Momenta Pharmaceuticals, Inc.
MOMENTA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/07/2014 13:33:11)

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, 2014

 

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 October 31, 2014.

 

Class

 

Number of Shares

Common Stock $0.0001 par value

 

53,050,634

 

 

 



Table of Contents

 

MOMENTA PHARMACEUTICALS, INC.

 

 

 

Page

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

5

 

 

 

 

Notes to Unaudited, Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

PART II. OTHER INFORMATION

37

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 6.

Exhibits

57

 

 

 

SIGNATURES

 

58

 

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.

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOMENTA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

 

September 30, 2014

 

December 31, 2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

54,876

 

$

29,766

 

Marketable securities

 

121,581

 

215,916

 

Accounts receivable

 

7,649

 

13,095

 

Unbilled receivables

 

3,056

 

3,413

 

Prepaid expenses and other current assets

 

3,701

 

3,401

 

 

 

 

 

 

 

Total current assets

 

190,863

 

265,591

 

Property and equipment, net

 

24,943

 

24,699

 

Restricted cash

 

20,719

 

20,719

 

Intangible assets, net

 

4,854

 

5,650

 

Other long-term assets

 

156

 

156

 

 

 

 

 

 

 

Total assets

 

$

241,535

 

$

316,815

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,150

 

$

6,307

 

Accrued expenses

 

11,908

 

11,447

 

Deferred revenue

 

3,065

 

3,692

 

Other current liabilities

 

492

 

496

 

 

 

 

 

 

 

Total current liabilities

 

18,615

 

21,942

 

Deferred revenue, net of current portion

 

21,863

 

24,024

 

Other long-term liabilities

 

701

 

1,012

 

 

 

 

 

 

 

Total liabilities

 

41,179

 

46,978

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share; 5,000 shares authorized at September 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013, 52,816 and 52,357 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

5

 

5

 

Additional paid-in capital

 

553,409

 

540,266

 

Accumulated other comprehensive income

 

20

 

25

 

Accumulated deficit

 

(353,078

)

(270,459

)

 

 

 

 

 

 

Total stockholders’ equity

 

200,356

 

269,837

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

241,535

 

$

316,815

 

 

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

 

3



Table of Contents

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

4,714

 

$

4,774

 

$

15,216

 

$

11,798

 

Research and development revenue

 

4,622

 

5,977

 

15,855

 

10,918

 

Total collaboration revenue

 

9,336

 

10,751

 

31,071

 

22,716

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development*

 

27,508

 

27,435

 

80,289

 

71,771

 

General and administrative*

 

11,103

 

8,977

 

34,039

 

30,202

 

Total operating expenses

 

38,611

 

36,412

 

114,328

 

101,973

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(29,275

)

(25,661

)

(83,257

)

(79,257

)

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

Interest income

 

112

 

224

 

452

 

736

 

Other income

 

62

 

55

 

186

 

174

 

Total other income

 

174

 

279

 

638

 

910

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(29,101

)

$

(25,382

)

$

(82,619

)

$

(78,347

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.56

)

$

(0.50

)

$

(1.61

)

$

(1.54

)

 

 

 

 

 

 

 

 

 

 

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

 

51,545

 

51,055

 

51,456

 

50,813

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(29,101

)

$

(25,382

)

$

(82,619

)

$

(78,347

)

Net unrealized holding (losses) gains on available-for-sale marketable securities

 

(26

)

98

 

(5

)

9

 

Comprehensive loss

 

$

(29,127

)

$

(25,284

)

$

(82,624

)

$

(78,338

)

 


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

 

Research and development

 

$

1,509

 

$

1,359

 

$

4,755

 

$

3,969

 

General and administrative

 

$

1,890

 

$

1,796

 

$

5,760

 

$

5,387

 

 

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

 

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Table of Contents

 

MOMENTA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(82,619

)

$

(78,347

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Non-cash items:

 

 

 

 

 

Depreciation and amortization

 

5,663

 

4,545

 

Share-based compensation expense

 

10,515

 

9,356

 

Amortization of premium on investments

 

1,855

 

2,627

 

Amortization of intangibles

 

796

 

796

 

Impairment of equity investment

 

 

244

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

5,446

 

4,409

 

Unbilled revenue

 

357

 

(4,545

)

Prepaid expenses and other current assets

 

(300

)

302

 

Restricted cash

 

 

(748

)

Accounts payable

 

(3,157

)

2,614

 

Accrued expenses

 

461

 

2,133

 

Deferred revenue

 

(2,788

)

(2,997

)

Other current liabilities

 

(4

)

(284

)

Other long-term liabilities

 

(311

)

(116

)

 

 

 

 

 

 

Net cash used in operating activities

 

(64,086

)

(60,011

)

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property and equipment

 

(5,907

)

(6,560

)

Purchases of marketable securities

 

(68,805

)

(178,162

)

Proceeds from maturities of marketable securities

 

161,280

 

220,569

 

Proceeds from sales of marketable securities

 

 

3,822

 

 

 

 

 

 

 

Net cash provided by investing activities

 

86,568

 

39,669

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of common stock under stock plans

 

2,628

 

4,483

 

 

 

 

 

 

 

Net cash provided by financing activities

 

2,628

 

4,483

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

25,110

 

(15,859

)

Cash and cash equivalents, beginning of period

 

29,766

 

52,990

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

54,876

 

$

37,131

 

 

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

 

5



Table of Contents

 

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 detailed structural analysis, process engineering and biologic systems analysis of complex molecules in three product areas—complex generics, biosimilars and novel drugs. 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, 2013, 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, 2014. 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 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 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 and outstanding and excludes unvested 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, 2014 and 2013 (in thousands):

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Weighted-average anti-dilutive shares related to:

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

6,572

 

4,719

 

5,763

 

4,799

 

Restricted stock awards

 

822

 

910

 

860

 

928

 

 

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, 2014 and 2013. 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 would be anti-dilutive had the Company had net income. Furthermore, performance-based restricted common stock awards which vest based

 

6



Table of Contents

 

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, 2014.

 

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, 2014 and December 31, 2013, 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, 2014

 

Quoted
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Other
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

51,339

 

$

51,339

 

$

 

$

 

Corporate debt securities

 

27,262

 

 

27,262

 

 

Commercial paper obligation

 

1,350

 

 

1,350

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

48,485

 

 

48,485

 

 

Commercial paper obligations

 

12,500

 

 

12,500

 

 

Foreign government bonds

 

20,187

 

 

20,187

 

 

Asset-backed securities

 

13,147

 

 

13,147

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

174,270

 

$

51,339

 

$

122,931

 

$

 

 

Description 

 

Balance as of
December 31,
2013

 

Quoted
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Other
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

24,841

 

$

24,841

 

$

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprise obligations

 

22,309

 

 

22,309

 

 

Corporate debt securities

 

110,158

 

 

110,158

 

 

Commercial paper obligations

 

20,996

 

 

20,996

 

 

Foreign government bonds

 

26,793

 

 

26,793

 

 

Asset-backed securities

 

35,660

 

 

35,660

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

240,757

 

$

24,841

 

$

215,916

 

$

 

 

During the nine months ended September 30, 2014, 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, 2014 and December 31, 2013. The carrying amounts reflected in the Company’s condensed consolidated balance sheets for cash, accounts receivable, unbilled receivables, 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

 

7



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September 30, 2014 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, 2014 and 2013. There were no realized gains or losses on marketable securities for the three months ended September 30, 2014 and 2013, or the nine months ended September 30, 2014. Realized gains on marketable securities for the nine months ended September 30, 2013 were immaterial. The Company’s marketable securities are classified as cash 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 primarily 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, 2014 and December 31, 2013.

 

The following tables summarize the Company’s cash, cash equivalents and marketable securities at September 30, 2014 and December 31, 2013 (in thousands):

 

As of September 30, 2014 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Cash and money market funds

 

$

53,526

 

$

 

$

 

$

53,526

 

Corporate debt securities due in one year or less

 

75,752

 

7

 

(12

)

75,747

 

Commercial paper obligations due in one year or less

 

13,841

 

9

 

 

13,850

 

Foreign government bonds due in one year or less

 

20,173

 

14

 

 

20,187

 

Asset-backed securities due in one year or less

 

13,145

 

3

 

(1

)

13,147

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

176,437

 

$

33

 

$

(13

)

$

176,457

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,876

 

$

 

$

 

$

54,876

 

Marketable securities

 

121,561

 

33

 

(13

)

121,581

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

176,437

 

$

33

 

$

(13

)

$

176,457

 

 

As of December 31, 2013 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Cash and money market funds

 

$

29,766

 

$

 

$

 

$

29,766

 

U.S. Government-sponsored enterprise obligations

 

 

 

 

 

 

 

 

 

Due in one year or less

 

11,000

 

3

 

 

11,003

 

Due in two years or less

 

11,303

 

3

 

 

11,306

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

94,659

 

13

 

(14

)

94,658

 

Due in two years or less

 

15,498

 

9

 

(7

)

15,500

 

Commercial paper obligations due in one year or less

 

20,978

 

18

 

 

20,996

 

Foreign government bonds due in one year or less

 

26,782

 

13

 

(2

)

26,793

 

Asset-backed securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

26,550

 

2

 

(4

)

26,548

 

Due in two years or less

 

9,121

 

 

(9

)

9,112

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

245,657

 

$

61

 

$

(36

)

$

245,682

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,766

 

$

 

$

 

$

29,766

 

Marketable securities

 

215,891

 

61

 

(36

)

215,916

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

245,657

 

$

61

 

$

(36

)

$

245,682

 

 

At September 30, 2014 and December 31, 2013, the Company held 16 and 28 marketable securities, respectively, that were in a continuous unrealized loss position for less than one year. At September 30, 2014, one marketable security was in a continuous unrealized loss position for greater than one year. At December 31, 2013, no marketable securities were in a continuous unrealized loss position for greater than one year.

 

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Table of Contents

 

The unrealized losses were caused by fluctuations in interest rates. The following table summarizes the aggregate fair value of these securities at September 30, 2014 and December 31, 2013 (in thousands):

 

 

 

As of September 30, 2014

 

As of December 31, 2013

 

 

 

Aggregate
Fair Value

 

Unrealized
Losses

 

Aggregate
Fair Value

 

Unrealized
Losses

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

37,416

 

$

(12

)

$

38,508

 

$

(14

)

Due in two years or less

 

$

 

$

 

$

11,696

 

$

(7

)

Foreign government bonds due in one year or less

 

$

 

$

 

$

6,203

 

$

(2

)

Asset-backed securities:

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

3,848

 

$

(1

)

$

16,977

 

$

(4

)

Due in two years or less

 

$

 

$

 

$

9,112

 

$

(9

)

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

 

$

 

$

 

$

7,303

 

$

*

 


* Less than $1,000

 

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, 2013, the Company had federal and state net operating loss carryforwards of $142.1 million and $132.1 million, respectively, available to reduce future taxable income and which will expire at various dates through 2033. Of this amount, approximately $13.1 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 December 31, 2013, the Company had federal and state research and development and other credit carryforwards of $12.8 million and $7.1 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 2033 and 2019 through 2028, respectively. The Company completed a research and development credit study and qualified its research activities under the tax code for the tax years 2004 through 2013. Ownership changes, as defined in Tax Reform Act of 1986, in future periods may place limits on the Company’s ability to utilize its net operating loss carryforwards and tax credit carryforwards. As the Company has a full valuation allowance on its net deferred tax assets, there is no financial statement impact for any differences between the credits claimed on its tax returns versus credits substantiated as part of the study.

 

Comprehensive Loss

 

Comprehensive income (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 income (loss) includes net (loss) income 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 consolidated statements of comprehensive loss for relevant disclosures.

 

The following tables summarize the changes in accumulated other comprehensive income during the three and nine months ended September 30, 2014 and 2013 (in thousands):

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of June 30, 2014

 

$

46

 

Other comprehensive income (loss) before reclassifications

 

(26

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive income (loss)

 

(26

)

 

 

 

 

Balance as of September 30, 2014

 

$

20

 

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of January 1, 2014

 

$

25

 

Other comprehensive income (loss) before reclassifications

 

(5

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive income (loss)

 

(5

)

 

 

 

 

Balance as of September 30, 2014

 

$

20

 

 

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Table of Contents

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of June 30, 2013

 

$

22

 

Other comprehensive income (loss) before reclassifications

 

98

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive income (loss)

 

98

 

 

 

 

 

Balance as of September 30, 2013

 

$

120

 

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of January 1, 2013

 

$

111

 

Other comprehensive income (loss) before reclassifications

 

12

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

(3

)

 

 

 

 

Net current period other comprehensive income (loss)

 

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 statements of comprehensive loss.

 

New Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-15, a new going concern standard, which requires management to assess, at each interim and annual reporting period, whether substantial doubt exists about a company’s ability to continue as a going concern. Substantial doubt exists if it is probable (the same threshold that is used for contingencies) that a company will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued (assessment date). Management needs to consider known (and reasonably knowable) events and conditions at the assessment date. If management determines there is substantial doubt, it should consider whether the doubt is overcome by management’s plans. If it is probable that management’s plans can be both effectively implemented and mitigate the conditions or events that raise substantial doubt, those plans, along with the principal conditions or events that gave rise to that doubt and management’s evaluation of the significance of those conditions or events, must be disclosed. The new standard is effective for all entities for fiscal years beginning after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is evaluating the impact of the new guidance.

 

In May 2014, the FASB issued ASU No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition , and creates a new Topic 606, Revenue from Contracts with Customers . This guidance is effective for fiscal years beginning after December 15, 2016, with early adoption not permitted. Two adoption methods are permitted: retrospectively to all prior reporting periods presented, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application. The Company has not yet determined which adoption method it will utilize or the effect that the adoption of this guidance will have on its consolidated financial statements.

 

3. Intangible Assets

 

As of September 30, 2014 and December 31, 2013, intangible assets, net of accumulated amortization, were as follows (in thousands):

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Weighted-Average
Amortization
Period (in years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Core and developed technology

 

10

 

$

10,257

 

$

(5,403

)

$

10,257

 

$

(4,607

)

Non-compete agreement

 

2

 

170

 

(170

)

170

 

(170

)

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

10

 

$

10,427

 

$

(5,573

)

$

10,427

 

$

(4,777

)

 

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Table of Contents

 

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, 2014 and 2013. Amortization expense was approximately $0.8 million for each of the nine months ended September 30, 2014 and 2013.

 

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

 

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 9, Commitments and 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

 

The following tables provide amounts by year and by line item included in the Company’s consolidated statements of comprehensive (loss) income attributable to transactions arising from its collaborative arrangements, as defined in the Financial Accounting Standards Board’s Accounting Standards Codification Topic 808, Collaborative Arrangements . The Company does not have any insignificant collaborative arrangements.

 

 

 

For the Three Months Ended September 30, 2014 (in thousands)

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxter Agreement

 

Total Collaborations

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

4,714

 

$

 

$

 

$

4,714

 

 

 

 

 

 

 

 

 

 

 

Research and development revenue:

 

 

 

 

 

 

 

 

 

Amortization of upfront payments

 

 

121

 

767

 

888

 

Research and development services and external costs

 

195

 

944

 

2,595

 

3,734

 

Total research and development revenue

 

$

195

 

$

1,065

 

$

3,362

 

$

4,622

 

 

 

 

 

 

 

 

 

 

 

Total collaboration revenues

 

$

4,909

 

$

1,065

 

$

3,362

 

$

9,336

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

$

50

 

$

444

 

$

3,639

 

$

4,133

 

General and administrative expense (1)

 

$

15

 

$

84

 

$

242

 

$

341

 

Total operating expenses

 

$

65

 

$

528

 

$

3,881

 

$

4,474

 

 

 

 

For the Three Months Ended September 30, 2013 (in thousands)

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxter Agreement

 

Total Collaborations

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

4,774

 

$

 

 

$

 

$

4,774

 

 

 

 

 

 

 

 

 

 

 

Research and development revenue:

 

 

 

 

 

 

 

 

 

Amortization of upfront payments

 

 

244

 

705

 

949

 

Research and development services and external costs

 

606

 

(325

)

4,747

 

5,028

 

Total research and development revenue

 

$

606

 

$

(81

)

$

5,452

 

$

5,977

 

 

 

 

 

 

 

 

 

 

 

Total collaboration revenues

 

$

5,380

 

$

(81

)

$

5,452

 

$

10,751

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

$

72

 

$

362

 

$

7,539

 

$

7,973

 

General and administrative expense (1)

 

$

5

 

$

 

$

140

 

$

145

 

Total operating expenses

 

$

77

 

$

362

 

$

7,679

 

$

8,118

 

 

11



Table of Contents

 

 

 

For the Nine Months Ended September 30, 2014 (in thousands)

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxter Agreement

 

Total Collaborations

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

15,216

 

$

 

$

 

$

15,216

 

 

 

 

 

 

 

 

 

 

 

Research and development revenue:

 

 

 

 

 

 

 

 

 

Amortization of upfront payments

 

 

480

 

2,309

 

2,789

 

Research and development services and external costs

 

796

 

1,738

 

10,532

 

13,066

 

Total research and development revenue

 

$

796

 

$

2,218

 

$

12,841

 

$

15,855

 

 

 

 

 

 

 

 

 

 

 

Total collaboration revenues

 

$

16,012

 

$

2,218

 

$

12,841

 

$

31,071

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

$

134

 

$

973

 

$

11,868

 

$

12,975

 

General and administrative expense (1)

 

$

110

 

$

315

 

$

399

 

$

824

 

Total operating expenses

 

$

244

 

$

1,288

 

$

12,267

 

$

13,799

 

 

 

 

For the Nine Months Ended September 30, 2013 (in thousands)

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxter Agreement

 

Total Collaborations

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

11,798

 

$

 

$

 

$

11,798

 

 

 

 

 

 

 

 

 

 

 

Research and development revenue:

 

 

 

 

 

 

 

 

 

Amortization of upfront payments

 

 

884

 

2,115

 

2,999

 

Research and development services and external costs

 

2,411

 

135

 

5,373

 

7,919

 

Total research and development revenue

 

$

2,411

 

$

1,019

 

$

7,488

 

$

10,918

 

 

 

 

 

 

 

 

 

 

 

Total collaboration revenues

 

$

14,209

 

$

1,019

 

$

7,488

 

$

22,716

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

$

571

 

$

1,238

 

$

12,924

 

$

14,733

 

General and administrative expense (1)

 

$

 

$

131

 

$

370

 

$

501

 

Total operating expenses

 

$

571

 

$

1,369

 

$

13,294

 

$

15,234

 

 


(1)          The amounts represent external expenditures, including amortization of an intangible asset, and exclude salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies, as these costs are not directly charged to programs.

 

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.

 

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. 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%. See “Product revenue” in the tables above for royalties earned by the Company on Sandoz’s net sales of Enoxaparin Sodium Injection.

 

The Company is no longer eligible to receive milestones under the 2003 Sandoz Collaboration because the remaining milestones were contingent upon there being no third-party competitors marketing an interchangeable generic version of a Lovenox-Equivalent Product.

 

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Table of Contents

 

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. Annual adjustments are recorded as a reduction in product revenue in the second quarter of the Company’s fiscal year. The annual adjustment of $2.2 million for the product year ending June 30, 2014 was decreased by $2.1 million to reflect an adjustment to royalties earned in the product year ended June 30, 2012. The annual adjustment was $3.8 million for the product year ended June 30, 2013.

 

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. See tables above for research and development revenue earned by the Company under the 2003 Sandoz Collaboration.

 

2006 Sandoz Collaboration

 

In July 2006, the Company entered into a Stock Purchase Agreement and an Investor Rights Agreement with Novartis Pharma AG, an affiliate of Sandoz 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 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 2014, the Company revised the estimate of the development period 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, 2014 was immaterial. See “Amortization of upfront payments” in the tables above for research and development revenue earned by the Company relating to this paid premium. The equity premium has been earned as of September 30, 2014.

 

Under the 2006 Sandoz Collaboration, the Company and Sandoz AG 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 costs will be borne by Sandoz AG as they are incurred for all products. Under the 2006 Sandoz Collaboration, the Company is paid at cost for any external costs incurred in the development of products at the same proportion that Sandoz is responsible for development costs. The Company also is paid at a contractually specified rate for FTEs performing development services at the same proportion that Sandoz is responsible for development costs. 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 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 payment related to the approval by the FDA of M356, and $153.0 million in sales-based and commercial milestone payments, 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. In making this assessment 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. 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

 

13



Table of Contents

 

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. See “Research and development services and external costs” in the tables above for research and development revenue earned by the Company from FTE services and external development costs under the 2006 Sandoz Collaboration.

 

Baxter Agreement

 

In December 2011, the Company entered into a global collaboration and license agreement with Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA (collectively, “Baxter”) to develop and commercialize biosimilar product candidates. The Company refers to this agreement as the “Baxter Agreement.” The Baxter Agreement became effective in February 2012.

 

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, both indicated in the inflammatory and autoimmune therapeutic areas, referred to as the initial products. M923 is a biosimilar product candidate for HUMIRA® (adalimumab). In addition to M923 and M834, both parties are evaluating additional products for biosimilar development under the Agreement. Baxter has the right, until February 2015, to select up to three additional biosimilars to be included in the collaboration.

 

The process for achieving milestones under the Baxter Agreement 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 additional product under the Baxter Agreement, the Company will earn a license payment.

 

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

 

·                   For an initial and additional product, if the Company either (a) submits an Investigational New Drug application, or IND, to the FDA or equivalent application in the European Union, and application is subsequently accepted by the regulatory authority, 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 $250 million in regulatory milestone payments. 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 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 three 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 or equivalent application in the European Union, 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

 

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(ii) Baxter’s selection of the three 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 under the Baxter Agreement. 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 $33.0 million. The Company is eligible to receive from Baxter license payments totaling $21.0 million for the exercise of options with respect to the additional three product candidates that can be named under the Baxter Agreement, payments of $5.0 million each for extensions of the period during which such additional products may be selected, and a $7.0 million license payment for M834 upon the achievement of pre-defined “minimum development” criteria, as defined in the agreement. The Company is also eligible to receive from Baxter an aggregate of approximately $316.0 million in potential milestone payments, comprised of (i) up to $66.0 million in substantive milestone payments upon achievement of specified technical and development milestone events across the five product candidates, and (ii) regulatory milestone payments totaling up to $250.0 million, on a sliding scale, across the five 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 or acceptance in the European Union of an equivalent application.

 

The Company continues to advance development of its two biosimilar products under development with Baxter. In October 2014, the Company achieved pre-defined “minimum development” criteria for M834 and earned (and collected from Baxter) the $7.0 million license payment in the fourth quarter of 2014. Also in October 2014, Baxter submitted a clinical trial application for M923 to support the initiation of a Phase 1 clinical trial in the European Union. Acceptance of the clinical trial application triggers technical and development milestone payments totaling $12.0 million.

 

In addition, if any of the five 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 we also have certain rights to directly commercialize such product, as opposed to terminating the Baxter Agreement, in event of such a breach by Baxter.

 

In accordance with FASB’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

 

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rates for similar services. At the inception of the Baxter Agreement, the arrangement consideration of $61.0 million, which included the $33.0 million upfront payment and aggregate option payments for the four additional biosimilars of $28.0 million, was allocated to the units of accounting based on the relative selling price method. Of the $61.0 million, $10.3 million was 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 was allocated to the joint steering committee unit of accounting. In December 2013, Baxter terminated its option to license M511, a named product under the Baxter Agreement. Accordingly, the expected consideration to be received under the arrangement has been reduced by $7.0 million (M511 option payment) and there is now one less deliverable. The Company determined that the change in expected consideration to be received under the arrangement represents a change in estimate and, as a result, the Company reallocated the revised expected consideration of $54.0 million to the remaining deliverables under the agreement using the original best estimate of selling price. The Company will recognize the resulting change in revenue on a prospective basis. Of the $54.0 million, $11.0 million was allocated to the first initial product license together with the related research and development services, $11.0 million to each of the three additional product licenses with the related research and development services, $10.0 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 $122,000 was allocated to the joint steering committee unit of accounting.

 

The Company will commence revenue recognition for each of the five 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 $7.0 million license payment for M834 will be combined with the $10.0 million consideration previously allocated to that product and will be recognized on a straight line basis over the period research and development services will be provided. 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 five 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 eight years, respectively, and the period of performance for the joint steering committee is approximately eleven years.

 

In 2012, the Company commenced recognition of the revenue allocated to the two initial products but not for the three additional products as those licenses have not been delivered. 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. Beginning in the second quarter of 2013, the Company commenced billing to Baxter external development costs for reimbursable activities related to M923. Beginning in the second half of 2013, the Company commenced billing to Baxter FTE fees related to M923. See tables above for research and development revenue earned by the Company under the Baxter Agreement. The portion of the upfront payment that is unearned at September 30, 2014 is included in deferred revenue.

 

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

 

·                   carbohydrate synthesis methods.

 

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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, 2014 and 2013 (in thousands):

 

 

 

For the Three
Months
Ended
September 30, 2014

 

For the Three
Months
Ended
September 30, 2013

 

For the Nine
Months
Ended
September 30, 2014

 

For the Nine
Months
Ended
September 30, 2013

 

License maintenance fees

 

$

22

 

$

21

 

$

63

 

$

62

 

Royalties

 

71

 

75

 

241

 

174

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

93

 

$

96

 

$

304

 

$

236

 

 

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. A portion of the annual license payments was applied against cumulative royalties due for the three and nine months ended September 30, 2014 and 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 40 United States patents and foreign counterparts of some of those. 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

 

In March 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.

 

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 with exercise prices 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 and restricted stock awards may be granted to employees, consultants and members of the Company’s board of directors. Restricted stock awards

 

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generally vest ratably over four years. 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.

 

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 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). On April 14, 2014, the compensation committee of the board of directors approved an amendment and restatement of the 2013 Plan to increase the shares of common stock available for grant under the 2013 Plan by 1,800,000 shares. The amended and restated 2013 Plan became effective on June 11, 2014, the date the Company received stockholder approval. At September 30, 2014, 3,301,068 shares were available for issuance under the 2013 Plan.

 

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.

 

In 2004, the Company’s Board of Directors adopted the 2004 Employee Stock Purchase Plan, or ESPP. Since adoption of the ESPP through February 2014, an aggregate of 524,652 shares of common stock have been reserved for issuance under the ESPP. In March 2014, the board of directors approved the amendment and restatement of the ESPP to increase the shares of common stock available for grant under the ESPP by 500,000 shares. The amended and restated ESPP became effective on June 11, 2014, the date the Company received approval by its stockholders. As of September 30, 2014, 527,968 shares of common stock have been issued to the Company’s employees under the ESPP, and 496,684 shares remain available for future issuance.

 

Share-Based Compensation

 

The Company recognizes the fair value of share-based compensation in its consolidated statements of comprehensive (loss) income. Share-based compensation expense primarily relates to stock options, restricted stock and stock issued under its stock option plans and the ESPP. For stock options, the Company recognizes share-based compensation expense equal to the fair value of the stock options on a straight-line basis over the requisite service period. For time-based restricted stock awards, the Company records share-based compensation expense equal to the market value on the date of the grant on a straight-line basis over each award’s explicit service period. For performance-based restricted stock, each reporting period the Company assesses the probability that the performance condition(s) will be achieved. The Company then expenses the awards over the implicit service period based on the probability of achieving the performance conditions. The Company estimates an award’s implicit service period based on its best estimate of the period over which an award’s vesting condition(s) will be achieved. The Company reviews and evaluates 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. The Company issues new shares upon stock option exercises, upon the grant of restricted stock awards and under its ESPP.

 

Total compensation cost for all share-based payment arrangements, including employee, director and consultant stock options, restricted stock and the ESPP for the three months ended September 30, 2014 and 2013 was $3.4 million and $3.2 million, respectively. Total compensation cost for all share-based payment arrangements, including employee, director and consultant stock options, restricted stock and the ESPP for the nine months ended September 30, 2014 and 2013 was $10.5 million and $9.4 million, respectively.

 

Share-based compensation expense related to outstanding employee stock option grants and the ESPP was $2.6 million and $2.2 million for the three months ended September 30, 2014 and 2013, respectively. Share-based compensation expense related to outstanding employee stock option grants and the ESPP was $7.5 million and $6.2 million for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, the Company granted 1,363,172 stock options, of which 1,164,922 were granted in connection with annual merit awards, 142,000 were granted to the Company’s board of directors, and 56,250 were granted to new hires. 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, 2014 and 2013 was $6.90 per option and $9.52 per option, respectively. The weighted average grant date fair value of option awards granted during the nine months ended September 30, 2014 and 2013 was $10.62 per option and $7.33 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, 2014

 

For the Three
Months
Ended
September 30, 2013

 

For the Three
Months
Ended
September 30, 2014

 

For the Three
Months
Ended
September 30, 2013

 

Expected volatility

 

61

%

65

%

63

%

63

%

Expected dividends

 

 

 

 

 

Expected life (years)

 

6.3

 

6.2

 

0.5

 

0.5

 

Risk-free interest rate

 

2.2

%

2.2

%

0.1

%

0.1

%

 

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Weighted Average Assumptions

 

 

 

Stock Options

 

Employee Stock Purchase Plan

 

 

 

For the Nine
Months
Ended
September 30, 2014

 

For the Nine
Months
Ended
September 30, 2013

 

For the Nine
Months
Ended
September 30, 2014

 

For the Nine
Months
Ended
September 30, 2013

 

Expected volatility

 

66

%

62

%

63

%

64

%

Expected dividends

 

 

 

 

 

Expected life (years)

 

6.1

 

6.0

 

0.5

 

0.5

 

Risk-free interest rate

 

2.2

%

1.4

%

0.1

%

0.1

%

 

At September 30, 2014, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to $18.1 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, 2014, holders of options issued under the Company’s stock plans exercised their right to acquire an aggregate of 155,944 shares of common stock. Additionally, during the nine months ended September 30, 2014, the Company issued 98,910 shares of common stock to employees under the ESPP.

 

Restricted Stock Awards

 

The Company has also made awards of time-based and performance-based restricted common stock to employees and officers. During the nine months ended September 30, 2014, the Company awarded 227,394 shares of time-based restricted common stock to its officers in connection with its annual merit grant. The time-based restricted common stock fully vests over the four years following the grant date. The time-based awards are generally forfeited if the employment relationship terminates with the Company prior to vesting. Between 2011 and early 2013, the Company awarded 949,620 shares of performance-based restricted common stock to employees and officers. 50% of the shares vest upon FDA approval in the United States for M356, the Company’s second major generic program, provided that approval occurs on or before March 28, 2015. The remaining 50% of the awards vest on the one-year anniversary of approval, as long as approval occurs on or before March 28, 2015 and the employment relationship exists on the anniversary date. Each quarter the Company evaluates its estimate of the implicit service period over which the fair value of the awards will be recognized and expensed. The Company determined that it was probable that the performance condition would be achieved and therefore is expensing the fair value of the shares over the implicit service period.  In September 2014, the Company revised its estimate of the implicit service period and 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, 2014 was immaterial.

 

The Company recorded share-based compensation expense related to nonvested, outstanding restricted stock awards, including the performance-based shares, because the Company determined that it was probable the performance condition would be achieved, of $0.8 million and $1.0 million for the three months ended September 30, 2014 and 2013, respectively. The Company recorded share-based compensation expense related to nonvested, outstanding restricted stock awards, including the performance-based shares, because the Company determined that it was probable the performance condition would be achieved, of $3.0 million for each of the nine months ended September 30, 2014 and 2013. As of September 30, 2014, the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to $6.8 million, which is expected to be recognized over the weighted average remaining requisite service period of 1.6 years.

 

A summary of the status of nonvested shares of restricted stock as of September 30, 2014 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, 2014

 

1,134

 

$

14.41

 

Granted

 

227

 

17.96

 

Vested

 

(113

)

13.57

 

Forfeited

 

(23

)

14.78

 

 

 

 

 

 

 

Nonvested at September 30, 2014

 

1,225

 

$

15.14

 

 

Nonvested shares of restricted stock that have time-based or performance-based vesting schedules as of September 30, 2014 are summarized below (in thousands):

 

Vesting Schedule

 

Nonvested
Shares

 

Time-based

 

411

 

Performance-based

 

814

 

 

 

 

 

Nonvested at September 30, 2014

 

1,225

 

 

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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 the Company attained its job creation commitment in 2012 and maintained it in 2013, it recognized one-fifth of the $1.1 million job creation tax award, or $0.2 million, as other income in each of the years ended December 31, 2013 and 2012. The unearned portion of the award is included in other liabilities in the consolidated balance sheet. The Company will continue to recognize an equal portion of the award as other income over the five year period it must maintain its job creation commitments.

 

8. At-The-Market Offering

 

In May 2014, the Company entered into an At-The-Market Equity Offering Sales Agreement, or the Sales Agreement, with Stifel, Nicolaus & Company, Incorporated, or Stifel, under which the Company is authorized to issue and sell shares of its common stock having aggregate sales proceeds of up to $75 million from time to time through Stifel, acting as sales agent and/or principal.

 

The offering is being conducted by the Company pursuant to a shelf registration statement previously filed with the Securities and Exchange Commission. The proceeds from this facility will be used to advance our development pipeline and for general corporate purposes, including working capital. As of September 30, 2014, no shares were issued pursuant to the Sales Agreement.

 

9. 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, or Vertex, 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. On July 15, 2014, the Company and Vertex entered into an agreement to extend the term of the West Kendall Sublease through April 2018, or such other earlier date as provided in accordance with the West Kendall Sublease.  During the extension term, which will commence May 1, 2015, annual rental payments will be approximately $4.8 million.

 

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, to 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 are 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 agreed to pay the Company a tenant improvement allowance of $0.7 million for reimbursement of laboratory and office improvements made by the Company (and subsequently reimbursed by BMR). The Company has recorded short and long-term liabilities for the construction allowance in its consolidated balance sheet, which is being amortized on a straight-line basis through a reduction to rental expense over the term of the lease.

 

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, 2014 are as follows (in thousands):

 

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Operating
Leases

 

October 1, 2014 through December 31, 2014

 

$

2,774

 

2015

 

11,177

 

2016

 

9,189

 

2017

 

4,924

 

2018

 

1,608

 

 

 

 

 

Total future minimum lease payments

 

$

29,672

 

 

Legal Contingencies

 

The Company is involved in various litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain and it is possible that an unfavorable resolution of these matters will adversely affect the Company, its results of operations, financial condition and cash flows. The Company’s general practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when losses are probable and reasonably estimable. The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of any accrual on its consolidated balance sheets.

 

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 a 20 mg/mL formulation of M356. The suit alleged infringement related to four of the seven Orange Book-listed patents 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 Orange Book is a publication of the FDA that identifies drug products approved on the basis of safety and effectiveness by the FDA under the Federal Food, Drug, and Cosmetic Act and includes patents that are purported by the drug application owner to protect each drug. If there is a patent listed for the branded drug in the Orange Book at the time of submission of an ANDA, or at any time before an ANDA is approved, a generic manufacturer’s ANDA must include one of four types of patent certification with respect to each listed patent. See “Part I, Item 1. Business — Regulatory and Legal Matters” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 28, 2014. The Company and Sandoz asserted various defenses and filed counterclaims for declaratory judgments to have all seven of the Orange Book-listed patents, as well as two additional patents, in the same patent family adjudicated in that 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-listed patents 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 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-listed patents and one non-Orange Book-listed patent expires on May 24, 2014 and one non-Orange Book-listed patent expires on September 1, 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 ANDA or Mylan ANDA prior to the expiration of the Orange Book-listed patents. In July 2012, the Company appealed the decision to the Court of Appeals for the Federal Circuit, or CAFC, and in July 2013, the CAFC issued a written opinion invalidating several of the patents, including the one patent set to expire in 2015. The other patents expired on May 24, 2014. The CAFC remanded the case to the District Court to modify the injunction in light of the CAFC decision. In September 2013, Teva filed a petition for rehearing of the CAFC decision, and on October 18, 2013 the CAFC denied the petition. Teva filed a petition for review by the Supreme Court of the United States in January 2014 and in March 2014 the Supreme Court granted certiorari in the case in order to review the appropriate standard for deference to district court findings related to claim construction. Briefing was completed in September 2014, and oral argument was held in October 2014. The Supreme Court could render a decision by the end of the year or during the first half of 2015. While the Company believes the Supreme Court should affirm the CAFC decision, it could rule otherwise and, among other things, remand the case to a lower court for additional findings to determine the validity of the relevant patent claims that had previously been determined to be invalid. During the pendency of this litigation any launch of the generic Copaxone product would be a launch at risk of infringement.

 

On September 10, 2014, Teva and Yeda filed suit against the Company and Sandoz in the United States Federal District Court in the District of Delaware in response to the filing by Sandoz of the ANDA with a Paragraph IV certification for a 40 mg/mL formulation of M356. The suit alleges infringement related to two Orange Book-listed patents for 40 mg/mL Copaxone, each expiring in 2030, and seeks declaratory and injunctive relief prohibiting the launch of the Company’s product until the last to expire of these patents. The Company and Sandoz have asserted various defenses and filed counterclaims for declaratory judgments of non-infringement, invalidatity and unenforceability of both patents.

 

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.

 

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In January 2013, Amphastar and Actavis filed a motion for summary judgment in the District Court following the decision from the CAFC and in July 2013, the District Court granted the motion for summary judgment. The Company has filed a notice of appeal of that decision to the CAFC. In February 2014, Amphastar filed a motion to the CAFC for summary affirmance of the District Court ruling. The Company opposed this motion and the Court denied the motion in May 2014. The CAFC has set a briefing schedule which ends in November 2014. A hearing could be expected in late 2014 or the first half of 2015, and a decision could be expected in 2015. 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. Amphastar has filed motions 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 operating in three product areas: Complex Generics, Biosimilars and Novel Drugs. Our approach is built around a complex systems analysis platform that we use to obtain a detailed understanding of complex chemical and biologic systems, design product candidates based on this knowledge, analyze sets of biological data to evaluate the biological function of our products, and develop manufacturing processes that enable our products to be reliably produced. Our first commercial product, developed in collaboration with Sandoz, Enoxaparin Sodium Injection, a generic version of Lovenox®, was approved in July of 2010, validating our development approach as well as the commercial value of our platform. In the period from commercial launch through September 2011, we capitalized on the advantage of having the only generic version of Lovenox in the marketplace and recognized over $340 million in revenue from this product.

 

The core objective of our complex systems analysis platform is to resolve the complexity of molecular structures and related biologic systems. For the complex systems we seek to understand, we first map the key measurements needed to provide comprehensive data on the system. We then develop a set of analytic tools and methods that include a combination of standard analytics, modified analytic approaches and custom developed analytics and methods. The modified and custom analytics may be protected by trade secrets or patents. The analytic set we use for a development program is designed to provide comprehensive data on the complex molecular mixture and target biology, including providing multiple related and complementary, or orthogonal, measures of the system. We also may use computer software to mine and synthesize the data to yield insights that advance our development programs across all three product areas. As we expand our infrastructure, intellectual property and knowledge of complex biologies, we accrue advantages as well. For example, the process development and manufacturing expertise developed from our complex generic and biosimilars efforts can be directly used to advance our novel drug candidates. The investments in biocharacterization made for our biosimilars program provide a core of models and biologic data sets that can form the basis of inquiries in our novel drug research. And the analytic tools and methods and biologic models we develop help build a substantial toolset that can be used across our programs.

 

As of September 30, 2014, we had an accumulated deficit of approximately $353 million. To date, we have devoted substantially all of our capital resource expenditures to the research and development of our product candidates. We have been incurring operating losses and we expect to incur annual operating losses over the next several years as we advance our drug development portfolio. We expect that our return to profitability, if at all, will most likely come from the commercialization of the products in our drug development portfolio. Additionally, we plan to continue to evaluate possible acquisitions or licensing of rights to related technologies, products or assets that fit within our growth strategy. Accordingly, we will need to generate significant revenue to return to profitability.

 

Our Product Areas

 

Complex Generics

 

In our Complex Generics product area, we develop generic versions of complex drugs 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

 

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regulatory pathway and have submitted Abbreviated New Drug Applications, or ANDAs, for these products. Enoxaparin Sodium Injection, our first product to receive FDA marketing approval under an ANDA, is a generic version of Lovenox (enoxaparin sodium injection) and has been developed and commercialized in collaboration with Sandoz Inc. and Sandoz AG, collectively Sandoz, affiliates of Novartis AG. 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 deep vein thrombosis, or DVT, and to support the treatment of acute coronary syndromes, or ACS.

 

Our second complex generic product candidate, M356, is designed to be a once-daily 20 mg/mL generic version of Copaxone® (glatiramer acetate injection), a complex drug consisting of a synthetic mixture of polypeptide chains. Copaxone is indicated for treatment of patients with relapsing-remitting multiple sclerosis, or RRMS, a chronic disease of the central nervous system characterized by inflammation and neurodegeneration. We are also collaborating with Sandoz to develop and commercialize a three-times-a-week 40 mg/mL generic Copaxone, and the Sandoz ANDAs for both formulations are currently under FDA review.

 

Most drugs approved as NDAs are simple small molecules that are easy to duplicate. However, products such as Lovenox and Copaxone are complex molecular mixtures that are difficult to analyze and therefore difficult to reproduce as generics. We use our complex systems analysis platform to define the detailed structures present in these complex drugs. Once the precise structures are identified, or characterized, this structural characterization of the brand product is used to guide the development of a precise manufacturing process to produce a generic version. Finally, to demonstrate that the biological function of our generic replicates that of the brand, we utilize our complex systems analysis platform to evaluate and compare multiple orthogonal sets of biologic data from in-vitro, in-vivo and ex-vivo models.

 

Biosimilars

 

Our second product area is biosimilars, which is targeted toward developing biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. 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 opened the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics, including antibodies, cytokines, fusion proteins, hormones and blood factors. By 2015, sales of biosimilars are expected to reach between $1.9 billion to $2.6 billion. For biosimilars, we seek to better understand the complex systems within cells that are involved in the assembly of proteins. This knowledge enables us to select the appropriate cell line and to manipulate the cell’s outputs using novel control strategies during the manufacturing with the goal of producing a biologic with structural similarity to the brand. Nevertheless, because of the complexity and variability of biologic manufacturing systems, it is important to evaluate whether any small differences between the biosimilar and the brand would be related to potential clinical differences. To minimize this residual uncertainty, we evaluate orthogonal sets of both structural and biologic data (biocharacterization) from in-vitro, in-vivo and ex-vivo models to compare the function of the brand product and our product. We believe that our complex systems analysis approaches, including these characterization methods, can significantly reduce residual uncertainty and may enable a relative reduction or even elimination of certain clinical trial requirements.

 

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 that our strategy for the development of biosimilars aligns well with the framework that the FDA has outlined in the draft guidance documents.

 

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. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities.

 

Under the Baxter Agreement, we and Baxter agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilar product candidates, which are:

 

·                   Our most advanced biosimilar M923 is a biosimilar for HUMIRA® (adalimumab), a product indicated for certain autoimmune and inflammatory diseases. In October 2014, Baxter submitted a clinical trial application to support the initiation of a Phase 1 clinical trial in the European Union. Acceptance of the clinical trial application triggers two development milestones under the Baxter Agreement for an aggregate payment of $12.0 million.

 

·                   M834, a biosimilar also indicated for certain autoimmune and inflammatory diseases. In October 2014, we achieved a pre-defined “minimum development criteria” milestone under the Baxter Agreement and earned (and collected from Baxter) a $7.0 million license payment.

 

In addition to collaborating with Baxter to develop and commercialize biosimilars, we are also investing in a set of early stage biosimilar programs in order to allow us to broaden our future biosimilar product portfolio and technology base.

 

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Novel Drugs

 

We believe that applying our complex systems analysis platform to the discovery and development of novel medicines can enhance our probability of success in a number of ways. As with our complex generics and biosimilars, our platform gives us a detailed understanding of the complex structures of our novel product candidates, their associated manufacturing processes and controls, and the targeted biologic systems.

 

Our most advanced novel candidate, necuparanib (formerly M402), is being evaluated in a Phase 1/2 clinical study as a potential anti-cancer agent. In preclinical models, necuparanib binds to multiple growth factors, adhesion molecules and chemokines to inhibit tumor angiogenesis, progression, and metastasis. In October 2014, we completed Part A of the study, determined the dose to take forward into Part B, and released initial safety and efficacy data from Part A.

 

We are also applying our complex systems analysis platform to identify potential improvements we can design into presently marketed complex mixture drugs. By evaluating their interaction with biologic systems, we can obtain an enhanced understanding of their function to identify biological activities we can exploit. This is the approach behind our novel drug research efforts to exploit the sialylation of intravenous immunoglobulin, or IVIg, and to identify drug candidates that target autoantibodies and immune complexes that drive many autoimmune diseases.

 

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.

 

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, 2014, Novartis AG owns approximately 9% of our outstanding common stock.

 

In July 2010, Sandoz began the commercial sale of Enoxaparin Sodium Injection. The profit-share or royalties Sandoz is 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 by Sanofi-Aventis. 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 annual adjustment of $2.2 million for the product year ending June 30, 2014 was decreased by $2.1 million to reflect an adjustment to royalties earned in the product year ended June 30, 2012. The annual adjustment was $3.8 million for the product year ended June 30, 2013. Annual adjustments are recorded as a reduction in product revenue.

 

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 biosimilars. The Baxter Agreement became effective in February 2012. 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 2013. We expect that any increase in operating expenses in future years will be partially offset in those years by revenues from option fees and milestone payments under the Baxter Agreement, subject to achievement of technical and regulatory criteria. Under the Baxter Agreement, we and Baxter are collaborating on the development and commercialization of M923, a biosimilar for HUMIRA®, and M834, a biosimilar indicated for certain autoimmune and inflammatory diseases. Baxter has the right, until February 2015, to select up to three additional biosimilars to be included in the collaboration.

 

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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 as we deliver product licenses and research and development services under that collaboration. 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.

 

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.

 

Our Portfolio

 

Complex Generics

 

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 deep vein thrombosis, or DVT, and to support the treatment of acute coronary syndromes, or 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, we and Sandoz each bear our 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, making it the first ANDA for a generic Lovenox to be approved by FDA. 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

 

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CAFC, and in January 2012, the CAFC stayed the preliminary injunction. Amphastar has filed motions 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 January 2013, Amphastar and Actavis filed a motion for summary judgment in the District Court following the decision from the CAFC and in July 2013, the District Court granted the motion for summary judgment. We have filed a notice of appeal of that decision to the CAFC. In February 2014, Amphastar filed a motion to the CAFC for summary affirmance of the District Court ruling. We opposed this motion and the Court denied the motion in May 2014. The CAFC has set a briefing schedule which ends in November 2014. A hearing could be expected in late 2014 or the first half of 2015, and a decision could be expected in 2015.

 

In December 2010, we sued Teva in the United States District Court for the District of Massachusetts for infringement of two of our patents related to Enoxaparin Sodium Injection. 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 in July 2013, the District Court granted the motion for summary judgment. We have filed a notice of appeal of the decision to the CAFC, and in June 2014 filed our opening brief. We anticipate that this case will be heard in parallel with the suit against Amphastar and Actavis.

 

M356—Generic Copaxone® (glatiramer acetate injection)

 

Our second complex generic product candidate, 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 treatment of patients with relapsing-remitting multiple sclerosis, or 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. Copaxone is available in both a once-daily 20 mg/mL formulation, which was approved by the FDA in 1996, and a three-times-a-week 40 mg/mL formulation, which was approved in January 2014. Under the Second Sandoz Collaboration Agreement, we and Sandoz AG agreed to exclusively collaborate on the development and commercialization of M356, among other products. Given its structure as a complex mixture of polypeptide chains of various lengths and sequences, there are significant technical challenges involved in thoroughly characterizing Copaxone and in manufacturing an equivalent version. We believe our technology can be applied to characterize glatiramer acetate and to develop a generic product that has the same active ingredient as Copaxone. We are continuing to expand our portfolio of pending patent applications related to glatiramer acetate injection.

 

Under the Second Sandoz Collaboration Agreement, costs, including development costs and the costs of clinical studies, will be borne by the parties in varying proportions depending on the type of expense and the related product. For M356, we are generally responsible for all of the development costs in the United States. For M356 outside of the United States and for Enoxaparin Sodium Injection in the European Union, we share development costs in proportion to our profit sharing interest. All commercialization responsibilities will be borne by Sandoz AG worldwide as they are incurred for all products. Upon commercialization, we will earn a 50% contractual profit share on worldwide net sales of M356. 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. We are reimbursed at cost for any full-time equivalent employee expenses as well as any external costs incurred in the development of products to the extent development costs are born by Sandoz AG. 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, including any patent infringement damages, will be offset against the profit-sharing amounts in proportion to our profit sharing interest. The parties will share profits in varying proportions, depending on the product.

 

In December 2007, Sandoz submitted to the FDA an ANDA seeking approval to market a once-daily 20 mg/mL 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 as of December 27, 2007. The Sandoz ANDA for the 20 mg/mL formulation of M356 is currently under FDA review.

 

In collaboration with Sandoz, we also developed a three-timesaweek 40 mg/mL formulation of generic Copaxone. Sandoz submitted an ANDA to the FDA in February 2014 seeking approval to market the 40 mg/mL formulation containing a Paragraph IV certification. On August 28, 2014, the FDA notified Sandoz that it had accepted the ANDA for review with a filing date of February 14, 2014 and that Sandoz’s ANDA would be eligible for the grant of a 180-day generic exclusivity period upon approval with other applicants who filed on the same date.  The Sandoz ANDA for the 40 mg/mL formulation of M356 is currently under FDA review.

 

Since 2008, Teva has filed seven Citizen Petitions with FDA requesting that FDA deny the approval of any ANDA filed for generic Copaxone. The FDA has denied five of the Citizen Petitions filed by Teva, Teva withdrew one and one is pending.  Teva filed suit against the FDA in the United States District Court for the District of Columbia in May 2014, seeking a court order granting the relief sought in the Citizen Petitions. We and Sandoz intervened in the suit, and following a hearing on a motion for the preliminary injunction, the Court dismissed the case for lack of jurisdiction prior to approval of the ANDA. We anticipate Teva will continue to engage in activities that seek to challenge the approval of our M356 ANDAs.

 

Subsequent to FDA’s acceptance of the 20 mg/mL M356 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-listed patents for Copaxone. The Orange Book is a publication of the FDA that

 

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identifies drug products approved on the basis of safety and effectiveness by the FDA under the Federal Food, Drug, and Cosmetic Act and includes patents that are purported by the drug application owner to protect each drug.  If there is a patent listed for the branded drug in the Orange Book at the time of submission of an ANDA, or at any time before an ANDA is approved, a generic manufacturer’s ANDA must include one of four types of patent certification with respect to each listed patent.  See “Part I, Item 1. Business — Regulatory and Legal Matters” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 28, 2014. We and Sandoz asserted various defenses and filed counterclaims for declaratory judgments to have all seven of the Orange Book-listed patents, as well as two additional patents, in the same patent family adjudicated in that 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-listed patents 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-listed patents and one non-Orange Book-listed patent expire on May 24, 2014 and one non-Orange Book-listed patent expires on September 1, 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 ANDA or Mylan ANDA prior to the expiration of the Orange Book-listed patents. In July 2012, we appealed the decision to the CAFC, and in July 2013, the CAFC issued a written opinion invalidating several of the patents, including the one patent set to expire in 2015. The other patents expired on May 24, 2014. The CAFC remanded the case to the District Court to modify the injunction in light of the CAFC decision. In September 2013, Teva filed a petition for rehearing of the CAFC decision, and in October 2013 the CAFC denied the petition. Teva filed a petition for review by the Supreme Court of the United States in January 2014 and in March 2014 the Supreme Court granted certiorari in the case in order to review the appropriate standard for deference to district court findings in claim construction.  Briefing was completed in September 2014, and oral argument was held in October 2014. The Supreme Court could render a decision by the end of the year or during the first half of 2015. While we believe the Supreme Court should affirm the CAFC decision, it could rule otherwise and, among other things, remand the case to a lower court for additional findings to determine the validity of the relevant patent claims that had previously been determined to be invalid. During the pendency of this litigation any launch of the generic Copaxone product would be a launch at risk of infringement. On April 18, 2014, the Supreme Court denied Teva’s request for a stay of the CAFC ruling. Teva had sought to prohibit the introduction of an FDA-approved generic Copaxone until the Supreme Court resolution of the case.

 

On September 10, 2014, 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 District of Delaware in response to the filing by Sandoz of the ANDA with a Paragraph IV certification for a 40 mg/mL formulation of M356. The suit alleges infringement related to two Orange Book-listed patents for 40 mg/mL Copaxone and seeks declaratory and injunctive relief prohibiting the launch of our product until the last to expire of these patents.

 

Biosimilars

 

We are also applying our complex systems analysis platform to the development of biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. 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 opened the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics, including antibodies, cytokines, fusion proteins, hormones and blood factors. By 2015, sales of biosimilars are expected to reach between $1.9 billion to $2.6 billion. 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 that our strategy for the development of biosimilars aligns well with the framework that the FDA has outlined in the draft guidance documents.

 

Given the inadequacies of standard technology available at the time of original review and approval, 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, various cross linkages, and backbone modifications that vary from molecule to molecule. These variations can impart specific biological properties to the therapeutic protein. We believe our approach to thoroughly understand these variations and engineer a highly similar biologic has the potential to drive regulatory advantages such as a reduction in the level of clinical data required for approval, the ability to achieve extrapolation of indications, and/or the achievement of a designation of interchangeability, which would allow our products to be directly substituted for brand products at the pharmacy.

 

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 biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities. Under the Baxter Agreement, we and Baxter agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilar product candidates, M923, a biosimilar for HUMIRA®, and M834, a biosimilar indicated for certain autoimmune and inflammatory diseases. In October 2014, Baxter submitted a clinical trial application for M923 to support the initiation of a Phase 1 clinical trial in the European Union. Acceptance of the clinical trial application triggers two M923 development milestones under the Baxter Agreement for an aggregate payment of $12.0 million. Also in October 2014, we achieved a pre-defined “minimum development” criteria milestone for M834 and earned (and collected from Baxter) a $7.0 million milestone payment.

 

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In addition to collaborating with Baxter on M923 and M834, we are evaluating additional products for biosimilar development. Baxter has the right, until February 2015, to select up to three additional biosimilars to be included in the collaboration.

 

We are also investing in a set of earlier stage biosimilar programs that will allow us to broaden our biosimilar product portfolio and technology base.

 

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 2012, the FDA implemented 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.

 

Novel Drugs

 

Overview

 

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

 

Necuparanib

 

Necuparanib is a novel oncology drug candidate engineered to have a broad range of effects on tumor cells. 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. Necuparanib, which is derived from unfractionated heparin, has been engineered to have significantly reduced anticoagulant activity while preserving the relevant antitumor properties of heparin. In June 2014, necuparanib received Orphan Drug Designation from the U.S. FDA for the treatment of pancreatic cancer. The FDA’s Orphan Drug Designation program provides orphan status to drugs and biologics intended to treat, diagnose or prevent rare diseases/disorders, defined as affecting fewer than 200,000 people in the U.S. This designation provides certain incentives, including federal grants, tax credits, and waiver of Prescription Drug User Fee Act, or PDUFA, filing fees. A product with orphan drug status also has the potential to receive a seven-year orphan drug exclusivity once approved.

 

Researchers have conducted a series of nonclinical experiments using mouse and rat tumor models of pancreatic, breast, colorectal, ovarian, and prostate cancer as well as melanoma to test the hypothesis that necuparanib can modulate tumor progression and metastasis. Necuparanib exhibits potent binding to multiple heparin-binding growth factors, adhesion molecules, and chemokines (such as VEGF, FGF-2, SDF-1, P-selectin, etc.) and neutralizes these by blocking the interaction with their receptors or by dissolving their gradients in the tumor microenvironment. As a result, necuparanib has been shown in these models to inhibit tumor cell progression, metastasis, and angiogenesis. Additionally, the nonclinical data showed that necuparanib in combination with gemcitabine prolonged survival and substantially lowered the incidence of metastasis, suggesting that necuparanib has the potential to complement conventional chemotherapy. We believe that necuparanib’s mechanism of action, by binding to multiple heparin binding factors involved in tumor growth and metastasis, creates the potential for necuparanib to contribute to efficacy in a broad range of cancers.

 

In 2012, we initiated a Phase 1/2 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 necuparanib in combination with nab-paclitaxel and

 

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gemcitabine. Part A is an open-label, multiple ascending dose escalation study. We have successfully completed the Part A dose escalation component of the Phase 1/2 trial and selected the dose to take forward into Part B of the study. Part B will be a randomized, controlled, proof of concept study to evaluate the antitumor activity of necuparanib in combination with nab-paclitaxel and gemcitabine, compared with nab-paclitaxel and gemcitabine alone. In October 2014, we released initial clinical data from Part A and we expect to report additional clinical data from Part A including safety, pharmacokinetics, pharmacodynamics, and preliminary efficacy in the first half of 2015. Part B of the study was also initiated in October 2014.

 

Discovery Research Program

 

The majority of human diseases result from the interaction of a complex web of biologic systems. We believe our core analytical tools and approach may enable new insights into the complex biology underlying diseases. This enhanced understanding should help us establish the relative role of different biological targets and related cell signaling pathways in contributing to the disease process. Our goal is to leverage this knowledge to identify novel targets, novel combinations of therapies, and possibly exploit the multi-targeting nature of complex mixture molecules to develop novel products which may positively modulate multiple pathways in a disease.

 

We are now focusing our efforts towards developing novel recombinant product candidates for the treatment of autoimmune diseases. Certain autoimmune diseases are currently treated with IVIg. IVIg contains pooled, human immunoglobulin G, or IgG, antibodies purified from the plasma of over one thousand blood donors. IVIg is approved in several inflammatory disease indications including idiopathic thrombocytopenic purpura, Kawasaki disease, and chronic inflammatory demyelinating polyneuropathy. Currently, IVIg is manufactured from large pools of human plasma, resulting in a high cost supply chain and limited supply due to usage in treating primary immunodeficiency for diseases such as AIDS. While not a focus of our research, usage in AIDS further limits available supply of IVIg for the treatment of autoimmune diseases. Increasing demand for IVIg products already exceeds available supply worldwide thus limiting broader clinical applications.

 

We have advanced our understanding of the the complex biology underlying the anti-inflammatory effects of IVIg and the biologic impact of sialylation, a method to add sialic acid to proteins, on the activity of IVIg as well as the behavior of recombinant molecules engineered from the Fc region of IgG. Through our testing in various models of inflammation and our biological characterization of patients treated with IVIg, we have gained a deeper understanding of the basic biologic pathways by which these molecules mediate their therapeutic effects. We are advancing three novel autoimmune candidates toward clinical development over the next 18-24 months including:

 

·                   Hyper-sialylated IVIg, or hsIVIg, a hyper-sialylated version of IVIg with many in-vivo models showing increased anti-inflammatory activity at a much lower dose, which may enable a simpler administration with the potential for superior efficacy.

 

·                   Selective immunomodulator of Fc receptors, or SIF3, a novel recombinant protein containing three IgG Fc regions joined carefully to maximize activity. Preclinical data has demonstrated that this construct enhances the molecules’ avidity and affinity for the Fc receptors. Using these data, we plan to advance this program with the goal of developing an IVIg-like efficacy profile at lower doses, potentially reducing the risks associated with plasma-derived products.

 

·                   Anti-FcRn antibody, a fully-human monoclonal antibody that blocks the neonatal Fc receptor, or FcRn. This receptor recycles IgG antibodies, enabling a long half-life. Blocking of this receptor with our antibody effectively inhibits the binding of IgGs and leads to their rapid clearance. We believe these data demonstrate high potential for acute and chronic / intermittent therapies in a broad range of autoantibody driven disease.

 

Results of Operations

 

Three Months Ended September 30, 2014 and 2013

 

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.  A portion of Enoxaparin Sodium Injection 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. The contractual share of these development and other expenses is subject to an annual claw-back adjustment at the end of each product year, and ends with the product year ending June 2015. During the three months ended September 30, 2014, we earned $4.7 million in royalties on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $48 million. 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. The decrease in our product revenue of $0.1 million, or 2%, and the decrease in Sandoz’s net sales of $10 million, or 17%, from the 2013 period to the 2014 period are both due to lower prices in response to competitor pricing reductions on enoxaparin.

 

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

 

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·                   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 the $33 million upfront payment.

 

Research and development revenue was $4.6 million and $6.0 million for the three months ended September 30, 2014 and 2013, respectively. The decrease in research and development revenue of $1.4 million, or 23%, from the 2013 period to the 2014 period is due to a decrease in reimbursable M923 research and development services and expenses incurred in connection with the Baxter Agreement.

 

We expect collaborative research and development revenue earned by us related to expense reimbursement from Baxter and Sandoz will fluctuate from quarter to quarter in 2014 depending on our research and development activities. We expect to continue to amortize the $33.0 million upfront payment from Baxter as we deliver research and development services under the Baxter Agreement, with anticipated amortization for the fourth quarter of 2014 of approximately $0.8 million related to the two licensed biosimilars.

 

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 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, 2014 was $27.5 million, compared with $27.4 million for the three months ended September 30, 2013. The increase of $0.1 million, or less than 1/2%, from the 2013 period to the 2014 period resulted from increases of: $2.0 million in costs incurred to advance our research program; $1.2 million in necuparanib clinical costs incurred to complete the Part A dose escalation component of the Phase 1/2 trial; and $0.9 million in facility related costs due to additional subleased laboratory and office space. These increases were offset by a $4.0 million decrease in consulting, third-party process development and contract research costs incurred for our biosimilars in development.

 

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 sets forth the primary components of our research and development external expenditures, including amortization of an intangible asset, for each of our principal development programs for the three months ended September 30, 2014 and 2013. The figures in the table include project expenditures incurred by us and reimbursed by our collaborators, but exclude project expenditures incurred by our collaborators. Although we track and accumulate personnel effort by percentage of time spent on our programs, a significant portion of our internal research and development costs, including salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies are not directly charged to programs. Therefore, our methods for accounting for internal research and development costs preclude us from reporting these costs on a project-by-project basis. 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, 2014

 

Three Months
Ended
September 30, 2013

 

Project Inception to
September 30, 2014