Momenta Pharmaceuticals, Inc.
MOMENTA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/08/2013 15:05:56)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(MARK ONE)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

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 000-50797

 

Momenta Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

04-3561634

(State or Other Jurisdiction of

 

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

 

 

 

675 West Kendall Street, Cambridge, MA

 

02142

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 491-9700

(Registrant’s Telephone Number, Including Area Code)

 

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  x   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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

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

 

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock as of November 4, 2013.

 

Class

 

Number of Shares

Common Stock $0.0001 par value

 

52,298,132

 

 

 



Table of Contents

 

MOMENTA PHARMACEUTICALS, INC.

 

 

Page

PART I. FINANCIAL INFORMATION

1

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

1

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2013 and 2012

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

3

 

 

 

 

Notes to Unaudited, Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 6.

Exhibits

50

 

 

SIGNATURES

51

 

Our logo, trademarks and service marks are the property of Momenta Pharmaceuticals, Inc. Other trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOMENTA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

 

September 30, 2013

 

December 31, 2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

37,131

 

$

52,990

 

Marketable securities

 

238,766

 

287,613

 

Accounts receivable

 

6,402

 

10,811

 

Unbilled revenue

 

5,345

 

800

 

Prepaid expenses and other current assets

 

5,378

 

4,953

 

 

 

 

 

 

 

Total current assets

 

293,022

 

357,167

 

Property and equipment, net

 

24,395

 

22,380

 

Restricted cash

 

20,719

 

19,971

 

Intangible assets, net

 

5,915

 

6,711

 

Other long-term assets

 

156

 

400

 

 

 

 

 

 

 

Total assets

 

$

344,207

 

$

406,629

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

6,194

 

$

3,580

 

Accrued expenses

 

11,774

 

9,641

 

Deferred revenue

 

4,438

 

4,426

 

Other current liabilities

 

479

 

514

 

 

 

 

 

 

 

Total current liabilities

 

22,885

 

18,161

 

Deferred revenue, net of current portion

 

24,260

 

27,269

 

Other long-term liabilities

 

1,074

 

712

 

 

 

 

 

 

 

Total liabilities

 

48,219

 

46,142

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share; 5,000 shares authorized at September 30, 2013 and December 31, 2012, 100 shares of Series A Junior Participating Preferred Stock, $0.01 par value per share designated and no shares issued and outstanding

 

 

 

Common stock, $0.0001 par value per share; 100,000 shares authorized at September 30, 2013 and December 31, 2012, 52,289 and 51,709 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

 

5

 

5

 

Additional paid-in capital

 

536,261

 

522,422

 

Accumulated other comprehensive income

 

120

 

111

 

Accumulated deficit

 

(240,398

)

(162,051

)

 

 

 

 

 

 

Total stockholders’ equity

 

295,988

 

360,487

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

344,207

 

$

406,629

 

 

The accompanying notes are an integral part of these unaudited, condensed consolidated financial statements.

 

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MOMENTA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

4,774

 

$

2,579

 

$

11,798

 

$

43,960

 

Research and development revenue

 

5,977

 

2,523

 

10,918

 

7,233

 

Total collaboration revenue

 

10,751

 

5,102

 

22,716

 

51,193

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development*

 

27,435

 

20,233

 

71,771

 

58,805

 

General and administrative*

 

8,977

 

10,999

 

30,202

 

34,309

 

Total operating expenses

 

36,412

 

31,232

 

101,973

 

93,114

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(25,661

)

(26,130

)

(79,257

)

(41,921

)

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

Interest income

 

224

 

308

 

736

 

950

 

Other income

 

55

 

 

174

 

 

Total other income

 

279

 

308

 

910

 

950

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(25,382

)

$

(25,822

)

$

(78,347

)

$

(40,971

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.50

)

$

(0.51

)

$

(1.54

)

$

(0.81

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic and diluted net loss per share

 

51,055

 

50,500

 

50,813

 

50,365

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(25,382

)

$

(25,822

)

$

(78,347

)

$

(40,971

)

Net unrealized holding gains on available-for-sale marketable securities

 

98

 

185

 

9

 

252

 

Comprehensive loss

 

$

(25,284

)

$

(25,637

)

$

(78,338

)

$

(40,719

)

 


* Non-cash share-based compensation expense included in operating expenses is as follows:

 

Research and development

 

$

1,359

 

$

1,530

 

$

3,969

 

$

4,317

 

General and administrative

 

$

1,796

 

$

2,019

 

$

5,387

 

$

5,943

 

 

The accompanying notes are an integral part of these unaudited, condensed consolidated financial statements.

 

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MOMENTA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(78,347

)

$

(40,971

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,545

 

4,591

 

Share-based compensation expense

 

9,356

 

10,260

 

Amortization of premium on investments

 

2,627

 

2,177

 

Amortization of intangibles

 

796

 

796

 

Impairment of equity investment

 

244

 

 

Loss on disposal of assets

 

 

3

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,409

 

23,220

 

Unbilled revenue

 

(4,545

)

1,581

 

Prepaid expenses and other current assets

 

302

 

(1,017

)

Restricted cash

 

(748

)

(2,471

)

Accounts payable

 

2,614

 

2,012

 

Accrued expenses

 

2,133

 

(1,182

)

Deferred revenue

 

(2,997

)

29,191

 

Other current liabilities

 

(284

)

168

 

Other long-term liabilities

 

(116

)

(144

)

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(60,011

)

28,214

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property and equipment

 

(6,560

)

(14,613

)

Purchases of marketable securities

 

(178,162

)

(434,404

)

Proceeds from maturities of marketable securities

 

220,569

 

454,751

 

Proceeds from sales of marketable securities

 

3,822

 

 

Purchase of equity investment

 

 

(400

)

 

 

 

 

 

 

Net cash provided by investing activities

 

39,669

 

5,334

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of common stock under stock plans

 

4,483

 

2,104

 

 

 

 

 

 

 

Net cash provided by financing activities

 

4,483

 

2,104

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(15,859

)

35,652

 

Cash and cash equivalents, beginning of period

 

52,990

 

49,245

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

37,131

 

$

84,897

 

 

The accompanying notes are an integral part of these unaudited, condensed consolidated financial statements.

 

3



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MOMENTA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED, CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. The Company

 

Business

 

Momenta Pharmaceuticals, Inc. (the “Company” or “Momenta”) was incorporated in the state of Delaware in May 2001 and began operations in early 2002. Its facilities are located in Cambridge, Massachusetts. Momenta is a biotechnology company specializing in the structural characterization, process engineering and biologic systems analysis of complex molecules such as polysaccharides, polypeptides, and biologics (including proteins and antibodies). The Company’s initial technology was built on the ability to characterize complex polysaccharides. Over the last decade, the Company has expanded its expertise into technologies that enable it to develop a diversified product portfolio of complex generics, biosimilars, and novel products. The Company presently derives all of its revenue from collaborations.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Company’s accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, applicable to interim periods and, in the opinion of management, include all normal and recurring adjustments that are necessary to state fairly the results of operations for the reported periods. The Company’s condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, the Company’s audited consolidated financial statements for the year ended December 31, 2012, which were included in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission, or SEC, on February 28, 2013. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

 

The accompanying condensed consolidated financial statements reflect the operations of the Company and the Company’s wholly-owned subsidiary Momenta Pharmaceuticals Securities Corporation. All significant intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, and share-based payments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

 

Net Loss Per Common Share

 

The Company computes basic net loss per common share by dividing net loss by the weighted average number of common shares outstanding, which includes common stock issued as a result of public offerings, stock option exercises, stock purchased under the Company’s employee stock purchase plan and vesting of shares of restricted common stock. The Company computes diluted net loss per common share by dividing net loss by the weighted average number of common shares and potential shares from outstanding stock options and unvested restricted stock determined by applying the treasury stock method.

 

The following table presents anti-dilutive shares for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Weighted-average anti-dilutive shares related to:

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

4,719

 

3,959

 

4,799

 

3,661

 

Restricted stock awards

 

910

 

1,179

 

928

 

1,048

 

 

Since the Company had a net loss for all periods presented, the effect of all potentially dilutive securities is anti-dilutive. Accordingly, basic and diluted net loss per share is the same for the three and nine months ended September 30, 2013 and 2012. Anti-dilutive shares comprise the impact of the number of shares that would have been dilutive had the Company had net income plus the number of common stock equivalents that

 

4



 

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would be anti-dilutive had the Company had net income. Furthermore, performance-based restricted common stock awards which vest based upon U.S. Food and Drug Administration, or FDA, approval for M356 in the United States were excluded from diluted shares outstanding as the vesting condition had not been met as of September 30, 2013.

 

Fair Value Measurements

 

The tables below present information about the Company’s assets that are measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012, and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices (adjusted), interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The fair value hierarchy level is determined by the lowest level of significant input. Financial assets measured at fair value on a recurring basis are summarized as follows (in thousands):

 

Description

 

Balance as of
September 30, 2013

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Other
Unobservable Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

31,495

 

$

31,495

 

$

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprise obligations

 

47,810

 

 

47,810

 

 

Corporate debt securities

 

96,726

 

 

96,726

 

 

Commercial paper obligations

 

45,499

 

 

45,499

 

 

Foreign government bonds

 

27,005

 

 

27,005

 

 

Asset-backed securities

 

21,726

 

 

21,726

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

270,261

 

$

31,495

 

$

238,766

 

$

 

 

Description

 

Balance as of
December 31, 2012

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Other
Unobservable Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

47,940

 

$

47,940

 

$

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprise obligations

 

51,225

 

 

51,225

 

 

Corporate debt securities

 

158,913

 

 

158,913

 

 

Commercial paper obligations

 

65,138

 

 

65,138

 

 

Foreign government bonds

 

12,337

 

 

12,337

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

335,553

 

$

47,940

 

$

287,613

 

$

 

 

During the three and nine months ended September 30, 2013, there were no transfers between Level 1 and Level 2 financial assets. The Company did not have any non-recurring fair value measurements on any assets or liabilities at September 30, 2013 and December 31, 2012. The carrying amounts reflected in the Company’s condensed consolidated balance sheets for cash, accounts receivable, unbilled revenue, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

 

Cash, Cash Equivalents and Marketable Securities

 

The Company invests its cash in bank deposits, money market accounts, corporate debt securities, United States treasury obligations, commercial paper and United States government-sponsored enterprise securities in accordance with its investment policy. The Company has established guidelines relating to diversification and maturities that allow the Company to manage risk.

 

The Company invests its excess cash balances in short-term and long-term marketable debt securities. The Company classifies its investments in marketable debt securities as available-for-sale based on facts and circumstances present at the time it purchased the securities. The Company reports available-for-sale investments at fair value at each balance sheet date and includes any unrealized holding gains and losses (the adjustment to fair value) in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included in interest income. To determine whether an other-than-temporary impairment exists, the Company considers whether it intends to sell the debt security and, if it does not intend to sell the debt security, it considers available evidence to assess whether it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. The Company reviewed its investments with unrealized losses and concluded that no other-than-temporary impairment existed at September 30, 2013 as it has the ability and intent to hold these investments to maturity and it is not more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. The Company did not record any impairment charges related to its marketable securities during the three and nine months ended September 30, 2013 and 2012. The Company’s marketable securities are classified as cash

 

5



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equivalents if the original maturity, from the date of purchase, is 90 days or less, and as marketable securities if the original maturity, from the date of purchase, is in excess of 90 days. The Company’s cash equivalents are composed of money market funds.

 

The Company’s financial assets have been initially valued at the transaction price and subsequently valued at the end of each reporting period, typically utilizing third-party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches, and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices provided by its third-party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. The Company did not adjust or override any fair value measurements provided by its pricing services as of September 30, 2013 and December 31, 2012.

 

The following tables summarize the Company’s cash, cash equivalents and marketable securities at September 30, 2013 and December 31, 2012 (in thousands):

 

As of September 30, 2013

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Cash and money market funds

 

$

37,131

 

$

 

$

 

$

37,131

 

U.S. Government-sponsored enterprise obligations

 

 

 

 

 

 

 

 

 

Due in one year or less

 

21,997

 

10

 

 

22,007

 

Due in two years or less

 

25,804

 

3

 

(4

)

25,803

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

82,889

 

33

 

(6

)

82,916

 

Due in two years or less

 

13,790

 

20

 

 

13,810

 

Commercial paper obligations due in one year or less

 

45,454

 

45

 

 

45,499

 

Foreign government bonds

 

 

 

 

 

 

 

 

 

Due in one year or less

 

25,380

 

29

 

(6

)

25,403

 

Due in two years or less

 

1,602

 

 

 

1,602

 

Asset-backed securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

13,672

 

 

(1

)

13,671

 

Due in two years or less

 

8,058

 

 

(3

)

8,055

 

Total

 

$

275,777

 

$

140

 

$

(20

)

$

275,897

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,131

 

$

 

$

 

$

37,131

 

Marketable securities

 

238,646

 

140

 

(20

)

238,766

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

275,777

 

$

140

 

$

(20

)

$

275,897

 

 

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As of December 31, 2012

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Cash and money market funds

 

$

52,990

 

$

 

$

 

$

52,990

 

U.S. Government-sponsored enterprise obligations

 

 

 

 

 

 

 

 

 

Due in one year or less

 

6,000

 

 

 

6,000

 

Due in two years or less

 

45,195

 

30

 

 

45,225

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

76,500

 

19

 

(11

)

76,508

 

Due in two years or less

 

82,363

 

72

 

(30

)

82,405

 

Commercial paper obligations due in one year or less

 

65,104

 

34

 

 

65,138

 

Foreign government bonds

 

 

 

 

 

 

 

 

 

Due in one year or less

 

7,390

 

 

(1

)

7,389

 

Due in two years or less

 

4,950

 

 

(2

)

4,948

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

340,492

 

$

155

 

$

(44

)

$

340,603

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,990

 

$

 

$

 

$

52,990

 

Marketable securities

 

287,502

 

155

 

(44

)

287,613

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

340,492

 

$

155

 

$

(44

)

$

340,603

 

 

At September 30, 2013 and December 31, 2012, the Company held 21 and 28 marketable securities, respectively, that were in a continuous unrealized loss position for less than one year. At September 30, 2013 and December 31, 2012, no marketable securities were in a continuous unrealized loss position for greater than one year.

 

The unrealized losses were caused by fluctuations in interest rates. The following table summarizes the aggregate fair value of these securities at September 30, 2013 and December 31, 2012 (in thousands):

 

 

 

As of September 30, 2013

 

As of December 31, 2012

 

 

 

Aggregate
Fair Value

 

Unrealized
Losses

 

Aggregate
Fair Value

 

Unrealized
Losses

 

U.S. Government-sponsored enterprise obligations due in two years or less

 

$

16,797

 

$

(4

)

$

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

27,578

 

$

(6

)

$

48,196

 

$

(11

)

Due in two years or less

 

$

 

$

 

$

35,333

 

$

(30

)

Foreign government bonds

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

6,535

 

$

(6

)

$

5,100

 

$

(1

)

Due in two years or less

 

$

 

$

 

$

3,345

 

$

(2

)

Asset-backed securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

13,671

 

$

(1

)

$

 

$

 

Due in two years or less

 

$

8,055

 

$

(3

)

$

 

$

 

 

Income Taxes

 

The Company generated U.S. taxable income during the years ended December 31, 2011 and 2010, and as a result, utilized $190.9 million and $26.3 million, respectively, of its available federal net operating loss carryforwards to offset this income. At December 31, 2012, the Company had federal and state net operating loss carryforwards of $41.4 million and $35.5 million, respectively, available to reduce future taxable income and which will expire at various dates through 2032. Of this amount, approximately $12.1 million of federal and state net operating loss carryforwards relate to stock option deductions for which the related tax benefit will be recognized in equity when realized. At

 

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December 31, 2012, the Company had federal and state research and development and other credit carryforwards of $6.5 million and $3.3 million, respectively, available to reduce future tax liabilities. The federal and state research and development credit carryforwards will expire at various dates beginning in 2024 through 2032 and 2013 through 2027, respectively.

 

As of December 31, 2012 and 2011, the Company had $2.9 million and $2.8 million of gross unrecognized tax benefits, respectively, of which $2.8 million and $2.7 million, respectively, if recognized, would not impact the Company’s effective tax rate as there is a full valuation allowance on these credits.

 

Comprehensive Loss

 

Comprehensive loss is the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. Comprehensive loss includes net loss and the change in accumulated other comprehensive income (loss) for the period. Accumulated other comprehensive income (loss) consists entirely of unrealized gains and losses on available-for-sale marketable securities for all periods presented. See the unaudited condensed consolidated statements of comprehensive loss for relevant disclosures.

 

The following tables summarize the changes in accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2013 (in thousands):

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of June 30, 2013

 

$

22

 

Other comprehensive income before reclassifications

 

98

 

Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive income

 

98

 

Balance as of September 30, 2013

 

$

120

 

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of December 31, 2012

 

$

111

 

Other comprehensive income before reclassifications

 

12

 

Amounts reclassified from accumulated other comprehensive income

 

(3

)

Net current period other comprehensive income

 

9

 

Balance as of September 30, 2013

 

$

120

 

 

The amounts reclassified from accumulated other comprehensive income (loss) represents realized gains on sales of marketable securities and are included in interest income in the consolidated statement of comprehensive loss.

 

3. Intangible Assets

 

As of September 30, 2013 and December 31, 2012, intangible assets, net of accumulated amortization, were as follows (in thousands):

 

 

 

 

 

As of September 30, 2013

 

As of December 31, 2012

 

 

 

Weighted Average
Amortization
Period (in years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Core and developed technology

 

10

 

$

10,257

 

$

(4,342

)

$

10,257

 

$

(3,546

)

Non-compete agreement

 

2

 

170

 

(170

)

170

 

(170

)

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

10

 

$

10,427

 

$

(4,512

)

$

10,427

 

$

(3,716

)

 

Amortization is computed using the straight-line method over the useful lives of the respective intangible assets as there is no other pattern of use that is reasonably estimable. Amortization expense was approximately $0.3 million for each of the three months ended September 30, 2013 and 2012. Amortization expense was approximately $0.8 million for each of the nine months ended September 30, 2013 and 2012.

 

The Company expects to incur amortization expense of appropriately $1.1 million per year for each of the next five years.

 

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4. Restricted Cash

 

The Company designated $17.5 million as collateral for a security bond posted in the litigation against Amphastar Pharmaceuticals Inc., or Amphastar, Actavis, Inc., or Actavis (formerly Watson Pharmaceuticals Inc.), and International Medical Systems, Ltd. (a wholly owned subsidiary of Amphastar), as discussed within Note 8, Legal Contingencies . The $17.5 million is held in an escrow account by Hanover Insurance. The Company classified this restricted cash as long-term as the timing of a final decision in the Enoxaparin Sodium Injection patent litigation is not known.

 

The Company designated $2.5 million as collateral for a letter of credit related to the lease of office and laboratory space located at 675 West Kendall Street in Cambridge, Massachusetts. This balance will remain restricted through the remaining term of the lease which ends in April 2015. The Company will earn interest on the balance.

 

The Company designated $0.7 million as collateral for a letter of credit related to the lease of office and laboratory space located at 320 Bent Street in Cambridge, Massachusetts. This balance will remain restricted through the lease term and during any lease term extensions. The Company will earn interest on the balance.

 

5. Collaboration and License Agreements

 

2003 Sandoz Collaboration

 

In November 2003, the Company entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration, with Sandoz AG and Sandoz Inc., collectively, Sandoz, to jointly develop and commercialize Enoxaparin Sodium Injection, a generic version of Lovenox®, a low molecular weight heparin, or LMWH.

 

Under the 2003 Sandoz Collaboration, the Company granted Sandoz the exclusive right to manufacture, distribute and sell Enoxaparin Sodium Injection in the United States. The Company agreed to provide development and related services on a commercially reasonable basis, which included developing a manufacturing process to make Enoxaparin Sodium Injection, scaling up the process, contributing to the preparation of an Abbreviated New Drug Application, or ANDA, in Sandoz’s name to be filed with the FDA, further scaling up the manufacturing process to commercial scale, and related development of intellectual property. The Company has the right to participate in a joint steering committee which is responsible for overseeing development, legal and commercial activities and which approves the annual collaboration plan. Sandoz is responsible for commercialization activities and will exclusively distribute and market the product. The Company identified two significant deliverables in this arrangement consisting of: (i) a license and (ii) development and related services. The Company determined that the license did not meet the criteria for separation as it did not have stand-alone value apart from the development services, which are proprietary to the Company. Therefore, the Company determined that a single unit of accounting exists with respect to the 2003 Sandoz Collaboration.

 

In July 2010, the FDA granted marketing approval of the ANDA for Enoxaparin Sodium Injection filed by Sandoz. The Company is paid at cost for external costs incurred for development and related activities and is paid for full time equivalents, or FTEs, performing development and related services. The profit-share or royalties Sandoz is obligated to pay the Company under the 2003 Sandoz Collaboration differ depending on whether (i) there are no third-party competitors marketing an interchangeable generic version of Lovenox, or Lovenox-Equivalent Product (as defined in the 2003 Sandoz Collaboration), (ii) a Lovenox-Equivalent Product is being marketed by Sanofi-Aventis, which distributes the brand name Lovenox, or licensed by Sanofi-Aventis to another company to be sold as a generic drug, both known as authorized generics, or (iii) there is one or more third-party which is not Sanofi-Aventis marketing a Lovenox-Equivalent Product. Until October 2011, no third-party competitors were marketing a Lovenox-Equivalent Product; therefore, Sandoz paid the Company 45% of the contractual profits from the sale of Enoxaparin Sodium Injection. Profits on sales of Enoxaparin Sodium Injection are calculated by deducting from net sales the cost of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of net sales. In October 2011, Sandoz confirmed that an authorized generic Lovenox-Equivalent Product was being marketed, which meant that Sandoz was obligated to pay the Company a royalty on its net sales of Enoxaparin Sodium Injection until the contractual profits from those net sales in a product year (July 1—June 30) reached a certain threshold, which was achieved in December 2011, at which point the Company reverted back to receiving profit share revenue. Additionally, in October 2011, FDA approved the ANDA for the enoxaparin product of Actavis and Amphastar. In January 2012, following the Court of Appeals for the Federal Circuit granting a stay of the preliminary injunction previously issued against them by the United States District Court, Actavis announced that it and Amphastar intended to launch their enoxaparin product. Consequently, Sandoz is obligated to pay the Company a royalty on net sales in each post-launch contract year, which for net sales up to a pre-defined sales threshold is payable at a 10% rate, and for net sales above the sales threshold increases to 12%. The Company earned royalties of $4.8 million and $11.8 million from Sandoz in the three and nine months ended September 30, 2013, respectively. The Company earned royalties of $2.6 million from Sandoz and hybrid profit share/royalties of $44.0 million from Sandoz during the three and nine months ended September 30, 2012, respectively.

 

If certain milestones were achieved with respect to Enoxaparin Sodium Injection under certain circumstances, Sandoz agreed to make payments to the Company which would reach $55 million. Under the 2003 Sandoz Collaboration, in July 2010, upon the achievement of a regulatory milestone the Company earned and recognized $5.0 million in research and development revenue. In addition, no third-party competitors had marketed a Lovenox-Equivalent Product as of July 2011, the one year anniversary of the FDA’s approval of Enoxaparin Sodium Injection. As a result, in the year ended December 31, 2011, the Company earned and recognized $10.0 million in product revenue upon the achievement of the commercial milestone. The Company is no longer eligible to receive milestones under the 2003 Sandoz Collaboration because

 

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the remaining milestones were contingent upon there being no third-party competitors marketing an interchangeable generic version of a Lovenox-Equivalent Product.

 

A portion of the development expenses and certain legal expenses, which in the aggregate have exceeded a specified amount, are offset against profit-sharing amounts, royalties and milestone payments. Sandoz also may offset a portion of any product liability costs and certain other expenses arising from patent litigation against any profit-sharing amounts, royalties and milestone payments. The contractual share of these development and other expenses is subject to an annual adjustment at the end of each product year, and ends with the product year ending June 2015. The second and third annual adjustments of $3.9 million and $3.8 million, respectively, were recorded as a reduction in product revenue in the three months ended June 30, 2012 and 2013, respectively.

 

The Company recognizes research and development revenue from FTE services and research and development revenue from external development costs upon completion of the performance requirements (i.e., as the services are performed and the reimbursable costs are incurred). Revenue from external development costs is recorded on a gross basis as the Company contracts directly with, manages the work of and is responsible for payments to third-party vendors for such development and related services, except with respect to any amounts due Sandoz for manufacturing raw material purchases, which are recorded on a net basis as an offset to the related development expense. Under the 2003 Sandoz Collaboration, the Company recorded research and development revenue of $0.6 million and $2.4 million in the three and nine months ended September 30, 2013, respectively, and $0.9 million and $3.1 million in the three and nine months ended September 30, 2012, respectively. There have been no such manufacturing raw material purchases since 2006.

 

2006 Sandoz Collaboration

 

In July 2006, the Company entered into a Stock Purchase Agreement and an Investor Rights Agreement with Novartis Pharma AG, and in June 2007, the Company and Sandoz AG executed a collaboration and license agreement, as amended, or the Second Sandoz Collaboration Agreement, related to the development and commercialization of M356, which is designed to be a generic version of Copaxone® (glatiramer acetate injection). Together, this series of agreements is referred to as the “2006 Sandoz Collaboration.”

 

Pursuant to the terms of the Stock Purchase Agreement, the Company sold 4,708,679 shares of common stock to Novartis Pharma AG, an affiliate of Sandoz AG, at a per share price of $15.93 (the closing price of the Company’s common stock on the NASDAQ Global Market was $13.05 on the date of the Stock Purchase Agreement) for an aggregate purchase price of $75.0 million, resulting in a paid premium of $13.6 million, which is being recognized in revenue on a straight-line basis over the estimated development period. In September 2013, the Company revised the estimate of the development period from approximately six years to approximately seven years due to a change in the period over which the Company’s remaining performance obligations will occur. The impact of this change in estimate on the Company’s net loss and net loss per share for the three months ended September 30, 2013 was immaterial. The Company recognized research and development revenue relating to this paid premium of approximately $0.2 million and $0.9 million for the three and nine months ended September 30, 2013, respectively. The Company recognized research and development revenue relating to this paid premium of approximately $0.5 million and $1.6 million for the three and nine months ended September 30, 2012, respectively. The portion of the equity premium that is unearned at September 30, 2013 is included in deferred revenue.

 

Under the 2006 Sandoz Collaboration, the Company and Sandoz AG expanded the geographic markets for Enoxaparin Sodium Injection covered by the 2003 Sandoz Collaboration to include the European Union and further agreed to exclusively collaborate on the development and commercialization of M356 for sale in specified regions of the world. Each party has granted the other an exclusive license under its intellectual property rights to develop and commercialize such products for all medical indications in the relevant regions. The Company has agreed to provide development and related services which includes developing a manufacturing process to make the products, scaling up the process, contributing to the preparation of regulatory filings, further scaling up the manufacturing process to commercial scale, and related development of intellectual property. The Company has the right to participate in a joint steering committee, which is responsible for overseeing development, legal and commercial activities and which approves the annual collaboration plan. Sandoz AG is responsible for commercialization activities and will exclusively distribute and market any products covered by the 2006 Sandoz Collaboration. The Company identified two significant deliverables in this arrangement consisting of (i) a license and (ii) the development and related services. The Company determined that the license did not meet the criteria for separation as it does not have stand-alone value apart from the development services, which are proprietary to the Company. Therefore, the Company has determined that a single unit of accounting exists with respect to the 2006 Sandoz Collaboration.

 

The term of the Second Sandoz Collaboration Agreement extends throughout the development and commercialization of the products until the last sale of the products, unless earlier terminated by either party pursuant to the provisions of the Second Sandoz Collaboration Agreement. Sandoz AG has agreed to indemnify the Company for various claims, and a certain portion of such costs may be offset against certain future payments received by the Company.

 

Costs, including development costs and the cost of clinical studies, will be borne by the parties in varying proportions, depending on the type of expense and the related product. All commercialization responsibilities and costs will be borne by Sandoz AG. Under the 2006 Sandoz Collaboration, the Company is paid at cost for any external costs incurred in the development of products where development activities are funded solely by Sandoz AG or partly in proportion where development costs are shared between the Company and Sandoz AG. The Company also is paid at a contractually specified rate for FTEs performing development services where development activities are funded solely by Sandoz AG or partly by proportion where development costs are shared between the Company and Sandoz AG. Upon commercialization, the Company will earn a 50% profit share on worldwide net sales of M356. Profits on net sales of M356 will be calculated by deducting from net sales the costs

 

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of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of net sales. Additionally, the Company is eligible to receive up to $163.0 million in milestone payments upon the achievement of certain regulatory, commercial and sales-based milestones for the products under the collaboration, which include: a $10.0 million regulatory milestone related to the approval by the FDA of M356, and $153.0 million in sales-based and commercial milestones, of which up to $140.0 million (including the M356 regulatory milestone) are U.S.-based milestones. The Company has concluded that the regulatory milestone pursuant to its 2006 Sandoz Collaboration is substantive. The Company evaluated factors such as the scientific and regulatory risks that must be overcome to achieve the respective milestone, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Revenues from the non-refundable regulatory milestone are recognized as research and development revenue upon successful accomplishment of the milestone. Sales-based and commercial milestones are accounted for as royalties and are recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. The Company has not earned and therefore has not recognized any milestone payments under this arrangement.

 

The Company recognizes research and development revenue from FTE services and research and development revenue from external development costs upon completion of the performance requirements (i.e., as the services are performed and the reimbursable costs are incurred). Revenue from external development costs is recorded on a gross basis as the Company contracts directly with, manages the work of and is responsible for payments to third-party vendors for such development and related services, except with respect to any amounts due Sandoz for shared development costs, which are recorded on a net basis. Under the 2006 Sandoz Collaboration, the Company recorded research and development revenue of $0.3 million and $0.8 million in the three and nine months ended September 30, 2013, respectively, and $0.2 million and $0.7 million in the three and nine months ended September 30, 2012, respectively. The Company recorded a reduction in research and development revenue for shared development costs of $0.6 million for each of the three and nine months ended September 30, 2013, and zero and $0.3 million for the three and nine months ended September 30, 2012, respectively, related to the shared development costs.

 

Baxter Agreement

 

In December 2011, the Company entered into a development, license and option agreement with Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA, collectively, Baxter. The Company refers to this agreement as the “Baxter Agreement.” The Baxter Agreement became effective in February 2012, following expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, as amended.

 

Under the Baxter Agreement, the Company agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilar products, M923 and M834, indicated in the inflammatory and autoimmune therapeutic areas, or the initial products. In July 2012, Baxter selected a third biosimilar for inclusion in the collaboration known as M511, a monoclonal antibody for oncology. Baxter has the right until February 2015, to select up to three additional biosimilars to be included in the collaboration. The Company has initiated development of M511. The Company does not receive milestones related to the selection of additional products. The process for achieving milestones is as follows:

 

·                   Baxter selects an additional product to the collaboration and the Company initiates development.

 

·                   If the Company achieves pre-defined “minimum development” criteria related to the additional product, Baxter is given an option to exercise exclusive license rights.

 

·                   If Baxter exercises its exclusive license option to advance the product under the Baxter Agreement, the Company will earn a license payment.

 

·                   If the Company achieves pre-defined “technical development” criteria related to the initial product or additional product, the Company will earn a milestone payment.

 

·                   For the initial and additional products, if the Company either (a) submits an Investigational New Drug application, or IND, to the FDA or (b) is not required to file an IND, either referred to as the “Transition Period,” the Company will earn a milestone payment.

 

·                   Following the Transition Period, Baxter will assume responsibility for development of each biosimilar, and the Company has the potential to receive up to $300 million in regulatory milestones. These milestones are designed to reward the Company, on a sliding scale, for reducing the scope of the clinical activities required to develop each biosimilar.

 

Under the Baxter Agreement, each party has granted the other an exclusive license under its intellectual property rights to develop and commercialize designated products for all therapeutic indications. The Company has agreed to provide development and related services on a commercially reasonable basis through the Transition Period for each product, which include high-resolution analytics, characterization, and product and process development. Baxter is responsible for clinical development, manufacturing and commercialization activities and will exclusively distribute and market any products covered by the Baxter Agreement. The Company has the right to participate in a joint steering committee, consisting of an equal number of members from the Company and Baxter, to oversee and manage the development and

 

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commercialization of products under the collaboration. Costs, including development costs, payments to third parties for intellectual property licenses, and expenses for legal proceedings, including the patent exchange process pursuant to the Biologics Price Competition and Innovation Act of 2009, will be borne by the parties in varying proportions, depending on the type of expense and the stage of development. The Company has the option to participate, at its discretion, in a cost and profit share arrangement for the four additional products up to 30%. If the profit share is elected, the royalties payable would be reduced by up to nearly half. Absent a cost share arrangement, the Company will generally be responsible for research and process development costs prior to filing an IND, and the cost of in-human clinical trials, manufacturing in accordance with current good manufacturing practices and commercialization will be borne by Baxter.

 

In addition, the Company has agreed, for a period commencing six months following the effective date and ending on the earlier of (i) three years from the effective date of the Baxter Agreement (subject to certain limited time extensions as provided for in the Baxter Agreement) or (ii) the selection of the four additional products, to notify Baxter of bona fide offers from third parties to develop or commercialize a biosimilar that could be an additional product candidate. Following such notification, if Baxter does not select such proposed product or products for inclusion in the collaboration, the Company has the right to develop, manufacture, and commercialize such product or products on its own or with a third party. The Company also agreed to provide Baxter with a right of first negotiation with respect to collaborating in the development of a competing product for a period of three years following the effectiveness of an IND exemption or waiver or regulatory authority authorization to dose humans, subject to certain restrictions as outlined in the Baxter Agreement. Following the third anniversary of the effective date of the Baxter Agreement (subject to certain limited time extensions as provided for in the Baxter Agreement), the Company may develop, on its own or with a third party, any biosimilar product not named under the Baxter Agreement, subject to certain restrictions.

 

Under the terms of the Baxter Agreement, the Company received an initial cash payment of $33 million. The Company is eligible to receive from Baxter license payments totaling $28 million for the exercise of options with respect to the additional four product candidates that can be named under the Baxter Agreement, payments of $5 million each for extensions of the period during which such additional products may be selected, and a license payment of $7 million upon the achievement of pre-defined “minimum development” criteria, as defined in the agreement, for M834 (a selected biosimilar). The Company is also eligible to receive from Baxter an aggregate of approximately $380 million in potential milestone payments, comprised of (i) up to $80 million in substantive milestone payments upon achievement of specified technical and development milestone events across the six product candidates, and (ii) regulatory milestones totaling up to $300 million, on a sliding scale, across the six product candidates where, based on the products’ regulatory application, there is a significant reduction in the scope of the clinical trial program required for regulatory approval. Two of the technical and development milestones were time-based and the total eligible milestones have been adjusted to correspond to current development plans. There are no other time-based milestones included in the Baxter Agreement. The technical and development milestones include (i) achievement of certain criteria that will ultimately drive commercial feasibility for manufacturing the products and (ii) acceptance by the FDA of an IND.

 

The Company continues to advance toward achievement of defined milestones in 2014 for its three biosimilar products under development with Baxter. For its lead biosimilar M923, the milestones targeted for second half of 2014 are achievement of technical development criteria and the submission of an IND application. The achievement of development criteria would generate a license payment and a milestone payment for M511 and M834, respectively, in 2014. If all these milestones are achieved, the Company would be eligible to receive an aggregate of $26 million.

 

In addition, if any of the six products are successfully developed and launched, Baxter will be required to pay to the Company royalties on net sales of licensed products worldwide, with a base royalty rate in the high single digits with the potential for significant tiered increases based on the number of competitors, the interchangeability of the product, and the sales tier for each product. The maximum royalty with all potential increases would be slightly more than double the base royalty.

 

The term of the collaboration shall continue throughout the development and commercialization of the products, on a product-by-product and country-by-country basis, until there is no remaining payment obligation with respect to a product in the relevant territory, unless earlier terminated by either party pursuant to the terms of the Baxter Agreement.

 

The Baxter Agreement may be terminated by:

 

·                   either party for breach by or bankruptcy of the other party;

 

·                   the Company in the event Baxter elects to terminate the Baxter Agreement with respect to both of the initial two products within a certain time period;

 

·                   Baxter for its convenience; or

 

·                   the Company in the event Baxter does not exercise commercially reasonable efforts to commercialize a product in the United States or other specified countries, provided that the Company also has certain rights to directly commercialize such product, as opposed to terminating the Baxter Agreement, in event of such a breach by Baxter.

 

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In accordance with the Financial Accounting Standards Board’s ASU No. 2009-13: Multiple-Deliverable Revenue Arrangements (Topic 615), the Company identified all of the deliverables at the inception of the Baxter Agreement. The deliverables were determined to include (i) the development and product licenses to the two initial biosimilars and the four additional biosimilars, (ii) the research and development services related to the two initial biosimilars and the four additional biosimilars and (iii) the Company’s participation in a joint steering committee. The Company has determined that each of the license deliverables do not have stand-alone value apart from the related research and development services deliverables as there are no other vendors selling similar, competing products on a stand-alone basis, Baxter does not have the contractual right to resell the license, and Baxter is unable to use the license for its intended purpose without the Company’s performance of research and development services. As such, the Company determined that separate units of accounting exist for each of the six licenses together with the related research and development services, as well as the joint steering committee with respect to this arrangement. The estimated selling prices for these units of accounting were determined based on similar license arrangements and the nature of the research and development services to be performed for Baxter and market rates for similar services. The arrangement consideration of $61 million, which includes the $33 million upfront payment and aggregate option payments of $28 million, was allocated to the units of accounting based on the relative selling price method. Of the $61 million, $10.3 million has been allocated to the first initial product license together with the related research and development services, $10.3 million to each of the four additional product licenses with the related research and development services, $9.4 million has been allocated to the second initial product license together with the related research and development services due to that product’s stage of development at the time the license was delivered, and $114,000 has been allocated to the joint steering committee unit of accounting. The Company will commence revenue recognition for each of the six units of accounting related to the products upon delivery of the related development and product license and will record this revenue on a straight-line basis over the applicable performance period during which the research and development services will be delivered. The Company will recognize the revenue related to the joint steering committee deliverable over the applicable performance period during which the research and development services will be delivered. The Company has determined that the performance period for each of the combined six units of accounting consisting of the products and related research and development services, begins upon delivery of the related development and product license and ends upon FDA approval of the related product. The Company has also determined that the applicable performance period for the joint steering committee deliverable begins upon delivery of the first development and product license and ends upon the latest date of FDA approval. The Company currently estimates that the performance period for the two initial products, considering their respective stage of development, is approximately five and seven years, respectively, and the period of performance for the joint steering committee is approximately nine years. In 2012, the Company commenced recognition of the revenue allocated to the two initial products but not for the four additional products as those licenses have not been delivered. The Company recognized revenue relating to the amortized portion of the upfront payment of approximately $0.7 million and $2.1 million for the three and nine months ended September 30, 2013, respectively, and $0.8 million and $2.2 million for the three and nine months ended September 30, 2012, respectively. The portion of the upfront payment that is unearned at September 30, 2013 is included in deferred revenue.

 

The Company recognizes research and development revenue from FTE services and research and development revenue from external development costs upon completion of the performance requirements (i.e., as the services are performed and the reimbursable costs are incurred). Revenue from external development costs is recorded on a gross basis as the Company contracts directly with, manages the work of and is responsible for payments to third-party vendors for such development and related services. In the three months ended June 30, 2013, the Company began billing Baxter external development costs for reimbursable activities related to one of the biosimilars in development under the Baxter Agreement. In the three months ended September 30, 2013, the Company commenced billing Baxter FTE fees for reimbursable activities related to one of the biosimilars in development under the Baxter Agreement. In the three and nine months ended, September 30, 2013, the Company recorded research and development revenue of $4.7 million and $5.4 million, respectively, for reimbursement from Baxter for research and development expenses incurred in connection with the Baxter Agreement.

 

Any associated royalty or profit sharing payments will be considered contingent fees that will be recorded as earned in future periods. Baxter’s option to extend the naming period is considered to be substantive. As such, potential fees associated with the naming period extensions will be recognized in future periods if and when Baxter exercises its right to extend the naming period for any additional products.

 

The Company has concluded that certain of the technical and development milestones and all of the regulatory milestones pursuant to the Baxter Agreement are substantive. The Company evaluated factors such as the scientific and regulatory risks that must be overcome to achieve these milestones, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Revenues from non-refundable technical, development and regulatory milestones will be recognized upon successful accomplishment of the milestones as research and development revenue. The Company has not earned and therefore has not recognized any milestone payments under this arrangement.

 

Massachusetts Institute of Technology

 

The Company has an agreement dated November 1, 2002 with the Massachusetts Institute of Technology, or M.I.T., granting the Company various exclusive and non-exclusive worldwide licenses, with the right to grant sublicenses, under certain patents and patent applications relating to:

 

·                   methods and technologies for characterizing polysaccharides;

 

·                   certain heparins, heparinases and other enzymes; and

 

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·                   synthesis methods.

 

In exchange for the licenses granted in the agreement, the Company has paid M.I.T. license maintenance fees, royalties on certain products and services covered by the licenses and sold by the Company or its affiliates or sublicensees, a percentage of certain other income received by the Company from corporate partners and sublicensees, and certain patent prosecution and maintenance costs.

 

The following table summarizes the license maintenance fees and royalties paid to M.I.T. and recorded in the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

 

 

For the Three
Months
Ended
September 30, 2013

 

For the Three
Months
Ended
September 30, 2012

 

For the Nine
Months
Ended
September 30, 2013

 

For the Nine
Months
Ended
September 30, 2012

 

License maintenance fees

 

$

21

 

$

39

 

$

62

 

$

143

 

Royalties

 

75

 

201

 

174

 

954

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

96

 

$

240

 

$

236

 

$

1,097

 

 

Beginning in 2013, the annual license maintenance obligations, which extend through the life of the patents, are approximately $0.1 million per year. The annual payments may be applied towards royalties payable to M.I.T. for that year for product sales, sublicensing of the patent rights or joint development revenue. The annual license payment for 2013 was applied against cumulative royalties due for the nine months ended September 30, 2013.

 

The Company is obligated to indemnify M.I.T. and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements, unless the losses result from the indemnified parties’ gross negligence or willful misconduct.

 

The agreement expires upon the expiration or abandonment of all patents that issue and are licensed to the Company by M.I.T. under such agreement. The issued patents include over 30 United States patents and foreign counterparts of some of those. The Company expects that additional patents will issue from presently pending U.S. and foreign patent applications. Any such patent will have a term of 20 years from the filing date of the underlying application. M.I.T. may terminate the agreement immediately if the Company ceases to carry on its business, if any nonpayment by the Company is not cured within 60 days of written notice or the Company commits a material breach that is not cured within 90 days of written notice. The Company may terminate the agreement for any reason upon six months’ notice to M.I.T., and it can separately terminate the license under a certain subset of patent rights upon three months’ notice.

 

The Company granted Sandoz a sublicense under the agreement to certain of the patents and patent applications licensed to the Company. If M.I.T. converts the Company’s exclusive licenses under this agreement to non-exclusive licenses due to the Company’s failure to meet diligence obligations, or if M.I.T. terminates this agreement, M.I.T. will honor the exclusive nature of the sublicense the Company granted to Sandoz so long as Sandoz continues to fulfill its obligations to the Company under the collaboration and license agreement the Company entered into with Sandoz and, if the Company’s agreement with M.I.T. is terminated, Sandoz agrees to assume the Company’s rights and obligations to M.I.T.

 

The Company previously had an exclusive patent license agreement dated October 31, 2002 with M.I.T granting the Company various licenses under certain patents solely related to the commercial sale or leasing of sequencing machines, including the performance of sequencing services. The Company terminated that agreement in January 2013. Nothing in the notice of termination impacts the agreement between the Company and M.I.T dated November 1, 2002.

 

6. Share-Based Payments

 

Incentive Award Plans

 

On March 5, 2013, the Company’s Board of Directors adopted the 2013 Incentive Award Plan, or the 2013 Plan. The 2013 Plan became effective on June 11, 2013, the date the Company received shareholder approval for the Plan. Also on June 11, 2013, the 2004 Stock Incentive Plan terminated except with respect to awards previously granted under that plan. No further awards will be granted under the 2004 Stock Incentive Plan.

 

The 2013 Plan allows for the granting of stock options (both incentive stock options and nonstatutory stock options), restricted stock, stock appreciation rights, performance awards, dividend equivalents, stock payments and restricted stock units to employees, consultants and members of the Company’s board of directors.

 

Under the 2013 Plan, the aggregate number of shares reserved for issuance is equal to the sum of: (a) 3,300,000 shares reserved for issuance under the 2013 Plan, plus (b) one share for each share subject to a stock option that was granted through December 31, 2012 under the 2004 Stock Incentive Plan and the Amended and Restated 2002 Stock Incentive Plan (together, the “Prior Plans”) that subsequently expires, is forfeited or is settled in cash (up to a maximum of 5,386,094 shares), plus (c) 1.35 shares for each share subject to an award other than a stock option that was

 

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granted through December 31, 2012 under the Prior Plans and that subsequently expires, is forfeited, is settled in cash or repurchased (up to a maximum of 1,137,394 shares).

 

Each share issued in connection with an award granted under the 2013 Plan, other than stock options and stock appreciation rights, will be counted against the 2013 Plan’s share reserve as 1.35 shares for every one share issued in connection with such award, while each share issued in connection with an award of stock options or stock appreciation rights will count against the share reserve as one share for every one share granted. At September 30, 2013, 3,182,240 shares are available for issuance under the 2013 Stock Incentive Plan.

 

Incentive stock options will be granted only to employees of the Company. Incentive stock options granted to employees who own more than 10% of the total combined voting power of all classes of stock will be granted at no less than 110% of the fair market value of the Company’s common stock on the date of grant. Incentive stock options generally vest ratably over four years. Non-statutory stock options may be granted to employees, consultants and members of the Company’s board of directors. Non-statutory stock options granted have varying vesting schedules. Incentive and non-statutory stock options generally expire ten years after the date of grant. Restricted stock awards are granted only to employees of the Company. Restricted stock awards generally vest ratably over four years.

 

Total compensation cost for all share-based payment arrangements, including employee, director and consultant stock options, restricted stock and the Company’s employee stock purchase plan for the three months ended September 30, 2013 and 2012 was $3.2 million and $3.5 million, respectively. Total compensation cost for all share-based payment arrangements, including employee, director and consultant stock options, restricted stock and the Company’s employee stock purchase plan for the nine months ended September 30, 2013 and 2012 was $9.4 million and $10.3 million, respectively.

 

Share-based compensation expense related to outstanding employee stock option grants and the Company’s employee stock purchase plan was $2.2 million and $2.0 million for the three months ended September 30, 2013 and 2012, respectively. Share-based compensation expense related to outstanding employee stock option grants and the Company’s employee stock purchase plan was $6.2 million and $5.7 million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013, the Company granted 1,320,821 stock options, of which 1,025,771 were granted in connection with annual merit awards, 153,050 were granted to new hires and 142,000 were granted to members of the Company’s Board of Directors. The average grant date fair value of options granted was calculated using the Black-Scholes-Merton option-pricing model and the weighted average assumptions noted in the table below. The weighted average grant date fair value of option awards granted during the three months ended September 30, 2013 and 2012 was $9.52 and $8.35 per option, respectively. The weighted average grant date fair value of option awards granted during the nine months ended September 30, 2013 and 2012 was $7.33 and $9.20 per option, respectively.

 

The following tables summarize the weighted average assumptions the Company used in its fair value calculations at the date of grant:

 

 

 

Weighted Average Assumptions

 

 

 

Stock Options

 

Employee Stock Purchase Plan

 

 

 

For the Three
Months
Ended
September 30, 2013

 

For the Three
Months
Ended
September 30, 2012

 

For the Three
Months
Ended
September 30, 2013

 

For the Three
Months
Ended
September 30, 2012

 

Expected volatility

 

65

%

67

%

63

%

66

%

Expected dividends

 

 

 

 

 

Expected life (years)

 

6.2

 

6.5

 

0.5

 

0.5

 

Risk-free interest rate

 

2.2

%

1.1

%

0.1

%

0.1

%

 

 

 

Weighted Average Assumptions

 

 

 

Stock Options

 

Employee Stock Purchase Plan

 

 

 

For the Nine
Months
Ended
September 30, 2013

 

For the Nine
Months
Ended
September 30, 2012

 

For the Nine
Months
Ended
September 30, 2013

 

For the Nine
Months
Ended
September 30, 2012

 

Expected volatility

 

62

%

66

%

64

%

66

%

Expected dividends

 

 

 

 

 

Expected life (years)

 

6.0

 

6.3

 

0.5

 

0.5

 

Risk-free interest rate

 

1.4

%

1.3

%

0.1

%

0.1

%

 

At September 30, 2013, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to $13.4 million, net of estimated forfeitures, which will be recognized over the weighted average remaining requisite service period of 2.5 years.

 

During the nine months ended September 30, 2013, holders of options issued under the Company’s stock plans exercised their right to acquire an aggregate of 390,931 shares of common stock. Additionally, during the nine months ended September 30, 2013, the Company issued 80,219 shares of common stock to employees under the Company’s employee stock purchase plan.

 

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Restricted Stock Awards

 

The Company has also made awards of restricted common stock to employees, officers and directors. During the nine months ended September 30, 2013, the Company awarded 140,300 shares of time-based restricted common stock to its officers in connection with its annual merit grant, 5,000 shares of time-based restricted common stock to a newly hired employee and 1,680 shares of performance-based restricted common stock to a newly hired employee. The time-based restricted common stock fully vests over the four years following the grant date. The performance condition that triggers vesting of the performance-based awards is the approval in the United States from the FDA for M356, the Company’s second major generic program, provided that approval occurs on or before March 28, 2015. The Company has granted 949,620 shares of restricted common stock tied to this M356 performance condition to its employees and officers. The awards of restricted common stock are generally forfeited if the employment relationship terminates with the Company prior to vesting.

 

The value of restricted stock awards is recognized as compensation cost in the Company’s consolidated statements of comprehensive loss over each award’s explicit or implicit service period. The Company estimates an award’s implicit service period based on its best estimate of the period over which an award’s vesting conditions will be achieved. The Company reevaluates these estimates on a quarterly basis and will recognize any remaining unrecognized compensation as of the date of an estimate revision over the revised remaining implicit service period. In September 2013, the Company revised the implicit service period for certain performance-based restricted stock awards due to a change in the expected vesting date. The impact of this change in estimate on the Company’s net loss and net loss per share for the three months ended September 30, 2013 was immaterial.

 

The Company recorded share-based compensation expense related to outstanding restricted stock awards, including the performance-based shares, because the Company determined that it was probable the performance condition would be achieved, of $1.0 million and $1.6 million for the three months ended September 30, 2013 and 2012, respectively, and $3.0 million and $4.5 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to $6.4 million, which is expected to be recognized over the weighted average remaining requisite service period of 1.4 years.

 

A summary of the status of nonvested shares of restricted stock as of September 30, 2013 and the changes during the nine months then ended are presented below (in thousands, except fair values):

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date
Fair Value

 

Nonvested at January 1, 2013

 

1,137

 

$

14.61

 

Granted

 

147

 

12.58

 

Vested

 

(109

)

14.52

 

Forfeited

 

(38

)

14.61

 

 

 

 

 

 

 

Nonvested at September 30, 2013

 

1,137

 

$

14.36

 

 

Nonvested shares of restricted stock that have time-based or performance-based vesting schedules as of September 30, 2013 are summarized below:

 

Vesting Schedule

 

Nonvested
Shares

 

Time-based

 

297

 

Performance-based

 

840

 

 

 

 

 

Nonvested at September 30, 2013

 

1,137

 

 

7. Tax Incentive Agreement

 

In March 2012, the Company entered into a Tax Incentive Agreement with the Massachusetts Life Sciences Center, or MLSC, under the MLSC’s Life Sciences Tax Incentive Program, or the Program, to expand life sciences-related employment opportunities, promote health-related innovations and stimulate research and development, manufacturing and commercialization in the life sciences in the Commonwealth of Massachusetts. The Program was established in 2008 in order to incentivize life sciences companies to create new sustained jobs in Massachusetts. Under the Tax Incentive Agreement, companies receive an award from the MLSC upon attaining job creation commitment. Jobs must be maintained for at least five years, during which time a portion of the grant proceeds can be recovered by the Massachusetts Department of Revenue if the Company does not maintain its job creation commitments. As of December 31, 2012, the Company attained its job creation commitment and earned a $1.1 million job creation tax award and, in December 2012, recognized one-fifth of the award, or $0.2 million, as other income. The Company will recognize an equal portion of the award as other income over the five year period the Company maintains its job

 

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creation commitments. The Company recognized other income of $0.1 million and $0.2 million for the three and nine months ended September 30, 2013, respectively. The unearned portion of the award is included in other liabilities in the consolidated balance sheet.

 

8. Commitments and Contingencies

 

Operating Leases

 

The Company leases office space and equipment under various operating lease agreements.

 

In September 2004, the Company entered into an agreement with Vertex Pharmaceuticals to lease 53,323 square feet of office and laboratory space located on the fourth and fifth floors at 675 West Kendall Street, Cambridge, Massachusetts, for an initial term of 80 months, or the West Kendall Sublease. In November 2005, the Company amended the West Kendall Sublease to lease an additional 25,131 square feet through April 2011. In April 2010, the Company exercised its right to extend the West Kendall Sublease for one additional term of 48 months, ending April 2015, or on such other earlier date as provided in accordance with the West Kendall Sublease. During the extension term, which commenced on May 1, 2011, annual rental payments increased by approximately $1.2 million over the previous annual rental rate.

 

In December 2011, the Company entered into an agreement to lease 68,575 square feet of office and laboratory space located on the first and second floors at 320 Bent Street, Cambridge, Massachusetts, for a term of approximately 18 months, or the First Bent Street Sublease. The Company gained access to the subleased space in December 2011 and, consequently, the Company commenced expensing the applicable rent on a straight-line basis beginning in December 2011. Annual rental payments due under the First Bent Street Sublease were approximately $2.3 million.

 

On February 5, 2013, the Company and BMR-Rogers Street LLC, or BMR, entered into a lease agreement, or the Second Bent Street Lease, pursuant to which the Company will lease 104,678 square feet of office and laboratory space located in the basement and first and second floors at 320 Bent Street, Cambridge, Massachusetts, beginning on September 1, 2013 and ending on August 31, 2016. Annual rental payments due under the Second Bent Street Lease will be approximately $6.1 million during the first lease year, $6.2 million during the second lease year and $6.3 million during the third lease year.

 

BMR has agreed to pay the Company a tenant improvement allowance of $0.7 million for certain improvements that the Company will construct to the leased office and laboratory space. During the three months ended September 30, 2013, the Company spent the tenant improvement allowance for certain leasehold improvements to the leased space and recorded a receivable within other current assets and a corresponding liability in its consolidated balance sheet. The Company will amortize the tenant improvement liability on a straight-line basis through a reduction to rental expense over the term of the lease. The Company expects to receive reimbursement from BMR in the fourth quarter of 2013.

 

The Company has two consecutive options to extend the term of the Second Bent Street Lease for one year each at the then-current fair market value. In addition, the Company has two additional consecutive options to extend the term of the Second Bent Street Lease for five years each for the office and laboratory space located in the basement portion of the leased space at the then-current fair market value.

 

Total operating lease commitments as of September 30, 2013 are as follows (in thousands):

 

 

 

Operating
Leases

 

October 1, 2013 — December 31, 2013

 

$

2,731

 

2014

 

10,937

 

2015

 

7,870

 

2016

 

4,273

 

2017

 

62

 

 

 

 

 

Total future minimum lease payments

 

$

25,873

 

 

Legal Contingencies

 

On August 28, 2008, Teva Pharmaceuticals Industries Ltd. and related entities, or Teva, and Yeda Research and Development Co., Ltd., or Yeda, filed suit against the Company and Sandoz in the United States Federal District Court in the Southern District of New York in response to the filing by Sandoz of the ANDA with a Paragraph IV certification for M356. The suit alleged infringement related to four of the seven Orange Book patents listed for Copaxone and sought declaratory and injunctive relief that would prohibit the launch of the Company’s product until the last to expire of these patents. The Company and Sandoz asserted various defenses and filed counterclaims for declaratory judgments to have all seven of the Orange Book patents as well as two additional patents in the same patent family adjudicated in the present lawsuit. Another company, Mylan Inc., or Mylan, also has an ANDA for generic Copaxone under FDA review. In October 2009, Teva sued Mylan for patent infringement related to the Orange Book patents listed for Copaxone, and in October 2010, the court consolidated the Mylan case with the case against the Company and Sandoz. A trial on the issue of inequitable conduct occurred in July 2011 and the trial on the remaining issues occurred in

 

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September 2011 in the consolidated case. In June 2012, the Court issued its opinion and found all of the claims in the patents to be valid, enforceable and infringed. In July 2012, the Court issued a final order and permanent injunction prohibiting Sandoz and Mylan from infringing all of the patents in the suit. The Orange Book patents and one non-Orange book patent expire in May 2014 and one non-Orange Book patent expires in September 2015. In addition, the permanent injunction further restricts the FDA, pursuant to 35 U.S.C. section 271(e)(4)(A), from making the effective date of any final approval of the Sandoz or Mylan ANDA prior to the expiration of the Orange Book patents. In July 2012, the Company appealed the decision to the Court of Appeals for the Federal Circuit, or CAFC, and on July 26, 2013, the CAFC issued a written opinion invalidating several of the patents, including the one patent set to expire in 2015. Several patents expiring in May 2014 remain in force. The CAFC remanded the case to the District Court to modify the injunction in light of the CAFC decision. On September 16, 2013, Teva filed a petition for rehearing of the CAFC decision, and on October 18, 2013 the CAFC denied the petition. Teva has indicated its intent to seek review by the Supreme Court.

 

On December 10, 2009, in a separate action in the same court, Teva sued Sandoz, Novartis AG and the Company for patent infringement related to certain other non-Orange Book patents seeking declaratory and injunctive relief that would prohibit the launch of the Company’s product until the last to expire of these patents as well as damages in the event that Sandoz has launched the product. In January 2010, the Company and Sandoz filed a motion to dismiss this second suit on several grounds. On July 16, 2013, the motion to dismiss the suit was granted. On August 19, 2013, Teva appealed that decision to the CAFC.

 

There are no damages being sought in the first suit, and at this time the Company believes a loss is not probable in the second suit. Litigation involves many risks and uncertainties, and there is no assurance that Novartis AG, Sandoz or the Company will ultimately prevail in either lawsuit.

 

On September 21, 2011, the Company and Sandoz sued Amphastar, Actavis and International Medical Systems, Ltd. (a wholly owned subsidiary of Amphastar) in the United States District Court for the District of Massachusetts for infringement of two of the Company’s patents. Also in September, 2011, the Company filed a request for a temporary restraining order and preliminary injunction to prevent Amphastar, Actavis and International Medical Systems, Ltd. from selling their enoxaparin product in the United States. In October 2011, the court granted the Company’s motion for a preliminary injunction and entered an order enjoining Amphastar, Actavis and International Medical Systems, Ltd. from advertising, offering for sale or selling their enoxaparin product in the United States until the conclusion of a trial on the merits and required the Company and Sandoz to post a security bond of $100 million in connection with the litigation. Amphastar, Actavis and International Medical Systems, Ltd. appealed the decision and in January 2012, the CAFC stayed the preliminary injunction. In August 2012, the CAFC issued a written opinion vacating the preliminary injunction and remanding the case to the District Court. In September 2012, the Company filed a petition with the CAFC for a rehearing by the full court en banc , which was denied. In February 2013, the Company filed a petition for a writ of certiorari for review of the CAFC decision by the United States Supreme Court and in June 2013 the Supreme Court denied the request.

 

In January 2013, Amphastar and Actavis filed a motion for summary judgment in the District Court following the decision from the CAFC. On July 19, 2013, the District Court granted the motion for summary judgment. The Company has filed a protective notice of appeal of the decision to the CAFC, although the District Court has not issued a final judgment as of this filing. The collateral for the security bond posted in the litigation remains outstanding. In the event that the Company is not successful in any appeal, and Amphastar and Actavis are able to prove they suffered damages as a result of the preliminary injunction, the Company could be liable for damages for up to $35 million of the security bond. In June 2012, Amphastar filed a motion to increase the amount of the security bond, which the Company and Sandoz have opposed.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations includes the identification of certain trends and other statements that may predict or anticipate future business or financial results. There are important factors that could cause our actual results to differ materially from those indicated. See “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, 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 regarding future events and our future results are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management including, without limitation, our expectations regarding results of operations, general and administrative expenses, research and development expenses, current and future development and manufacturing efforts, regulatory filings, nonclinical and clinical trial results, the outcome of litigation and the sufficiency of our cash for future operations. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “hope,” “target,” “project,” “goals,” “potential,” “predict,” “might,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms.

 

We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below under “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Business Overview

 

The Company

 

We are a biotechnology company specializing in the structural characterization, process engineering and biologic systems analysis of complex molecules such as polysaccharides, polypeptides, and biologics (including proteins and antibodies). Our initial technology was built on the ability to characterize complex polysaccharides. Over the last decade, we have expanded our expertise into technologies that enable us to develop a diversified product portfolio of complex generics, biosimilars and novel products. Our business strategy has been to develop both generic and novel products, and we are working with collaborators to develop and commercialize our complex generics and biosimilars. This strategy was validated by the marketing approval and commercial launch of Enoxaparin Sodium Injection, a generic version of Lovenox®, in July 2010. Since its launch through September 30, 2013, we have recorded Enoxaparin Sodium Injection product revenues of approximately $434 million, driven primarily by its initial status as a sole generic. We believe that our scientific capabilities, engineering approaches, intellectual property and regulatory strategies, and synergistic business model position us to develop and commercialize competitively differentiated products in our target areas of complex generics, biosimilars and novel products.

 

As of September 30, 2013, we had an accumulated deficit of $240.4 million. To date, we have devoted substantially all of our capital resource expenditures to the research and development of our product candidates. In the second half of 2010, we began to derive revenue from our profit share on Sandoz’s commercial sale of Enoxaparin Sodium Injection. Due to the launch by Actavis and Amphastar of their enoxaparin product in January 2012, our Enoxaparin Sodium Injection product revenue has significantly decreased and we have been incurring operating losses. We expect that our return to profitability, if at all, will most likely come from the commercialization of our generic Copaxone product, which is subject to FDA approval. Unless and until generic Copaxone is approved, we expect to incur annual operating losses over the next several years as we expand our drug commercialization, development and discovery efforts. Additionally, we plan to continue to evaluate possible acquisitions or licensing of rights to additional technologies, products or assets that fit within our growth strategy. Accordingly, we will need to generate significant revenue to return to profitability.

 

Our Programs

 

Our complex generics programs target marketed products that were originally approved by the United States Food and Drug Administration, or FDA, as New Drug Applications, or NDAs. Therefore, we have been able to access the existing 505(j) generic regulatory pathway and have submitted Abbreviated New Drug Applications, or ANDAs, for these products. Our first commercial product, Enoxaparin Sodium Injection, which has been developed and commercialized in collaboration with Sandoz Inc. and Sandoz AG, collectively Sandoz, affiliates of Novartis AG, received FDA marketing approval in July 2010 as a generic version of Lovenox® (enoxaparin sodium injection). Lovenox is a complex mixture of polysaccharide chains derived from naturally sourced heparin which is used to prevent and treat deep vein thrombosis, or DVT, and to support the treatment of acute coronary syndromes, or ACS. The Enoxaparin Sodium Injection ANDA submitted by Sandoz was the first ANDA for a generic Lovenox to be approved by FDA, validating our novel approaches to the structural characterization, process engineering and biologic systems analysis of complex molecules. From July 2010 through early October 2011, the Enoxaparin Sodium Injection marketed by Sandoz was

 

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the sole generic version of Lovenox, and consequently, under the terms of our collaborative agreement with Sandoz, we earned 45% profit share on Sandoz’s sales of Enoxaparin Sodium Injection. The product now faces other generic competitors and we receive a royalty on net sales, which have been significantly eroded by competitive pressures.

 

Our second complex generic product candidate, M356, is designed to be a generic version of Copaxone® (glatiramer acetate injection), a drug that is indicated for the reduction of the frequency of relapses in patients with relapsing-remitting multiple sclerosis, or RRMS. Copaxone consists of a synthetic mixture of polypeptide chains. With M356, we extended our core polysaccharide characterization and process engineering capabilities to develop capabilities for the structural characterization, process engineering and biologic systems analysis of this complex polypeptide mixture. We are also collaborating with Sandoz to develop and commercialize M356, and the Sandoz ANDA for M356 is currently under FDA review.

 

Our biosimilars program is targeted toward developing biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. The subset of biosimilars receiving an interchangeability designation are known as interchangeable biologics. In March 2010, an abbreviated regulatory process was codified in Section 351(k) of the Patient Protection and Affordable Care Act of 2010. This new pathway opens the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics, including antibodies, cytokines, fusion proteins, hormones and other recombinant proteins. Forecasters predict a rapidly growing multi-billion dollar global market for these products. Most of these biologics are complex mixtures, and for several years we have been investing in developing novel approaches to the structural characterization, process engineering and analysis of the biologic activities of these products. In February 2012, FDA released three documents containing their preliminary guidelines for applications under the Section 351(k) pathway. These guidelines state that FDA will use a step-wise review that considers the totality-of-the-evidence in determining extent of the clinical development program. This approach puts a substantial emphasis on structural and functional characterization data in evaluating biosimilar products for approval. We believe the framework that the FDA has outlined in the draft guidance documents aligns with our strategy for biosimilars. Our goal is to engineer biologic products that would justify a selective and targeted approach to human clinical testing and to support demonstration of interchangeability. In December 2011, we and Baxter International, Inc., Baxter Healthcare Corporation and Baxter Healthcare SA, collectively, Baxter, entered into a global collaboration and license agreement, or the Baxter Agreement, to develop and commercialize up to six biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities.

 

Our novel products program leverages the capabilities and expertise of our complex generics and biosimilars programs to address unmet clinical needs. Our most advanced efforts have been in the area of polysaccharide mixtures. M402, in Phase 1 clinical development as a potential anti-cancer agent, is a novel heparan sulfate mimetic that binds to multiple growth factors, adhesion molecules and chemokines to inhibit tumor angiogenesis, progression, and metastasis. In addition to this development candidate, we are also seeking to discover and develop additional novel products. Our goal is to leverage the multi-targeting nature of complex mixture molecules to develop novel products which could positively modulate multiple pathways in a disease. We have built significant capabilities in biological characterization and engineering of proteins through our biosimilars platform that provide us with the potential to create unique and novel formulations of protein (including antibody) drug compositions for specific disease indications. To add to these capabilities, in December 2011 we acquired selected assets of Virdante Pharmaceuticals, Inc. relating to sialylation technology. Sialic acid is a type of sugar modification on selected proteins that is understood to regulate anti-inflammatory and immunomodulatory function. These assets add to our core ability to modify and engineer protein backbones to precisely regulate biological networks and develop novel biologic product candidates. We are applying our proprietary sialylation technology program to develop a sialylated plasma-derived intravenous immunoglobulin, or IVIG, product, or a recombinant sialylated Fc product. We continue to generate data to investigate and validate the biology of sialylated IVIG/Fc in order to define the specific product, or products, to potentially advance to the clinic, as well as, to inform our selection of the indication to potentially take forward into development. We continue to investigate both approaches, and expect to have data later this year that will help guide our development efforts.

 

Our Collaborations

 

In 2003, we entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration, with Sandoz N.V. and Sandoz Inc. to jointly develop, manufacture and commercialize Enoxaparin Sodium Injection in the United States. Sandoz N.V. later assigned its rights in the 2003 Sandoz Collaboration to Sandoz AG, an affiliate of Novartis Pharma AG. We refer to Sandoz AG and Sandoz Inc. together as Sandoz.

 

In 2006 and 2007, we entered into a series of agreements, including a Stock Purchase Agreement and an Investor Rights Agreement, with Novartis Pharma AG, and a collaboration and license agreement, as amended, or the Second Sandoz Collaboration Agreement, with Sandoz AG. Together, this series of agreements is referred to as the 2006 Sandoz Collaboration. Under the Second Sandoz Collaboration Agreement, we and Sandoz AG expanded the geographic markets for Enoxaparin Sodium Injection covered by the 2003 Sandoz Collaboration to include the European Union. Further, under the Second Sandoz Collaboration Agreement, we and Sandoz AG agreed to exclusively collaborate on the development and commercialization of M356, among other products. In connection with the 2006 Sandoz Collaboration, we sold 4,708,679 shares of common stock to Novartis Pharma AG at a per share price of $15.93 (the closing price of our common stock on the NASDAQ Global Market was $13.05 on the date of purchase) for an aggregate purchase price of $75.0 million, resulting in an equity premium of $13.6 million. As of September 30, 2013, Novartis AG owned approximately 9% of our outstanding common stock.

 

Prior to the launch of Enoxaparin Sodium Injection in 2010, the collaboration revenues derived from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration primarily consisted of amounts earned by us for reimbursement by Sandoz of research and development services and development costs. In July 2010, Sandoz began the commercial sale of Enoxaparin Sodium Injection. The profit-share or royalties Sandoz is

 

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obligated to pay us under the 2003 Sandoz Collaboration differ depending on whether (i) there are no third-party competitors marketing an interchangeable generic version of Lovenox, or Lovenox-Equivalent Product (as defined in the 2003 Sandoz Collaboration), (ii) a Lovenox-Equivalent Product is being marketed by Sanofi-Aventis, which distributes the brand name Lovenox, or licensed by Sanofi-Aventis to another company to be sold as a generic drug, both known as authorized generics, or (iii) there are one or more third-party competitors which are not Sanofi-Aventis marketing a Lovenox-Equivalent Product. From July 2010 through September 2011, no third-party competitor was marketing a Lovenox-Equivalent Product; therefore, during that period, Sandoz paid us 45% of the contractual profits from the sale of Enoxaparin Sodium Injection. In September 2011, FDA approved the ANDA for the enoxaparin product of Amphastar Pharmaceuticals, Inc. or Amphastar. In October 2011, Sandoz confirmed that an authorized generic Lovenox-Equivalent Product was being marketed, which meant that Sandoz was obligated to pay us a royalty on its net sales of Enoxaparin Sodium Injection until the contractual profits from those net sales in a product year (July 1—June 30) reached a certain threshold. Upon the achievement of the contractual profit threshold in December 2011, Sandoz was obligated to pay us a profit share for the remainder of the product year. In January 2012, following the Court of Appeals for the Federal Circuit granting a stay of the preliminary injunction previously issued against them by the United States District Court, Watson Pharmaceuticals, Inc. (now Actavis, Inc., or Actavis) and Amphastar launched their third-party competitor enoxaparin product. Consequently, in each product year, for net sales of Enoxaparin Sodium Injection up to a pre-defined sales threshold, Sandoz is obligated to pay us a royalty on net sales payable at a 10% rate, and for net sales above the sales threshold, payable at a 12% rate.

 

Certain development and legal expenses may reduce the amount of profit-share, royalty and milestone payments paid to us by Sandoz. Any product liability costs and certain other expenses arising from patent litigation may also reduce the amount of profit-share, royalty and milestone payments paid to us by Sandoz, but only up to 50% of these amounts due to us from Sandoz each quarter. Our contractual share of these development and legal expenses is subject to an annual adjustment at the end of each product year, and ends with the product year ending June 2015. The third annual adjustment of $3.8 million was recorded as a reduction in product revenue in the three and six months ended June 30, 2013.

 

In December 2011, we and Baxter entered into the Baxter Agreement under which we agreed to collaborate, on a world-wide basis, on the development and commercialization of up to six biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities. To accelerate efforts in the biosimilars space and address this growing global market, we significantly increased the headcount and related operating expenses dedicated to our biosimilars program in 2012 and this trend has continued in 2013. We expect that the increase in operating expenses will be partially offset in future years by revenues from option fees and milestone payments under the Baxter Agreement, subject to achievement of technical and regulatory criteria. We have announced the following three products in development under the Baxter Agreement:

 

·                   M923, a biosimilar for a branded biologic indicated for autoimmune and inflammatory disease, is our most advanced biosimilar. We are working towards an Investigational New Drug, or IND, submission, which is targeted for the second half of 2014.

 

·                M834, also indicated for autoimmune and inflammatory disease. We are working toward achievement of a pre-defined “minimum development criteria” license payment in 2014.

 

·                   M511, a monoclonal antibody for oncology. We are working toward achievement of a pre-defined “minimum development criteria” license payment in 2014.

 

Financial Operations Overview

 

Revenue

 

Our revenue has been primarily derived from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration. In 2012, we began recognizing revenue under the Baxter Agreement. In the near term, our current and future revenues are dependent upon the continued successful commercialization of Enoxaparin Sodium Injection, license fees and milestone payments earned under the Baxter Agreement and potential profit share payments and milestones from our 2006 Sandoz Collaboration. In the longer term, our revenue growth will depend upon the successful clinical development, regulatory approval and launch of new commercial products and the pursuit of external business development opportunities. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the amount and timing of revenue we earn under our collaborative or strategic relationships.

 

Research and Development

 

Research and development expenses consist of costs incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, license fees, consulting fees, nonclinical and clinical trial costs, contract research and manufacturing costs, and the costs of laboratory equipment and facilities. We expense research and development costs as incurred. Due to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.

 

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Product Programs— Complex Generics and Biosimilars

 

Enoxaparin Sodium Injection—Generic Lovenox®

 

Enoxaparin Sodium Injection, our first product to receive marketing approval under an ANDA, is a generic version of Lovenox®. Lovenox is a complex drug consisting of a mixture of polysaccharide chains and is a widely-prescribed low molecular weight heparin, or LMWH, used for the prevention and treatment of DVT and to support the treatment of ACS. Lovenox is distributed worldwide by Sanofi-Aventis U.S. LLC, or Sanofi-Aventis, and is also known outside the United States as Clexane® and Klexane®. Under our 2003 Sandoz Collaboration, we work with Sandoz exclusively to develop, manufacture and commercialize Enoxaparin Sodium Injection in the United States. Sandoz is responsible for funding substantially all of the United States-related Enoxaparin Sodium Injection development, regulatory, legal and commercialization costs, other than legal expenses incurred by each party in connection with the patent suits filed against Teva Pharmaceutical Industries Ltd., or Teva, in December 2010 and Amphastar Pharmaceuticals, Inc., or Amphastar, Actavis, Inc., or Actavis, and International Medical Systems, Ltd. (a wholly owned subsidiary of Amphastar) in September 2011. In these cases, Momenta and Sandoz each bear their own legal expenses.

 

Sandoz submitted ANDAs in its name to the FDA for Enoxaparin Sodium Injection in syringe and vial forms, seeking approval to market Enoxaparin Sodium Injection in the United States. The ANDA for the syringe form of Enoxaparin Sodium Injection was approved in July 2010 and the ANDA for the vial form of Enoxaparin Sodium Injection was approved in December 2011.

 

In September 2011, we and Sandoz sued Amphastar, Actavis and International Medical Systems, Ltd. in the United States District Court for the District of Massachusetts for infringement of two of our patents. Also in September 2011, we filed a request for a temporary restraining order and preliminary injunction to prevent Amphastar, Actavis and International Medical Systems, Ltd. from selling their enoxaparin sodium product in the United States. In October 2011, the District Court granted our motion for a preliminary injunction and entered an order enjoining Amphastar, Actavis and International Medical Systems, Ltd. from advertising, offering for sale or selling their enoxaparin product in the United States until the conclusion of a trial on the merits and requiring us and Sandoz to post a security bond of $100 million in connection with the litigation. Amphastar, Actavis and International Medical Systems, Ltd. appealed the decision to the Court of Appeals for the Federal Circuit, or CAFC, and in January 2012, the CAFC stayed the preliminary injunction. In June 2012, Amphastar filed a motion to increase the amount of the security bond, which we and Sandoz have opposed. In August 2012, the CAFC issued a written opinion vacating the preliminary injunction and remanding the case to the District Court, holding that Amphastar’s use of our patented method for processing Enoxaparin Sodium Injection was protected by the “safe harbor” from patent infringement under federal patent law, 35 U.S.C. Section 271(e)(1). In September 2012, we filed a petition with the CAFC for rehearing by the full court en banc , which was denied. In February 2013, we filed a petition for a writ of certiorari for review of the CAFC decision by the United States Supreme Court and in June 2013 the Supreme Court denied the request.

 

In January 2013, Amphastar and Actavis filed a motion for summary judgment in the District Court following the decision from the CAFC and on July 19, 2013, the District Court granted the motion for summary judgment. We have filed a protective notice of appeal of the decision to the CAFC, although the District Court has not issued a final judgment as of this filing.

 

In December 2010, we sued Teva in the United States District Court for the District of Massachusetts for infringement of two of our patents. In January 2013, Teva filed a motion for summary judgment in the District Court following the decision from the CAFC in the aforementioned case and on July 19, 2013, the District Court granted the motion for summary judgment. We have filed a protective notice of appeal of the decision to the CAFC, although the District Court has not issued a final judgment as of this filing.

 

M356—Generic Copaxone® (glatiramer acetate injection)

 

M356 is designed to be a generic version of Copaxone ® (glatiramer acetate injection), a complex drug consisting of a synthetic mixture of polypeptide chains. Copaxone is indicated for the reduction of the frequency of relapses in patients with RRMS, a chronic disease of the central nervous system characterized by inflammation and neurodegeneration. In North America, Copaxone is marketed by Teva Neuroscience, Inc., which is a subsidiary of Teva. Under the Second Sandoz Collaboration Agreement, we and Sandoz AG agreed to exclusively collaborate on the development and commercialization of M356, among other products. Under the Second Sandoz Collaboration Agreement, costs, including development costs and the cost of clinical studies, will be borne by the parties in varying proportions, depending on the type of expense. For M356, we are generally responsible for all of the development costs in the United States. For M356 outside of the United States, we share development costs in proportion to our profit sharing interest. All commercialization responsibilities and costs will be borne by Sandoz AG worldwide as they are incurred for all products. We are reimbursed at cost for any external costs incurred in the development of products where development activities are funded solely by Sandoz AG or partly in proportion where development costs are shared between us and Sandoz AG. We are also paid at a contractually specified rate for FTEs performing development services where development activities are funded solely by Sandoz AG or partly by proportion where development costs are shared between us and Sandoz AG. The parties will share profits in varying proportions, depending on the product. Profits on net sales of M356 will be calculated by deducting from net sales the costs of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of net sales. Sandoz AG is responsible for funding all of the legal expenses incurred under the Second Sandoz Collaboration Agreement; however a portion of certain legal expenses will be offset against the profit-sharing amounts in proportion to our profit sharing interest.

 

In December 2007, Sandoz submitted to the FDA an ANDA seeking approval to market our joint product M356 in the United States containing a Paragraph IV certification. This is a certification by the ANDA applicant that the patent relating to the drug product that is the subject of the ANDA is invalid, unenforceable or will not be infringed. In July 2008, the FDA notified Sandoz that it had accepted the ANDA for review

 

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as of December 27, 2007. In addition, the FDA’s published database indicates that the first substantially complete ANDA submitted for glatiramer acetate injection containing a Paragraph IV certification was filed on December 27, 2007, making Sandoz’s ANDA eligible for the grant of a 180-day generic exclusivity period upon approval. Under applicable laws, there are a number of ways an ANDA applicant may forfeit its 180-day exclusivity. While the FDA will not make any decision regarding the exclusivity period before the date the ANDA is approved, due to the passage of time and the outcome of the Hatch-Waxman litigation with Teva, we do not expect that the 180-day exclusivity will be granted at the time of approval of the ANDA.

 

Since 2008, Teva has filed four Citizen Petitions with FDA requesting FDA deny approval of any ANDA filed for generic Copaxone. The FDA has denied each of the Citizen Petitions. We anticipate Teva will continue to engage in activities that seek to challenge the approval of our M356 ANDA.

 

Subsequent to FDA’s acceptance of the ANDA for review, in August 2008, Teva and related entities and Yeda Research and Development Co., Ltd., filed suit against us and Sandoz in the United States Federal District Court in the Southern District of New York. The suit alleged infringement related to four of the seven Orange Book patents listed for Copaxone. We and Sandoz asserted various defenses and filed counterclaims for declaratory judgments to have all seven of the Orange Book patents as well as two additional patents in the same patent family adjudicated in the present lawsuit. Another company, Mylan Inc., or Mylan, also has an ANDA for generic Copaxone under FDA review. In October 2009, Teva sued Mylan for patent infringement related to the Orange Book patents listed for Copaxone, and in October 2010, the court consolidated the Mylan case with the case against us and Sandoz. A trial on the issue of inequitable conduct occurred in July 2011 and the trial on the remaining issues occurred in September 2011 in the consolidated case. In June 2012, the Court issued its opinion and found all of the claims in the patents to be valid, enforceable and infringed. In July 2012, the Court issued a final order and permanent injunction prohibiting Sandoz and Mylan from infringing all of the patents in the suit. The Orange Book patents and one non-Orange book patent expire in May 2014 and one non-Orange Book patent expires in September 2015. In addition, the permanent injunction further restricts the FDA, pursuant to 35 U.S.C. Section 271(e)(4)(A), from making the effective date of any final approval of the Sandoz or Mylan ANDA prior to the expiration of the Orange Book patents. In July 2012, we appealed the decision to the CAFC, and on July 26, 2013, the CAFC issued a written opinion invalidating several of the patents, including the one patent set to expire in 2015.  Several patents expiring in May 2014 remain in force. The CAFC remanded the case to the District Court to modify the injunction in light of the CAFC decision. On September 16, 2013, Teva filed a petition for rehearing of the CAFC decision, and on October 18, 2013 the CAFC denied the petition. Teva has indicated its intent to seek review by the Supreme Court.

 

In December 2009, in a separate action in the same court, Teva sued Sandoz, Novartis AG and us for patent infringement related to certain other non-Orange Book patents seeking declaratory and injunctive relief that would prohibit the launch of our product until the last to expire of these patents as well as damages in the event that Sandoz has launched the product. In January 2010, we and Sandoz filed a motion to dismiss this second suit on several grounds. On July 16, 2013, the motion to dismiss the suit was granted. On August 19, 2013, Teva appealed that decision to the CAFC.

 

Biosimilars Program

 

We are also applying our technology platform to the development of biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. Therapeutic proteins represent a sizable segment of the United States drug market, with sales expected to be approximately $69 billion in 2013, according to Datamonitor. Given the inadequacies of standard technology, many of these therapeutic proteins have not been thoroughly characterized. Most of these products are complex glycoprotein mixtures, consisting of proteins that contain branched sugars that vary from molecule to molecule. These sugars can impart specific biological properties to the therapeutic protein and can often comprise a significant portion of the mass of the molecule. In addition to the structural characterization of several marketed therapeutic proteins, we are also advancing our structure-process capabilities as we further define the relationship between aspects of the manufacturing process and the structural composition of the final protein product. We believe that our investment in our analytics and characterization technology coupled with our investment in the science of better understanding the relationship of the biologic manufacturing process to structural composition provides us with the opportunity develop a competitive advantage for our future biosimilars or interchangeable biologic product candidates.

 

In December 2011, we and Baxter entered into the Baxter Agreement under which we agreed to collaborate, on a world-wide basis, on the development and commercialization of up to six biosimilars. The Baxter Agreement became effective in February 2012. We have announced the following three products in development under the Baxter Agreement:

 

·                   M923, a biosimilar for a branded biologic indicated for autoimmune and inflammatory disease, is our most advanced biosimilar. We are working towards an IND submission, which is targeted for the second half of 2014.

 

·                   M834, also indicated for autoimmune and inflammatory disease. We are working toward achievement of a pre-defined “minimum development criteria” license payment in 2014.

 

·                   M511, a monoclonal antibody for oncology. We are working toward achievement of a pre-defined “minimum development criteria” license payment in 2014.

 

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Most protein drugs have been approved by the FDA under the Biologics License Application, or BLA, regulatory pathway. The BLA pathway was created to review and approve applications for biologic drugs that are typically produced from living systems. Until 2010, there was no abbreviated regulatory pathway for the approval of interchangeable or biosimilar versions of BLA-approved products in the United States; however, there have been guidelines for biosimilar products in the European Union for several years.

 

In March 2010, with the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCI, an abbreviated pathway for the approval of biosimilars and interchangeable biologics was created. The new abbreviated regulatory pathway established legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable,” based on its similarity to an existing brand product.

 

Under the BPCI, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original brand product was approved under a BLA. There are many biologics at this time for which this 12-year period has expired or is nearing expiration. We believe that scientific progress in the analysis and characterization of complex mixture drugs is likely to play a significant role in FDA’s approval of biosimilar (including interchangeable) biologics in the years to come.

 

In December 2011, the FDA released its proposed biosimilar user fee program which includes a fee-based meeting process for consultation between applicants and the division of FDA responsible for reviewing biosimilar and interchangeable biologics applications under the new approval pathway. It contemplates well-defined meetings where the applicant can propose and submit analytic, physicochemical and biologic characterization data along with a proposed development plan. The proposed development plan may have a reduced scope of clinical development based on the nature and extent of the characterization data. There are defined time periods for meetings and written advice. In February 2012, the FDA published draft guidance documents for the development and registration of biosimilars and interchangeable biologics. The draft guidance documents indicate that the FDA will consider the totality of the evidence developed by an applicant in determining the nature and extent of the nonclinical and clinical requirements for a biosimilar or interchangeable biologic product.

 

The new law is complex and is in the initial stages of being interpreted and implemented by the FDA. As a result, we expect that its ultimate impact, implementation and meaning will be subject to uncertainty for years to come.

 

Product Candidates—Novel Products

 

Overview

 

Our novel products program uses the established characterization and process engineering capabilities from our complex generics and biosimilars programs—with a focus on polysaccharides and therapeutic proteins.

 

M402

 

M402 is a novel heparan sulfate mimetic that binds to multiple growth factors, adhesion molecules, and chemokines to inhibit tumor angiogenesis, progression, and metastasis. The use of heparins to treat venous thrombosis in cancer patients has generated numerous reports of antitumor activity; however, the dose of these products has been limited by their anticoagulant activity. M402, which is derived from unfractionated heparin, has been engineered to have significantly reduced anticoagulant activity while preserving the relevant antitumor properties of heparin.

 

Researchers have conducted a series of nonclinical experiments using different pancreatic cancer models to test the hypothesis that M402 can modulate tumor progression and metastasis and enhance the efficacy of gemcitabine, a first-line standard of care chemotherapy treatment for pancreatic cancer. The nonclinical results showed that M402 in combination with gemcitabine prolonged survival and substantially lowered the incidence of metastasis, suggesting that M402 has the potential to complement conventional chemotherapy. We believe that M402’s mechanism of action, by binding to multiple heparin binding factors involved in tumor growth and metastasis, creates the potential for M402 to contribute to efficacy in a broad range of cancers.

 

In April 2012, we initiated a Phase 1/2 proof-of-concept clinical study in patients with advanced metastatic pancreatic cancer. The trial consists of two parts and will evaluate the safety, potential efficacy, pharmacokinetics and pharmacodynamics of M402 in combination with nab-paclitaxel and gemcitabine (nab-paclitaxel was added to the trial design by a protocol amendment in April 2013). Part A is an open-label, multiple ascending dose escalation study. We have completed several cohorts in Part A of the trial, including one with the new regimen of M402 plus nab-paclitaxel and gemcitabine. Dose escalation data from Part A are expected during the first half of 2014. Pending successful completion of this phase, we expect to initiate Part B of the trial, which will be a randomized, controlled study investigating the safety and antitumor activity of M402 administered in combination with nab-paclitaxel and gemcitabine, compared with nab-paclitaxel and gemcitabine alone.

 

Discovery Program

 

Many complex diseases are a result of multiple biological activities. We believe our core analytical tools may enable new insights into the biology of many diseases, which could lead to an enhanced understanding of the relative role of different biological targets and related cell-to-cell signaling pathways. Our goal is to leverage this knowledge and the multi-targeting nature of complex mixture molecules to develop novel products which may positively modulate multiple pathways in a disease.

 

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Sialylation Technology

 

We are applying our proprietary sialylation technology, a method to add sialic acid to proteins, to modify immunoglobulin G, or IgG, antibodies in IVIG, a drug that is currently used to treat autoimmune and inflammatory disease. Our objective is to further potentiate the anti-inflammatory activities of these antibodies and to potentially develop drugs with differentiated attributes such as enhanced efficacy and/or a wider therapeutic window that address autoimmune and inflammatory diseases. To date, we have made substantial progress in this program by demonstrating that sialylating Fc-linked glycans of IgG antibodies can enhance anti-inflammatory effects in a nonclinical model, consistent with the findings previously published by Dr. Jeffrey Ravetch of The Rockefeller University. On the development front, we continue to advance toward identifying a development candidate. We continue to generate data to investigate and validate the biology of sialylated IVIG/Fc to define the specific product, or products, to potentially advance to the clinic, as well as, to inform our selection of the indication to potentially take forward into development. We could apply our sialylation technology to develop a sialylated plasma-derived IVIG product, or a recombinant sialylated Fc product. We continue to investigate both approaches, and expect to have data later this year that will help guide our development efforts.

 

Currently, IVIG is manufactured from large pools of human plasma. Increasing demand for IVIG products already exceeds available supply worldwide thus limiting broader clinical applications. Today, estimated global IVIG sales are $7 billion annually according to Health Advances. IVIG is approved in several indications primarily addressing inflammatory, infectious and immunodeficiency diseases, including primary immunodeficiency disease, idiopathic thrombocytopenic purpura, Kawasaki disease, chronic inflammatory demyelinating polyneuropathy, and multifocal motor neuropathy.

 

General and Administrative

 

General and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, legal, accounting, investor relations, information technology, business development and human resource functions. Other costs include royalty and license fees, facility and insurance costs not otherwise included in research and development expenses and professional fees for legal and accounting services and other general expenses.

 

Results of Operations

 

Three Months Ended September 30, 2013 and 2012

 

Collaboration Revenue

 

Collaboration revenue includes product revenue and research and development revenue earned under our collaborative arrangements. Product revenue consists of profit share, royalties and commercial milestones earned from Sandoz on sales of Enoxaparin Sodium Injection following its commercial launch in July 2010. During the three months ended September 30, 2013, we earned $4.8 million in royalties on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $58 million. During the three months ended September 30, 2012, we earned $2.6 million in royalties on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $34 million. The increases in net sales of $24 million, or 71%, and product revenue of $2.2 million, or 85%, from the 2012 period to the 2013 period is due to significant adjustments to reserve accruals in the third quarter of 2012 caused by aggressive competitor pricing.

 

Research and development revenue generally consists of amounts earned by us:

 

·                   under the 2003 Sandoz Collaboration and 2006 Sandoz Collaboration for reimbursement of research and development services and reimbursement of development costs;

·                   under the 2006 Sandoz Collaboration for amortization of the equity premium;

·                   under the Baxter Agreement for reimbursement of research and development services and reimbursement of development costs; and

·                   under the Baxter Agreement for amortization of an upfront payment.

 

Research and development revenue was $6.0 million and $2.5 million for the three months ended September 30, 2013 and 2012, respectively. The increase in research and development revenue of $3.5 million, or 140%, from the 2012 period to the 2013 period is due to an increase in reimbursable M923 expenses incurred in connection with the Baxter Agreement.

 

We expect research and development revenue earned by us under the 2003 Sandoz Collaboration and 2006 Sandoz Collaboration will be between $1.0 million and $2.0 million per quarter in 2013 and we will continue to recognize the $13.6 million equity premium under the 2006 Sandoz Collaboration at a rate of $0.2 million per quarter in 2013. We expect to continue to amortize the $33.0 million upfront payment from Baxter as we deliver research and development services for the two licensed biosimilars, with quarterly amortization of approximately $0.7 million in 2013.

 

There are a number of factors that make it difficult for us to predict the magnitude of future Enoxaparin Sodium Injection product revenue, including the impact of generic competition on the Sandoz market share; the pricing of products that compete with Enoxaparin Sodium Injection and other actions taken by our competitors; the inventory levels of Enoxaparin Sodium Injection maintained by wholesalers, distributors and other

 

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customers; the frequency of re-orders by existing customers and the change in estimates for product reserves. Accordingly, our Enoxaparin Sodium Injection product revenue in previous quarters may not be indicative of future Enoxaparin Sodium Injection product revenue. The change in Sandoz contractual payment terms, along with additional generic competition, has caused, and we expect will continue to cause, our future product revenue from Enoxaparin Sodium Injection to be significantly reduced compared to revenues earned during the product’s exclusivity period.

 

Research and Development Expense

 

Research and development expense for the three months ended September 30, 2013 was $27.4 million, compared with $20.2 million for the three months ended September 30, 2012. The increase of $7.2 million, or 36%, from the 2012 period to the 2013 period resulted from increases of: $5.6 million in process development and third-party research costs related to our biosimilars program; $0.8 million in personnel and related costs associated with our headcount growth to support our programs; and $0.8 million in professional fees primarily related to consulting for our biosimilars program.

 

The lengthy process of securing FDA approval for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate when, if ever, our product candidates will generate revenues and cash flows.

 

The following table summarizes the primary components of our research and development external expenditures, including amortization of our intangible assets, for each of our principal development programs for the three months ended September 30, 2013 and 2012. The figures in the table include project expenditures incurred by us and reimbursed by our collaborative partner, but exclude project expenditures incurred by our collaborative partner. We do not maintain or evaluate, and therefore do not allocate, internal research and development costs on a project-by-project basis. Consequently, we do not analyze internal research and development costs by project in managing our research and development activities. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

 

 

Research and Development Expense (in thousands)

 

Development Programs (Status)

 

Three Months
Ended
September 30, 2013

 

Three Months
Ended
September 30, 2012

 

Project Inception to
September 30, 2013

 

 

 

 

 

 

 

 

 

M356 (ANDA Filed)

 

$

362

 

$

816

 

$

45,800

 

M402 (Phase 1/2)

 

851

 

679

 

17,059

 

Biosimilars (Development)

 

8,402

 

2,243

 

27,097

 

Discovery programs

 

701

 

307

 

 

 

Research and development internal costs

 

17,119

 

16,188

 

 

 

 

 

 

 

 

 

 

 

Total research and development expense

 

$

27,435

 

$

20,233

 

 

 

 

The decrease of $0.5 million in M356 external expenditures from the 2012 period to the 2013 period was primarily due to timing of process development activities, manufacturing and third-party research costs. The increase of $0.2 million in M402 external expenditures from the 2012 period to the 2013 period was principally due to timing of patient enrollment and costs incurred in connection with our Phase 1/2 proof-of-concept clinical study. The increase of $6.2 million in biosimilars external expenditures from the 2012 period to the 2013 period was due to the timing of process development and third-party research costs to fund the build-out of our biologics infrastructure to support product development under our Baxter collaboration. Discovery program external expenditures increased by $0.4 million from the 2012 period to the 2013 period as due to funding of our sialylation technology program.

 

Research and development internal costs consist of compensation and other expense for research and development personnel, supplies and materials, facility costs and depreciation. The increase of $0.9 million from the 2012 period to the 2013 period was due to additional research and development headcount and related costs in support of our development programs.

 

General and Administrative

 

General and administrative expense for the three months ended September 30, 2013 was $9.0 million, compared to $11.0 million for the three months ended September 30, 2012. General and administrative expense decreased by $2.0 million, or 18%, from the 2012 period to the 2013 period due to a decrease in professional fees principally due to decreased legal fees relating to Enoxaparin Sodium Injection patent litigation.

 

Interest Income

 

Interest income on available-for-sale marketable securities was $0.2 million and $0.3 million for the three months ended September 30, 2013 and 2012, respectively. The decrease of $0.1 million from the 2012 period to the 2013 period was due to lower average investment balances.

 

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Other Income

 

Other income was $0.1 million and zero for the three months ended September 30, 2013 and 2012, respectively. The increase in other income of $0.1 million from the 2012 period to the 2013 period was due to the commencement of income recognition related to a job creation tax award in the fourth quarter of 2012.

 

Nine Months Ended September 30, 2013 and 2012

 

Collaboration Revenue

 

During the nine months ended September 30, 2013, we earned $11.8 million in royalties on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $162 million. During the nine months ended September 30, 2012, we earned $44.0 million in part on a profit share and in part on a royalty on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $366 million. The decrease in our product revenue of $32.2 million, or 73%, from the 2012 period to the 2013 period is due to a change in the contractual basis of our earned product revenues from hybrid profit share / royalty to straight royalty following the January 2012 launch of a third-party competitor’s generic Lovenox®, as well as decreased unit sales due to lower market share, and lower prices in response to competitor pricing reductions on enoxaparin.

 

Research and development revenue generally consists of amounts earned by us:

 

·                   under the 2003 Sandoz Collaboration and 2006 Sandoz Collaboration for reimbursement of research and development services and reimbursement of development costs;

·                   under the 2006 Sandoz Collaboration for amortization of the equity premium;

·                   under the Baxter Agreement for reimbursement of research and development services and reimbursement of development costs; and

·                   under the Baxter Agreement for amortization of an upfront payment.

 

Research and development revenue was $10.9 million and $7.2 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in research and development revenue of $3.7 million, or 51%, from the 2012 period to the 2013 period is due to an increase in reimbursable M923 expenses incurred in connection with the Baxter Agreement.

 

There are a number of factors that make it difficult for us to predict the magnitude of future Enoxaparin Sodium Injection product revenue, including the impact of generic competition on Sandoz’s market share; the pricing of products that compete with Enoxaparin Sodium Injection and other actions taken by our competitors; the inventory levels of Enoxaparin Sodium Injection maintained by wholesalers, distributors and other customers; the frequency of re-orders by existing customers; and the change in estimates for product reserves. Accordingly, our Enoxaparin Sodium Injection product revenue in previous quarters may not be indicative of future Enoxaparin Sodium Injection product revenue. The change in Sandoz contractual payment terms, along with additional generic competition, has caused, and we expect will continue to cause, our future product revenue from Enoxaparin Sodium Injection to be significantly reduced compared to revenues earned during the product’s exclusivity period.

 

Research and Development Expense

 

Research and development expense for the nine months ended September 30, 2013 was $71.8 million, compared with $58.8 million for the nine months ended September 30, 2012. The increase of $13.0 million, or 22%, from the 2012 period to the 2013 period resulted primarily from increases of: $7.5 million in process development and third-party contract research costs related to our biosimilars program; $3.9 million in personnel and related costs associated with our headcount growth to support our programs; and $1.3 million in professional fees primarily related to consulting fees to support our programs.

 

The following table summarizes the primary components of our research and development external expenditures, including amortization of our intangible assets, for each of our principal development programs for the nine months ended September 30, 2013 and 2012. The figures in the table include project expenditures incurred by us and reimbursed by our collaborative partner, but exclude project expenditures incurred by our collaborative partner. We do not maintain or evaluate, and therefore do not allocate, internal research and development costs on a project-by-project basis. Consequently, we do not analyze internal research and development costs by project in managing our research and development activities. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

 

 

Research and Development Expense (in thousands)

 

Development Programs (Status)

 

Nine Months
Ended
September 30, 2013

 

Nine Months
Ended
September 30, 2012

 

Project Inception to
September 30, 2013

 

 

 

 

 

 

 

 

 

M356 (ANDA Filed)

 

$

1,238

 

$

3,191

 

$

45,800

 

M402 (Phase 1/2)

 

2,654

 

2,664

 

17,059

 

Biosimilars (Development)

 

15,659

 

4,695

 

27,097

 

Discovery programs

 

1,474

 

862

 

 

 

Research and development internal costs

 

50,746

 

47,393

 

 

 

 

 

 

 

 

 

 

 

Total research and development expense

 

$

71,771

 

$

58,805

 

 

 

 

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The decrease of $2.0 million in M356 external expenditures from the 2012 period to the 2013 period was primarily due to timing of process development activities, manufacturing and third-party research costs. M402 external expenditures remained consistent from the 2012 period to the 2013 period as we fund our Phase 1/2 proof-of-concept clinical study. The increase of $11.0 million in biosimilars external expenditures from the 2012 period to the 2013 period was due to the timing of process development and third-party research costs to fund the build-out of our biologics infrastructure to support product development under our Baxter collaboration. Discovery program external expenditures increased by $0.6 million from the 2012 period to the 2013 period as due to funding of our sialylation technology program.

 

Research and development internal costs consist of compensation and other expense for research and development personnel, supplies and materials, facility costs and depreciation. The increase of $3.4 million from the 2012 period to the 2013 period was due to additional research and development headcount and related costs in support of our development programs.

 

General and Administrative

 

General and administrative expense for the nine months ended September 30, 2013 was $30.2 million, compared to $34.3 million for the nine months ended September 30, 2012. General and administrative expense decreased by $4.1 million, or 12%, from the 2012 period to the 2013 period principally due to decreased legal fees relating to Enoxaparin Sodium Injection patent litigation.

 

Interest Income

 

Interest income on available-for-sale marketable securities was $0.7 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease of $0.3 million from the 2012 period to the 2013 period was due to lower average investment balances.

 

Other Income

 

Other income was $0.2 million and zero for the nine months ended September 30, 2013 and 2012, respectively. The increase of $0.2 million from the 2012 period to the 2013 period was due to the commencement of income recognition related to a job creation tax award in the fourth quarter of 2012.

 

Liquidity and Capital Resources

 

We have financed our operations since inception primarily through the sale of equity securities, payments from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration, including profit share/royalty payments related to sales of Enoxaparin Sodium Injection, and borrowings from our lines of credit and capital lease obligations. Since our inception, we have received $406 million through private and public issuance of equity securities. As of September 30, 2013, we had received a cumulative total of $569.3 million from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration, a $33.0 million upfront payment under the Baxter Agreement, $4.0 million from debt financing, $9.2 million from capital lease obligations and $3.2 million from our landlord for leasehold improvements related to our corporate facility and additional funds from interest income. The January 2012 launch of a third-party competitor’s enoxaparin product triggered a change under the terms of our agreement with Sandoz in the basis of our product revenue from profit share to a royalty that is based on Sandoz’s net sales of Enoxaparin Sodium Injection. This competition and the resulting contractual change has resulted in us incurring operating losses. We expect that our return to profitability, if at all, will most likely come from the commercialization of our generic Copaxone product, which is subject to FDA approval. We expect to finance our current programs and planned operating requirements principally through our current cash, cash equivalents and marketable securities. We believe that these funds will be sufficient to meet our operating requirements through at least 2015. However, 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 other important factors, and actual results could vary materially. We may, from time to time, seek additional funding through a combination of new collaborative agreements, strategic alliances and additional equity and debt financings or from other sources.

 

At September 30, 2013, we had $275.9 million in cash, cash equivalents and marketable securities and $6.4 million in accounts receivable. In addition, we also held approximately $20.7 million in restricted cash, of which $17.5 million serves as collateral for a security bond posted in the litigation against Actavis, Amphastar and International Medical Systems, Ltd. Our funds at September 30, 2013 were primarily invested in senior debt of government-sponsored enterprises, commercial paper, asset-backed securities, corporate debt securities and United States money market funds, directly or through managed funds, with remaining maturities of 24 months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of our evaluation of conditions in the financial markets, the maturity of specific investments, and our near term liquidity needs. We do not believe that our cash equivalents and marketable securities were subject to significant market risk at September 30, 2013.

 

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During the nine months ended September 30, 2013, our operating activities used cash of $60.0 million. During the nine months ended September 30, 2012, our operating activities provided cash of $28.2 million. The cash provided by or used in operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities.

 

For the nine months ended September 30, 2013, our net loss adjusted for non-cash items was $60.8 million. For the nine months ended September 30, 2013, non-cash items include share-based compensation of $9.4 million, depreciation and amortization of our property, equipment and intangible assets of $5.3 million and amortization of purchased premiums on our marketable securities of $2.6 million. In addition, the net change in our operating assets and liabilities provided cash of $0.8 million and resulted from: a decrease in accounts receivable of $4.4 million due to lower Enoxaparin Sodium Injection prices in response to aggressive competitor pricing reductions and a decrease in Enoxaparin Sodium Injection units sold; an increase in unbilled revenue of $4.5 million, primarily due to an increase in reimbursable M923 expenses incurred in connection with the Baxter Agreement; an increase in restricted cash of $0.7 million due to the designation of this cash as collateral for a letter of credit related to the lease of office and laboratory space at 320 Bent Street; an increase in accounts payable of $2.6 million and an increase in accrued expenses of $2.1 million primarily due to timing of activities incurred in connection with the Baxter Agreement; and a decrease in deferred revenue of $3.0 million, primarily due to the amortization of revenue related to the $33.0 million upfront payment made to us by Baxter in 2012 under our collaboration.

 

For the nine months ended September 30, 2012, our net loss adjusted for non-cash items was $23.1 million. For the nine months ended September 30, 2012, non-cash items include share-based compensation of $10.3 million, depreciation and amortization of our property, equipment and intangible assets of $5.4 million and amortization of purchased premiums on our marketable securities of $2.2 million. In addition, the net change in our operating assets and liabilities provided cash of $51.4 million and resulted from: a decrease in accounts receivable of $23.2 million, due to a contractual change in the basis of calculating our enoxaparin product revenue, related to the launch of a competitor’s generic Lovenox in January 2012, aggressive competitor pricing, significant adjustments to reserve accruals caused by increased competition and continued pricing pressure, and a decrease in units sold; a decrease in unbilled revenue of $1.6 million, resulting from lower reimbursable manufacturing activities for our M356 program, including amounts due Sandoz for shared development costs; an increase in prepaid expenses and other current assets of $1.0 million, primarily due to advance payments made for renewals of vendor maintenance agreements and interest accrued on our available-for-sale marketable debt securities; an increase in restricted cash of $2.5 million due to the designation of this cash as collateral for a letter of credit related to the lease of office and laboratory space at 675 West Kendall Street; an increase in accounts payable of $2.0 million, primarily due to the timing of Enoxaparin Sodium Injection litigation expenses and process development activities for our biosimilars program; a decrease in accrued expenses of $1.2 million resulting from the timing of Massachusetts Institute of Technology royalty payments; and an increase in deferred revenue of $29.2 million, primarily due to the $33.0 million upfront payment under the Baxter Agreement.

 

During the nine months ended September 30, 2013, our investing activities provided cash of $39.7 million. In the nine months ended September 30, 2013, we received $220.6 million from maturities of marketable securities and $3.8 million from sales of marketable securities. Additionally, during the first nine months of 2013, we used $178.1 million of cash to purchase marketable securities and $6.6 million for the purchase of laboratory equipment and leasehold improvements.

 

During the nine months ended September 30, 2012, our investing activities provided cash of $5.3 million. In the nine months ended September 30, 2012, we used $434.4 million of cash to purchase marketable securities and we received $454.8 million from maturities of marketable securities. Additionally, during the first nine months of 2012, we used $9.2 million of cash for the purchase of laboratory equipment for our biosimilars and novel products programs, $3.1 million principally for leasehold improvements related to our headquarters and software for our business operations, and $2.3 million primarily for leasehold improvements, furniture and computer equipment related to our leased laboratory and office space.

 

During the nine months ended September 30, 2013 and 2012, financing activities provided cash of $4.5 million and $2.1 million, respectively, in the form of net proceeds from stock option exercises and purchases of shares of our common stock through our employee stock purchase plan.

 

Contractual Obligations

 

Our major outstanding contractual obligations relate to license maintenance obligations including royalties payable to third parties and operating lease obligations. In February 2013, we and BMR-Rogers Street LLC entered into a lease agreement pursuant to which we will lease approximately 105,000 square feet of office and laboratory space located in the basement and first and second floors at 320 Bent Street, Cambridge, Massachusetts beginning on September 1, 2013 and ending on August 31, 2016. Annual rental payments due under this lease agreement will be approximately $1.5 million during 2013, $6.1 million during 2014, $6.2 million during 2015 and $4.2 million during 2016.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of revenues and expenses during the reporting periods. Additionally, we are required to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet dates. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and share-based payments. We base our estimates on historical experience, known trends and

 

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events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Please read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of our critical accounting policies and estimates.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

 

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of United States money market, government-secured, and high-grade corporate securities, directly or through managed funds, with maturities of twenty-four months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, due to the conservative nature of our investments, low prevailing market rates and relatively short effective maturities of debt instruments, we believe that interest rate risk is mitigated. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2013, we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We do not own derivative financial instruments in our investment portfolio. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative, foreign currency or other financial instruments that would require disclosure under this item.

 

Item 4.   Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2013, our disclosure controls and procedures were effective at the reasonable assurance level.

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

On August 28, 2008, Teva and related entities, or Teva, and Yeda Research and Development Co., Ltd., or Yeda, filed suit against us and Sandoz in the United States Federal District Court in the Southern District of New York in response to the filing by Sandoz of the ANDA with a Paragraph IV certification for M356. The suit alleged infringement related to four of the seven Orange Book patents listed for Copaxone and seeks declaratory and injunctive relief that would prohibit the launch of our product until the last to expire of these patents. We and Sandoz asserted various defenses and filed counterclaims for declaratory judgments to have all seven of the Orange Book patents as well as two additional patents in the same patent family adjudicated in the present lawsuit. Another company, Mylan Inc., or Mylan, also has an ANDA for generic Copaxone under FDA review. In October 2009, Teva sued Mylan for patent infringement related to the Orange Book patents listed for Copaxone, and in October 2010, the Court consolidated the Mylan case with the case against us and Sandoz. A trial on the issue of inequitable conduct occurred in July 2011 and the trial on the remaining issues occurred in September 2011 in the consolidated case. In June 2012, the Court issued its opinion and found all of the claims in the patents to be valid, enforceable and infringed. In July 2012, the Court issued a final order and permanent injunction prohibiting Sandoz and Mylan from infringing all of the patents in the suit. The Orange Book patents and one non-Orange book patent expire in May 2014 and one non-Orange Book patent expires in September 2015. In addition, the permanent injunction further restricts the FDA, pursuant to 35 U.S.C. section 271(e)(4)(A), from making the effective date of any final approval of the Sandoz or Mylan ANDA prior to the expiration of the Orange Book patents. In July 2012, we appealed the decision to the CAFC, and on July 26, 2013, the CAFC issued a written opinion invalidating several of the nine patents, including the one patent set to expire in 2015. Several patents expiring in May 2014 remain in force. The CAFC remanded the case to the District Court to modify the injunction in light of the CAFC decision. On September 16, 2013, Teva filed a petition for rehearing of the CAFC decision, and on October 18, 2013 the CAFC denied the petition. Teva has indicated that it will seek review by the United States Supreme Court.

 

On December 10, 2009, in a separate action in the same court, Teva sued Sandoz, Novartis AG and us for patent infringement related to certain other non-Orange Book patents seeking declaratory and injunctive relief that would prohibit the launch of our product until the last to expire of these patents as well as damages in the event that Sandoz has launched the product. In January 2010, we and Sandoz filed a motion to dismiss this second suit on several grounds. On July 16, 2013, the motion to dismiss the suit was granted. On August 19, 2013, Teva appealed that decision to the CAFC.

 

There are no damages being sought in the first suit, and at this time we believe a loss is not probable in the second. Litigation involves many risks and uncertainties, and there is no assurance that Novartis AG, Sandoz or we will ultimately prevail in either lawsuit.

 

On September 21, 2011, we and Sandoz sued Amphastar, Actavis, and International Medical Systems, Ltd. (a wholly owned subsidiary of Amphastar) in the United States District Court for the District of Massachusetts for infringement of two of our patents. Also in September, 2011, we filed a request for a temporary restraining order and preliminary injunction to prevent Amphastar, Actavis and International Medical Systems, Ltd. from selling their enoxaparin product in the United States. In October 2011, the District Court granted our motion for a preliminary injunction and entered an order enjoining Amphastar, Actavis and International Medical Systems, Ltd. from advertising, offering for sale or selling their enoxaparin sodium product in the United States until the conclusion of a trial on the merits and required us and Sandoz to post a security bond of $100 million in connection with the litigation. Amphastar, Actavis and International Medical Systems, Ltd. appealed the decision to the CAFC, and in January 2012, the CAFC stayed the preliminary injunction. In August 2012, the CAFC issued a written opinion vacating the preliminary injunction and remanding the case to the District Court. In September 2012, we filed a petition with the CAFC for rehearing by the full court en banc, which was denied. In February 2013, we filed a petition for a writ of certiorari for review of the CAFC decision by the United States Supreme Court and in June 2013 the Supreme Court denied the petition. In January 2013, Amphastar and Actavis filed a motion for summary judgment in the District Court following the decision from the CAFC and on July 19, 2013 the motion was granted.

 

We have filed a protective notice of appeal of the decision to the CAFC, although the District Court has not issued a final judgment as of this filing.

 

In the event that the Company is not successful in any appeal, and Amphastar and Actavis are able to prove they suffered damages as a result of the preliminary injunction, we could be liable for damages for up to $35 million of the security bond. In June 2012, Amphastar filed a motion to increase the amount of the security bond, which we and Sandoz have opposed.  Litigation involves many risks and uncertainties, and there is no assurance that we or Sandoz will prevail in this patent enforcement suit.

 

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Item 1A.   Risk Factors

 

Investing in our stock involves a high degree of risk. You should carefully consider the risks and uncertainties and other important factors described below in addition to other information included or incorporated by reference in this Quarterly Report on Form 10-Q before purchasing our stock. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer.

 

Risks Relating to Our Business

 

We have incurred a cumulative loss since inception. If we do not generate significant revenue, we may not return to profitability.

 

We have incurred significant losses since our inception in May 2001. At September 30, 2013, our accumulated deficit was $240.4 million. We may incur annual operating losses over the next several years as we expand our drug commercialization, development and discovery efforts. In addition, we must successfully develop and obtain regulatory approval for our other drug candidates, and effectively manufacture, market and sell any drugs we successfully develop. Accordingly, we may not generate significant revenue in the longer term and, even if we do generate significant revenue, we may never achieve long-term profitability.

 

To be profitable, we and our collaborative partners must succeed in developing and commercializing drugs with significant market potential. This will require us and our collaborative partners to be successful in a range of challenging activities: developing product candidates; obtaining regulatory approval for product candidates through either existing or new regulatory approval pathways; clearing allegedly infringing patent rights; enforcing our patent rights; and manufacturing, distributing, marketing and selling products. Our potential profitability will also be adversely impacted by the entry of competitive products and, if so, the degree of the impact could be effected by whether the entry is before or after the launch of our products. We may never succeed in these activities and may never generate revenues that are significant.

 

Our current product revenue is dependent on the continued successful manufacture and commercialization of Enoxaparin Sodium Injection.

 

Our near-term ability to generate product revenue depends, in large part, on Sandoz’s continued ability to manufacture and commercialize Enoxaparin Sodium Injection, maintain pricing levels and market share and compete with Lovenox brand competition as well as authorized and other generic competition.

 

Sandoz is facing increasing competition and pricing pressure from brand, authorized generic and other currently-approved generic competitors, which has and will continue to impact Sandoz net sales of Enoxaparin Sodium Injection, which will therefore impact our product revenue. Furthermore, other competitors may in the future receive approval to market generic enoxaparin products which would further impact our product revenue.

 

Under these circumstances, the resulting market price for our Enoxaparin Sodium Injection product has decreased and may decrease further, and we have lost market share and may continue to lose market share for Enoxaparin Sodium Injection. All of this may further impact our revenue from Enoxaparin Sodium Injection and, as a result, our business, including our near-term financial results and our ability to fund future discovery and development programs, may suffer.

 

If our patent litigation against Amphastar or Teva related to Enoxaparin Sodium Injection is not successful, we may be liable for damages. In addition, third parties may be able to commercialize a generic Lovenox product without risk of patent infringement damages, and our business may be materially harmed.

 

If we are not successful in the patent litigation against Amphastar and Actavis and do not succeed in obtaining injunctive relief or damages, the reduction in our revenue stream will be permanent and our ability to fund future discovery and development programs may suffer. Furthermore, in the event that we are not successful in any appeal of the District Court decision, and Amphastar and Actavis are able to prove they suffered damages as a result of the preliminary injunction having been in effect, then we could be liable for such damages for up to $35 million of the security bond. This amount may be increased if Amphastar and Actavis are successful in their motion to increase the amount of the security bond.

 

In addition, if we are not successful in the patent case against Teva and do not succeed in obtaining injunctive relief or a declaratory judgment that we are entitled to damages for our lost profits due to infringing sales, and if Teva receives marketing approval, it will be able to commercialize a generic Lovenox. Under these circumstances, the resulting market price for our Enoxaparin Sodium Injection product may decline further and we may lose significant market share for Enoxaparin Sodium Injection. Consequently, our revenue would be reduced and our business, including our near-term financial results and our ability to fund future discovery and development programs, may suffer.

 

If efforts by manufacturers of branded products to delay or limit the use of generics or biosimilars are successful, our sales of generic and biosimilar products may suffer.

 

Many manufacturers of branded products have increasingly used legislative, regulatory and other means to delay regulatory approval and competition from manufacturers of generic drugs and could be expected to use similar tactics to delay competition from biosimilars. These efforts have included:

 

·                   settling patent lawsuits with generic or biosimilar companies, resulting in such patents remaining an obstacle for generic or biosimilar approval by others;

 

·                   settling paragraph IV patent litigation with generic companies to prevent the expiration of the 180-day generic marketing exclusivity period or to delay the triggering of such exclusivity period;

 

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·                   submitting Citizen Petitions to request the FDA Commissioner to take administrative action with respect to prospective and submitted generic drug or biosimilar applications;

 

·                   appealing denials of Citizen Petitions in United States federal district courts and seeking injunctive relief to reverse approval of generic drug or biosimilar applications;

 

·                   restricting access to reference brand products for equivalence and biosimilarity testing that interfere with timely generic and biosimilar development plans, respectively;

 

·                   conducting medical education with physicians, payors and regulators that claim that generic or biosimilar products are too complex for generic or biosimilar approval and influence potential market share;

 

·                   seeking state law restrictions on the substitution of generic and biosimilar products at the pharmacy without the intervention of a physician or through other restrictive means such as excessive recordkeeping requirements or patient and physician notification;

 

·                   seeking federal or state regulatory restrictions on the use of the same non-proprietary name as the reference brand product for a biosimilar or interchangeable biologic;

 

·                   seeking changes to the United States Pharmacopeia, an industry recognized compilation of drug and biologic standards;

 

·                   pursuing new patents for existing products or processes which could extend patent protection for a number of years or otherwise delay the launch of generic drugs or biosimilars; and

 

·                   attaching special patent extension amendments to unrelated federal legislation.

 

The FDA’s practice is to rule within 180 days on Citizen Petitions that seek to prevent approval of an ANDA if the petition was filed after the Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA. If, at the end of the 180-day period, the ANDA is not ready for approval or rejection, then the FDA has typically denied and dismissed the petition without acting on the petition. Teva Neuroscience, Inc. has filed several Citizen Petitions regarding M356, all of which have been denied and dismissed. However, Teva may seek to file future petitions and may also seek reversal of the denial of a Citizen Petition in federal court. Other third parties may also file Citizen Petitions requesting that the FDA adopt specific approval standards for generic or biosimilar products. If the FDA grants future Citizen Petitions, we and Sandoz may be delayed in obtaining, or potentially unable to obtain, approval of the ANDA for M356 which would materially harm our business.

 

If these efforts to delay or block competition are successful, we may be unable to sell our generic products, which could have a material adverse effect on our sales and profitability.

 

If other generic versions of our product candidates, including M356, are approved and successfully commercialized, our business would suffer.

 

Generic versions of our products contribute most significantly to revenues at the time of their launch, especially with limited competition. As such, the timing of competition can have a significant impact our financial results. We expect that certain of our product candidates may face intense and increasing competition from other manufacturers of generic and/or branded products. For example, in September 2009, Mylan announced that the FDA had accepted for filing its ANDA for generic Copaxone and in 2011 Synthon announced that it submitted an ANDA to the FDA for a generic Copaxone. Furthermore, as patents for branded products and related exclusivity periods expire, manufacturers of generic products may receive regulatory approval for generic equivalents and may be able to achieve significant market share. As this happens, and as branded manufacturers launch authorized generic versions of such products, market share, revenues and gross profit typically decline, in some cases, dramatically. If any of our generic or biosimilar product offerings, including M356, enter markets with a number of competitors, we may not achieve significant market share, revenues or gross profit. In addition, as other generic products are introduced to the markets in which we participate, the market share, revenues and gross profit of our generic products could decline.

 

If an improved version of a reference brand product, such as Copaxone, is developed that has a new product profile and labeling, the improved version of the product could significantly reduce the market share of the original reference brand product, and may cause a significant decline in sales or potential sales of our generic and biosimilar products.

 

Brand companies may develop improved versions of a reference brand product as part of a life cycle extension strategy, and may obtain approval of the improved version under a supplemental new drug application, for a drug, or biologics license application for a biologic. Should the brand company succeed in obtaining an approval of an improved product, it may capture a significant share of the collective reference brand product market and significantly reduce the market for the original reference brand product and thereby the potential size of the market for our generic or biosimilar products.  For example, Teva announced its plans to submit a Supplemental NDA to the FDA for marketing approval of a

 

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3-times a week dose of Copaxone. If Teva’s formulation is approved, this formulation would compete with our M356 product, if approved. In addition, the improved product may be protected by additional patent rights as well as have the benefit, in the case of drugs, of an additional three years of FDA marketing approval exclusivity, which would prohibit a generic version of the improved product for some period of time. As a result, our business, including our financial results and our ability to fund future discovery and development programs, would suffer.

 

If the market for a reference brand product, such as Copaxone, significantly declines, sales or potential sales of our generic and biosimilars product and product candidates may suffer and our business would be materially impacted.

 

Competition in the biotechnology industry is intense. Brand name products face competition on numerous fronts as technological advances are made or new products are introduced. As new products are approved that compete with the reference brand product to our generic product and generic or biosimilar product candidates, such as Copaxone, sales of the reference brand products may be significantly and adversely impacted and may render the reference brand product obsolete.

 

Current injectable treatments commonly used to treat multiple sclerosis, including Copaxone, are competing with novel drug products, including oral therapies. These oral therapies may offer patients a more convenient form of administration than Copaxone and may provide increased efficacy.

 

If the market for the reference brand product is impacted, we in turn may lose significant market share or market potential for our generic or biosimilar products and product candidates, and the value for our generic or biosimilar pipeline could be negatively impacted. As a result, our business, including our financial results and our ability to fund future discovery and development programs, would suffer.

 

Teva may allege that we are infringing additional issued or pending patents they hold. If this occurs we may expend substantial resources in resulting litigation, the outcome of which would be uncertain. Any unfavorable outcome in such litigation could delay our launch of M356, if approved, and may have a material adverse effect on our business.

 

Teva may assert additional issued or pending patents, and they may claim that we are infringing those patents.  If that occurs, we may incur significant expenses to respond to and litigate the claims. In addition, if we are unsuccessful in litigation, or pending the outcome of litigation or while litigation is pending, a court could issue a temporary injunction or a permanent injunction preventing us from marketing and selling M356. Furthermore, we may be ordered to pay damages, potentially including treble damages, if we launch M356 and are subsequently found to have willfully infringed Teva’s patent rights. Litigation concerning intellectual property and proprietary technologies is widespread and can be protracted and expensive, and can distract management and other key personnel from performing their duties for us.

 

If we were unsuccessful in any additional patent suits brought by Teva, we may be unable to effectively market M356, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations.

 

If the raw materials, including unfractionated heparin, or UFH, used in our products become difficult to obtain, significantly increase in cost or become unavailable, we may be unable to produce our products and this would have a material adverse impact on our business.

 

We and our collaborative partners and vendors obtain certain raw materials, including UFH, from suppliers who in turn source the materials from other countries, including four suppliers in China. In 2008, due to the occurrence of adverse events associated with the use of UFH, there were global recalls of UFH products, including in the United States, putting our supply chain at risk. Based on investigation by the FDA into those adverse events, the FDA identified a heparin-like contaminant in the implicated UFH products and recommended that manufacturers and suppliers of UFH use additional tests to screen their UFH active pharmaceutical ingredient. We and our collaborative partner worked with the appropriate regulatory authorities to document and to demonstrate that our testing standards meet or exceed all requirements for testing and screening the supply of UFH active pharmaceutical ingredient. The FDA and other authorities have also placed restrictions on the import of some raw materials from China, and may in the future place additional restrictions and testing requirements on the use of raw materials, including UFH, in products intended for sale in the United States. As a result, the raw materials, including UFH, used in our products may become difficult to obtain, significantly increase in cost, or become unavailable to us. If any of these events occur, we and our collaborative partners may be unable to produce our products in sufficient quantities to meet the requirements for the commercial launch or demand for the product, which would have a material adverse impact on our business.

 

If we or our collaborative partners and other third parties are unable to satisfy FDA quality standards and related regulatory requirements, experience manufacturing difficulties or are unable to manufacture sufficient quantities of our products or product candidates, our development and commercialization efforts may be materially harmed.

 

We have limited personnel with experience in, and we do not own facilities for, manufacturing any products. We depend upon our collaborative partners and other third parties to provide raw materials meeting FDA quality standards and related regulatory requirements, manufacture the drug substance, produce the final drug product and provide certain analytical services with respect to our products and product candidates. We, our collaborative partners or our third-party contractors may have difficulty meeting FDA manufacturing requirements, including, but not limited to, reproducibility, validation and scale-up, and continued compliance with current good manufacturing practices requirements. In addition, events such as the contamination of UFH may have an adverse impact on the supply of starting or raw materials for some of our products and product candidates, and we, our collaborative partners or our third-party contractors may have difficulty producing

 

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products in the quantities necessary to meet FDA requirements or meet anticipated market demand. If we, our collaborative partners or our third-party manufacturers or suppliers are unable to satisfy the FDA manufacturing requirements for our products and product candidates, or are unable to produce our products in sufficient quantities to meet the requirements for the launch of the product or to meet market demand, our revenue and gross margins could be adversely affected, and could have a material adverse impact on our business.

 

Competition in the biotechnology and pharmaceutical industries is intense, and if we are unable to compete effectively, our financial results will suffer.

 

The markets in which we intend to compete are undergoing, and are expected to continue to undergo, rapid and significant technological change. We expect competition to intensify as technological advances are made or new biotechnology products are introduced. New developments by competitors may render our current or future product candidates and/or technologies non-competitive, obsolete or not economical. Our competitors’ products may be more efficacious or marketed and sold more effectively than any of our products.

 

Many of our competitors have:

 

·                   significantly greater financial, technical and human resources than we have at every stage of the discovery, development, manufacturing and commercialization process;

 

·                   more extensive experience in commercializing generic drugs, conducting nonclinical studies, conducting clinical trials, obtaining regulatory approvals, challenging patents and manufacturing and marketing pharmaceutical products;

 

·                   products that have been approved or are in late stages of development; and

 

·                   collaborative arrangements in our target markets with leading companies and/or research institutions.

 

If we successfully develop and obtain approval for our drug candidates, we will face competition based on many different factors, including:

 

·                   the safety and effectiveness of our products;

 

·                   with regard to our generic or biosimilar product candidates, the differential availability of clinical data and experience and willingness of physicians, payors and formularies to rely on biosimilarity data;

 

·                   the timing and scope of regulatory approvals for these products and regulatory opposition to any product approvals;

 

·                   the availability and cost of manufacturing, marketing, distribution and sales capabilities;

 

·                   the effectiveness of our marketing, distribution and sales capabilities;

 

·                   the price of our products;

 

·                   the availability and amount of third-party reimbursement for our products; and

 

·                   the strength of our patent position.

 

Our competitors may develop or commercialize products with significant advantages in regard to any of these factors. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business.

 

If we or our collaborators are unable to establish and maintain key customer distribution arrangements, sales of our products, and therefore revenue, would decline.

 

Generic pharmaceutical products are sold through various channels, including retail, mail order, and to hospitals through group purchasing organizations, or GPOs. As Enoxaparin Sodium Injection is primarily a hospital-based product, a large percentage of the revenue for Enoxaparin Sodium Injection is derived through contracts with GPOs. Currently, a relatively small number of GPOs control a substantial portion of generic pharmaceutical sales to hospital customers. In order to establish and maintain contracts with these GPOs, we believe that we, in collaboration with Sandoz, will need to maintain adequate drug supplies, remain price competitive, comply with FDA regulations and provide high-quality products. The GPOs with whom we or our collaborators have established contracts may also have relationships with our competitors and may decide to contract for or otherwise prefer products other than ours, limiting access of Enoxaparin Sodium Injection to certain hospital segments. Our sales could also be negatively affected by any rebates, discounts or fees that are required by our customers, including the GPOs, wholesalers,

 

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distributors, retail chains or mail order services, to gain and retain market acceptance for our products. We anticipate that M356 will be primarily distributed through retail channels and mail order services. If we or our collaborators are unable to establish and maintain distribution arrangements with all of these customers, sales of our products, our revenue and our profits would suffer.

 

Even if we receive approval to market our product candidates, the market may not be receptive to our product candidates upon their commercial introduction, which could adversely affect our ability to generate sufficient revenue from product sales to maintain or grow our business.

 

Even if our product candidates are successfully developed and approved for marketing, our success and growth will also depend upon the acceptance of our products by patients, physicians and third-party payors. Acceptance of our products will be a function of our products being clinically useful, being cost effective and demonstrating superior therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. In addition, even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time.

 

Factors that we believe will materially affect market acceptance of our product candidates under development include:

 

·                   the timing of our receipt of any marketing approvals, the terms of any approval and the countries in which approvals are obtained;

 

·                   the safety, efficacy and ease of administration of our products;

 

·                   the competitive pricing of our products;

 

·                   physician confidence in the safety and efficacy of complex generic products or biosimilars;

 

·                   the success and extent of our physician education and marketing programs;

 

·                   the clinical, medical affairs, sales, distribution and marketing efforts of competitors; and

 

·                   the availability and amount of government and third-party payor reimbursement.

 

If our products do not achieve market acceptance, we will not be able to generate sufficient revenue from product sales to maintain or grow our business.

 

We will require substantial funds and may require additional capital to execute our business plan and, if additional capital is not available, we may need to limit, scale back or cease our operations.

 

As of September 30, 2013, we had cash, cash equivalents and marketable securities totaling $275.9 million. For the nine months ended September 30, 2013, we had a net loss of $78.3 million and cash used in operating activities of $60.0 million. We will continue to require substantial funds to conduct research and development, process development, manufacturing, nonclinical testing and clinical trials of our product candidates, as well as funds necessary to manufacture and market products that are approved for commercial sale. Because successful development of our drug candidates is uncertain, we are unable to estimate the actual funds we will require to complete research and development and commercialize our products under development.

 

Our future capital requirements may vary depending on the following:

 

·                   the level of sales of Enoxaparin Sodium Injection;

 

·                   a final decision, after appeal, is issued in favor of Teva in its patent infringement litigation matters against us;

 

·                   the timing of the approval, launch and commercialization of our product candidates, including M356;

 

·                   the advancement of our product candidates and other development programs, including the timing and costs of obtaining regulatory approvals;

 

·                   the advancement of our biosimilar product candidates and receipt of license and milestone payments under our Baxter Agreement;

 

·                   the timing of FDA approval of the products of our competitors;

 

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·                   the cost of litigation, including with Amphastar and Actavis relating to enoxaparin, that is not otherwise covered by our collaboration agreement, or potential patent litigation with others, as well as any damages, including possibly treble damages, that may be owed to third parties should we be unsuccessful in such litigation;

 

·                   the ability to enter into strategic collaborations;

 

·                   the continued progress in our research and development programs, including completion of our nonclinical studies and clinical trials;

 

·                   the potential acquisition and in-licensing of other technologies, products or assets; and

 

·                   the cost of manufacturing, marketing and sales activities, if any.

 

We expect to finance our current programs and planned operating requirements principally through our current cash, cash equivalents and marketable securities. We believe that these funds will be sufficient to meet our operating requirements through at least 2015. We may seek additional funding in the future and intend to do so through collaborative arrangements and public or private equity and debt financings or from other sources. Any additional capital raised through the sale of equity may dilute existing investors’ percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Additional funds may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products which we would otherwise pursue on our own.

 

If we are not able to retain our current management team or attract and retain qualified scientific, technical and business personnel, our business will suffer.

 

We are dependent on the members of our management team for our business success. Our employment arrangements with our executive officers are terminable by either party on short notice or no notice. We do not carry life insurance on the lives of any of our personnel. The loss of any of our executive officers would result in a significant loss in the knowledge and experience that we, as an organization, possess and could cause significant delays, or outright failure, in the development and approval of our product candidates. In addition, there is intense competition from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions, for human resources, including management, in the technical fields in which we operate, and we may not be able to attract and retain qualified personnel necessary for the successful development and commercialization of our product candidates.

 

There is a substantial risk of product liability claims in our business. If our existing product liability insurance is insufficient, a product liability claim against us that exceeds the amount of our insurance coverage could adversely affect our business.

 

Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing products, such claims could result in a recall of our products or a change in the approved indications for which they may be used. While we currently maintain product liability insurance coverage that we believe is adequate for our current operations, we cannot be sure that such coverage will be adequate to cover any incident or all incidents. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain sufficient insurance at a reasonable cost to protect us against losses that could have a material adverse effect on our business. These liabilities could prevent or interfere with our product development and commercialization efforts.

 

As we evolve from a company primarily involved in drug discovery and development into one that is also involved in the commercialization of pharmaceutical products, we may have difficulty managing our growth and expanding our operations successfully.

 

As we advance our product candidates through the development process, we will need to expand our development, regulatory, manufacturing, quality, distribution, sales and marketing capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various collaborative partners, suppliers and other organizations. Our ability to manage our operations and growth requires us to continue to improve our operational, financial and management controls, reporting systems and procedures. For example, some jurisdictions, such as the District of Columbia, have imposed licensing requirements for sales representatives. In addition, the District of Columbia and the Commonwealth of Massachusetts, as well as the federal government by way of the Sunshine Act provisions of the Patient Protection and Affordable Care Act of 2010, have established reporting requirements that would require public reporting of consulting and research fees to health care professionals. Because the reporting requirements vary in each jurisdiction, compliance will be complex and expensive and may create barriers to entering the commercialization phase. The need to build new systems as part of our growth could place a strain on our administrative and operational infrastructure. We may not be able to make improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing

 

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systems and controls. Such requirements may also impact our opportunities to collaborate with physicians at academic research centers as new restrictions on academic-industry relationships are put in place. In the past, collaborations between academia and industry have led to important new innovations, but the new laws may have an effect on these activities. While we cannot predict whether any legislative or regulatory changes will have negative or positive effects, they could have a material adverse effect on our business, financial condition and potential profitability.

 

We may acquire or make investments in companies or technologies that could have an adverse effect on our business, results of operations and financial condition or cash flows.

 

We may acquire or invest in companies, products and technologies. Such transactions involve a number of risks, including:

 

·                   we may find that the acquired company or assets does not further our business strategy, or that we overpaid for the company or assets, or that economic conditions change, all of which may generate a future impairment charge;

 

·                   difficulty integrating the operations and personnel of the acquired business, and difficulty retaining the key personnel of the acquired business;

 

·                   difficulty incorporating the acquired technologies;

 

·                   difficulties or failures with the performance of the acquired technologies or drug products;

 

·                   we may face product liability risks associated with the sale of the acquired company’s products;

 

·                   disruption or diversion of management’s attention by transition or integration issues and the complexity of managing diverse locations;

 

·                   difficulty maintaining uniform standards, internal controls, procedures and policies;

 

·                   the acquisition may result in litigation from terminated employees or third parties; and

 

·                   we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

 

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

 

The consideration paid in connection with an acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

 

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Risks Relating to Development and Regulatory Approval

 

If we are not able to obtain regulatory approval for commercial sale of our generic product candidate, M356, as a therapeutic equivalent to Copaxone, our future results of operations will be adversely affected.

 

Our future results of operations depend to a significant degree on our ability to obtain regulatory approval for and commercialize M356. We will be required to demonstrate to the satisfaction of the FDA, among other things, that M356:

 

·                   contains the same active ingredients as Copaxone;

 

·                   is of the same dosage form, strength and route of administration as Copaxone, and has the same labeling as the approved labeling for Copaxone, with certain exceptions; and

 

·                   meets compendial or other applicable standards for strength, quality, purity and identity, including potency.

 

In addition, approval of a generic product generally requires demonstrating that the generic drug is bioequivalent to the reference listed drug upon which it is based, meaning that there are no significant differences with respect to the rate and extent to which the active ingredients are absorbed and become available at the site of drug action. However, the FDA may or may not waive the requirements for certain bioequivalence data (including clinical data) for certain drug products, including injectable solutions that have been shown to contain the same active and inactive ingredients in the same concentration as the reference listed drug.

 

Determination of therapeutic equivalence of M356 to Copaxone will be based, in part, on our demonstration of the chemical equivalence of our versions to their respective reference listed drugs. The FDA may not agree that we have adequately characterized M356 or that M356 and Copaxone are chemical equivalents. In that case, the FDA may require additional information, including nonclinical or clinical test results, to determine therapeutic equivalence or to confirm that any inactive ingredients or impurities do not compromise the product’s safety and efficacy. Provision of sufficient information for approval may be difficult, expensive and lengthy. We cannot predict whether M356 will receive FDA approval as therapeutically equivalent to Copaxone.

 

In the event that the FDA modifies its current standards for therapeutic equivalence with respect to generic versions of Copaxone, or requires us to conduct clinical trials or complete other lengthy procedures, the commercialization of M356 could be delayed or prevented or become more expensive. In addition, FDA is currently prohibited from granting final marketing approval until May 2014 as a result of ongoing patent litigation. Delays in any part of the process or our inability to obtain regulatory approval for M356 could adversely affect our operating results by restricting or significantly delaying our introduction of M356.

 

Although health care reform legislation that establishes a regulatory pathway for the approval by the FDA of biosimilars has been enacted, the standards for determining similarity or interchangeability for biosimilars are only just being implemented by the FDA. Therefore, substantial uncertainty remains about the potential value our proprietary technology platform can offer to biosimilars development programs.

 

The regulatory climate in the United States for follow-on versions of biologic and complex protein products remains uncertain, even following the recent enactment of legislation establishing a regulatory pathway for the approval of biosimilars. The new pathway contemplates approval of two categories of follow-on biologic products: (1) biosimilar products, which are highly similar to the existing brand product, notwithstanding minor differences in clinically inactive components, and for which there are no clinically meaningful differences from the brand product and (2) interchangeable biologic products, which in addition to being biosimilar can be expected to produce the same clinical result in any given patient without an increase in risk due to switching from the brand product. Only interchangeable biosimilar products would be considered interchangeable at the retail pharmacy level without the intervention of a physician. The new legislation authorizes but does not require the FDA to establish standards or criteria for determining biosimilarity and interchangeability, and also authorizes the FDA to use its discretion to determine the nature and extent of product characterization, nonclinical testing and clinical testing on a product-by-product basis. Our competitive advantage in this area will depend on our success in demonstrating to the FDA that our analytics, biocharacterization and protein engineering platform technology provides a level of scientific assurance that facilitates determinations of interchangeability, reduces the need for expensive clinical or other testing, and raises the scientific quality requirements for our competitors to demonstrate that their products are highly similar to a brand product. Our ability to succeed will depend in part on our ability to invest in new programs and develop data in a timeframe that enables the FDA to consider our approach as the agency begins to implement the new law. In addition, the FDA will likely require significant new resources and expertise to review biosimilar applications, and the timeliness of the review and approval of our future applications could be adversely affected if there were a decline or even limited growth in FDA funding.

 

The new regulatory pathway also creates a number of additional obstacles to the approval and launch of biosimilar and interchangeable products, including:

 

·                   an obligation of the applicant to share, in confidence, the information in its abbreviated pathway application with the brand company’s and patent owner’s counsel as a condition to using the new patent clearance process;

 

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·                   the inclusion of multiple potential patent rights in the patent clearance process; and

 

·                   a grant to each brand company of 12 years of marketing exclusivity following the brand approval.

 

Furthermore, the new regulatory pathway creates the risk that the brand company, during its 12-year marketing exclusivity period, will develop and replace its product with a non-substitutable or modified product that may also qualify for an additional 12-year marketing exclusivity period, reducing the opportunity for substitution at the retail pharmacy level for interchangeable biosimilars. Finally, the new legislation also creates the risk that, as brand and biosimilar companies gain experience with the new regulatory pathway, subsequent FDA determinations or court rulings could create additional areas for potential disputes and resulting delays in biosimilars approval.

 

In addition, there is reconsideration and legislative debate that could lead to the repeal or amendment of the new healthcare legislation. If the legislation is significantly amended or is repealed with respect to the biosimilar approval pathway, our opportunity to develop biosimilars (including interchangeable biologics) could be materially impaired and our business could be materially and adversely affected. Similarly, the legislative debate at the federal level regarding the federal government budget has restricted federal agency funding for the biosimilar pathway, including biosimilar user fee funding for fiscal year 2014, and has resulted in delays in the conduct of meetings with biosimilar applicants and the review of biosimilar meeting and application information. The scheduling and conduct of biosimilar meeting and applications review was also suspended during the U.S. Government shutdown in October 2013, and could be subject to future suspensions as a result of future deadlocks in passage of federal budget resolutions. Depending on the timing and the extent of these funding, meeting and review disruptions, the Company’s development of biosimilar products could be delayed.

 

Even if we are able to obtain regulatory approval for our generic and interchangeable biologic product candidates as therapeutically equivalent or interchangeable, state pharmacy boards or agencies may conclude that our products are not substitutable at the pharmacy level for the reference listed drug. If our generic or interchangeable biologic products are not substitutable at the pharmacy level for their reference listed drugs, this could materially reduce sales of our products and our business would suffer.

 

Although the FDA may determine that a generic product is therapeutically equivalent to a brand product and provide it with an “A” rating in the FDA’s Orange Book, this designation is not binding on state pharmacy boards or agencies. As a result, in states that do not deem our product candidates therapeutically equivalent, physicians will be required to specifically prescribe a generic product alternative rather than have a routine substitution at the pharmacy level for the prescribed brand product. Should this occur with respect to one of our generic product candidates, it could materially reduce sales in those states which would substantially harm our business.

 

While a designation of interchangeability is a finding by the FDA that a biosimilar can be substituted at the pharmacy without physician intervention or prescription, brand pharmaceutical companies are lobbying state legislatures to enact physician prescription requirements, or in the absence of a prescription, physician and patient notification requirements, special labeling requirements and alternative naming requirements which if enacted could create barriers to substitution and adoption rates of interchangeable biologics as well as biosimilars. Should this occur with respect to one of our biosimilars or interchangeable biologic product candidates, and it is not determined to be unlawful or preempted by federal law, it could materially reduce sales in those states which would substantially harm our business.

 

If our nonclinical studies and clinical trials for our development candidates, including M402, are not successful, we will not be able to obtain regulatory approval for commercial sale of our novel or improved drug candidates.

 

To obtain regulatory approval for the commercial sale of our novel product candidates, we are required to demonstrate through nonclinical studies and clinical trials that our drug development candidates are safe and effective. Nonclinical studies and clinical trials of new development candidates are lengthy and expensive and the historical failure rate for development candidates is high.

 

A failure of one or more of our nonclinical studies or clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, nonclinical studies and clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize M402 or our other drug candidates, including:

 

·                   regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

·                   our nonclinical studies or clinical trials may produce negative or inconclusive results, and we may be required to conduct additional nonclinical studies or clinical trials or we may abandon projects that we previously expected to be promising;

 

·                   enrollment in our clinical trials may be slower than we anticipate, resulting in significant delays, and participants may drop out of our clinical trials at a higher rate than we anticipate;

 

·                   we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;

 

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·                   regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or if, in their opinion, participants are being exposed to unacceptable health risks;

 

·                   the cost of our clinical trials may be greater than we anticipate;

 

·                   the effects of our drug candidates may not be the desired effects or may include undesirable side effects or our product candidates may have other unexpected characteristics; and

 

·                   we may decide to modify or expand the clinical trials we are undertaking if new agents are introduced which influence current standard of care and medical practice, warranting a revision to our clinical development plan.

 

The results from nonclinical studies of a development candidate may not predict the results that will be obtained in human clinical trials. If we are required by regulatory authorities to conduct additional clinical trials or other testing of M402 or our other product candidates that we did not anticipate, if we are unable to successfully complete our clinical trials or other tests, or if the results of these trials are not positive or are only modestly positive, we may be delayed in obtaining marketing approval for our drug candidates or we may not be able to obtain marketing approval at all. Our product development costs will also increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or potential products. If any of these events occur, our business will be materially harmed.

 

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products abroad.

 

We intend in the future to market our products, if approved, outside of the United States, either directly or through collaborative partners. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with the numerous and varying regulatory requirements of each jurisdiction. The approval procedure and requirements vary among countries, and can require, among other things, conducting additional testing in each jurisdiction. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval, and we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in any other foreign country or by the FDA. We and our collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside of the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition, and results of operations.

 

Even if we obtain regulatory approvals, our marketed products will be subject to ongoing regulatory review. If we fail to comply with continuing United States and foreign regulations, we could lose our approvals to market products and our business would be seriously harmed.

 

Even after approval, any drugs or biological products we develop will be subject to ongoing regulatory review, including the review of clinical results which are reported after our products are made commercially available. Any regulatory approvals that we obtain for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, the manufacturer and manufacturing facilities we use to produce any of our product candidates will be subject to periodic review and inspection by the FDA, or foreign equivalent, and other regulatory agencies. We will be required to report any serious and unexpected adverse experiences and certain quality problems with our products and make other periodic reports to the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. Certain changes to an approved product, including in the way it is manufactured or promoted, often require prior FDA approval before the product as modified may be marketed. If we fail to comply with applicable FDA regulatory requirements, we may be subject to fines, warning letters, civil penalties, refusal by the FDA to approve pending applications or supplements, suspension or withdrawal of regulatory approvals, product recalls and seizures, injunctions, operating restrictions, refusal to permit the import or export of products, and/or criminal prosecutions and penalties.

 

Similarly, our commercial activities will be subject to comprehensive compliance obligations under state and federal reimbursement, Sunshine Act, anti-kickback and government pricing regulations. If we make false price reports, fail to implement adequate compliance controls or our employees violate the laws and regulations governing relationships with health care providers, we could also be subject to substantial fines and penalties, criminal prosecution and debarment from participation in the Medicare, Medicaid, or other government reimbursement programs.

 

In addition, the FDA’s policies may change and additional government regulations may be enacted that could prevent, limit, or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature, or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business.

 

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If third-party payors do not adequately reimburse customers for any of our approved products, they might not be purchased or used, and our revenue and profits will not develop or increase.

 

Our revenue and profits will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

·                   a covered benefit under its health plan;

 

·                   safe, effective and medically necessary;

 

·                   appropriate for the specific patient;

 

·                   cost-effective; and

 

·                   neither experimental nor investigational.

 

Obtaining coverage and reimbursement approv