Supply Agreement, respectively, Novartis was
appointed to manufacture the commercial supply of Tyzeka
®
that was intended for sale in
the United States and to finish and package licensed products for commercial sale. Moreover, a
Packaging Agreement provided that the supply of Tyzeka
®
intended for commercial sale
in the United States would be packaged by Novartis Pharmaceuticals Corporation, an affiliate of
Novartis.
As a result of the 2007 Amendment, the Manufacturing Agreement with Novartis was
terminated as it relates to telbivudine. Effective October 1, 2007, Novartis is solely responsible
for the manufacture and supply of Tyzeka
®
/Sebivo
®
on a worldwide basis. No
penalties were incurred by the Company as a result of the termination.
13
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
Product Sales Arrangements
In connection with the Novartis license of product candidates under the Development and
Commercialization Agreement, the Company had retained the right to co-promote or co-market all
licensed products, with the exception of Tyzeka
®
/Sebivo
®
, in the United
States, United Kingdom, France, Germany, Italy and Spain. In the United States, the Company would
act as the lead party and record revenue from product sales and share equally the net benefit from
co-promotion from the date of product launch. In the United Kingdom, France, Germany, Italy and
Spain, Novartis would act as the lead party, record revenue from product sales and share with the
Company the net benefit from co-promotion and co-marketing. The net benefit was defined as net
product sales minus related cost of sales. The amount of the net benefit that would be shared with
the Company would start at 15% for the first 12-month period following the date of launch,
increasing to 30% for the second 12-month period following the date of launch and 50% thereafter.
In other countries, the Company would effectively sell products to Novartis for their further sale
to third parties. Novartis would pay the Company for such products at a price that is determined
under the terms of the Companys supply agreement with Novartis.
In September 2007, the Company amended its Development and Commercialization Agreement
with Novartis in which Novartis assumed sole responsibility for product sales of Tyzeka
®
/Sebivo
®
on a worldwide basis beginning on October 1, 2007. As a result,
beginning in the fourth quarter of 2007, the Company no longer records product sales of Tyzeka
®
.
6. MARKETABLE SECURITIES
The Company invests its excess cash in accounts held at large U.S. based financial
institutions and considers its investment portfolio as marketable securities available-for-sale as
defined in SFAS No. 115. Accordingly, these marketable securities are recorded at fair value based
on Level 2 and Level 3 inputs as described by SFAS No. 157. The fair values of available-for-sale
investments by type of security, contractual maturity and classification in the balance sheets as
of June 30, 2008 and December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
32,679
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,679
|
|
Corporate debt securities
|
|
|
18,085
|
|
|
|
15
|
|
|
|
(202
|
)
|
|
|
17,898
|
|
U.S. government obligations
|
|
|
6,813
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
6,811
|
|
Auction rate securities
|
|
|
2,375
|
|
|
|
|
|
|
|
|
|
|
|
2,375
|
|
Accrued interest
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,259
|
|
|
$
|
15
|
|
|
$
|
(204
|
)
|
|
$
|
60,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
21,702
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,702
|
|
Commercial paper
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
|
1,993
|
|
Corporate debt securities
|
|
|
56,361
|
|
|
|
15
|
|
|
|
(109
|
)
|
|
|
56,267
|
|
Municipal bonds
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
Auction rate securities
|
|
|
11,050
|
|
|
|
|
|
|
|
|
|
|
|
11,050
|
|
Accrued interest
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,859
|
|
|
$
|
15
|
|
|
$
|
(109
|
)
|
|
$
|
93,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Contractual maturity:
|
|
|
|
|
|
|
|
|
Maturing in one year or
less
|
|
$
|
49,762
|
|
|
$
|
69,883
|
|
Maturing after one year through two
years
|
|
|
5,087
|
|
|
|
4,490
|
|
Maturing after two years through ten
years
|
|
|
2,321
|
|
|
|
7,274
|
|
Maturing after ten
years
|
|
|
2,900
|
|
|
|
12,118
|
|
|
|
|
|
|
|
|
|
|
$
|
60,070
|
|
|
$
|
93,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Classification in balance sheets:
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
33,492
|
|
|
$
|
30,021
|
|
Marketable
securities
|
|
|
16,270
|
|
|
|
39,862
|
|
Marketable securities,
non-current
|
|
|
10,308
|
|
|
|
23,882
|
|
|
|
|
|
|
|
|
|
|
$
|
60,070
|
|
|
$
|
93,765
|
|
|
|
|
|
|
|
|
At June 30, 2008 and
December 31, 2007, approximately $2.4 million and $11.1 million,
respectively, of the Companys investments in marketable securities were auction rate securities.
These auction rate securities consisted of municipal or student-loan backed debt securities and
were classified as long-term based on final contractual maturity. In the first six months of 2008,
certain of the Companys auction rate securities experienced failed auctions. As of June 30, 2008,
the Company had liquidated all but $2.4 million of the Companys auction rate securities that were
held at December 31, 2007. The liquidation of these auction rate securities did not result in any
losses to the Company and the fair value did not decline significantly as compared to December 31,
2007. As of June 30, 2008, the Companys $2.4 million of auction rate securities were rated Aa3 and
AA or Aaa by investment rating agencies. In the event that a future auction is not able to be
completed due to sell orders exceeding buy orders, the Company may not have the ability to quickly
liquidate these investments. In the event that access to investments in these securities is
necessary, the Company will not be able to do so until a future auction is successful, the issuer
redeems the outstanding securities, a buyer is found outside the auction process, or the securities
mature. For all of the Companys auction rate securities, the underlying final maturity date is in
excess of one year and can be as far as 37 years in the future.
7. RECEIVABLES FROM RELATED PARTY
Receivables from related party consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Unbilled receivables from related party
|
|
$
|
1,727
|
|
|
$
|
11,196
|
|
|
|
|
|
|
|
|
Unbilled receivables from related party represent amounts under collaborative agreements
in the normal course of business for reimbursement of development, regulatory and marketing
expenditures that have not been billed at June 30, 2008 and December 31, 2007. The reimbursement of
development and regulatory expenditures is billed quarterly. All related party receivables are due
from Novartis.
8. INTANGIBLE ASSET, NET
The Companys intangible asset relates to a settlement agreement entered into by and
among the Company along with the Companys Chief Executive Officer, in his individual capacity, the
Universite Montpellier II (University of Montpellier) and Centre National de la Recherche
Scientifique (CNRS), the Board of Trustees of the University of Alabama on behalf of the
University of Alabama at Birmingham (UAB), the University of Alabama Research Foundation
(UABRF) and Emory University as described more fully in Note 12 and Note 14.
The settlement agreement, effective as of June 1, 2008, includes a full release of all claims,
contractual or otherwise, by the parties. The settlement agreement was entered into in July 2008.
The Company is amortizing the $15.0 million accrued settlement payment to UAB and related
entities over the period of the expected economic benefit of the related asset. The amount of
amortization each period is determined as the greater of straight line or economic consumption.
Amortization expense pertaining to the asset was $0.3 million and $0.6 million for the three and
six months
15
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
ended June 30, 2008, respectively, which was recorded in cost of sales. There was no expense for
the three and six months ended June 30, 2007. As of June 30, 2008, accumulated amortization was
$2.0 million. Amortization expense for this asset is anticipated to be $1.2 million per year
through 2012 and $7.8 million through the remaining term of the expected economic benefit of the
asset.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Research and development contract costs
|
|
$
|
1,786
|
|
|
$
|
2,050
|
|
Payroll and benefits
|
|
|
3,317
|
|
|
|
4,231
|
|
License fees
|
|
|
982
|
|
|
|
1,000
|
|
Professional fees
|
|
|
1,043
|
|
|
|
1,309
|
|
Restructuring
|
|
|
636
|
|
|
|
1,838
|
|
Accrued upfront settlement payment
|
|
|
4,000
|
|
|
|
4,000
|
|
Other
|
|
|
2,152
|
|
|
|
2,009
|
|
|
|
|
|
|
|
|
|
|
$
|
13,916
|
|
|
$
|
16,437
|
|
|
|
|
|
|
|
|
The accrued restructuring liability represents costs associated with the Companys
announcement in September of 2007 that it would restructure its operations with the transfer of
development, commercialization and manufacturing rights of telbivudine and obligations related to
Novartis (Note 10).
The $4.0 million accrued upfront settlement payment is the short-term portion of the
$15.0 million settlement payment to UAB and related entities which is described more fully in Note
12 and Note 14.
10. RESTRUCTURING CHARGES
In September 2007, the Company announced a restructuring of its operations as a result of
an agreement with Novartis in which the Company would transfer to Novartis all development,
commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka
®
/Sebivo
®
) on a worldwide basis effective October 1, 2007. As a result, the
Company entered into a plan to enact a workforce reduction of approximately 100 positions, the
majority of which had supported the development and commercialization of Tyzeka
®
/Sebivo
®
in the United States and Europe. The restructuring was a strategic decision on
behalf of the Company to focus its resources on its HCV and HIV discovery and development programs.
A summary of the restructuring activity at June 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
Liability
|
|
|
|
as of
|
|
|
Payments and
|
|
|
Additional
|
|
|
as of
|
|
|
|
December 31, 2007
|
|
|
other adjustments
|
|
|
Expense
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Employee severance,
benefits and lease
exit
costs
|
|
$
|
1,838
|
|
|
$
|
(1,396
|
)
|
|
$
|
297
|
|
|
$
|
739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
11. SHARE-BASED COMPENSATION
The following table shows stock-based compensation expense as reflected in the Companys
consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Research and
development
|
|
$
|
467
|
|
|
$
|
723
|
|
|
$
|
1,127
|
|
|
$
|
1,891
|
|
Selling, general and
administrative
|
|
|
876
|
|
|
|
1,296
|
|
|
|
1,755
|
|
|
|
2,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation
expense
|
|
$
|
1,343
|
|
|
$
|
2,019
|
|
|
$
|
2,882
|
|
|
$
|
4,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below illustrates the fair value per share and Black-Scholes option pricing model
with the following assumptions used for grants issued during the three and six months ended
June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Weighted average fair value of
options
|
|
$
|
3.76
|
|
|
$
|
3.74
|
|
|
$
|
2.99
|
|
|
$
|
4.02
|
|
Risk-free interest rate
|
|
|
3.27
|
%
|
|
|
4.91
|
%
|
|
|
2.83
|
%
|
|
|
4.75
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option term (in years)
|
|
|
5.14
|
|
|
|
5.05
|
|
|
|
5.14
|
|
|
|
5.05
|
|
Expected volatility
|
|
|
63.2
|
%
|
|
|
56.9
|
%
|
|
|
63.2
|
%
|
|
|
56.9
|
%
|
The expected option term and expected volatility were determined by examining the
expected option term and expected volatilities of similarly sized biotechnology companies as well
as expected term and expected volatility of the Companys stock.
A summary of stock option activity under the Companys stock option plans for the six
months ended June 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Exercise
|
|
|
|
Shares
|
|
|
Price per Share
|
|
Outstanding, December 31, 2007
|
|
|
5,712,289
|
|
|
$
|
9.83
|
|
Granted
|
|
|
1,336,600
|
|
|
|
5.32
|
|
Cancelled
|
|
|
(687,781
|
)
|
|
|
13.05
|
|
Exercised
|
|
|
(207,810
|
)
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
|
6,153,298
|
|
|
$
|
8.76
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2008
|
|
|
3,137,405
|
|
|
$
|
11.25
|
|
The Company has an aggregate of $10.5 million of stock compensation as of June 30, 2008
remaining to be amortized over a weighted average life of 3.3 years.
12. LEGAL CONTINGENCIES
Hepatitis C Product Candidates
In May 2004, the Company and, in an individual capacity, its Chief Executive Officer
(CEO), entered into a settlement agreement with UAB to resolve a dispute among these parties. In
March 2004, the Company and, in an individual capacity, its CEO, filed a lawsuit against UAB in the
United States District Court, District of Massachusetts, seeking declaratory judgment regarding the
Companys ownership of inventions and discoveries made during the period from November 1999 to
November 2002 (Leave Period) by the CEO, and the Companys ownership of patents and patent
applications related to such inventions and discoveries. During the Leave Period, while acting in
the capacity of the Companys Chief Scientific Officer, the CEO was on sabbatical from November
1999 to November 2000 (Sabbatical Period) and then unpaid leave prior to resigning in November
2002 from his position as a professor at UAB.
As a part of the settlement agreement, it was agreed that neither UAB nor UABRF has any
right, title or ownership interest in the inventions and discoveries made or reduced to practice
during the Leave Period or the related patents and patent applications. In exchange, the Company
made a $2.0 million payment to UAB in May 2004. The Company also dismissed the pending litigation
and agreed to make certain future payments to UAB. These future payments consist of: (i) a
$1.0 million payment upon the receipt of regulatory approval to market and sell in the United
States a product which relates to inventions and discoveries made by the CEO during the Sabbatical
Period; and (ii) payments in an amount equal to 0.5% of worldwide net sales of such products with a
minimum
17
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
sales based payment to equal $12.0 million. The sales based payments (including the minimum
amount) are contingent upon the commercial launch of products that relate to inventions and
discoveries made by the CEO during the Sabbatical Period. The minimum amount is due within seven
years after the later of the commercial launch in the United States or any of the United Kingdom,
France, Germany, Italy or Spain, of a product that: (i) has within its approved product label a use
for the treatment of HCV; and (ii) relates to inventions and discoveries made by the CEO during the
Sabbatical Period, if sales based payments for such product have not then exceeded $12.0 million.
At that time, the Company will be obligated to pay to UAB the difference between the sales based
payments then paid to date for such product and $12.0 million. The Company has no amounts accrued
or payable under this settlement agreement at June 30, 2008 as the Company has had no sales of
products relating to these inventions and discoveries by the CEO.
In October 2006, the Company entered into a two-year research collaboration agreement
with Metabasis Therapeutics, Inc. or Metabasis. Under the terms of the agreement, Metabasis
proprietary liver-targeted technology would have been applied to one of the Companys compounds to
develop second-generation nucleoside analog product candidates for the treatment of HCV. In
July 2007, the Company notified Metabasis that it would exercise its option to terminate the
research collaboration on the first anniversary of the agreement in October 2007. Prior to the
termination of the agreement, Metabasis asserted that a certain scientific milestone was met and
thus a $1.0 million payment under the collaboration agreement came due. The Company does not agree
with Metabasis assessment that the scientific milestone has been met and therefore does not
believe that it has any liability for this payment and initially so notified Metabasis. In May
2008, the Company and Metabasis entered into a letter agreement whereby Metabasis will apply its
proprietary liver-targeted technology to a compound developed by the Company. If the results are
considered positive, as measured by efficacy and safety in a predictive animal study, then the
Company anticipates re-instating the original 2006 agreement with Metabasis, which was terminated
in October 2007. If the original agreement with Metabasis were to be re-instated, then the Company
would remain obligated to all the terms and conditions thereunder, including the $1.0 million
milestone payment.
Hepatitis B Product
In addition to the Leave Period matter noted above, the Company was notified in
January 2004, February 2005 and June 2005, that UAB believes that patent applications which the
Company has licensed from UAB can be amended to obtain broad patent claims that would generally
cover the method of using telbivudine to treat HBV. In July 2005, UAB filed this continuation
patent application.
In February 2006, UAB notified the Company that it and Emory University were asserting a
claim, that as a result of filing a continuation patent application in July 2005 by UAB, the UAB
license agreement covers the Companys telbivudine technology and that the Company is obligated to
pay to UAB, Emory University and CNRS (collectively, the 1998 licensors) an aggregate of
$15.3 million, comprised of 20% of the $75.0 million license fee that the Company received from
Novartis in May 2003 in connection with the license of its HBV product candidates and a
$0.3 million payment in connection with the submission to the FDA of the investigational new drug
application (IND) pursuant to which the Company conducted its clinical trials of telbivudine.
In January 2007, UAB and related entities filed a complaint in the United States District
Court for the Northern District of Alabama, Southern Division against the Company, CNRS and the
University of Montpellier. The complaint alleges that a former employee of UAB is a co-inventor of
certain patents in the United States and corresponding foreign patent applications related to the
use of ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of the Company,
CNRS and the University of Montpellier and which cover the use of Tyzeka
®
/Sebivo
®
for the treatment of HBV. Pursuant to the terms of the dispute resolution procedure in the
UAB license agreement, in September 2007 the Companys CEO and the CEO of UABRF met and agreed to
begin a mediation process. Following a joint mediation session in January 2008 and several months
of further discussions, in July 2008, the parties entered into a settlement agreement. Pursuant to
this settlement agreement, all contractual disputes relating to patents covering the use of certain
synthetic nucleosides for the treatment of the HBV virus and all litigation matters relating to
patents and patent applications related to the use of ß-L-2-deoxy-nucleosides for the treatment of
HBV assigned to one or more of the Company, CNRS and the University of Montpellier and which cover
the use of Tyzeka
®
/Sebivo
®
for the treatment of HBV have been resolved.
UAB also agreed to abandon the continuation patent applications it filed in July 2005. Under the
terms of the settlement, the Company paid UABRF (on behalf of UAB and Emory University) a
$4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty
payments received by the Company from Novartis from worldwide sales of telbivudine, subject to minimum
payment obligations aggregating $11.0 million. The settlement agreement is effective as of June 1,
2008 (see Note 14).
In December 2001, the Company retained the services of Clariant (subsequently acquired by
Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the
form of a multiproject development and supply agreement. Under the terms of the agreement with
Clariant, the Company would, on an as needed basis, utilize the Clariant process development and
manufacture services in the development of certain of the Companys product candidates, including
telbivudine. After reviewing respective bids from each of Novartis and Clariant, the joint
manufacturing committee decided to proceed with Novartis as the primary manufacturer of
telbivudine. In late 2007, the Company transferred full responsibility to Novartis for the
development, commercialization and manufacturing of telbivudine. As a result, in January 2008, the
Company exercised its right under the agreement with Clariant to terminate the agreement effective
July 2008. In February 2008, Clariant asserted that they should have been able to participate in
the manufacturing process for telbivudine as a non-primary supplier and are due an unspecified
amount. The Company does not agree with Clariants assertion and therefore has not recorded a
liability associated with this potential
18
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
contingent matter. Clariant has not initiated legal
proceedings. If legal proceedings are initiated, the Company intends to vigorously defend against
such lawsuit.
Indemnification
The Company has agreed to indemnify Novartis and its affiliates against losses suffered
as a result of any breach of representations and warranties in the Development and
Commercialization Agreement. Under the Development and Commercialization Agreement and the stock
purchase agreement (the Stock Purchase Agreement), the Company made numerous representations and
warranties to Novartis regarding its HBV and HCV product candidates, including representations
regarding the Companys ownership of the inventions and discoveries described above. If one or more
of the representations or warranties were not true at the time they were made to Novartis, the
Company would be in breach of one or both of these agreements. In the event of a breach by the
Company, Novartis has the right to seek indemnification from the Company and, under certain
circumstances, the Company and its stockholders who sold shares to Novartis, which include many of
its directors and officers, for damages suffered by Novartis as a result of such breach. While it
is possible that the Company may be required to make payments pursuant to the indemnification
obligations it has under the Development and Commercialization Agreement, the Company cannot
reasonably estimate the amount of such payments or the likelihood that such payments would be
required.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2008, FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157,
(FSP FAS No. 157-2) was issued. FSP FAS No. 157-2 defers the effective date provision of SFAS No.
157 for certain non-financial assets and liabilities until fiscal years beginning after November
15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 for certain
non-financial assets and liabilities that are recognized and disclosed at fair value in the
Companys financial statements on a non-recurring basis.
In December 2007, EITF Issue No. 07-01,
Accounting for Collaborative Arrangements Related
to the Development and Commercialization of Intellectual Property,
(EITF 07-01) was issued. EITF
07-01 prescribes the accounting for collaborations. It requires certain transactions between
collaborators to be recorded in the income statement on either a gross or net basis within expenses
when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for
all of the Companys collaborations existing after January 1, 2009. The Company is evaluating the
impact this standard will have on its financial statements.
14. SUBSEQUENT EVENT UAB SETTLEMENT
In July 2008, the Company, along with its CEO, in his individual capacity, the University of
Montpellier and CNRS entered into a settlement agreement with UAB, UABRF and Emory University. The
settlement agreement relates to, among other things, a complaint filed by UAB and UABRF against the
Company, the University of Montpellier and CNRS and an arbitrable contractual dispute asserted by
UABRF and Emory University against the Company.
Pursuant to this settlement agreement, the following matters have been resolved among the
parties:
|
|
|
all contractual disputes relating to patents covering the use of certain
synthetic nucleosides for the treatment of the HBV virus; and
|
|
|
|
|
all litigation matters relating to patents and patent applications related to the
use of ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of
the Company, CNRS and the University of Montpellier and which cover the use of
Tyzeka
®
/
Sebivo
®
(telbivudine) for the treatment of HBV.
|
Under the terms of the
settlement agreement, the Company paid UABRF (on behalf of UAB
and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to
20% of all royalty payments received by the Company from Novartis from worldwide sales of
telbivudine (the Royalty Payments), subject to minimum payment obligations as set forth below.
The Company is obligated to make minimum payments (offset by the ongoing Royalty Payments) to
UABRF totaling $11.0 million as set forth in the table below. If the Royalty Payments made to UABRF
by the dates set forth below do not equal the minimum payments as detailed in the table, the
Company is obligated to pay UABRF the difference between such payments and the minimum payment
amount within thirty (30) days following each of the dates specified. In the event that Royalty
Payments during one period exceed the minimum payment obligation for that period, the excess will
be credited against subsequent minimum payments for later periods.
19
IDENIX
PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) CONTINUED
|
|
|
|
|
Period Ending
|
|
Minimum Payment
|
December 30, 2010
|
|
$
|
2,000,000
|
|
December 30, 2013
|
|
$
|
2,000,000
|
|
December 30, 2016
|
|
$
|
2,000,000
|
|
December 30, 2018
|
|
$
|
5,000,000
|
|
The Company has recorded liabilities for the $4.0 million upfront payment and the minimum
payments of $11.0 million as of June 30, 2008.
The Companys payment obligations under the settlement agreement expire on August 10, 2019.
The settlement agreement is effective as of June 1, 2008 and includes mutual releases of all claims
and covenants not to sue among the parties. It also includes a release from a third-party
scientist who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier
patents. UAB also agreed to abandon the continuation patent applications it filed in July 2005.
20
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. For this purpose, any statements
contained herein regarding our strategy, future operations, financial position, future revenues,
projected costs and expenses, prospects, plans and objectives of management, other than statements
of historical facts, are forward-looking statements. The words anticipate, believes,
estimates, intends, may, plans, will, would and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain these
identifying words. Such statements reflect our current views with respect to future events. We
cannot guarantee that we actually will achieve the plans, intentions, or expectations disclosed in
our forward-looking statements. There are a number of important factors that could cause actual
results or events to differ materially from those disclosed in the expressed or implied
forward-looking statements we make. These important factors include our critical accounting
policies and estimates and the risk factors set forth below in Part II, Item 1A Risk Factors.
Although we may elect to update forward-looking statements in the future, we specifically disclaim
any obligation to do so, even if our estimates change, readers should not rely on those
forward-looking statements as representing our views as of any date subsequent to the date of this
quarterly report.
Overview
Idenix is a biopharmaceutical company engaged in the discovery and development of drugs
for the treatment of human viral and other infectious diseases with operations in the United States
and Europe. Our current focus is on diseases caused by hepatitis C virus, or HCV, and human
immunodeficiency virus, or HIV. To date, we have successfully developed and received regulatory
approval for telbivudine (Tyzeka®/Sebivo®) for the treatment of chronic hepatitis B virus, or HBV,
and have discovered product candidates for the treatment of HCV and HIV. We currently have a
non-nucleoside reverse transcriptase inhibitor, or NNRTI, product candidate for the treatment of
HIV-1 in phase I/II clinical testing and a nucleoside/nucleotide prodrug product candidate for the
treatment of HCV in phase I clinical testing. We also have HCV discovery programs focusing on
protease inhibitors and non-nucleoside polymerase inhibitors. Three clinical candidates have been
selected from these two discovery programs and are currently undergoing IND-enabling preclinical
testing.
Effective May 8, 2003,
we entered into a development, license and commercialization
agreement, or development and commercialization agreement, with Novartis Pharma AG, or Novartis, a
subsidiary of Novartis AG, under which we collaborate with Novartis to develop, manufacture and
commercialize product candidates which they license from us. Novartis also acquired a majority
interest in our outstanding stock on May 8, 2003 and our operations have been consolidated in the
financial statements of Novartis since that date. Since May 2003, Novartis has had the ability to
exercise control over our strategic direction, research and development activities and other
material business decisions. Additionally, as long as Novartis retains its majority position in our
company, Novartis, among other things, retains the right to license any product candidate we
develop. We have co-promotion and co-marketing rights with Novartis in the United States, United
Kingdom, France, Germany, Italy and Spain on all products, with the exception of Tyzeka
®
/Sebivo
®
, that Novartis licenses from us that are successfully developed and
approved for commercial sales. Novartis has the exclusive right to promote and market these
licensed products in the rest of the world.
The following table summarizes key information regarding
Tyzeka
®
/Sebivo
®
and our pipeline of product candidates:
|
|
|
|
|
Indication
|
|
Product/Product Candidates/Programs
|
|
Description
|
HBV
|
|
Tyzeka
®
/Sebivo
®
(telbivudine)
(L- nucleoside)
|
|
Novartis has all
development,
commercialization and
manufacturing rights
and obligations
related to
telbivudine
(Tyzeka
®
/Sebivo
®
)
on a worldwide basis.
We receive royalty
payments equal to a
percentage of net
sales of Tyzeka
®
/Sebivo
®
. Novartis is
solely responsible
for clinical trial
costs and related
expenditures
associated with
telbivudine.
|
|
|
|
|
|
HCV
|
|
Discovery and development program
|
|
This program is
focused on the three
primary classes of
drugs for the
treatment of HCV,
which include
nucleoside/nucleotide
polymerase
inhibitors, protease
inhibitors and
non-nucleoside
polymerase
inhibitors.
|
21
|
|
|
|
|
Indication
|
|
Product/Product Candidates/Programs
|
|
Description
|
|
|
IDX184 and IDX102
(nucleotide polymerase inhibitor)
|
|
The most advanced of
these efforts is our
research on the
next-generation
nucleoside/nucleotide
polymerase
inhibitors. Data from
a four day study of
once daily
administered IDX184
in 5 HCV-infected
chimps demonstrated a
median viral load
reduction of 2.3
log10. This data was
presented at the
European Association
for the Study of the
Liver, or EASL, in
April 2008. We have
initiated a
first-in-man study of
IDX184 under a United
States IND. The
study design is a
double-blind,
placebo-controlled,
single
dose-escalation study
to evaluate the
safety and
pharmacokinetic
activity of IDX184 in
healthy
volunteers. We plan
to submit a CTA in
Europe for IDX184 in
2008. IDX102 is in
late stage
preclinical
development.
|
|
|
|
|
|
|
|
IDX136 and IDX316
(protease inhibitors)
|
|
We have selected IDX136 and IDX316 as
our lead clinical candidates from
this program and have begun
IND-enabling pharmacology and
toxicology studies. Preliminary in
vitro data from this program was
presented at EASL in April 2008. We
plan to submit an IND in the United
States and a CTA in Europe for one of
these product candidates in 2009
assuming positive results from the
IND-enabling pre-clinical studies.
|
|
|
|
|
|
|
|
IDX375
(non-nucleoside polymerase
inhibitors)
|
|
We have selected IDX375 as our lead
clinical candidate from our
non-nucleoside HCV polymerase
inhibitors program and have begun
IND-enabling pharmacology and
toxicology studies. We plan to submit
an IND in the United States and a CTA
in Europe for this product candidate
in 2009 assuming positive results
from the IND-enabling pre-clinical
studies.
|
|
|
|
|
|
HIV
|
|
IDX899
(non-nucleoside reverse
transcriptase inhibitor or NNRTI)
|
|
We are developing a non-nucleoside
reverse transcriptase inhibitor, or
NNRTI, for use in combination therapy
of HIV-1
infected
patients.
|
|
|
|
|
|
In February 2008, we reported
positive data from the 800 mg cohort
of a phase I/II study of IDX899. In
June 2008, we also reported positive
data from 400 mg and 200 mg dosing
cohorts of that ongoing phase I/II
study of IDX899. In the three dosing
cohorts of this study, patients
receiving once-daily IDX899 achieved
a mean plasma viral load reduction of
approximately 1.8 log10 after seven
days of treatment. Patients receiving
placebo had a 0.05 log10 viral load
reduction over the same treatment
period. No treatment-related serious
adverse events were reported for any
of the patients receiving IDX899 and
no patients discontinued the study.
Also, there were no discernable
patterns in adverse events between
treatment groups and there were no
laboratory abnormalities during the
treatment period. Based on the potent
antiviral activity of IDX899 observed
to date, the study was recently
amended to also evaluate a 100 mg/day
dose.
|
Prior to October 1, 2007, we developed, commercialized and manufactured telbivudine for the
treatment of patients with HBV. Certain of these activities were completed with Novartis. For
instance, pursuant to a manufacturing agreement and supply agreement, respectively, Novartis was
appointed to manufacture the commercial supply of Tyzeka
®
that was intended for sale in
the United States and to finish and package licensed products for commercial sale. Moreover, a
packaging agreement provided that the supply of Tyzeka
®
intended for commercial sale
in the United States would be packaged by Novartis Pharmaceuticals Corporation, an affiliate of
Novartis.
In September 2007, we entered into an amendment to the development and commercialization
agreement, which we refer to as the 2007 Amendment. When we refer to the development and
commercialization agreement, we mean the 2003 original agreement, 2007 Amendment and all prior
amendments. Pursuant to the 2007 Amendment, we transferred to Novartis our development,
commercialization and manufacturing rights and obligations pertaining to telbivudine (Tyzeka
®
/Sebivo
®
) on a worldwide basis. Effective October 1, 2007, we began receiving
royalty payments equal to a percentage of net sales of Tyzeka
®
/Sebivo
®
,
with such percentage increasing according to specified tiers of net sales. The royalty percentage
varies based upon the territory and the aggregate dollar amount of net sales. Also as a result of
the 2007 Amendment, the manufacturing agreement and supply agreement were
22
terminated as each
related to telbivudine. Effective October 1, 2007, Novartis is solely responsible for the
manufacture and supply of Tyzeka
®
/Sebivo
®
on a worldwide basis. No
penalties were incurred by us as a result of the termination of these arrangements.
In conjunction with the 2007 Amendment, we announced a restructuring of our operations in
which we reduced our workforce by approximately 100 positions, the majority of which had supported
the development and commercialization of Tyzeka
®
/Sebivo
®
in the United
States and Europe. The restructuring was a strategic decision on our behalf to focus our resources
on our HCV and HIV discovery and development programs
.
We estimate that this restructuring will
result in annual cost savings of $40.0 million to $45.0 million, including associated third party
and marketing costs.
Under our collaboration with Novartis, we received a license fee of $75.0 million for
our HBV product and product candidate, Tyzeka
®
/Sebivo
®
and valtorcitabine,
respectively, development funding for Tyzeka
®
/Sebivo
®
and valtorcitabine and
milestone payments. Potential milestone payments could have been earned upon the achievement of
specific regulatory approvals and commercial targets. In 2007, we received payments of $20.0
million for achieving two of these regulatory milestones. We do not expect to receive any additional
regulatory milestones for telbivudine or valtorcitabine.
In March 2006, Novartis exercised its option to license valopicitabine, our lead HCV product
candidate at that time. Under the development and commercialization agreement, Novartis agreed to
pay us up to $500.0 million in license fees and regulatory milestone payments for valopicitabine,
or NM283, and related compounds. Of this amount and in connection with its option exercise,
Novartis paid us a license fee of $25.0 million, paid us an additional $25.0 million payment based
upon results from our phase I clinical trial and provided development funding for the product
candidate. In July 2007, we announced that the FDA had placed on clinical hold in the United States
our development program of valopicitabine for the treatment of HCV based on the overall
risk/benefit profile observed in clinical testing. We subsequently discontinued the development of
valopicitabine. As a result, we do not expect to receive any additional license fees or milestone
payments for valopicitabine from Novartis.
In addition to the collaboration described above, Novartis purchased approximately 54% of our
outstanding capital stock in May 2003 from our then existing stockholders for $255.0 million in
cash, with an additional aggregate amount of up to $357.0 million contingently payable to these
stockholders if we achieve predetermined development milestones relating to NM283 or related
compounds. The future contingent payments are payable in cash or, under certain circumstances,
Novartis AG American Depository Shares. At present, Novartis owns approximately 56% of our
outstanding common stock.
All of our product candidates are currently in preclinical development or clinical
development. To commercialize any of our product candidates, we will be required to obtain
marketing authorization approvals after successfully completing preclinical studies and clinical
trials of such product candidates.
To date, our revenues have been derived from: license fees and milestone payments,
development expense reimbursements received from Novartis, Tyzeka
®
product sales in
the United States prior to October 1, 2007, amounts associated with Sebivo
®
product
sales outside of the United States prior to October 1, 2007, royalty payments associated with sales
of Tyzeka
®
/Sebivo
®
, and government grants. Effective October 1, 2007,
with the transfer to Novartis of our development and commercial rights to telbivudine, we no longer
recognize revenue from product sales of Tyzeka
®
and instead we recognize royalty income
associated with product sales of Tyzeka
®
/Sebivo
®
. We derived substantially
all of our total revenues from Novartis in 2008 and 2007. We anticipate recognizing additional
revenues from our collaboration with Novartis. These revenues include additional development
expense funding for our HCV product candidate and other product candidates that Novartis may elect
to subsequently license from us, as well as, regulatory milestones and, if products are approved
for sale, commercialization milestones and revenues derived from sales by us or Novartis of our
licensed product candidates.
We have incurred significant losses since our inception in May 1998 and expect such
losses to continue in the foreseeable future. Historically, we have generated losses principally
from costs associated with research and development activities, including clinical trial costs, and
general and administrative activities. As a result of planned expenditures for future discovery and
development activities, we expect to incur additional operating losses for the foreseeable future.
We expect our near-term sources of funding to consist principally of anticipated royalty payments
associated with product sales of Tyzeka
®
/Sebivo
®
, the reimbursement of
expenses we may incur in connection with the development of our licensed product and product
candidates, and potential license and other fees we may receive in connection with license
agreements with third parties.
Our research and development expenses consist primarily of salaries and payroll-related
expenses for research and development personnel, including stock-based compensation, fees paid to
clinical research organizations and other professional service providers in conjunction with our
clinical trials, fees paid to research organizations in conjunction with animal studies, costs of
material used in research and development, costs of contract manufacturing consultants, occupancy
costs associated with the use of our research facilities and equipment, consulting and license fees
paid to third parties, and depreciation of property and equipment related to research and
development. We incur the majority of our research and development spending on clinical,
preclinical and manufacturing activity with third-party contractors relating to the development of
our product candidates. We expense internal and external research and development costs as
incurred. We expect our research and development expenses to increase from our base level as of
January 1,
23
2008 as we continue to engage in research activities, further develop our potential
product candidates and advance our clinical trials.
Pursuant to our development and commercialization agreement with Novartis, after it
licenses a product candidate, Novartis is obligated to fund development expenses that we incur in
accordance with development plans agreed upon by Novartis and us. The option we have granted to
Novartis with respect to its exclusive right to license our product candidates generally requires
that Novartis exercise the option for each such product candidate generally 90 days after early
demonstration of activity and safety in a proof of concept clinical study. The expenses associated
with phase III clinical trials generally are the most costly component in the development of a
successful new product.
Our current estimates for additional research and development expenses are subject to
risks and uncertainties associated with research, development, clinical trials and the FDA and
foreign regulatory review and approval processes. The time and cost to complete development of our
product candidates may vary significantly and depends upon a number of factors, including the
requirements mandated by the FDA and other regulatory agencies, the success of our clinical trials,
the availability of financial resources, our collaboration with Novartis and its participation in
the manufacturing and clinical development of our product candidates.
Results of Operations
Comparison of Three Months Ended June 30, 2008 and 2007
Revenues
Total revenues for the three months ended June 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Collaboration revenue related party:
|
|
|
|
|
|
|
|
|
Reimbursement of research and development costs
|
|
$
|
974
|
|
|
$
|
12,475
|
|
License fee
|
|
|
(157
|
)
|
|
|
6,540
|
|
Royalty revenue
|
|
|
616
|
|
|
|
|
|
Product revenue rest of world
|
|
|
|
|
|
|
108
|
|
Profit sharing to related party
|
|
|
|
|
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
|
|
18,674
|
|
Product sales, net
|
|
|
|
|
|
|
1,038
|
|
Government grants
|
|
|
159
|
|
|
|
20
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,592
|
|
|
$
|
19,732
|
|
|
|
|
|
|
|
|
Collaboration revenue-related party consists of revenue associated with our collaboration with
Novartis for the worldwide development and commercialization of our product candidates. Effective
October 1, 2007, as a result of the 2007 Amendment, collaboration revenue-related party is
comprised of the following:
|
|
|
reimbursement by Novartis for expenses we incur in connection with the development and registration of
our licensed products and product candidates, net of certain qualifying costs incurred by Novartis;
|
|
|
|
|
license and other fees received from Novartis for the license of HBV and HCV product candidates, net of
reductions for Novartis stock subscription rights, which is being recognized over the development period
of the licensed product candidates;
|
|
|
|
|
milestone amounts from Novartis upon achievement of regulatory filings, certain marketing authorization
approvals and other milestone payments; and
|
|
|
|
|
royalty payments associated with product sales of
Tyzeka
®
/Sebivo
®
made by Novartis.
|
Prior to October 1, 2007, collaboration revenue-related party that we have recognized from
Novartis also included the following:
|
|
|
product revenue rest of world which was comprised of amounts that
Novartis would pay us for the supply of licensed products in countries
outside of the United States, United Kingdom, Germany, France, Spain
and Italy. These amounts were recorded as revenue at a percentage of
net sales; and
|
24
|
|
|
profit sharing to related party which represented the net benefit
amount paid to Novartis on licensed product sales in the United States
in which we acted as the lead commercialization party. The net
benefit, defined as net sales less cost of goods sold, was shared
equally with Novartis on product sales in the United States. These
amounts due to Novartis were recorded as a reduction of collaboration
revenue.
|
Collaboration revenue related party was $1.4 million in the three months ended June 30,
2008 as compared to $18.7 million in the same period in 2007. The majority of the decrease was due
to $11.5 million in lower reimbursements of research and development costs from Novartis as a
result of the transfer to Novartis of our development, manufacture rights and obligations of
telbivudine in October 2007 and the discontinuation of our valtorcitabine and valopicitabine
development activities in the third quarter of 2007. The decrease in license fee revenue was
primarily due to $4.1 million of lower revenue recognized in 2008 related to a milestone payment
received in 2007 and $2.2 million related to the impact of Novartis stock subscription rights.
Research and Development Expenses
Research and development expenses were $14.1 million in the three months ended June 30,
2008 as compared to $24.6 million in the same period in 2007. The decrease was primarily due to
$9.0 million in lower expenses as a result of the transfer to Novartis of our development,
manufacture rights and obligations of telbivudine and the discontinuation of our valtorcitabine and
valopicitabine development activities in the third quarter of 2007.
While our research and development expenses for 2008 will be considerably less than that
for 2007, we expect that research and development expenses for 2009 and beyond may increase as we
expand our development efforts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $6.7 million in the three months ended
June 30, 2008 as compared to $19.8 million in the same period in 2007. The decrease was primarily
due to $7.1 million in lower salaries and personnel related costs due to the reduction in headcount
and consultants as part of the October 2007 restructuring. There were also $4.5 million in lower
sales and marketing expenses as a result of the transfer to Novartis in October 2007 of our
commercialization rights to Tyzeka
®
/Sebivo
®
.
We expect our selling, general and administrative expenses to be substantially less in
2008 as compared to 2007 due to the savings in salaries and personnel related costs related to the
October 2007 restructuring as well as reduced sales and marketing expenses associated with the
transfer of Tyzeka
®
/Sebivo
®
to Novartis.
Investment and Other Income, Net
Investment and other income, net was $0.5 million in the three months ended June 30, 2008
as compared to $1.8 million in the same period in 2007. The decrease was primarily the result of
lower average cash and marketable securities balances held during the three months ended June 30,
2008 due to the use of cash for operations.
Income Taxes
Income tax benefit was substantially unchanged in the three months ended June 30, 2008 as
compared to the same period in 2007.
25
Comparison of Six Months Ended June 30, 2008 and 2007
Revenues
Total revenues for the six months ended June 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Collaboration revenue related party:
|
|
|
|
|
|
|
|
|
Reimbursement of research and development costs
|
|
$
|
1,250
|
|
|
$
|
24,262
|
|
License fee
|
|
|
1,054
|
|
|
|
9,255
|
|
Royalty revenue
|
|
|
1,174
|
|
|
|
|
|
Milestone revenue
|
|
|
|
|
|
|
10,000
|
|
Product revenue rest of world
|
|
|
|
|
|
|
138
|
|
Profit sharing to related party
|
|
|
|
|
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
3,478
|
|
|
|
43,025
|
|
Product sales, net
|
|
|
|
|
|
|
1,463
|
|
Government grants
|
|
|
157
|
|
|
|
50
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,635
|
|
|
$
|
44,538
|
|
|
|
|
|
|
|
|
Collaboration revenue related party was $3.5 million in the six months ended June 30,
2008 as compared to $43.0 million in the same period in 2007. The majority of the decrease was due
to $23.0 million in lower reimbursements of research and development costs from Novartis as a
result of the transfer to Novartis of our development, manufacture rights and obligations of
telbivudine in October 2007 and the discontinuation of our valtorcitabine and valopicitabine
development activities in the third quarter of 2007. Additionally, no milestone revenue was
recognized during the six months ended June 30, 2008 as compared to the same period in 2007. The
decrease in license fee revenue was primarily due to $3.9 million of lower revenue recognized in
2008 related to a milestone payment received in 2007 and $3.1 million related to the impact of
Novartis stock subscription rights.
Research and Development Expenses
Research and development expenses were $29.0 million in the six months ended June 30,
2008 as compared to $47.1 million in the same period in 2007. The decrease was primarily due to
$18.1 million in lower expenses as a result of the transfer to Novartis of our development,
manufacture rights and obligations of telbivudine in October 2007 and the discontinuation of our
valtorcitabine and valopicitabine development activities in the third quarter of 2007. In addition,
salaries and personnel related costs decreased by $2.1 million due to the reduction in headcount as
part of the October 2007 restructuring. Offsetting these amounts was an increase of $4.1 million in
2008 related to preclinical evaluation of compounds from our HCV discovery program.
While our research and development expenses for 2008 will be considerably less than that
for 2007, we expect that research and development expenses for 2009 and beyond may increase as we
expand our development efforts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $15.0 million in the six months ended
June 30, 2008 as compared to $35.7 million in the same period in 2007. The decrease was primarily
due to $12.0 million in lower salaries and personnel related costs due to the reduction in
headcount and consultants as part of the October 2007 restructuring. Sales and marketing expenses
decreased by $6.6 million as a result of the transfer to Novartis in October 2007 of our
commercialization rights to Tyzeka
®
/Sebivo
®
.
We expect our selling, general and administrative expenses to be substantially less in
2008 as compared to 2007 due to the savings in salaries and personnel related costs related to the
October 2007 restructuring as well as reduced sales and marketing expenses associated with the
transfer of Tyzeka
®
/Sebivo
®
to Novartis.
Investment and Other Income, Net
Investment and other income, net was $1.4 million in the six months ended June 30, 2008
as compared to $3.8 million in the same period in 2007. The decrease was primarily the result of
lower average cash and marketable securities balances held during the six months ended June 30,
2008 due to the use of cash for operations.
Income Taxes
Income tax benefit was $0.7 million in the six months ended June 30, 2008 as compared to
$0.2 million in the same period in 2007. The increase was due to a higher amount of research and
development credits our French subsidiary is expected to receive.
Liquidity and Capital Resources
Since our inception in 1998, we have financed our operations with proceeds obtained in
connection with license and development arrangements and equity financings. The proceeds include:
26
|
|
|
license, milestone, royalty and other payments from Novartis,
|
|
|
|
|
reimbursements from Novartis for costs we have incurred subsequent to May 8, 2003 in connection with the
development of
Tyzeka
®
/Sebivo
®
, valtorcitabine and valopicitabine,
|
|
|
|
|
collections on sales of Tyzeka
®
in the United States through September 30, 2007,
|
|
|
|
|
net proceeds from Sumitomo for reimbursement of development costs,
|
|
|
|
|
net proceeds from private placements of our convertible preferred stock,
|
|
|
|
|
net proceeds from public offerings,
|
|
|
|
|
net proceeds from concurrent private placements of our common stock in July 2004 and in October 2005, and
|
|
|
|
|
proceeds from the exercise of stock options granted pursuant to our equity compensation plans.
|
We had total cash, cash equivalents and marketable securities of $80.6 million and $112.0
as of June 30, 2008 and December 31, 2007, respectively. Of these amounts, $54.1 million and
$48.3 million were cash and cash equivalents as of June 30, 2008 and December 31, 2007,
respectively. We invest our excess cash balances in short-term and long-term marketable debt
securities. All of our marketable securities are classified as available-for-sale. Except for
certain of our auction rate securities, our investments have effective maturities not greater than
24 months. Investments with final maturities greater than 12 months are classified as non-current
marketable securities. As of June 30, 2008, we had $16.3 million in current marketable securities
and $10.3 million in non-current marketable securities. As of December 31, 2007, we had
$39.9 million in current marketable securities and $23.9 million in non-current marketable
securities.
We invest our cash in instruments that meet high credit quality standards, as specified
in our investment policy. Our investment policy also limits the amount of our credit exposure to
any one issue or issuer and seeks to manage these assets to achieve our goals of preserving
principal, maintaining adequate liquidity at all times, and maximizing returns subject to our
investment policy.
We held approximately $2.4 million in auction rate securities at June 30, 2008 and $11.1
million as of December 31, 2007. Our investments in auction rate securities consist of municipal or
student-loan backed debt securities. During the first six months of 2008, certain of our auction
rate securities experienced failed auctions. As of June 30, 2008, we had liquidated all but
$2.4 million of our auction rate securities that were held at December 31, 2007. The liquidation of
these auction rate securities did not result in any losses to the Company and the fair value did
not decline significantly as compared to December 31, 2007. These auction rate securities were
classified as Level 3 in accordance with SFAS No. 157 and valued at par value as of June 30, 2008.
We determined the fair value of these securities to be par value based on either i) recent trades
and an expected redemption of the entire security holding within the next 30 days or ii) a cash
flow model which incorporated a three-year discount period, a 3.448% per annum coupon rate, a
0.313% per coupon payment discount rate (which integrated a liquidity discount rate, 3-year swap
forward rate and credit spread), as well as coupon history and the number of auctions as of June
30, 2008. We also considered in determining fair value that our holdings in auction rate securities
were either insured by a private insurer or backed by the U.S. government and that these
securities are rated either Aa3 and AA or Aaa at June 30, 2008. At June 30, 2008, our investments
in auction rate securities represented 4.0% of the total assets and liabilities that were measured
at fair value on a recurring basis. The continued uncertainty in the credit markets may cause
additional auctions with respect to our auction rate securities to fail, which could prevent us
from liquidating certain of our holdings of auction rate securities. Based on our ability to access
our cash and other short-term investments, our expected operating cash flows, and our other sources
of cash, we do not anticipate the current lack of liquidity on these investments to have a material
impact on our financial condition or results of operation. However, due to the current lack of
liquidity in these investments, we do not intend to invest in auction rate securities in the
future.
Net cash used in operating activities was $30.0 million and $20.8 million in the six
months ended June 30, 2008 and 2007, respectively. The $9.2 million increase in cash used was
primarily related to a higher net loss and a lower cash contribution from working capital.
Net cash provided by investing activities was $35.3 million and $24.2 million in the six
months ended June 30, 2008 and 2007, respectively. The $11.1 million increase was primarily due to
net proceeds from sales and maturities of our marketable securities to fund operations.
Net cash provided by financing activities was substantially unchanged in the six months
ended June 30, 2008 compared to the same period in 2007. The net cash provided by financing
activities in the six months ended June 30, 2008 and 2007 was due to proceeds received from the
issuance of stock primarily from the exercise of employee stock options.
We believe that our current cash and cash equivalents and marketable securities together
with anticipated royalty payments associated with product sales of Tyzeka
®
/Sebivo
®
will be sufficient to satisfy our cash needs through late 2009. At any time, it is
27
possible that we may seek additional financing. We may seek such financing through a combination of
public or private financing, collaborative relationships and other arrangements. Any financing
requiring the issuance of additional shares of capital stock must first be approved by Novartis so
long as Novartis continues to own at least 19.4% of our voting stock. Additional funding may not be
available to us or, if available, may not be on terms favorable to us. Further, any additional
equity financing may be dilutive to stockholders, other than Novartis, which has the right to
maintain its current ownership level. Moreover, any debt financing, if available, may involve
restrictive covenants that would not be favorable to us. Our failure to obtain financing when
needed may harm our business and operating results.
Contractual Obligations and Commitments
Set forth below is a description of our contractual obligations as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
After 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
16,511
|
|
|
$
|
3,394
|
|
|
$
|
5,346
|
|
|
$
|
4,262
|
|
|
$
|
3,509
|
|
Consulting and other agreements
|
|
|
2,487
|
|
|
|
1,644
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations
|
|
$
|
18,998
|
|
|
$
|
5,038
|
|
|
$
|
6,189
|
|
|
$
|
4,262
|
|
|
$
|
3,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with certain of our operating leases, we have two letters of credit with a
commercial bank totaling $1.2 million which expire at varying dates through December 31, 2013.
We have certain potential payment obligations relating to our HBV and HCV product and
product candidates. These obligations are excluded from the contractual obligations table above as
we cannot make a reliable estimate of the period in which the cash payments will be made as of June
30, 2008, as further described below. As such, the table above
excludes payments associated with the UAB settlement entered into in
July 2008 as described in Note 14.
Pursuant to the license agreement between us and the University of Alabama at Birmingham,
or the UAB license agreement, we were granted an exclusive license to the rights that the
University of Alabama at Birmingham Research Foundation, or UABRF, an affiliate of the University
of Alabama at Birmingham, or UAB, Emory University and the Centre National de la Recherche
Scientifique, or CNRS, collectively the 1998 licensors, have to a 1995 U.S. patent application and
progeny thereof and counterpart patent applications in Europe, Canada, Japan and Australia that
cover the use of certain synthetic nucleosides for the treatment of HBV virus.
In February 2006, UAB notified us that it and Emory University were asserting a claim
that, as a result of the filing of a continuation patent application in July 2005 by UAB, the UAB
license agreement covers our telbivudine technology. UAB contended that we are obligated to pay the
1998 licensors an aggregate of $15.3 million comprised of 20% of the $75.0 million license fee we
received from Novartis in May 2003 in connection with the license of our HBV product candidates and
a $0.3 million payment in connection with the submission to the FDA of the IND pursuant to which we
have conducted clinical trials of telbivudine.
In January 2007, UAB and related entities filed a complaint in the United States District
Court for the Northern District of Alabama, Southern Division against us, CNRS and LUniversite
Montpellier, or the University of Montpellier. The complaint alleges that a former employee of UAB
is a co-inventor of certain patents in the United States and corresponding foreign patent
applications related to the use of ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to
one or more of Idenix, CNRS and the University of Montpellier and which cover the use of
Tyzeka
®
/Sebivo
®
for the treatment of HBV. Pursuant to the terms of the
dispute resolution procedure in the UAB license agreement, in September 2007 our CEO and the CEO of
UABRF met and agreed to begin a mediation process. Following a joint mediation session in
January 2008 and several months of further discussions, in July 2008, the parties entered into a
settlement agreement. Pursuant to this settlement agreement, all contractual disputes relating to
patents covering the use of certain synthetic nucleosides for the treatment of the HBV virus and
all litigation matters relating to patents and patent applications related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of the Company, CNRS and
the University of Montpellier and which cover the use of Tyzeka
®
/Sebivo
®
for the treatment of HBV have been resolved. Under the terms of the
settlement, we paid UABRF (on behalf of UAB and Emory University) a
$4.0 million upfront payment and will make additional
payments to UABRF equal to 20% of all royalty payments received by us from Novartis from worldwide
sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million as set forth
in the table in Note 14.
Our payment obligations under the settlement agreement expire on August 10, 2019. The
settlement agreement is effective as of June 1, 2008 and includes mutual releases of all claims and
covenants not to sue among the parties. It also includes a release from a third-party scientist
who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents.
UAB also agreed to abandon the continuation patent applications it filed in July 2005.
28
Additionally, in connection with the resolution of matters relating to certain of our HCV
product candidates we entered into a settlement agreement with UAB which provides for a milestone
payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market
and sell certain HCV products invented or discovered by our CEO during the period from November 1,
1999 to November 1, 2000. This settlement agreement also allows for payments in an amount equal to
0.5% of worldwide net sales of such HCV products with a minimum sales based payment equal to
$12.0 million.
Further, we have potential payment obligations under the license agreement with the
Universita degli Studi di Cagliari, or University of Cagliari, pursuant to which we have the
exclusive worldwide right to make, use and sell valopicitabine and certain other HCV and HIV
technology. We are liable for certain payments to the University of Cagliari if we receive from
Novartis or another collaborator license fees or milestone payments with respect to such
technology.
In March 2003, we entered into a final settlement agreement with Sumitomo Pharmaceuticals
Corporation or Sumitomo, under which the rights to develop and commercialize telbivudine in Japan,
China, South Korea and Taiwan previously granted to Sumitomo were returned to us. This agreement
with Sumitomo became effective upon consummation of our collaboration with Novartis in May 2003.
The settlement agreement which we entered into with Sumitomo provides for a $5.0 million milestone
payment to Sumitomo if and when the first commercial sale of
telbivudine occurs in Japan. Under our collaboration with Novartis,
Novartis will reimburse us for this $5.0 million
milestone payment if and when we pay it to Sumitomo.
In October 2006, we entered into a two-year research collaboration agreement with
Metabasis Therapeutics, Inc. or Metabasis. Under the terms of the agreement, Metabasis proprietary
liver-targeted technology would have been applied to one of our compounds to develop
second-generation nucleoside analog product candidates for the treatment of HCV. In July 2007, we
notified Metabasis that we would exercise our option to terminate the research collaboration on the
first anniversary of the agreement in October 2007. Prior to the termination of the agreement,
Metabasis asserted that a certain scientific milestone was met and thus a $1.0 million payment
under the collaboration agreement came due. We do not agree with Metabasis assessment that the
scientific milestone has been met and therefore do not believe that we have any liability for this
payment and initially so notified Metabasis. In May 2008, we and Metabasis entered into a letter
agreement whereby Metabasis will apply its proprietary liver-targeted technology to a compound
developed by us. If the results are considered positive, as measured by efficacy and safety in a
predictive animal study, then we anticipate re-instating the original 2006 agreement with
Metabasis, which was terminated in October 2007. If the original agreement with Metabasis were to
be re-instated, then we would remain obligated to all the terms and conditions thereunder,
including the $1.0 million milestone payment.
In December 2001, we retained the services of Clariant (subsequently acquired by
Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the
form of a multiproject development and supply agreement. Under the terms of the agreement with
Clariant, we would, on an as needed basis, utilize the Clariant process development and
manufacture services in the development of certain of our product candidates, including
telbivudine. After reviewing respective bids from each of Novartis and Clariant, the joint
manufacturing committee decided to proceed with Novartis as the primary manufacturer of
telbivudine. In late 2007, we transferred full responsibility to Novartis for the development,
commercialization and manufacturing of telbivudine. As a result, in January 2008, we exercised our
right under the agreement with Clariant to terminate effective July 2008. In February 2008,
Clariant asserted that they should have been able to participate in the manufacturing process for
telbivudine as a non-primary supplier and are due an unspecified amount. We do not agree with
Clariants assertion and therefore have not recorded a liability associated with this potential
contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are
initiated, we intend to vigorously defend against such lawsuit.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of the financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments,
including those related to collaborative research and development revenue recognition, accrued
expenses and stock-based compensation. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007. However, we believe that the following critical accounting
29
policy related to
fair value, adopted in the first quarter of 2008, is important to the understanding and evaluating
our reported financial results.
As of January 1, 2008, we implemented SFAS No. 157,
Fair Value Measurements,
(SFAS
No. 157) for our financial assets and other items that are recognized or disclosed at fair value
on a recurring basis. SFAS No. 157 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumption, SFAS No. 157 established a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
|
Level 1 Observable inputs such as quoted prices in active markets;
|
|
|
|
|
Level 2 Inputs, other than the quoted prices in active markets, that
are observable either directly or indirectly; and
|
|
|
|
|
Level 3 Unobservable inputs in which there is little or no market
data, which requires the reporting entity to develop its own
assumptions.
|
With the exception of our holdings in auction rate securities, our marketable securities
are generally valued using information provided by a pricing service, or for money market
investments, at calculated net asset values. Because our investment portfolio includes many fixed
income securities that do not always trade on a daily basis, the pricing service applied other
available information as applicable through processes such as benchmark yields, benchmarking of
like securities, sector groupings and matrix pricing to prepare evaluations. In addition, model
processes were used to assess interest rate impact and develop prepayment scenarios. These models
take into consideration relevant credit information, perceived market movements, sector news and
economic events. The inputs into these models may include benchmark yields, reported trades,
broker-dealer quotes, issuer spreads and other relevant data.
Since our investments in auction rate securities typically do not actively trade except
on successful auction dates, they are classified as Level 3 in accordance with SFAS No. 157. We
determined the fair value of these securities to be par value based on recent trades, anticipated
redemptions or a discounted cash flow model which incorporated a discount period, coupon rate,
liquidity discount, coupon history and the number of auctions as of June 30, 2008. We also
considered in determining fair value the rating of the securities by
investment rating agencies and whether or not the securities were insured or backed by the U.S. government.
Recent Accounting Pronouncements
In February 2008, FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157,
(FSP SFAS No. 157-2) was issued. FSP SFAS No. 157-2 defers the effective date provision of SFAS
No. 157 for certain non-financial assets and liabilities until fiscal years beginning after
November 15, 2008. We are currently evaluating the impact of adopting SFAS No. 157 for certain
non-financial assets and liabilities that are recognized and disclosed at fair value in our
financial statements on a non-recurring basis.
In December 2007, the Emerging Issues Task Force (EITF) Issue No. 07-01,
Accounting for
Collaborative Arrangements Related to the Development and Commercialization of Intellectual
Property,
(EITF 07-01) was issued. EITF 07-01 prescribes the accounting for collaborations. It
requires certain transactions between collaborators to be recorded in the income statement on
either a gross or net basis within expenses when certain characteristics exist in the collaboration
relationship. EITF 07-01 is effective for all of our collaborations existing after January 1, 2009.
We are evaluating the impact this standard will have on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Changes in interest rates may impact our financial position, operating results or cash
flows. The primary objective of our investment activities is to preserve capital, while maintaining
liquidity, until it is required to fund operations. To minimize risk, we maintain our operating
cash in commercial bank accounts. We invest our excess cash in high quality financial instruments
with active secondary or resale markets consisting primarily of money market funds, U.S. government
guaranteed debt obligations, repurchase agreements with major financial institutions and certain
corporate debt securities. Except for certain of our auction rate securities, our investments have
dollar weighted average effective maturity of the portfolio less than 12 months and effective
maturity of less than 24 months.
Foreign Currency Exchange Rate Risk
We have subsidiaries in Europe that are denominated in foreign currencies. We also receive
royalty revenues based on worldwide product sales by Novartis on sales of Sebivo
®
outside of the U.S. As a result, our financial position, results of operations and cash flows can
be affected by market fluctuations in foreign currency exchange rates. We have not entered into any
derivative financial instruments to reduce the risk of fluctuations in currency exchange rates.
30
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have conducted an evaluation under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer (our principal
executive officer and principal financial officer, respectively), regarding the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period
covered by this report. Based on such evaluation, our chief executive officer and chief financial
officer concluded that, as of June 30, 2008, our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30,
2008 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2007 and
Note 12 of this quarterly report for discussions of our legal proceedings
Item 1A. Risk Factors
Our business faces many risks. The risks described below may not be the only risks we face.
Additional risks we do not yet know of or we currently believe are immaterial may also impair our
business operations. If any of the events or circumstances described in the following risks
actually occurs, our business, financial condition or results of operations could suffer, and the
trading price of our common stock could decline. You should consider the following risks, together
with all of the other information in our Annual Report on Form 10-K for the year ended December 31,
2007, before deciding to invest in our securities.
Factors Related to Our Business
We have a limited operating history and have incurred a cumulative loss since inception. If we do
not generate significant revenues, we will not be profitable.
We have incurred significant losses since our inception in May 1998. We have generated limited
revenue from the sale of telbivudine (Tyzeka
®
/Sebivo
®
) to date and are
unable to make a meaningful assessment of potential future revenue associated with royalty payments
of product sales. We will not be able to generate additional revenues from product sales until one
of our other product candidates receives regulatory approval and we or a collaborative partner
successfully introduce such product commercially. We expect to incur annual operating losses over
the next several years as we expand our drug discovery and development efforts. We also expect that
the net loss we will incur will fluctuate from quarter to quarter and such fluctuations may be
substantial. To generate product revenue, regulatory approval for products we successfully develop
must be obtained and we and/or Novartis or a future collaboration partner must effectively
manufacture, market and sell such products. Even if we successfully commercialize product
candidates that receive regulatory approval, we may not be able to realize revenues at a level that
would allow us to achieve or sustain profitability. Accordingly, we may never generate significant
revenue and, even if we do generate significant revenue, we may never achieve profitability.
We will need additional capital to fund our operations, including the development, manufacture and
potential commercialization of our product candidates. If we do not have or cannot raise additional
capital when needed, we will be unable to develop and ultimately commercialize our product
candidates successfully.
Our cash, cash equivalents and marketable securities balance was approximately $80.6 million
at June 30, 2008. We believe that this balance, and the anticipated royalty payments associated
with product sales of Tyzeka
®
/Sebivo
®
will be sufficient to satisfy our
anticipated cash needs through late 2009. However, we may need or choose to seek additional funding
within this period of time. Our drug development programs and the potential commercialization of
our product candidates will require substantial cash to fund expenses that we will incur in
connection with preclinical studies and clinical trials, regulatory review and future manufacturing
and sales and marketing efforts.
31
Our need for additional funding will depend in large part on whether:
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with respect to Tyzeka
®
/Sebivo
®
, the level of royalty payments received from Novartis is significant;
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with respect to our other product candidates, Novartis exercises its option to license other product candidates, and we
receive related license fees, milestone payments and development expense reimbursement payments from Novartis; and with
respect to our other product candidates not licensed by Novartis, we receive related license fees, milestone payments and
development expense reimbursement payments from third parties.
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In addition, although Novartis has agreed to pay for certain development expenses incurred
under development plans it approves for products and product candidates it has licensed from us,
Novartis has the right to terminate its license and the related funding obligations with respect to
any such product or product candidate by providing us with six months written notice.
Our future capital needs will also depend generally on many other factors, including:
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the amount of revenue that we may be able to realize from commercialization and sale of
product candidates, if any, which are approved for commercial sale by regulatory
authorities;
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the scope and results of our preclinical studies and clinical trials;
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the progress of our current preclinical and clinical development programs for HCV and HIV;
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the cost of obtaining, maintaining and defending patents on telbivudine, our product candidates and our processes;
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the cost, timing and outcome of regulatory reviews;
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the commercial potential of our product candidates;
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the rate of technological advances in our markets;
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the cost of acquiring or in-licensing new discovery compounds, technologies, product candidates or other business assets;
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the magnitude of our general and administrative expenses;
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any costs we may incur under current and future licensing arrangements; and
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the costs of commercializing and launching other products, if any, which are successfully developed and approved for
commercial sale by regulatory authorities.
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We expect that we will incur significant costs to complete the clinical trials and other
studies required to enable us to submit regulatory submissions with the FDA and/or the EMEA for our
HCV and HIV product candidates as we continue development of each of these product candidates. The
time and cost to complete clinical development of these product candidates may vary as a result of
a number of factors.
We may seek additional capital through a combination of public and private equity offerings,
debt financings and collaborative, strategic alliance and licensing arrangements. Such additional
financing may not be available when we need it or may not be available on terms that are favorable
to us. Moreover, any financing requiring the issuance of additional shares of capital stock must
first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting
stock.
If we raise additional capital through the sale of our common stock, existing stockholders,
other than Novartis, which has the right to maintain its current level of ownership, will
experience dilution of their current level of ownership of our common stock and the terms of the
financing may adversely affect the holdings or rights of our stockholders. If we are unable to
obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one
or more of our drug development programs or to enter into new collaborative, strategic alliance or
licensing arrangements that may not be favorable to us. These arrangements could result in the
transfer to third parties of rights that we consider valuable.
Our research and development efforts may not result in additional product candidates being
discovered on anticipated timelines, if at all, which could limit our ability to generate revenues.
Our research and development programs, other than our program for NNRTIs for HIV, are at
preclinical stages. Additional product candidates that we may develop or acquire will require
significant research, development, preclinical studies and clinical trials, regulatory approval and
commitment of resources before any commercialization may occur. We cannot predict whether our
research will lead to the discovery of any additional product candidates that could generate
revenues for us.
32
Our failure to successfully acquire or develop and market additional product candidates or approved
drugs would impair our ability to grow.
As part of our strategy, we intend to establish a franchise in the HCV and HIV market by
developing product candidates for each therapeutic indication. The success of this strategy depends
upon the development and commercialization of additional product candidates that we successfully
discover, license or otherwise acquire.
Product candidates we discover, license or acquire will require additional and likely
substantial development, including extensive clinical testing and approval by the FDA and
applicable foreign regulatory authorities. All product candidates are prone to the risks of failure
inherent in pharmaceutical product development, including the possibility that the product
candidate will not be shown to be sufficiently safe and effective for approval by regulatory
authorities.
Proposing, negotiating and implementing acquisition or in-license of product candidates may be
a lengthy and complex process. Other companies, including those with substantially greater
financial, marketing and sales resources, may compete with us for the acquisition of product
candidates. We may not be able to acquire the rights to additional product candidates on terms that
we find acceptable, if at all.
Our investments are subject to general credit, liquidity, market and interest rate risks, which may
be exacerbated by the volatility in the U.S. credit markets.
Our investment portfolio included auction rate securities which approximated $2.4 million as
of June 30, 2008. Auction rate securities are generally debt instruments that are structured to
allow for short-term interest rate resets but with final contractual maturities that can be well in
excess of ten years. At the end of each reset period (which occurs every 28 days for the auction
rate securities held by us at June 30, 2008) investors can sell or continue to hold the securities.
The auction rate securities we held at December 31, 2007 reset in subsequent auctions in January
2008. Beginning mid-February 2008, certain of our auction rate securities experienced failed
auctions. As of June 30, 2008, we had liquidated all but $2.4 million of the $11.1 million auction
rate securities that were held at December 31, 2007. The liquidation of these auction rate
securities did not result in any losses to the Company and the fair value did not decline
significantly as compared to December 31, 2007. The continued uncertainty in the credit markets
could cause additional auctions with respect to our auction rate securities to fail, and could
prevent us from liquidating certain of our holdings of auction rate securities because the amount
of these securities submitted for sale has exceeded the amount of purchase orders for these
securities. There is a risk that auctions related to our remaining auction rate securities may fail
and that there could be a decline in value of these securities or any other securities which may
ultimately be deemed to be other than temporary. In the future, should we experience additional
auction failures and/or determine that these declines in value of auction rate securities are other
than temporary, we would recognize a loss in our consolidated statement of operations, which could
be material.
The condition of the credit markets remains dynamic. As a result, we may experience a
reduction in value or loss of liquidity with respect to our investments in auction rate securities
or our other investments. In addition, should our investments cease paying or reduce the amount of
interest paid to us, our interest income would suffer. These market risks associated with our
investment portfolio may have an adverse effect on our financial condition.
The markets which we intend to enter are subject to intense competition. If we are unable to
compete effectively, products we successfully develop and our product candidates may be rendered
noncompetitive or obsolete.
We are engaged in segments of the pharmaceutical industry that are highly competitive and
rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions,
governmental agencies and other public and private research organizations are commercializing or
pursuing the development of products that target viral diseases, including the same diseases we are
targeting.
We face intense competition from existing products and we expect to face increasing
competition as new products enter the market and advanced technologies become available. For the
treatment of the hepatitis B virus, we are aware of four other drug products, specifically,
lamivudine, entecavir and adefovir dipivoxil, each nucleoside analogs, and pegylated interferon,
which are approved by the FDA and commercially available in the United States or in foreign
jurisdictions. These products have preceded Tyzeka
®
/Sebivo
®
into the
marketplace and have gained acceptance with physicians and patients. For the treatment of the
chronic hepatitis C virus, the current standard of care is pegylated interferon in combination with
ribavirin, a nucleoside analog. Currently, for the treatment of HIV, there are 25 antiviral
therapies approved for commercial sale in the United States. Of these approved therapies, seven are
nucleosides, four are non-nucleosides, eleven are protease inhibitors, one is an integrase
inhibitor and two are entry inhibitors.
33
We believe that a significant number of product candidates that are currently under
development may become available in the future for the treatment of HBV, HCV and HIV. Our
competitors products may be more effective, have fewer side effects, lower costs or be better
marketed and sold, than any of our products. Additionally, products our competitors successfully
develop for the treatment of HCV and HIV may be marketed prior to any HCV or HIV product we
successfully develop. Many of our competitors
have:
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significantly greater financial, technical and human resources than we
have and may be better equipped to discover, develop, manufacture and
commercialize products;
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more extensive experience in conducting preclinical studies and clinical trials, obtaining
regulatory approvals and manufacturing and marketing pharmaceutical products;
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products that have been approved or product candidates that are in late-stage development; and
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collaborative arrangements in our target markets with leading companies and research institutions.
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Under certain circumstances, Novartis has the right to compete with products and product
candidates developed or licensed by us. Novartis has the right under certain circumstances to
market and sell products that compete with the product candidates and products that we license to
it, and any competition by Novartis could have a material adverse effect on our business.
Competitive products may render our products obsolete or noncompetitive before we can recover
the expenses of developing and commercializing our product candidates. Furthermore, the development
of new treatment methods and/or the widespread adoption or increased utilization of vaccines for
the diseases we are targeting could render our product candidates noncompetitive, obsolete or
uneconomical.
With respect to Tyzeka
®
/Sebivo
®
and other products, if any, we may
successfully develop and obtain approval to commercialize, we will face competition based on the
safety and effectiveness of our products, the timing and scope of regulatory approvals, the
availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price,
patent position and other factors. Our competitors may develop or commercialize more effective or
more affordable products, or obtain more effective patent protection, than we do. Accordingly, our
competitors may commercialize products more rapidly or effectively than we do, which could
adversely affect our competitive position and business.
Biotechnology and related pharmaceutical technologies have undergone and continue to be
subject to rapid and significant change. Our future will depend in large part on our ability to
maintain a competitive position with respect to these technologies.
If we are not able to attract and retain key management and scientific personnel and advisors, we
may not successfully develop our product candidates or achieve our other business objectives.
The growth of our business and our success depends in large part on our ability to attract and
retain key management and research and development personnel. Our key personnel include our senior
officers, many of whom have very specialized scientific, medical or operational knowledge. The loss
of the service of any of the key members of our senior management team may significantly delay or
prevent our discovery of additional product candidates, the development of our product candidates
and achievement of our other business objectives. Our ability to attract and retain qualified
personnel, consultants and advisors is critical to our success.
We face intense competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities, governmental entities and other research institutions. We
may be unable to attract and retain these individuals, and our failure to do so would have an
adverse effect on our business.
Our business has a substantial risk of product liability claims. If we are unable to obtain
appropriate levels of insurance, a product liability claim against us could adversely affect our
business.
Our business exposes us to significant potential product liability risks that are inherent in
the development, manufacturing and marketing of human therapeutic products. Product liability
claims could result in a recall of products or a change in the therapeutic indications for which
such products may be used. In addition, product liability claims may distract our management and
key personnel from our core business, require us to spend significant time and money in litigation
or to pay significant damages, which could prevent or interfere with commercialization efforts and
could adversely affect our business. Claims of this nature would also adversely affect our
reputation, which could damage our position in the marketplace.
For Tyzeka
®
/Sebivo
®
, product liability claims could be made against us
based on the use of our product in people. For Tyzeka
®
/Sebivo
®
and our
product candidates, product liability claims could be made against us based on the use of our
product candidates in clinical trials. We have obtained product liability insurance for Tyzeka
®
/Sebivo
®
and maintain clinical trial insurance for our product candidates in
development. Such insurance may not provide adequate coverage against potential liabilities. In
addition, clinical trial and product liability insurance is becoming increasingly expensive. As a
result, we may be unable to maintain or increase current amounts of product liability and clinical
trial insurance coverage, obtain product liability insurance for other products, if any, that we
seek to commercialize, obtain additional clinical trial insurance or obtain sufficient insurance at
a reasonable cost. If we are unable to
34
obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims, we may be unable to commercialize our products or
conduct the clinical trials necessary to develop our product candidates. A successful product
liability claim brought against us in excess of our insurance coverage, if any, may require us to
pay substantial amounts in damages. This could adversely affect our cash position and results of
operations.
Our insurance policies are expensive and protect us only from some business risks, which will leave
us exposed to significant, uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We
currently maintain general liability, property, workers compensation, products liability,
directors and officers, and employment practices insurance policies. We do not know, however, if
we will be able to maintain existing insurance with adequate levels of coverage. Any significant
uninsured liability may require us to pay substantial amounts, which would adversely affect our
cash position and results of operations.
If the estimates we make, and the assumptions on which we rely, in preparing our financial
statements prove inaccurate, our actual results may vary from those reflected in our projections
and accruals.
Our financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of our assets, liabilities,
revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. There can be no assurance,
however, that our estimates, or the assumptions underlying them, will not change.
One of these estimates is our estimate of the development period to amortize license fee
revenue from Novartis which we review on a quarterly basis. As of June 30, 2008, we have estimated
that the performance period during which the development of our licensed product and product
candidates will be completed is a period of approximately ten and a half years following the
effective date of the development and commercialization agreement that we entered into with
Novartis, or December 2013. If the estimated development period changes, we will adjust periodic
revenue that is being recognized and will record the remaining unrecognized license fees and other
upfront payments over the remaining development period during which our performance obligations
will be completed. Significant judgments and estimates are involved in determining the estimated
development period and different assumptions could yield materially different financial results.
This, in turn, could adversely affect our stock price.
If we fail to design and maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a result, current and potential
stockholders could lose confidence in our financial reporting, which could harm our business and
the trading price of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission adopted rules requiring public companies to include a report in Annual Reports on Form
10-K that contains an assessment by management of the effectiveness of the companys internal
controls over financial reporting. In addition, the companys registered independent public
accounting firm must attest to the effectiveness of our internal controls over financial reporting.
We have completed an assessment and will continue to review in the future our internal
controls over financial reporting in an effort to ensure compliance with the Section 404
requirements. The manner by which companies implement, maintain and enhance these requirements
including internal control reforms, if any, to comply with Section 404, and how registered
independent public accounting firm apply these requirements and test companies internal controls,
is subject to change and will evolve over time. As a result, notwithstanding our efforts, it is
possible that either our management or our registered independent public accounting firm may in the
future determine that our internal controls over financial reporting are not effective.
A determination that our internal controls over financial reporting are ineffective could
result in an adverse reaction in the financial marketplace due to a loss of investor confidence in
the reliability of our financial statements, which ultimately could negatively impact the market
price of our stock, increase the volatility of our stock price and adversely affect our ability to
raise additional funding.
Factors Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates
All of our product candidates are in development. Our product candidates remain subject to clinical
testing and regulatory approval. If we are unable to develop our product candidates, we will not be
successful.
To date, we have limited experience marketing, distributing and selling any products. The
success of our business depends primarily upon Novartis ability to commercialize Tyzeka
®
/Sebivo
®
and our ability, or that of any future collaboration partner, to
successfully commercialize other products, if any, we successfully develop. We received approval
from the FDA in the fourth quarter of 2006 to market and sell Tyzeka
®
for the treatment
of the chronic hepatitis B virus in the United States. In April 2007, Sebivo
®
was
approved in the European Union for the treatment of patients with the chronic hepatitis B virus.
Effective October 1, 2007, we
35
transferred to Novartis our development, commercialization and manufacturing rights and obligations
related to telbivudine
(Tyzeka
®
/Sebivo
®
)
on a world-wide basis in exchange
for royalty payments equal to a percentage of net sales of Tyzeka
®
/Sebivo
®
, with such percentage increasing according to specified tiers of net sales. The royalty
percentage varies based upon the territory and the aggregate dollar amount of net sales. Our other
product candidates are in various earlier stages of development. All of our product candidates
require regulatory review and approval prior to commercialization. Approval by regulatory
authorities requires, among other things, that our product candidates satisfy rigorous standards of
safety, including assessments of the toxicity and carcinogenicity of the product candidates we are
developing, and efficacy. To satisfy these standards, we must engage in expensive and lengthy
testing. As a result of efforts to satisfy these regulatory standards, our product candidates may
not:
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offer therapeutic or other improvements over existing drugs;
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be proven safe and effective in clinical trials;
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meet applicable regulatory standards;
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be capable of being produced in commercial quantities at acceptable costs; or
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be successfully commercialized.
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Commercial availability of our product candidates is dependent upon successful clinical
development and receipt of requisite regulatory approvals. Clinical data often are susceptible to
varying interpretations. Many companies that have believed that their product candidates performed
satisfactorily in clinical trials in terms of both safety and efficacy have nonetheless failed to
obtain approval for such product candidates. Furthermore, the FDA may request from us, and the EMEA
and regulatory agencies in other jurisdictions may request from Novartis, additional information
including data from additional clinical trials, which may delay significantly any approval and
these regulatory agencies ultimately may not grant marketing approval for any of our product
candidates. For example, in July 2007, we announced that the FDA had placed on clinical hold in the
United States our development program of valopicitabine for the treatment of HCV based on the
overall risk/benefit profile observed in clinical testing. We subsequently discontinued the
development of valopicitabine.
If our clinical trials are not successful, we will not obtain regulatory approval for the
commercial sale of our product candidates.
To obtain regulatory approval for the commercial sale of our product candidates, we will be
required to demonstrate through preclinical studies and clinical trials that our product candidates
are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the
historical rate of failure for product candidates is high. The results from preclinical studies of
a product candidate may not predict the results that will be obtained in human clinical trials.
We, the FDA or other applicable regulatory authorities may prohibit the initiation or suspend
clinical trials of a product candidate at any time if we or they believe the persons participating
in such clinical trials are being exposed to unacceptable health risks or for other reasons. As an
example, in July 2007, we announced that the FDA had placed on clinical hold in the United States
our development program of valopicitabine for the treatment of HCV based on the overall
risk/benefit profile observed in clinical testing. We subsequently discontinued the development of
valopicitabine. The observation of adverse side effects in a clinical trial may result in the FDA
or foreign regulatory authorities refusing to approve a particular product candidate for any or all
indications of use. Additionally, adverse or inconclusive clinical trial results concerning any of
our product candidates could require us to conduct additional clinical trials, result in increased
costs, significantly delay the submission of applications seeking marketing approval for such
product candidates, result in a narrower indication than was originally sought or result in a
decision to discontinue development of such product candidates.
Clinical trials require sufficient patient enrollment, which is a function of many factors,
including the size of the patient population, the nature of the protocol, the proximity of patients
to clinical sites, the availability of effective treatments for the relevant disease, the
eligibility criteria for the clinical trial and clinical trials evaluating other investigational
agents, which may compete with us for patient enrollment. Delays in patient enrollment can result
in increased costs and longer development times.
We cannot predict whether we will encounter problems with any of our completed, ongoing or
planned clinical trials that will cause us or regulatory authorities to delay or suspend our
clinical trials, delay or suspend patient enrollment into our clinical trials or delay the analysis
of data from our completed or ongoing clinical trials. Delays in the development of our product
candidates would delay our ability to seek and potentially obtain regulatory approvals, increase
expenses associated with clinical development and likely increase the volatility of the price of
our common stock.
Any of the following could suspend, terminate or delay the completion of our ongoing, or the
initiation of our planned, clinical trials:
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discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
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delays in obtaining, or the inability to obtain, required approvals from, or suspensions or termination by,
institutional review boards or other governing entities at clinical sites selected for participation in our
clinical trials;
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delays enrolling participants into clinical trials;
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lower than anticipated retention of participants in clinical trials;
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insufficient supply or deficient quality of product candidate materials or other materials necessary to conduct
our clinical trials;
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serious or unexpected drug-related side effects experienced by participants in our clinical trials; or
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negative results of clinical trials.
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If the results of our ongoing or planned clinical trials for our product candidates are not
available when we expect or if we encounter any delay in the analysis of data from our preclinical
studies and clinical trials:
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we may be unable to commence human clinical trials of any HIV product
candidate, HCV product candidates or other product candidates;
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Novartis may choose not to license our product candidates and we may
not be able to enter into other collaborative arrangements for any of
our other product candidates; or
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we may not have the financial resources to continue the research and
development of our product candidates.
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If our product candidates fail to obtain U.S. and/or foreign regulatory approval, we and our
partners will be unable to commercialize our product candidates.
Each of our product candidates is subject to extensive governmental regulations relating to
development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and
clinical trials and an extensive regulatory approval process are required in the United States and
in many foreign jurisdictions prior to the commercial sale of our product candidates. Before any
product candidate can be approved for sale, we must demonstrate that it can be manufactured in
accordance with the FDAs current good manufacturing practices, which are a rigorous set of
requirements. In addition, facilities where the principal commercial supply of a product is to be
manufactured must pass FDA inspection prior to approval. Satisfaction of these and other regulatory
requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is
possible that none of the product candidates we are currently developing will obtain the
appropriate regulatory approvals necessary to permit commercial distribution.
The time required for FDA review and other approvals is uncertain and typically takes a number
of years, depending upon the complexity of the product candidate. Our analysis of data obtained
from preclinical studies and clinical trials is subject to confirmation and interpretation by
regulatory authorities, which could delay, limit or prevent regulatory approval. We may also
encounter unanticipated delays or increased costs due to government regulation from future
legislation or administrative action, changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review.
Any delay in obtaining or failure to obtain required approvals could materially adversely
affect our ability to generate revenues from a particular product candidate. Furthermore, any
regulatory approval to market a product may be subject to limitations on the indicated uses for
which we may market the product. These restrictions may limit the size of the market for the
product. Additionally, product candidates we successfully develop could be subject to post market
surveillance and testing.
We are also subject to numerous foreign regulatory requirements governing the conduct of
clinical trials, and we, with Novartis, are subject to numerous foreign regulatory requirements
relating to manufacturing and marketing authorization, pricing and third-party reimbursement. The
foreign regulatory approval processes include all of the risks associated with FDA approval
described above as well as risks attributable to the satisfaction of local regulations in foreign
jurisdictions. Approval by any one regulatory authority does not assure approval by regulatory
authorities in other jurisdictions. Many foreign regulatory authorities, including those in the
European Union and in China, have different approval procedures than those required by the FDA and
may impose additional testing requirements for our product candidates. Any failure or delay in
obtaining such marketing authorizations for our product candidates would have a material adverse
effect on our business.
Our products will be subject to ongoing regulatory review even after approval to market such
products is obtained. If we fail to comply with applicable U.S. and foreign regulations, we could
lose approvals we have been granted and our business would be seriously harmed.
37
Even after approval, any drug product we successfully develop will remain subject to
continuing regulatory review, including the review of clinical results, which are reported after
our product becomes commercially available. The marketing claims we are permitted to make in
labeling or advertising regarding our marketed drugs in the United States will be limited to those
specified in any FDA approval, and in other markets such as the European Union, regulatory
approvals similar to FDA approval. Any manufacturer we use to make approved products will be
subject to periodic review and inspection by the FDA or other similar regulatory authorities in the
European Union and other jurisdictions. We are required to report any serious and unexpected
adverse experiences and certain quality problems with our products and make other periodic reports
to the FDA or other similar regulatory authorities in the European Union and other jurisdictions.
The subsequent discovery of previously unknown problems with the product, manufacturer or facility
may result in restrictions on the drug manufacturer or facility, including withdrawal of the drug
from the market. We do not have, and currently do not intend to develop, the ability to manufacture
material at commercial scale or for our clinical trials. Our reliance on third-party manufacturers
entails risks to which we would not be subject if we manufactured products ourselves, including
reliance on such manufacturers for regulatory compliance. Certain changes to an approved product,
including the way it is manufactured or promoted, often require prior approval from regulatory
authorities before the product as modified may be marketed.
If we fail to comply with applicable continuing regulatory requirements, we may be subject to
civil penalties, suspension or withdrawal of any regulatory approval obtained, product recalls and
seizures, injunctions, operating restrictions and criminal prosecutions and penalties. Because of
these potential sanctions, we seek to monitor compliance with these regulations.
If we fail to comply with ongoing regulatory requirements after receipt of approval to
commercialize a product, we may be subject to significant sanctions imposed by the FDA, EMEA or
other U.S. and foreign regulatory authorities.
The research, testing, manufacturing and marketing of product candidates and products are
subject to extensive regulation by numerous regulatory authorities in the United States and other
countries. Failure to comply with FDA or other applicable U.S. and foreign regulatory requirements
may subject a company to administrative or judicially imposed sanctions. These enforcement actions
may include without limitation:
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warning letters and other regulatory authority communications
objecting to matters such as promotional materials and requiring
corrective action such as revised communications to healthcare
practitioners;
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civil penalties;
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criminal penalties;
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injunctions;
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product seizure or detention;
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product recalls;
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total or partial suspension of manufacturing; and
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FDA refusal to review or approve pending new drug applications or
supplements to new drug applications for previously approved products,
and/or similar rejections of marketing applications or supplements by
foreign regulatory authorities.
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The imposition of one or more of these sanctions could have a material adverse effect on our
business.
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 activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although we believe that our safety procedures for
handling and disposing of these materials comply with the standards prescribed by state and federal
laws and 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 and environmental liability insurance to cover us for costs associated with environmental
or toxic tort claims that may be asserted against us, this insurance may not provide adequate
coverage against all potential liabilities. Additional federal, state, foreign 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.
38
Factors Related to Our Relationship with Novartis
Novartis has substantial control over us and could delay or prevent a change in corporate control.
As of June 30, 2008, Novartis owned approximately 56% of our outstanding common stock. For so
long as Novartis owns at least a majority of our outstanding common stock, in addition to its
contractual approval rights, Novartis has the ability to delay or prevent a change in control of
Idenix that may be favored by other stockholders and otherwise exercise substantial control over
all corporate actions requiring stockholder approval irrespective of how our other stockholders may
vote, including:
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the election of directors;
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any amendment of our restated certificate of incorporation or amended and restated by-laws;
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the approval of mergers and other significant corporate transactions, including a sale of
substantially all of our assets; or
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the defeat of any non-negotiated takeover attempt that might otherwise benefit our other stockholders.
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Novartis has the right to exercise control over certain corporate actions that may not otherwise
require stockholder approval as long as it holds at least 19.4% of our voting stock.
As long as Novartis and its affiliates own at least 19.4% of our voting stock, which we define
below, we cannot take certain actions without the consent of Novartis. These actions include:
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the authorization or issuance of additional shares of our capital stock or the capital stock of our
subsidiaries, except for a limited number of specified issuances;
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any change or modification to the structure of our board of directors or a similar governing body of any
of our subsidiaries;
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any amendment or modification to any of our organizational documents or those of our subsidiaries;
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the adoption of a three-year strategic plan;
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the adoption of an annual operating plan and budget, if there is no approved strategic plan;
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any decision that would result in a variance of total annual expenditures, capital or expense, in excess
of 20% from the approved three-year strategic plan;
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any decision that would result in a variance in excess of the greater of $10.0 million or 20% of our
profit or loss target in the strategic plan or annual operating plan;
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the acquisition of stock or assets of another entity that exceeds 10% of our consolidated net revenue,
net income or net assets;
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the sale, lease, license or other disposition of any assets or business which exceeds 10% of our net
revenue, net income or net assets;
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the incurrence of any indebtedness by us or our subsidiaries for borrowed money in excess of $2.0 million;
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any material change in the nature of our business or that of any of our subsidiaries;
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any change in control of Idenix or any subsidiary; and
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any dissolution or liquidation of Idenix or any subsidiary, or the commencement by us or any subsidiary
of any action under applicable bankruptcy, insolvency, reorganization or liquidation laws.
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Pursuant to the amended and restated stockholders agreement, dated July 27, 2004, among us,
Novartis and certain of our stockholders, which we refer to as the stockholders agreement, we are
obligated to use our reasonable best efforts to nominate for election as a director at least two
designees of Novartis for so long as Novartis and its affiliates own at least 35% of our voting
stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least
19.4% of our voting stock.
Additionally, until such time as Novartis and its affiliates own less than 50% of our voting
stock, Novartis consent is required for the selection and appointment of our chief financial
officer. If in Novartis reasonable judgment our chief financial officer is not satisfactorily
performing his duties, we are required to terminate the employment of our chief financial officer.
39
Furthermore, under the terms of the stock purchase agreement, dated as of March 21, 2003,
among us, Novartis and substantially
all of our then existing stockholders, which we refer to as the stock purchase agreement, Novartis
is required to make future contingent payments of up to $357.0 million to these stockholders if we
achieve predetermined development milestones with respect to NM283 or related compounds. As a
result, in making determinations as to our annual operating plan and budget for the development of
our product candidates, the interests of Novartis may be different than the interests of our other
stockholders, and Novartis could exercise its approval rights in a manner that may not be in the
best interests of all of our stockholders.
Under the stockholders agreement, voting stock means our outstanding securities entitled to
vote in the election of directors, but does not include:
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securities issued in connection with our acquisition of all of the
capital stock or all or substantially all of the assets of another
entity; and
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shares of common stock issued upon exercise of stock options or stock
awards pursuant to compensation and equity incentive plans.
Notwithstanding the foregoing, voting stock includes up to 1,399,106
shares that were reserved as of May 8, 2003 for issuance under our
1998 equity incentive plan.
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Novartis has the ability to exercise substantial control over our strategic direction, our
research and development focus and other material business decisions.
We currently depend on Novartis for substantially all our revenues and for the commercialization of
Tyzeka
®
/Sebivo
®
and for support in the development of product candidates
Novartis has licensed from us. If our development, license and commercialization agreement with
Novartis terminates, our business and, in particular, the development of our product candidates and
the commercialization of any products that we successfully develop could be harmed.
In May 2003, we received a $75.0 million license fee from Novartis in connection with the
license to Novartis of our then HBV product candidates, telbivudine and valtorcitabine. In April
2007, we received a $10.0 million milestone payment for regulatory approval of Sebivo
®
in China and in June 2007 we received an additional $10.0 million milestone payment for regulatory
approval of Sebivo
®
in the European Union. Pursuant to the development and
commercialization agreement, as amended, Novartis also acquired options to license valopicitabine
and additional product candidates from us. In March 2006, Novartis exercised its option and
acquired a license to valopicitabine. In exchange we received a $25.0 million license fee from
Novartis and the right to receive up to an additional $45.0 million in license fee payments upon
advancement of an HCV product candidate into phase III clinical trials. Assuming we continue to
successfully develop and commercialize our product candidates (other than valopicitabine), under
the terms of the development and commercialization agreement, we are entitled to receive
reimbursement of expenses we incur in connection with the development of these product candidates
and additional milestone payments from Novartis. Additionally, if any of the product candidates we
have licensed to Novartis are approved for commercialization, we anticipate receiving proceeds in
connection with the sales of such products. If Novartis exercises the option to license with
respect to other product candidates that we discover, or in some cases, acquire, we are entitled to
receive license fees and milestone payments as well as reimbursement of expenses we incur in the
development of such product candidates in accordance with development plans mutually agreed with
Novartis.
Under the existing terms of the development and commercialization agreement, we have the right
to co-promote and co-market with Novartis in the United States, United Kingdom, Germany, Italy,
France and Spain any products licensed by Novartis, excluding
Tyzeka
®
/Sebivo
®
. For Tyzeka
®
/Sebivo
®
, we acted as lead commercial party in the
United States. On September 28, 2007, we entered into an amendment to the development and
commercialization agreement and a transition services agreement, both of which became effective on
October 1, 2007, whereby we transferred to Novartis our development, commercialization and
manufacturing rights and obligations related to telbivudine (Tyzeka
®
/Sebivo
®
) on a world-wide basis. We receive royalty payments equal to a percentage of net sales of
Tyzeka
®
/Sebivo
®
, with such percentage increasing according to specified
tiers of net sales. The royalty percentage varies based upon the territory and the aggregate dollar
amount of net sales. Novartis is solely responsible for development and commercialization expenses
relating to telbivudine after October 1, 2007 and is also responsible for certain costs associated
with the transition of third party contracts and arrangements relating to telbivudine and certain
intellectual property prosecution and enforcement activities. Pursuant to the transition services
agreement, we will provide Novartis with certain services relating to telbivudine until such period
of time that is agreeable by both parties. We are reimbursed for these services at an agreed upon
rate.
As a result of the amendment to the development and commercialization agreement discussed
above, our master manufacturing and supply agreement, dated May 2003, and our commercial
manufacturing agreement, dated June 2006, between us and Novartis, were terminated without penalty
as each related to telbivudine.
Novartis may terminate the development and commercialization agreement in any country or with
respect to any product or product candidate licensed under the development and commercialization
agreement for any reason with six months written notice. If the development and commercialization
agreement is terminated in whole or in part and we are unable to enter similar arrangements with
other collaborators or partners, our business would be materially adversely affected.
40
Novartis has the option to license from us product candidates we discover, or in some cases,
acquire. If Novartis does not exercise its option with respect to a product candidate, our
development, manufacture and/or commercialization of such product candidate may be substantially
delayed or limited.
Our drug development programs and potential commercialization of our product candidates will
require substantial additional funding. In addition to its license of Tyzeka
®
/Sebivo
®
, valtorcitabine and valopicitabine, Novartis has the option under the
development and commercialization agreement to license our other product candidates. If Novartis
elects not to exercise such option, we may be required to seek other collaboration arrangements to
provide funds necessary to enable us to develop such product candidates.
If we are not successful in efforts to enter into a collaboration arrangement with respect to
a product candidate not licensed by Novartis, we may not have sufficient funds to develop such
product candidate internally. As a result, our business would be adversely affected. In addition,
the negotiation of a collaborative agreement is time consuming, and could, even if successful,
delay the development, manufacture and/or commercialization of a product candidate and the terms of
the collaboration agreements may not be favorable to us.
If we breach any of the numerous representations and warranties we made to Novartis under the
development and commercialization agreement or the stock purchase agreement, Novartis has the right
to seek indemnification from us for damages it suffers as result of such breach. These amounts
could be substantial.
We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of
our breach of representations and warranties in the development and commercialization agreement and
the stock purchase agreement. Under the development and commercialization agreement and stock
purchase agreement, we made numerous representations and warranties to Novartis regarding our HCV
and HBV product candidates, including representations regarding our ownership of and licensed
rights to the inventions and discoveries relating to such product candidates. If one or more of our
representations or warranties were not true at the time we made them to Novartis, we would be in
breach of these agreements. In the event of a breach by us, Novartis has the right to seek
indemnification from us and, under certain circumstances, us and our stockholders who sold shares
to Novartis, which include many of our directors and officers, for damages suffered by Novartis as
a result of such breach. The amounts for which we could become liable to Novartis may be
substantial.
In May 2004, we entered into a settlement agreement with UAB, relating to our ownership of our
chief executive officers inventorship interest in certain of our patents and patent applications,
including patent applications covering our HCV product candidates. Under the terms of the
settlement agreement, we agreed to make payments to UAB, including an initial payment made in 2004
in the amount of $2.0 million, as well as regulatory milestone payments and payments relating to
net sales of certain products. Novartis may seek to recover from us, and, under certain
circumstances, us and our stockholders who sold shares to Novartis, which include many of our
officers and directors, the losses it suffers as a result of any breach of the representations and
warranties we made relating to our HCV product candidates and may assert that such losses include
the settlement payments.
In July 2008, we, our CEO, in his individual capacity, the University of Montpellier and CNRS
entered into a settlement agreement with UAB, UABRF and Emory University. Pursuant to this
settlement agreement, all contractual disputes relating to patents covering the use of certain
synthetic nucleosides for the treatment of the HBV virus and all litigation matters relating to
patents and patent applications related to the use of ß-L-2-deoxy-nucleosides for the treatment of
HBV assigned to one or more of the Company, CNRS and the University of Montpellier and which cover
the use of Tyzeka
®
/Sebivo
®
for the treatment of HBV have been resolved.
Under the terms of the settlement, we paid UABRF (on behalf of UAB and Emory University) a
$4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty
payments received by us from Novartis from worldwide sales of telbivudine, subject to minimum
payment obligations aggregating $11.0 million. Novartis may seek to recover from us, and, under
certain circumstances, us and those of our officers, directors and other stockholders who sold
shares to Novartis, such losses and other losses it suffers as a result of any breach of the
representations and warranties we made relating to our HBV product candidates and may assert that
such losses include the settlement payments.
If we materially breach our obligations or covenants arising under the development and
commercialization agreement with Novartis, we may lose our rights to develop or commercialize our
product candidates.
We have significant obligations to Novartis under the development and commercialization
agreement. The obligations to which we are subject include the responsibility for developing and,
in some countries, co-promoting or co-marketing the products licensed to Novartis in accordance
with plans and budgets subject to Novartis approval. The covenants and agreements we made when
entering into the development and commercialization agreement include covenants relating to payment
of our required portion of development expenses under the development and commercialization
agreement, compliance with certain third-party license agreements, the conduct of our clinical
studies and activities relating to the commercialization of any products that we successfully
develop. If we materially breach this agreement and are unable within an agreed time period to cure
such breach, the agreement may be terminated and we may be required to grant Novartis an exclusive
license to develop, manufacture and/or sell such products. Although such a
41
license would be subject to payment of a royalty by Novartis to be negotiated in good faith, we and
Novartis have stipulated that no such payments would permit the breaching party to receive more
than 90% of the net benefit it was entitled to receive before the agreement were terminated.
Accordingly, if we materially breach our obligations under the development and commercialization
agreement, we may lose our rights to develop our product candidates or commercialize our
successfully developed products and receive lower payments from Novartis than we had anticipated.
If we issue capital stock, in certain situations Novartis will be able to purchase shares at par
value to maintain its percentage ownership in Idenix and, if that occurs, this could cause
dilution. In addition, Novartis has the right, under specified circumstances, to purchase a pro
rata portion of other shares that we may issue.
Under the terms of the stockholders agreement, Novartis has the right to purchase at par
value of $0.001 per share, such number of shares required to maintain its percentage ownership of
our voting stock if we issue shares of capital stock in connection with the acquisition or
in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. If
Novartis elects to maintain its percentage ownership of our voting stock under the rights described
above, Novartis will be buying such shares at a price, which is substantially below market value,
which would cause dilution. This right of Novartis will remain in effect until the earlier of:
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the date that Novartis and its affiliates own less than 19.4% of our voting stock; or
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the date that Novartis becomes obligated under the stock purchase agreement to make
the additional future contingent payments of $357.0 million to our stockholders who
sold shares to Novartis in May 2003.
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In addition to the right to purchase shares of our common stock at par value as described
above, Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata
portion of shares of capital stock that we issue. The price that Novartis pays for these securities
would be the price that we offer such securities to third parties, including the price paid by
persons who acquire shares of our capital stock pursuant to awards granted under stock compensation
or equity incentive plans. Novartis right to purchase a pro rata portion does not include:
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securities issuable in connection with any stock split, reverse stock split,
stock dividend or recapitalization that we undertake that affects all holders
of our common stock proportionately;
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shares that Novartis has the right to purchase at par value, as described above;
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shares of common stock issuable upon exercise of stock options and
other awards pursuant to our 1998 Equity Incentive Plan; and
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securities issuable in connection with our acquisition of all the
capital stock or all or substantially all of the assets of another
entity.
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Novartis right to purchase shares includes a right to purchase securities that are
convertible into, or exchangeable for, our common stock, provided that Novartis right to purchase
stock in connection with options or other convertible securities issued to any of our directors,
officers, employees or consultants pursuant to any stock compensation or equity incentive plan will
not be triggered until the underlying equity security has been issued to the director, officer,
employee or consultant.
If Novartis terminates or fails to perform its obligations under the development and
commercialization agreement, we may not be able to successfully commercialize our product
candidates licensed to Novartis and the development and commercialization of our other product
candidates could be delayed, curtailed or terminated.
Under the amended development and commercialization agreement, Novartis is solely responsible
for the development, commercialization and manufacturing rights to telbivudine on a world-wide
basis. We expect to co-promote or co-market with Novartis other products, if any, that Novartis has
licensed or will license from us which are successfully developed and approved for
commercialization. As a result, we will depend upon the success of the efforts of Novartis to
manufacture, market and sell Tyzeka
®
/Sebivo
®
and our other products, if
any, that we successfully develop. However, we have limited control over the resources that
Novartis may devote to such manufacturing and commercialization efforts and, if Novartis does not
devote sufficient time and resources to such efforts, we may not realize the commercial or
financial benefits we anticipate, and our results of operations may be adversely affected.
In addition, Novartis has the right to terminate the development and commercialization
agreement with respect to any product, product candidate or country with six months written notice
to us. If Novartis were to breach or terminate this agreement with us, the development or
commercialization of the affected product candidate or product could be delayed, curtailed or
terminated because we may not have sufficient resources or capabilities, financial or otherwise, to
continue development and commercialization of the product candidate, and we may not be successful
in entering into a collaboration with another third party.
42
Novartis has the right to market and sell products that compete with the product candidates and
products that we license to it, and any competition by Novartis could have a material adverse
effect on our business.
Novartis may market, sell, promote or license competitive products. Novartis has significantly
greater financial, technical and human resources than we have and is better equipped to discover,
develop, manufacture and commercialize products. In addition, Novartis has more extensive
experience in preclinical studies and clinical trials, obtaining regulatory approvals and
manufacturing and marketing pharmaceutical products. In the event that Novartis competes with us,
our business could be materially and adversely affected.
Factors Related to Our Dependence on Third Parties
If we seek to enter into collaboration agreements for any product candidates other than those
licensed to Novartis and we are not successful in establishing such collaborations, we may not be
able to continue development of those product candidates.
Our drug development programs and product commercialization efforts will require substantial
additional cash to fund expenses to be incurred in connection with these activities. While we have
entered into the development and commercialization agreement with Novartis, we may seek to enter
into additional collaboration agreements with pharmaceutical companies to fund all or part of the
costs of drug development and commercialization of product candidates that Novartis does not
license. We may not be able to enter into collaboration agreements and the terms of the
collaboration agreements, if any, may not be favorable to us. If we are not successful in our
efforts to enter into a collaboration arrangement with respect to a product candidate, we may not
have sufficient funds to develop such product candidate or any other product candidate internally.
If we do not have sufficient funds to develop our product candidates, we will not be able to
bring these product candidates to market and generate revenue. As a result, our business will be
adversely affected. In addition, the inability to enter into collaboration agreements could delay
or preclude the development, manufacture and/or commercialization of a product candidate and could
have a material adverse effect on our financial condition and results of operations because:
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we may be required to expend our own funds to advance the product candidate to commercialization;
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revenue from product sales could be delayed; or
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we may elect not to develop or commercialize the product candidate.
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If any collaborative partner terminates or fails to perform its obligations under agreements with
us, the development and commercialization of our product candidates could be delayed or terminated.
We have entered into the development and commercialization agreement with Novartis and we may
enter into additional collaborative arrangements in the future. If collaborative partners do not
devote sufficient time and resources to any collaboration arrangement with us, we may not realize
the potential commercial benefits of the arrangement, and our results of operations may be
adversely affected. In addition, if Novartis or future collaboration partners were to breach or
terminate their arrangements with us, the development and commercialization of the affected product
candidate could be delayed, curtailed or terminated because we may not have sufficient financial
resources or capabilities to continue development and commercialization of such product candidate.
Our collaborations with outside scientists may be subject to restriction and change.
We work with chemists and biologists at academic and other institutions that assist us in our
research and development efforts. Telbivudine, valtorcitabine and valopicitabine were discovered
with the research and development assistance of these chemists and biologists. Many of the
scientists who have contributed to the discovery and development of our product candidates are not
our employees and may have other commitments that would limit their future availability to us.
Although our scientific advisors and collaborators generally agree not to do competing work, if a
conflict of interest between their work for us and their work for another entity arises, we may
lose their services.
We have depended on third-party manufacturers to manufacture products for us. If in the future we
manufacture any of our products, we will be required to incur significant costs and devote
significant efforts to establish these capabilities.
We have relied upon third parties to produce material for preclinical and clinical studies and
may continue to do so in the future. Although we believe that we will not have any material supply
issues, we cannot be certain that we will be able to obtain long term supply arrangements of those
materials on acceptable terms, if at all. We also expect to rely upon other third parties to
produce materials required for clinical trials and for the commercial production of certain of our
products if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for
third-party manufacturing, or to do so on commercially reasonable terms, we may
not be able to complete development of our products or market them.
43
Reliance on third-party manufacturers entails risks to which we would not be subject if we
manufactured products ourselves, including reliance on the third party for regulatory compliance
and quality assurance, the possibility of breach by the third party of agreements related to supply
because of factors beyond our control and the possibility of termination or nonrenewal of the
agreement by the third party, based on its own business priorities, at a time that is costly or
damaging to us.
In addition, the FDA and other regulatory authorities require that our products be
manufactured according to current good manufacturing practice regulations. Any failure by us or our
third-party manufacturers to comply with current good manufacturing practices and/or our failure to
scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory
approval. In addition, such failure could be the basis for action by the FDA to withdraw approvals
for product candidates previously granted to us and for other regulatory action.
Factors Related to Patents and Licenses
If we are unable to adequately protect our patents and licenses related to our product candidates,
or if we infringe the rights of others, it may not be possible to successfully commercialize
products that we develop.
Our success will depend in part on our ability to obtain and maintain patent protection both
in the United States and in other countries for any products we successfully develop. The patents
and patent applications in our patent portfolio are either owned by us, exclusively licensed to us,
or co-owned by us and others and exclusively licensed to us. Our ability to protect any products we
successfully develop from unauthorized or infringing use by third parties depends substantially on
our ability to obtain and maintain valid and enforceable patents. 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 obtain and enforce
patents is uncertain and involves complex legal and factual questions. Accordingly, rights under
any issued patents may not provide us with sufficient protection for any products we successfully
develop or provide sufficient protection to afford us a commercial advantage against our
competitors or their competitive products or processes. In addition, we cannot guarantee that any
patents will be issued from any pending or future patent applications owned by or licensed to us.
Even if patents have been issued or will be issued, we cannot guarantee that the claims of these
patents are, or will be, valid or enforceable, or provide us with any significant protection
against competitive products or otherwise be commercially valuable to us.
We may not have identified all patents, published applications or published literature that
affect our business either by blocking our ability to commercialize our product candidates, by
preventing the patentability of our product candidates to us or our licensors or co-owners, or by
covering the same or similar technologies that may invalidate our patents, limit the scope of our
future patent claims or adversely affect our ability to market our product candidates. For example,
patent applications in the United States are maintained in confidence for up to 18 months after
their filing. In some cases, however, patent applications remain confidential in the U.S. Patent
and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time prior to
issuance of a U.S. patent. Patent applications filed in countries outside the United States are not
typically published until at least 18 months from their first filing date. Similarly, publication
of discoveries in the scientific or patent literature often lags behind actual discoveries.
Therefore, we cannot be certain that we or our licensors or co-owners were the first to invent, or
the first to file, patent applications on our product or product candidates or for their uses. In
the event that a third party has also filed a U.S. patent application covering our product or
product candidates or a similar invention, we may have to participate in an adversarial proceeding,
known as an interference, declared by the U.S. Patent Office to determine priority of invention in
the United States. The costs of these proceedings could be substantial and it is possible that our
efforts could be unsuccessful, resulting in a loss of our U.S. patent position. The laws of some
foreign jurisdictions do not protect intellectual property rights to the same extent as in the
United States and many companies have encountered significant difficulties in protecting and
defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or
are otherwise precluded from effectively protecting our intellectual property rights in foreign
jurisdictions, our business prospects could be substantially harmed.
Since our HBV product, telbivudine, was a known compound before the filing of our patent
applications covering the use of this product candidate to treat HBV, we cannot obtain patent
protection on telbivudine itself. As a result, we have obtained and maintain patents granted on the
method of using telbivudine as a medical therapy for the treatment of the hepatitis B virus.
Pursuant to the UAB license agreement, we were granted an exclusive license to the rights that
the 1998 licensors have to a 1995 U.S. patent application and progeny thereof and counterpart
patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic
nucleosides for the treatment of HBV.
In February 2006, UAB notified us that it and Emory University were asserting a claim that, as
a result of the filing of a continuation patent application in July 2005 by UAB, the UAB license
agreement covers our telbivudine technology. UAB contends that we are obligated to pay the 1998
licensors an aggregate of $15.3 million comprised of 20% of the $75.0 million license fee we
received from Novartis in May 2003 in connection with the license of our HBV product candidates and
a $0.3 million payment in
connection with the submission to the FDA of the IND pursuant to which we conducted clinical trials
of telbivudine.
44
In January 2007, UAB and related entities filed a complaint in the United States District
Court for the Northern District of Alabama, Southern Division against us, CNRS and LUniversite
Montpellier, or the University of Montpellier. The complaint alleges that a former employee of UAB
is a co-inventor of certain patents in the United States and corresponding foreign patent
applications related to the use of ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to
one or more of Idenix, CNRS and the University of Montpellier and which cover the use of
Tyzeka
®
/Sebivo
®
for the treatment of HBV. Pursuant to the terms of the
dispute resolution procedure in the UAB license agreement, in September 2007 our CEO and the CEO of
UABRF met and agreed to begin a mediation process. Following a joint mediation session in January
2008 and several months of further discussions, in July 2008, the parties entered into a settlement
agreement. Pursuant to this settlement agreement, all contractual disputes relating to patents
covering the use of certain synthetic nucleosides for the treatment of the HBV virus and all
litigation matters relating to patents and patent applications related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of the Company, CNRS and
the University of Montpellier and which cover the use of Tyzeka
®
/Sebivo
®
for the treatment of HBV have been resolved. UAB also agreed to abandon the continuation patent
applications it filed in July 2005. Under the terms of the
settlement, we paid UABRF (on
behalf of UAB and Emory University) a $4.0 million upfront
payment and will make additional payments to
UABRF equal to 20% of all royalty payments received by us from Novartis from worldwide sales of
telbivudine, subject to minimum payment obligations in the aggregate of $11.0 million.
In accordance with our patent strategy, we are attempting to obtain patent protection for our
HCV nucleoside/nucleotide polymerase inhibitor product candidates IDX184 and IDX102. We have filed
U.S. and international patent applications related to IDX184 and IDX102 themselves, as well as to
methods of treating HCV with IDX184 and IDX102. Further, we are prosecuting U.S. and international
patent applications, and have been granted U.S. and foreign patents, claiming methods of treating
HCV with nucleoside polymerase inhibitors including compounds that relate to IDX184 and IDX102.
We are aware that a number of other companies have filed patent applications attempting to
cover broad classes of compounds and their use to treat HCV, or infection by any member of the
Flaviviridae virus family to which the HCV virus belongs. These classes of compounds might relate
to nucleoside polymerase inhibitors associated with IDX184 and IDX102. The companies include Merck
& Co., Inc. together with Isis Pharmaceuticals, Inc., Ribapharm, Inc., a wholly-owned subsidiary of
Valeant Pharmaceuticals International, Genelabs Technologies, Inc. and Biota, Inc., a subsidiary of
Biota Holdings Ltd., or Biota. We believe that we were the first to file patent applications
covering the use certain of these compounds to treat HCV. Because patents in countries outside the
United States are awarded to the first to file a patent application covering an invention, we
believe that we are entitled to patent protection in these countries. Notwithstanding this, a
foreign country may grant patent rights covering our product candidates to one or more other
companies, either because it is not aware of our patent filings or because the country does not
interpret our patent filing as a bar to issuance of a patent to the other company in that country.
If that occurs, we may need to challenge the third-party patent to enforce our proprietary rights,
and if we do not or are not successful, we will need to obtain a license that may not be available
at all or on commercially reasonable terms. In the United States, a patent is awarded to the first
to invent the subject matter. The U.S. Patent Office could initiate an interference proceeding
between us and any or all of Merck/Isis, Ribapharm, Genelabs, Biota or another company to determine
the priority of invention of the use of these compounds to treat HCV. If such an interference
proceeding is initiated and it is determined that we were not the first to invent the use of these
compounds in methods for treating HCV or other viral infection under U.S. law, we might need to
obtain a license that may not be available on commercially reasonable terms or at all.
In accordance with our patent strategy, we are attempting to obtain patent protection for our
HIV product candidate IDX899. We have filed U.S. and international patent applications directed to
IDX899 itself, as well as methods of treating HIV with IDX899.
A number of companies have filed patent applications and have obtained patents covering
general methods for the treatment of HBV, HCV and HIV that could materially affect the ability to
develop and commercialize Tyzeka
®
/Sebivo
®
, and other product candidates we
may develop in the future. For example, we are aware that Chiron Corporation, now a subsidiary of
Novartis, and Apath, LLC have obtained broad patents covering HCV proteins, nucleic acids,
diagnostics and drug screens. If we need to use these patented materials or methods to develop any
of our HCV product candidates and the materials or methods fall outside certain safe harbors in the
laws governing patent infringement, we will need to buy these products from a licensee of the
company authorized to sell such products or we will require a license from one or more companies,
which may not be available to us on commercially reasonable terms or at all. This could materially
affect or preclude our ability to develop and sell our HCV product candidates.
If we find that any product candidates we are developing should be used in combination with a
product covered by a patent held by another company or institution, and that a labeling instruction
is required in product packaging recommending that combination, we could be accused of, or held
liable for, infringement or inducement of infringement of the third-party patents covering the
product recommended for co-administration with our product. In that case, we may be required to
obtain a license from the other company or institution to provide the required or desired package
labeling, which may not be available on commercially reasonable terms or at all.
Litigation and disputes related to intellectual property matters occur frequently in the
biopharmaceutical industry. Litigation regarding patents, patent applications and other proprietary
rights may be expensive and time consuming. If we are unsuccessful in
45
litigation concerning patents or patent applications owned or co-owned by us or licensed to us, we
may not be able to protect our products from competition or we may be precluded from selling our
products. If we are involved in such litigation, it could cause delays in bringing product
candidates to market and harm our ability to operate. Such litigation could take place in the
United States in a federal court or in the U.S. Patent Office. The litigation could also take place
in a foreign country, in either the court or the patent office of that country.
Our success will depend in part on our ability to uphold and enforce patents or patent
applications owned or co-owned by us or licensed to us, which cover products we successfully
develop. Proceedings involving our patents or patent applications could result in adverse decisions
regarding:
|
|
|
ownership of patents and patent applications;
|
|
|
|
|
the patentability of our inventions relating to our product candidates; and/or
|
|
|
|
|
the enforceability, validity or scope of protection offered by our patents relating to our product candidates.
|
Even if we are successful in these proceedings, we may incur substantial cost and divert
management time and attention in pursuing these proceedings, which could have a material adverse
effect on us.
In May 2004, we and our
chief executive officer entered into a settlement
agreement with UAB resolving a dispute regarding ownership of inventions and discoveries made by
our CEO during the period from November 1999 to
November 2002, at which time our CEO was on sabbatical and then unpaid leave from his position at UAB. The patent applications we filed
with respect to such inventions and discoveries include the patent applications covering
valopicitabine.
Under the terms of the settlement agreement, we agreed to make a $2.0 million initial payment
to UAB, as well as other potential contingent payments based upon the commercial launch of other
HCV products discovered or invented by our CEO during his sabbatical and unpaid leave. In
addition, UAB and UABRF have each agreed that neither of them has any right, title or ownership
interest in these inventions and discoveries. Under the development and commercialization agreement
and stock purchase agreement, we made numerous representations and warranties to Novartis regarding
valopicitabine and our HCV program, including representations regarding our ownership of the
inventions and discoveries. If one or more of our representations or warranties were not true at
the time we made them to Novartis, we would be in breach of these agreements. In the event of a
breach by us, Novartis has the right to seek indemnification from us and, under certain
circumstances, us and our stockholders who sold shares to Novartis, which include many of our
directors and officers, for damages suffered by Novartis as a result of such breach. The amounts
for which we could be liable to Novartis may be substantial.
Our success will also depend in part on our ability to avoid infringement of the patent rights
of others. If it is determined that we do infringe a patent right of another, we may be required to
seek a license, defend an infringement action or challenge the validity of the patents in court.
Patent litigation is costly and time consuming. We may not have sufficient resources to bring these
actions to a successful conclusion. In addition, if we are not successful in infringement
litigation and we do not license or develop non-infringing technology, we may:
|
|
|
incur substantial monetary damages;
|
|
|
|
|
encounter significant delays in bringing our product candidates to market; and/or
|
|
|
|
|
be precluded from participating in the manufacture, use or sale of our product
candidates or methods of treatment requiring licenses.
|
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
To protect our proprietary technology and processes, we also rely in part on confidentiality
agreements with our corporate collaborators, employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors. These agreements may not effectively
prevent disclosure of confidential information and may not provide an adequate remedy in the event
of unauthorized disclosure of confidential information. In addition, others may independently
discover our trade secrets and proprietary information, and in such cases we could not assert any
trade secret rights against such parties. Costly and time-consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain
trade secret protection could adversely affect our competitive business position.
46
If any of our agreements that grant us the exclusive right to make, use and sell our product
candidates are terminated, we and/or Novartis may be unable to develop or commercialize our product
candidates.
We, together with Novartis, entered into an amended and restated agreement with CNRS and the
University of Montpellier, co-owners of the patents and patent applications covering Tyzeka
®
/Sebivo
®
and valtorcitabine. This agreement covers both the cooperative
research program and the terms of our exclusive right to exploit the results of the cooperative
research, including Tyzeka
®
/Sebivo
®
and valtorcitabine. The cooperative
research program with CNRS and the University of Montpellier ended in December 2006 although many
of the terms remain in effect for the duration of the patent life of the affected products. We,
together with Novartis, have also entered into two agreements with the University of Cagliari, the co-owner of the patents and patent
applications covering our HCV product candidates and certain HIV product candidates. One agreement
with the University of Cagliari covers our cooperative research program and the other agreement is
an exclusive license to develop and sell the jointly created HCV and HIV product candidates. Under
the amended and restated agreement with CNRS and the University of Montpellier and the license
agreement, as amended, with the University of Cagliari, we obtained from our co-owners the
exclusive right to exploit these product candidates. Subject to certain rights afforded to
Novartis, these agreements can be terminated by either party in circumstances such as the
occurrence of an uncured breach by the non-terminating party. The termination of our rights,
including patent rights, under the agreement with CNRS and the University of Montpellier or the
license agreement, as amended, with the University of Cagliari would have a material adverse effect
on our business and could prevent us from developing a product candidate or selling a product. In
addition, these agreements provide that we pay the costs of patent prosecution, maintenance and
enforcement. These costs could be substantial. Our inability or failure to pay these costs could
result in the termination of the agreements or certain rights under them.
Under our amended and restated agreement with CNRS and the University of Montpellier and our
license agreement, as amended, with the University of Cagliari, we and Novartis have the right to
exploit and license our co-owned product candidates without the permission of the co-owners.
However, our agreements with CNRS and the University of Montpellier and with the University of
Cagliari are currently governed by, and will be interpreted and enforced under, French and Italian
law, respectively, which are different in substantial respects from U.S. law, and which may be
unfavorable to us in material respects. Under French law, co-owners of intellectual property cannot
exploit, assign or license their individual rights without the permission of the co-owners.
Similarly, under Italian law, co-owners of intellectual property cannot exploit or license their
individual rights without the permission of the co-owners. Accordingly, if our agreements with the
University of Cagliari terminate, we may not be able to exploit, license or otherwise convey to
Novartis or other third parties our rights in our product candidates for a desired commercial
purpose without the consent of the co-owner, which could materially affect our business and prevent
us from developing our product candidates and selling our products.
Under U.S. law, a co-owner has the right to prevent the other co-owner from suing infringers
by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated agreement
with CNRS and the University of Montpellier and our license agreement, as amended, with the
University of Cagliari provide that such parties will cooperate to enforce our jointly owned
patents on our product candidates. If these agreements terminate or the parties cooperation is not
given or is withdrawn, or they refuse to join in litigation that requires their participation, we
may not be able to enforce these patent rights or protect our markets.
If our cooperative research agreement with the University of Cagliari is terminated, we may be
unable to utilize research results arising out of that work prior to the termination.
Our cooperative research agreement with the University of Cagliari, as amended, grants us the
exclusive right to directly or indirectly use or license to Novartis or other third parties the
results of research obtained from the cooperative effort, in exchange for a fixed royalty. If the
cooperative research agreement is terminated, our exclusive right to use the research results will
also terminate, unless those rights are also granted under a separate license agreement. Our
cooperative agreement with the University of Cagliari currently expires in January 2011 and can
only be renewed by the written consent of both parties. If the agreement is not renewed, there is
no guarantee that the University of Cagliari will agree to transfer rights to any of the research
results into a separate license agreement on termination of the research program, or that it will
agree to do so on reasonable commercial terms.
Factors Related to Our Common Stock
Sales of additional shares of our common stock could result in dilution to existing stockholders
and cause the price of our common stock to decline.
Sales of substantial amounts of our common stock in the public market, or the availability of
such shares for sale, could adversely affect the price of our common stock. In addition, the
issuance of common stock upon exercise of outstanding options could be dilutive, and may cause the
market price for a share of our common stock to decline. As of July 31, 2008, we had 56,421,677
shares of common stock issued and outstanding, together with outstanding options to purchase
approximately 6,045,326 shares of common stock with a weighted average exercise price of $8.71 per
share.
Novartis and other holders of shares of common stock have rights, subject to certain
conditions, to require us to file registration statements covering their shares or to include their
shares in registration statements that we may file for ourselves or other stockholders.
47
Fluctuation of our quarterly results may cause our stock price to decline, resulting in losses to
you.
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the
future. A number of factors, many of which are not within our control, could subject our operating
results and stock price to volatility, including:
|
|
|
realization of license fees and achievement of milestones under our development and commercialization agreement with
Novartis and, to the extent applicable, other licensing and collaborative agreements;
|
|
|
|
|
reductions in proceeds associated with Novartis right to maintain its percentage ownership of our voting stock when we
issue shares at a price below fair market value;
|
|
|
|
|
adverse developments regarding the safety and efficacy of Tyzeka
®
/Sebivo
®
; or our product candidates;
|
|
|
|
|
the results of ongoing and planned clinical trials of our product candidates;
|
|
|
|
|
developments in the market with respect to competing products or more generally the treatment of HBV, HCV
or HIV;
|
|
|
|
|
the results of regulatory reviews relating to the approval of our product candidates;
|
|
|
|
|
the timing and success of the launch of products, if any, we successfully develop;
|
|
|
|
|
future royalty payments received by us associated with sales of Tyzeka
®
/Sebivo
®
;
|
|
|
|
|
the initiation or conclusion of litigation to enforce or defend any of our assets; and
|
|
|
|
|
general and industry-specific economic conditions that may affect our research and development expenditures.
|
Due to the possibility of significant fluctuations, we do not believe that quarterly
comparisons of our operating results will necessarily be indicative of our future operating
performance. If our quarterly operating results fail to meet the expectations of stock market
analysts and investors, the price of our common stock may decline, resulting in losses to you.
An investment in our common stock may decline in value as a result of announcements of business
developments by us or our competitors.
The market price of our common stock is subject to substantial volatility as a result of
announcements by us or other companies in our industry. As a result, purchasers of our common stock
may not be able to sell their shares of common stock at or above the price at which they purchased
such stock. Announcements which may subject the price of our common stock to substantial volatility
include announcements regarding:
|
|
|
our collaboration with Novartis;
|
|
|
|
|
the results of discovery, preclinical studies and clinical trials by us or our competitors;
|
|
|
|
|
the acquisition of technologies, product candidates or products by us or our competitors;
|
|
|
|
|
the development of new technologies, product candidates or products by us or our competitors;
|
|
|
|
|
regulatory actions with respect to our product candidates or products or those of our competitors, including
those relating to our clinical trials, marketing authorizations, pricing and reimbursement;
|
|
|
|
|
the timing and success of launches of any product we successfully develop;
|
|
|
|
|
future royalty payments received by us associated with sales of Tyzeka
®
/Sebivo
®
;
|
|
|
|
|
the market acceptance of any products we successfully develop;
|
|
|
|
|
significant changes to our existing business model;
|
|
|
|
|
the initiation or conclusion of litigation to enforce or defend any of our assets; and
|
|
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|
|
significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.
|
In addition, if we fail to reach an important research, development or commercialization
milestone or result by a publicly expected deadline, even if by only a small margin, there could be
a significant impact on the market price of our common stock. Additionally, as we approach the
announcement of important clinical data or other significant information and as we announce such
results and
48
information, we expect the price of our common stock to be particularly volatile, and negative
results would have a substantial negative impact on the price of our common stock.
We could be subject to class action litigation due to stock price volatility, which, if it occurs,
will distract our management and could result in substantial costs or large judgments against us.
The stock market frequently experiences extreme price and volume fluctuations. In addition,
the market prices of securities of companies in the biotechnology and pharmaceutical industry have
been extremely volatile and have experienced fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies. These fluctuations could
adversely affect the market price of our common stock. In the past, securities class action
litigation has often been brought against companies following periods of volatility in the market
prices of their securities. Due to the volatility in our stock price, we may be the target of
similar litigation in the future. Securities litigation could result in substantial costs and
divert our managements attention and resources, which could cause serious harm to our business,
operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
We issued and sold the following shares of our common stock during the quarterly period ending
June 30, 2008 on the respective date below:
|
(1)
|
|
On May 29, 2008, we issued and sold 924 shares of our common stock to
Novartis Pharma AG pursuant to the terms of our stockholders
agreement at a per share price of $2.41.
|
The issuance and sale of common stock described above were issued in reliance upon exemptions
from the registration provisions of the Securities Act set forth in Section 4(2) thereof (and
Regulation D) relative to sales by an issuer not involving any public offering, to the extent an
exemption from such registration was required.
No underwriters were involved in the issuance and/or sale of the foregoing securities. All of
the foregoing securities are deemed restricted securities for purposes of the Securities Act. All
certificates representing the issued shares of common stock described above included appropriate
legends setting forth that the securities had not been registered and the applicable restrictions
on transfer.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of the stockholders at our 2008 Annual Meeting
of Stockholders held on June 3, 2008 (the Annual Meeting):
|
1.
|
|
To elect nine directors to serve until the next annual meeting of stockholders; and
|
|
|
2.
|
|
To ratify the selection of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for the current fiscal year ending December 31,
2008
|
The number of shares of common stock outstanding and eligible to vote as of the record date of
April 9, 2008 was 56,316,286. Each of these matters was approved by the requisite vote of our
stockholders. Set forth below is the number of votes cast for, against, or withheld, as well as the
number of abstentions and broker non-votes as to the respective matter, including a separate
tabulation with respect to each nominee for director.
Proposal 1: Electing nine directors to serve until the next annual meeting of stockholders
|
|
|
|
|
|
|
|
|
|
|
|
For
|
|
|
Withheld
|
Jean-Pierre Sommadossi
|
|
|
45,842,856
|
|
|
|
1,067,722
|
|
Charles W. Cramb
|
|
|
44,269,547
|
|
|
|
2,641,031
|
|
Emmanuel Puginier
|
|
|
43,199,830
|
|
|
|
2,744,397
|
|
Wayne T. Hockmeyer
|
|
|
44,166,181
|
|
|
|
2,744,397
|
|
Thomas R. Hodgson
|
|
|
44,166,181
|
|
|
|
2,744,397
|
|
Norman C. Payson
|
|
|
45,831,871
|
|
|
|
1,078,707
|
|
Robert E. Pelzer
|
|
|
45,843,736
|
|
|
|
1,066,842
|
|
Denise Pollard-Knight
|
|
|
45,716,695
|
|
|
|
1,193,883
|
|
Pamela Thomas-Graham
|
|
|
45,829,717
|
|
|
|
1,080,861
|
|
49
Proposal 2: Ratifying and approving the selection of PricewaterhouseCoopers LLP as Idenixs
independent registered public accounting firm for the current year
|
|
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
No-Vote
|
46,738,821
|
|
|
105,184
|
|
|
|
66,573
|
|
|
|
0
|
|
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of the exhibits
filed as a part of this quarterly report, which Exhibit Index is incorporated by reference.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
Date: August 7, 2008
|
By:
|
/s/ JEAN-PIERRE SOMMADOSSI
|
|
|
|
Jean-Pierre Sommadossi
|
|
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
Date: August 7, 2008
|
By:
|
/s/ RONALD C. RENAUD, JR.
|
|
|
|
Ronald C. Renaud, Jr.
|
|
|
|
Chief Financial Officer
(Principal Accounting
Officer)
|
|
51
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
10.1
|
|
Master Services Agreement, dated April 1, 2008, by and between the Registrant and Parexel International LLC
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
52
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