ITEM 1: BUSINESS
The following Business Section contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and other factors including the risk factors set forth in Part I, Item 1A
ITEM 1A: RISK FACTORS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE THOSE THAT WE CURRENTLY BELIEVE MAY MATERIALLY AFFECT OUR COMPANY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THEY MAY MATERIALLY HARM OUR BUSINESS, OUR FINANCIAL CONDITION AND OUR RESULTS OF OPERATIONS.
Risks Relating to Our Financial Position and Capital Requirements
We have incurred significant losses to date and may never be profitable.
Although we had net income in 2010 of $85.2 million, primarily attributable to our License Agreement with Merck in May 2010, we have incurred significant losses since our formation in 1991, and have an accumulated deficit of $433.4 million at December 31, 2010. Our losses have resulted principally from costs incurred in research and development of our product candidates, including clinical development of ridaforolimus and ponatinib, and from general and administrative costs, including costs incurred to prosecute and protect our intellectual property, associated with our operations. It is likely that we will incur significant operating losses for the foreseeable future, as we continue our research and development activities and begin to build a sales and marketing organization in anticipation of obtaining regulatory approval to market one or more of our product candidates, which approval may never occur. We currently have no product revenues, limited license revenues and limited commitments for future licensing revenues other than our License Agreement with Merck, and we may not be able to generate such revenues in the future. If our losses continue and we and our existing partners or potential future partners are unable to successfully develop, commercialize, manufacture and market our product candidates and/or we are unable to enter into additional collaboration agreements or licenses for our intellectual property, we may never generate sufficient revenues to achieve profitability. Even if we and our partners are able to commercialize products and we are able to enter into collaboration agreements or licenses in the future, we may never generate sufficient revenues to have profitable operations.
Insufficient funding may jeopardize our research and development programs and may require us to reduce our operations or prevent commercialization of our products and technologies.
We have funded our operations to date through sales of equity securities, debt, the upfront and milestone payments received from Merck since July 2007, and, to a limited extent, operating revenues. Most of our operating revenue to date has been generated through previous collaborative research and development agreements and existing licenses.
As of December 31, 2010, we had cash and cash equivalents of $103.6 million. We estimate that our cash used in operations in 2011 will be in the range of $53 million to $56 million and that our net use of cash will be in the range of $41 million to $44 million. These estimates assume receipt of a $25 million milestone payment from Merck in 2011 for the acceptance by the FDA of a new drug application for ridaforolimus in patients with metastatic sarcomas. We will require substantial additional funding for our research and development programs (including pre-clinical development and clinical trials), for the pursuit of regulatory approvals and for establishing or accessing manufacturing, marketing and sales capabilities related to our other product candidates. We will also require funding for our other operating expenses (including intellectual property protection and enforcement) as well as capital expenditures to maintain and improve our facility, equipment and systems.
We have the opportunity to receive milestone payments from Merck in an amount of up to $65 million related to regulatory filing and approvals of ridaforolimus in sarcomas, which could occur in 2011 or 2012, as well as funding from a potential partnering transaction related to ponatinib outside the United States. However, we may not receive these payments and funding in the timeframes we currently anticipate, or at all. We also have, at December 31, 2010, outstanding warrants to purchase 9,563,610 shares of our common stock at an exercise price of $2.15 per share, which expire on February 25, 2012. Of this amount, warrants to purchase 2,962,500 shares have been exercised in January and February of 2011 for proceeds of $6.4 million. Although we are eligible to receive up to an additional $14.2 million if the remaining warrants are exercised, there can be no assurance that the warrants will be exercised before they expire in February 2012.
In addition, we may from time to time access funding by issuing common stock or other securities in private placements or public offerings, including under our universal shelf registration statement under which we currently have $65.8 million in securities available for issuance. We may also from time to time seek additional funding from other product-based collaborations such as partnering of our product candidates ponatinib and AP26113, technology licensing, or the issuance of debt. However, such additional funding may not be available on terms acceptable to us, or at all.
Accordingly, we may not be able to secure the significant funding which is required to maintain our operations or continue to fund current or future research and development programs at their current levels or at levels that may be required in the future, or establish or access capabilities necessary for commercialization of our product candidates. If we cannot secure adequate funding from these or other sources, we may be required to reduce our operations, to delay, scale back, eliminate or terminate clinical trials for one or more of our other research and development programs, or to enter into licenses, settlements or other arrangements with third parties, on terms that may be unfavorable to us, to sell, license or relinquish rights to develop or commercialize our product candidates, approved products, technologies or intellectual property.
Raising additional capital by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights.
We may seek to raise the additional capital necessary to fund our operations through public or private equity offerings, debt financings, and collaboration and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Our stockholders’ ownership interest will also be diluted if additional warrants are exercised. If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
Significant additional losses or insufficient funding may cause us to default on certain covenants of our loan documents.
At December 31, 2010, we had $9.6 million outstanding under a term loan agreement with a bank, which agreement was amended in January 2011 to increase the loan balance to $14.0 million and extend our quarterly payments through December 31, 2015. Pursuant to this loan agreement, we are required to maintain certain financial and non-financial covenants, including minimum cash, cash equivalents and investments of $15 million, a default of any of which would allow the bank to demand payment of its loan. We currently have sufficient liquidity to fund payment of this loan if demand for payment were made. However, if we do not receive sufficient revenues from our collaborations and licenses or from any sales of our products, if approved, or if we are unable to raise adequate financing to fund continuing operations or otherwise to refinance our loan, we may not be able to maintain compliance with loan covenants, may be required to pay off the loan and may be required to reduce our spending on operations.
Risks Relating to the Discovery, Development and Commercialization of Our Product Candidates
We have no product candidates that have been approved by the FDA or any foreign regulatory authority, and we and our partners may never succeed in obtaining regulatory approval for any products, developing marketable products or generating product revenues.
We are a biopharmaceutical company focused on the discovery and development of drugs to provide therapeutic intervention in treating human diseases at the cellular level. As with all scientific endeavors, we face much trial and error, and we and our partners may fail at numerous stages along the way, which would inhibit us and our partners from successfully developing, obtaining approval for and marketing our drug candidates.
We do not currently have any products on the market and have no product revenues. Our lead product candidate, ridaforolimus, is currently being developed by our partner Merck for potential cancer indications and by our partners, Medinol and ICON, for use in stents or other medical devices to reduce reblockage of injured vessels following interventions in which stents are used in conjunction with balloon angioplasty. Ridaforolimus is currently being studied in a Phase 3 clinical trial in patients with metastatic sarcomas and in multiple Phase 1 and Phase 2 clinical trials in various other cancer indications and in combination with other agents. Our second product candidate, ponatinib, is currently being studied in Phase 1 and Phase 2 clinical trials in patients with hematologic malignancies. Our third product candidate, AP26113, is currently in preclinical testing and investigational new drug, or IND, enabling studies. We anticipate submitting an IND by mid-year 2011 and beginning a Phase 1 clinical trial shortly thereafter. Therefore, our success is substantially dependent on (1) the ability of Merck to obtain marketing approval for ridaforolimus for metastatic sarcoma and other cancer indications, (2) the ability of our partners, Medinol and ICON, to obtain marketing approval for stents or other medical devices delivering ridaforolimus, and (3) our ability to successfully complete clinical development and obtain marketing approval for ponatinib, AP26113 and our other product candidates, or enter into collaboration agreements for these product candidates on terms favorable to us.
We and our partners have yet to submit any applications for marketing approval for ridaforolimus, ponatinib or any of our other product candidates to the FDA or foreign regulatory authorities. Factors which could affect the ability to obtain regulatory approval and to achieve market acceptance and gain market share for ridaforolimus, ponatinib and any other product candidate of ours include, among other factors, product formulation, dose, dosage regimen, the ability to obtain timely and sufficient patient enrollment in clinical trials, the risk of occurrence of adverse side effects in patients participating in clinical trials, the ability to manufacture, directly or indirectly, sufficient quantities of product candidates at commercially reasonable costs, the ability to fund commercial development and to build or access a sales force in the marketplace, the ability to successfully differentiate product candidates from competitive product(s), the ability to educate physicians and build awareness about our product candidates, and the ability to sell, market and distribute, directly or indirectly, such product candidates.
We do not expect to have any products on the market before 2012, at the earliest, and ultimately we and our partners may not succeed in developing or commercializing any products which will generate revenues for our company. If we and our partners are not successful in developing or marketing ridaforolimus or our other product candidates, we will not be profitable.
Positive results from earlier stage preclinical or clinical trials may not be replicated in later-stage clinical trials.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results to date from preclinical studies and clinical trials for ridaforolimus and ponatinib may not be predictive of the results to be obtained from ongoing or future clinical trials. Furthermore, potential competitive commercial factors may influence future decisions and directions by us or our partners on which clinical indications to pursue and when. If we or our partners are required to conduct additional clinical trials or other testing of our product candidates beyond those currently contemplated, we or our partners may be delayed in obtaining, or may not be able to obtain, marketing approval for these product candidates, and we may lose the opportunity to earn additional development or regulatory milestones or royalties or generate product revenues.
Competing technologies may render some or all of our programs or future products noncompetitive or obsolete.
Many well-known pharmaceutical, healthcare and biotechnology companies, academic and research institutions and government agencies, which have substantially greater capital, research and development capabilities and experience than us or our potential partners, are presently engaged in one or more of the following activities:
●
developing products based on cell signaling, cancer biology, and computational chemistry;
●
conducting research and development programs for the treatment of the various potential disease indications in which we are focused; and
●
manufacturing, marketing and selling pharmaceutical or medical device products for treatment of diseases in all of the various disease indications in which we or our current or possible future partners are focused.
Some of these entities already have competitive products on the market or product candidates in clinical trials or in more advanced preclinical studies than we do. Many of these entities also have substantially greater research, development, manufacturing and marketing resources and experience than us. In particular, we are aware that Pfizer and Novartis have mTOR inhibitors on the market which are competitive with ridaforolimus, our lead product candidate. Decisions taken by either of these parties regarding clinical initiatives, including Phase 3 trials, of their mTOR inhibitors may impact or block the clinical and commercial opportunities available to us and Merck for ridaforolimus. Additionally, PharmaMar has a marine derived antitumoral agent currently approved for the treatment of soft tissue sarcomas in Europe and Takeda Pharmaceutical Co., Ltd. has mifamurtide, an immunotherapy product approved for treatment of bone sarcomas in Europe. By virtue of having or introducing competitive products on the market before us, these entities may gain a competitive advantage. Competing technologies may render some or all of our programs or future products noncompetitive or obsolete, and we may not be able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies. Competing products on the market or in development may also lead us and our collaborators to revise or cease development of our product candidates in one or more indications for commercial reasons, even where clinical data may be promising. If we are unable to successfully compete in our chosen markets, we will not become profitable.
If we are unable to establish sales, marketing and distribution capabilities or to enter into agreements with third parties to do so, we may be unable to successfully market and sell any products, even if we are able to obtain regulatory approval.
Although Merck has responsibility under our May 2010 License Agreement for all sales and marketing activities for our lead product candidate, ridaforolimus, we have an option to co-promote ridaforolimus in the United States, which we have elected to exercise for the sarcoma indication, and we currently intend to retain our rights to commercialize our other product candidates, including ponatinib, in the United States and potentially in Europe. We have no experience in marketing or selling any products or with respect to pricing and obtaining adequate third-party reimbursement for drugs. In order to market our product candidates, if they are approved, we will need to build a marketing organization and a specialized sales force, which requires substantial efforts and significant management and financial resources. While we intend to stage our commitments to the extent possible in consideration of the development timelines, in order to support an effective launch of any product, we will need to make significant financial commitments to our marketing organization prior to receiving regulatory approval. We will need to devote significant effort, in particular, to recruiting individuals with experience in the sales and marketing of pharmaceutical products. Competition for personnel with these skills is very high and may be particularly difficult for us while our present candidates are yet to be approved and we will be competing with companies that are currently marketing approved, successful drugs. Accordingly, we may be unable to successfully, directly or indirectly, sell any product candidates that we obtain marketing approval to sell. If we are unable to effectively sell our products, our ability to generate revenues will be materially adversely affected. We may not be able to hire, in a timely manner, the qualified sales and marketing personnel we need, if at all. In addition, we may not be able to enter into any marketing or distribution agreements on acceptable terms, if at all. If we cannot establish sales, marketing and distribution capabilities as we intend, either by developing our own capabilities or entering into agreements with third parties, sales of future products, if any, may be harmed.
If our product candidates are not accepted by patients, physicians and insurers, we will not be successful.
Our success is dependent on the acceptance of any approved products. Our product candidates may not achieve market acceptance among patients, physicians or third-party payors, even if we obtain necessary regulatory and reimbursement approvals. Physicians and health care payors may conclude that any of our product candidates are not as safe and/or effective as competing therapies or are not as attractive based on a cost/benefit analysis as alternative treatments. For example, physicians may elect not to prescribe our drugs, and patients may elect not to request or take them, for a variety of reasons including: lower demonstrated clinical safety and efficacy compared to other drugs; prevalence and severity of adverse side effects; lack of cost-effectiveness; lack of reimbursement availability from third-party payors; a decision to wait for the approval of other therapies that have significant perceived advantages over our drug candidates; convenience and ease of administration; other potential advantages of alternative treatment methods; and ineffective marketing and distribution support. Failure to achieve significant market acceptance of our product candidates, or to be paid and adequate amount for our product candidates, will harm our business. We believe that recommendations by physicians and health care payors will be essential for market acceptance of any product candidates. If our product candidates are approved and fail to achieve market acceptance, we will not be able to generate significant revenues.
If we develop a product for commercial use, a subsequent product liability-related claim or recall could have an adverse effect on our business.
Our business exposes us to potential product liability risks inherent in the testing, manufacturing and marketing of pharmaceutical products. Prior to obtaining regulatory approval to market our products, we or our partners are required to test such products in human clinical trials at health care institutions pursuant to agreements which indemnify such institutions in case of harm caused to patients by our products. We may not be able to avoid significant product liability exposure resulting from use of our products. A product liability-related claim or recall could be detrimental to our business. In addition, except for insurance covering product use in our clinical trials, we do not currently have any product liability insurance, and we may not be able to obtain or maintain such insurance on acceptable terms, or we may not be able to obtain any insurance to provide adequate coverage against potential liabilities, including liabilities arising from our clinical trials. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products that we or our partners may develop.
Risks Relating to Our Dependence on Third Parties
Because we have licensed our lead product candidate, ridaforolimus, to Merck, we are dependent on Merck for the successful development and commercialization of ridaforolimus.
We have entered into a license agreement with Merck for the development and commercialization of ridaforolimus, and we may enter into additional such licenses or collaborations for our other product candidates. Among other provisions, Merck is responsible for the development of ridaforolimus in multiple oncology indications. We will depend heavily on Merck for the successful development and commercialization of ridaforolimus. We would expect to be dependent upon other partners, if we enter into arrangements with one or more of them, to successfully develop and commercialize our other product candidates, including ponatinib. There can be no assurance that Merck will satisfy its obligations to develop ridaforolimus in multiple oncology indications or that it will be successful in developing and commercializing ridaforolimus or that we will be able to secure any other partners for ponatinib or our other product candidates on terms favorable to us, or at all.
In addition, we cannot predict the success of our License Agreement with Merck or with any other license or collaboration we may enter. Each collaboration or license agreement may involve a complex allocation of responsibilities, costs and benefits. The third party may be responsible for conducting and funding much of the future development and regulatory approval activities for a product candidate and have control over the conduct and timing of development efforts for the product candidate. A third party’s failure to devote sufficient financial and other resources to the development plan may delay the clinical development of a product candidate, which could lead to the delay in payment of clinical and regulatory milestones under our agreements and may delay eventual commercialization of a product candidate and any royalties we could receive on commercial sales.
We have limited experience in conducting clinical trials and are dependent upon the ability of third parties, including Merck, contract research organizations, collaborative academic groups, clinical trial sites and investigators, to conduct or to assist us in conducting clinical trials for our product candidates.
We have limited experience in designing, initiating, conducting and monitoring the clinical trials necessary to obtain regulatory approval of our product candidates. Our License Agreement with Merck provides that Merck is responsible for the conduct of clinical trials of ridaforolimus in multiple cancer indications. As such, we are heavily dependent on Merck’s decisions to initiate and continue clinical development of ridaforolimus and, for indications it chooses to pursue, its ability to successfully initiate, enroll, conduct and monitor clinical trials. We are also dependent upon the ability of Merck to timely and accurately collect and report to regulatory authorities worldwide the patient data generated in the SUCCEED trial and other clinical trials of ridaforolimus. Merck may not effectively initiate clinical trial sites, recruit and enroll patients, conduct and monitor clinical trials, and to collect and report patient data relating to the SUCCEED trial or other clinical trials of ridaforolimus, either generally or in specific countries.
We are conducting Phase 1 and Phase 2 clinical trials of ponatinib in patients with hematologic malignancies. We do not currently have a partner for the development and commercialization of ponatinib, although we have announced that we may seek a partner outside the United States for this product candidate. We are dependent upon our ability and/or the ability of our collaborators, licensees, contract research organizations, clinical trial sites and investigators to successfully design, initiate, conduct and monitor clinical trials of ponatinib, including the ongoing trials. Failure by us or any of these parties to timely and effectively initiate, conduct and monitor our clinical trials could significantly delay or materially impair our ability to complete clinical trials and/or obtain regulatory approval of our product candidates and, consequently, could delay or materially impair our ability to generate milestones, royalties or other revenues from them.
We have limited manufacturing experience and are dependent upon the ability of third parties, including Merck, to manufacture our product candidates.
Under our License Agreement with Merck, Merck is responsible for providing the active pharmaceutical ingredient used in ridaforolimus drug product and for the formulation of the finished product. Under our agreements with Medinol and ICON, we are responsible for providing the ridaforolimus to be delivered by the stents or medical devices being developed by Medinol and ICON. We have no experience in manufacturing any of our product candidates on a large scale and have contracted and expect to continue to contract with third-party manufacturers, including Merck, to provide material for clinical trials and potential commercial launch, and to assist in the development and optimization of our manufacturing processes and methods. Our ability to conduct clinical trials and commercialize our product candidates will depend on the ability of such third parties to manufacture our product candidates on a large scale at a competitive cost and in accordance with current good manufacturing practices, or cGMPs, and other regulatory requirements. If we are not able to obtain contract manufacturing on commercially reasonable terms, obtain or develop the necessary materials and technologies for manufacturing, or obtain intellectual property rights necessary for manufacturing, or if our contract manufacturers fail to provide us with the quantities and quality of the products we require in a timely manner, we may not be able to conduct or complete clinical trials or commercialize our product candidates, including ridaforolimus. There can be no assurance that we will be able to obtain the materials, technologies and intellectual property necessary to successfully manufacture our product candidates for clinical trials and commercialization.
We are dependent upon the ability of our medical device partners to develop, manufacture, test and market stents or other medical devices to deliver ridaforolimus.
We have no experience in the development of medical devices and do not intend ourselves to develop stents or other medical devices to deliver ridaforolimus. Instead, we have granted licenses to Medinol and ICON and, under those license agreements, we may grant one additional license, to a medical device company for its use in developing and commercializing such medical devices to reduce blockage of injured vessels following stent-assisted angioplasty.
We and our medical device partners have limited experience in designing, conducting and managing the clinical trials necessary to obtain regulatory approval of drug-eluting stents or other combination products that use a medical device to deliver small-molecule drugs to reduce blockage of injured vessels following interventions in which stents are used in conjunction with balloon angioplasty. We are dependent upon the success of Medinol and ICON and any future medical device partner to successfully develop, manufacture and market stents or other medical devices to deliver ridaforolimus. If Medinol or ICON is not successful and/or if we are not able to enter into an agreement with an additional medical device company to develop, manufacture, and market medical devices to deliver ridaforolimus, we will not be able to generate revenues from the marketing of stents or other medical devices that deliver ridaforolimus.
While we expect to supply ridaforolimus to our medical device partners and any additional partner, we will be otherwise dependent upon them to develop and commercialize stents or other medical devices to deliver ridaforolimus. Such medical device partners have varying degrees of scientific, technical, medical and regulatory experience and resources to, directly or through third parties, develop, manufacture, test or market stents or other medical devices to deliver ridaforolimus. Their ability to conduct clinical trials and commercialize such medical devices will be dependent on both the safety profile of their medical devices and ridaforolimus, as well as their ability to manufacture and supply medical devices for clinical trials and marketing purposes and our ability to manufacture and supply ridaforolimus, either directly or through third parties, at a competitive cost and in accordance with cGMPs and other regulatory requirements. Although, under our License Agreement with Merck, Merck is responsible for the supply of ridaforolimus as a finished drug product for potential indications covered by the license, we depend upon Merck and third-party manufacturers or collaborative partners for the production of ridaforolimus for clinical trials to be conducted by our medical device partners, and we intend to rely on Merck or third-party manufacturers to produce ridaforolimus on a commercial scale for these medical devices, if any medical device partner receives regulatory approval. Our reliance on third-party manufacturers and their potential inability to meet our supply commitments to one or more of our partners could adversely impact the ability of our partners to commercialize stents or other medical devices to deliver ridaforolimus.
We may be reliant on a medical device manufacturer to develop and commercialize a diagnostic test in order to allow us to market ponatinib to a specific patient population.
We are conducting a pivotal Phase 2 clinical trial of ponatinib in patients with resistant or intolerant CML and Ph+ ALL. Patients who are resistant or intolerant to certain other currently marketed drugs or those who have the T315I mutation of the BCR-ABL protein are being enrolled in this trial. In order to be able to obtain regulatory approval to market ponatinib specifically with an indication for patients with the T315I mutation, we expect that the FDA will require there to be an FDA-approved diagnostic test that identifies patients who have this T315I mutation. Such an approved diagnostic test does not currently exist, and we plan to collaborate with one or more companies to provide for the development and commercialization of such a companion diagnostic test.
If we are not successful in establishing a collaboration with a company for the development and commercialization of a companion diagnostic test for the T315I mutation, or if a company with whom we establish a collaboration is unsuccessful in its efforts to develop and gain regulatory approval for such a test, we may not be able to market ponatinib specifically for patients who have the T315I mutation.
If any collaborator or licensee terminates its agreement with us or fails to perform its obligations under its agreement with us, or fails to comply with applicable law, the development and commercialization of our product candidates could be delayed or terminated.
Our use of collaborators and licensees for development of our product candidates means that our business would be adversely affected if any collaborator or licensee terminates its agreement with us or fails to perform its obligations under that agreement or under applicable law. Our current or future collaborations and licenses may not result in product candidates that are scientifically or commercially successful or result in the development or commercialization of any product candidates. For example, if our License Agreement with Merck does not result in the development or approval of any product candidates, our business could be adversely affected. In addition, disputes may arise in the future with respect to the ownership of rights to technology or product candidates developed with collaborators and licensees, which could have an adverse effect on our ability to develop and commercialize any affected product candidate.
Our current collaboration and license agreements allow, and we expect that any future collaborations and licenses will allow, either party to terminate the agreement for specified material breaches by the other party. If a collaborator or licensee terminates its agreement with us, for breach or otherwise, it may be difficult for us to attract new collaborators or licensees and could adversely affect how we are perceived in the business and financial communities. In addition, a collaborator or licensee could determine that it is in its financial interest to:
●
pursue alternative technologies or develop alternative products, either on its own or jointly with others, that may be competitive with the products on which it is collaborating with us or has licensed from us, which could affect its commitment to us;
●
pursue higher-priority programs or change the focus of its development programs, which could affect the collaborator’s or licensee’s commitment to us; or
●
if it has marketing rights, choose to devote fewer resources to the marketing of our product candidates, if any are approved for marketing, than it does for product candidates of its own development.
If any of these events occur, the development and commercialization of one or more of our product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.
Risks Related to Our Intellectual Property
We may not be able to protect our intellectual property relating to our research programs, technologies and product candidates.
We and our licensors have issued patents and pending patent applications covering research methods useful in drug discovery, new chemical compounds discovered in our drug discovery programs including, among others, ridaforolimus, certain components, configurations and uses of our cell-signaling regulation technologies and products-in-development, methods and materials for manufacturing our products-in-development and other pharmaceutical products and methods and materials for conducting pharmaceutical research. Pending patent applications may not issue as patents and may not issue in all countries in which we develop, manufacture or sell our products or in countries where others develop, manufacture and sell products using our technologies. In addition, patents issued to us or our licensors may be challenged, and they may be subsequently narrowed, invalidated or circumvented. In that event, such patents may not afford meaningful protection for our technologies or product candidates, which would materially impact our ability to develop and market our product candidates and to generate licensing revenues from our patent portfolio. Certain technologies utilized in our research and development programs are already in the public domain. Moreover, a number of our competitors have developed technologies, filed patent applications or obtained patents on technologies, compositions and methods of use that are related to our business and may cover or conflict with our patent applications, technologies or product candidates. Such conflicts could limit the scope of the patents that we may be able to obtain or may result in the denial of our patent applications. If a third party were to obtain intellectual property protection for any of the foregoing, we may be required to challenge such protection, terminate or modify our programs impacted by such protection or obtain licenses from such third parties, which might not be available on acceptable terms, or at all. Also, if a third party were to introduce a product into the market which we believe infringes our patents, we may be required to enforce our patent rights or seek to obtain an injunction or other relief, which could be time-consuming and expensive.
We anticipate that Merck and our medical device partners will seek to develop and commercialize ridaforolimus and ridaforolimus-eluting stents in a manner that does not infringe third-party patents. However, there can be no assurance that any products that may be marketed by our partners will not be subject to third-party claims. Furthermore, the patents issued to us or our partners covering ridaforolimus and/or medical devices, including stents, may be subject to challenge and may be subsequently narrowed, invalidated or circumvented. Any such event would adversely impact the ability of one or more of our partners to market ridaforolimus or stents or other medical devices to deliver ridaforolimus.
We may be unable to develop or commercialize our product candidates if we are unable to obtain or maintain certain licenses on commercial terms or at all.
We have entered, and will continue to enter, into agreements with third parties to test compounds, blood and tissue samples, to perform gene expression analysis and to develop biological tests for use with our product candidates, which testing may yield new inventions and discoveries requiring us to obtain licenses in order to exclusively develop or market new products, alone or in combination with our product candidates, or to develop or market our product candidates for new indications. We have also entered into license agreements for some of our technologies. We use third parties to test blood and tissue samples and other biological materials in our clinical programs and to develop biological tests, with respect to which we may be required to obtain licenses or pay royalties or other fees in order to commercialize such tests for use with our product candidates. Manufacturing and/or use of our products may also require licensing biological materials, technologies and intellectual property from third parties. Our inability to obtain any one or more of these licenses, on commercially reasonable terms, or at all, or to circumvent the need for any such license, could cause significant delays and cost increases and materially affect our ability to develop and commercialize or prevent us from developing and commercializing our product candidates. Obtaining licenses for these discoveries, materials and technologies may require us to make cumulative royalty payments or other payments to several third parties, potentially reducing amounts paid to us or making the cost of our products commercially prohibitive.
Some of our licenses obligate us to exercise diligence in pursuing the development of product candidates, to make specified milestone payments and to pay royalties. In some instances, we are responsible for the costs of filing and prosecuting patent applications and actions to enforce our rights against infringers. These licenses generally expire upon the earlier of a fixed term of years after the date of the license or the expiration of the applicable patents, but each license is also terminable by the other party upon default by us of our obligations. Our inability or failure to meet our diligence requirements or make any payments required under these licenses would result in a reversion to the licensor of the rights granted which, with respect to the licenses pursuant to which we have obtained exclusive rights, would materially and adversely affect our ability to develop and market products based on our licensed technologies.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology, and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also have entered into confidentiality and invention or patent assignment agreements with all of our employees and our consultants. Any of these parties may breach the agreements and disclose our proprietary information, and we may not have adequate remedies for any such breach. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
Risks Related to Our Employees and Growth
The loss of key members of our scientific and management staff could delay and may prevent the achievement of our research, development and business objectives.
Our performance as a specialized scientific business is substantially dependent on our key officers and members of our scientific staff responsible for areas such as drug development, clinical trials, regulatory affairs, drug discovery, manufacturing, marketing, business development and intellectual property protection and licensing. We also are dependent upon certain of our scientific advisors to assist in formulating our research and development strategy. While we have entered into employment agreements with all of our executive officers, these officers may terminate their employment with us at any time. The loss of, and failure to promptly replace, any member of our management team could significantly delay and may prevent the achievement of our research, development and business objectives.
We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. As a result of our limited financial resources and the inexperience of our management team in managing a company with such anticipated growth, we may not be able to manage the expansion of our operations effectively or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources from the running of our business. Any inability to manage growth could delay the implementation of our business plans or disrupt our operations. Depending on the rate at which we expand our workforce, we may need to seek alternative space for our operations in the future, which may not be available to us on reasonable terms.
Risks Relating to Regulatory Approvals, Pricing and Reimbursement
We have limited experience in conducting clinical trials, which may cause delays in commencing and completing clinical trials of our product candidates.
Clinical trials must meet applicable FDA and foreign regulatory requirements. We have limited experience in designing, conducting and managing the preclinical studies and clinical trials necessary to obtain regulatory approval for our product candidates in any country and no experience in conducting and managing post-approval studies of any products. We or our collaborative partners may encounter problems in clinical trials that may cause us or the FDA or foreign regulatory agencies to delay, suspend or terminate our clinical trials at any phase. These problems could include the possibility that we may not be able to manufacture sufficient quantities of cGMP materials for use in our clinical trials, conduct clinical trials at our preferred sites, enroll a sufficient number of patients for our clinical trials at one or more sites, or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, we, our partners, the FDA or foreign regulatory agencies may suspend clinical trials of our product candidates at any time if we or they believe the subjects participating in the trials are being exposed to unacceptable health risks, whether as a result of adverse events occurring in our trials or otherwise, or if we or they find deficiencies in the clinical trial process or conduct of the investigation. If clinical trials of any of our product candidates fail, we or our partners will not be able to market the product candidate which is the subject of the failed clinical trials. The FDA and foreign regulatory agencies could also require additional clinical trials before or after granting of marketing approval for any products, which would result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market after obtaining marketing approval. Our failure, or the failure of our partners, to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent obtaining marketing approval of the product candidate and, after obtaining marketing approval, data from post-approval studies could result in the product being withdrawn from the market, either of which would likely have a material adverse effect on our business.
We may not be able to obtain government regulatory approval to market our product candidates.
To date, neither we nor our partners have submitted a marketing application for any of our product candidates to the FDA or any foreign regulatory agency, and none of our product candidates has been approved for commercialization in any country. Prior to commercialization, each product candidate will be subject to an extensive and lengthy governmental regulatory approval process in the United States and in other countries. We or our partners may not be able to obtain regulatory approval for any product candidates, or even if approval is obtained, the labeling for such products may place restrictions on their use that could materially impact the marketability and profitability of the product subject to such restrictions. Satisfaction of these regulatory requirements, which includes satisfying the FDA and foreign regulatory authorities that the product is both safe and effective for its intended uses, typically takes several years or more depending upon the type, complexity, novelty and safety profile of the product and requires the expenditure of substantial resources. Uncertainty with respect to meeting the regulatory requirements governing our product candidates may result in excessive costs or extensive delays in the regulatory approval process, adding to the already lengthy review process. If regulatory approval of a product is granted, such approval will be limited to those disease states and conditions for which the product is proven safe and effective, as demonstrated by clinical trials, and may not include all of the indications necessary to successfully market the product. Even though we have obtained orphan drug designation from the FDA and EMEA for ridaforolimus in bone and soft-tissue sarcomas and for ponatinib in certain indications, the designation-related marketing exclusivity periods may be challenged by others or may prove to be of no practical benefit. In addition, even though we have reached agreement on a Special Protocol Assessment, or SPA, with the FDA with respect to our SUCCEED Phase 3 trial of ridaforolimus for metastatic sarcoma, the FDA is not obligated to approve ridaforolimus as a result of the SPA, even though the clinical outcome of the SUCCEED trial is positive. Therefore, we cannot provide assurance that positive results in the SUCCEED trial will be sufficient for FDA approval of ridaforolimus.
We will not be able to sell our product candidates if we, Merck or our third-party manufacturers fail to comply with FDA manufacturing and quality requirements.
Under our License Agreement with Merck, Merck is responsible for providing the active pharmaceutical ingredient used in ridaforolimus drug product, and for the formulation of the finished drug product. Under our agreements with Medinol and ICON, we are responsible for providing the ridaforolimus to be delivered by the stents or other medical devices being developed by Medinol and ICON. Before approving any of our product candidates, the FDA will inspect the facility or facilities at which the drug product is manufactured and will not approve the drug candidate unless it is satisfied with our or our third-party manufacturer’s compliance with manufacturing and quality requirements. The manufacturing of our product candidates must comply with cGMP requirements of the FDA and similar requirements of regulatory agencies in other countries. These requirements govern, among other things, quality control and documentation procedures. We, Merck or any third-party manufacturer of product candidates, may not be able to comply with these requirements, which would prevent us from obtaining approval for or selling such products. Material changes to the manufacturing processes of products after approvals have been granted are also subject to review and approval by the FDA or other regulatory agencies. Following approval, such facilities are subject to continuing FDA and foreign regulatory inspections and failure to comply with cGMPs or similar regulations can result in regulatory action up to and including cessation of shipment of product.
Even if we or our partners bring products to market, we or they may be unable to effectively price the products or obtain adequate reimbursement for sales of the products, which would prevent the products from becoming profitable.
If we or our partners succeed in bringing any product candidates to the market, they may not be considered cost-effective, and coverage and adequate payments may not be available or may not be sufficient to allow us to sell such products on a competitive basis. In both the United States and elsewhere, sales of medical products and the availability or acceptance of treatments are dependent, in part, on the availability of reimbursement from third-party payors, such as health maintenance organizations and other commercial insurance plans and governmental programs such as Medicare. Third-party payors, including Medicare, are increasingly challenging the prices charged for pharmaceutical products and medical procedures.
Healthcare policy changes may have a material adverse effect on us.
Our business may be affected by the efforts of government and third-party payors to contain or reduce the cost of health care through various means. For example, the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the Affordable Care Act or the ACA), enacted in March 2010, substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. With regard to pharmaceutical products, among other things, ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare D program. ACA is currently being challenged in the courts and there are also congressional efforts to repeal ACA. This adds to the uncertainty of the legislative changes enacted as part of ACA, and we cannot predict the impact of ACA or any other legislative or regulatory proposals will have on our business.
Each of our product candidates will remain subject to ongoing regulatory review even if it receives marketing approval. If we or our collaborators or contractors fail to comply with continuing regulations, we or they may be subject to enforcement action that could adversely affect us.
We and our collaborators and contractors will continue to be subject to pervasive regulation by the FDA and other regulatory authorities even after our product candidates become approved products. We and our collaborators and contractors will continue to be subject to FDA requirements governing among other things the manufacture, packaging, sale, promotion adverse event reporting, storage and recordkeeping of our approved products. The Commissioner of the FDA, who was appointed in calendar year 2009, has put FDA-regulated entities on notice that they should expect to see more enforcement actions in all areas regulated by the FDA. Although we have not received any notice that we are the subject of any such enforcement action, it is possible that we may be in the future and that could have a material adverse effect on our business. We or any applicable collaborator of ours may be slow to adapt, or may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements.
If we or any applicable collaborator of ours fails to comply with the requirements of the FDA and other applicable U.S. or foreign governmental or regulatory authorities or previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we or the collaborator could be subject to administrative or judicially imposed sanctions, including restrictions on the products, manufacturers or manufacturing processes; warning letters; civil or criminal penalties; fines; injunctions; product seizures or detentions; import bans; voluntary or mandatory product recalls and publicity requirements; suspension or withdrawal of regulatory approvals; total or partial suspension of production; and refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.
Risks Relating to Our Common Stock
Results of our operations, general market conditions for biotechnology stocks and other factors could result in a sudden change in the value of our stock.
As a biopharmaceutical company with no products currently on the market, we continue to experience significant volatility in the price of our common stock. In 2010, our stock price ranged from a high of $5.44 to a low of $2.06. Some of the many factors that contribute to such volatility
include:
●
announcements regarding results and timing of preclinical studies and clinical trials for our product candidates, including the Phase 3 SUCCEED trial for ridaforolimus being conducted by Merck and our pivotal Phase 2 PACE trial for ponatinib;
●
the results and timing of efforts by Merck and our medical device partners or any future partners to develop ridaforolimus or any other product candidates that we license;
●
the timing of our receipt of, or our failure to receive, future milestones under our License Agreement with Merck;
●
announcements regarding existing collaborations or new collaborations or our failure to enter into collaborations;
●
evidence of the safety or efficacy of our product candidates;
●
decisions by regulatory agencies that impact or may impact our product candidates;
●
announcements regarding product developments or regulatory approvals obtained by companies developing competing products;
●
our funding resources and requirements, including announcements of new equity or debt financings;
●
announcements of technological innovations or new therapeutic product candidates;
●
developments relating to intellectual property rights, including licensing, litigation and governmental regulation;
●
healthcare or cost-containment legislation and public policy pronouncements;
●
sales of our common stock by us, our insiders or our other stockholders;
●
market conditions for biopharmaceutical stocks in general; and
●
general economic and market conditions.
The stock markets, and the markets for biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may realize less than, or lose all of, their investment.
Anti-takeover provisions of Delaware law, provisions in our charter and bylaws and our stockholders’ rights plan, or poison pill, could make a third-party acquisition of us difficult.
Because we are a Delaware corporation, the anti-takeover provisions of Delaware law could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. We are subject to the provisions of Section 203 of the General Corporation Law of Delaware, which prohibits us from engaging in certain business combinations, unless the business combination is approved in a prescribed manner. In addition, our certificate of incorporation and our bylaws, each as currently in effect, also contain certain provisions that may make a third-party acquisition of us difficult, including:
●
a classified board of directors, with three classes of directors each serving a staggered three-year term, such that not all members of the board of directors may be elected at one time;
●
the authorized number of directors may be changed only by resolution of our board of directors;
●
the ability of the board of directors to issue preferred stock that could dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
●
establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings; and
●
the inability of our stockholders to call a special meeting.
These provisions, as well as Section 203, may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the current market price, and may limit the ability of our stockholders to approve transactions that they think may be in their best interests.
ITEM 1B:
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2:
ITEM 2: PROPERTIES
We have leased approximately 100,000 square feet of laboratory and office space at 26 Landsdowne Street, Cambridge, Massachusetts through July 2012, with two consecutive five-year renewal options. We believe that our currently leased facility will be adequate for our research and development and other business activities at least through the year 2012. We believe that any additional space we may require will be available on commercially reasonable terms.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4:
ITEM 4: (Removed and Reserved)
PART II
ITEM 5:
ITEM 5:
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on The NASDAQ Global Market under the symbol “ARIA”. The following table sets forth the high and low sales prices of our common stock as quoted on The NASDAQ Global Market for the periods indicated.
On March 11, 2011, the last reported sale price of our common stock was $5.71.
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock since December 31, 2005, with the total cumulative return of the NASDAQ Biotechnology Index and the Russell 2000® Index, each of which ARIAD is a member. The Russell 2000 Index is a market capitalization-weighted index of stock price performance for the 2,000 smallest companies in the Russell 3000® Index. Since the Russell 2000 Index is specifically designed to measure the stock price trends of smaller companies, we believe it is a meaningful index against which to compare our stock price performance.
The price of a share of common stock is based upon the closing price per share as quoted on The NASDAQ Global Market on the last trading day of the year shown. The graph lines merely connect year-end values and do not reflect fluctuations between those dates. The comparison assumes $100 was invested on December 31, 2005 in our common stock and in each of the foregoing indices. We did not declare or pay any dividends during the comparison period. The stock price performance as shown in the graph below is not necessarily indicative of future stock price performance.
The performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such acts.
Stockholders
As of February 28, 2011, the approximate number of holders of record of our common stock was 440, and the approximate total number of beneficial holders of our common stock was 48,000.
Dividends
We have not declared or paid dividends on our common stock in the past and do not intend to declare or pay such dividends in the foreseeable future. Our long-term debt agreement prohibits the payment of cash dividends.
Unregistered Sales of Securities
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 2010, 2009, 2008, 2007 and 2006 and for each of the years then ended have been derived from the audited consolidated financial statements of the Company, of which the financial statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 are included elsewhere in this Annual Report on Form 10-K. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements, and the notes thereto, and other financial information included herein.
_________________
(1)
During 2010, we modified our collaboration agreement with Merck and entered into a license agreement. As a result of this modification, additional payments were received and deferred revenue was recognized, as further discussed in Note 2 to the consolidated financial statements. Pursuant to the license agreement, we provided transitional services to Merck and recognized service revenue in 2010.
(2)
In 2009, we issued warrants that are accounted for as a derivative liability. The change in fair value of outstanding warrants is recorded in our statement of operations. See notes 8 and 9 to the consolidated financial statements.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the audited consolidated financial statements, and the notes thereto, and other financial information included herein.
Overview
Our vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need - aggressive cancers where current therapies are inadequate. Our goal is to build a fully integrated oncology company.
Product Development and Discovery
Our lead cancer product candidate, ridaforolimus, previously known as deforolimus, is being studied in multiple clinical trials in patients with various types of cancers. In July 2007, we entered into a global collaboration agreement, or the Collaboration Agreement, with Merck & Co., Inc., or Merck, under which we shared responsibility for the development, manufacturing and commercialization of ridaforolimus for use in cancer. In May 2010, we entered into an amended and restated agreement with Merck, referred to as the License Agreement, that replaces the Collaboration Agreement. Under the terms of the License Agreement, we granted Merck an exclusive license to ridaforolimus for use in cancer, and Merck assumed responsibility for all activities related to the development, manufacturing and commercialization of ridaforolimus, as discussed further below. We initiated patient enrollment in our initial Phase 3 clinical trial of ridaforolimus in patients with metastatic sarcoma in the third quarter of 2007. We enrolled a total of 711 patients in this trial and, in January 2011, announced top-line data showing that ridaforolimus met the primary endpoint of improved progression-free survival, or PFS, compared to placebo. This clinical trial remains active, and patients continue to be followed to gather additional data on secondary endpoints, including overall survival and safety. Merck currently plans to file for marketing approval of ridaforolimus in patients with metastatic sarcomas in 2011, subject to final collection and analysis of all available data from the trial. In addition, Merck is currently continuing development of ridaforolimus, as both a single agent and in combination with other agents, in Phase 1 and Phase 2 clinical trials in several other cancer indications.
Our second product candidate, ponatinib, previously known as AP24534, is an investigational pan BCR-ABL inhibitor that we believe has broad potential applications in various hematological cancers and solid tumors. In the third quarter of 2010, we initiated patient enrollment in a pivotal Phase 2 clinical trial of ponatinib in patients with resistant or intolerant chronic myeloid leukemia, or CML, or Philadelphia positive acute lymphoblastic leukemia, or Ph+ALL. This trial, named PACE (Ponatinib Ph+ ALL and CML Evaluation), is designed to provide definitive clinical data for regulatory approval of ponatinib in this setting. The trial is expected to enroll 320 patients at approximately 60 centers in North America, Europe, Australia and Asia. The primary endpoints are major cytogenetic response rate for chronic phase patients and major hematologic response rate for accelerated or blast phase CML patients and Ph+ALL patients. Secondary endpoints include major molecular response rate, duration of response, progression-free survival and overall survival. Patient enrollment in this clinical trial is progressing as planned, and we expect to complete patient enrollment by year-end 2011.
Our third product candidate is AP26113, an investigational anaplastic lymphoma kinase, or ALK, inhibitor. We are conducting preclinical testing and other studies required for an investigational new drug application, or IND, and anticipate submitting an IND by mid-2011 and beginning a Phase 1 clinical trial shortly thereafter.
In addition to our lead development programs, we have a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.
Our Collaboration and License Agreements with Merck
Under our Collaboration Agreement with Merck for the global development, manufacture and commercialization of ridaforolimus, we and Merck were conducting a broad-based development program in multiple potential cancer indications. The Collaboration Agreement as in effect until May 4, 2010 provided that each party would fund 50 percent of global development costs, except for certain specific costs to be funded 100 percent by Merck. The Collaboration Agreement and a related supply agreement established responsibilities for supply of the product for development and commercial purposes, promotion, distribution and sales of the product, governance of the collaboration, termination provisions and other matters.
In addition to cost-sharing provisions, the Collaboration Agreement as in effect until May 4, 2010 provided for an up-front payment by Merck of $75 million, which was paid to us in July 2007, and provided up to $452 million in milestone payments based on the successful development of ridaforolimus in multiple potential cancer indications, of which $53.5 million had been paid to us through March 31, 2010, and up to $200 million in milestone payments based on achievement of specified product sales thresholds. The Collaboration Agreement provided that each party would receive 50 percent of the profit from the sales of ridaforolimus in the United States, and Merck would pay us tiered double-digit royalties on sales of ridaforolimus outside the United States.
In May 2010, we entered into an Amended and Restated Collaboration and Exclusive License Agreement, or the License Agreement, with Merck that replaces the Collaboration Agreement and a related supply agreement. Under the terms of the License Agreement, we have granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and Merck assumed responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and will fund 100 percent of all ridaforolimus costs effective as of January 1, 2010. If ridaforolimus receives regulatory approval, Merck will be responsible for selling ridaforolimus worldwide, will record global sales and will pay us tiered double-digit royalties on global net sales. The License Agreement provides us with an option to co-promote ridaforolimus for all indications in the United States and, in such case, we would be compensated by Merck for our sales efforts. We have elected to exercise our option to co-promote ridaforolimus for the sarcoma indication, subject to the terms of a co-promotion agreement to be negotiated by us and Merck.
Under the License Agreement, Merck paid us an initial up-front fee of $50 million in the second quarter of 2010 and has agreed to pay us up to $514 million in potential regulatory and sales milestone payments, based on the successful development of ridaforolimus in multiple potential cancer indications or upon achievement of specified product sales thresholds. These potential milestone payments include up to $65 million associated with potential regulatory filings and approvals for the sarcoma indication, for which we announced positive Phase 3 results in January 2011 and for which Merck has indicated its intention to file for marketing approval in 2011, up to $249 million associated with potential regulatory filings and approvals for other cancer indications and up to $200 million based on achievement of certain sales thresholds.
The License Agreement provides that all ridaforolimus activities that had been our responsibility under the Collaboration Agreement would be transitioned to Merck, a process that was substantially completed in the fourth quarter of 2010. Merck agreed to pay us for all costs we incur related to the transition.
In accordance with our revenue recognition policy, upon execution of the License Agreement, all previously deferred revenue from the Collaboration Agreement was recognized as revenue in the three-month period ended June 30, 2010, which in combination with $62.8 million of payments received from Merck pursuant to the License Agreement, was the primary contributor to our license and collaboration revenue of $174.5 million and our net income of $85.2 million for the year ended December 31, 2010. As a consequence, our deferred revenue liability at December 31, 2009 related to the Collaboration Agreement of $111.5 million (including the current portion of that liability) has been eliminated and our stockholders’ deficit at December 31, 2009 of $89.0 million has become stockholders’ equity of $64.1 million at December 31, 2010.
Liquidity and Sources and Uses of Funding
As of December 31, 2010, we had cash and cash equivalents of $103.6 million, working capital of $88.8 million, and total stockholders’ equity of $64.1 million. We believe that our cash and cash equivalents will be sufficient to fund our operations to the fourth quarter of 2012. This estimate assumes receipt of a $25 million milestone payment from Merck in 2011 for the acceptance by the FDA of a new drug application for ridaforolimus in patients with metastatic sarcomas, as well as the exercise of our outstanding warrants, which expire in February 2012, for proceeds to us of $20.6 million, of which a total of $6.4 million was received in January and February 2011.
We do not have significant recurring revenue streams and have historically incurred operating losses and net losses related to our research and development activities. We expect to continue to incur significant operating expenses related to our research and development activities in 2011 and beyond. Potential sources of funding for such activities beyond our current cash and cash equivalents include potential milestone payments from Merck related to regulatory filings and marketing approvals for ridaforolimus (including up to $65 million in milestones related to the sarcoma indication) and, if ridaforolimus is approved, royalty payments on net sales of ridaforolimus from Merck. We are also pursuing partnering opportunities for the development and commercialization of ponatinib outside of the United States which, if successful, could result in up-front, milestone and/or potential future royalty payments to us. In addition, at December 31, 2010, we had outstanding warrants to purchase 9,563,610 shares of our common stock which expire in February 2012, if not previously exercised. These warrants have an exercise price of $2.15 per share and would result in $20.6 million of proceeds if fully exercised. In January and February 2011, a total of 2,962,500 warrants were exercised for proceeds to us of approximately $6.4 million. We may also seek to raise funding by issuing common stock or other securities in one or more private placements or public offerings, as market conditions permit, or through the issuance of debt. Please see additional information under the caption “Liquidity and Capital Resources” below.
Each of our potential sources of funding is subject to numerous risks and uncertainties, and there is no assurance that such funding will become available in 2011, or at all, as discussed further in the section entitled “Risk Factors” in Part I, Item 1A of this annual report.
Critical Accounting Policies and Estimates
Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, the carrying value of intangible assets, accrued product development expenses and the fair value of warrants to purchase our common stock.
Revenue Recognition
We generate revenue from license and collaboration agreements with third parties related to use of our technology and/or development and commercialization of product candidates. Such agreements may provide for payment to us of up-front payments, periodic license payments, milestone payments and royalties.
For the year ended December 31, 2010, we reported license and collaboration revenue of $174.5 million. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the fair value of the undelivered element by application of the residual method and the appropriate revenue recognition principles are applied to each unit.
The assessment of multiple element arrangements requires judgment in order to determine the appropriate units of accounting and the points in time that, or periods over which, revenue should be recognized. Regarding our Collaboration Agreement with Merck for the development, manufacturing and commercialization of ridaforolimus, in effect from July 2007 to May 2010, we determined the license and development deliverables constituted one unit of accounting and, therefore, the up-front and milestone payments were deferred and were being recognized over the performance period. As a consequence, of the $128.5 million in up-front and milestone payments received from Merck pursuant to the Collaboration Agreement, as of December 31, 2009, $17.0 million had been recognized as revenue and $111.5 million had been deferred on our balance sheet. Regarding our License Agreement with Merck entered into in May 2010 that replaced the Collaboration Agreement, we determined that the license and the transition services were separate units of accounting, and because the fair value of the undelivered transition services is known, the amounts received related to the license and transition services rendered to date would be recognized in the period in which they were received or the services were rendered.
Intangible Assets
At December 31, 2010, we reported $7.1 million of intangible assets, consisting of capitalized costs related primarily to purchased and issued patents, patent applications and licenses and the recorded value of the technology associated with our acquisition in September 2008 of the 20-percent minority interest of ARIAD Gene Therapeutics, Inc. that we did not previously own, net of accumulated amortization. The carrying value of these intangible assets is evaluated for possible impairment, and losses are recorded when the evaluation indicates that the carrying value is not recoverable. This evaluation involves estimates of future net cash flows expected to be generated by the asset. Such estimates require judgment regarding future events and probabilities. Changes in these estimates, including decisions to discontinue using the technologies, could result in material changes to our balance sheet and charges to our statements of operations. If we were to abandon the ongoing development of the underlying product candidates or technologies or terminate our efforts to pursue collaborations or license agreements, we may be required to reserve or write off a portion of the carrying value of our intangible assets. In 2010, we recorded charges of $2.4 million in our statement of operations related to the discontinuation of efforts to pursue our NF-кB technology and to the assessment of the recoverability of our ARGENT technology and certain other technologies.
Accrued Product Development Expenses
We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our statement of operations and are reflected in accrued product development expenses on our balance sheet. At December 31, 2010, we reported accrued product development expenses of $8.2 million on our balance sheet.
Our estimates of services performed or progress achieved are based on all available information we have obtained through reports, correspondence and discussions with our vendors. Our estimates of accrued expenses based on such information require judgment. Actual costs may vary from such estimates. When such variances become known, we adjust our expenses accordingly.
Fair Value of Warrants
Warrants outstanding at December 31, 2010 to purchase 9,563,610 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of our common stock, are classified as a derivative liability. Accordingly, the fair value of the warrants is recorded on our balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of operations. At December 31, 2010, we reported a warrant liability of $28.8 million on our balance sheet. These warrants expire in February 2012.
In January and February 2011, a total of 2,962,500 warrants were exercised for proceeds to us of approximately $6.4 million. Upon exercise of the warrants, the warrant liability is reduced by the portion of the warrant liability applicable to the exercised warrants, and stockholders’ equity is increased by this same amount plus the proceeds from the exercise.
The fair value of the warrants is determined using the Black-Scholes option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes model would result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations. If, for example, the volatility of our common stock at December 31, 2010 were 10% higher or lower than used in the valuation of such warrants, our valuation of the warrants would have increased or decreased by up to $251,000 with such difference reflected in our statement of operations.
Results of Operations
Years Ended December 31, 2010 and 2009
Revenue
We recorded total revenue of $179.0 million for the year ended December 31, 2010, compared to $8.3 million for the year ended December 31, 2009. Total revenue in 2010 consisted of license and collaboration revenue of $174.5 million and service revenue of $4.5 million. License and collaboration revenue in 2010 includes the $50 million up-front payment and a $12.8 million payment for our share of ridaforolimus costs incurred from January 1, 2010 to May 4, 2010 from Merck pursuant to the terms of the License Agreement. License and collaboration revenue in 2010 also includes $111.5 million representing the recognition in 2010 of revenue deferred as of December 31, 2009 under our accounting for the Collaboration Agreement, which was recognized upon execution of the License Agreement. Service revenue of $4.5 million in the year ended December 31, 2010 consisted of transition services that we provided to Merck pursuant to the terms of the License Agreement.
We expect that our revenue will decrease significantly in 2011 because we recognized in 2010 all of the previously deferred revenue related to our Collaboration Agreement with Merck and because we substantially completed as of December 31, 2010 the transition of responsibilities to Merck pursuant to the License Agreement.
Operating Expenses
Research and Development Expenses
Research and development expenses decreased by $5.4 million, or 9 percent, to $58.0 million in 2010, compared to $63.4 million in 2009. The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:
·
preclinical toxicology, pharmacology and metabolism studies, as well as in vivo efficacy studies in relevant animal models of disease;
·
manufacturing of drug product for preclinical studies and clinical trials and ultimately for commercial supply;
·
submission of the results of preclinical studies and information regarding manufacturing and control and proposed clinical protocol to the U.S. Food and Drug Administration, or FDA, in an Investigational New Drug application, or IND (or similar filings with regulatory agencies outside the United States);
·
conduct of clinical trials designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and
·
submission of all the results of testing to the FDA in a New Drug Application, or NDA (or similar filings with regulatory agencies outside the United States).
Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing, we may commence commercial marketing and distribution of the product.
We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to work on our clinical and preclinical candidates as well as our discovery research efforts.
Direct external expenses are further categorized as costs for clinical programs and costs for preclinical programs. Preclinical programs include product candidates undergoing toxicology, pharmacology, metabolism and efficacy studies and manufacturing process development required before testing in humans can begin. Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.
Our R&D expenses for 2010 as compared to 2009 were as follows:
In 2010, our clinical programs consisted of our lead product candidate ridaforolimus, for which we initiated clinical development in 2003, and ponatinib, for which we initiated clinical development in 2008. The direct external expenses for ridaforolimus reflect our share of such expenses, including our share of Merck’s costs, pursuant to the cost-sharing arrangement of our collaboration with Merck in effect through May 4, 2010.
Direct external expenses for ridaforolimus were $8.5 million in 2010, a decrease of $21.5 million, as compared to 2009. The decrease is primarily due to the restructuring of our collaboration with Merck, under which Merck is responsible for and funds 100 percent of the cost of ridaforolimus from May 4, 2010. Therefore, our expenses during 2010 reflect our share of ridaforolimus costs from January 1, 2010 to May 4, 2010, as compared to a full twelve months in the year ended December 31, 2009. We will have no direct external expenses for ridaforolimus in 2011 as Merck is now responsible for 100 percent of such costs.
Direct external expenses for our second clinical program, ponatinib, were $13.2 million in 2010, an increase of $7.7 million as compared to 2009. The increase is due primarily to an increase in contract manufacturing costs of $3.6 million, clinical trial costs of $5.7 million and supporting non-clinical costs of $482,000 offset in part by a decrease in toxicology costs of $2.1 million. Toxicology costs decreased due to the completion in 2009 of long-term toxicology studies necessary to support development of this product candidate. Clinical trials costs increased due to continued enrollment and treatment of patients in our Phase 1 clinical trial as well as preparation for and initiation of enrollment of patients in our pivotal Phase 2 clinical trial. Contract manufacturing costs increased due to continuing product and process development initiatives as well as the production of ponatinib for use in these clinical trials. We expect that our direct external expenses for ponatinib will increase in 2011 as we enroll additional patients in our Phase 2 clinical trial and continue to treat patients in our ongoing Phase 1 clinical trial.
The direct external expenses of $1.0 million incurred in our preclinical program for the year ended December 31, 2010, relate to manufacturing and other IND-enabling studies for our third product candidate, AP26113, an increase of $987,000 from 2009. We expect that our direct external expenses for AP26113 will increase in 2011 as we complete IND-enabling studies and expect to initiate a Phase 1 clinical trial.
All other R&D expenses increased by $7.2 million in 2010 as compared to 2009. This increase is due in part to the termination in 2010 of the cost-sharing provisions for ridaforolimus under our Collaboration Agreement with Merck. In 2010, we received $6.1 million less in reimbursement from Merck than in 2009 for its share of our internal costs charged to Merck pursuant to the Collaboration Agreement. This reimbursement provision ended effective May 4, 2010 with the execution of the License Agreement under which we now invoice Merck for our services and record such amounts as service revenue. The increase is also due to an increase of $2.1 million in expenses related to intellectual property protection of our R&D programs, primarily due to reserves for and write-offs of certain technologies. These increases were offset in part by a credit of $733,000 related to grants awarded to us by the Internal Revenue Service under the Qualified Therapeutic Discovery Project, or QTDP, program established by the U.S. Congress in March 2010 as part of the Patient Protection and Affordable Care Act. This credit was recorded as an offset to the related R&D expenses. We expect that all other R&D expenses will increase in 2011 to support the expanding development of ponatinib and AP26113 as well as our ongoing discovery research efforts.
The successful development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory clearance. We, the FDA or other regulatory authorities may suspend clinical trials at any time if we or they believe that the subjects participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our products under development. Delays or rejections may be encountered based on additional governmental regulation, legislation, administrative action or changes in FDA or other regulatory policy during development or the review process. Other risks associated with our product development programs are described in the section entitled “Risk Factors” in Part I, Item 1A of this annual report. Due to these uncertainties, accurate and meaningful estimates of the ultimate cost to bring a product to market, the timing of completion of any of our drug development programs and the period in which material net cash inflows from any of our drug development programs will commence are unavailable.
General and Administrative Expenses
General and administrative expenses decreased by $793,000, or 5 percent, from $16.9 million in 2009 to $16.1 million in 2010. This decrease was due primarily to a decrease in professional services of $1.9 million, primarily due to a reduction in corporate and commercial development initiatives and legal fees related to patent litigation. This decrease was partially offset by an increase in personnel expenses of $660,000 due to salary increases and annual performance awards, an increase in overhead and other expenses of $193,000, and a decrease of $97,000 in reimbursement from Merck for its share of our internal costs charged to Merck pursuant to the Collaboration Agreement. We expect that general and administrative expenses will increase in 2011 to support our ongoing research and development activities.
We expect that our operating expenses in total will increase in 2011 for the reasons described above. Operating expenses may fluctuate from quarter to quarter. The actual amount of any increase in operating expenses will depend on, among other things, the progress of our product development programs, including on-going and planned clinical trials, results of continuing non-clinical studies and the costs of product and process development activities and product manufacturing.
Other Income/Expense
Interest Income
Interest income decreased by 26 percent to $86,000 in 2010 from $116,000 in 2009, as a result of lower interest yields from our invested funds, offset in part by a higher average balance of funds invested in 2010.
Interest Expense
Interest expense decreased by 28 percent to $206,000 in 2010 from $287,000 in 2009, due to lower average loan balances and lower interest rates in 2010.
Revaluation of Warrant Liability
The fair value of our warrant liability at December 31, 2010 was $17.5 million higher than its fair value at December 31, 2009, due to the net impact of the exercise of warrants to purchase 1,220,414 shares of our common stock in the second quarter of 2010 and the revaluation of our warrant liability at December 31, 2010. The revaluation of our warrant liability resulted in a non-cash charge of $19.5 million for the year ended December 31, 2010 and was due primarily to increases in the market price of our common stock since December 31, 2009. The revaluation of our warrant liability in 2009 resulted in a non-cash charge of $7.8 million for the year ended December 31, 2009. Potential future increases or decreases in our stock price, or other changes in the factors that impact the valuation of the warrant liability, will result in charges or credits, recognized in our consolidated statement of operations in future periods. Such charges or credits will not have any impact on our cash balances, current liquidity or cash flows unless the conditions that require cash settlement are met. These conditions include a change in control and the price of our common stock at less than the $2.15 warrant exercise price. These warrants expire in February 2012.
Operating Results
We reported income from operations of $104.9 million in 2010 compared to a loss from operations of $72.0 million in 2009, an increase in income of $176.9 million. The increase in income from operations is primarily due to the recognition of approximately $174 million in license and collaboration revenue as a result of the accounting impact of the License Agreement entered into with Merck in May 2010, and a decrease in our share of the costs of development of ridaforolimus. We also reported net income of $85.2 million in 2010 compared to a net loss of $80.0 million in 2009, an increase in net income of $165.2 million. The increase in income is largely due to the impact of the License Agreement with Merck, offset in part by the revaluation of our warrant liability described above. Because the revenue we reported in 2010 resulting from the License Agreement with Merck will not recur in 2011, we do not expect to report net income in 2011, consistent with the stage and status of our research and development efforts. We expect that our results of operations for 2011 will depend on a number of factors, including the progress of our product development programs, the progress of our discovery research programs, the receipt of milestone payments, the exercise of warrants, the impact of commercial and business development activities, and changes in the valuation of our warrant liability, among other factors. The extent of operating losses will also depend on the sufficiency of funds on hand or available from time to time, which will influence the amount we will spend on operations and capital expenditures as well as the development timelines for our product candidates.
Years Ended December 31, 2009 and 2008
Revenue
We recognized license and collaboration revenue of $8.3 million for the year ended December 31, 2009, compared to $7.1 million for the year ended December 31, 2008. The increase in license and collaboration revenue was due primarily to an increase in the revenue recognized from the Merck collaboration, based on the non-refundable up-front and milestone payments, totaling $128.5 million, paid by Merck through December 31, 2009, including $22.5 million in milestone payments paid by Merck during the year ended December 31, 2009, in accordance with our revenue recognition policy.
Operating Expenses
Research and Development Expenses
Research and development expenses increased by $12.6 million, or 25 percent, to $63.4 million in 2009, compared to $50.8 million in 2008, as follows:
In 2009, our clinical programs consisted of our lead product candidate ridaforolimus, for which we initiated clinical development in 2003, and ponatinib, for which we initiated clinical development in 2008. The direct external expenses for ridaforolimus reflect our share of such expenses, including our share of Merck’s costs, pursuant to the cost-sharing arrangement of our collaboration with Merck.
Direct external expenses for ridaforolimus were $30.0 million in 2009, an increase of $9.4 million, as compared to 2008, primarily reflecting our share of increases in clinical trial costs ($6.4 million) and manufacturing costs ($2.2 million) and our share of costs for Merck’s services ($1.6 million). Clinical trial costs and contract manufacturing costs increased due primarily to increasing enrollment in our Phase 3 clinical trial of ridaforolimus in patients with metastatic sarcomas and in Phase 2 clinical trials of ridaforolimus in patients with breast cancer, endometrial cancer, prostate cancer and non-small cell lung cancer. Merck’s services provided to the collaboration increased as a result of Merck’s increasing activities in support of clinical trials and other activities for which Merck is responsible.
Direct external expenses for our second clinical program, ponatinib, were $5.5 million in 2009, an increase of $1.8 million as compared to 2008. The increase is due primarily to an increase in clinical costs of $548,000 and toxicology costs of $1.3 million. Clinical costs increased due to increasing enrollment in our Phase 1 clinical trial in patients with hematologic malignancies. Toxicology costs increased due to the conduct of long-term toxicology studies necessary to support development of this product candidate.
The direct external expenses incurred in our preclinical program relate to costs for toxicology studies for our third product candidate, AP26113. We incurred no direct external expenses for preclinical programs in 2008. Prior to the designation of our third product candidate, all programs other than clinical programs were designated as discovery research and are included in “all other R&D expenses” in the above table.
All other R&D expenses increased by $1.3 million in 2009 as compared to the corresponding period in 2008. This increase is due to an increase in 2009 in personnel expenses of $3.6 million related to the hiring of additional R&D personnel, primarily in our clinical, regulatory and manufacturing areas to support the expanding development of our product candidates, and an increase in overhead and general expenses of $1.1 million due to increased depreciation and amortization related to capital expenditures, offset in part by a decrease in lab supplies and services of $594,000 and legal and consulting costs of $833,000, due to a focus on cost reduction, and an increase in Merck’s allocated share of our internal expenses under the terms of the collaboration agreement of $1.9 million.
General and Administrative Expenses
General and administrative expenses decreased by $11.2 million, or 40 percent, from $28.1 million in 2008 to $16.9 million in 2009. Professional fees decreased by $11.3 million to $7.6 million in 2009 as compared to $18.9 million in 2008, due primarily to reduced costs related to corporate and commercial development initiatives, including reduced costs related to the development of systems and processes to support growth, and to our patent infringement litigations against Eli Lilly and Company, or Lilly, and Amgen Inc., or Amgen.
Other Income/Expense
Interest Income
Interest income decreased by 91 percent to $116,000 in 2009 from $1.3 million in 2008, as a result of lower interest yields from our cash equivalents and marketable securities and a lower average balance of funds invested in 2009.
Interest Expense
Interest expense decreased by 48 percent to $287,000 in 2009 from $550,000 in 2008, due to lower average loan balances and lower interest rates in 2009.
Revaluation of Warrant Liability
The fair value of our warrant liability at December 31, 2009 was $7.8 million higher than its fair value at its inception in February 2009, resulting in a non-cash charge of $7.8 million for the year ended December 31, 2009. The increase in value of the warrant liability is primarily due to the impact of the increase in the market price of our common stock since inception of the warrant.
Operating Results
We reported a loss from operations of $72.0 million in 2009 compared to a loss from operations of $71.9 million in 2008, an increase in loss of $182,000, or less than 1 percent. The increase in loss from operations is largely due to the net impact of increases in R&D expenses and decreases in general and administrative expenses described above. We also reported a net loss of $80.0 million in 2009 compared to a net loss of $71.1 million in 2008, an increase in net loss of $8.9 million or 13 percent, and a net loss per share of $0.86 and $1.02, in 2009 and 2008, respectively. The increase in net loss is largely due to the revaluation of our warrant liability described above. The decrease in net loss per share is largely due to the increase in the weighted average number of shares of common stock outstanding as a result of sales of common stock completed in February 2009 and August 2009.
Selected Quarterly Financial Data
Summarized unaudited quarterly financial data are as follows:
(1) In May 2010, we entered into an amended and restated agreement with Merck for the development and commercialization of ridaforolimus that provided for an up-front payment of $50 million and resulted in the recognition at that time of previously deferred revenue. See Note 2 to the consolidated financial statements.
Liquidity and Capital Resources
We have financed our operations and investments to date primarily through sales of our common stock to institutional investors, collaborations with pharmaceutical companies and, to a lesser extent, through issuances of our common stock pursuant to our stock option and employee stock purchase plans, supplemented by the issuance of long-term debt. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. We seek to balance the level of cash, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms.
Sources of Funds
During the years ended December 31, 2010, 2009 and 2008, our sources of funds were as follows:
Our up-front payment of $50 million from Merck in 2010 was received pursuant to the License Agreement entered into in May 2010. This up-front payment is included in cash provided by operating activities in our consolidated statement of cash flows for the year ended December 31, 2010 but is presented separately in this analysis due to the non-recurring nature of this payment.
The amount of funding we raise through sales of our common stock depends on many factors, including, but not limited to, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.
On February 25, 2009, we sold 14,378,698 shares of our common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional 10,784,024 shares of our common stock exercisable at a price of $2.15 per share in cash or pursuant to the net exercise provisions of the warrants. At the election of the warrant holder, upon certain transactions, including a merger, tender offer or sale of all or substantially all of our assets, the holder may receive cash in exchange for the warrant, in an amount determined by application of the Black-Scholes option valuation model at the time of any such event, if the consideration received by the stockholders from such transaction is less than $2.15 per share. The warrants became exercisable on August 25, 2009 and will expire on February 25, 2012 if not exercised by that date. On April 30, 2010, 1,220,414 warrants were exercised for proceeds of $2.6 million.
On August 7, 2009, we sold 21,850,000 shares of our common stock in an underwritten public offering, including 2,850,000 shares of common stock upon exercise by the underwriters of their over-allotment option, at a purchase price of $1.75 per share. Net proceeds of this offering, after underwriting discounts and commissions and direct expenses, were $35.6 million.
On October 29, 2010, we sold 16,000,000 shares of our common stock in an underwritten public offering at a purchase price of $3.70 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $57.5 million.
We have filed shelf registration statements with the SEC, from time to time, to register shares of our common stock or other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate. On January 11, 2010, we filed a shelf registration statement with the SEC for the issuance of common stock, preferred stock, various series of debt securities and/or warrants or rights to purchase any of such securities, either individually or in units, with a total value of up to $125 million, from time to time at prices and on terms to be determined at the time of any such offering. This filing was declared effective on January 21, 2010. Following the October 29, 2010 stock issuance, we have approximately $65.8 million of securities remaining available under this shelf registration statement.
In January 2011, we amended our existing term loan with a bank. The amendment increases the outstanding balance of the loan from $9.6 million at December 31, 2010 to $14.0 million, extends the maturity date from March 31, 2013 to December 31, 2015, and re-sets the quarterly repayment provisions, with payments increasing from 2.5% of the principal amount in the first quarter, commencing on March 31, 2011, to 8.75% of the principal amount in the final quarter, together with interest, throughout the term of the loan. All other provisions of our existing loan remain in full force and effect.
Uses of Funds
The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to invest in property and equipment as needed for our business. Our uses of cash during the years ended December 31, 2010, 2009 and 2008 were as follows:
The net cash provided by or used in operating activities is comprised of our net income or losses, adjusted for non-cash expenses, changes in deferred revenue, including deferrals of the up-front and milestone payments received from Merck, and working capital requirements. As noted above, we recorded net income for the year ended December 31, 2010 of $85.2 million. Included in net income for the year ended December 31, 2010 was $111.5 million of license and collaboration revenue representing the recognition of previously deferred revenue under our Collaboration Agreement with Merck, which had no impact on cash flow during this period. After taking into account such non-cash revenue as well as non-cash expenses, and after deducting the $50 million up-front payment from Merck pursuant to the License Agreement, our adjusted net cash used in operating activities decreased by $8.3 million in 2010 as compared to 2009. This decrease reflected the impact of actions we took during 2010 to conserve cash and capital as we balanced our spending with our available resources, as well as the reduction in expenses related to ridaforolimus which were fully assumed by Merck pursuant to the License Agreement as of May 4, 2010. As noted above, we expect that we will incur a net loss in 2011 due to ongoing development of our product candidates; that our investment in intangible assets, consisting of our intellectual property, will increase in 2011 in support of our product development activities; and that our investment in property and equipment will increase in 2011 to support growth of our R&D and general and administrative functions.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2010, we maintained outstanding letters of credit of $749,000 in accordance with the terms of our long-term lease for our office and laboratory facility and for other purposes.
Contractual Obligations
We have substantial fixed contractual obligations under our long-term debt agreement, operating and capital lease agreements, employment agreements and benefit plans. These non-cancellable contractual obligations were comprised of the following as of December 31, 2010:
Long-term debt consists of scheduled principal payments on such debt under the terms of the amendment to our term loan agreement entered into in January 2011, which amendment also increased the loan balance by $4.4 million to $14 million. Interest on our long-term debt is based on variable interest rates. Assuming a constant interest rate of 1.54 percent, the interest rate on our debt at December 31, 2010, over the remaining term of the debt, our interest expense would total approximately $128,000 in 2011.
Leases consist of payments to be made on our lease for our office and laboratory facility, the term of which extends to July 2012 (subject to two five-year renewals, at our option), and on agreements for certain assets acquired under capital leases which expire at various dates into 2013. Employment agreements represent base salary payments under agreements with officers that extend for terms ranging from one to four years. Other long-term obligations are comprised primarily of our obligations under our deferred executive compensation plans.
Liquidity
At December 31, 2010, we had cash and cash equivalents totaling $103.6 million and working capital of $88.8 million, compared to cash and cash equivalents totaling $40.4 million and working capital of $8.2 million at December 31, 2009. For the year ended December 31, 2010, we reported net income of $85.2 million and cash provided by operating activities of $6.4 million which reflects the favorable impact of the $50.0 million up-front payment received from Merck related to the License Agreement entered into in May 2010. We believe that our cash and cash equivalents will be sufficient to fund our operations to the fourth quarter of 2012. This estimate assumes receipt of a $25 million milestone payment from Merck in 2011 for the acceptance by the FDA of a new drug application for ridaforolimus in patients with metastatic sarcomas as well as the exercise of our outstanding warrants, which expire in February 2012, for proceeds of $20.6 million of which a total of $6.4 million has been received in January and February of 2011.
We do not have significant recurring revenue streams and have historically incurred operating losses and net losses related to our research and development activities. We expect to continue to incur significant operating expenses related to our research and development activities in 2011 and beyond. There are numerous factors that are likely to affect the level of spending on our research and development programs including the number, size and complexity of, and rate of enrollment of patients in, our clinical trials for ponatinib and any clinical trials we may begin for AP26113, the extent of other development activities for ponatinib and AP26113, including product and process development, the progress of our preclinical and discovery research programs, the timing and amount of any future milestone and royalty payments related to ridaforolimus from Merck, the potential proceeds from the exercise of outstanding warrants to purchase our common stock, and the impact of our business development activities.
As noted previously, our License Agreement with Merck provides potential funding in the form of up to $514 million in regulatory and sales milestone payments, including potential near-term milestone payments related to the Phase 3 SUCCEED clinical trial of ridaforolimus in patients with bone and soft-tissue sarcomas. In January 2011, we announced top-line data from this clinical trial showing that ridaforolimus met the primary endpoint of improved progression-free survival compared to placebo. Merck currently plans to file for marketing approval of ridaforolimus in the United States and Europe in 2011, subject to final collection and analysis of all available data from the trial. We will be eligible to receive up to $65 million in milestone payments from Merck related to the sarcoma indication (consisting of $25 million for acceptance of a new drug application by the FDA which we expect to receive in 2011, $25 million for marketing approval in the United States, $10 million for marketing approval in Europe, and $5 million for marketing approval in Japan). In addition to milestone payments, if ridaforolimus receives regulatory approval, Merck will pay us tiered double-digit royalties on global net sales of ridaforolimus.
In addition to potential funding from Merck, we are also pursuing partnering opportunities with our second product candidate, ponatinib and other licensing opportunities with our technologies. Such transactions could generate up-front and milestone payments as well as funding of on-going development costs. Regarding ponatinib, we are focusing our partnering strategy on a regional collaboration in select markets outside of the United States. We believe that such an approach will allow us to retain substantial potential commercial value of ponatinib for use in cancers. There is no guarantee, however, that we will be successful in entering into any such partnership arrangements on commercially reasonable terms, if at all, or that we will receive any revenue through these partnership efforts in the future. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
We may also seek to raise funds by issuing common stock or other securities in one or more private placements or public offerings, as market conditions permit, or through the issuance of debt. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. At December 31, 2010, we had warrants outstanding to purchase 9,563,610 shares of our common stock from our registered direct offering of common stock in February 2009. These warrants have an exercise price of $2.15 per share and expire in February 2012. In January and February 2011, a total of 2,962,500 warrants were exercised by the holders for proceeds to us of approximately $6.4 million. Subsequent to the exercises in January and February 2011, a total of 6,601,110 warrants remain outstanding which, if exercised, would provide $14.2 million in net proceeds to the Company. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends.
There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate preclinical studies, clinical trials or other clinical development activities for one or more of our product candidates; (2) delay, limit, reduce or terminate our discovery research or preclinical development activities; or (3) delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.
Recently Adopted or Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition - Milestone Method, which provides guidance on determining whether a milestone is substantive including the criteria that must be met for a milestone to be considered a substantive milestone and the recognition of consideration received upon achievement of a substantive milestone. ASU No. 2010-17 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after June 15, 2010 and is not expected to have a material impact on our financial statements.
In September 2009, the FASB issued authoritative guidance that modifies the accounting for multiple element revenue arrangements. This guidance requires an entity to allocate revenue to each unit of accounting in multiple deliverable arrangements based on the relative selling price of each deliverable. It also changes the level of evidence of stand-alone selling prices required to separate deliverables by requiring an entity to make its best estimate of the stand-alone selling price of the deliverables when more objective evidence of selling price is not available. Implementation of this guidance is required no later than fiscal years beginning after June 15, 2010 and this guidance may be applied prospectively to new or materially modified arrangements after the effective date or retrospectively. Early application is permitted. This guidance may impact our determination of the separation of deliverables for future arrangements.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.
We invest cash balances in excess of operating requirements in short-term, highly liquid securities, with original maturities of 90 days or less, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund our liquidity needs and may not in any case exceed three years. These securities are classified as available-for-sale.
Our investments are sensitive to interest rate risk. However, because our available funds at December 31, 2010, were invested solely in cash equivalents, our risk of loss due to changes in interest rates is not material.
At December 31, 2010, we have recorded as a liability the fair value of warrants to purchase 9,563,610 shares of our common stock issued to investors in connection with a registered direct offering of our common stock on February 25, 2009. The fair value of this warrant liability is determined using the Black-Scholes option valuation model and is therefore sensitive to changes in the market price and volatility of our common stock among other factors. In the event of a hypothetical 10% increase in the market price ($0.51 based on the market price of our stock at December 31, 2010) of our common stock on which the December 31, 2010 valuation was based, the value would have increased by $4.7 million. Such increase would have been reflected as additional loss on revaluation of the warrant liability in our statement of operations.
At December 31, 2010, we had $9.6 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR plus 1.25 to 2.25 percent. This note is sensitive to changes in interest rates. In the event of a hypothetical 10 percent increase in the interest rate on which the loan is based (15.0 basis points at December 31, 2010), we would incur approximately $14,000 of additional interest expense per year based on expected balances over the next twelve months.
Certain Factors That May Affect Future Results of Operations
The SEC encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Annual Report on Form 10-K contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Annual Report, and they may also be made a part of this Annual Report by reference to other documents filed with the SEC, which is known as "incorporation by reference." Such statements in connection with any discussion of future operating or financial performance are identified by use of words such as "may," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning. Such statements are based on management's expectations and are subject to certain factors, risks and uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those expressed or implied by such forward-looking statements. These risks include, but are not limited to, the costs associated with our research, development, manufacturing and other activities, the conduct and results of preclinical and clinical studies of our product candidates, difficulties or delays in obtaining regulatory approvals to market products resulting from our or our partners’ development efforts, our reliance on our strategic partners and licensees and other key parties for the successful development, manufacturing and commercialization of our product candidates, the adequacy of our capital resources and the availability of additional funding, patent protection and third-party intellectual property claims relating to our and our partners’ product candidates, future capital needs, risks related to key employees, markets, economic conditions, prices, reimbursement rates and competition, and other factors. Please also see the discussion under “Risk Factors” in Part I, Item 1A appearing elsewhere in this Annual Report on Form 10-K for more details regarding these and other risks.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference in this Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of ARIAD Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ARIAD Pharmaceuticals, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 15, 2011
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Business and Summary of Significant Accounting Policies
Nature of Business
ARIAD’s vision is to transform the lives of cancer patients with breakthrough medicines. The Company’s mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need - aggressive cancers where current therapies are inadequate. The Company’s goal is to build a fully integrated oncology company.
The Company’s lead cancer product candidate, ridaforolimus, previously known as deforolimus, is being studied in multiple clinical trials in patients with various types of cancers. The Company entered into a global collaboration in July 2007 with Merck & Co., Inc. (together with its subsidiaries, “Merck”) to jointly develop and commercialize ridaforolimus for use in cancer, which agreement was amended and restated in May 2010. As further discussed in Note 2, under the terms of the amended and restated agreement, Merck has assumed responsibility for all activities related to the development, manufacture, and commercialization of ridaforolimus. The Company will receive milestone payments upon achievement of certain events and royalties as discussed in Note 2. The Company’s second product candidate, ponatinib, previously known as AP24534, is being studied in Phase 1 and Phase 2 clinical trials in patients with hematologic cancers, including chronic myeloid leukemia and Philadelphia positive acute lymphoblastic leukemia. The Company’s third product candidate, AP26113, is in the preclinical stage of development. In addition to our lead development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.
Principles of Consolidation
The consolidated financial statements include the accounts of ARIAD Pharmaceuticals, Inc. and its wholly-owned subsidiaries, ARIAD Corporation, ARIAD Pharma S.A. and ARIAD Pharma Ltd. Intercompany accounts and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported amounts and disclosure of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include short-term, highly liquid investments, which consist principally of United States government and agency securities, purchased with remaining maturities of 90 days or less, and money market accounts.
Restricted Cash
Restricted cash consists of cash balances held as collateral for outstanding letters of credit related to the lease of the Company’s laboratory and office facility and other purposes.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (3 to 10 years). Leasehold improvements and assets under capital leases are amortized over the shorter of their useful lives or lease term using the straight-line method.
Intangible and Other Assets
Intangible and other assets consist primarily of purchased technology and capitalized patent and license costs. The cost of purchased technology, patents and patent applications, costs incurred in filing patents and certain license fees are capitalized. Capitalized costs related to purchased technology are amortized over the estimated useful life of the technology. Capitalized costs related to issued patents are amortized over a period not to exceed seventeen years or the remaining life of the patent, whichever is shorter, using the straight-line method. Capitalized license fees are amortized over the periods to which they relate. In addition, capitalized costs are expensed when it becomes determinable that the related patents, patent applications or technology will not be pursued.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including the above-mentioned intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Revenue Recognition
The Company generates revenue from license and collaboration agreements with third parties related to use of the Company’s technology and/or development and commercialization of product candidates. Such agreements may provide for payment to the Company of up-front payments, periodic license payments, milestone payments and royalties.
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the fair value of the undelivered element by application of the residual method and the appropriate revenue recognition principles are applied to each unit.
The Company also generates service revenue from license agreements with third parties related to internal services provided under such agreements. Service revenue is recognized as the services are delivered.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement basis and the income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax computations are based on enacted tax laws and rates applicable to the years in which the differences are expected to affect taxable income. A valuation allowance is established when it is necessary to reduce deferred income tax assets to the expected realized amounts.
The Company does not recognize a tax benefit unless it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Segment Reporting
The Company organizes itself into one operating segment reporting to the chief executive officer.
Stock-Based Compensation
The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.
Executive Compensation Plan
The Company has an unfunded deferred executive compensation plan that defers the payment of annual bonus awards to officers to future periods as specified in each award. The value of the awards is indexed to the value of specified mutual funds. The Company accrues a liability based on the value of the awards ratably over the vesting period (generally four years). The recorded balances of such awards are increased or decreased based on the actual total return and quoted market prices of the specified mutual funds.
Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
Recently Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition - Milestone Method, which provides guidance on determining whether a milestone is substantive including the criteria that must be met for a milestone to be considered a substantive milestone and the recognition of consideration received upon achievement of a substantive milestone. ASU No. 2010-17 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after June 15, 2010 and is not expected to have a material impact on the Company’s financial statements.
In September 2009, the FASB issued authoritative guidance that modifies the accounting for multiple element revenue arrangements. This guidance requires an entity to allocate revenue to each unit of accounting in multiple deliverable arrangements based on the relative selling price of each deliverable. It also changes the level of evidence of stand-alone selling prices required to separate deliverables by requiring an entity to make its best estimate of the stand-alone selling price of the deliverables when more objective evidence of selling price is not available. Implementation of this guidance is required no later than fiscal years beginning after June 15, 2010 and this guidance may be applied prospectively to new or materially modified arrangements after the effective date or retrospectively. Early application is permitted. This guidance may impact the Company’s determination of the separation of deliverables for future arrangements.
2.
Collaboration and License Agreements with Merck & Co., Inc.
In July 2007, the Company entered into a collaboration agreement with Merck for the joint global development, manufacture and commercialization of ridaforolimus, the Company’s lead product candidate, for use in cancer (the “Collaboration Agreement”). In May 2010, the Company entered into an amended and restated agreement with Merck for ridaforolimus (the “License Agreement”), which replaced the Collaboration Agreement. These agreements are described below.
The Collaboration Agreement (July 2007 to May 2010)
Under the terms of the Collaboration Agreement, as in effect until May 4, 2010, Merck and the Company were conducting a broad-based development program for the use of ridaforolimus in multiple types of cancer. Each party funded 50 percent of global development costs, except that Merck funded 100 percent of any cost of development specific to development or commercialization of ridaforolimus outside the United States. Under the Collaboration Agreement, the Company was responsible for supplying the active pharmaceutical ingredient used in the product and Merck was responsible for the formulation of the finished product, all under a separate supply agreement between the parties entered into in May 2008.
The Collaboration Agreement provided that, in the United States, the Company and Merck would co-promote the product, the Company would distribute and sell the product for all cancer indications and record all sales, and each party would receive 50 percent of the profit from such sales. Outside the United States, Merck would distribute, sell and promote the product and record all sales, and Merck would pay the Company tiered double-digit royalties on such sales. Royalties would be payable by Merck, on a country by country basis, until the later of (i) the expiration of the last valid claim of any patent rights owned by either the Company or Merck that cover the product, (ii) a specified number of years from first commercial sale, or (iii) the last date upon which the Company supplies the active pharmaceutical ingredient to Merck under the supply agreement, subject to partial reduction in certain circumstances.
Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007, and agreed to pay up to $652 million in milestone payments, of which $53.5 million had been paid up to May 4, 2010, based on the successful development of ridaforolimus in multiple potential cancer indications, and achievement of specified product sales thresholds. Merck had also agreed to provide the Company with up to $200 million in interest-bearing, repayable, development cost advances to cover a portion of the Company’s share of global costs, after the Company had paid $150 million in global development costs and had obtained regulatory approval to market ridaforolimus from the Food and Drug Administration (“FDA”) in the United States or similar regulatory authorities in Europe or Japan.
The Company’s accounting policy for exclusive license arrangements is to recognize revenue when all revenue recognition criteria have been met. As the Collaboration Agreement included multiple elements, the Company identified the units of accounting and determined the related performance period. The Company assessed each of the deliverables related to the Collaboration Agreement against the separation criteria for multiple element arrangements and concluded that the license and research and development deliverables constituted one unit of accounting. This conclusion reflected the nature of the planned research and development services under the terms of the Collaboration Agreement and the ongoing research in multiple cancer indications. The up-front and milestone payments received were deferred and were being recognized as revenue through 2023, the estimated expiration of the patents related to the underlying technology, which was determined to be the performance period.
Development costs under the Collaboration Agreement were aggregated and split between the Company and Merck in accordance with the terms of the agreement. The Company’s share of such development costs from inception of the collaboration up to May 4, 2010 was reflected in operating expenses in the Company’s statement of operations. Any amounts due to or from Merck in respect of such development costs and milestone payments earned but not received were recorded as such on the Company’s balance sheet.
The License Agreement (May 2010 to present)
Under the terms of the License Agreement, the Company granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and Merck assumed responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and will fund 100 percent of all ridaforolimus costs incurred after January 1, 2010. The License Agreement provides that Merck will develop ridaforolimus in multiple oncology indications. If ridaforolimus receives regulatory approval, Merck will be responsible for selling ridaforolimus worldwide, will record global sales and will pay the Company tiered double-digit royalties on global net sales. The Company has an option to co-promote ridaforolimus with up to 20 percent of the sales effort in all indications in the United States and, in such case, would be compensated by Merck for its sales efforts.
Under the License Agreement, Merck paid the Company an initial up-front fee of $50 million in May 2010 and has agreed to pay the Company up to $514 million in regulatory and sales milestone payments, based on the successful development of ridaforolimus in multiple potential cancer indications and upon achievement of specified product sales thresholds. These potential milestone payments include up to $65 million associated with potential regulatory filings and approvals for the sarcoma indication, (consisting of $25 million for acceptance of filing of a new drug application by the FDA, $25 million for marketing approval in the United States, $10 million for marketing approval in Europe, and $5 million for marketing approval in Japan), up to $249 million associated with potential regulatory filings and approvals for other cancer indications, and up to $200 million associated with the achievement of certain sales thresholds. These milestone payments replace the remaining unpaid milestone payments provided for in the Collaboration Agreement.
The License Agreement provides that all ridaforolimus activities that had been the responsibility of the Company under the Collaboration Agreement would be transitioned to Merck, a process that was substantially completed in the fourth quarter of 2010. Merck may request the Company to provide additional services, which the Company can provide at its election. Merck agreed to pay the Company for its internal transition services at agreed upon rates and reimburse the Company for all external costs incurred in connection with transition services or research and development activities.
Pursuant to this License Agreement, in addition to the $50 million up-front payment from Merck, the Company has also received from Merck approximately $12.8 million for its share of costs incurred in the period from January 1, 2010 to May 4, 2010 related to development, manufacture and commercial activities for ridaforolimus in accordance with the cost-sharing provisions of the Collaboration Agreement as in effect during that period.
The Company considers this License Agreement to be a new agreement for accounting purposes, as the economic terms and deliverables have been materially modified from the prior arrangement. The Company assessed each of the deliverables related to the License Agreement against the separation criteria for multiple element arrangements and concluded that there are two units of accounting, namely the license and the transition services. The Company concluded that the license deliverable has stand-alone value, as the nature of the transition services could be provided by other vendors and there is objective and reliable evidence of the fair value of the undelivered transition services. In accounting for separate units of accounting for multiple element arrangements, when the fair value of the undelivered element is known, the revenue recognized for the undelivered element is based on the fair value of this unit of accounting. Accordingly, the Company will recognize the fair value of the transition services as they are provided. The Company’s accounting policy for exclusive licenses is to recognize revenue when all revenue recognition criteria are met. Accordingly, the Company recognized the revenue associated with the delivered elements of the agreement in the second quarter of 2010.
The amounts recognized as license and collaboration revenue for the year ended December 31, 2010 included the following components:
·
$50 million up-front payment pursuant to the License Agreement,
·
$12.8 million payment received from Merck pursuant to the License Agreement as payment for the Company’s 50 percent share of costs incurred from January 1, 2010 to May 4, 2010, and
·
$111.5 million representing the recognition of revenue deferred as of December 31, 2009 under the Company’s accounting for the Collaboration Agreement.
Under the License Agreement, Merck pays the Company for its transition services from May 4, 2010 until completion of the transition. The Company recognizes these payments as service revenue as the services are delivered. For the year ended December 31, 2010, the Company has recorded approximately $4.5 million of service revenue related to its transition services. The cost of such services is reflected in operating expenses in the period in which they are incurred.
Merck is required to reimburse the Company for the cost of any services related to ridaforolimus being provided to the Company by outside service providers from May 4, 2010 until completion. Based on the nature of the arrangement with Merck for management of such services and reimbursement of their costs, reimbursement received from Merck for the cost of such services is reflected as an offset to the related cost and presented on a net basis in operating expenses. As noted above, the payment for all internal costs associated with transition services is presented on a gross basis as service revenue.
3.
Property and Equipment, Net
Property and equipment, net, was comprised of the following at December 31:
Depreciation and amortization expense for the years ended December 31, 2010, 2009 and 2008 was $3.0 million, $3.2 million and $2.3 million, respectively.
The Company leases certain assets under capital leases having terms up to three years. Assets under capital leases included in property and equipment were as follows at December 31:
4.
Intangible and Other Assets, Net
Intangible and other assets, net, were comprised of the following at December 31:
Amortization expense for intangible assets amounted to $880,000, $1,031,000 and $749,000 in 2010, 2009 and 2008, respectively. The weighted average amortization period for intangible assets was 14.8 years, 15.2 years and 14.8 years in 2010, 2009 and 2008, respectively. The estimated future amortization expenses for capitalized patent and license costs and purchased technology are $601,000 for 2011, $592,000 for 2012, $592,000 for 2013, $592,000 for 2014 and $585,000 for 2015.
For the years ended December 31, 2010, 2009 and 2008, the Company recorded charges in research and development expense of $2.4 million, $47,000 and $1,000, respectively, to reflect impairment of the carrying value of certain capitalized patents and licenses. In 2010, the charges relate to the write-off of the carrying value of patents related to the Company’s NF-кB technology, upon unsuccessful conclusion of litigation related to this technology, and an impairment of the carrying value of the ARGENT patents and certain other patents based on a current assessment of future cash flows anticipated from these technologies.
5.
Long-term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations were comprised of the following at December 31:
The term loan as of December 31, 2010 provides for quarterly payments of principal and interest with final maturity in 2013. The loan bears interest at LIBOR plus 1.25 to 2.25 percent, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate. The effective interest rate on the loan was 1.54% at December 31, 2010. The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. The loan, as amended, requires the Company to maintain a minimum of $15.0 million in unrestricted cash, cash equivalents and investments. The loan also contains certain covenants that restrict additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of common stock.
In addition, a covenant in the loan agreement requires that the Company not receive an audit report on its annual audited financial statements that includes a “going concern” explanatory paragraph within the audit report. The Company obtained a waiver from the bank related to this requirement for the year ended December 31, 2009. At December 31, 2009, the entire term loan balance was classified as a current liability because the Company was unable to conclude that future covenant violations would not occur within the following twelve months. As a result of the additional funding provided under the May 2010 Merck License Agreement and the net proceeds of approximately $57.5 million received from the underwritten public offering of our common stock on October 29, 2010, the debt is now classified based on its scheduled maturity.
In January 2011, the Company amended the existing term loan with the bank. The amendment increases the outstanding balance of the loan from $9.6 million at December 31, 2010 to $14.0 million, extends the maturity date from March 31, 2013 to December 31, 2015, and re-sets the quarterly repayment provisions with payments increasing from 2.5% of the principal amount in the first quarter, commencing on March 31, 2011, to 8.75% of the principal amount in the final quarter, together with interest, throughout the term of the loan. All other provisions of the Company’s existing loan remain in full force and effect. Given the Company’s intent and ability to refinance the scheduled maturity of the loan payments, the current portion of the long-term debt at December 31, 2010 reflects the scheduled principal payments in 2011, giving effect to the January 2011 amendment.
In addition, the Company leases certain equipment under capital leases with original terms of generally three years. These leases have effective interest rates ranging from 5.6% to 7.2% and are secured by the underlying leased asset.
The future principal payments of the outstanding obligations as of December 31, 2010, after giving effect to the January 2011 amendment, were as follows:
6.
Executive Compensation Plan
Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards ratably over the vesting period. The value of awards made in 2010, 2009 and 2008 were $1.8 million, $1.1 million and $812,000, respectively. The net expense for this plan was $1.5 million, $1.1 million and $402,000 in 2010, 2009 and 2008, respectively. The estimated future expenses for awards made through December 31, 2010, assuming no change in the value of the underlying mutual funds, are $1.2 million and $946,000 for 2011 and 2012, respectively.
7.
Leases, Licensed Technology and Other Commitments
Facility Lease
The Company conducts its operations in a 100,000 square foot office and laboratory facility under a non-cancelable operating lease. The lease was amended in 2006 and provides that the current lease term extends to July 2012 with two consecutive five-year renewal options. The Company maintains an outstanding letter of credit of $699,000 in accordance with the terms of the amended lease. Rent expense, net of sublease income of $28,000 in 2010, amounted to $2.1 million, $2.1 million and $2.1 million in 2010, 2009 and 2008, respectively. Future minimum annual rental payments through July 2012 are $2.0 million in 2011 and $1.2 million in 2012, which are net of expected sub-lease income of $67,000 in 2011 and $39,000 in 2012.
Licensed Technology
The Company has entered into agreements with several universities under the terms of which the Company has received exclusive licenses to technology and intellectual property. The agreements, which are generally cancelable by the Company, provide for the payment of license fees and/or minimum payments, which are generally creditable against future royalties. Fees paid by the Company amounted to $145,000 in each of 2010, 2009 and 2008, and are expected to amount to approximately $145,000 annually in 2011 and thereafter. In addition, the agreements provide for payments upon the achievement of certain milestones in product development. The agreements also require the Company to fund certain costs associated with the filing and prosecution of patent applications.
Other Commitments
The Company has entered into various employment agreements with twenty officers of the Company. The agreements provide for aggregate annual base salaries of $5.9 million for 2010, $5.5 million for 2011, $1.4 million for 2012, and $632,000 for 2013, and remaining terms of employment of up to four years.
8.
Stockholders’ Equity and Warrants
Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock which the Board of Directors is authorized to designate and issue in different series.
Common Stock and Warrants
At December 31, 2010, the Company had 240,000,000 shares of common stock authorized.
On February 25, 2009, the Company sold 14,378,698 shares of its common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional 10,784,024 shares of the Company’s common stock exercisable at a price of $2.15 per share in cash or pursuant to the net exercise provisions of the warrants. At the election of the warrant holder, upon certain transactions, including a merger, tender offer or sale of all or substantially all of the assets of the Company, the holder may receive cash in exchange for the warrant, in an amount determined by application of the Black-Scholes option valuation model at the time of any such event, if the consideration received by the stockholders from such transaction is less than $2.15 per share. The warrants became exercisable on August 25, 2009 and will expire on February 25, 2012. On April 30, 2010, 1,220,414 warrants were exercised for proceeds to the Company of $2.6 million. Prior to exercise, the warrants were recorded at fair value, with the adjustment to carrying value recognized in earnings upon exercise. The sum of the fair value of the warrants and the proceeds received was credited to additional paid-in-capital and totaled $4.7 million. At December 31, 2010, there were 9,563,610 warrants outstanding. In January and February 2011, a total of 2,962,500 warrants were exercised by the holders for proceeds to the Company of approximately $6.4 million.
As a result of the potential cash settlement provision, the warrants do not qualify to be classified as an equity instrument but instead are classified as a derivative liability. Accordingly, the fair value of the warrants is reflected on the consolidated balance sheet as a liability and the fair value is adjusted at each financial reporting date with the adjustment reflected in the consolidated statement of operations. The Company has classified the warrant obligation as a long-term liability as there is no indication that a merger, tender offer or similar transaction is probable.
On August 7, 2009, the Company sold 21,850,000 shares of its common stock in an underwritten public offering, including 2,850,000 shares of common stock upon exercise by the underwriters of their over-allotment option, at a purchase price of $1.75 per share. Net proceeds of this offering, after underwriting discounts and commissions and direct expenses, were $35.6 million.
On October 29, 2010, the Company sold 16,000,000 shares of its common stock in an underwritten public offering at a purchase price of $3.70 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $57.5 million.
On January 11, 2010, the Company filed a shelf registration statement with the U.S. Securities and Exchange Commission (“SEC”) for the issuance of common stock, preferred stock, various series of debt securities and/or warrants or rights to purchase any of such securities, either individually or in units, with a total value of up to $125 million, from time to time at prices and on terms to be determined at the time of any such offering. This filing was declared effective on January 21, 2010. Following the October 29, 2010 stock offering, the Company has approximately $65.8 million of securities remaining available under it shelf registration statement.
9.
Fair Value of Financial Instruments
The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements may be classified based on the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities using the following three levels:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2-Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3-Unobservable inputs that reflect the Company's estimates of the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
The following table presents information about the Company’s assets and liabilities as of December 31, 2010 and 2009 that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
The Company’s warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. The fair value of the warrants on the date of their issuance was determined to be $3.6 million using the Black-Scholes option valuation model applying the following inputs: (i) the market price of the Company’s common stock of $1.69 on that date, (ii) a risk-free rate of 1.5%, (iii) an expected term of 3 years, (iv) no dividend yield, and (v) a volatility of 66%. As of December 31, 2010, the fair value of the warrants was determined to be $28.8 million using Black-Scholes option valuation model applying the financing assumptions: (i) the market price of the Company’s common stock of $5.10 on that date, (ii) a risk-free rate of 0.34%, (iii) an expected term of 1.2 years, (iv) no dividend yield and (v) a volatility of 54%. As of December 31, 2009, the fair value of the warrants was determined to be $11.4 million using the Black-Scholes option valuation model applying the following assumptions: (i) the market price of the Company’s common stock of $2.28 on that date, (ii) a risk-free rate of 1.23%, (iii) an expected term of 2.2 years, (iv) no dividend yield and (v) a volatility of 79%. The increase in the fair value of the warrants was recognized in other income (expense) in the consolidated statement of operations. The changes in the fair value of the warrant liability for the years ended December 31, 2010 and 2009 were as follows:
The carrying amounts of cash, cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The carrying amount of the Company’s bank term note approximates fair value due to its variable interest rate. The Company’s obligation under its executive compensation plans is based in part on the current fair market value of underlying securities, which is therefore stated at its estimated fair value.
10.
Stock Plans
ARIAD Stock Option and Stock Plans
The Company’s 1991, 1994, 2001 and 2006 stock option and stock plans (the “Plans”) provide for the awarding of nonqualified and incentive stock options, stock grants and restricted stock units to officers, directors, employees and consultants of the Company. Stock options become exercisable as specified in the related option certificate, typically over a four-year period, and expire ten years from the date of grant. Stock grants and restricted stock units provide the recipient with ownership of common stock subject to any rights the Company may have to repurchase the shares granted or other restrictions. The 1991 and 1994 Plans have expired according to their terms and the 2001 Plan has no shares remaining available for grant, although existing stock options granted under these Plans remain outstanding. As of December 31, 2010, there are 5,409,680 shares available for awards under the 2006 Plan.
Employee Stock Purchase Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan and reserved 500,000 shares of common stock for issuance under this plan. In June 2008, the Plan was amended to reserve an additional 500,000 shares of common stock for issuance. Under this plan, substantially all of the Company’s employees may, through payroll withholdings, purchase shares of the Company’s common stock at a price of 85 percent of the lesser of the fair market value at the beginning or end of each three-month withholding period. In 2010, 2009 and 2008, 176,318, 401,797 and 92,698 shares of common stock were issued under the plan, respectively.
11.
Stock-Based Compensation
The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. The Company’s statement of operations included total compensation cost from share-based payments for the years ended December 31, as follows:
Stock Options
Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over four years and have contractual terms of ten years. Stock options are valued using the Black-Scholes option valuation model and compensation cost is recognized based on such fair value over the period of vesting on a straight-line basis.
The following table summarizes information about stock options as of and for the years ended December 31, 2010, 2009 and 2008:
The weighted average fair value of options granted in the years ended December 31, 2010, 2009 and 2008, reflect the following weighted-average assumptions:
The expected life assumption is based on an analysis of historical behavior of participants related to options awarded over time. The expected volatility assumption for the years ended December 31, 2010, 2009 and 2008 is based on the implied volatility of the Company’s common stock, derived from analysis of historical traded and quoted options on the Company’s common stock over the period commensurate with the expected life of the options granted. The risk-free rate is based on the forward U.S. Treasury yield curve. The expected dividends reflect the Company’s current and expected future policy for dividends on its common stock.
Stock option activity under the Company’s stock plans for the year ended December 31, 2010 was as follows:
The following table summarizes information about stock options outstanding as of December 31, 2010:
Options expected to vest consist of options scheduled to vest in the future less expected forfeitures.
At December 31, 2010, total unrecognized compensation cost related to non-vested stock options outstanding amounted to $1.7 million. That cost is expected to be recognized over a weighted-average period of 2.1 years.
Stock and Stock Unit Grants
Stock and stock unit grants are provided to non-employee directors as compensation and generally carry no restrictions as to resale or are fully vested upon grant. Stock and stock unit grants to officers carry restrictions as to resale for periods of time or vesting provisions over time as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite service period, vesting period or period during which restrictions remain on the common stock or stock units granted.
Stock and stock unit activity under the Company’s stock plans for the year ended December 31, 2010 was as follows:
At December 31, 2010, total unrecognized compensation cost related to stock and stock unit awards amounted to $4.0 million. That cost is expected to be recognized over a weighted average of 2.1 years. The total fair value of stock and stock unit awards that vested in 2010, 2009 and 2008 was $1.6 million, $279,000 and $275,000, respectively.
Purchase of Common Stock Pursuant to Employee Stock Purchase Plan
Purchases of common stock by employees are provided pursuant to the Company’s employee stock purchase plan. Purchase price is calculated as 85 percent of the lower of the closing price of our common stock on the first trading day or last trading day of each calendar quarter. Compensation cost is equal to the fair value of the discount on the date of grant and is recognized as compensation in the period of purchase.
12.
Net Income (Loss) Per Share
Basic net income (loss) per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net income (loss) per share amounts have been computed based on the weighted-average number of common shares outstanding plus the dilutive effect of potential common shares. The computation of potential common shares has been performed using the treasury stock method. The changes in income or loss that would result if the warrants were reported as an equity instrument would be reflected as an adjustment to the numerator when warrants would be dilutive. The warrants are antidilutive for all periods presented. When net loss is reported, diluted and basic net loss per share amounts are the same as the impact of potential common shares is antidilutive.
The calculation of net income (loss) and the number of shares used to compute basic and diluted earnings per share for the years ended December 31, 2010, 2009 and 2008 are as follows:
For the years ended December 31, 2010, 2009 and 2008, the following potentially dilutive securities were not included in the computation of net income (loss) per share because the effect would be anti-dilutive:
13.
Income Taxes
The Company’s effective tax rate differs from the statutory rate principally due to the full valuation allowance on its deferred tax assets, after consideration of permanent differences including the Company’s expense related to the revaluation of its warrant liability. The components of deferred income taxes were as follows at December 31:
At December 31, 2010, the Company had available estimated net operating loss carryforwards and research and development credit carryforwards for federal and state tax reporting purposes as follows:
Since the Company has not yet achieved sustained profitable operations, management believes the tax benefits do not satisfy the more-likely-than-not realization criteria and has recorded a valuation allowance for the entire net deferred tax asset. The valuation allowance increased by $21.9 million and $21.8 million in 2009 and 2008, respectively, due to taxable losses and resulting increases in net operating loss carryforwards. The valuation allowance decreased by $43.5 million in 2010 due to the recognition of previously deferred revenue for tax purposes and the utilization of net operating loss carryforwards. The Company does not have any material uncertain tax positions.
The Company is subject to U.S. federal and Massachusetts corporate income taxes. Due to the Company’s historical net operating loss position, the Company’s U.S. federal and Massachusetts tax returns remain open to examination for three years after the Company utilizes that year’s net operating loss carryforward. The Company’s earliest year which generated a net operating loss including in the Company’s current net operating loss carryforward is 1996 for U.S. federal tax purposes and 2006 for Massachusetts state tax purposes.
14.
Related Party Transactions
In June 2007, the Company entered into an agreement with its chief executive officer and with a member of its Board of Directors in their individual capacities as shareholders of the Company’s former majority-owned subsidiary, ARIAD Gene Therapeutics, Inc. (“AGTI”). The agreement contained provisions regarding (i) confidentiality of material non-public information provided to them and their advisors in the course of evaluation of any potential transaction to acquire the 20 percent interest in AGTI that the Company did not own, (ii) reimbursement by the Company of certain reasonable expenses incurred by them to retain financial advisors and legal counsel to advise them in connection with any potential transaction, (iii) indemnification of them by the Company for claims arising out of or relating to any potential transaction and (iv) the maintenance by the Company of liability insurance for their benefit. For the year ended December 31, 2008, the Company reimbursed $259,000 in expenses pursuant to this agreement. AGTI was merged with and into ARIAD Pharmaceuticals, Inc. on September 12, 2008 and the 20 percent minority interest in AGTI was acquired by the Company consequent to the merger.
In the offering and sale by the Company of 21,850,000 shares of its common stock on August 7, 2009 (see Note 8), the Company’s chief executive officer purchased 1,714,286 shares, at the offering price of $1.75 per share, for $3 million.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this Annual Report on Form 10-K was being prepared.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their desired control objectives. Our principle executive officer and principle financial officer have concluded that our controls and procedures are effective at that reasonable assurance level.
(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2010, the Company’s internal control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2010, which is included below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.
Cambridge, Massachusetts
We have audited the internal control over financial reporting of ARIAD Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated March 15, 2011 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 15, 2011
ITEM 9B:
ITEM 9B: OTHER INFORMATION
Not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Board of Directors,” “Executive Officers,“ “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Code of Conduct and Ethics” in the Company’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation”, “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Board of Directors” and “Compensation Practices and Policies Relating to Risk Management” in the Company’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Board of Directors” and “Certain Relationships and Related Transactions” in the Company’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Proposal 2: Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
The following Consolidated Financial Statements, Notes thereto and Report of Independent Registered Public Accounting Firm have been presented in
Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2)
Financial Statement Schedules:
Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.
(a)(3)
The Exhibits listed in the Exhibit Index are filed herewith in the manner set forth therein.
(b)
See (a) (3) above.
(c)
See (a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge and Commonwealth of Massachusetts on the 15th day of March, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Harvey J. Berger, M.D.
Harvey J. Berger, M.D.
Chairman of the Board of Directors, Chief Executive
Officer and President (Principal Executive Officer)
March 15, 2011
/s/ Edward M. Fitzgerald
Edward M. Fitzgerald
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer and Principal
Accounting Officer)
March 15, 2011
/s/ Jay R. LaMarche
Jay R. LaMarche
Director
March 15, 2011
/s/ Athanase Lavidas, Ph.D.
Athanase Lavidas, Ph.D.
Director
March 15, 2011
/s/ Massimo Radaelli, Ph.D.
Massimo Radaelli, Ph.D.
Director
March 15, 2011
/s/ A. Collier Smyth, M.D.
A. Collier Smyth, M.D.
Director
March 15, 2011
/s/ Robert M. Whelan, Jr.
Robert M. Whelan, Jr.
Director
March 15, 2011
/s/ Wayne Wilson
Wayne Wilson
Director
March 15, 2011
ARIAD Pharmaceuticals, Inc.
Form 10-K for the year ended December 31, 2010
Exhibit List
Exhibit
Number
Exhibit Description
Filed
with
this
Report
Incorporated by
Reference
herein from
Form or
Schedule
Filing Date
SEC File/
Reg. Number
3.1
Certificate of Incorporation of ARIAD Pharmaceuticals, Inc., as amended
10-Q
(Exhibit 3.1)
05/10/10
000-21696
3.2
Amended and Restated By-laws of ARIAD Pharmaceuticals, Inc.
8-K
(Exhibit 3.1)
08/27/09
000-21696
4.1
Specimen common stock certificate of ARIAD Pharmaceuticals, Inc.
S-3
(Exhibit 4.5)
10/14/94
33-85166
4.2
Form of Warrant to Purchase Common Stock dated February 25, 2009
8-K
(Exhibit 10.2)
02/20/09
000-21696
(+)
Management contract or compensatory plan or arrangement.
(*)
Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions.