Momenta Pharmaceuticals, Inc.
MOMENTA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/06/2015 12:42:35)

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, 2015

 

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 30, 2015.

 

Class

 

Number of Shares

Common Stock $0.0001 par value

 

68,997,260

 

 

 



Table of Contents

 

MOMENTA PHARMACEUTICALS, INC.

 

 

 

Page

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

3

 

 

PART I. FINANCIAL INFORMATION

4

 

 

 

Item 1.

Financial Statements (unaudited)

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

6

 

 

 

 

Notes to Unaudited, Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

PART II. OTHER INFORMATION

34

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 6.

Exhibits

56

 

 

 

SIGNATURES

57

 

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements contained in this Quarterly Report on Form 10-Q that are about future events or future results, or are otherwise not statements of 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 statements are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management. In some cases, these statements can be identified by words such as “anticipate,” “believe,” “continue,” “could,” “hope,” “target,” “project,” “goal,” “objective,” “plan,” “potential,” “predict,” “might,” “estimate,” “expect,” “intend,” “may,” “seek”, “should,” “will,” “would,” “look forward” and other similar words or expressions, or the negative of these words or similar words or expressions. These statements include, but are not limited to, statements regarding our expectations regarding the development and utility of our products; product candidates and novel therapeutic programs; efforts to seek collaboration partners, including without limitation for our biosimilar programs; the timing of clinical trials and the availability of results; the significance and meaning of results of clinical trials, including without limitation, results from our necuparanib clinical trial; the timing of launch of products and product candidates; Glatopa TM  (glatiramer acetate injection) product revenues and market potential; our M356 (40 mg)-related patent litigation; collaboration revenues and research and development revenues; manufacturing, including our intent to rely on contract manufacturers; regulatory filings and approvals; and the sufficiency of our cash for future operations.

 

Any forward-looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Important factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

3



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, 2015

 

December 31, 2014

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

69,987

 

$

61,349

 

Marketable securities

 

304,882

 

130,180

 

Accounts receivable

 

11,060

 

7,427

 

Unbilled revenue

 

1,969

 

2,909

 

Prepaid expenses and other current assets

 

3,329

 

3,465

 

Total current assets

 

391,227

 

205,330

 

Property and equipment, net

 

22,370

 

25,422

 

Restricted cash

 

20,660

 

20,719

 

Intangible assets, net

 

3,793

 

4,589

 

Other long-term assets

 

156

 

156

 

 

 

 

 

 

 

Total assets

 

$

438,206

 

$

256,216

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,719

 

$

7,433

 

Accrued expenses

 

14,127

 

10,348

 

Deferred revenue

 

9,770

 

5,490

 

Other current liabilities

 

543

 

518

 

Total current liabilities

 

30,159

 

23,789

 

Deferred revenue, net of current portion

 

14,656

 

25,508

 

Other long-term liabilities

 

129

 

551

 

 

 

 

 

 

 

Total liabilities

 

44,944

 

49,848

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share; 5,000 shares authorized at September 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 68,995 shares issued and 68,876 shares outstanding at September 30, 2015 and 54,486 shares issued and outstanding at December 31, 2014

 

6

 

5

 

Additional paid-in capital

 

818,496

 

575,438

 

Accumulated other comprehensive income (loss)

 

16

 

(16

)

Accumulated deficit

 

(423,208

)

(369,059

)

Treasury stock, at cost, 119 shares and zero shares at September 30, 2015 and December 31, 2014, respectively

 

 (2,048

)

 

 

 

 

 

 

 

Total stockholders’ equity

 

393,262

 

206,368

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

438,206

 

$

256,216

 

 

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 COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

8,666

 

$

4,714

 

$

30,693

 

$

15,216

 

Research and development revenue

 

5,129

 

4,622

 

36,565

 

15,855

 

Total collaboration revenue

 

13,795

 

9,336

 

67,258

 

31,071

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development*

 

31,733

 

27,508

 

88,466

 

80,289

 

General and administrative*

 

12,459

 

11,103

 

33,678

 

34,039

 

Total operating expenses

 

44,192

 

38,611

 

122,144

 

114,328

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(30,397

)

(29,275

)

(54,886

)

(83,257

)

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

Interest income

 

252

 

112

 

486

 

452

 

Other income

 

95

 

62

 

251

 

186

 

Total other income

 

347

 

174

 

737

 

638

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(30,050

)

$

(29,101

)

$

(54,149

)

$

(82,619

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.44

)

$

(0.56

)

$

(0.88

)

$

(1.61

)

 

 

 

 

 

 

 

 

 

 

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

 

68,004

 

51,545

 

61,442

 

51,456

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(30,050

)

$

(29,101

)

$

(54,149

)

$

(82,619

)

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

 

(4

)

(26

)

32

 

(5

)

Comprehensive loss

 

$

(30,054

)

$

(29,127

)

$

(54,117

)

$

(82,624

)

 


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

 

Research and development

 

$

2,122

 

$

1,509

 

$

3,031

 

$

4,755

 

General and administrative

 

$

2,435

 

$

1,890

 

$

3,756

 

$

5,760

 

 

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

 

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MOMENTA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(54,149

)

$

(82,619

)

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

 

 

 

 

 

Non-cash items:

 

 

 

 

 

Depreciation and amortization

 

5,799

 

5,663

 

Share-based compensation expense

 

6,787

 

10,515

 

Amortization of premium on investments

 

987

 

1,855

 

Amortization of intangibles

 

796

 

796

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,633

)

5,446

 

Unbilled revenue

 

940

 

357

 

Prepaid expenses and other current assets

 

136

 

(300

)

Restricted cash

 

59

 

 

Accounts payable

 

(1,714

)

(3,157

)

Accrued expenses

 

3,779

 

461

 

Deferred revenue

 

(6,572

)

(2,788

)

Other current liabilities

 

25

 

(4

)

Other long-term liabilities

 

(422

)

(311

)

 

 

 

 

 

 

Net cash used in operating activities

 

(47,182

)

(64,086

)

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property and equipment

 

(2,747

)

(5,907

)

Purchases of marketable securities

 

(281,500

)

(68,805

)

Proceeds from maturities of marketable securities

 

105,844

 

161,280

 

 

 

 

 

 

 

Net cash (used in) / provided by investing activities

 

(178,403

)

86,568

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from public offering of common stock, net of issuance costs

 

148,439

 

 

Net proceeds from issuance of common stock under ATM facilities

 

64,503

 

 

Proceeds from issuance of common stock under stock plans

 

23,329

 

2,628

 

Purchase of treasury stock

 

(2,048

)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

234,223

 

2,628

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

8,638

 

25,110

 

Cash and cash equivalents, beginning of period

 

61,349

 

29,766

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

69,987

 

$

54,876

 

 

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

 

6



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 focused on developing generic versions of complex drugs, biosimilars and novel therapeutics for oncology and autoimmune disease. The Company presently derives all of its revenue from its 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, 2014, 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 27, 2015. 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, 2015 and 2014 (in thousands):

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Weighted-average anti-dilutive shares related to:

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

2,690

 

6,572

 

4,341

 

5,763

 

Restricted stock awards

 

457

 

822

 

547

 

860

 

 

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, 2015 and 2014. 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, 312,916 performance-based restricted common stock awards which vest on the one year anniversary of the U.S. Food and Drug Administration, or FDA, approval for Glatopa in the United States were excluded from

 

7



Table of Contents

 

diluted shares outstanding as the vesting condition for the amended awards, discussed further in Note 6 “ Share-Based Payments,” had not been met as of September 30, 2015.

 

Fair Value Measurements

 

The tables below present information about the Company’s assets that are regularly measured and carried at fair value as of September 30, 2015 and December 31, 2014, and indicate the level within the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

 

Description

 

Balance as of
September 30, 2015

 

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 and overnight repurchase agreement

 

$

64,341

 

$

48,341

 

$

16,000

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

102,034

 

 

102,034

 

 

Commercial paper obligations

 

145,345

 

 

145,345

 

 

Asset-backed securities

 

57,503

 

 

57,503

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

369,223

 

$

48,341

 

$

320,882

 

$

 

 

Description

 

Balance as of
December 31, 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

 

$

55,283

 

$

55,283

 

$

 

$

 

Corporate debt securities

 

980

 

 

980

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

70,668

 

 

70,668

 

 

Commercial paper obligations

 

15,250

 

 

15,250

 

 

Foreign government bonds

 

18,520

 

 

18,520

 

 

Asset-backed securities

 

25,742

 

 

25,742

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

186,443

 

$

55,283

 

$

131,160

 

$

 

 

There have been no impairments of the Company’s assets measured and carried at fair value during the three and nine months ended September 30, 2015 and 2014. In addition, there were no changes in valuation techniques or transfers between the fair value measurement levels during the three and nine months ended September 30, 2015. The fair value of Level 2 instruments classified as marketable securities were determined through third party pricing services. For a description of the Company’s validation procedures related to prices provided by third party pricing services, refer to Note 2 “ Summary of Significant Accounting Policies: Fair Value Measurements ” to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014. 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, U.S. treasury obligations, commercial paper, asset-backed securities and U.S. 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’s cash equivalents are primarily composed of money market funds carried at fair value, which approximates cost at September 30, 2015 and December 31, 2014. The Company classifies corporate debt securities, U.S. treasury obligations, commercial paper, asset-backed securities and U.S. government-sponsored enterprise securities as short-term and long-term marketable securities in its consolidated financial statements. See Note 2 “ Summary of Significant Accounting Policies: Cash, Cash Equivalents and Marketable Securities” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of the Company’s accounting policies.

 

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The following tables summarize the Company’s cash, cash equivalents and marketable securities as of September 30, 2015 and December 31, 2014 (in thousands):

 

As of September 30, 2015

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Cash, money market funds and overnight repurchase agreement

 

$

69,987

 

$

 

$

 

$

69,987

 

Corporate debt securities due in one year or less

 

102,148

 

3

 

(116

)

102,035

 

Commercial paper obligations due in one year or less

 

145,205

 

139

 

 

145,344

 

Asset-backed securities due in one year or less

 

57,513

 

2

 

(12

)

57,503

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

374,853

 

$

144

 

$

(128

)

$

374,869

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,987

 

$

 

$

 

$

69,987

 

Marketable securities

 

304,866

 

144

 

(128

)

304,882

 

Total

 

$

374,853

 

$

144

 

$

(128

)

$

374,869

 

 

As of December 31, 2014 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Cash and money market funds

 

$

60,369

 

$

 

$

 

$

60,369

 

Corporate debt securities due in one year or less

 

71,669

 

3

 

(24

)

71,648

 

Commercial paper obligations due in one year or less

 

15,237

 

13

 

 

15,250

 

Foreign government bonds due in one year or less

 

18,519

 

2

 

(1

)

18,520

 

Asset-backed securities due in one year or less

 

25,751

 

 

(9

)

25,742

 

Total

 

$

191,545

 

$

18

 

$

(34

)

$

191,529

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,349

 

$

 

$

 

$

61,349

 

Marketable securities

 

130,196

 

18

 

(34

)

130,180

 

Total

 

$

191,545

 

$

18

 

$

(34

)

$

191,529

 

 

At September 30, 2015 and December 31, 2014, the Company held 52 and 44 marketable securities, respectively, that were in a continuous unrealized loss position for less than one year. At September 30, 2015, there were no securities in a continuous unrealized loss position for greater than one year. At December 31, 2014, there was one marketable security in a continuous unrealized loss position for greater than one year. The Company believes the unrealized losses were caused by fluctuations in interest rates.

 

The following table summarizes the aggregate fair value of these securities at September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

As of September 30, 2015

 

As of December 31, 2014

 

 

 

Aggregate
Fair Value

 

Unrealized
Losses

 

Aggregate
Fair Value

 

Unrealized
Losses

 

Corporate debt securities due in one year or less

 

$

89,793

 

$

(116

)

$

63,221

 

$

(24

)

Foreign government bonds due in one year or less

 

$

 

$

 

$

12,773

 

$

(1

)

Asset-backed securities due in one year or less

 

$

52,558

 

$

(12

)

$

25,742

 

$

(9

)

 

Treasury Stock

 

Treasury stock represents common stock currently owned by the Company as a result of shares withheld from the vesting of performance-based restricted common stock to satisfy minimum tax withholding requirements.

 

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Table of Contents

 

Comprehensive Income (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.

 

The following tables summarize the changes in accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of July 1, 2015

 

$

20

 

Other comprehensive loss before reclassifications

 

(4

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive loss

 

(4

)

 

 

 

 

Balance as of September 30, 2015

 

$

16

 

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of January 1, 2015

 

$

(16

)

Other comprehensive income before reclassifications

 

32

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive income

 

32

 

 

 

 

 

Balance as of September 30, 2015

 

$

16

 

 

 

 

Unrealized Gains
(Losses) on
Securities
Available for Sale

 

Balance as of July 1, 2014

 

$

46

 

Other comprehensive income before reclassifications

 

(26

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive income

 

(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 before reclassifications

 

(5

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

Net current period other comprehensive income

 

(5

)

 

 

 

 

Balance as of September 30, 2014

 

$

20

 

 

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Table of Contents

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which converges the FASB and the International Accounting Standards Board standards on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The board also agreed to allow entities to choose to adopt the standard as of the original effective date of January 1, 2017. The FASB decided, based on its outreach to various stakeholders and the forthcoming amendments to the new revenue standard, that a deferral is necessary to provide adequate time to effectively implement the new revenue standard. The new standard will be effective for the Company on January 1, 2018. The Company is currently evaluating the method of adoption and the potential impact that ASU 2014-09 may have on its financial position and results of operations.

 

3. Intangible Assets

 

Intangible assets consist solely of core developed technology acquired as part of a 2007 asset purchase agreement with Parivid LLC. See Part I, Item 1 “Business—Collaborations, Licenses and Asset Purchases—Parivid” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for relevant disclosures. The developed technology intangible assets are being amortized over the estimated useful life of the Enoxaparin Sodium Injection and Glatopa developed technologies of approximately 10 years. As of September 30, 2015 and December 31, 2014, intangible assets, net of accumulated amortization, were as follows (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Total intangible assets for core and developed technology and non-compete agreement

 

$

10,427

 

$

(6,634

)

$

3,793

 

$

10,427

 

$

(5,838

)

$

4,589

 

 

The weighted-average amortization period for the Company’s intangible assets is 10 years. 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, 2015 and 2014, and $0.8 million for each of the nine months ended September 30, 2015 and 2014.

 

The Company expects to incur amortization expense of approximately $1.1 million per year for each of the next three years and $0.6 million in the fourth year.

 

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 $2.4 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 ended in April 2015 and will remain restricted during the extension period, which ends in April 2018. 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.

 

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Table of Contents

 

 

 

For the Three Months Ended September 30, 2015 (in thousands)

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxalta Agreement

 

Total Collaborations

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

 

$

8,666

 

$

 

$

8,666

 

 

 

 

 

 

 

 

 

 

 

Research and development revenue:

 

 

 

 

 

 

 

 

 

Regulatory and commercial milestones

 

 

 

 

 

Amortization of upfront payments

 

 

 

2,442

 

2,442

 

Research and development services (FTEs) and external costs

 

69

 

742

 

1,876

 

2,687

 

Total research and development revenue

 

$

69

 

$

742

 

$

4,318

 

$

5,129

 

 

 

 

 

 

 

 

 

 

 

Total collaboration revenues

 

$

69

 

$

9,408

 

$

4,318

 

$

13,795

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

$

 

$

274

 

$

251

 

$

525

 

General and administrative expense (1)

 

$

104

 

$

38

 

$

166

 

$

308

 

Total operating expenses

 

$

104

 

$

312

 

$

417

 

$

833

 

 

 

 

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

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxalta 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 (FTEs) 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

 

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30, 2015 (in thousands)

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxalta Agreement

 

Total Collaborations

 

Collaboration revenues:

 

 

 

 

 

 

 

 

 

Product revenue

 

$

2,843

 

$

27,850

 

$

 

$

30,693

 

 

 

 

 

 

 

 

 

 

 

Research and development revenue:

 

 

 

 

 

 

 

 

 

Regulatory and commercial milestones

 

 

20,000

 

 

20,000

 

Amortization of upfront payments

 

 

 

6,572

 

6,572

 

Research and development services (FTEs) and external costs

 

450

 

2,220

 

7,323

 

9,993

 

Total research and development revenue

 

$

450

 

$

22,220

 

$

13,895

 

$

36,565

 

 

 

 

 

 

 

 

 

 

 

Total collaboration revenues

 

$

3,293

 

$

50,070

 

$

13,895

 

$

67,258

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

$

208

 

$

703

 

$

1,376

 

$

2,287

 

General and administrative expense (1)

 

$

326

 

$

149

 

$

798

 

$

1,273

 

Total operating expenses

 

$

534

 

$

852

 

$

2,174

 

$

3,560

 

 

 

 

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

 

 

 

2003 Sandoz
Collaboration

 

2006 Sandoz
Collaboration

 

Baxalta 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 (FTEs) 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

 

 


(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 2003, the Company entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration, with Sandoz AG (formerly Sandoz N.V. and Biochemie West Indies, N.V.) and Sandoz Inc. (formerly Geneva Pharmaceuticals, Inc.) to jointly develop, manufacture and commercialize Enoxaparin Sodium Injection, a generic version of Lovenox®, 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. The Company refers to Sandoz AG and Sandoz Inc. together as Sandoz.

 

Under the terms of the 2003 Sandoz Collaboration, the Company and Sandoz agreed to exclusively work with each other to develop and commercialize Enoxaparin Sodium Injection for any and all medical indications within the United States. In addition, the Company granted Sandoz an exclusive license under its intellectual property rights to develop and commercialize injectable enoxaparin for all medical indications

 

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Table of Contents

 

outside the United States. The Company identified two significant deliverables in this arrangement consisting of: (i) the license and (ii) development and related services. The Company determined that the license did not meet the criteria for separation as it did not have stand-alone value apart from the development services, which are proprietary to the Company. Therefore, the Company determined that a single unit of accounting exists with respect to the 2003 Sandoz Collaboration.

 

The Company is paid at cost for external costs incurred for commercial and related activities and is paid for full time equivalents, or FTEs, performing commercial and related services.

 

Sandoz began selling Enoxaparin Sodium Injection in July 2010. Under the original payment terms of the 2003 Sandoz Collaboration, Sandoz was obligated to pay the Company either a contractually-defined profit-share or royalty on net sales depending on the kind and number of other marketed generic versions of Lovenox. The Company received 45% of profits from July 2010 through September 2011, a royalty on net sales from October 2011 through December 2011 and a share of profits in January 2012. From February 2012 to March 2015, the Company received a 10% royalty on net sales (12% on net sales above a certain threshold). In June 2015, the Company and Sandoz amended the 2003 Sandoz Collaboration, effective April 1, 2015, to provide that Sandoz would pay the Company 50% of contractually-defined profits on sales. For the three months ended September 30, 2015, Sandoz recorded a loss on its third quarter sales of Enoxaparin Sodium Injection. See “Product revenue” in the tables above for product revenue earned by the Company in the nine months ended September 30, 2015 and the three and nine months ended September 30, 2014 on Sandoz’s 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 a substitutable generic version of a Lovenox-Equivalent Product.

 

The collaboration is governed by a joint steering committee and a joint project team, each consisting of an equal number of Sandoz and Company representatives. Most decisions must be made unanimously, with Sandoz collectively having one vote and the Company having one vote. Sandoz has the sole authority to determine the price at which it sells Enoxaparin Sodium Injection.

 

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 the Company by Sandoz, but only by up to 50% of these amounts due to the Company from Sandoz each quarter.

 

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 Company’s contractual share of these development and other expenses is subject to an annual claw-back adjustment at the end of each product year, with the product year beginning on July 1 and ending on June 30. The annual adjustment can only reduce the Company’s profits, royalties and milestones by up to 50% in a given calendar quarter and any excess amount due will be carried forward into future quarters and reduce any profits in those future periods until it is paid in full. Annual adjustments, including amounts carried forward into future periods, are recorded as a reduction in product revenue. The annual adjustment was approximately $1.9 million for the product year ending June 30, 2015 and in the second quarter the Company paid $0.1 million of the total annual adjustment through a reduction of its second quarter product revenue. The amount of the annual adjustment that will be carried forward into future periods and repaid by offsetting Momenta’s future Enoxaparin product revenue was approximately $1.8 million as of September 30, 2015.

 

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 “Research and development revenue” in the tables above for research and development revenue earned by the Company under the 2003 Sandoz Collaboration.

 

2006 Sandoz Collaboration

 

In 2006 and 2007, the Company 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, the Company and Sandoz AG agreed to exclusively collaborate on the development and commercialization of Glatopa and M356 (40 mg), among other products. Further, under the Second Sandoz Collaboration Agreement, the Company and Sandoz AG expanded the geographic markets for Enoxaparin Sodium Injection covered by the 2003 Sandoz Collaboration to include the European Union. Under 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 was recognized as revenue on a straight-line basis over the estimated development period. 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 was fully earned and amortized to revenue in 2014.

 

Under the Second Sandoz Collaboration Agreement, costs, including development costs and the costs of clinical studies, are borne by the Company and Sandoz AG in varying proportions depending on the type of expense and the related product. For Glatopa and M356 (40 mg), the Company is generally responsible for all of the development costs in the United States. For Glatopa and M356 (40 mg) outside of the United States and for Enoxaparin Sodium Injection in the European Union, the Company shares development costs in proportion to its profit sharing

 

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Table of Contents

 

interest. The Company is reimbursed at a contractual FTE rate 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. All commercialization responsibilities are borne by Sandoz AG worldwide as they are incurred for all products. The Company and Sandoz AG will share profits in varying proportions, depending on the product.

 

Sandoz commenced sales of Glatopa in the United States on June 18, 2015. Under the Second Sandoz Collaboration Agreement, the Company earns 50% of contractually-defined profits on Sandoz’s worldwide net sales of Glatopa. Upon approval of the ANDA and commercialization, the Company then will earn 50% of contractually-defined profits on Sandoz’s worldwide net sales of M356 (40 mg). Profits on net sales of Glatopa and M356 (40 mg) are calculated by deducting from net sales the costs of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of net sales. Sandoz AG is responsible for funding all of the legal expenses incurred under the Second Sandoz Collaboration Agreement; however a portion of certain legal expenses, including any patent infringement damages, can be offset against the profit-sharing amounts in proportion to the Company’s 50% profit sharing interest.

 

For the three months ended September 30, 2015, the Company recorded $8.7 million in product revenues from Sandoz’s profits earned on sales of Glatopa. For the nine months ended September 30, 2015, the Company recorded $27.9 million in product revenues from Sandoz’s sales of Glatopa, reflecting $36.9 million in profits net of a deduction of $9.0 million for reimbursement to Sandoz of the Company’s 50% share of pre-launch Glatopa-related legal expenses. These expenses consist primarily of the costs incurred by Sandoz in connection with the patent infringement suit brought in 2008 by Teva Pharmaceuticals Industries Ltd. and related parties. See Note 9 “Commitments and Contingencies” for information on the suit. In the nine months ended September 30, 2015, the Company earned a $10.0 million regulatory milestone payment upon Glatopa receiving sole FDA approval and an additional $10.0 million milestone payment upon the first commercial sale. The Company is eligible to receive up to $143.0 million in additional milestone payments upon the achievement of certain commercial and sales-based milestones for Glatopa in the United States and Enoxaparin Sodium Injection in the European Union. The Glatopa milestone payments include up to $120.0 million in additional milestone payments upon the achievement of certain U.S. commercial and sales-based milestones for Glatopa. If Enoxaparin Sodium Injection is commercialized in the European Union, the Company is eligible to receive up to $23.0 million in sales-based and commercial milestones. None of these payments, once received, is refundable and there are no general rights of return in the arrangement. 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.

 

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. The Second Sandoz Collaboration Agreement may be terminated if either party breaches the Second Sandoz Collaboration Agreement or files for bankruptcy. In addition, either the Company or Sandoz AG may terminate the Second Sandoz Collaboration Agreement as it relates to the remaining products, on a product-by-product basis, if clinical trials are required.

 

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.

 

Baxalta 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 biosimilars. The agreement became effective in February 2012. Effective as of July 1, 2015, Baxter completed its restructuring into two independent companies. In connection with the restructuring, in April 2015, Baxter assigned all of its rights and obligations under the collaboration agreement relating to M923 (the “Baxter Agreement”) to Baxalta U.S. Inc., Baxalta GmbH and Baxalta Incorporated (collectively, “Baxalta”). In light of the assignment, all references to “Baxter” and the “Baxter Agreement” have been replaced with references to “Baxalta” and the “Baxalta Agreement,” respectively.

 

Under the Baxalta Agreement, the Company and Baxalta agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilars, M923, a biosimilar of HUMIRA® (adalimumab), and M834, a biosimilar of ORENCIA® (abatacept). In addition, Baxalta had the right to select four additional originator biologics to target for biosimilar development under the collaboration. In July 2012, Baxalta selected an additional product: M511, a biosimilar of AVASTIN® (bevacizumab). In December 2013, Baxalta terminated its option to license M511 under the Baxalta Agreement following an internal portfolio review. In February 2015, Baxalta’s right to select additional programs expired without being exercised. Also in February 2015, Baxalta terminated in part the Baxalta Agreement as it relates specifically to M834. The Company retains all worldwide development and commercialization rights for M834. The Baxalta Agreement remains in effect and unchanged with respect to M923.

 

Under the Baxalta Agreement, each party has granted the other an exclusive license under its intellectual property rights to develop and commercialize M923 for all therapeutic indications. The Company has agreed to provide development and related services on a commercially reasonable basis through the filing of an Investigational New Drug application, or IND, or equivalent application in the European Union for

 

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Table of Contents

 

M923. Development and related services include high-resolution analytics, characterization, and product and process development. Baxalta is responsible for clinical development, manufacturing and commercialization activities and will exclusively distribute and market M923. The Company has the right to participate in a joint steering committee, consisting of an equal number of members from the Company and Baxalta, to oversee and manage the development and commercialization of M923 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 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 Baxalta.

 

Baxalta has a right of first negotiation with respect to collaborating with the Company on the development of any biosimilar product candidate that could compete with M923 based on the same mechanism of action. This right is effective until December 2017, subject to certain restrictions as outlined in the Baxalta Agreement.

 

Under the terms of the Baxalta Agreement, the Company received an initial cash payment of $33.0 million, a $7.0 million license payment for achieving pre-defined “minimum development criteria” for M834, and $12.0 million in technical and development milestone payments in connection with the UK Medicines and Healthcare Products Regulatory Agency’s acceptance of Baxalta’s clinical trial application to initiate a pharmacokinetic clinical trial for M923. The Company is eligible to receive from Baxalta, in aggregate, up to $50.0 million in regulatory milestone payments for M923, on a sliding scale, where, based on the product’s regulatory application, there is a significant reduction in the scope of the clinical trial program required for regulatory approval.

 

In addition, if M923 is successfully developed and launched, Baxalta 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 the 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 M923 on a country-by-country basis until there is no remaining payment obligation with respect to the product in the relevant territory, unless earlier terminated by either party pursuant to the terms of the Baxalta Agreement.

 

The Baxalta Agreement may be terminated by:

 

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

 

·                   Baxalta for its convenience; or

 

·                   the Company in the event Baxalta does not exercise commercially reasonable efforts to commercialize M923 in the United States or other specified countries, provided that the Company also has certain rights to directly commercialize M923, as opposed to terminating the Baxalta Agreement, in event of such a breach by Baxalta.

 

At the inception of the Baxalta Agreement, the Company identified seven deliverables under the arrangement in accordance with FASB’s ASU No. 2009-13: Multiple-Deliverable Revenue Arrangements (Topic 615). The deliverables were determined to include (i) the development and product licenses to the two initial biosimilars (M923 and M834) 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. Baxalta’s termination of its option to license M511 in December 2013, Baxalta’s termination of M834 and the lapsing of Baxalta’s right to select additional products in February 2015 reduced the number of deliverables from seven to two and decreased the total consideration from $61.0 million to $40.0 million. The Company determined that the change in total consideration received and total deliverables under the arrangement represented a change in estimate and, as a result, the Company reallocated the revised total consideration of $40.0 million to the remaining deliverables under the agreement using the original best estimate of selling price. The remaining deliverables are the combined unit of account for the M923 license and the related research and development services and the Company’s participation on the joint steering committee. Of the $40.0 million, $39.6 million was allocated to the M923 product license together with the related research and development services and $0.4 million was allocated to the joint steering committee unit of accounting. The Company recognized the resulting change in revenue as a result of the decrease in deliverables and expected consideration on a prospective basis beginning in the first quarter of 2015. The Company records this revenue on a straight-line basis over the applicable performance period, which begins upon delivery of the development and product license and ends upon FDA approval of the product. The Company currently estimates that the performance period for M923 and for the joint steering committee is approximately six years. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for more information on the identification of deliverables and the allocation of arrangement consideration under the Baxalta Agreement. As of September 30, 2015, $24.4 million of revenue was deferred under this agreement, of which $9.8 million was included in current liabilities and $14.6 million was included in non-current liabilities in the consolidated balance sheet.

 

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).

 

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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 Baxalta external development costs for reimbursable activities related to M923. Beginning in the second half of 2013, the Company commenced billing to Baxalta FTE fees related to M923. See tables above for research and development revenue earned by the Company under the Baxalta Agreement.

 

The Company has concluded that the M923 technical development milestones and the IND milestones pursuant to the Baxalta 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 the non-refundable, technical development and IND milestones were recognized upon successful accomplishment of the milestones as research and development revenue.

 

The regulatory milestones, along with any associated royalty or profit sharing payments, will be considered contingent fees that will be recorded as earned in future periods.

 

6. Share-Based Payments

 

Incentive Award Plans

 

The 2013 Incentive Award Plan, or the 2013 Plan, as amended and restated, initially became effective on June 11, 2013, the date the Company received stockholder 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 are 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 are 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 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.

 

The total number of shares reserved for issuance under the 2013 Plan before giving effect to the amendment and restatement described below equals the sum of: (a) 5,100,000, (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 prior to June 9, 2015 (up to a maximum of 4,337,882 shares) and (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 prior to June 9, 2015 (up to a maximum of 950,954 shares).

 

On March 11, 2015, the board of directors approved the amendment and restatement of the 2013 Plan (the “Amended and Restated 2013 Plan”), subject to and effective upon stockholder approval. At the Company’s 2015 Annual Meeting of Stockholders, held on June 9, 2015 (the “Annual Meeting”), stockholders approved the Amended and Restated 2013 Plan. The Amended and Restated 2013 Plan (1) increases the number of shares of common stock available for issuance under the Amended and Restated 2013 Plan by 2,550,000 shares; (2) approves the material terms of performance goals that may apply to awards granted under the Amended and Restated 2013 Plan; (3) increases the fungible ratio under the Amended and Restated 2013 Plan such that any shares subject to awards granted on or after June 9, 2015 or that, in the future, become available for grant under the Amended and Restated 2013 Plan upon forfeiture, expiration or cash settlement of such awards or awards granted under its prior equity plans, other than awards that are options or stock appreciation rights, be counted against or, as applicable, added to the aggregate number of shares available for issuance under the Amended and Restated 2013 Plan as 1.67 shares for every one share granted; and (4) provides that future awards granted under the Amended and Restated 2013 Plan be subject to a minimum one-year vesting requirement, subject to certain limitations. At September 30, 2015, 4,722,746 shares were available for issuance under the Amended and Restated 2013 Plan.

 

Share-Based Compensation

 

The Company recognizes the fair value of share-based compensation in its consolidated statements of comprehensive (loss) income. The Company records compensation cost for all share-based payment arrangements, including employee, director and consultant stock options, restricted stock and the employee stock purchase plan. 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

 

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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.

 

The following table summarizes share-based compensation expense (income) recorded in the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

Share-based compensation expense (income)

 

For the Three
Months
Ended
September 30, 2015

 

For the Three
Months
Ended
September 30, 2014

 

For the Nine
Months
Ended
September 30, 2015

 

For the Nine
Months
Ended
September 30, 2014

 

Outstanding employee and non-employee stock option grants

 

$

2,769

 

$

2,505

 

$

7,785

 

$

7,257

 

Outstanding restricted stock awards

 

1,691

 

780

 

(1,282

)

2,935

 

Employee stock purchase plan

 

97

 

114

 

284

 

323

 

Total compensation cost

 

$

4,557

 

$

3,399

 

$

6,787

 

$

10,515

 

 

During the nine months ended September 30, 2015, the Company granted 1,415,046 stock options, of which 1,165,146 were granted in connection with annual merit awards, 124,250 were granted to board members and 125,650 were granted primarily 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 are noted in the table below. The weighted average grant date fair value of option awards granted during the three months ended September 30, 2015 and 2014 was $11.14 per option and $6.90 per option, respectively. The weighted average grant date fair value of option awards granted during the nine months ended September 30, 2015 and 2014 was $8.00 per option and $10.62 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, 2015

 

For the Three
Months
Ended
September 30, 2014

 

For the Three
Months
Ended
September 30, 2015

 

For the Three
Months
Ended
September 30, 2014

 

Expected volatility

 

53

%

61

%

58

%

63

%

Expected dividends

 

 

 

 

 

Expected life (years)

 

6.2

 

6.3

 

0.5

 

0.5

 

Risk-free interest rate

 

1.9

%

2.2

%

0.1

%

0.1

%

 

 

 

Weighted Average Assumptions

 

 

 

Stock Options

 

Employee Stock Purchase Plan

 

 

 

For the Nine
Months
Ended
September 30, 2015

 

For the Nine
Months
Ended
September 30, 2014

 

For the Nine
Months
Ended
September 30, 2015

 

For the Nine
Months
Ended
September 30, 2014

 

Expected volatility

 

60

%

66

%

59

%

63

%

Expected dividends

 

 

 

 

 

Expected life (years)

 

6.1

 

6.1

 

0.5

 

0.5

 

Risk-free interest rate

 

1.8

%

2.2

%

0.1

%

0.1

%

 

At September 30, 2015, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to $17.2 million, net of estimated forfeitures, which will be recognized over the weighted average remaining requisite service period of 2.4 years.

 

During the nine months ended September 30, 2015, holders of options issued under the Company’s stock plans exercised their right to acquire an aggregate of 1.6 million shares of common stock for $22.3 million in proceeds. Additionally, during the nine months ended September 30, 2015, the Company issued 109,506 shares of common stock to employees under the ESPP resulting in proceeds of approximately $1.0 million.

 

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, 2015, the Company awarded 255,087 shares of time-based restricted common stock primarily to its officers in connection with its annual merit grants. The time-based restricted common stock vest as to 25% on the one year anniversary of the grant date and as to 6.25% quarterly over three years that follow the grant date. The time-based awards are generally forfeited if the employment relationship terminates with the Company prior to vesting.

 

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Between 2011 and early 2013, the Company awarded 949,620 shares of performance-based restricted common stock to employees and officers. The performance-based restricted common stock vests upon FDA approval of the Glatopa ANDA on or before the performance deadline date of March 28, 2015 according to the following vesting schedule: 50% of the shares vest upon FDA approval and 50% vest upon the one-year anniversary of FDA approval. The Company had historically determined that the performance condition was probable of being achieved by March 28, 2015 and, as a result, had recognized approximately $10.5 million of stock compensation costs related to the awards. On March 11, 2015, the Board of Directors approved an amendment to the awards extending the performance deadline date to September 1, 2015 and reducing the original number of shares subject to each award by 15% on the 29th of each month, beginning March 29, 2015. On March 29, 2015, 117,898 shares of performance-based restricted common stock were forfeited pursuant to the modified awards. The Company evaluated the modification and determined it was a Type III modification or “Improbable to Probable” pursuant to ASC 718 as the awards, on the date of modification, were no longer deemed to be probable of being earned by March 28, 2015. As a result, the Company reversed the cumulative compensation cost related to the original awards of $10.5 million in the first quarter of 2015. Also, in accordance with ASC 718, the Company re-measured the modified awards with a measurement date of March 11, 2015, and determined the aggregate compensation was $9.8 million. The FDA approved Glatopa on April 16, 2015. The Company recognizes the compensation cost attributed to the new awards as follows: the first 50% of the awards were expensed beginning on March 11, 2015 and ending on April 16, 2015, the date of FDA approval, and the remaining 50% of the awards expected to vest will be expensed beginning on March 11, 2015 and ending on April 16, 2016, the one year anniversary of FDA approval. Accordingly, approximately $7.1 million of stock compensation cost was recognized in the period beginning March 11, 2015 and ending September 30, 2015. As of September 30, 2015, the total remaining unrecognized compensation cost related to the nonvested portion of the new awards amounted to $2.2 million, which is expected to be recognized over the weighted average remaining requisite service period of 0.5 years.

 

As of September 30, 2015, the total remaining unrecognized compensation cost related to the nonvested portion of the time-based restricted stock awards amounted to $6.4 million, which is expected to be recognized over the weighted average remaining requisite service period of 2.7 years.

 

A summary of the status of nonvested shares of restricted stock as of September 30, 2015 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, 2015

 

1,174

 

$

15.15

 

Granted

 

255

 

13.19

 

Vested

 

(484

)

15.11

 

Forfeited

 

(149

)

14.56

 

 

 

 

 

 

 

Nonvested at September 30, 2015

 

796

 

$

14.66

 

 

Nonvested shares of restricted stock that have time-based or both performance-based and time-based vesting conditions as of September 30, 2015 are summarized below (in thousands):

 

Vesting Schedule

 

Nonvested
Shares

 

Time-based

 

483

 

Performance-based and time-based

 

313

 

 

 

 

 

Nonvested at September 30, 2015

 

796

 

 

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 (2012 - 2016), 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 both 2013 and 2014, 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, 2014, 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.

 

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8. Equity Financings

 

In May 2015, the Company sold an aggregate of 8,337,500 shares of its common stock through an underwritten public offering at a price to the public of $19.00 per share. As a result of the offering, which included the full exercise of the underwriters’ option to purchase additional shares, the Company received aggregate net proceeds of approximately $148.4 million, after deducting underwriting discounts and commissions and other offering expenses. The Company intends to use these proceeds for general corporate purposes, including working capital.

 

In May 2014, the Company entered into an At-the-Market Equity Offering Sales Agreement, or the 2014 ATM Agreement, with Stifel, Nicolaus & Company, Incorporated, or Stifel, under which the Company was 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 Company paid Stifel a commission of 2.0% of the gross proceeds from the sale of shares of its common stock under this facility. The offering was conducted by the Company pursuant to an effective shelf registration statement previously filed with the Securities and Exchange Commission (Reg. No. 333-188227) and a related prospectus supplement. The Company intends to use the net proceeds from this facility to advance its development pipeline and for general corporate purposes, including working capital. The Company concluded sales under the 2014 ATM Agreement in April 2015. In the nine months ended September 30, 2015, the Company sold approximately 3.8 million shares of common stock under the 2014 ATM Agreement, raising aggregate net proceeds of approximately $55.2 million. Between October 2014 and April 2015, the Company sold approximately 5.4 million shares of common stock under the 2014 ATM Agreement, raising aggregate net proceeds of approximately $73.5 million.

 

In April 2015, the Company entered into a new ATM Agreement, or the 2015 ATM Agreement, with 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 Company is required to pay Stifel a commission of 2.0% of the gross proceeds from the sale of shares of its common stock under the 2015 ATM Agreement. Sales of common stock under this facility are made pursuant to an effective shelf registration statement previously filed with the Securities and Exchange Commission (Reg. No. 333-188227) and a related prospectus supplement. In the nine months ended September 30, 2015, the Company sold approximately 0.5 million shares of common stock under the 2015 ATM Agreement, raising aggregate net proceeds of approximately $9.3 million. No shares were sold under the 2015 ATM Agreement in the three months ended September 30, 2015.

 

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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 commenced on May 1, 2015, annual rental payments are 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. See Note 10 “ Subsequent Event ” for further information.

 

Total operating lease commitments as of September 30, 2015 are as follows (in thousands):

 

 

 

Operating
Leases

 

October 1, 2015 through December 31, 2015

 

$

2,820

 

2016

 

9,189

 

2017

 

4,924

 

2018

 

1,608

 

 

 

 

 

Total future minimum lease payments

 

$

18,541

 

 

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.

 

Glatopa-and M356 (40 mg)-Related Litigation

 

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 Glatopa. The suit alleged infringement related to four of the seven Orange

 

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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 certifications 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, 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. 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 nine patents, including one non-Orange Book-listed patent which is set to expire in September 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. On January 20, 2015, the Supreme Court vacated the 2013 decision of the CAFC and remanded the case to the CAFC for additional findings to determine the validity of the relevant patent claims that had previously been determined to be invalid. The parties filed briefs with the CAFC on March 2, 2015. On April 16, 2015, upon FDA approval of Glatopa, the Company requested an expedited decision with a full opinion to follow later. On June 18, 2015, the CAFC issued a decision and found the one remaining patent at issue in the suit invalid. The CAFC decision is final and not subject to further legal review.

 

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 M356 (40 mg). 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, invalidity and unenforceability of both patents. On April 10, 2015, Teva and Yeda filed an additional suit against the Company and Sandoz in the United States District Court for the District of Delaware alleging infringement related to a third Orange Book-listed patent for 40 mg/mL Copaxone, which issued in March 2015 and expires in 2030. In May 2015, this suit was consolidated with the initial suit filed in September 2014. A pre-trial claim construction hearing is anticipated to be held in January 2016 and the trial is scheduled to begin in September 2016.

 

Enoxaparin Sodium Injection-related Litigation

 

On September 21, 2011, the Company and Sandoz sued Amphastar, International Medical Systems, Ltd., a wholly owned subsidiary of Amphastar and, together with Amphastar (“Amphastar”) and Actavis 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 and Actavis from selling their enoxaparin product in the United States. In October 2011, the District Court granted the Company’s motion for a preliminary injunction and entered an order enjoining Amphastar and Actavis 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 and Actavis appealed the decision to the CAFC, and in January 2012, the CAFC stayed the preliminary injunction. In August 2012, the CAFC issued a written opinion vacating the preliminary injunction and remanding the case to the District Court. In September 2012, 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 petition.

 

In July 2013, the District Court granted a motion by Amphastar and Actavis for summary judgment. The Company 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, which the CAFC denied in May 2014. On May 4, 2015, the CAFC held a hearing on the Company’s appeal of summary judgment, and requested the views of the United States Solicitor General on certain issues raised in the suit. The U.S. Solicitor General filed its brief on July 13, 2015. On July 24, 2015, Amphastar and Actavis filed a brief in response to the brief of the U.S. Solicitor General. On August 4, 2015, the Company and Sandoz filed a brief in response to the responsive brief of Amphastar and Actavis. The Company expects the CAFC to issue a decision 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.

 

On September 17, 2015, Amphastar filed a complaint against the Company and Sandoz in the United States District Court for the Central District of California. The complaint alleges that, by filing the September 2011 patent infringement suit against Amphastar and Actavis, the Company and Sandoz sought to prevent Amphastar from selling generic enoxaparin sodium injection and thereby exclude competition for generic

 

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enoxaparin sodium injection in violation of federal and California anti-trust laws and California unfair business laws. Amphastar is seeking unspecified damages. While the outcome of litigation is inherently uncertain, the Company believes the complaint is without merit, and the Company intends to vigorously defend itself in any resulting litigation should the suit be served on the defendants.

 

On October 14, 2015, The Hospital Authority of Metropolitan Government of Nashville and Davidson County, Tennessee, d/b/a Nashville General Hospital (“NGH”) filed a class action suit against the Company and Sandoz in the United States District Court for the Middle District of Tennessee on behalf of certain purchasers of Lovenox or generic enoxaparin sodium injection.  The complaint alleges that, by filing the September 2011 patent infringement suit against Amphastar and Actavis, the Company and Sandoz sought to prevent Amphastar from selling generic enoxaparin sodium injection and thereby exclude competition for generic enoxaparin sodium injection in violation of federal anti-trust laws. NGH is seeking injunctive relief and unspecified damages. While the outcome of litigation is inherently uncertain, the Company believes the complaint is without merit, and it intends to vigorously defend itself in this litigation.

 

10. Subsequent Event

 

On October 28, 2015, the Company exercised its option to extend the term of the Second Bent Street Lease for one year to August 31, 2017. The annual rental payment due during this extension period will be based on the current fair market value for comparable space as agreed by the Company and BMR in accordance with the Second Bent Street Lease. The Company has an option to further extend the term of the Second Bent Street Lease for one additional, consecutive year 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.

 

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Item 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many important factors, such as those set forth under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a biotechnology company focused on developing generic versions of complex drugs, biosimilars and novel therapeutics for oncology and autoimmune disease. Our approach to drug discovery and development 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, evaluate the biological function of products and product candidates, and develop reliable and scalable manufacturing processes. The core objective of our platform is to resolve the complexity of molecular structures and related biologic systems.

 

To date, we have devoted substantially all of our capital resource expenditures to the research and development of our products and product candidates. As of September 30, 2015, we had an accumulated deficit of $423.2 million. Since last being profitable in 2011, we have been incurring operating losses and we may incur annual operating losses over the next several years as we continue to advance our drug development portfolio.

 

Complex Generics

 

Glatopa™ — Generic Copaxone® (glatiramer acetate injection) 20 mg/mL (formerly M356)

 

On April 16, 2015, the FDA approved the ANDA for once-daily Glatopa TM (glatiramer acetate injection) 20 mg/mL (formerly referred to as M356), a generic equivalent of once-daily Copaxone® 20 mg/mL. Glatopa is the first “AP” rated, substitutable generic equivalent of once-daily Copaxone. Sandoz commenced sales of Glatopa on June 18, 2015. Under our collaboration agreement with Sandoz, we earn 50% of contractually-defined profits on Glatopa sales. For the three months ended September 30, 2015, we recorded $8.7 million in product revenues from Sandoz’s profits on sales of Glatopa.

 

Glatopa was formerly referred to as M356. M356 (40 mg) now refers to our generic product candidate for three-times-weekly Copaxone 40 mg/mL.

 

M356 (40 mg) — Generic Three-times-weekly Copaxone® (glatiramer acetate injection) 40 mg/mL

 

An ANDA with a Paragraph IV certification for our generic version of three-times-weekly 40 mg/mL Copaxone, which was filed in February 2014, remains under review by the FDA. Our M356 (40 mg) formulation contains the same drug substance as Glatopa, which we believe should help streamline the FDA review of the ANDA. To date, we are the only ANDA applicants for the three-times-weekly 40 mg/mL Copaxone with an approved active pharmaceutical ingredient. If we are successful in our challenge of the patents related to 40 mg/mL Copaxone, and based on the scheduled September 2016 trial start date and assuming customary patent litigation timelines, we believe M356 (40 mg) could be approved, following expiration of any 30-month stay, if applicable, and be on the market as early as the first quarter of 2017. In August 2015, the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office, or PTAB, instituted an Inter Partes Review (IPR), filed by an unaffiliated third party challenging the validity of several of the same patents relating to 40 mg/mL Copaxone that are the subject of our patent litigation. We believe the outcome of this IPR could also impact our M356 (40 mg) litigation and launch timelines.

 

Enoxaparin Sodium Injection —Generic Lovenox®

 

In June 2015, we and Sandoz amended our collaboration agreement relating to Enoxaparin Sodium Injection, replacing Sandoz’s obligation to pay us a royalty on net sales with an obligation to pay us 50% of contractually-defined profits on sales. The collaboration economics were amended from a royalty to a profit share to align our interests in an evolving market that has seen continued pricing pressure. The amendment was effective April 1, 2015. Sandoz did not record any profit on sales of Enoxaparin Sodium Injection in the three months ended September 30, 2015, and therefore we recorded no revenue for Enoxaparin Sodium Injection in the period.

 

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In addition to Sanofi’s branded generic, which was launched in October 2011, and the generic product by Actavis and Amphastar, which was launched in January 2012, Teva announced that it launched a generic version of enoxaparin sodium injection in February 2015. In the second and third quarters of 2015, our enoxaparin revenue experienced a significant decline as compared with previous quarters as a result of increased generic competition. We do not anticipate significant enoxaparin revenue in the near term.

 

Biosimilars

 

M923 —Biosimilar HUMIRA® (adalimumab) Candidate

 

Effective as of July 1, 2015, Baxter completed a restructuring into two independent companies. In connection with the restructuring, in April 2015, Baxter assigned all of its rights and obligations under our collaboration agreement (the “Baxter Agreement”) relating to M923 to Baxalta U.S. Inc., Baxalta GmbH and Baxalta Incorporated (collectively, “Baxalta”). In light of the assignment, all references to “Baxter” and the “Baxter Agreement” have been replaced with references to “Baxalta” and the “Baxalta Agreement,” respectively.

 

In February 2015, Baxalta (formerly Baxter) commenced a randomized, double-blind, single-dose study in healthy volunteers to compare the pharmacokinetics, safety, tolerability and immunogenicity of M923 versus EU-sourced and US-sourced HUMIRA. We expect data to be available in the fourth quarter of 2015. In October 2015, Baxalta initiated a pivotal clinical trial in patients with chronic plaque psoriasis for M923. The trial is a randomized, double blind, active control, multi-center, global study in patients with chronic plaque psoriasis to compare the safety, efficacy and immunogenicity of M923 with HUMIRA. Baxalta is planning to submit the first regulatory application for marketing approval for M923 in 2017 and, subject to marketing approval and patent considerations, we expect first commercial launch to be as early as 2018.

 

M834 —Biosimilar ORENCIA® (abatacept) Candidate

 

We have all worldwide development and commercialization rights for M834. We continue to develop M834 with a goal of entering clinical development in 2016 and continue to identify and explore potential collaboration opportunities for the program. Subject to marketing approval and patent considerations, we believe M834 could be on the market as early as 2019. We believe there is currently limited biosimilar competition for M834.

 

Other Biosimilar Candidates

 

We also have seven other earlier stage biosimilar programs that we believe will allow us to broaden our biosimilar product portfolio and technology base. We seek to identify and collaborate with strategic partners who can bring best-in-class, global commercial capabilities and can help secure high quality, low cost manufacturing and distribution. We seek to leverage our capabilities and expertise to advance programs to a stage where we can derive optimal stockholder value from each of our collaborations.

 

We continue to pursue potential opportunities to partner one or more of our biosimilar programs, other than M923, with a goal of having an additional collaboration in place by the end of 2015.

 

As of September 30, 2015, we had over 100 employees working on our biosimilars programs. We maintain a state-of-the-art development facility for bioprocess manufacturing development and scale-up.

 

Novel Therapeutics

 

Necuparanib

 

In 2012, we initiated a Phase 1/2 clinical trial evaluating necuparanib in combination with Abraxane® (nab-paclitaxel) plus gemcitabine in patients with advanced metastatic pancreatic cancer. In October 2014, we successfully completed and reported top-line data from Part A, or Phase 1, of the trial, including determining a maximum tolerated dose of 5 mg/kg. In June 2015 at the American Society of Clinical Oncology annual meeting, we reported more mature data from Phase 1 which continued to show acceptable safety and tolerability and encouraging signals of activity, including the following:

 

·                   Adding necuparanib to Abraxane and gemcitabine did not appear to increase the toxicity profile associated with Abraxane and gemcitabine alone.

 

·                   Of the 24 patients who received at least one dose of necuparanib in combination with Abraxane plus gemcitabine, the median overall survival was 14.2 months. Also, within a subset of 16 patients who completed one cycle and had at least one scan on treatment, the median overall survival was 15.3 months.

 

·                   Of the 15 patients treated with necuparanib in combination with Abraxane plus gemcitabine that completed Cycle 1 and had at least one follow-up measurement for CA19.9 (a biomarker predictive of long-term outcome and treatment response in pancreatic cancer), 93% had a greater than 50% decrease from baseline, and 100% had a greater than 20% decrease from baseline.

 

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We believe the safety data and early signals of activity are encouraging and that the 5 mg/kg dose has the potential to provide significantly higher levels of activity against multiple cancer targets than traditional anticoagulant heparins have achieved. We believe these results, combined with nonclinical data in other cancer models, and necuparanib’s differentiated, multi-targeted mechanism of action, suggest the possibility of combining necuparanib with other chemotherapy and targeted therapy standards of care in a variety of other tumor types. We continue to collect data from Phase 1 of the trial and plan to publish and/or present updated results following the completion of the study.

 

We continue to enroll patients in Part B, or Phase 2, of the trial, to evaluate the antitumor activity of necuparanib in combination with Abraxane plus gemcitabine, versus Abraxane plus gemcitabine alone. We expect data from this randomized trial to be available in the first half of 2017. Subject to successfully completing clinical trials and obtaining marketing approval, we believe necuparanib could be on the market in the 2020-2021 timeframe, or potentially earlier under Fast-Track Designation.

 

In June 2014, necuparanib received Orphan Drug Designation from the U.S. FDA for the treatment of pancreatic cancer. In December 2014, we received Fast-Track Designation by the FDA for necuparanib as a first-line treatment in combination with Abraxane and gemcitabine in patients with metastatic pancreatic cancer.

 

Other Novel Therapeutic Programs

 

We are continuing to advance our SIF3 program, which we have designated as M230, and our Anti-FcRn program, which we have designated as M281. Our goal is to progress both programs into clinical development in late 2016. We continue to identify and explore potential opportunities to partner the further development and commercialization of our hsIVIg program.

 

We believe these early stage programs could have the potential to produce product candidates capable of treating a large number of immunological disorders driven by antibodies, immune complexes, and Fc receptor biology. Such disorders include rheumatoid arthritis, autoimmune neurologic diseases such as Guillain-Barre syndrome, chronic inflammatory demyelinating neuropathy and myasthenia gravis, autoimmune blood disorders such as immune thrombocytopenic purpura, systemic autoimmune diseases such as dermatomyositis, lupus nephritis, and catastrophic antiphospholipid syndrome, antibody-mediated transplant rejection, and autoimmune blistering diseases, several of which have few treatment options.

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2015 and 2014

 

Collaboration Revenue

 

Collaboration revenue includes both product revenue and research and development revenue earned under our collaborative arrangements. Product revenue includes our contractually-defined profits and/or royalties earned on Sandoz’s sales of Enoxaparin Sodium Injection and Glatopa.

 

Glatopa™ — Generic Copaxone® (glatiramer acetate injection) 20 mg/mL

 

Sandoz commenced sales of Glatopa in the United States on June 18, 2015. We earn 50% of contractually-defined profits on Sandoz’s sales of Glatopa. A portion of certain Glatopa legal expenses, including any patent infringement damages, is deducted from our profits in proportion to our 50% profit sharing interest.

 

For the three months ended September 30, 2015, we recorded $8.7 million in product revenues from Sandoz’s profits on sales of Glatopa. We estimate that the number of prescriptions for Glatopa represents approximately 25-30% of the once-daily 20 mg/mL glatiramer acetate market.

 

We believe there is a meaningful market opportunity for Glatopa. The price for Copaxone 20 mg/mL has increased over 165% since 2009 and there is no other generic for multiple sclerosis currently available in the United States. However, Teva received marketing approval of its three-times-weekly 40 mg/mL formulation of Copaxone in January 2014. In October 2015, Teva reported that their three-times-weekly formulation accounted for more than 2/3 of total Copaxone prescriptions in the United States. Because Glatopa is only a substitutable generic version of the 20 mg/mL formulation of Copaxone, the market potential of Glatopa is negatively impacted by the conversion of patients from once-daily Copaxone to three-times-weekly Copaxone. Teva reported $4.2 billion in worldwide sales of Copaxone (20 mg/mL and 40 mg/mL) in 2014, $3.1 billion of which was from the United States.

 

Enoxaparin Sodium Injection —Generic Lovenox®

 

Effective April 1, 2015, we earn 50% of contractually-defined profits on Sandoz’s sales of Enoxaparin Sodium Injection. 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. Our contractual share of these development and other expenses is subject

 

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to an annual claw-back adjustment at the end of each product year, with the product year ending on June 30. The annual adjustment can only reduce our profits, royalties and milestones by up to 50% in the quarter ended June 30 and any excess will be carried forward into future quarters and reduce profits in those future periods by up to 50% until it is paid in full. Sandoz did not record any profit on sales of Enoxaparin Sodium Injection in the three months ended September 30, 2015. The annual adjustment was approximately $1.9 million for the product year ending June 30, 2015 and in the second quarter we paid $0.1 million of the total annual adjustment through a reduction of our second quarter product revenue. The portion of the annual adjustment that will be applied to reduce our profits in future quarters is approximately $1.8 million.

 

For the three months ended September 30, 2014, we recorded $4.7 million in royalties on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $48 million. The decrease in our product revenue of $4.7 million, or 100%, from the 2014 period to the 2015 period is due to the change from a royalty to a profit-share arrangement under our collaboration with Sandoz and lower prices in response to competitor pricing reductions on enoxaparin.

 

Research and Development Revenue

 

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

 

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

 

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

 

·                   regulatory and commercial milestones earned under the 2006 Sandoz Collaboration;

 

·                   under the Baxalta Agreement for reimbursement of research and development services and reimbursement of development costs for M923;

 

·                   under the Baxalta Agreement for amortization of the arrangement consideration; and

 

·                   technical development milestones earned under the Baxalta Agreement.

 

Research and development revenue increased by $0.5 million, or 11 %, from $4.6 million for the three months ended September 30, 2014 to $5.1 million for the three months ended September 30, 2015 primarily due to an increase in the quarterly amortization of the arrangement consideration under the Baxalta Agreement.

 

We expect collaborative research and development revenue earned by us related to FTE and external expense reimbursement from Baxalta and Sandoz will fluctuate from quarter to quarter in 2015 depending on our research and development activities. Furthermore, we expect to continue to amortize the $40 million arrangement consideration from Baxalta as we deliver research and development services under the collaboration agreement, with 2015 quarterly amortization of approximately $2.4 million related to M923.

 

Research and Development Expense

 

Research and development expenses consist of costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred. We track the external research and development costs incurred for each of our product candidates. Our external research and development expenses consist primarily of:

 

·                   expenses incurred under agreements with consultants, third-party contract research organizations, or CROs, and investigative sites where all of our nonclinical studies and clinical trials are conducted;

 

·                   costs of acquiring originator comparator materials and manufacturing nonclinical study and clinical trial supplies and other materials from contract manufacturing organizations, or CMOs, and related costs associated with release and stability testing; and

 

·                   costs associated with process development activities.

 

Internal research and development costs are associated with activities performed by our research and development organization and consist primarily of:

 

·                   personnel-related expenses, which include salaries, benefits and share-based compensation; and

 

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·                   facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization of leasehold improvements and equipment and laboratory and other supplies.

 

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.

 

Research and development expense for the three months ended September 30, 2015 was $31.7 million, compared with $27.5 million for the three months ended September 30, 2014. The increase of $4.2 million, or 15%, from the 2014 period to the 2015 period primarily resulted from increases of: $2.0 million primarily in nonclinical and manufacturing expenditures to advance our M281 and M230 novel therapeutic programs; $1.8 million in clinical trial expenses as the necuparanib Phase 2 clinical trial continued to enroll patients; and $0.3 million in share-based compensation expense associated with performance-based stock awards.

 

The lengthy process of securing FDA approval for generics and 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 the amortization of our intangible asset, for each of our principal development programs for the three months ended September 30, 2015 and 2014. 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.

 

 

 

Phase of

 

 

 

 

 

Project

 

 

 

Development as of

 

Three Months Ended September 30,

 

Inception to

 

 

 

September 30, 2015

 

2015

 

2014

 

September 30, 2015

 

External Costs Incurred by Product Candidate:

 

 

 

 

 

 

 

 

 

Glatopa and M356 (40 mg)—Generic Copaxone®

 

ANDAs filed (1)

 

$

274

 

$

444

 

$

48,710

 

Necuparanib—Oncology Product Candidate

 

Phase 2

 

3,901

 

2,079

 

34,079

 

Biosimilars

 

Various (2)

 

4,277

 

4,049

 

70,177

 

Other novel therapeutic programs

 

Discovery/Nonclinical

 

4,742

 

2,706

 

 

 

Internal Costs

 

 

 

18,539

 

18,230

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Research and Development Expenses

 

 

 

$

31,733

 

$

27,508

 

 

 

 


(1)                                  On April 16, 2015, the FDA approved the ANDA for once-daily Glatopa. Sandoz launched Glatopa on June 18, 2015. The ANDA for M356 (40 mg) is under FDA review.

(2)                                  Biosimilars includes M923, a biosimilar version of HUMIRA® (adalimumab), M834, a biosimilar version of ORENCIA® (abatacept), as well as seven other biosimilar candidates. A pharmacokinetic clinical trial for M923 commenced in the first quarter of 2015. M834 is in the nonclinical phase of development, and our other biosimilar candidates are in discovery and process development.

 

Our necuparanib external expenditures increased by $1.8 million, or 88%, from the 2014 period to the 2015 period as the latter period includes ongoing patient costs for the Phase 1 clinical trial as well as contract research and site and patient costs for Phase 2 of the Phase 1/2 trial. The increase of $0.2 million, or 6%, in biosimilars external expenditures from the 2014 period to the 2015 period was due to higher third-party process development and contract research costs incurred for our M834 biosimilar and our other early stage biosimilar candidates. The increase of $2.0 million, or 75%, in other novel therapeutics program external expenditures from the 2014 period to the 2015 period was due to increased nonclinical development for M281 and our other novel product candidates.

 

The increase of $0.3 million, or 2%, in research and development internal costs from the 2014 period to the 2015 period was due to share-based compensation expense associated with performance-based stock awards and higher depreciation expense for property and equipment purchased and placed into service in prior fiscal years.

 

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General and Administrative Expense

 

General and administrative expenses consist primarily of salaries and other related costs for personnel in general and administrative functions, professional fees for legal and accounting services, royalty and license fees, insurance costs, and allocated rent, facility and lab supplies, and depreciation expense.

 

General and administrative expense for the three months ended September 30, 2015 was $12.5 million, compared with $11.1 million for the three months ended September 30, 2014. The increase of $1.4 million, or 13%, from the 2014 period to the 2015 period primarily resulted from increases of: $0.8 million in salary and salary-related expenses and stock compensation associated with performance-based stock awards; $0.3 million in personnel professional fees, driven mainly by consulting fees; $0.1 million in rent and facility-related costs to support our subleased laboratory and office space; and $0.1 million in other expense primarily due to increased insurance costs for our business.

 

We expect our general and administrative expenses, including internal and external legal and business development costs that support our various product development efforts, to vary from period to period in relation to our commercial and development activities.

 

Interest Income

 

Interest income was $0.2 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively. The increase of $0.1 million, or 100%, from the 2014 period to the 2015 period was due to higher average cash and marketable securities investment balances from our equity financings.

 

Other Income

 

Other income was $0.1 million for each of the three months ended September 30, 2015 and 2014 and represents other income related to a job creation tax award that was granted to us in the fourth quarter of 2012.

 

Comparison of Nine Months Ended September 30, 2015 and 2014

 

Collaboration Revenue

 

Glatopa™ — Generic Copaxone® (glatiramer acetate injection) 20 mg/mL

 

For the nine months ended September 30, 2015, we recorded $27.9 million in product revenues from Sandoz’s sales of Glatopa, reflecting $36.9 million in profits net of a deduction of $9.0 million for reimbursement to Sandoz of 50% of pre-launch Glatopa-related legal expenses incurred by Sandoz since 2008. We expect that any future quarterly legal expense deductions will be significantly less as they will generally be incurred and reimbursed on a quarterly basis.

 

Enoxaparin Sodium Injection —Generic Lovenox®

 

For the nine months ended September 30, 2015, we earned $2.8 million in product revenue consisting of $0.1 million in second quarter 2015 profits, net of a claw-back adjustment of $0.1 million, and $2.7 million in royalties earned in the first quarter of 2015 on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $25.9 million. Sandoz did not earn any profit on its third quarter 2015 sales of Enoxaparin Sodium Injection. The portion of the claw-back adjustment that will be applied to reduce our profit in future quarters is approximately $1.8 million.

 

For the nine months ended September 30, 2014, we earned $15.2 million in product revenue, which includes $15.3 million in royalties on Sandoz’s reported net sales of Enoxaparin Sodium Injection of $150 million, offset by $2.2 million of our contractual share of development and other expenses for the product year ending June 30, 2014, and increased by $2.1 million to reflect an adjustment to royalties earned in the product year ended June 30, 2012. The decrease in our product revenue of $12.4 million, or 82%, from the 2014 period to the 2015 period is due to the change in our collaboration economics, decreased unit sales due to lower market share, and lower prices in response to competitor pricing reductions on enoxaparin.

 

Research and Development Revenue

 

Research and development revenue increased by $20.7 million, or 131%, from $15.9 million for the nine months ended September 30, 2014 to $36.6 million for the nine months ended September 30, 2015 primarily due to a $10.0 million milestone payment we earned upon receiving sole FDA approval for Glatopa and an additional $10.0 million milestone payment we earned upon first commercial sale of Glatopa.

 

We expect collaborative research and development revenue earned by us related to FTE and external expense reimbursement from Baxalta and Sandoz will fluctuate from quarter to quarter in 2015 depending on our research and development activities. Furthermore, we expect to continue to amortize the $40 million arrangement consideration from Baxalta as we deliver research and development services under the collaboration agreement, with 2015 quarterly amortization of approximately $2.4 million related to M923.

 

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Research and Development Expense

 

Research and development expense for the nine months ended September 30, 2015 was $88.5 million, compared with $80.3 million for the nine months ended September 30, 2014. The increase of $8.2 million, or 10%, from the 2014 period to the 2015 period primarily resulted from increases of $10.7 million in third-party research and process development costs for our novel therapeutics and biosimilar programs and $2.8 million in clinical trial expenses as the necuparanib Phase 2 clinical trial continued to enroll patients. These increases were partially offset by decreases of: $2.0 million for a 2014 purchase of antibodies for our research program; $1.8 million in personnel related expenses, primarily attributed to the reversal of prior period share-based compensation expense associated with performance-based stock awards; $0.8 million in sponsored research agreements; and $0.6 million in purchased drug product. In 2011 and 2012, we granted broad-based performance stock awards that vested 50% upon approval of the Glatopa ANDA and 50% one year later. The awards were scheduled to expire March 28, 2015. In March 2015, we amended the awards to extend the performance period to September 2015, but with share amounts that decreased monthly. Upon the amendment, stock compensation previously recognized was reversed and new stock compensation was recognized ratably based on the Glatopa ANDA approval, which occurred in April 2015. In the first nine months of 2015 research and development expense included a stock compensation credit of $5.1 million and expense of $3.5 million relating to the performance grants.

 

The following table sets forth the primary components of our research and development external expenditures, including the amortization of our intangible asset, for each of our principal development programs for the nine months ended September 30, 2015 and 2014. 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.

 

 

 

Phase of

 

 

 

 

 

Project

 

 

 

Development as of

 

Nine Months Ended September 30,

 

Inception to

 

 

 

September 30, 2015

 

2015

 

2014

 

September 30, 2015

 

External Costs Incurred by Product Candidate:

 

 

 

 

 

 

 

 

 

Glatopa and M356 (40 mg)—Generic Copaxone®

 

ANDAs filed (1)

 

$

703

 

$

973

 

$

48,710

 

Necuparanib—Oncology Product Candidate

 

Phase 2

 

9,005

 

4,532

 

34,079

 

Biosimilars

 

Various (2)

 

14,656

 

14,189

 

70,177

 

Other novel therapeutic programs

 

Discovery/Nonclinical

 

10,143

 

4,203

 

 

 

Internal Costs

 

 

 

53,959

 

56,392

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Research and Development Expenses

 

 

 

$

88,466

 

$

80,289

 

 

 

 


(1)                                  On April 16, 2015, the FDA approved the ANDA for once-daily Glatopa. Sandoz launched Glatopa on June 18, 2015. The ANDA for M356 (40 mg) is currently under FDA review.

(2)                                  Biosimilars includes M923, a biosimilar version of HUMIRA® (adalimumab), M834, a biosimilar version of ORENCIA® (abatacept), as well as seven other biosimilar candidates. A pharmacokinetic clinical trial for M923 commenced in the first quarter of 2015. M834 is in the nonclinical phase of development, and our other biosimilar candidates are in discovery and process development.

 

Our necuparanib external expenditures increased by $4.5 million, or 99%, from the 2014 period to the 2015 period as the latter period includes ongoing patient costs for the Phase 1 clinical trial as well as contract research and site and patient costs for Phase 2 of the Phase 1/2 trial. The increase of $0.5 million, or 3%, in biosimilars external expenditures from the 2014 period to the 2015 period was due to higher third-party process development and contract research costs incurred for our M834 biosimilar and our other early stage biosimilar candidates. The increase of $5.9 million, 141%, in other novel therapeutics program external expenditures from the 2014 period to the 2015 period was due to increased nonclinical development to support M281 and our other novel product candidates.

 

The decrease of $2.4 million, or 4%, in research and development internal costs from the 2014 period to the 2015 period was primarily due to the reversal of prior period share-based compensation expense associated with performance-based stock awards discussed under “ Research and Development Expense ”.

 

General and Administrative Expense

 

General and administrative expense for the nine months ended September 30, 2015 was $33.7 million, compared with $34.0 million for the nine months ended September 30, 2014. The decrease of $0.3 million, or 1%, from the 2014 period to the 2015 period was primarily due to the reversal of prior period share-based compensation expenses associated with performance-based stock awards discussed under “ Research and Development Expense ”. In the first nine months of 2015 general and administrative expense included a stock compensation credit of $5.4 million and expense of $3.5 million relating to the performance grants.

 

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Interest Income

 

Interest income was $0.5 million in each of the nine months ended September 30, 2015 and 2014.

 

Other Income

 

Other income was $0.2 million for each of the nine months ended September 30, 2015 and 2014, and represents other income related to a job creation tax award that was granted to us in the fourth quarter of 2012.

 

Liquidity and Capital Resources

 

At September 30, 2015, we had $374.9 million in cash, cash equivalents and marketable securities and $11.1 million in accounts receivable, including $8.7 million from third quarter Glatopa sales. In addition, we also held $20.7 million in restricted cash, of which $17.5 million serves as collateral for a security bond posted in the litigation against Actavis, Amphastar and International Medical Systems, Ltd. Our funds at September 30, 2015 were primarily invested in senior debt of government-sponsored enterprises, commercial paper, asset-backed securities, corporate debt securities and United States money market funds, directly or through managed funds, with remaining maturities of 12 months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of our evaluation of conditions in the financial markets, the maturity of specific investments, and our near term liquidity needs. We do not believe that our cash equivalents and marketable securities were subject to significant market risk at September 30, 2015.

 

We have funded our operations primarily through the sale of equity securities and payments received under our collaboration and license agreements, including product revenue from Sandoz’s sales of Enoxaparin Sodium Injection and Glatopa. Since our inception through September 30, 2015, we have received $638 million through private and public issuances of equity securities, including approximately $148 million in net proceeds from our May 2015 public offering of common stock and approximately $83 million under our At-the-Market Equity Offering Sales Agreements with Stifel, Nicolaus & Company, Incorporated entered into in May 2014 and April 2015 (the “ATM Agreements”). As of September 30, 2015, we had received a cumulative total of $649 million under our collaborations with Sandoz, including $466 million in revenues on sales of Enoxaparin Sodium Injection and regulatory and commercial milestones related to that product and $39 million in revenues on sales of Glatopa and regulatory and commercial milestones related to that product. In addition we received $81 million under our collaboration with Baxalta, including a $33 million upfront payment, $29 million in reimbursement of research and development services and costs and $19 million in license and milestone payments.

 

We expect to finance and manage our planned operating and expenditure requirements principally through our current cash, cash equivalents and marketable securities; capital raised through equity financings, including under our ATM Agreements; and future product revenues. We believe that these funds will be sufficient to meet our operating requirements through at least the end of 2016.

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(47,182

)

$

(64,086

)

Net cash (used in) / provided by investing activities

 

$

(178,403

)

$

86,568

 

Net cash provided by financing activities

 

$

234,223

 

$

2,628

 

Net increase in cash and cash equivalents

 

$

8,638

 

$

25,110

 

 

Cash used in operating activities

 

The cash provided by or used for operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities.

 

Cash used in operating activities was $47.2 million for the nine months ended September 30, 2015 reflecting a net loss of $54.1 million, which was partially offset by non-cash charges of $6.6 million for depreciation and amortization of property, equipment and intangible assets, $6.8 million in shared-based compensation and $1.0 million for amortization of purchased premiums on our marketable securities. In addition, the net change in our operating assets and liabilities used cash of $7.4 million and resulted from: an increase in accounts receivable of $3.6 million, which includes a receivable of $8.7 million for third quarter 2015 Glatopa product revenues and the collection of a $4.7 million receivable for fourth quarter 2014 Enoxaparin Sodium Injection royalties; a decrease in unbilled revenue of $0.9 million primarily due to lower reimbursable FTEs and external costs for M923; a decrease in prepaid expenses and other current assets of $0.1 million due to the timing of advance payments to vendors for services and the amortization of those payments; a decrease in accounts payable of $1.7 million due to timing of vendor payments; an increase in accrued expenses of $3.8 million primarily due to process development services for our biosimilars programs; a decrease in deferred revenue of $6.6 million, due to higher quarterly amortization of revenue from the $33.0 million Baxalta upfront payment in 2012 and a $7 million M834 pre-defined “minimum development criteria” license payment in 2014; and a decrease in other long-term liabilities of $0.4 million, of which $0.2 million represents the amortization of a job creation tax award and $0.2 million is the amortization of the tenant improvement allowance over the term of our facility lease.

 

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Cash used in operating activities was $64.1 million for the nine months ended September 30, 2014 reflecting a net loss of $82.6 million, which was partially offset by non-cash charges of $6.4 million for depreciation and amortization of property, equipment and intangible assets, $10.5 million for share-based compensation and $1.9 million for amortization of purchased premiums on our marketable securities. In addition, the net change in our operating assets and liabilities used cash of $0.3 million and resulted from: decreases in accounts receivable of $5.4 million and unbilled revenue of $0.4 million, primarily due to lower reimbursable M923 FTEs and expenses incurred in connection with the Baxalta Agreement; a decrease in prepaid expenses and other current assets of $0.3 million, primarily due to advance payments to vendors for software license fees and equipment maintenance agreements offset by lower interest receivable on lower average cash and marketable securities investment balances; a decrease in accounts payable of $3.2 million due to the payment of third-party contract expenses incurred for our biosimilars and Glatopa and M356 (40 mg) programs; an increase in accrued expenses of $0.5 million due to timing of M834 third-party contract expenses; a decrease in deferred revenue of $2.8 million, primarily due to the amortization of revenue from the $33.0 million Baxalta upfront payment; and a decrease in other long-term liabilities of $0.3 million primarily due to the amortization of a job creation tax award.

 

Cash provided by investing activities

 

Cash used in investing activities of $178.4 million for the nine months ended September 30, 2015 includes cash inflows of $105.8 million from maturities of marketable securities partially offset by cash outflows of $281.5 million for purchases of marketable securities and $2.7 million for capital equipment and leasehold improvements.

 

Cash provided by investing activities of $86.6 million for the nine months ended September 30, 2014 includes cash inflows of $161.3 million from maturities of marketable securities partially offset by cash outflows of $68.8 million for purchases of marketable securities and $5.9 million for laboratory equipment and leasehold improvements.

 

Cash provided by financing activities

 

Cash provided by financing activities of $234.2 million for the nine months ended September 30, 2015 includes $148.4 million of net proceeds from the sale of 8.3 million shares of our common stock through an underwritten public offering, $64.5 million of net proceeds from the sale of 4.3 million shares of our common stock under our ATM Agreements and $23.3 million from stock option exercises and purchases of shares of our common stock through our employee stock purchase plan, for total proceeds of $236.2 million. Total proceeds were partially offset by $2.0 million of cash paid to tax authorities in connection with the vesting of employee performance-based restricted stock.

 

Cash provided by financing activities of $2.6 million for the nine months ended September 30, 2014 relate to stock option exercises and purchases of shares of our common stock through our employee stock purchase plan.

 

Contractual Obligations

 

Our major outstanding contractual obligations relate to license maintenance obligations including royalties payable to third parties, purchase commitments to various contractual research and manufacturing organizations and operating lease obligations. The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 27, 2015 have not materially changed since we filed that report, except for the following:

 

During the three months ended September 30, 2015, we entered into purchase commitments of approximately $11.5 million related to the manufacture of clinical materials for certain of our clinical programs. We expect to pay the amounts related to the purchase commitments over the next four quarters. We have a right to terminate the purchase commitments with penalty, the amount of which is determined based on the timing of the termination.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us 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, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

There have been no significant changes to our accounting policies during the three months ended September 30, 2015, as compared to the significant accounting policies described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on February 27, 2015.

 

New Accounting Standards

 

See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies” for a discussion of new accounting standards. The notes to our consolidated financial statements are contained in Part I, Item I of this Quarterly Report on Form 10-Q.

 

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Item 3.                                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain an investment portfolio consisting mainly of United States money market, government-secured, and high-grade corporate securities, directly or through managed funds, with maturities of twenty-four months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, due to the conservative nature of our investments, low prevailing market rates and relatively short effective maturities of debt instruments, interest rate risk is mitigated. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2015, we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We do not own derivative financial instruments in our investment portfolio. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative, foreign currency or other financial instruments that would require disclosure under this item.

 

Item 4.                                  CONTROLS AND PROCEDURES

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2015. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There was no change in our internal control over financial reporting during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.   LEGAL PROCEEDINGS

 

Glatopa and M356 (40 mg)-Related Proceedings

 

On August 28, 2008, Teva and related entities, or Teva, and Yeda Research and Development Co., Ltd., or Yeda, filed suit against us and Sandoz in the United States Federal District Court in the Southern District of New York in response to the filing by Sandoz of the ANDA with a Paragraph IV certification for Glatopa. 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 our 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 certifications with respect to each listed patent. 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 conduc