Table of
Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
|
|
|
For the quarterly period ended
September 30, 2010.
|
|
|
o
|
Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
|
|
|
For the transition period from
to
.
|
Commission File Number
000-29815
Allos
Therapeutics, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
|
|
54-1655029
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
11080 CirclePoint Road, Suite 200
Westminster, Colorado 80020
(303) 426-6262
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
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):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
As
of November 2, 2010, there were 105,352,676 shares of the registrants
Common Stock, par value $0.001 per share, outstanding.
Table of
Contents
ALLOS THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
NOTE:
Allos Therapeutics, Inc., the Allos Therapeutics, Inc.
logo, FOLOTYN, the FOLOTYN logo and all
other Allos names are trademarks of Allos Therapeutics, Inc. in the United
States and in other selected countries. All other brand names or trademarks
appearing in this report are the property of their respective holders. Unless
the context requires otherwise, references in this report to Allos, the Company,
we, us, and our refer to Allos Therapeutics, Inc.
2
Table of
Contents
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
ALLOS THERAPEUTICS, INC.
BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
(unaudited)
|
|
September 30,
2010
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,432
|
|
$
|
141,185
|
|
Short-term investments
|
|
45,151
|
|
17,016
|
|
Restricted cash
|
|
238
|
|
238
|
|
Accounts receivable
|
|
9,633
|
|
4,862
|
|
Inventory
|
|
151
|
|
36
|
|
Prepaid expenses and other assets
|
|
3,907
|
|
3,808
|
|
Total current assets
|
|
122,512
|
|
167,145
|
|
Property and equipment, net
|
|
2,237
|
|
2,169
|
|
Long-term investments
|
|
337
|
|
343
|
|
Intangible asset, net
|
|
5,339
|
|
5,679
|
|
Other assets
|
|
48
|
|
48
|
|
Total assets
|
|
$
|
130,473
|
|
$
|
175,384
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
2,515
|
|
$
|
2,035
|
|
Deferred revenue
|
|
1,587
|
|
669
|
|
Accrued liabilities
|
|
14,040
|
|
13,136
|
|
Total current liabilities
|
|
18,142
|
|
15,840
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000
shares authorized; no shares issued or outstanding
|
|
|
|
|
|
Series A Junior Participating Preferred
Stock, $0.001 par value; 1,500,000 shares designated from authorized
preferred stock at September 30, 2010 and December 31, 2009; no
shares issued or outstanding
|
|
|
|
|
|
Common stock, $0.001 par value; 200,000,000 and
150,000,000 shares authorized at September 30, 2010 and December 31,
2009, respectively; 105,352,676 and 104,234,409 shares issued and
outstanding at September 30, 2010 and December 31, 2009,
respectively
|
|
105
|
|
104
|
|
Additional paid-in capital
|
|
544,713
|
|
532,652
|
|
Accumulated deficit
|
|
(432,487
|
)
|
(373,212
|
)
|
Total stockholders equity
|
|
112,331
|
|
159,544
|
|
Total liabilities and stockholders equity
|
|
$
|
130,473
|
|
$
|
175,384
|
|
The accompanying notes are an
integral part of these financial statements.
3
Table of
Contents
ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
8,230
|
|
$
|
|
|
$
|
23,522
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding amortization expense
|
|
889
|
|
|
|
2,330
|
|
|
|
Research and development
|
|
7,249
|
|
7,538
|
|
23,056
|
|
24,675
|
|
Selling, general and administrative
|
|
18,702
|
|
11,327
|
|
57,151
|
|
26,326
|
|
Amortization of intangible asset
|
|
113
|
|
7
|
|
340
|
|
7
|
|
Total operating costs and expenses
|
|
26,953
|
|
18,872
|
|
82,877
|
|
51,008
|
|
Operating loss
|
|
(18,723
|
)
|
(18,872
|
)
|
(59,355
|
)
|
(51,008
|
)
|
Interest and other income, net
|
|
(129
|
)
|
125
|
|
2
|
|
304
|
|
Loss before income taxes
|
|
(18,852
|
)
|
(18,747
|
)
|
(59,353
|
)
|
(50,704
|
)
|
Income tax benefit
|
|
78
|
|
77
|
|
78
|
|
77
|
|
Net loss
|
|
$
|
(18,774
|
)
|
$
|
(18,670
|
)
|
$
|
(59,275
|
)
|
$
|
(50,627
|
)
|
Net loss per share: basic and diluted
|
|
$
|
(0.18
|
)
|
$
|
(0.21
|
)
|
$
|
(0.56
|
)
|
$
|
(0.58
|
)
|
Weighted average shares: basic and diluted
|
|
105,320,554
|
|
89,543,949
|
|
105,039,263
|
|
86,581,372
|
|
The accompanying notes are an
integral part of these financial statements.
4
Table of
Contents
ALLOS THERAPEUTICS, INC.
STATEMENTS
OF CASH FLOWS
(Dollars in thousands)
(unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(59,275
|
)
|
$
|
(50,627
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
668
|
|
314
|
|
Stock-based compensation expense
|
|
7,892
|
|
6,603
|
|
Amortization of intangible asset
|
|
340
|
|
7
|
|
Realized loss on sale of marketable securities
|
|
|
|
157
|
|
Other
|
|
226
|
|
149
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(3,852
|
)
|
|
|
Prepaid expenses and other assets
|
|
40
|
|
(385
|
)
|
Interest receivable on investments
|
|
(60
|
)
|
686
|
|
Inventory
|
|
(136
|
)
|
|
|
Trade accounts payable
|
|
480
|
|
2,739
|
|
Accrued liabilities
|
|
761
|
|
(1,670
|
)
|
Net cash used in operating activities
|
|
(52,916
|
)
|
(42,027
|
)
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
Acquisition of property and equipment
|
|
(937
|
)
|
(1,147
|
)
|
Cash paid for license
|
|
|
|
(5,800
|
)
|
Purchases of investments
|
|
(55,050
|
)
|
(18,217
|
)
|
Proceeds from maturities of investments
|
|
26,980
|
|
45,250
|
|
Proceeds from sales of marketable securities
|
|
|
|
3,894
|
|
Net cash (used in) provided by investing activities
|
|
(29,007
|
)
|
23,980
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Proceeds from issuance of common stock associated
with stock options and employee stock purchase plan
|
|
4,138
|
|
3,009
|
|
Proceeds from issuance of common stock, net of
issuance costs
|
|
32
|
|
46,957
|
|
Net cash provided by financing activities
|
|
4,170
|
|
49,966
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(77,753
|
)
|
31,919
|
|
Cash and cash equivalents, beginning of period
|
|
141,185
|
|
30,458
|
|
Cash and cash equivalents, end of period
|
|
$
|
63,432
|
|
$
|
62,377
|
|
Supplemental Schedule of Cash and Non-cash
Activities:
|
|
|
|
|
|
Deferred revenue in accounts receivable
|
|
$
|
918
|
|
$
|
|
|
Assets recorded for which payment has not yet
occurred
|
|
142
|
|
|
|
The accompanying notes are an
integral part of these financial statements.
5
Table of
Contents
ALLOS THERAPEUTICS, INC.
NOTES TO
FINANCIAL STATEMENTS
(Dollars shown in tables are in thousands, except per
share amounts)
(unaudited)
1.
Basis
of Presentation
The
unaudited financial statements of Allos Therapeutics, Inc. (referred to herein
as the Company, we, us or our) included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state our financial position, results of
operations and cash flows for the periods presented. Certain information and footnote disclosures
normally included in audited financial information prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, or SEC.
Operating results for the nine months ended September 30, 2010, are not
necessarily indicative of the results that may be expected for the year ending December
31, 2010. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto which are included in our Annual Report on Form 10-K for the year ended
December 31, 2009 for a broader discussion of our business and the
opportunities and risks inherent in such business.
Liquidity
As
of September 30, 2010, we had $108.9 million in cash, cash equivalents, and
investments. Based upon the current status of our product development and
commercialization plans, we believe that our cash, cash equivalents, and
investments as of September 30, 2010, will be adequate to support our
operations through at least the next 12 months, although there can be no
assurance that this can, in fact, be accomplished.
Our
ability to achieve profitability is dependent on our ability to grow product
sales of FOLOTYN® (pralatrexate injection) for the treatment of patients with
relapsed or refractory peripheral T-cell lymphoma, or PTCL, in the United
States. The amount of our future product
sales are subject to significant uncertainty.
We may never generate sufficient revenue from product sales to become
profitable.
We
expect to continue to spend substantial amounts on research and development,
including amounts spent on conducting clinical trials and seeking additional
regulatory approvals for FOLOTYN. We
also expect to continue to spend substantial amounts on selling, general and
administrative expenses in connection with our commercialization of FOLOTYN for
the treatment of patients with relapsed or refractory PTCL. Therefore, we may need to raise additional
capital to support our future operations. Our actual capital requirements will depend on
many factors, including:
·
the timing and
amount of revenues generated from sales of FOLOTYN;
·
the timing and
costs associated with our sales and marketing activities for the
commercialization of FOLOTYN;
·
the timing and
costs associated with manufacturing clinical and commercial supplies of
FOLOTYN;
·
the timing and
costs associated with conducting preclinical and clinical development of
FOLOTYN, including the post-approval clinical studies required by the U.S. Food
and Drug Administration, or FDA, as well as our evaluation of, and decisions
with respect to, additional therapeutic indications for which we may develop
FOLOTYN;
·
the timing,
costs and potential revenue associated with any co-promotion or other
partnering arrangements entered into to commercialize FOLOTYN; and
·
our evaluation
of, and decisions with respect to, potential in-licensing or product
acquisition opportunities or other strategic alternatives.
6
Table of
Contents
We
may seek to obtain this additional capital through equity or debt financings,
arrangements with corporate partners, or from other sources. Such financings or
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that additional financing will be
available when needed, or that, if available, we will obtain such financing on
terms that are favorable to our stockholders or us. In the event that additional
funds are obtained through arrangements with collaborative partners or other
sources, such arrangements may require us to relinquish rights to some of our
technologies, product candidates or products under development, which we might
otherwise seek to develop or commercialize ourselves, on terms that are less
favorable than might otherwise be available. If we are unable to generate meaningful
amounts of revenue from future product sales or cannot otherwise raise
sufficient additional funds to support our operations, we may be required to
delay, reduce the scope of or eliminate one or more of our development programs
and our business and future prospects for revenue and profitability may be
harmed.
2.
Fair
Value of Financial Instruments
Cash, Cash Equivalents and Investments
All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. The carrying values of our cash equivalents
and investments approximate their market values based on quoted market prices.
Investments are classified as held to maturity and are carried at cost plus
accrued interest. Our cash and cash equivalents are maintained in a financial
institution in amounts that, at times, may exceed federally insured limits. The
weighted average duration of the remaining time to maturity for our portfolio
of investments as of September 30, 2010, was approximately four months. As of September 30, 2010, our investments
were held in a variety of interest-bearing instruments, consisting mainly of U.S.
Treasury notes. We did not hold any derivative instruments, foreign exchange
contracts, asset backed securities, mortgage backed securities, auction rate
securities, or securities of issuers in bankruptcy in our investment portfolio
as of September 30, 2010.
Fair Value of Financial Instruments
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
The following fair value hierarchy prioritizes the inputs into valuation
techniques used to measure fair value. Accordingly, we use valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable
inputs when determining fair value. The three levels of the hierarchy are as
follows:
Level
1: Inputs that reflect unadjusted quoted prices in active markets that are
accessible to us for identical assets or liabilities;
Level
2: Inputs include quoted prices for similar assets and liabilities in active
and inactive markets or that are observable for the asset or liability either
directly or indirectly; and
Level
3: Unobservable inputs that are supported by little or no market activity.
We
have no assets or liabilities that were measured using quoted prices for
similar assets and liabilities or significant unobservable inputs (Level 2 and
Level 3 assets and liabilities, respectively) as of September 30, 2010. Our financial instruments include cash and
cash equivalents, investments, accounts receivable, prepaid expenses, accounts
payable and accrued liabilities. The carrying amounts of financial instruments
approximate their fair value due to their short maturities. The carrying value
of our cash held in money market funds totaling $62.8 million as of September 30,
2010, is included in cash and cash equivalents on our Balance Sheet and
approximates market values based on quoted market prices, or Level 1 inputs.
7
Table of
Contents
The
carrying value of investments consisted of the following as of September 30,
2010:
|
|
Amortized
cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Short-term
held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
45,151
|
|
$
|
9
|
|
$
|
|
|
$
|
45,160
|
|
Total due in one year or less
|
|
$
|
45,151
|
|
$
|
9
|
|
$
|
|
|
$
|
45,160
|
|
|
|
|
|
|
|
|
|
|
|
Long-term held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
U. S. Government agency securities
|
|
$
|
269
|
|
$
|
9
|
|
$
|
|
|
$
|
278
|
|
Corporate notes
|
|
306
|
|
14
|
|
|
|
320
|
|
Sub-total
|
|
$
|
575
|
|
$
|
23
|
|
$
|
|
|
$
|
598
|
|
Less: Amounts classified as restricted cash
|
|
(238
|
)
|
|
|
|
|
(238
|
)
|
Total due in one to three years
|
|
$
|
337
|
|
$
|
23
|
|
$
|
|
|
$
|
360
|
|
The
carrying value of investments consisted of the following as of December 31,
2009:
|
|
Amortized
cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Short-term
held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
$
|
8,006
|
|
$
|
11
|
|
$
|
|
|
$
|
8,017
|
|
Certificates of deposit
|
|
9,010
|
|
5
|
|
|
|
9,015
|
|
Total due in one year or less
|
|
$
|
17,016
|
|
$
|
16
|
|
$
|
|
|
$
|
17,032
|
|
|
|
|
|
|
|
|
|
|
|
Long-term held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
U. S. Government agency securities
|
|
$
|
273
|
|
$
|
11
|
|
$
|
|
|
$
|
284
|
|
Corporate notes
|
|
308
|
|
13
|
|
|
|
321
|
|
Sub-total
|
|
$
|
581
|
|
$
|
24
|
|
$
|
|
|
$
|
605
|
|
Less: Amounts classified as restricted cash
|
|
(238
|
)
|
|
|
|
|
(238
|
)
|
Total due in one to three years
|
|
$
|
343
|
|
$
|
24
|
|
$
|
|
|
$
|
367
|
|
We
realized a loss of approximately $0 and $157,000 on the sale of certain of our
investments during the nine months ended September 30, 2010 and 2009,
respectively, which were sold in order to preserve our principal as the issuers
of these securities experienced significant deteriorations in their
creditworthiness as evidenced by investment rating downgrades. Market values were determined for each
individual security in the investment portfolio. If a decline in fair value below the
amortized cost basis of an investment is judged to be other-than-temporary, the
cost basis of the investment is written down to fair value. Additionally,
management assesses whether it intends to sell or would more-likely-than-not
not be required to sell the investment before the expected recovery of the
amortized cost basis. Management has asserted that it has no intent to sell and
that it believes it is more-likely-than-not that it will not be required to
sell the investment before recovery of its amortized cost basis. There were no investments in an unrealized
loss position as of September 30, 2010 or December 31, 2009. We do not intend to sell and we do not
believe that it is more likely than not that we will be required to sell our
investments before recovering the cost of securities, nor do we expect not to
recover the entire amortized cost basis of our investments as of September 30,
2010. We have the ability and intent to
hold our remaining investments to recover the entire amortized cost basis of
the investments as of September 30, 2010.
3.
Inventory
Inventory
Costs associated with the
production of FOLOTYN bulk drug substance and formulated drug product by our
third party manufacturers are recorded as either research and development
expense or inventory.
Costs associated with the
production of FOLOTYN by our third party manufacturers are expensed to research
and development expense at the time of production when:
8
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·
the formulated drug product is
packaged for clinical trial use;
·
the bulk drug
substance and formulated drug product is produced prior to receiving regulatory
approval to market the product candidate; and
·
the bulk drug
substance and formulated drug product is produced prior to receiving FDA
approval for the respective third party manufacturing facilities.
If and when we receive the
related regulatory approval, we capitalize those manufacturing costs for our
marketed products at the lower of cost (first-in, first-out method) or market
(current replacement cost) with cost determined on the first-in, first-out
basis and then expense the sold inventory as a component of cost of goods sold.
Prior
to receiving FDA approval of FOLOTYN, all costs related to purchases of the
active pharmaceutical ingredient and the manufacturing of the product were
recorded as research and development expense.
We have remaining supplies of FOLOTYN drug substance and drug product
that are not recorded as inventory on our Balance Sheet as of September 30,
2010 because they were purchased prior to FDA approval. Accordingly, our cost of sales will be lower
with respect to product manufactured prior to FDA approval. Until we sell these supplies for which the
costs were previously expensed, our cost of sales will reflect only incremental
costs incurred subsequent to the FDA approval date. We sold a portion of our finished goods that
were manufactured subsequent to the FDA approval date totaling $67,000 and
$82,000 during the three and nine months ended September 30, 2010,
respectively, which were recorded in cost of sales, excluding amortization
expense in the Statement of Operations.
See further discussion in Note 7 below.
We continue to expense costs associated with clinical trial material as
research and development expense.
Inventory as of September 30, 2010, consists of work in process of
$83,000 and finished goods of $68,000.
4.
Prepaid
Expenses and Other Assets
Prepaid
expenses and other assets are comprised of the following:
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Prepaid sales, marketing and medical affairs
expenses
|
|
$
|
2,119
|
|
$
|
1,839
|
|
Prepaid expenses and other assets
|
|
1,216
|
|
1,251
|
|
Prepaid research and development expenses
|
|
572
|
|
718
|
|
|
|
$
|
3,907
|
|
$
|
3,808
|
|
5.
Intangible
asset, net
Costs
incurred for products or product candidates not yet approved by the FDA and for
which no alternative future use exists are recorded as expense. In the event a
product or product candidate has been approved by the FDA or an alternative
future use exists for a product or product candidate, patent and license costs
are capitalized and amortized over the shorter of the expected patent life and
the expected life cycle of the related product or product candidate.
As
a result of the FDAs approval to market FOLOTYN on September 24, 2009, we met
a milestone under our license agreement with Memorial Sloan-Kettering Cancer
Center, SRI International and Southern Research Institute, discussed in Note
10, which required us to make a milestone payment of $5.8 million. We
capitalized the $5.8 million payment as an intangible asset and began
amortizing the asset immediately following the FDA approval of FOLOTYN.
Amortization expense is being recorded on a straight line basis over the
remaining expected life of the patent for FOLOTYN, which we expect to last
until July 16, 2022. This includes the anticipated Hatch-Waxman extension that
provides patent protection for drug compounds for a period of up to five years
to compensate for time spent in development. This term is our best estimate of
the life of the patent. If, however, the Hatch-Waxman extension is not granted,
the intangible asset will be amortized over a shorter period. Amortization
expense of $113,000 and $340,000 for the three and nine months ended September 30,
2010 was recorded as amortization of intangible asset in the Statement of
Operations. Amortization expense of
$7,000 for the three and nine months ended September 30, 2009, was recorded as
amortization of intangible asset in the Statement of Operations. The estimated annual amortization expense for
the intangible asset is approximately $454,000 per year during 2010 through
2021 and $234,000 in 2022.
9
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The
carrying values of intangible assets are periodically reviewed to determine if
the facts and circumstances suggest that a potential impairment may have
occurred. No trigger events occurred for
the three months ended September 30, 2010, on the $5,339,000 of intangible
asset, net.
6.
Accrued
Liabilities
Accrued
liabilities are comprised of the following:
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Accrued personnel costs
|
|
$
|
5,042
|
|
$
|
5,133
|
|
Accrued sales and marketing expenses
|
|
3,224
|
|
2,407
|
|
Accrued royalties, government rebates, chargebacks
and distribution fees
|
|
2,338
|
|
963
|
|
Accrued research and development expenses
|
|
2,184
|
|
3,363
|
|
Accrued expensesother
|
|
1,252
|
|
1,270
|
|
|
|
$
|
14,040
|
|
$
|
13,136
|
|
7.
Product
Sales
Product Sales
We
generate revenue from product sales. We
recognize product revenue when it is realized or realizable and earned. Revenue
is realized or realizable and earned when all of the following criteria are
met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) our price to the buyer is fixed
and determinable; and (4) collectability is reasonably assured. Revenue from
sales transactions where the buyer has the right to return the product is
recognized at the time of sale only if (1) our price to the buyer is
substantially fixed or determinable at the date of sale, (2) the buyer has paid
us, or the buyer is obligated to pay us and the obligation is not contingent on
resale of the product, (3) the buyers obligation to us would not be changed in
the event of theft or physical destruction or damage of the product, (4) the
buyer acquiring the product for resale has economic substance apart from that
provided by us, (5) we do not have significant obligations for future
performance to directly bring about resale of the product by the buyer, and (6)
the amount of future returns can be reasonably estimated.
We
sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or
distributors, the three largest of which are affiliates under common control of
an unrelated party. These distributors
then resell FOLOTYN to the patients respective health care providers. Given our limited sales history, we are
currently unable to reasonably estimate returns. Therefore, we have determined
that domestic shipments of FOLOTYN made to distributors do not meet the
criteria for revenue recognition at the time of shipment, and therefore such
shipments are accounted for using the sell-through method. Under the
sell-through method, we do not recognize revenue upon shipment of FOLOTYN to
the distributor. For these product sales, we invoice the distributor and record
deferred revenue equal to the gross invoice sales price. We then recognize
revenue when the product is sold through, or upon shipment of the product from
the distributors to the distributors customers. Because of the price of FOLOTYN, the limited
number of patients, the short period from sale of product to patient infusion
and limited contractual return rights, FOLOTYN distributors and their customers
generally carry limited inventory.
Through September 30, 2010, product returns have been negligible. Deferred revenue results from amounts
receivable in advance of revenue recognition and totaled $1,587,000 as of September
30, 2010.
We
estimate sell-through revenue and certain gross to net sales adjustments based
upon analysis of third-party information, including information obtained from
certain distributors with respect to their inventory levels and sell-through to
the distributors customers. Our estimates are subject to the inherent
limitations of estimates that rely on third-party data. The information
received from distributors is a product of their record-keeping process and
their internal controls surrounding such processes. Our sales and revenue recognition under the
sell-through method reflect our estimate of actual product sold through the
distribution channel.
Net Product Sales
Our net product sales
represent total sell-through revenue less estimated allowances for rebates and
chargebacks to be incurred on the selling price of FOLOTYN related to the
respective revenue. In addition, we incur certain distributor fees related to
the management of our product by distributors. These distributor fees are
recorded within net revenues and are
10
Table of Contents
known at the time of sale.
Due to estimates and assumptions inherent in determining the amount of rebates
and chargebacks, the actual amount of claims for rebates and chargebacks may be
different from our estimates, at which time we would adjust our reserves
accordingly. Product sales allowances
and accruals are based on definitive contractual agreements or legal
requirements (such as Medicaid laws and regulations) related to the purchase
and/or utilization of the product by these entities. Allowances and accruals are generally
recorded in the same period that the related revenue is recognized.
Classification
of Product Sales Allowances and Accruals
Accruals related to Medicaid
rebates, government chargebacks and distributor fees are recognized at the time
sell-through revenue is recorded, resulting in a reduction in product sales
revenue and the recording of an increase in accrued expenses.
Medicaid Rebates
Our product is subject to
state government-managed Medicaid programs whereby discounts and rebates are
provided to participating state governments. We record estimated rebates
payable under governmental programs, including Medicaid, as a reduction of
revenue at the time sell-through revenues are recorded. Our calculations
related to these rebate accruals require estimates, including estimates of
customer mix primarily based on a combination of market and clinical research,
to determine which sales will be subject to rebates and the amount of such
rebates. During the first quarter of 2010, we obtained additional market
research and were able to refine our estimated Medicaid utilization, which
resulted in a reversal of Medicaid rebate allowances related to 2009 sales
totaling $208,000. We also consider any
legal interpretations of the applicable laws related to Medicaid and qualifying
federal and state government programs and any new information regarding changes
in the Medicaid programs regulations and guidelines that would impact the
amount of the rebates. In March 2010,
the Patient Protection and Affordable Care Act, as modified by the Health Care
and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted,
which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive
to January 1, 2010. In addition, the
states ability to early adopt portions of PPACA, and any implementing
regulations, could impact future estimates related to our Medicaid rebate
allowances. We update our estimates and assumptions each period and record any
necessary adjustments to our reserves. Although allowances and accruals are
recorded at the time of product sale, certain rebates are typically paid out,
on average, up to six months or longer after the sale. We account for Medicaid
rebates by establishing an accrual in an amount equal to our estimate of
Medicaid rebate claims attributable to sales recognized in that period. If actual future results vary from our
estimates, we may need to adjust our previous estimates, which would affect our
earnings in the period of the adjustment.
For reference purposes, a 10% to 20% variance in Medicaid utilization
estimates for state Medicaid rebates as of September 30, 2010, would result in
an approximate $449,000 to $898,000 adjustment to cumulative net product sales.
Government Chargebacks
Our
products are subject to certain programs with federal government qualified
entities whereby pricing on products is discounted below distributor list price
to participating entities. These entities purchase products through
distributors at the discounted price, and the distributors charge the difference
between their acquisition cost and the discounted price back to us. We account
for chargebacks by establishing an accrual in an amount equal to our estimate
of maximum chargeback claims. We determine our chargeback estimates based on
actual FOLOTYN sell-through sales
data from third-party information. Chargeback amounts are determined at the
time of resale to the federal government qualified entities, and we generally
issue credits for such amounts within several weeks of receiving claims from
the distributor. We do not expect the impact of the 340B program expansion
included in the PPACA to significantly change our estimated government
chargeback accruals because drugs approved under an Orphan Drug designation
were specifically excluded from the provisions of the PPACA. The FDA has awarded orphan drug status to
FOLOTYN for the treatment of patients with T-cell lymphoma, which includes
patients with relapsed or refractory PTCL.
Estimated
chargeback amounts are recorded at the time the sell-through sale occurs and we
adjust the accrual quarterly to reflect actual experience. Due to estimates and
assumptions inherent in determining the amount of government chargebacks, the
actual amount of claims for chargebacks may be different from our estimates, at
which time we would adjust our reserves accordingly
.
11
Table of
Contents
Balances
and activity in the deferred revenue account and a reconciliation of gross to
net product sales for the three and nine months ended September 30, 2010 and
2009 are as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, beginning of the period
|
|
$
|
1,153
|
|
$
|
|
|
$
|
669
|
|
$
|
|
|
Gross product sales to distributors
|
|
9,708
|
|
|
|
27,430
|
|
|
|
Less: Gross product sales recognized
|
|
(9,274
|
)
|
|
|
(26,512
|
)
|
|
|
Deferred revenue as of September 30, 2010
|
|
$
|
1,587
|
|
$
|
|
|
$
|
1,587
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross product sales
|
|
$
|
9,274
|
|
$
|
|
|
$
|
26,512
|
|
$
|
|
|
Less: Gross to Net Sales
Adjustments
|
|
|
|
|
|
|
|
|
|
Government rebates and chargebacks
|
|
(778
|
)
|
|
|
(2,212
|
)
|
|
|
Distribution fees
|
|
(266
|
)
|
|
|
(762
|
)
|
|
|
Returns
|
|
|
|
|
|
(16
|
)
|
|
|
Net product sales
|
|
$
|
8,230
|
|
$
|
|
|
$
|
23,522
|
|
$
|
|
|
Balances and activity in the
government rebates and chargebacks and distribution fees payable accounts for
the nine months ended September 30, 2010, are as follows:
|
|
Government
Rebates and
Chargebacks
|
|
Distribution
Fees
|
|
Balance at December 31, 2009
|
|
$
|
487
|
|
$
|
86
|
|
Reserve for current period sales
|
|
2,420
|
|
762
|
|
Change in estimated Medicaid utilization for 2009
sales
|
|
(208
|
)
|
|
|
Credits/payments made for current period sales
|
|
(1,054
|
)
|
(615
|
)
|
Credits/payments made for prior period sales
|
|
(126
|
)
|
(84
|
)
|
Balance at September 30, 2010
|
|
$
|
1,519
|
|
$
|
149
|
|
Major Customers and Concentration of Credit Risk
We
sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or
distributors, the three largest of which are affiliates under common control of
an unrelated party and are detailed below, without requiring collateral. We periodically assess the financial strength
of these customers and establish allowances for anticipated losses, if
necessary. Substantially all of our 2010
sales were made in the United States.
|
|
% of Total
Trade
Accounts
Receivable at
|
|
% of Total
Gross Product
Sales for the
Nine Months
Ended
|
|
|
|
September 30,
2010
|
|
September 30,
2010
|
|
Customer A
|
|
52.6
|
%
|
49.7
|
%
|
Customer B
|
|
20.6
|
%
|
22.4
|
%
|
Customer C
|
|
26.6
|
%
|
27.0
|
%
|
Cost of
sales
Cost
of sales, excluding amortization expense, includes cost of product sold,
royalties, inventory packaging and labeling, warehousing and shipping costs
associated with FOLOTYN product sales.
See discussion in Note 10 regarding the royalty rates under our license
agreement for FOLOTYN. Prior to
receiving FDA approval of FOLOTYN, all costs related to purchases of the active
pharmaceutical ingredient and the manufacturing of the product were recorded as
research and
12
Table of
Contents
development
expense. Accordingly, our cost of sales
will be lower with respect to product manufactured prior to FDA approval. Until we sell these supplies for which the
costs were previously expensed, our cost of sales will reflect only incremental
costs incurred subsequent to the FDA approval date. Cost of sales, excluding amortization expense
were $889,000 and $2,330,000 for the three and nine months ended September 30,
2010, respectively. Cost of sales,
excluding amortization expense primarily relates to an 8% royalty on gross
product sales payable to the licensors of FOLOTYN under the terms of our
license agreement. We sold a portion of
our finished goods that were manufactured subsequent to the FDA approval date
totaling $67,000 and $82,000 during the three and nine months ended September 30,
2010, respectively, which w
ere
recorded in
cost of sales, excluding amortization expense in the Statement of Operations.
Under
the sell-through method, royalties paid to our licensors of FOLOTYN based on
the unit shipments to distributors are deferred and recognized as royalty
expense when those units are sold through and recognized as revenue. Royalties
paid are deferred as we have the right to offset royalties paid for product
that are later returned against subsequent royalty obligations.
8.
Stock-Based
Compensation
Stock-based
compensation expense for the three and nine months ended September 30, 2010 and
2009 has been recognized in the accompanying Statements of Operations as
follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Research and development
|
|
$
|
873
|
|
$
|
44
|
|
$
|
2,236
|
|
$
|
1,964
|
|
Selling, general and administrative
|
|
1,304
|
|
1,711
|
|
5,656
|
|
4,639
|
|
Total stock-based compensation expense
|
|
$
|
2,177
|
|
$
|
1,755
|
|
$
|
7,892
|
|
$
|
6,603
|
|
Effective
August 24, 2010, James V. Caruso, our former Executive Vice President and Chief
Commercial Officer (CCO), departed the Company. As a result of Mr. Carusos departure, we
adjusted the forfeiture rate applied to his equity compensation, which resulted
in a one-time $787,000 reversal of selling, general and administrative
stock-based compensation expense during the three and nine months ended September
30, 2010, of which $605,000 related to stock option awards and $182,000 related
to restricted stock unit awards.
Effective September 30, 2009, Pablo J. Cagnoni, M.D., our former Senior
Vice President and Chief Medical Officer (CMO), resigned. As a result of Dr. Cagnonis resignation, we
adjusted the forfeiture rate applied to his equity compensation, which resulted
in a one-time $906,000 reversal of research and development stock-based
compensation expense during the three and nine months ended September 30, 2009,
of which $699,000 related to stock option awards, $166,000 related to
restricted stock awards and $41,000 related to restricted stock unit awards.
We
did not recognize a related tax benefit during the nine months ended September 30,
2010 and 2009, as we maintain net operating loss carryforwards and we have
established a valuation allowance against the entire tax benefit as of September
30, 2010. No stock-based compensation
expense was capitalized on our Balance Sheet as of September 30, 2010 and December
31, 2009.
The
following table summarizes activity and related information for stock option
awards granted under our equity incentive plans:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31,
2009
|
|
8,292,496
|
|
$
|
5.83
|
|
3,823,683
|
|
$
|
5.02
|
|
Granted
|
|
2,628,251
|
|
7.32
|
|
|
|
|
|
Exercised
|
|
(1,024,474
|
)
|
3.75
|
|
|
|
|
|
Forfeited/Expired
|
|
(1,008,300
|
)
|
7.07
|
|
|
|
|
|
Outstanding at September 30,
2010
|
|
8,887,973
|
|
$
|
6.37
|
|
4,279,015
|
|
$
|
5.80
|
|
During
the nine months ended September 30, 2010, we granted 2,628,251 stock options
with a weighted-average grant-date fair
value of $4.14 per share. During
the three months ended September 30, 2010 and 2009, we recorded stock-based
compensation related to our stock option plans of $1,840,000 and $1,754,000,
respectively. During the nine months ended
13
Table of
Contents
September
30, 2010 and 2009, we recorded stock-based compensation related to our stock
option plans of $6,754,000 and $6,252,000, respectively. The stock-based compensation expense amounts
for the three and nine months ended September 30, 2010 include the $605,000
one-time reversal related to the departure of our former CCO discussed
above. The stock-based compensation
expense amounts for the three and nine months ended September 30, 2009 include
the $699,000 one-time reversal related to the resignation of our former CMO
discussed above. As of September 30, 2010, the unrecorded stock-based
compensation balance related to stock option awards was $9,265,000 and will be
recognized over an estimated weighted-average amortization period of 1.7 years.
The
following table summarizes information about outstanding stock options that are
fully vested and currently exercisable, and outstanding stock options that are
expected to vest in the future:
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Term
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
Options fully vested and exercisable
|
|
4,279,015
|
|
6.1
|
|
$
|
5.80
|
|
$
|
1,746,000
|
|
Options expected to vest, including effects of expected
forfeitures
|
|
3,778,708
|
|
8.9
|
|
$
|
6.92
|
|
36,000
|
|
Options fully vested and expected to vest
|
|
8,057,723
|
|
7.4
|
|
$
|
6.32
|
|
$
|
1,782,000
|
|
The
aggregate intrinsic value in the tables above represents the total pretax
intrinsic value, based on our closing stock price of $4.72 as of September 30,
2010, which would have been received by the option holders had all option
holders with in-the-money options exercised their options as of that date. The total number of in-the-money options exercisable
as of September 30, 2010, was 1,047,425.
The
total intrinsic value of options exercised during the three months ended September
30, 2010 and 2009 was $36,000 and $2,775,000, respectively, determined as of
the date of option exercise. The total
intrinsic value of options exercised during the nine months ended September 30,
2010 and 2009 was $3,984,000 and $4,370,000, respectively, determined as of the
date of option exercise. We settle
employee stock option exercises with newly issued common shares. No tax benefits were realized by us in
connection with these exercises during the nine months ended September 30, 2010
and 2009 as we maintain net operating loss carryforwards and we have
established a valuation allowance against the entire tax benefit as of September
30, 2010.
The
following table summarizes activity and related information for restricted
stock, or RS, awards:
|
|
Number of
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested RS at December 31,
2009
|
|
125,000
|
|
$
|
3.72
|
|
Granted
|
|
|
|
|
|
Vested
|
|
(112,500
|
)
|
3.41
|
|
Nonvested RS at September 30,
2010
|
|
12,500
|
|
$
|
6.51
|
|
The shares of restricted stock vest in four equal
annual installments from the date of grant.
D
uring the three months ended September 30, 2010 and 2009, we recorded
stock-based compensation related to restricted stock awards of $6,000 and
$(119,000), respectively. During the nine months ended September
30, 2010 and 2009, we recorded stock-based compensation related to restricted
stock awards of $38,000 and $21,000, respectively. The stock-based compensation expense amounts
for the three and nine months ended September 30, 2009 include the $166,000
one-time reversal related to the resignation of our former CMO discussed
above. As of September 30, 2010, the
unrecorded stock-based compensation balance related to restricted stock awards
was $15,000 and will be recognized over an estimated weighted-average
amortization period of 1.4 years.
14
Table of
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The
following table summarizes activity and related information for restricted
stock unit, or RSU, awards:
|
|
Number of
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested RSU at December 31, 2009
|
|
155,479
|
|
$
|
6.48
|
|
Granted
|
|
454,403
|
|
7.61
|
|
Vested
|
|
(36,366
|
)
|
6.53
|
|
Forfeited
|
|
(85,519
|
)
|
7.33
|
|
Nonvested RSU at September 30,
2010
|
|
487,997
|
|
$
|
7.38
|
|
The shares of restricted stock unit awards vest in
four equal annual installments from the date of grant. D
uring the three months ended
September 30, 2010 and 2009, we recorded stock-based compensation related to
restricted stock unit awards of $273,000 and $87,000, respectively. During
the nine months ended September 30, 2010 and 2009, we recorded stock-based
compensation related to restricted stock unit awards of $934,000 and $255,000,
respectively. The stock-based
compensation expense amounts for the three and nine months ended September 30,
2010 include the $182,000 one-time reversal related to the departure of our
former CCO discussed above. The
stock-based compensation expense amounts for the three and nine months ended September
30, 2009 include the $41,000 one-time reversal related to the resignation of
our former CMO discussed above. As of September
30, 2010, the unrecorded stock-based compensation balance related to restricted
stock unit awards was $2,231,000 and will be recognized over an estimated
weighted-average amortization period of 2.2 years.
9.
Net
Loss Per Share
Basic
net loss per share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted
earnings per share is computed by giving effect to all dilutive potential
common stock outstanding during the period, including stock options, restricted
stock, restricted stock unit awards and shares to be issued under our employee
stock purchase plan.
Diluted
net loss per share is the same as basic net loss per share for all periods
presented because any potential dilutive common shares were anti-dilutive due
to our net loss (as including such shares would decrease our basic net loss per
share). Such potentially dilutive shares are excluded when the effect would be
to reduce net loss per share. Because we reported a net loss for the nine
months ended September 30, 2010 and 2009, all potentially dilutive common
shares have been excluded from the computation of the dilutive net loss per
share for all periods presented. Such potentially dilutive common shares
consist of the following:
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
Common stock options
|
|
8,887,973
|
|
8,469,810
|
|
Unvested restricted stock
|
|
12,500
|
|
125,000
|
|
Unvested restricted stock units
|
|
487,997
|
|
150,108
|
|
|
|
9,388,470
|
|
8,744,918
|
|
10.
Commitments
and Contingencies
Royalty and License Fee Commitments
In
December 2002, we entered into a license agreement with Memorial
Sloan-Kettering Cancer Center, SRI International and Southern Research
Institute, as amended, under which we obtained exclusive worldwide rights to a
portfolio of patents and patent applications related to FOLOTYN and its uses.
Under the terms of the agreement, we paid an up-front license fee of $2.0
million upon execution of the agreement and have made aggregate milestone
payments of $2.5 million based on the passage of time. Additionally, in May and
September 2009, we made milestone payments of $1.5 million based on the FDA
accepting our New Drug Application for review and $5.8 million based on the FDA
approval to market FOLOTYN, respectively.
The up-front license fee and all milestone payments under the agreement
prior to FDA approval to market FOLOTYN were recorded to research and
development expense as incurred. As
discussed in Note 5, the $5.8 million milestone payment based on the FDA
approval was capitalized as an intangible asset and is being amortized over the
expected useful life of the composition of matter patent for FOLOTYN, which we
expect to last until July 16, 2022. The only
15
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remaining
potential milestone payment under the license agreement is for $3.5 million
upon regulatory approval to market FOLOTYN in Europe, which, if made would be
capitalized and amortized over the expected useful life of the licensed
patents. Under the terms of the agreement, we are required to fund all
development programs and will have sole responsibility for all
commercialization activities. In addition, we will pay the licensors royalties
based on graduated annual levels of net sales of FOLOTYN to our distributors,
net of actual rebates and chargebacks, or distributor sales, which may be
different than our net product revenue recognized in accordance with U.S.
generally accepted accounting principles, or GAAP, or sublicense revenues
arising from sublicensing the product, if and when such sales or sublicenses
occur. Royalties are 8% of annual distributor
sales up to $150.0 million; 9% of annual distributor sales of $150.0 million
through $300.0 million; and 11% of annual distributor sales in excess of $300.0
million. In 2010 and 2009, our royalties
were 8% of our net distributor sales. As
of September 30, 2010, accrued royalties were $669,000 and are included in
accrued liabilities on the Balance Sheet.
11. Subsequent
Event
In
October 2010, we issued an aggregate of 2,016,315 RSUs to our employees under
the Companys 2008 Equity Incentive Plan, as amended. The RSU awards vest in three equal annual
installments from the date of grant, subject to the employees continued
service with the Company through such vesting dates.
In October 2010, we received notice that we were
approved for the Therapeutic Discovery Tax Credit, which we elected to receive
in the form of a cash payment, or grant totaling approximately $1,467,000 and
which will be recorded in Other Income in the fourth quarter.
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ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations, as well as information contained
elsewhere in this report,
contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking statements
include, but are not limited to, statements regarding our commercialization of
FOLOTYN for patients with relapsed or refractory peripheral T-cell lymphoma;
our intent and projected timeline to submit a Marketing Authorisation
Application, or MAA, in Europe for FOLOTYN; our projected operating costs and
expenses for fiscal year 2010; other statements regarding our future product
development and regulatory strategies, including our intent to develop or seek
regulatory approval for FOLOTYN for additional indications; the ability of our
third-party manufacturers to support our requirements for drug supply; any
statements regarding our future financial performance, results of operations or
sufficiency of capital resources to fund our operating requirements; and any
other statements that are other than statements of historical fact. In some
cases, these statements may be identified by terminology such as may, will,
should, expects, plans, anticipates, believes, estimates, predicts,
potential or continue, or the negative of such terms and other comparable
terminology. Although we believe that the expectations reflected in the
forward-looking statements contained herein are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. These
statements involve known and unknown risks and uncertainties that may cause
our, or our industrys results, levels of activity, performance or achievements
to be materially different from those expressed or implied by the
forward-looking statements. Factors that may cause or contribute to such
differences include, among other things, those discussed in Part II, Item 1A of
this report under the caption Risk Factors. All forward-looking statements
included in this report are based on information available to us as of the date
hereof and we undertake no obligation to revise any forward-looking statements
in order to reflect any subsequent events or circumstances. Forward-looking
statements not specifically described above also may be found in these and
other sections of this report.
Overview
We
are a biopharmaceutical company committed to the development and
commercialization of innovative anti-cancer therapeutics. Our goal is to build a profitable company by
generating income from products we develop and commercialize, either alone or
with one or more potential strategic partners.
We strive to develop proprietary products that have the potential to
improve the standard of care in cancer therapy.
We
are currently focused on the development and commercialization of FOLOTYN®
(pralatrexate injection). FOLOTYN is a
targeted folate inhibitor designed to accumulate preferentially in cancer
cells. FOLOTYN targets the inhibition of
dihydrofolate reductase, or DHFR, an enzyme critical in the folate pathway,
thereby interfering with DNA and RNA synthesis and triggering cancer cell
death. FOLOTYN can be delivered as a
single agent, for which we currently have approval for the treatment of
patients with relapsed or refractory peripheral T-cell lymphoma, or PTCL, and
has the potential to be used in combination therapy regimens. We believe that FOLOTYNs unique mechanism of
action offers us the ability to target the drug for development in a variety of
hematological malignancies and solid tumor indications. We currently retain exclusive worldwide
commercial rights to FOLOTYN for all indications. We may also seek to grow our product
portfolio through product acquisition and in-licensing efforts.
On
September 24, 2009, the U.S. Food and Drug Administration, or FDA, granted
accelerated approval of FOLOTYN for use as a single agent for the treatment of
patients with relapsed or refractory PTCL. This approval was based on overall
response rate from our pivotal PROPEL trial. Clinical benefit such as
improvement in progression-free survival or overall survival has not been
demonstrated. FOLOTYN represents our
first drug approved for marketing in the United States. FOLOTYN is the first and only drug approved
by the FDA for this indication. In
connection with the accelerated approval, we are required to conduct
post-approval studies that are intended to verify and describe FOLOTYNs
clinical benefit in patients with T-cell lymphoma. Additional post-approval studies are required
to assess whether FOLOTYN poses a serious risk of altered drug levels resulting
from organ impairment.
We
began making FOLOTYN available for commercial sale in the United States in
October 2009 and commenced our commercial launch of FOLOTYN in January 2010. We have established a commercial
organization, including sales, marketing, supply chain management and
reimbursement capabilities, for sales of FOLOTYN in the United States. We believe the market for relapsed or
refractory PTCL is addressable with a targeted U.S. sales and marketing
organization, and we intend to promote FOLOTYN ourselves in the United States.
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Based
on the results of the PROPEL trial, we intend to seek regulatory approval to
market FOLOTYN in Europe for the treatment of patients with relapsed or
refractory PTCL. Our current intention
is to submit a Marketing Authorisation Application, or MAA, in Europe in the
fourth quarter of 2010. We may also
seek regulatory approval to market FOLOTYN for the treatment of patients with
relapsed or refractory PTCL in Japan and other countries. We intend to enter into co-promotion or
out-licensing arrangements with other pharmaceutical or biotechnology partners
where necessary to reach foreign market segments and when deemed strategically
and economically advisable.
We
are committed to evaluating FOLOTYN for oncology use as a single agent and in
combination with other therapies. We
currently are conducting clinical trials involving FOLOTYN in multiple
indications and plan to initiate additional trials in the future to evaluate
FOLOTYNs potential utility in other hematologic malignancies and solid tumor
indications. The following table
summarizes the target indications and clinical development status of the
FOLOTYN development program, including our planned post-approval studies:
Line of
Therapy / Indication
|
|
Phase
|
|
Status
|
HEMATOLOGIC
MALIGNANCIES
|
|
|
|
|
Peripheral
T-cell Lymphoma
|
|
|
|
|
2
nd
line+: PROPEL Pivotal Study
|
|
2
|
|
FDA
accelerated approval on 9/24/09; Marketed in U.S.
|
1
st
Line: CHOP sequential study*
|
|
3
|
|
Planned
initiation in 4Q 2010
|
Cutaneous
T-cell Lymphoma
|
|
|
|
|
2
nd
Line+: Single agent study in relapsed or refractory
CTCL
|
|
1
|
|
Patient
enrollment completed
|
2
nd
Line: Bexarotene combination*
bexarotene +/- FOLOTYN
|
|
1/3
|
|
Patient
enrollment ongoing in Phase 1 study
|
Non-Hodgkin
Lymphoma
|
|
|
|
|
2
nd
Line+: non-Hodgkin lymphoma combination
FOLOTYN + gemcitabine
|
|
1/2a
|
|
Patient
enrollment completed
|
2
nd
Line+: B-cell non-Hodgkin lymphoma
|
|
2
|
|
Patient
enrollment ongoing
|
SOLID
TUMORS
|
|
|
|
|
Non-Small
Cell Lung Cancer
|
|
|
|
|
2
nd
& 3
rd
Line: Current or former smokers, Stage
IIIB/IV
FOLOTYN vs. erlotinib
|
|
2b
|
|
Enrollment
complete; results reported October 2010
|
Bladder
Cancer
|
|
|
|
|
2
nd
Line: Metastatic relapsed transitional cell
carcinoma (TCC) of the urinary bladder
|
|
2
|
|
Patient
enrollment ongoing
|
Breast
Cancer
|
|
|
|
|
2
nd
Line+: Previously treated advanced or
metastatic breast cancer
|
|
2
|
|
Patient
enrollment ongoing
|
*
These studies
are required by the FDA as a condition of the accelerated approval of FOLOTYN
for the treatment of patients with relapsed or refractory PTCL and must verify
the clinical benefit of FOLOTYN.
Recent Developments
On October 11, 2010, we
announced the presentation of favorable survival data from our international,
randomized, multi-center Phase 2b investigational trial of FOLOTYN relative to
erlotinib in patients with Stage IIIB/IV (advanced) non-small cell lung cancer,
or NSCLC, who had received one or two prior systemic treatments including at
least one prior platinum-based regimen.
We previously announced the top line results from this trial in July 2010. The objective of this Phase 2b study was to
estimate the efficacy of FOLOTYN relative to that of erlotinib as assessed by
overall survival, or OS, the primary endpoint of the trial. The results demonstrated that patients
receiving FOLOTYN had a 16% reduction in the risk of death compared to
erlotinib in the overall (intent-to-treat) population (n=201; hazard ratio
(HR)=0.84) and a 13% reduction in the risk of death in the primary efficacy
analysis population (n=166; HR=0.87). At
six months, 56% of patients treated with FOLOTYN were alive and 51% of patients
treated with erlotinib were alive; at one year, 28 % of patients treated with
FOLOTYN were alive and 18% of patients treated with erlotinib were alive. The
median OS time was 6.7 months for patients who received FOLOTYN and 7.0 months
for patients who received erlotinib.
Secondary endpoints included
progression-free survival (PFS) (HR=0.91; median PFS=3.4 months and 2.8 months
for FOLOTYN and erlotinib, respectively) and objective response rate (2% and
7%, respectively). Disease control rate, which includes patients with complete
responses, partial responses or stable disease, was 36% for FOLOTYN and 43% for
erlotinib.
18
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Analyses were also performed
according to the statistical analysis plan to assess the activity of FOLOTYN
and erlotinib in predefined patient cohorts. Most notably, patients with
non-squamous cell carcinoma (n=107) who received FOLOTYN experienced a 35%
reduction in the risk of death (OS HR=0.65) and 42% reduction in the risk of
disease progression (PFS HR=0.58) relative to erlotinib. In patients with
squamous cell carcinoma, a hazard ratio for OS of 1.06 was observed, which
suggests activity of FOLOTYN given that erlotinib has historically shown a
survival benefit in these patients. In the small subset of patients who
received prior pemetrexed (n=30), a hazard ratio for OS of 1.15 was observed.
The safety profile of
FOLOTYN was consistent with that observed and reported in previous FOLOTYN
solid tumor studies. The most common Grade 3-4 adverse event observed in
patients treated with FOLOTYN was mucositis (23%). Other Grade 3-4 adverse
events occurring in more than 5% of patients were fatigue (9%), dyspnea (6%),
neutropenia (6%), thrombocytopenia (5%) and anemia (5%) in patients treated
with FOLOTYN, and rash (8%), dyspnea (8%), anemia (8%) and fatigue (5%) in
patients treated with erlotinib.
We
believe these data warrant further analysis to determine the future development
strategy based on our assessment of the potential clinical, regulatory and
commercial opportunities for FOLOTYN in this indication. We are in the process of exploring potential
Phase 3 development options for FOLOTYN in this indication.
Results of Operations
We have incurred significant net losses and negative cash flows from
operations. We have incurred these losses principally from costs incurred in
our research and development programs and from our selling, general and
administrative expenses. Our primary
business activities have been focused on the development of FOLOTYN and other
programs that we discontinued in previous years. Our ability to achieve profitability is
dependent on our ability to grow product sales of FOLOTYN for the treatment of
patients with relapsed or refractory PTCL in the United States. The amount of our future product sales are
subject to significant uncertainty. We
may never generate sufficient revenue from product sales to become profitable.
We
expect to continue to spend substantial amounts on research and development,
including amounts spent on conducting clinical trials and seeking additional
regulatory approvals for FOLOTYN. We
also expect to continue to spend substantial amounts on selling, general and
administrative expenses in connection with our commercialization of FOLOTYN for
the treatment of patients with relapsed or refractory PTCL. Therefore, we may need to raise additional
capital to support our future operations.
Our actual capital requirements will depend on many factors, including
those discussed under the Liquidity and Capital Resources section below. If we are unable to generate meaningful
amounts of revenue from future product sales or cannot otherwise raise
sufficient additional funds to support our operations, we may be required to
delay, reduce the scope of or eliminate one or more of our development programs
and our business and future prospects for revenue and profitability may be
harmed.
Comparison of the three and nine months ended September 30, 2010 and
2009
Net
product sales.
Net product sales represent
total sales of FOLOTYN less distributor fees and estimated allowances for sales
returns, government rebates and chargebacks, as further described in the Critical
Accounting Policies section below. We began making FOLOTYN available for
commercial sale in the United States in October 2009.
We
sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or
distributors, the three largest of which are affiliates under common control of
an unrelated party. These distributors
then resell FOLOTYN to the patients respective health care providers. Given our limited sales history, we are
currently unable to reasonably estimate returns. Therefore, we have determined that domestic
shipments of FOLOTYN made to distributors do not meet the criteria for revenue
recognition at the time of shipment, and therefore such shipments are accounted
for using the sell-through method. Under the sell-through method, we do not
recognize revenue upon shipment of FOLOTYN to the distributor. For these
product sales, we invoice the distributor and record deferred revenue equal to
the gross invoice sales price. We then recognize revenue when the product is
sold through, or upon shipment of the product from the distributors to the
distributors customers. Because of the
price of FOLOTYN, the limited number of patients, the short period from sale of
product to patient infusion and limited contractual return rights, FOLOTYN
distributors and their customers generally carry limited inventory. Through September 30, 2010, product returns
have been negligible. Deferred revenue
results from amounts receivable in advance of revenue recognition and totaled
$1.6 million as of September 30, 2010.
Balances
and activity in the deferred revenue account and a reconciliation of gross to
net product sales for the three and
19
Table of
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nine
months ended September 30, 2010 and 2009 are as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, beginning of the period
|
|
$
|
1.2
|
|
$
|
|
|
$
|
0.7
|
|
$
|
|
|
Gross product sales to distributors
|
|
9.7
|
|
|
|
27.4
|
|
|
|
Less: Gross product sales recognized
|
|
(9.3
|
)
|
|
|
(26.5
|
)
|
|
|
Deferred revenue as of September 30, 2010
|
|
$
|
1.6
|
|
$
|
|
|
$
|
1.6
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross product sales
|
|
$
|
9.3
|
|
$
|
|
|
$
|
26.5
|
|
$
|
|
|
Less: Gross to Net Sales
Adjustments
|
|
|
|
|
|
|
|
|
|
Government rebates and chargebacks
|
|
(0.8
|
)
|
|
|
(2.2
|
)
|
|
|
Distribution fees
|
|
(0.3
|
)
|
|
|
(0.8
|
)
|
|
|
Returns
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
8.2
|
|
$
|
|
|
$
|
23.5
|
|
$
|
|
|
Net
product sales for the three months ended September 30, 2010 of $8.2 million
represented an increase of 4.4% compared to the $7.9 million of net product
sales for the three months ended June 30, 2010.
There were no corresponding net product sales in the three and nine
months ended September 30, 2009, as sales of FOLOTYN commenced in the fourth
quarter of 2009.
Balances and activity in the
government rebates and chargebacks and distribution fees payable accounts for
the nine months ended September 30, 2010 are as follows:
|
|
Government
Rebates and
Chargebacks
|
|
Distribution
Fees
|
|
|
|
(in millions)
|
|
Balance at December 31, 2009
|
|
$
|
0.5
|
|
$
|
0.1
|
|
Reserve for current period sales
|
|
2.4
|
|
0.8
|
|
Change in estimated Medicaid utilization for 2009
sales
|
|
(0.2
|
)
|
|
|
Credits/payments made for current period sales
|
|
(1.1
|
)
|
(0.6
|
)
|
Credits/payments made for prior period sales
|
|
(0.1
|
)
|
(0.1
|
)
|
Balance at September 30, 2010
|
|
$
|
1.5
|
|
$
|
0.2
|
|
Government
rebates and chargebacks reflect management estimates which are further
discussed in the Critical Accounting Policies section below
.
Cost of
sales, excluding amortization expense.
Cost of sales,
excluding amortization expense, includes cost of product sold, royalties,
inventory packaging and labeling, warehousing and shipping costs associated
with FOLOTYN product revenue.
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Cost of sales, excluding amortization expense
|
|
$
|
0.9
|
|
$
|
|
|
$
|
2.3
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to receiving FDA approval of FOLOTYN, all costs related to purchases of the
active pharmaceutical ingredient and manufacturing of the product were recorded
as research and development expense. We
have remaining supplies of drug substance and drug product that are not
recorded as inventory on our Balance Sheet as of September 30, 2010 because
they were purchased prior to FDA approval.
Accordingly, our cost of sales will be lower with respect to product
manufactured
20
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prior
to FDA approval. Until we sell these
supplies for which the costs were previously expensed, our cost of sales will
reflect only incremental costs incurred subsequent to the FDA approval
date. This occurred with respect to a
majority of our sales of FOLOTYN in the nine months ended September 30,
2010. After the inventory has been sold
that was already expensed to research and development prior to FDA approval, we
expect cost of sales, excluding amortization expense to approximate 10% of net
product sales, which includes our current 8% royalty.
The
$0.9 million and $2.3 million of cost of sales, excluding amortization expense
for the three and nine months ended September 30, 2010, respectively, was
primarily due to an 8% royalty on gross product sales payable to the licensors
of FOLOTYN under the terms of our license agreement. We sold a portion of our finished goods that
were manufactured subsequent to the FDA approval date totaling $67,000 and
$82,000 during the three and nine months ended September 30, 2010,
respectively, which were recorded in cost of sales, excluding amortization
expense. There were no corresponding
cost of sales for the three and nine months ended September 30, 2009.
Research and Development.
Research and development expenses include the
costs of certain personnel, preclinical studies, clinical trials, regulatory
affairs, biostatistical data analysis, third-party manufacturing costs for
development of drug materials for use in preclinical studies and clinical
trials, and manufacturing costs and licensing fees incurred for FOLOTYN prior
to receipt of FDA approval.
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Research and development
|
|
$
|
7.2
|
|
$
|
7.5
|
|
$
|
23.1
|
|
$
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
$0.3 million decrease in research and development expenses in the three months
ended September 30, 2010, as compared to the same period in 2009 was primarily
due to:
·
a $1.2 million decrease in costs related to clinical
trials involving FOLOTYN that have closed enrollment, including decreased costs
for our Phase 2b NSCLC study, which completed patient enrollment in July 2009;
·
a $539,000 decrease in consulting, professional fees
and grants, primarily resulting from regulatory affairs and preparations for
the FDAs Oncologic Drugs Advisory Committee, or ODAC, meeting for FOLOTYN in September
2009, with no corresponding amounts in 2010; and
·
a $522,000 decrease in third-party manufacturing
costs for clinical trial material and manufacturing pre-commercial product in
preparation for approval.
This
decrease was partially offset by:
·
a $1.1 million increase in costs related to clinical
trials involving FOLOTYN, including start-up costs for the post-approval
studies required by the FDA and other trials with ongoing enrollment; and
·
an $828,000 increase in non-cash stock-based
compensation expense, primarily resulting from
the one-time $0.9 million reversal of stock-based compensation expense
in connection with the resignation of our former Chief Medical Officer in September
2009, as discussed in more detail in the
Stock-based Compensation
Expense
section below.
The
$1.6 million decrease in research and development expenses in the nine months
ended September 30, 2010, as compared to the same period in 2009 was primarily
due to:
·
a $1.6 million decrease in costs related to clinical
trials involving FOLOTYN that have closed enrollment, including decreased costs
for our Phase 2b NSCLC study, which completed patient enrollment in July 2009;
·
a $1.5 million decrease in licensing costs resulting
from the milestone payment made under the license agreement for FOLOTYN upon
FDA acceptance of our NDA for review in the three months ended June 30, 2009,
with no corresponding amount in the same period in 2010;
·
a $1.1 million decrease in third-party manufacturing
costs for clinical trial material and manufacturing pre-commercial product in
preparation for approval; and
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·
a $581,000 decrease in consulting, professional fees
and grants, primarily resulting from regulatory affairs and preparations
related to the filing of our NDA and the FDAs ODAC meeting for FOLOTYN in September
2009, with no corresponding amounts in 2010.
This
decrease was partially offset by:
·
a $2.3 million increase in costs related to clinical
trials involving FOLOTYN, including start-up costs for the post-approval
studies required by the FDA and other trials with ongoing enrollment;
·
a $610,000 increase in personnel and related travel
costs, mainly attributable to additional headcount and increases in
compensation costs year over year; and
·
a $271,000 increase in non-cash stock-based
compensation expense, primarily resulting from
the one-time $0.9 million reversal of stock-based compensation expense
in connection with the resignation of our former Chief Medical Officer in September
2009, as discussed in more detail in the
Stock-based Compensation
Expense
section below.
For
the fourth quarter of 2010, we expect our research and development expenses to
increase compared to the quarterly average for the nine months ended September 30,
2010, due to the following:
·
an increase in costs related to clinical
trials involving FOLOTYN, including start-up costs for the post-approval
studies required by the FDA; and
·
an increase in non-cash stock-based
compensation expense related to the broad-based RSU awards to existing
employees in October 2010 and grants to new employees.
Selling, General and Administrative.
Selling, general and administrative expenses
include costs for sales and marketing activities, corporate development,
medical affairs, executive administration, corporate offices and related
infrastructure.
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Selling, general and administrative
|
|
$
|
18.7
|
|
$
|
11.3
|
|
$
|
57.2
|
|
$
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
$7.4 million increase in selling, general and administrative expenses in the
three months ended September 30, 2010, as compared to the same period in 2009
was primarily due to the following:
·
a $3.7 million
increase in personnel and related travel and facilities costs, mainly
attributable to additional headcount to support the commercialization of
FOLOTYN, including our sales and marketing organization, and increases in
compensation costs year over year;
·
a $2.8 million
increase in sales and marketing costs associated with the commercialization of
FOLOTYN, including promotional expenses, advisory boards, market research and
costs related to trade shows;
·
a $924,000
increase in grants and sponsored medical education programs; and
·
a $330,000
increase in professional fees primarily related to increased portfolio and
intellectual property development activities and administrative compliance
associated with commercialization and additional headcount.
These
increases were partially offset by a decrease of $405,000 in stock-based
compensation, primarily resulting from the one-time $0.8 million reversal
related to the departure of our former Chief Commercial Officer in August 2010,
as discussed in more detail in the
Stock-based Compensation
Expense
section below.
The
$30.8 million increase in selling, general and administrative expenses in the
nine months ended September 30, 2010, as compared to the same period in 2009
was primarily due to the following:
·
a $17.0 million
increase in personnel and related travel and facilities costs, mainly
attributable to additional headcount to support the commercialization of
FOLOTYN, including our sales and marketing organization, and
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increases
in compensation costs year over year;
·
a $9.6 million
increase in sales and marketing costs associated with the commercialization of
FOLOTYN, including promotional expenses, advisory boards, market research and
costs related to trade shows;
·
a $2.8 million
increase in grants and sponsored medical education programs;
·
a $1.0 million
increase in stock-based compensation, net of the one-time $0.8 million reversal
resulting from the departure of our former Chief Commercial Officer in August 2010,
as discussed in more detail in the
Stock-based Compensation
Expense
section below; and
·
a $304,000
increase in professional fees primarily related to increased portfolio and
intellectual property development activities and administrative compliance
associated with commercialization and additional headcount.
For
the fourth quarter of 2010, we expect our selling, general and administrative
expenses to increase compared to the quarterly average for the nine months
ended September 30, 2010, due to the following:
·
an increase in sales and marketing costs associated
with executing our marketing and promotional programs for the commercialization
of FOLOTYN;
·
an increase in costs associated with medical affairs
and medical education expenses to educate the medical community; and
·
an increase in non-cash stock-based compensation
expense related to the broad-based RSU awards to existing employees in October 2010
and grants to new employees.
Amortization
of intangible asset.
Amortization of intangible asset represents
amortization expense of capitalized license costs over the expected patent life
of the related product.
Amortization
expense of our intangible asset for the three and nine months ended September 30,
2010, was $113,000 and $340,000, respectively.
Amortization expense of our intangible asset for the three and nine
months ended September 30, 2009, was $7,000.
The expense in the three and nine months ended September 30, 2010 was
due to the amortization of the $5.8 million intangible asset resulting from a
milestone payment under our license agreement for FOLOTYN in September 2009
discussed further in the Obligations and Commitments section below. Amortization expense is being recorded on a
straight line basis over the estimated remaining life of the composition of
matter patent for FOLOTYN, which we expect to last until July 16, 2022. This
includes the anticipated Hatch-Waxman extension that provides patent protection
for drug compounds for a period of up to five years to compensate for time
spent in development. This term is our best estimate of the life of the
patent. If, however, the Hatch-Waxman
extension is not granted, the intangible asset will be amortized over a shorter
period.
Stock-based
Compensation Expense.
Stock-based
compensation expense for the three and nine months ended September 30, 2010 and
2009 has been recognized in our Statements of Operations as follows:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in millions)
|
|
Research and development
|
|
$
|
0.9
|
|
$
|
0.1
|
|
$
|
2.2
|
|
$
|
2.0
|
|
Selling, general and administrative
|
|
1.3
|
|
1.7
|
|
5.7
|
|
4.6
|
|
Total stock-based compensation expense
|
|
$
|
2.2
|
|
$
|
1.8
|
|
$
|
7.9
|
|
$
|
6.6
|
|
Effective
August 24, 2010, James V. Caruso, our former Executive Vice President and Chief
Commercial Officer (CCO), departed the Company.
As a result of Mr. Carusos departure, we adjusted the forfeiture rate
applied to his equity compensation, which resulted in a one-time $0.8 million
reversal of selling, general and administrative stock-based compensation
expense during the three and nine months ended September 30, 2010, of which
$0.6 million related to stock option awards and $0.2 million related to
restricted stock unit awards. Effective September
30, 2009, Pablo J. Cagnoni,
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M.D.,
our former Senior Vice President and Chief Medical Officer (CMO),
resigned. As a result of Dr. Cagnonis
resignation, we adjusted the forfeiture rate applied to his equity
compensation, which resulted in a one-time $0.9 million reversal of research
and development stock-based compensation expense during the three and nine
months ended September 30, 2009, of which $0.7 million related to stock option
awards, $0.2 million related to restricted stock and restricted stock unit
awards.
Of
the $2.2 million of stock-based compensation recognized in the three months
ended September 30, 2010, $1.8 million was related to our stock option plans,
$279,000 related to restricted stock and restricted stock units and $59,000
related to our employee stock purchase plan.
The $1.8 million of stock-based compensation recognized in the three
months ended September 30, 2009 primarily related to our stock option
plans. The $0.4 million increase in
stock-based compensation expense in the three months ended September 30, 2010,
as compared to the same period in 2009 was primarily related to an increase in
the number of options granted to new employees and to existing employees pursuant
to our annual grants in February 2010.
Of
the $7.9 million of stock-based compensation recognized in the nine months
ended September 30, 2010, $6.8 million was related to our stock option plans,
$972,000 related to restricted stock and restricted stock units and $165,000
related to our employee stock purchase plan.
Of the $6.6 million of stock-based compensation recognized in the nine
months ended September 30, 2009, $6.3 million was related to our stock option
plans, $275,000 was related to restricted stock and restricted stock units and
$75,000 was related to our employee stock purchase plan. The $1.3 million increase in stock-based
compensation expense in the nine months ended September 30, 2010, as compared
to the same period in 2009 was primarily related to an increase in the number
of options granted to new employees and to existing employees pursuant to our
annual grants in February 2010.
As
of September 30, 2010, the unrecorded stock-based compensation balance related
to stock option awards was $9.3 million and will be recognized over an
estimated weighted-average amortization period of 1.7 years. As of September 30,
2010, the unrecorded stock-based compensation balance related to restricted
stock unit awards was $2.2 million and will be recognized over an estimated
weighted-average amortization period of 2.2 years. As of September 30, 2010, the unrecorded
stock-based compensation balance related to restricted stock awards was $15,000
and will be recognized over an estimated weighted-average amortization period
of 1.4 years.
Stock-based
compensation expense in fiscal year 2010 is expected to be approximately $12
million.
Interest and Other Income, Net
. Interest and other income, net for the three
months ended September 30, 2010 and 2009 was $(129,000) and $125,000,
respectively. Interest income, net of
interest expense, for the nine months ended September 30, 2010 and 2009 was
$2,000 and $304,000, respectively. The
$254,000 decrease in net interest income in the three months ended September 30,
2010, as compared to the same period in 2009 was primarily due to a $199,000
loss on the disposal of certain software that was no longer in use and
partially due to lower yields on our cash, cash equivalents and investments. The $302,000 decrease in net interest income
in the nine months ended September 30, 2010, as compared to the same period in
2009 was primarily due to lower yields on our cash, cash equivalents and
investments, offset by a realized loss of approximately $157,000 on the sale of
certain of our investments during the nine months ended September 30, 2009,
with no corresponding amount for the same period in 2010. We recognized a loss on the disposal of
certain software that was no longer in use totaling $199,000 and $149,000 for
the nine months ended September 30, 2010 and 2009, respectively.
Income Tax Benefit
. Income tax benefit for the three and nine
months ended September 30, 2010 and 2009 was $78,000 and $77,000,
respectively. The income tax benefit in
both the three and nine months ended September 30, 2010 and 2009 was related to
a refundable research and experimentation income tax credit received during the
respective periods. We do not expect a
significant income tax benefit during the fourth quarter of 2010. We performed an evaluation of tax periods
that remain subject to examination by major tax jurisdictions as of September 30,
2010 and we have concluded based on that evaluation that there are no
significant uncertain tax positions requiring recognition in our financial statements. A full valuation allowance has been
established for the entire tax benefit as we believe that it is more likely
than not that such assets will not be realized.
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Liquidity and Capital Resources
As
of September 30, 2010, we had $108.9 million in cash, cash equivalents, and
investments. Until required for use in
our business, we invest our cash reserves in bank deposits, money market funds
and U.S. government instruments in accordance with our investment policy. The weighted average duration of the
remaining time to maturity for our portfolio of investments as of September 30,
2010 was approximately four months. Our
investments as of September 30, 2010, primarily consisted of U.S. Treasury
notes. We did not hold any derivative instruments, foreign exchange contracts,
asset backed securities, mortgage backed securities, auction rate securities,
or securities of issuers in bankruptcy in our investment portfolio as of September
30, 2010. We have the ability and intent
to hold our remaining investments to recover the entire amortized cost basis of
the investments as of September 30, 2010, although we monitor our investment
portfolio with the primary objectives of preserving principal and maintaining
proper liquidity to meet our operating needs.
Since
our inception, we have financed our operations primarily through public and private
sales of our equity securities, which have resulted in net proceeds to us of
$477.7 million through September 30, 2010.
Net
cash used to fund our operating activities for the nine months ended September 30,
2010 and 2009 was $52.9 million and $42.0 million, respectively. The $10.9 million increase in net cash used
to fund our operating activities in the nine months ended September 30, 2010,
as compared to the same period in 2009 was primarily due to the increase in our
net loss and the $3.9 million increase in accounts receivable, as we had no
accounts receivable in the corresponding period in 2009.
For
fiscal year 2010, total operating costs and expenses are expected to be
approximately $105 to $110 million, excluding non-cash stock-based compensation
expense. Stock-based compensation
expense is expected to be approximately $12 million. Actual financial results for 2010 will vary
based upon many factors, including FOLOTYN sales and rate of patient enrollment
in clinical trials that are ongoing and planned for initiation in the fourth
quarter of 2010.
Net
cash used in investing activities for the nine months ended September 30, 2010,
was $29.0 million and consisted primarily of purchases of investments offset by
proceeds from maturities of investments.
Net cash provided by investing activities for the nine months ended September
30, 2009 was $24.0 million and consisted of the net proceeds from maturities,
sales and purchases of investments in marketable securities, partially offset
by the $5.8 million of cash paid for license related to the milestone payment
made under our license agreement for FOLOTYN upon FDA approval of our NDA in September
2009 and $1.1 million of cash paid for the acquisition of property and
equipment.
Net
cash provided by financing activities for the nine months ended September 30,
2010, was $4.2 million and consisted primarily of proceeds from the issuance of
common stock associated with stock options exercised by our employees and sales
of stock under our employee stock purchase plan. Net cash provided by financing activities for
the nine months ended September 30, 2009 was $50.0 million and consisted
primarily of the $47.0 million of net proceeds from our financing in April 2009
and $3.0 million of proceeds from the issuance of common stock associated with
stock options exercised by our employees and sales of stock under our employee
stock purchase plan.
Based
upon the current status of our product development and commercialization plans,
we believe that our cash, cash equivalents, and investments as of September 30,
2010, will be adequate to support our operations through at least the next 12
months, although there can be no assurance that this can, in fact, be
accomplished. Our forecast of the period of time through which our financial
resources will be adequate to support our operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary
materially.
We
anticipate continuing our current development programs and beginning other
long-term development projects involving FOLOTYN, including the post-approval
clinical studies required for FOLOTYN. These projects may require many years
and substantial expenditures to complete and may ultimately be unsuccessful. In addition, we expect to incur significant
costs relating to the commercialization of FOLOTYN, including costs related to
our sales and marketing, medical affairs and manufacturing operations. Therefore, we may need to raise additional
capital to support our future operations. Our actual capital requirements will depend on
many factors, including:
·
the timing and amount of revenues generated
from sales of FOLOTYN;
·
the timing and costs associated with our sales
and marketing activities for the commercialization of FOLOTYN;
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·
the timing and costs associated with
manufacturing clinical and commercial supplies of FOLOTYN;
·
the timing and costs associated with
conducting preclinical and clinical development of FOLOTYN, including the
post-approval clinical studies required by the FDA, as well as our evaluation
of, and decisions with respect to, additional therapeutic indications for which
we may develop FOLOTYN;
·
the timing, costs and potential revenue
associated with any co-promotion or other partnering arrangements entered into
to commercialize FOLOTYN; and
·
our evaluation of, and decisions with respect
to, potential in-licensing or product acquisition opportunities or other
strategic alternatives.
We
may seek to obtain this additional capital through equity or debt financings,
arrangements with corporate partners, or from other sources. Such financings or
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that additional financing will be
available when needed, or that, if available, we will obtain such financing on
terms that are favorable to our stockholders or us. In the event that
additional funds are obtained through arrangements with collaborative partners
or other sources, such arrangements may require us to relinquish rights to some
of our technologies, product candidates or products under development, which we
might otherwise seek to develop or commercialize ourselves, on terms that are
less favorable than might otherwise be available. If we are unable to generate meaningful
amounts of revenue from future product sales or cannot otherwise raise
sufficient additional funds to support our operations, we may be required to
delay, reduce the scope of or eliminate one or more of our development programs
and our business and future prospects for revenue and profitability may be
harmed.
Obligations
and Commitments
Royalty and License Fee Commitments
In
December 2002, we entered into a license agreement with Memorial
Sloan-Kettering Cancer Center, SRI International and Southern Research
Institute, as amended, under which we obtained exclusive worldwide rights to a
portfolio of patents and patent applications related to FOLOTYN and its uses.
Under the terms of the agreement, we paid an up-front license fee of $2.0
million upon execution of the agreement and have made aggregate milestone
payments of $2.5 million based on the passage of time. Additionally, in May and
September 2009, we made milestone payments of $1.5 million based on the FDA
accepting our New Drug Application for review and $5.8 million based on the FDA
approval to market FOLOTYN, respectively.
The up-front license fee and all milestone payments under the agreement
prior to FDA approval to market FOLOTYN were recorded to research and
development expense as incurred. The
$5.8 million milestone payment based on the FDA approval was capitalized as an
intangible asset and is being amortized over the expected useful life of the
composition of matter patent for FOLOTYN, which we expect to last until July 16,
2022. The only remaining potential milestone payment under the license
agreement is for $3.5 million upon regulatory approval to market FOLOTYN in
Europe, which, if made would be capitalized and amortized over the expected
useful life of the licensed patents. Under the terms of the agreement, we are
required to fund all development programs and will have sole responsibility for
all commercialization activities. In addition, we will pay the licensors
royalties based on graduated annual levels of net sales of FOLOTYN to our
distributors, net of actual rebates and chargebacks, or distributor sales,
which may be different than our net product revenue recognized in accordance
with U.S. generally accepted accounting principles, or GAAP, or sublicense
revenues arising from sublicensing the product, if and when such sales or
sublicenses occur. Royalties are 8% of
annual distributor sales up to $150.0 million; 9% of annual distributor sales
of $150.0 million through $300.0 million; and 11% of annual distributor sales
in excess of $300.0 million. In 2010 and
2009, our royalties were 8% of our net distributor sales.
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Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, and
expenses. We base our estimates on historical experience, available information
and assumptions that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following policies to be the most critical to an
understanding of our financial condition and results of operations because they
require us to make estimates, assumptions and informed management judgments
about matters that are inherently uncertain:
·
revenue recognition;
·
accounting for research and development expenses;
·
accounting for inventory; and
·
accounting for stock-based compensation expense.
Revenue Recognition.
We generate revenue from product sales. We recognize product revenue when it is
realized or realizable and earned. Revenue is realized or realizable and earned
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) our price to the buyer is fixed and determinable; and (4) collectability is
reasonably assured. Revenue from sales transactions where the buyer has the
right to return the product is recognized at the time of sale only if (1) our
price to the buyer is substantially fixed or determinable at the date of sale,
(2) the buyer has paid us, or the buyer is obligated to pay us and the
obligation is not contingent on resale of the product, (3) the buyers
obligation to us would not be changed in the event of theft or physical
destruction or damage of the product, (4) the buyer acquiring the product for
resale has economic substance apart from that provided by us, (5) we do not
have significant obligations for future performance to directly bring about
resale of the product by the buyer, and (6) the amount of future returns can be
reasonably estimated.
We
sell FOLOTYN to a limited number of pharmaceutical wholesale distributors, or
distributors, the three largest of which are affiliates under common control of
an unrelated party. These distributors
then resell FOLOTYN to the patients respective health care providers. Given our limited sales history, we are
currently unable to reasonably estimate returns. Therefore, we have determined
that domestic shipments of FOLOTYN made to distributors do not meet the
criteria for revenue recognition at the time of shipment, and therefore such
shipments are accounted for using the sell-through method. Under the
sell-through method, we do not recognize revenue upon shipment of FOLOTYN to
the distributor. For these product sales, we invoice the distributor and record
deferred revenue equal to the gross invoice sales price. We then recognize
revenue when the product is sold through, or upon shipment of the product from
the distributors to the distributors customers. Because of the price of FOLOTYN, the limited
number of patients, the short period from sale of product to patient infusion
and limited contractual return rights, FOLOTYN distributors and their customers
generally carry limited inventory.
Through September 30, 2010, product returns have been negligible. Deferred revenue results from amounts
receivable in advance of revenue recognition and totaled $1.6 million as of September
30, 2010.
We
estimate sell-through revenue and certain gross to net sales adjustments based
upon analysis of third-party information, including information obtained from
certain distributors with respect to their inventory levels and sell-through to
the distributors customers. Our estimates are subject to the inherent
limitations of estimates that rely on third-party data. The information
received from distributors is a product of their record-keeping process and
their internal controls surrounding such processes. Our sales and revenue recognition under the
sell-through method reflect our estimate of actual product sold through the
distribution channel.
Additionally
under the sell-through method, royalties paid based on unit shipments to
distributors are deferred and recognized as royalty expense when those units
are sold through and recognized as revenue. Royalties paid are deferred as we
have the right to offset royalties paid for product that are later returned
against subsequent royalty obligations.
Net Product Sales
Our net product sales
represent total sell-through revenue less estimated allowances for rebates and
chargebacks to be incurred on the selling price of FOLOTYN related to the
respective revenue. In addition, we incur certain distributor fees related to
the management of our product by distributors. These distributor fees are
recorded within net revenues and are
27
Table of Contents
known at the time of sale.
Due to estimates and assumptions inherent in determining the amount of rebates
and chargebacks, the actual amount of claims for rebates and chargebacks may be
different from our estimates, at which time we would adjust our reserves
accordingly. Product sales allowances
and accruals are based on definitive contractual agreements or legal
requirements (such as Medicaid laws and regulations) related to the purchase
and/or utilization of the product by these entities. Allowances and accruals are generally
recorded in the same period that the related revenue is recognized.
Classification
of Product Sales Allowances and Accruals
Accruals related to Medicaid
rebates, government chargebacks and distributor fees are recognized at the time
sell-through revenue is recorded, resulting in a reduction in product sales
revenue and the recording of an increase in accrued expenses.
Medicaid Rebates
Our product is subject to
state government-managed Medicaid programs whereby discounts and rebates are
provided to participating state governments. We record estimated rebates
payable under governmental programs, including Medicaid, as a reduction of
revenue at the time sell-through revenues are recorded. Our calculations
related to these rebate accruals require estimates, including estimates of
customer mix primarily based on a combination of market and clinical research,
to determine which sales will be subject to rebates and the amount of such
rebates. During the first quarter of 2010, we obtained additional market
research and were able to refine our estimated Medicaid utilization, which
resulted in a reversal of Medicaid rebate allowances related to 2009 sales
totaling $208,000. We also consider any
legal interpretations of the applicable laws related to Medicaid and qualifying
federal and state government programs and any new information regarding changes
in the Medicaid programs regulations and guidelines that would impact the
amount of the rebates. In March 2010,
the Patient Protection and Affordable Care Act, as modified by the Health Care
and Education Affordability Reconciliation Act of 2010, or PPACA, was enacted,
which increased the Medicaid rebate percentage from 15.1% to 23.1%, retroactive
to January 1, 2010. In addition, the
states ability to early adopt portions of PPACA, and any implementing
regulations, could impact future estimates related to our Medicaid rebate
allowances. We update our estimates and assumptions each period and record any
necessary adjustments to our reserves. Although allowances and accruals are recorded
at the time of product sale, certain rebates are typically paid out, on
average, up to six months or longer after the sale. We account for Medicaid
rebates by establishing an accrual in an amount equal to our estimate of
Medicaid rebate claims attributable to sales recognized in that period. If actual future results vary from our
estimates, we may need to adjust our previous estimates, which would affect our
earnings in the period of the adjustment.
For reference purposes, a 10% to 20% variance in Medicaid utilization
estimates for state Medicaid rebates as of September 30, 2010, would result in
an approximate $0.4 million to $0.9 million adjustment to cumulative net
product sales.
Government Chargebacks
Our
products are subject to certain programs with federal government qualified
entities whereby pricing on products is discounted below distributor list price
to participating entities. These entities purchase products through
distributors at the discounted price, and the distributors charge the difference
between their acquisition cost and the discounted price back to us. We account
for chargebacks by establishing an accrual in an amount equal to our estimate
of maximum chargeback claims. We determine our chargeback estimates based on
actual FOLOTYN sell-through sales
data from third-party information. Chargeback amounts are determined at the
time of resale to the federal government qualified entities, and we generally
issue credits for such amounts within several weeks of receiving claims from the
distributor. We do not expect the impact of the 340B program expansion included
in the PPACA to significantly change our estimated government chargeback
accruals because drugs approved under an Orphan Drug designation were
specifically excluded from the provisions of the PPACA. The FDA has awarded orphan drug status to
FOLOTYN for the treatment of patients with T-cell lymphoma, which includes
patients with relapsed or refractory PTCL.
Estimated
chargeback amounts are recorded at the time the sell-through sale occurs and we
adjust the accrual quarterly to reflect actual experience. Due to estimates and
assumptions inherent in determining the amount of government chargebacks, the
actual amount of claims for chargebacks may be different from our estimates, at
which time we would adjust our reserves accordingly.
Research and Development.
Research and development expenditures are
charged to expense as incurred. Research and development expenses include the
costs of certain personnel, preclinical studies, clinical trials, regulatory
affairs, biostatistical data analysis, third party manufacturing costs for
development of drug materials for use in clinical trials and preclinical
studies and licensing fees for our product candidates prior to FDA approval. All finished drug inventory costs
28
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associated
with production activities in our third party manufacturing facilities prior to
receiving FDA approval for such facilities and prior to receiving regulatory
approval to market our product are expensed to research and development
expenses. Upon receipt of the related regulatory approval, we capitalize those
manufacturing costs for our marketed products at the lower of cost or market
and then expense the sold inventory as a component of cost of sales. We accrue
research and development expenses for activity as incurred during the fiscal
year and prior to receiving invoices from clinical sites and third party
clinical and preclinical research organizations. We accrue external costs for
clinical and preclinical studies based on an evaluation of the following: the
progress of the studies, including patient enrollment, dosing levels of
patients enrolled, estimated costs to dose patients, invoices received, and
contracted costs with clinical sites and third party clinical and preclinical
research organizations. Significant judgments and estimates must be made and
used in determining the accrued balance in any accounting period. Actual
results could differ from those estimates. During the quarters ended September 30,
2010 and 2009, we did not have any changes in estimates that would have
resulted in material adjustments to research and development expenses accrued
in the prior period.
In
accordance with certain research and development agreements, we are obligated
to make certain upfront payments upon execution of the agreement. We record
these upfront payments as prepaid research and development expenses. Such
payments are recorded to research and development expense as services are
performed. We evaluate on a quarterly basis whether events and circumstances
have occurred that may indicate impairment of remaining prepaid research and development
expenses.
Inventory
.
Costs
associated with the production of FOLOTYN bulk drug substance and formulated
drug product by our third party manufacturers are recorded as either research
and development expense or inventory.
Costs associated with the
production of FOLOTYN by our third party manufacturers are expensed to research
and development expense at the time of production when:
·
the formulated
drug product is packaged for clinical trial use;
·
the bulk drug
substance and formulated drug product is produced prior to receiving regulatory
approval to market the product candidate; and
·
the bulk drug
substance and formulated drug product is produced prior to receiving FDA
approval for the respective third party manufacturing facilities.
If and when we receive the
related regulatory approval, we capitalize those manufacturing costs for our
marketed products at the lower of cost (first-in, first-out method) or market
(current replacement cost) with cost determined on the first-in, first-out basis
and then expense the sold inventory as a component of cost of goods sold.
Prior to receiving FDA
approval of FOLOTYN, all costs related to purchases of the active
pharmaceutical ingredient and the manufacturing of the product were recorded as
research and development expense. We
have remaining supplies of FOLOTYN drug substance and drug product that are not
recorded as inventory on our Balance Sheet as of September 30, 2010 because
they were purchased prior to FDA approval.
Accordingly, our cost of sales will be lower with respect to product
manufactured prior to FDA approval.
Until we sell these supplies for which the costs were previously
expensed, our cost of sales will reflect only incremental costs incurred subsequent
to the FDA approval date. We sold a
portion of our finished goods that were manufactured subsequent to the FDA
approval date totaling $67,000 and $82,000 during the three and nine months
ended September 30, 2010, respectively, which were recorded in cost of sales,
excluding amortization expense in the Statement of Operations. We continue to expense costs associated with
clinical trial material as research and development expense. Inventory as of September 30, 2010, consists
of work in process of $83,000 and finished goods of $68,000.
Stock-based Compensation Expense.
We have several stock-based compensation plans
under which incentive and non-qualified stock options, restricted stock units
and restricted shares may be granted, and an employee stock purchase plan. We measure the cost of employee services
received in exchange for an award of equity instruments based on the grant date
fair value of the award. That cost is recognized over the period during which
an employee is required to provide services in exchange for the award, the requisite
service period (usually the vesting period). We provide an estimate of
forfeitures at initial grant date.
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During
the nine months ended September 30, 2010 and 2009, we recorded stock-based
compensation expense of approximately $7.9 million and $6.6 million,
respectively, related to stock-based awards, including stock options,
restricted stock units, restricted stock and our employee stock purchase plan.
As of September 30, 2010, the unrecorded deferred stock-based compensation
balance related to these stock-based awards was approximately $11.5 million and
will be recognized over the remaining vesting periods of the awards. Judgments
and estimates must be made and used in determining the factors used in
calculating the fair value of stock-based awards, including the expected
forfeiture rate of our stock-based awards, the expected life of our stock-based
awards, and the expected volatility of our stock price. For more information on
stock-based compensation expense during the nine months ended September 30,
2010, refer to Note 8 Stock-Based Compensation of the unaudited September 30,
2010, financial statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our
financial instruments as of September 30, 2010, consisted of cash, cash
equivalents, investments, accounts receivable and accounts payable. All highly liquid investments with original
maturities of three months or less are considered to be cash equivalents. We invest in securities in accordance with
our investment policy. The primary objectives
of our investment policy are to preserve principal and maintain proper
liquidity to meet our operating needs.
Our investment policy specifies credit quality standards for our
investments and limits the amount of credit exposure to any single issue,
issuer or type of investment. The
weighted average duration of the remaining time to maturity for our portfolio
of investments as of September 30, 2010, was approximately four months. As of September 30, 2010, our investments of
$45.5 million were all classified as held-to-maturity and were held in a
variety of interest-bearing instruments, consisting primarily of U.S. Treasury
notes. We did not hold any derivative instruments, foreign exchange contracts,
asset backed securities, mortgage backed securities, auction rate securities,
or securities of issuers in bankruptcy in our investment portfolio as of September
30, 2010. We have the ability and intent
to hold our remaining investments to recover the entire amortized cost basis of
the investments as of September 30, 2010, although we monitor our investment
portfolio with the primary objectives of preserving principal and maintaining
proper liquidity to meet our operating needs.
Investments
in fixed-rate interest-bearing instruments carry varying degrees of interest
rate risk. The fair market value of our
fixed-rate securities may be adversely impacted due to a rise in interest
rates. In general, securities with
longer maturities are subject to greater interest-rate risk than those with
shorter maturities. Due in part to this
factor, our interest income may fall short of expectations or we may suffer
losses in principal if securities are sold that have declined in market value
due to changes in interest rates. Due to
the short duration of our investment portfolio, we believe an immediate 10%
change in interest rates would not be material to our financial condition or
results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As
of the end of the period covered by this report, an evaluation was carried out
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our management,
including our principal executive officer and principal financial officer,
concluded that our disclosure controls and procedures were effective as of September
30, 2010, to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commissions rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
No Changes in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting during the
three months ended September 30, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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ITEM 1A. RISK FACTORS
Our
business faces significant risks. These risks include those described below and
may include additional risks of which we are not currently aware or which we
currently do not believe are material. If any of the events or circumstances
described in the following risk factors actually occurs, they may materially
harm our business, financial condition, operating results and cash flow. As a
result, the market price of our common stock could decline. Additional risks
and uncertainties that are not yet identified or that we think are immaterial
may also materially harm our business, operating results and financial
condition.
Stockholders
and potential investors in shares of our common stock should carefully consider
the following risk factors, which hereby update those risks contained in the Risk
Factors section of our Annual Report on Form 10-K for the year ended December 31, 2009 in
addition to other information and risk factors in this report. We are identifying these risk factors as
important factors that could cause our actual results to differ materially from
those contained in any written or oral forward-looking statements made by or on
behalf of the Company. We are relying
upon the safe harbor for all forward-looking statements in this report, and any
such statements made by or on behalf of the Company are qualified by reference
to the following cautionary statements, as well as to those set forth elsewhere
in this report. We consistently update and include our risk factors in our
Quarterly Reports on Form 10-Q. Risk factors that have been substantively
changed from those set forth in our Annual Report on Form 10-K for the period
ended December 31, 2009 have been marked with an asterisk immediately following
the heading of such risk factor.
We have a history of net losses and an accumulated deficit, and we may
never generate sufficient revenue to achieve or maintain profitability in the
future.
*
We
have experienced significant net losses and negative cash flows from
operations. To date, we have financed our operations primarily through the
public and private sale of securities.
For the nine months ended September 30, 2010, we had a net loss of $59.3
million. As of September 30, 2010, we
had accumulated a deficit of $432.5 million.
We have incurred these losses principally from costs incurred in our
research and development programs and from our selling, general and
administrative expenses.
On
September 24, 2009, we obtained accelerated approval from the FDA for FOLOTYN
for use as a single agent for the treatment of patients with relapsed or
refractory PTCL. Our ability to generate
revenue and achieve profitability is dependent on our ability, alone or with
partners, to successfully commercialize FOLOTYN for the treatment of patients
with relapsed or refractory PTCL. We are
also developing FOLOTYN for use as a single agent and in combination therapy
regimens in a range of hematologic malignancies and solid tumor indications,
which may or may not lead to obtaining the necessary regulatory approvals to
market FOLOTYN for additional indications. We expect to continue to spend
substantial amounts on research and development, including amounts spent on
conducting clinical trials and seeking additional regulatory approvals for
FOLOTYN, and commercializing FOLOTYN for the treatment of patients with
relapsed or refractory PTCL. As a result, we may never generate sufficient
revenue from product sales to become profitable or generate positive cash
flows.
Our near-term prospects are dependent on FOLOTYN. If we are unable to successfully commercialize
FOLOTYN for the treatment of patients with relapsed or refractory PTCL, our
ability to generate significant revenue or achieve profitability will be
adversely affected.
*
FOLOTYN
is our only product approved for marketing by the FDA and our ability to
generate revenue in the near term is entirely dependent upon sales of
FOLOTYN. We may not be able to
successfully commercialize FOLOTYN for a number of reasons, including:
·
we
may not be able to establish or demonstrate in the medical community the safety
and efficacy of FOLOTYN and any potential advantages over existing therapeutics
and products currently in clinical development;
·
doctors
may be hesitant to prescribe FOLOTYN until results from our post-approval
studies are available or other long term data regarding efficacy and safety
exists;
·
results
from our Phase 3 post-approval studies may fail to verify the clinical benefit
of FOLOTYN for the treatment of T-cell lymphoma;
·
our
limited experience in marketing, selling and distributing FOLOTYN;
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·
reimbursement
and coverage policies of government and private payers such as Medicare,
Medicaid, insurance companies, health maintenance organizations and other plan
administrators;
·
the
relative price of FOLOTYN as compared to alternative treatment options;
·
the
relatively low incidence and prevalence rates of relapsed or refractory PTCL,
including the reliability of our estimates;
·
we
may not have adequate financial or other resources to successfully
commercialize FOLOTYN; and
·
we
may not be able to manufacture FOLOTYN in commercial quantities or at acceptable
costs.
If
we are unable to successfully commercialize FOLOTYN for the treatment of
patients with relapsed or refractory PTCL, our ability to generate revenue from
product sales and achieve profitability will be adversely affected and our
stock price would likely decline.
Our operating results are unpredictable and
may fluctuate. If our operating results are below the expectations of
securities analysts or investors, the trading price of our stock could decline.
*
Our
operating results are difficult to predict and will likely fluctuate from
quarter to quarter and year to year. Due
to the recent approval of FOLOTYN for the treatment of patients for relapsed or
refractory PTCL in the United States and the lack of historical sales data,
FOLOTYN sales will be difficult to predict from period to period. We believe that our quarterly and annual
results of operations may be negatively affected by a variety of factors,
including:
·
the level of patient demand for FOLOTYN;
·
the timing and
level of investment in our sales and marketing efforts to support FOLOTYN
sales;
·
the timing and
level of investment in our research and development activities involving
FOLOTYN; and
·
expenditures we
may incur to acquire or develop additional products.
In
addition, we measure compensation cost for stock-based awards made to employees
at the grant date of the award, based on the fair value of the award, and
recognize the cost as an expense over the employees requisite service period.
As the variables that we use as a basis for valuing these awards change over
time, including our underlying stock price, the magnitude of the expense that
we must recognize may vary significantly. Any such variance from one period to
the next could cause a significant fluctuation in our operating results.
For
these reasons, it is difficult for us to accurately forecast future profits or
losses. As a result, it is possible that in some quarters our operating results
could be below the expectations of securities analysts or investors, which
could cause the trading price of our common stock to decline, perhaps
substantially.
If we are unable to maintain adequate sales, marketing or distribution
capabilities or enter into agreements with third parties to perform some of
these functions, we will not be able to commercialize FOLOTYN effectively.
*
The
approval of FOLOTYN for the treatment of patients with relapsed or refractory
PTCL is our first U.S. approval. Accordingly,
we have limited experience in sales, marketing and distribution of
pharmaceutical products. We may not be able to adequately maintain the
necessary sales, marketing, supply chain management and reimbursement
capabilities on our own or enter into arrangements with third parties to
perform these functions in a timely manner or on acceptable terms. Additionally, maintaining sales, marketing and
distribution capabilities may be more expensive than we anticipate, requiring
us to divert capital from other intended purposes or preventing us from
building our sales, marketing and distribution capabilities to the desired
levels. To be successful we must:
·
recruit and retain adequate numbers of
effective sales personnel;
·
effectively
train our sales personnel in the benefits of FOLOTYN;
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·
establish
and maintain successful sales and marketing and education programs that
encourage physicians to recommend FOLOTYN to their patients; and
·
manage
geographically dispersed sales and marketing operations.
The
commercialization of FOLOTYN requires us to manage relationships with an
increasing number of collaborative partners, suppliers and third-party
contractors. If we are unable to successfully establish and maintain the
required infrastructure, either internally or through third parties, and
successfully manage an increasing number of relationships, we will have
difficulty growing our business. In addition, we intend to enter into
co-promotion or out-licensing arrangements with other pharmaceutical or
biotechnology partners where necessary to reach foreign market segments and
when deemed strategically and economically advisable. To the extent that we
enter into co-promotion or other licensing arrangements, our product revenues
are likely to be lower than if we directly marketed and sold FOLOTYN, and some
or all of the revenues we receive will depend upon the efforts of third
parties, which may not be successful. If we are unable to develop and maintain
adequate sales, marketing and distribution capabilities, independently or with
others, we may not be able to generate significant product revenue or become
profitable.
Even though we have obtained accelerated approval to market FOLOTYN for
the treatment of patients with relapsed or refractory PTCL, we are subject to
ongoing regulatory obligations and review, including post-approval
requirements. *
FOLOTYN
was approved for the treatment of patients with relapsed or refractory PTCL
under the FDAs accelerated approval regulations, which allow the FDA to approve
products for cancer or other life threatening diseases based on initial
positive data from clinical trials. Under these provisions, we are subject to
certain post-approval requirements pursuant to which we are required to conduct
two randomized Phase 3 trials to verify and describe FOLOTYNs clinical benefit
in patients with T-cell lymphoma. The
FDA has also required that we conduct two Phase 1 trials to assess whether
FOLOTYN poses a serious risk of altered drug levels resulting from organ
impairment. Failure to complete the
studies or adhere to the timelines established by the FDA could result in
penalties, including fines or withdrawal of FOLOTYN from the market. The FDA may also initiate proceedings to
withdraw approval if our Phase 3 studies fail to verify clinical benefit. Further, the FDA may require us to strengthen
the warnings and precautions section of the FOLOTYN package insert or institute
a Risk Evaluation and Mitigation Strategy based on the results of these studies
or clinical experience. We are also
subject to additional, continuing post-approval regulatory obligations,
including the possibility of additional clinical studies required by the FDA,
safety reporting requirements and regulatory oversight of the promotion and
marketing of FOLOTYN.
In
addition, we or our third-party manufacturers are required to adhere to
regulations setting forth the FDAs current Good Manufacturing Practices, or
cGMP. These regulations cover all aspects of the manufacturing, storage,
testing, quality control and record keeping relating to FOLOTYN. Furthermore,
we or our third-party manufacturers are subject to periodic inspection by the
FDA and foreign regulatory authorities to ensure compliance with cGMP or other
applicable government regulations and corresponding foreign standards. We have
limited control over a third-party manufacturers compliance with these
regulations and standards. If we or our
third-party manufacturers fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension, modification or
withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
The status of coverage and reimbursement from third-party payers for
newly approved health care drugs is uncertain and failure to obtain adequate
coverage and reimbursement could limit our ability to generate revenue.*
Our
ability to successfully commercialize FOLOTYN for the treatment of patients
with relapsed or refractory PTCL or for other future indications will depend,
in part, on the extent to which coverage and reimbursement for FOLOTYN is
available from government and health administration authorities, private health
insurers, managed care programs and other third-party payers. Significant uncertainty exists as to the
coverage and reimbursement of newly approved health care products. In addition, the U.S. Congress recently
enacted legislation to reform the health care system that includes cost
containment measures that may adversely affect the amount of reimbursement for
pharmaceutical products, including FOLOTYN.
These measures include increasing the minimum rebates for products
covered by Medicaid programs and extending such rebates to drugs dispensed to
Medicaid beneficiaries enrolled in Medicaid managed care organizations as well
as expansion of the 340(B) Public Health Services drug discount program.
Healthcare
providers and third-party payers use coding systems to identify diagnoses,
procedures, services, drugs, pharmaceutical devices, equipment and other
health-related items and services. Proper coding is an integral component to
receiving appropriate reimbursement for the administration of FOLOTYN and
related services. The majority of payers use
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nationally
recognized code sets to report medical conditions, services and drugs. We recently obtained transitional pass-through
status which enables FOLOTYN to be reimbursed under the hospital outpatient
prospective payment system. In addition,
we have applied for a permanent reimbursement J-code for FOLOTYN, although
healthcare providers prescribing FOLOTYN are currently required to submit
claims for reimbursement using a temporary J-code, which may result in payment
delays or incorrect payment levels. We cannot predict at this time whether our
customers will receive adequate reimbursement for FOLOTYN, nor can we predict whether
FOLOTYN will receive a permanent J-code in the future.
Third-party
payers, including Medicare, are challenging the prices charged for medical
products and services. Government and other third-party payers increasingly are
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new drugs and by refusing, in some cases, to provide
coverage for uses of approved products for disease conditions for which the FDA
has not granted labeling approval. Third-party insurance coverage may not be
available to patients for FOLOTYN. If government and other third-party payers
do not provide adequate coverage and reimbursement levels for FOLOTYN, FOLOTYNs
market acceptance may be adversely affected.
We are dependent upon a small number of
customers for a significant portion of our revenue, and the loss of, or
significant reduction or cancellation in sales to, any one of these customers
could adversely affect our operations and financial condition.*
In
the United States, we sell FOLOTYN to a small number of distributors who in
turn sell-through to patient health care providers. These distributors also
provide multiple logistics services relating to the distribution of FOLOTYN,
including transportation, warehousing, cross-docking, inventory management,
packaging and freight-forwarding. We do
not promote FOLOTYN to these distributors and they do not set or determine
demand for FOLOTYN. For the nine months
ended September 30, 2010, three companies affiliated with AmerisourceBergen
Corporation accounted for substantially all of our FOLOTYN sales. We expect significant customer concentration
to continue for the foreseeable future.
Our ability to successfully commercialize FOLOTYN will depend, in part,
on the extent to which these distributors are able to provide adequate
distribution of FOLOTYN to patient health care providers. Although we believe we can find alternative
distributors on a relatively short notice, our revenue during that period of
time may suffer and we may incur additional costs to replace a
distributor. The loss of any large
customer, a significant reduction in sales we make to them, any cancellation of
orders they have made with us or any failure to pay for the products we have
shipped to them could materially and adversely affect our results of operations
and financial condition.
If the distributors that we rely upon to
sell FOLOTYN fail to perform, our business may be adversely affected.
*
Our
success depends on the continued customer support efforts of our network of
distributors. The use of distributors
involves certain risks, including, but not limited to, risks that these
distributors will:
·
not provide us with accurate or timely
information regarding their inventories, the number of patients who are using
FOLOTYN or complaints about FOLOTYN;
·
not effectively distribute or support
FOLOTYN;
·
reduce or discontinue their efforts to sell
or support FOLOTYN;
·
be unable to satisfy financial obligations to
us or others; and
·
cease operations.
Any
such failure may result in decreased sales of FOLOTYN, which would harm our
business.
If we fail to comply with healthcare fraud and abuse laws, we could
face substantial penalties and our business, operations and financial condition
could be adversely affected
.*
As
a biopharmaceutical company, even though we do not and will not control
referrals of health care services or bill directly to Medicare, Medicaid or
other third-party payers, certain federal and state healthcare laws and
regulations pertaining to fraud and abuse will be applicable to our business.
These laws and regulations, include, among others:
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·
the
federal Anti-Kickback statute, which prohibits, among other things, persons
from soliciting, receiving or providing remuneration, directly or indirectly,
to induce either the referral of an individual for an item or service or the
purchasing or ordering of a good or service, for which payment may be made
under federal health care programs such as the Medicare and Medicaid programs;
·
federal
false claims laws that prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third-party payers that are false or fraudulent;
·
the
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
which prohibits executing a scheme to defraud any healthcare benefit program or
making false statements relating to healthcare matters and which also imposes
certain requirements relating to the privacy, security and transmission of
individually identifiable health information;
·
federal
self-referral laws, such as STARK, which prohibit a physician from making a
referral to a provider of certain health services with which the physician or
the physicians family member has a financial interest; and
·
state law equivalents of each of the above
federal laws, such as anti-kickback and false claims laws that may apply to
items or services reimbursed by any third-party payer, including commercial
insurers, and state laws governing the privacy of health information in certain
circumstances, many of which differ from each other in significant ways and
often are not preempted by HIPAA.
Although
there are a number of statutory exemptions and regulatory safe harbors
protecting certain common activities from prosecution under the federal
Anti-Kickback statute, the exemptions and safe harbors are drawn narrowly, and
practices that involve remuneration intended to induce prescriptions, purchases
or recommendations may be subject to scrutiny if they do not qualify for an
exemption or safe harbor. Further, the recently enacted health care reform law
known as the Patient Protection and Affordable Care Act (PPACA), enacted in
2010, amends the intent requirement of the federal anti-kickback and criminal
health care fraud statutes. A person or entity no longer needs to have actual
knowledge of this statute or specific intent to violate it. In addition, the
government may assert that a claim including items or services resulting from a
violation of the federal anti-kickback statute constitutes a false or
fraudulent claim for purposes of the false claims laws. Our practices may not
in all cases meet all of the criteria for safe harbor protection from
anti-kickback liability.
Although
physicians are permitted to, based on their medical judgment, prescribe
products for indications other than those cleared or approved by the FDA,
manufacturers are prohibited from promoting their products for such off-label
uses. We market FOLOTYN for the treatment of patients with relapsed or
refractory PTCL and provide promotional materials and training programs to
physicians regarding the use of FOLOTYN for the treatment of patients with
relapsed or refractory PTCL. Although we believe our marketing, promotional
materials and training programs for physicians do not constitute off-label
promotion of FOLOTYN, the FDA may disagree. If the FDA determines that our
promotional materials, training or other activities constitute off-label
promotion of FOLOTYN, it could request that we modify our training or
promotional materials or other activities or subject us to regulatory
enforcement actions, including the issuance of a warning letter, injunction,
seizure, civil fine and criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take action if they
believe that the alleged improper promotion led to the submission and payment
of claims for an unapproved use, which could result in significant fines or
penalties under other statutory authorities, such as laws prohibiting false
claims for reimbursement. Even if it is later determined we are not in
violation of these laws, we may be faced with negative publicity, incur
significant expenses defending our position and have to divert significant
management resources from other matters.
The
PPACA, enacted in 2010, imposes new reporting and disclosure requirements for
pharmaceutical and device manufacturers with regard to payments or other
transfers of value made to physicians and teaching hospitals, effective March 30,
2013. Such information will be made
publicly available in a searchable format beginning September 30, 2013. In addition, pharmaceutical and device
manufacturers will also be required to report and disclose investment interests
held by physicians and their immediate family members during the preceding
calendar year. Failure to submit
required information may result in civil monetary penalties of up to $150,000
per year (and up to $1 million per year for knowing failures), for all
payments, transfers of value or ownership or investment interests not reported
in an annual submission.
In
recent years, several states and localities, including California, the District
of Columbia, Maine, Massachusetts, Minnesota, Nevada, Vermont, and West
Virginia, have enacted legislation requiring pharmaceutical companies to
establish
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marketing
compliance programs, and file periodic reports with the state or make periodic
public disclosures on sales, marketing, pricing, clinical trials, and other
activities. Similar legislation is being considered in other states. Many of
these requirements are new and uncertain, and the penalties for failure to
comply with these requirements are unclear. Nonetheless, if we are found not to
be in full compliance with these laws, we could face enforcement action and
fines and other penalties, and could receive adverse publicity.
If
our operations are found to be in violation of any of the healthcare fraud and
abuse laws described above or any other governmental regulations that apply to
us, we may be subject to penalties, including civil and criminal penalties,
damages, fines and the curtailment or restructuring of our operations. Any
penalties, damages, fines, curtailment or restructuring of our operations could
adversely affect our ability to operate our business and our financial results.
Although compliance programs can mitigate the risk of investigation and
prosecution for violations of these laws, the risks cannot be entirely
eliminated. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal
expenses and divert our managements attention from the operation of our
business. Moreover, achieving and sustaining compliance with all applicable
federal and state fraud and abuse laws may be costly.
If our competitors develop and market products that are more effective
than FOLOTYN, our commercial opportunity will be reduced or eliminated.
*
Even
though we have obtained approval to market FOLOTYN for the treatment of
patients with relapsed or refractory PTCL, our commercial opportunity will be
reduced or eliminated if our competitors develop and market products that are
more effective, have fewer side effects or are less expensive than FOLOTYN for
this or any other potential indication. Our potential competitors include
large, fully-integrated pharmaceutical companies and more established
biotechnology companies, both of which have significant resources and expertise
in research and development, manufacturing, testing, obtaining regulatory
approvals and marketing. Academic institutions, government agencies, and other
public and private research organizations conduct research, seek patent
protection and establish collaborative arrangements for research, development,
manufacturing and marketing. It is possible that competitors will succeed in
developing technologies that are more effective than those being developed by
us or that would render our technology obsolete or noncompetitive.
We cannot predict when or if we will obtain regulatory approval to
market FOLOTYN in the United States for any additional indications or in any
other countries.
*
We
are subject to stringent regulations with respect to product safety and
efficacy by various international, federal, state and local authorities.
FOLOTYN has not been approved for marketing in the United States for any
indication other than the treatment of patients with relapsed or refractory
PTCL. In addition, FOLOTYN has not been approved for marketing for this or any
other indication in any other country. A pharmaceutical product cannot be
marketed in the United States or most other countries until it has completed a
rigorous and extensive regulatory review and approval process. Satisfaction of
regulatory requirements typically takes many years, is dependent upon the type,
complexity and novelty of the product and requires the expenditure of substantial
resources. Of particular significance are the requirements covering research
and development, preclinical and clinical testing, manufacturing, quality
control, labeling and promotion of drugs for human use. We may not obtain the
necessary regulatory approvals to market FOLOTYN in the United States for any
additional indications or in any other countries. If we fail to obtain or
maintain regulatory approvals to market FOLOTYN in the United States for any
additional indications or in any other countries, our ability to generate
significant revenue or achieve profitability may be adversely affected.
Reports of adverse events or safety concerns involving FOLOTYN or
similar small molecule chemotherapeutic agents could delay or prevent us from
obtaining or maintaining regulatory approval or negatively impact sales of
FOLOTYN.*
FOLOTYN
may cause serious adverse events. These adverse events could interrupt, delay
or halt clinical trials of FOLOTYN, including the FDA-required post-approval
studies, and could result in the FDA or other regulatory authorities denying or
withdrawing approval of FOLOTYN for any or all indications, including for the
treatment of patients with relapsed or refractory PTCL. Adverse events may also
negatively impact the sales of FOLOTYN.
The FDA, other regulatory authorities or we may suspend or terminate
clinical trials at any time. We may also be required to update the warnings and
precautions section of the FOLOTYN package insert based on reports of adverse
events or safety concerns or implement a Risk Evaluation and Mitigation
Strategy, which could adversely affect FOLOTYNs acceptance in the market. We cannot assure you that FOLOTYN will be
safe for human use.
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At
present, there are a number of clinical trials being conducted by other
pharmaceutical companies involving small molecule chemotherapeutic agents. If
other pharmaceutical companies announce that they observed frequent adverse
events or unknown safety issues in their trials involving compounds similar to,
or competitive with, FOLOTYN, we could encounter delays in the timing of our
clinical trials or difficulties in obtaining or maintaining the necessary
regulatory approvals for FOLOTYN. In addition, the public perception of FOLOTYN
might be adversely affected, which could harm our business and results of
operations and cause the market price of our common stock to decline, even if
the concern relates to another companys product or product candidate.
If FOLOTYN fails to meet safety or efficacy endpoints in clinical
trials for additional indications, it will not receive regulatory approval and
we will be unable to market FOLOTYN for those indications studied.
*
We
have ongoing clinical trials involving FOLOTYN and plan to initiate additional
trials to evaluate FOLOTYNs potential clinical utility in other hematologic
malignancies and solid tumor indications. FOLOTYN may not prove to be safe and
efficacious in clinical trials for other indications and may not meet all of
the applicable regulatory requirements needed to receive regulatory approval
for those indications. The clinical development and regulatory approval process
is expensive and takes many years. Failure can occur at any stage of
development, and the timing of any regulatory approval cannot be accurately
predicted. In addition, failure to comply with the FDA and other applicable
U.S. and foreign regulatory requirements applicable to clinical trials may
subject us to administrative or judicially imposed sanctions.
As
part of the regulatory approval process, we must conduct clinical trials for
FOLOTYN and any other product candidate to demonstrate safety and efficacy to
the satisfaction of the FDA and other regulatory authorities abroad. The number
and design of clinical trials that will be required varies depending on the
product candidate, the condition being evaluated, the trial results and
regulations applicable to any particular product candidate. The designs of our
clinical trials for FOLOTYN are based on many assumptions about the expected
effect of FOLOTYN, and if those assumptions prove incorrect, the clinical
trials may not demonstrate the safety or efficacy of FOLOTYN. Preliminary
results may not be confirmed upon full analysis of the detailed results of a
trial, and prior clinical trial program designs and results may not be
predictive of future clinical trial designs or results. Product candidates in
later stage clinical trials may fail to show the desired safety and efficacy
despite having progressed through initial clinical trials with acceptable
endpoints. For example, we terminated the development of EFAPROXYN, one of our
former product candidates, when it failed to demonstrate statistically
significant improvement in overall survival in the targeted patients in a Phase
3 clinical trial. If FOLOTYN fails to show clinically significant benefits in
any clinical trial or for any particular indication, it may not be approved for
marketing for such indication. Additionally, if FOLOTYN is demonstrated to be
unsafe in clinical trials for other indications, such demonstration could
negatively impact FOLOTYNs existing approval for the treatment of patients
with relapsed or refractory PTCL.
Even
if we achieve positive interim results in clinical trials, these results do not
necessarily predict final results, and acceptable results in early trials may
not be repeated in later trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations that could delay, limit
or prevent regulatory clearances, and the FDA can request that we conduct
additional clinical trials. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. In
addition, negative or inconclusive results or adverse safety events during a
clinical trial could cause a clinical trial to be repeated or terminated. Also,
failure to construct clinical trial protocols to screen patients for risk
profile factors relevant to the trial for purposes of segregating patients into
the patient populations treated with the drug being tested and the control
group could result in either group experiencing a disproportionate number of
adverse events and could cause a clinical trial to be repeated or terminated.
If we have to conduct additional clinical trials for FOLOTYN for any particular
indication, it will significantly increase our expenses and may delay marketing
of FOLOTYN for such indication.
Even if FOLOTYN meets safety and efficacy endpoints in clinical trials
for additional indications, regulatory authorities may not approve FOLOTYN, or
we may face post-approval problems that require withdrawal of FOLOTYN from the
market.
*
We
will not be able to market FOLOTYN in the United States for any additional
indications or in any other countries for any indications until we have
obtained the necessary regulatory approvals. Our receipt of approval of FOLOTYN
in the United States for the treatment of patients with relapsed or refractory
PTCL does not guarantee that we will obtain regulatory approval to market
FOLOTYN in the United States for any additional indications or in any other countries.
We have limited experience in filing and pursuing applications necessary to
gain regulatory approvals, which may place us at risk of delays, overspending
and human resources inefficiencies.
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FOLOTYN
may not be approved for any additional indications even if it achieves its
endpoints in clinical trials. Regulatory agencies, including the FDA, or their
advisors, may disagree with our interpretations of data from preclinical
studies and clinical trials. The FDA has substantial discretion in the approval
process, and when or whether regulatory approval will be obtained for any drug
we develop. Regulatory agencies also may
approve a product candidate for fewer conditions than requested or may grant
approval subject to the performance of post-approval studies or Risk Evaluation
and Mitigation Strategies for a product candidate. In addition, regulatory
agencies may not approve the labeling claims that are necessary or desirable
for the successful commercialization of FOLOTYN.
Following
regulatory approval for any additional indication, FOLOTYN may later produce
adverse events that limit or prevent its widespread use or that force us to
withdraw FOLOTYN from the market for that indication or other indications. In
addition, a marketed product continues to be subject to strict regulation after
approval and may be required to undergo post-approval studies. For example, we
are required to conduct two randomized Phase 3 trials to verify and describe
FOLOTYNs clinical benefit in patients with T-cell lymphoma as well as two
Phase 1 trials to assess whether FOLOTYN poses a serious risk of altered drug
levels resulting from organ impairment. Any unforeseen problems with an approved
product, any failure to meet the post-approval study requirements or any
violation of regulations could result in restrictions on the product, including
its withdrawal from the market. Any delay in or failure to obtain or maintain
regulatory approvals for FOLOTYN in the United States for any additional
indication or in any other countries could harm our business and prevent us
from ever generating significant revenues or achieving profitability.
We may experience delays in our clinical trials that could adversely
affect our financial position and our commercial prospects.
*
We
do not know when our current clinical trials will be completed, if at all. We
also cannot accurately predict when other planned clinical trials will begin or
be completed. Many factors affect patient enrollment, including the size of the
patient population, the proximity of patients to clinical sites, the
eligibility criteria for the trial, competing clinical trials and new drugs
approved for the conditions we are investigating. Other companies are
conducting clinical trials and have announced plans for future trials that are
seeking or likely to seek patients with the same diseases as those we are
studying. Competition for patients in some cancer trials is particularly
intense because of the limited number of leading specialist physicians and the
geographic concentration of major clinical centers.
As
a result of the numerous factors that can affect the pace of progress of clinical
trials, our trials may take longer to enroll patients than we anticipate, if
they can be completed at all. Delays in patient enrollment in the trials may
increase our costs and slow our product development and approval process. Our
product development costs will also increase if we need to perform more or
larger clinical trials than planned. If other companies product candidates
show favorable results, we may be required to conduct additional clinical
trials to address changes in treatment regimens or for our products to be
commercially competitive. Any delays in completing our clinical trials will
delay our ability to obtain regulatory approval to market FOLOTYN in the United
States for any additional indications or in any other countries, which may adversely
affect our ability to generate significant revenues or achieve profitability.
We may be required to suspend, repeat or terminate our clinical trials
if they are not conducted in accordance with regulatory requirements, the
results are negative or inconclusive or the trials are not well designed.
*
Clinical
trials must be conducted in accordance with current Good Clinical Practices, or
cGCP, or other applicable foreign government guidelines and are subject to
oversight by the FDA, other foreign governmental agencies and Institutional
Review Boards at the medical institutions where the clinical trials are
conducted. In addition, clinical trials must be conducted with product
candidates produced under cGMP and may require large numbers of test subjects.
Clinical trials may be suspended by the FDA, other foreign governmental
agencies, or us for various reasons, including:
·
deficiencies
in the conduct of the clinical trials, including failure to conduct the
clinical trial in accordance with regulatory requirements or clinical
protocols;
·
deficiencies
in the clinical trial operations or trial sites;
·
the product candidate may have unforeseen
adverse side effects;
·
the
time required to determine whether the product candidate is effective may be
longer than expected;
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·
fatalities
or other adverse events arising during a clinical trial due to medical problems
that may not be related to clinical trial treatments;
·
the
product candidate may appear to be less effective than current therapies;
·
the
quality or stability of the product candidate may fall below acceptable
standards; or
·
insufficient
quantities of the product candidate to complete the trials.
In
addition, changes in regulatory requirements and guidance may occur and we may
need to amend clinical trial protocols to reflect these changes. Amendments may
require us to resubmit our clinical trial protocols to Institutional Review
Boards for reexamination, which may impact the costs, timing or successful
completion of a clinical trial. Due to these and other factors, FOLOTYN could
take a significantly longer time to gain regulatory approval for any additional
indications than we expect or we may never gain approval for additional
indications, which could reduce our revenue by delaying or terminating the
commercialization of FOLOTYN for additional indications.
Due to our reliance on contract research organizations and other third
parties to conduct our clinical trials, we are unable to directly control the
timing, conduct and expense of our clinical trials.
*
We
rely primarily on third parties to conduct our clinical trials. As a result, we
have had and will continue to have less control over the conduct of our
clinical trials, the timing and completion of the trials, the required
reporting of adverse events and the management of data developed through the
trial than would be the case if we were relying entirely upon our own staff.
Communicating with outside parties can also be challenging, potentially leading
to mistakes as well as difficulties in coordinating activities. Outside parties
may have staffing difficulties, may undergo changes in priorities or may become
financially distressed, any of which may adversely affect their willingness or
ability to conduct our trials. We may experience unexpected cost increases that
are beyond our control. Problems with the timeliness or quality of the work of
a contract research organization may lead us to seek to terminate the
relationship and use an alternative service provider. However, making this
change may be costly and may delay our trials, and contractual restrictions may
make such a change difficult or impossible. Additionally, it may be impossible
to find a replacement organization that can conduct our trials in an acceptable
manner and at an acceptable cost.
We may need to raise additional capital to support our future
operations. If we fail to obtain the
capital necessary to fund our operations, we will be unable to successfully
develop or commercialize FOLOTYN.*
Based
upon the current status of our product development and commercialization plans,
we believe that our cash, cash equivalents, and investments as of September 30,
2010, should be adequate to support our operations through at least the next 12
months, although there can be no assurance that this can, in fact, be
accomplished. We anticipate continuing
our current development programs and beginning other long-term development
projects involving FOLOTYN, including the post-approval clinical studies
required for FOLOTYN. These projects may require many years and substantial
expenditures to complete and may ultimately be unsuccessful. In addition, we expect to incur significant
costs relating to the commercialization of FOLOTYN, including costs related to
our sales and marketing, medical affairs and manufacturing operations. Therefore, we may need to raise additional
capital to support our future operations. Our actual capital requirements will depend on
many factors, including:
·
the timing and amount of revenues generated
from sales of FOLOTYN;
·
the
timing and costs associated with our sales and marketing and medical affairs
activities involving FOLOTYN;
·
the
timing and costs associated with manufacturing clinical and commercial supplies
of FOLOTYN;
·
the
timing and costs associated with conducting preclinical and clinical
development of FOLOTYN, including the post-approval studies required by the
FDA, as well as our evaluation of, and decisions with respect to, additional
therapeutic indications for which we may develop FOLOTYN;
·
the
timing, costs and potential revenue associated with any co-promotion or other
partnering arrangements entered into to commercialize FOLOTYN; and
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·
our
evaluation of, and decisions with respect to, potential in-licensing or product
acquisition opportunities or other strategic alternatives.
We
may seek to obtain this additional capital through equity or debt financings,
arrangements with corporate partners, or from other sources. Such financings or
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that additional financing will be
available when needed, or that, if available, we will obtain such financing on
terms that are favorable to our stockholders or us. In the event that
additional funds are obtained through arrangements with collaborative partners
or other sources, such arrangements may require us to relinquish rights to some
of our technologies, product candidates or products under development, which we
might otherwise seek to develop or commercialize ourselves, on terms that are
less favorable than might otherwise be available. If we are unable to generate meaningful
amounts of revenue from future product sales or cannot otherwise raise
sufficient additional funds to support our operations, we may be required to
delay, reduce the scope of or eliminate one or more of our development programs
and our business and future prospects for revenue and profitability may be
harmed.
Budget constraints may force us to delay our efforts to develop FOLOTYN
for additional indications while we complete the post-approval clinical studies
required by the FDA, which may prevent us from commercializing FOLOTYN for all
desired indications as quickly as possible.
*
Because
we have limited resources, and because research and development is an expensive
process, we must regularly assess the most efficient allocation of our research
and development budget. In particular,
our approval of FOLOTYN in patients with relapsed or refractory PTCL is
conditioned upon us undertaking two additional Phase 3 studies and two
additional Phase 1 studies which will result in significant additional expense.
As a result of our limited resources, we
may have to prioritize the development of FOLOTYN for additional indications
and may not be able to fully realize the value of FOLOTYN for other indications
in a timely manner, if at all.
We do not have manufacturing facilities or capabilities and are
dependent on third parties to fulfill our manufacturing needs, which could
result in the delay of clinical trials, regulatory approvals, product
introductions and commercial sales.*
We
are dependent on third parties for the manufacture and storage of FOLOTYN for
clinical trials and for commercial sale. If we are unable to contract for a
sufficient supply of FOLOTYN on acceptable terms, or if we encounter delays or
difficulties in the manufacturing process or our relationships with our
manufacturers, we may not have sufficient product to conduct or complete our
clinical trials or support commercial requirements for FOLOTYN.
FOLOTYN
is cytotoxic, which requires the manufacturers of FOLOTYN to have specialized
equipment and safety systems to handle such a substance. In addition, the
starting materials for FOLOTYN require custom preparations, which require us to
manage an additional set of suppliers to obtain the needed supplies of FOLOTYN.
We
have entered into arrangements with two third-party manufacturers to produce
FOLOTYN bulk drug substance and two third-party manufacturers to produce
FOLOTYN formulated drug product. We believe these third-party manufacturers
have the capability to meet our projected worldwide clinical trial and
commercial requirements for FOLOTYN although we cannot assure you of this. In particular, our third party manufacturers
may not be able to fulfill our potential commercial needs or meet our
deadlines, or the components they supply to us may not meet our specifications
and quality policies and procedures. If we need to find additional alternative
suppliers of FOLOTYN or its components, we may not be able to contract for
those components on acceptable terms, if at all. Any such failure to supply or
delay caused by such suppliers would have an adverse effect on our ability to
continue clinical development of FOLOTYN or commercialize FOLOTYN.
Our
current or future manufacturers may be unable to accurately and reliably
manufacture commercial quantities of FOLOTYN at reasonable costs, on a timely
basis and in compliance with the FDAs cGMP. If our current or future contract
manufacturers fail in any of these respects, our ability to timely complete our
clinical trials, obtain or maintain required regulatory approvals and
successfully commercialize FOLOTYN may be materially and adversely affected.
This risk may be heightened with respect to FOLOTYN as there are a limited
number of manufacturers with the ability to handle cytotoxic products such as
FOLOTYN. Our reliance on contract manufacturers exposes us to additional risks,
including:
·
our
current and future manufacturers are subject to ongoing, periodic, unannounced
inspections by the FDA and corresponding state and international regulatory
authorities for compliance with strictly enforced cGMP regulations
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and
similar state and foreign standards, and we do not have control over our
contract manufacturers compliance with these regulations and standards;
·
our
manufacturers may not be able to comply with applicable regulatory
requirements, which would prohibit them from manufacturing products for us;
·
our
manufacturers may have staffing difficulties, may undergo changes in control or
may become financially distressed, adversely affecting their willingness or
ability to manufacture products for us;
·
our
manufacturers might not be able to fulfill our commercial needs, which would
require us to seek new manufacturing arrangements and may result in substantial
delays in meeting market demands;
·
if
we need to change to other commercial manufacturing contractors, the FDA and
comparable foreign regulators must approve our use of any new manufacturer,
which would require additional testing, regulatory filings and compliance
inspections, and the new manufacturers would have to be educated in, or
themselves develop substantially equivalent processes necessary for, the
production of our products; and
·
we
may not have intellectual property rights, or may have to share intellectual
property rights, to any improvements in the manufacturing processes or new
manufacturing processes for our products.
Any
of these factors could result in the delay of clinical trials, regulatory
submissions, required approvals or commercialization of FOLOTYN. They could
also entail higher costs and result in our being unable to effectively
commercialize FOLOTYN.
If we are unable to effectively protect our intellectual property, we
will be unable to prevent third parties from using our technology, which would
impair our competitiveness and ability to commercialize FOLOTYN. In addition,
enforcing our proprietary rights may be expensive and result in increased
losses.
*
Our
success will depend in part on our ability to obtain and maintain meaningful
patent protection for FOLOTYN, both in the United States and in other
countries. We rely on patents to protect a large part of our intellectual
property and our competitive position. Any patents issued to or licensed by us could
be challenged, invalidated, infringed, circumvented or held unenforceable,
based on, among other things, obviousness, inequitable conduct, anticipation or
enablement. In addition, it is possible that no patents will issue on any of
our licensed patent applications. It is possible that the claims in patents
that have been issued or licensed to us or that may be issued or licensed to us
in the future will not be sufficiently broad to protect our intellectual
property or that the patents will not provide protection against competitive
products or otherwise be commercially valuable. Failure to obtain and maintain
adequate patent protection for our intellectual property would impair our
ability to be commercially competitive.
Our
commercial success will also depend in part on our ability to commercialize
FOLOTYN without infringing patents or other proprietary rights of others or
breaching the licenses granted to us. We may not be able to obtain a license to
third-party technology that we may require to conduct our business or, if
obtainable, we may not be able to license such technology at a reasonable cost.
If we fail to obtain a license to any technology that we may require to
commercialize FOLOTYN, or fail to obtain a license at a reasonable cost, we
will be unable to commercialize FOLOTYN or to commercialize it at a price that
will allow us to become profitable.
In
addition to patent protection, we also rely upon trade secrets, proprietary
know-how and technological advances that we seek to protect through
confidentiality agreements with our collaborators, employees, advisors and
consultants. Our employees and consultants are required to enter into
confidentiality agreements with us. We also enter into non-disclosure
agreements with our collaborators and vendors, which agreements are intended to
protect our confidential information delivered to third parties for research
and other purposes. However, these agreements could be breached and we may not
have adequate remedies for any breach, or our trade secrets and proprietary
know-how could otherwise become known or be independently discovered by others.
Furthermore,
as with any pharmaceutical company, our patent and other proprietary rights are
subject to uncertainty. Our patent rights related to FOLOTYN might conflict
with current or future patents and other proprietary rights of others. For the
same reasons, the products of others could infringe our patents or other
proprietary rights. Litigation or patent interference proceedings, either of
which could result in substantial costs to us, may be necessary to enforce any
of our patents or other
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proprietary
rights, or to determine the scope and validity or enforceability of other
parties proprietary rights. We may be dependent on third parties, including
our licensors, for cooperation and information that may be required in
connection with the defense and prosecution of our patents and other
proprietary rights. The defense and prosecution of patent and intellectual
property infringement claims are both costly and time consuming, even if the
outcome is favorable to us. Any adverse outcome could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require us to cease selling our future products. We are not
currently a party to any patent or other intellectual property infringement
claims.
We may explore strategic partnerships that may never materialize or may
fail.
*
We
may, in the future, periodically explore a variety of possible strategic
partnerships in an effort to gain access to additional product candidates or
resources. At the current time, we cannot predict what form such a strategic
partnership might take. We are likely to face significant competition in
seeking appropriate strategic partners, and these strategic partnerships can be
complicated and time consuming to negotiate and document. We may not be able to
negotiate strategic partnerships on acceptable terms, or at all. We are unable
to predict when, if ever, we will enter into any additional strategic
partnerships because of the numerous risks and uncertainties associated with
establishing strategic partnerships.
If we enter into one or more strategic partnerships, we may be required
to relinquish important rights to and control over the development of FOLOTYN
or otherwise be subject to unfavorable terms.
*
Any
future strategic partnerships we enter into could subject us to a number of
risks, including:
·
we
may be required to undertake the expenditure of substantial operational,
financial and management resources in integrating new businesses, technologies
and products;
·
we
may be required to issue equity securities that would dilute our existing
stockholders percentage ownership;
·
we
may be required to assume substantial actual or contingent liabilities;
·
we
may not be able to control the amount and timing of resources that our
strategic partners devote to the development or commercialization of FOLOTYN;
·
strategic
partners may delay clinical trials, provide insufficient funding, terminate a
clinical trial or abandon a product candidate, repeat or conduct new clinical
trials or require a new version of a product candidate for clinical testing;
·
strategic
partners may not pursue further development and commercialization of products
resulting from the strategic partnering arrangement or may elect to discontinue
research and development programs;
·
strategic
partners may not commit adequate resources to the marketing and distribution of
FOLOTYN or any other products, limiting our potential revenues from these
products;
·
disputes
may arise between us and our strategic partners that result in the delay or
termination of the research, development or commercialization of FOLOTYN or any
other product candidate or that result in costly litigation or arbitration that
diverts managements attention and consumes resources;
·
strategic
partners may experience financial difficulties;
·
strategic
partners may not properly maintain or defend our intellectual property rights
or may use our proprietary information in a manner that could jeopardize or
invalidate our proprietary information or expose us to potential litigation;
·
business
combinations or significant changes in a strategic partners business strategy
may also adversely affect a strategic partners willingness or ability to
complete its obligations under any arrangement;
·
strategic
partners could independently move forward with a competing product candidate
developed either independently or in collaboration with others, including our
competitors; and
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·
strategic
partners could terminate the arrangement or allow it to expire, which would
delay the development and may increase the cost of developing FOLOTYN or any
other product candidate.
Health care reform measures could adversely affect our business.*
The
business and financial condition of pharmaceutical and biotechnology companies
are affected by the efforts of governmental and third-party payers to contain
or reduce the costs of health care. The
U.S. Congress recently enacted legislation to reform the health care
system. While we anticipate that this
legislation may, over time, increase the number of patients who have insurance
coverage for pharmaceutical products, it also imposes cost containment measures
that may adversely affect the amount of reimbursement for pharmaceutical
products, including FOLOTYN. These
measures include increasing the minimum rebates for products covered by
Medicaid programs and extending such rebates to drugs dispensed to Medicaid
beneficiaries enrolled in Medicaid managed care organizations as well as
expansion of the 340(B) Public Health Services drug discount program. In foreign jurisdictions there have been, and
we expect that there will continue to be, a number of legislative and
regulatory proposals aimed at changing the health care system. For example, in
some countries other than the United States, pricing of prescription drugs is
subject to government control and we expect to see continued efforts to reduce
healthcare costs in international markets.
Some
states are also considering legislation that would control the prices of drugs,
and state Medicaid programs are increasingly requesting manufacturers to pay
supplemental rebates and requiring prior authorization by the state program for
use of any drug for which supplemental rebates are not being paid. Managed care organizations continue to seek
price discounts and, in some cases, to impose restrictions on the coverage of
particular drugs. Government efforts to
reduce Medicaid expenses may lead to increased use of managed care
organizations by Medicaid programs. This
may result in managed care organizations influencing prescription decisions for
a larger segment of the population and a corresponding constraint on prices and
reimbursement for drugs, including FOLOTYN.
It is likely that federal and state legislatures and health agencies
will continue to focus on additional health care reform in the future although
we are unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future or what effect such legislation or regulation
would have on our business. The pendency or approval of such proposals or
reforms could result in a decrease in our stock price or limit our ability to
raise capital or to obtain strategic partnerships or licenses.
We may not obtain orphan drug exclusivity or we may not receive the
full benefit of orphan drug exclusivity even if we obtain such exclusivity.
*
The
FDA has awarded orphan drug status to pralatrexate, which we market under the
tradename FOLOTYN, for the treatment of patients with relapsed or refractory
PTCL. In addition, the FDA has awarded
orphan drug designation to pralatrexate for the treatment of patients with
follicular lymphoma and diffuse large B-cell lymphoma, for which we do not have
approval. Under the Orphan Drug Act, the first company to receive FDA approval
for pralatrexate for a designated orphan drug indication will obtain seven
years of marketing exclusivity during which the FDA may not approve another
companys application for pralatrexate for the same orphan indication. Because the FDA approved FOLOTYN for the
treatment of patients with relapsed or refractory PTCL, we have received seven
years of marketing exclusivity for that indication. Orphan drug exclusivity does not prevent FDA
approval of a different drug for the orphan indication or the same drug for a
different indication. In addition, the
FDA may void orphan drug exclusivity under certain circumstances.
If product liability lawsuits are successfully brought against us, we
may incur substantial liabilities and may be required to limit
commercialization of FOLOTYN.
*
The
testing and marketing of pharmaceutical products entail an inherent risk of
product liability. Product liability claims might be brought against us by
consumers or health care providers or by pharmaceutical companies or others
selling FOLOTYN or any future products. If we cannot successfully defend
ourselves against such claims, we may incur substantial liabilities or be
required to limit the commercialization of FOLOTYN. We have obtained limited
product liability insurance coverage for our human clinical trials and
commercial sales of FOLOTYN. However, product liability insurance coverage is
becoming increasingly expensive, and we may be unable to maintain such
insurance coverage at a reasonable cost or in sufficient amounts to protect us
against losses due to product liability. A successful product liability claim
in excess of our insurance coverage could have a material adverse effect on our
business, financial condition and results of operations.
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Our success depends on the retention of our President and Chief
Executive
Officer and
other key personnel.
*
We
are highly dependent on our President and Chief Executive Officer, Paul L.
Berns, and other members of our management team. We are named as the
beneficiary on a term life insurance policy covering Mr. Berns in the amount of
$10.0 million. We also depend on key employees and academic collaborators for
each of our research and development programs. The loss of any of our key
employees or academic collaborators could delay the development and
commercialization of FOLOTYN or result in the termination of our FOLOTYN
development program in its entirety. Mr. Berns and others on our executive
management team have employment agreements with us, but the agreements provide
for at-will employment with no specified term. Our future success also will
depend in large part on our continued ability to attract and retain other
highly qualified scientific, technical and management personnel, as well as
personnel with expertise in clinical testing, governmental regulation and
commercialization of pharmaceutical products. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If we are unsuccessful in our
recruitment and retention efforts, our business will be harmed.
We
also rely on consultants, collaborators and advisors to assist us in
formulating and conducting our research and development programs. All of our
consultants, collaborators and advisors are employed by other employers or are
self-employed and may have commitments to or consulting contracts with other
entities that may limit their ability to contribute to our company.
We cannot guarantee that we will be in compliance with all potentially
applicable regulations.
*
The
development, manufacturing, pricing, marketing, sale and reimbursement of
FOLOTYN, together with our general operations, are subject to extensive
regulation by federal, state and other authorities within the United States and
numerous entities outside of the United States. We have fewer employees than
many other companies that have one or more product candidates that are approved
for marketing and we rely heavily on third parties to conduct many important
functions.
As
a publicly-traded company, we are subject to significant regulations including
the Sarbanes Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act.
There are significant corporate
governance and executive compensation-related provisions in the Dodd-Frank Act
that require the SEC to adopt additional rules and regulations in these areas
such as say on pay and proxy access. We cannot assure you that we are
or will be in compliance with all potentially applicable regulations. If we
fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act or any other regulations, we could be subject to a
range of consequences, including restrictions on our ability to sell equity
securities or otherwise raise capital funds, the de-listing of our common stock
from The NASDAQ Global Market, suspension or termination of our clinical
trials, failure to obtain approval to market FOLOTYN, restrictions on future
products or our manufacturing processes, significant fines, or other sanctions
or litigation. Our efforts to comply with these requirements have resulted in,
and are likely to continue to result in, an increase in expenses and a
diversion of managements time from other business activities.
If our internal controls over financial reporting are not considered
effective, our business and stock price could be adversely affected.
*
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness
of our internal controls over financial reporting as of the end of each fiscal
year, and to include a management report assessing the effectiveness of our
internal controls over financial reporting in our annual report on Form 10-K
for that fiscal year. Section 404 also requires our independent registered
public accounting firm to attest to, and report on, managements assessment of
our internal controls over financial reporting.
Our
management, including our chief executive officer and principal financial
officer, does not expect that our internal controls over financial reporting
will prevent all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud
involving a company have been, or will be, detected. The design of any system
of controls is based in part on certain assumptions about the likelihood of
future events, and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become ineffective because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. We cannot assure you that
we or our independent registered public accounting firm will not
44
Table of
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identify
a material weakness in our internal controls in the future. A material weakness
in our internal controls over financial reporting would require management and
our independent registered public accounting firm to consider our internal
controls as ineffective. If our internal controls over financial reporting are
not considered effective, we may experience a loss of public confidence, which
could have an adverse effect on our business and on the market price of our
common stock.
Our revenue recognition model under the
sell-through method is complex and depends upon the accuracy and consistency of
third party data as well as dependence upon key finance and accounting
personnel to maintain and implement the surrounding controls.
*
We
have developed a revenue recognition model under the sell-through method that
is complex and incorporates a significant amount of third party data from our
wholesalers. To effectively maintain the revenue recognition model, we depend
to a considerable degree upon the timely and accurate reporting to us of such
data from these third parties and our key accounting and finance personnel to
accurately interpolate such data into the model. If the third party data is not calculated on
a consistent basis and reported to us on an accurate or timely basis or we lose
any of our key accounting and finance personnel, the accuracy of our
consolidated financial statements could be materially affected. This could
cause future delays in our earnings announcements, regulatory filings with the
Securities and Exchange Commission, or SEC, and delisting with the NASDAQ.
If we do not progress in our programs as anticipated, our stock price
could decrease.
*
For
planning purposes, we estimate the timing of a variety of clinical, regulatory
and other milestones, such as when a certain product candidate will enter
clinical development, when a clinical trial will be initiated or completed, or
when an application for regulatory approval will be filed. Some of our
estimates are included in this report. Our estimates are based on information
available to us as of the date of this report and a variety of assumptions.
Many of the underlying assumptions are outside of our control. If milestones
are not achieved when we estimated that they would be, investors could be
disappointed and our stock price may decrease.
Warburg Pincus Private Equity VIII, L.P. controls a substantial
percentage of the voting power of our outstanding common stock.
*
On
March 2, 2005, we entered into a Securities Purchase Agreement with Warburg
Pincus Private Equity VIII, L.P., or Warburg, and certain other investors in
connection with an equity financing. In
connection with this financing, Warburg and certain of its affiliates entered
into a standstill agreement pursuant to which they agreed not to pursue, for so
long as they continue to own a specified number of shares of our common stock,
certain activities the purpose or effect of which may be to change or influence
the control of our company.
As
of November 2, 2010, we had 105,352,676 shares of common stock outstanding, of
which Warburg owned 26,124,430 shares, or approximately 25% of the voting power
of our outstanding common stock. Although Warburg has entered into a standstill
agreement with us, Warburg is, and will continue to be, able to exercise
substantial influence over any actions requiring stockholder approval.
Anti-takeover provisions in our charter documents and under Delaware
law could discourage, delay or prevent an acquisition of us, even if an
acquisition would be beneficial to our stockholders, and may prevent attempts
by our stockholders to replace or remove our current management.
*
Provisions
of our amended and restated certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. In addition, these
provisions may make it more difficult for stockholders to replace members of
our board of directors. Because our board of directors is responsible for
appointing the members of our management team, these provisions could in turn
affect any attempt by our stockholders to replace current members of our
management team. These provisions include:
·
authorizing the issuance of blank check
preferred stock that could be issued by our board of directors to increase the
number of outstanding shares or change the balance of voting control and thwart
a takeover attempt;
·
prohibiting
cumulative voting in the election of directors, which would otherwise allow for
less than a majority of stockholders to elect director candidates;
45
Table of
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·
prohibiting stockholder action by written
consent, thereby requiring all stockholder actions to be taken at a meeting of
our stockholders;
·
eliminating
the ability of stockholders to call a special meeting of stockholders; and
·
establishing
advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon at stockholder
meetings.
In
addition, we are subject to Section 203 of the Delaware General Corporation
Law, which generally prohibits a Delaware corporation from engaging in any of a
broad range of business combinations with an interested stockholder for a
period of three years following the date on which the stockholder became an
interested stockholder. This provision could have the effect of delaying or
preventing a change of control, whether or not it is desired by or beneficial
to our stockholders. Notwithstanding the foregoing, the three-year moratorium
imposed on business combinations by Section 203 will not apply to Warburg
because, prior to the date on which Warburg became an interested stockholder,
our board of directors approved the transactions that resulted in Warburg
becoming an interested stockholder. However, in connection with Warburgs
participation in an equity financing we completed in March 2005, Warburg and
certain of its affiliates entered into a standstill agreement pursuant to which
they agreed not to pursue, for so long as they continue to own a specified
number of shares of our common stock, certain activities the purpose or effect
of which may be to change or influence the control of our company.
We have adopted a stockholder rights plan that may discourage, delay or
prevent a merger or acquisition that is beneficial to our stockholders.
*
In
May 2003, our board of directors adopted a stockholder rights plan that may
have the effect of discouraging, delaying or preventing a merger or acquisition
of us that our stockholders may consider beneficial by diluting the ability of
a potential acquirer to acquire us. Pursuant to the terms of the stockholder
rights plan, when a person or group, except under certain circumstances,
acquires 15% or more of our outstanding common stock or 10 business days after
announcement of a tender or exchange offer for 15% or more of our outstanding
common stock, the rights (except those rights held by the person or group who
has acquired or announced an offer to acquire 15% or more of our outstanding
common stock) would generally become exercisable for shares of our common stock
at a discount. Because the potential acquirers rights would not become
exercisable for our shares of common stock at a discount, the potential
acquirer would suffer substantial dilution and may lose its ability to acquire
us. In addition, the existence of the plan itself may deter a potential
acquirer from acquiring or making an offer to acquire us. As a result, either by operation of the plan
or by its potential deterrent effect, mergers and acquisitions of our company
that our stockholders may consider in their best interests may not occur.
Because
Warburg owns a substantial percentage of our outstanding common stock, we
amended the stockholder rights plan in connection with Warburgs participation
in an equity financing we completed in March 2005 to provide that Warburg and
its affiliates will be exempt from the stockholder rights plan, unless Warburg
and its affiliates become, without the prior consent of our board of directors,
the beneficial owner of more than 44% of our common stock. Likewise, in
connection with our completion of an underwritten offering of 9,000,000 shares
of common stock in February 2007, we amended the stockholder rights plan to
provide that Baker Brothers Life Sciences, L.P. and certain other affiliated
funds, which are collectively referred to herein as Baker, will be exempt
from the stockholder rights plan, unless Baker becomes, without the prior
consent of our board of directors, the beneficial owner of more than 20% of our
common stock. According to filings with
the SEC, Baker owned less than 5% of our outstanding common stock as of
February 2010. Under the stockholder rights plan, our board of directors has
express authority to amend the rights plan without stockholder approval.
Unstable market conditions may have serious adverse consequences on our
business.
*
The
recent economic downturn and market instability has made the business climate
more volatile and more costly. Our general business strategy may be adversely
affected by unpredictable and unstable market conditions. If the current equity
and credit markets deteriorate further, or do not improve, it may make any
necessary equity or debt financing more difficult, more costly, and more
dilutive. While we believe we have adequate capital resources to meet our expected
working capital and capital expenditure requirements for at least the next 12
months, a radical economic downturn or increase in our expenses could require
additional financing on less than attractive rates or on terms that are
excessively dilutive to existing stockholders. Failure to secure any necessary
financing in a timely manner and on favorable terms could have a material
adverse effect on our growth strategy, financial performance and stock price
and could require us to delay or abandon clinical development plans. There is a
risk that one or more of our current service providers, manufacturers or other
partners may
46
Table of
Contents
encounter
difficulties during challenging economic times, which could have an adverse
effect on our business, results of operations and financial condition.
The market price for our common stock has been and may continue to be
highly volatile, and an active trading market for our common stock may never
exist.
*
We
cannot assure you that an active trading market for our common stock will exist
at any time. Holders of our common stock may not be able to sell shares quickly
or at the market price if trading in our common stock is not active. The
trading price of our common stock has been and is likely to continue to be
highly volatile and could be subject to wide fluctuations in price in response
to various factors, many of which are beyond our control, including:
·
the
timing and amount of revenues generated from sales of FOLOTYN;
·
actual
or anticipated variations in quarterly operating results;
·
actual
or anticipated regulatory approvals or non-approvals of FOLOTYN or of competing
product candidates;
·
the
loss of regulatory approval for FOLOTYN in patients with relapsed or refractory
PTCL;
·
actual
or anticipated results of our clinical trials involving FOLOTYN;
·
changes
in laws or regulations applicable to FOLOTYN;
·
changes
in the expected or actual timing of our development programs;
·
announcements
of technological innovations by us or our competitors;
·
changes
in financial estimates or recommendations by securities analysts;
·
conditions
or trends in the biotechnology and pharmaceutical industries;
·
changes
in the market valuations of similar companies;
·
announcements
by us of significant acquisitions, strategic partnerships, joint ventures or
capital commitments;
·
additions
or departures of key personnel;
·
disputes
or other developments relating to proprietary rights, including patents,
litigation matters and our ability to obtain patent protection for our
technologies;
·
developments
concerning any of our research and development, manufacturing and marketing
collaborations;
·
sales
of large blocks of our common stock;
·
sales
of our common stock by our executive officers, directors and five percent
stockholders; and
·
economic
and other external factors, including disasters or crises.
Public
companies in general and companies included on The NASDAQ Global Market in
particular have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of those
companies. There has been particular volatility in the market prices of
securities of biotechnology and other life sciences companies, and the market
prices of these companies have often fluctuated because of problems or
successes in a given market segment or because investor interest has shifted to
other segments. These broad market and industry factors may cause the market
price of our common stock to decline, regardless of our operating performance.
We have no control over this volatility and can only focus our efforts on our
own operations, and even these may be affected due to the state of the capital
markets. In the past, following large price declines in the public market price
of a companys securities, securities
47
Table of
Contents
class
action litigation has often been initiated against that company, including in
2004 against us. Litigation of this type could result in substantial costs and
diversion of managements attention and resources, which would hurt our
business. Any adverse determination in litigation could also subject us to
significant liabilities.
Substantial sales of shares may impact the market price of our common
stock.
*
If
our stockholders sell substantial amounts of our common stock, the market price
of our common stock may decline. These sales also might make it more difficult
for us to sell equity or equity-related securities in the future at a time and
price that we consider appropriate. We are unable to predict the effect that
sales may have on the then prevailing market price of our common stock. We have entered into a Registration Rights
Agreement with Warburg pursuant to which Warburg is entitled to certain
registration rights with respect to shares of our common stock. On July 20, 2009, we filed a Registration
Statement on Form S-3 with the SEC providing for the registration for resale by
Warburg of up to 26,124,430 shares of our common stock, which registration
statement was declared effective on August 28, 2009.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
|
|
None
|
|
|
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
|
None
|
|
|
|
|
ITEM 4.
|
RESERVED
|
|
None
|
|
|
|
|
ITEM 5.
|
OTHER INFORMATION
|
|
None
|
|
|
|
|
ITEM 6.
|
EXHIBITS
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
No.
|
|
Description
|
|
Form
|
|
Filing
Date
|
|
Number
|
|
Filed
Herewith
|
10.18.1
|
|
Employment
Agreement, effective September 16, 2010, between Allos Therapeutics, Inc. and
Bruce K. Bennett, Jr.
|
|
8-K
|
|
9/17/2010
|
|
10.1
|
|
|
10.20.4
|
|
Form
of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award
Agreement.
|
|
8-K
|
|
10/22/2010
|
|
10.2
|
|
|
10.23
|
|
Employment
Agreement, effective September 16, 2010, between Allos Therapeutics, Inc. and
Michael E. Schick.
|
|
8-K/A
|
|
9/17/2010
|
|
10.1
|
|
|
10.24
|
|
Employment
Agreement, effective April 29, 2009, between Allos Therapeutics, Inc. and
Bruce A. Goldsmith.
|
|
8-K/A
|
|
9/17/2010
|
|
10.2
|
|
|
10.24.1
|
|
First
Amendment to Employment Agreement, effective May 22, 2009, between Allos
Therapeutics, Inc. and Bruce A. Goldsmith.
|
|
8-K/A
|
|
9/17/2010
|
|
10.3
|
|
|
10.25
|
|
Release
Agreement, dated as of October 22, 2010, between Allos and James V. Caruso.
|
|
8-K
|
|
10/22/2010
|
|
10.3
|
|
|
10.26
|
|
Executive
Equity Awards.
|
|
8-K
|
|
10/22/2010
|
|
10.1
|
|
|
31.1
|
|
Certification
of principal executive officer required by Rule 13a-14(a) / 15d-14(a).
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Certification
of principal financial officer required by Rule 13a-14(a) / 15d-14(a).
|
|
|
|
|
|
|
|
X
|
32.1#
|
|
Section
1350 Certification.
|
|
|
|
|
|
|
|
X
|
Indicates management contract or compensatory plan
or arrangement.
#
The certifications attached as Exhibit 32.1 that
accompany this Quarterly Report on Form 10-Q are not deemed filed with the
Securities and Exchange Commission and are not to be incorporated by reference
into any filing of Allos Therapeutics, Inc. under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether made
before or after the date of this Form 10-Q, irrespective of any general
incorporation language contained in such filing.
48
Table of
Contents
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:
November 4, 2010
|
ALLOS
THERAPEUTICS, INC.
|
|
|
|
/s/
Paul L. Berns
|
|
Paul
L. Berns
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
David C. Clark
|
|
David
C. Clark
|
|
Vice
President, Finance and Treasurer
|
|
(Principal
Financial and Accounting Officer)
|
49
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