HALOZYME THERAPEUTICS, INC. - Quarter Report: 2011 June (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 001-32335
HALOZYME THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
88-0488686 (I.R.S. Employer Identification No.) |
|
11388 Sorrento Valley Road, San Diego, CA (Address of principal executive offices) |
92121 (Zip Code) |
(858) 794-8889
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes [X] No [ _ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of outstanding shares of the registrants common stock, par value $0.001 per share, was 103,619,644 as of
August 1, 2011.
HALOZYME THERAPEUTICS, INC.
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | (Note) | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 79,116,705 | $ | 83,255,848 | ||||
Accounts receivable |
4,495,792 | 2,328,268 | ||||||
Inventory |
83,849 | 193,422 | ||||||
Prepaid expenses and other assets |
4,317,105 | 3,720,896 | ||||||
Total current assets |
88,013,451 | 89,498,434 | ||||||
Property and equipment, net |
1,495,639 | 1,846,899 | ||||||
Total Assets |
$ | 89,509,090 | $ | 91,345,333 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,731,663 | $ | 3,820,368 | ||||
Accrued expenses |
9,465,723 | 8,605,569 | ||||||
Deferred revenue |
20,345,671 | 2,917,129 | ||||||
Total current liabilities |
31,543,057 | 15,343,066 | ||||||
Deferred revenue, net of current portion |
37,279,394 | 55,176,422 | ||||||
Deferred rent, net of current portion |
633,243 | 474,389 | ||||||
Commitments and contingencies (Note 11) |
||||||||
Stockholders equity: |
||||||||
Preferred stock $0.001 par value; 20,000,000 shares authorized;
no shares issued and outstanding |
- | - | ||||||
Common stock $0.001 par value; 150,000,000 shares authorized;
103,609,419 and 100,580,849 shares issued and outstanding at
June 30, 2011 and December 31, 2010, respectively |
103,610 | 100,581 | ||||||
Additional paid-in capital |
251,721,011 | 245,502,670 | ||||||
Accumulated deficit |
(231,771,225 | ) | (225,251,795 | ) | ||||
Total stockholders equity |
20,053,396 | 20,351,456 | ||||||
Total Liabilities and Stockholders Equity |
$ | 89,509,090 | $ | 91,345,333 | ||||
Note: | The condensed consolidated balance sheet at December 31, 2010 has been derived from audited
financial statements at that date. It does not include, however, all of the information and
notes required by U.S. generally accepted accounting principles for complete financial
statements. |
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Product sales |
$ | 165,470 | $ | 199,530 | $ | 330,919 | $ | 597,340 | ||||||||
Revenues under collaborative agreements |
23,023,478 | 3,013,823 | 30,401,922 | 6,057,744 | ||||||||||||
Total revenues |
23,188,948 | 3,213,353 | 30,732,841 | 6,655,084 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of product sales |
178,235 | 83,539 | 189,952 | 89,199 | ||||||||||||
Research and development |
15,347,116 | 11,924,406 | 29,132,913 | 23,391,610 | ||||||||||||
Selling, general and administrative |
4,567,666 | 3,357,486 | 7,973,632 | 7,114,499 | ||||||||||||
Total operating expenses |
20,093,017 | 15,365,431 | 37,296,497 | 30,595,308 | ||||||||||||
Operating income (loss) |
3,095,931 | (12,152,078 | ) | (6,563,656 | ) | (23,940,224 | ) | |||||||||
Interest and other income, net |
20,357 | 1,155 | 44,226 | 1,824 | ||||||||||||
Net income (loss) |
$ | 3,116,288 | $ | (12,150,923 | ) | $ | (6,519,430 | ) | $ | (23,938,400 | ) | |||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.03 | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.26 | ) | |||||
Diluted |
$ | 0.03 | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.26 | ) | |||||
Shares used in computing net income (loss)
per share: |
||||||||||||||||
Basic |
102,671,410 | 91,766,799 | 101,804,887 | 91,689,909 | ||||||||||||
Diluted |
104,393,835 | 91,766,799 | 101,804,887 | 91,689,909 |
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (6,519,430 | ) | $ | (23,938,400 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activies: |
||||||||
Share-based compensation |
2,158,970 | 2,420,286 | ||||||
Depreciation and amortization |
612,931 | 799,629 | ||||||
(Gain) loss on disposal of equipment |
(656 | ) | 9,609 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(2,167,524 | ) | 1,990,138 | |||||
Inventory |
109,573 | 77,675 | ||||||
Prepaid expenses and other assets |
19,644 | (3,102,452 | ) | |||||
Accounts payable and accrued expenses |
(1,083,350 | ) | (2,706,739 | ) | ||||
Deferred rent |
(14,800 | ) | (144,717 | ) | ||||
Deferred revenue |
(468,486 | ) | (1,799,401 | ) | ||||
Net cash used in operating activities |
(7,353,128 | ) | (26,394,372 | ) | ||||
Investing activities: |
||||||||
Purchases of property and equipment |
(232,562 | ) | (255,168 | ) | ||||
Net cash used in investing activities |
(232,562 | ) | (255,168 | ) | ||||
Financing activities: |
||||||||
Proceeds from exercise of stock options, net |
3,446,547 | 497,460 | ||||||
Net cash provided by financing activities |
3,446,547 | 497,460 | ||||||
Net decrease in cash and cash equivalents |
(4,139,143 | ) | (26,152,080 | ) | ||||
Cash and cash equivalents at beginning of period |
83,255,848 | 67,464,506 | ||||||
Cash and cash equivalents at end of period |
$ | 79,116,705 | $ | 41,312,426 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Accounts payable for purchases of property and equipment |
$ | 28,453 | $ | 7,603 |
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Business
Halozyme Therapeutics, Inc. (Halozyme or the Company) is a biopharmaceutical company
dedicated to the development and commercialization of recombinant human enzymes that either
transiently modify tissue under the skin to facilitate injection of other therapies or correct
diseased tissue structures for clinical benefit. The Companys existing products and its products
under development are based primarily on intellectual property covering the family of human enzymes
known as hyaluronidases.
The Companys operations to date have involved: (i) organizing and staffing its operating
subsidiary, Halozyme, Inc.; (ii) acquiring, developing and securing its technology; (iii)
undertaking product development for its existing products and a limited number of product
candidates; and (iv) supporting the development of partnered product candidates. The Company
currently has multiple proprietary programs in various stages of research and development. In
addition, the Company has collaborative partnerships with F. Hoffmann-La Roche, Ltd and Hoffmann-La
Roche, Inc. (Roche), Baxter Healthcare Corporation (Baxter), ViroPharma Incorporated
(ViroPharma) and Intrexon Corporation (Intrexon) to apply the Companys proprietary
EnhanzeÔ Technology to the partners biological therapeutic compounds. The Company
also had a partnership with Baxter, under which Baxter had worldwide marketing rights for
HYLENEX®, a registered trademark of Baxter International, Inc. (the HYLENEX
Partnership). In January 2011, the Company and Baxter mutually agreed to terminate the HYLENEX
Partnership. There are two marketed products that utilize the Companys technology: HYLENEX, a
hyaluronidase human injection used as an adjuvant to enhance the dispersion and absorption of other
injected drugs and fluids, and ICSI Cumulase®, a product used for in vitro fertilization
(IVF). Currently, the Company has received only limited revenue from the sales of active
pharmaceutical ingredients (API) to the third party that produces ICSI Cumulase, in addition to
other revenues from its collaborative partnerships.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting principles (U.S. GAAP)
and with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) related
to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and
disclosures required by U.S. GAAP for a complete set of financial statements. These interim
unaudited condensed consolidated financial statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on
March 11, 2011. The unaudited financial information for the interim periods presented herein
reflects all adjustments which, in the opinion of management, are necessary for a fair presentation
of the financial condition and results of operations for the periods presented, with such
adjustments consisting only of normal recurring adjustments. Operating results for interim periods
are not necessarily indicative of the operating results for an entire fiscal year.
The consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and
its wholly owned subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been
eliminated.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. On an ongoing basis, the Company
evaluates its estimates and judgments, which are based on historical and anticipated results and
trends and on various other assumptions that management believes to be reasonable under the
circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as
such, actual results may differ from managements estimates.
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Adoption of Recent Accounting Pronouncements
Effective January 1, 2011, the Company adopted on a prospective basis Financial Accounting
Standards Boards (FASB) Accounting Standards Update (ASU) No. 2010-17, Revenue Recognition
(Topic 605): Milestone Method of Revenue Recognition (Milestone Method). ASU No. 2010-17 states
that the Milestone Method is a valid application of the proportional performance model when applied
to research or development arrangements. Accordingly, an entity can make an accounting policy
election to recognize a payment that is contingent upon the achievement of a substantive milestone
in its entirety in the period in which the milestone is achieved. The Milestone Method is not
required and is not the only acceptable method of revenue recognition for milestone payments. The
adoption of ASU No. 2010-17 did not have a material impact on the Companys consolidated financial
position or results of operations.
Effective January 1, 2011, the Company adopted on a prospective basis FASBs ASU No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13
requires an entity to allocate arrangement consideration at the inception of an arrangement to all
of its deliverables based on their relative selling prices. ASU No. 2009-13 eliminates the use of
the residual method of allocation and requires the relative-selling-price method in all
circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables
subject to Accounting Standards Code 605-25. The Company accounted for the collaborative
arrangements with ViroPharma and Intrexon under the provisions of ASU No. 2009-13, which resulted
in revenue recognition patterns that are materially different from those recognized for the
Companys existing multiple-element arrangements.
Pending Adoption of Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation
of Comprehensive Income. In ASU No. 2011-05, an entity has the option to present the total of
comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. In both choices, an entity is required to present each component of net
income along with total net income, each component of other comprehensive income along with a total
for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05
eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders equity. The amendments in ASU No. 2011-05 do not change the
items that must be reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The amendments in ASU No. 2011-05 are effective for
fiscal years, and interim period within those years, beginning after December 15, 2011. The Company
does not expect the adoption of ASU No. 2011-05 to have a material impact on its consolidated
financial position or results of operations.
Revenue Recognition
The Company generates revenues from product sales and collaborative agreements. The Company
recognizes revenues in accordance with the authoritative guidance for revenue recognition. The
Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the sellers
price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.
Product Sales Revenue from the sales of API for ICSI Cumulase is recognized when the
transfer of ownership occurs, which is upon shipment to the Companys distributor. The Company is
obligated to accept returns for product that does not meet product specifications. Historically,
the Company has not had any product returns as a result of not meeting product specifications.
In accordance with the HYLENEX Partnership with Baxter, the Company supplied Baxter with API
for HYLENEX at its fully burdened cost plus a margin. Baxter filled and finished HYLENEX and held
it for subsequent distribution, at which time the Company ensured it met product specifications and
released it as available for sale. Because of the Companys continued involvement in the
development and production process of HYLENEX, the earnings process was not considered to be
complete. Accordingly, the Company deferred the revenue and related product costs on the API for
HYLENEX until the product was filled, finished, packaged and released. Baxter might only return the
API for HYLENEX to the Company if it did not conform to the specified criteria set forth in the
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HYLENEX Partnership or upon termination of such agreement. In addition, the Company received
product-based payments upon the sale of HYLENEX by Baxter, in accordance with the terms of the
HYLENEX Partnership. Product sales revenues were recognized as the Company earned such revenues
based on Baxters shipments of HYLENEX to its distributors when such amounts could be reasonably
estimated. Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the
HYLENEX Partnership and the associated agreements. See Note 9, Deferred Revenue, for further
discussion.
Revenues under Collaborative Agreements The Company entered into license and collaboration
agreements under which the collaborative partners obtained worldwide exclusive rights for the use
of the Companys proprietary recombinant human PH20 enzyme (rHuPH20) in the development and
commercialization of the partners biologic compounds. The collaborative agreements contain
multiple elements including nonrefundable payments at the inception of the arrangement, license
fees, exclusivity fees, payments based on achievement of specific milestones designated in the
collaborative agreements, reimbursements of research and development services, payments for supply
of rHuPH20 API for the partner and/or royalties on sales of products resulting from collaborative
agreements. The Company analyzes each element of its collaborative agreements and considers a
variety of factors in determining the appropriate method of revenue recognition of each element.
Prior to the adoption of ASU No. 2009-13 on January 1, 2011, in order for a delivered item to
be accounted for separately from other deliverables in a multiple-element arrangement, the
following three criteria had to be met: (i) the delivered item had standalone value to the
customer, (ii) there was objective and reliable evidence of fair value of the undelivered items and
(iii) if the arrangement included a general right of return relative to the delivered item,
delivery or performance of the undelivered items was considered probable and substantially in the
control of the vendor. For the collaborative agreements entered into prior to January 1, 2011,
there was no objective and reliable evidence of fair value of the undelivered items. Thus, the
delivered licenses did not meet all of the required criteria to be accounted for separately from
undelivered items. Therefore, the Company recognizes revenue on nonrefundable upfront payments and
license fees from these collaborative agreements over the period of significant involvement under
the related agreements.
For new collaborative agreements or material modifications of existing collaborative
agreements entered into after December 31, 2010, the Company follows the provisions of ASU No.
2009-13. In order to account for the multiple-element arrangements, the Company identifies the
deliverables included within the agreement and evaluates which deliverables represent units of
accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and
each deliverable may be an obligation to deliver services, a right or license to use an asset, or
another performance obligation. The deliverables under the Companys collaborative agreements
include (i) the license to the Companys rHuPH20 technology, (ii) at the collaborators request,
research and development services which are reimbursed at contractually determined rates, and (iii)
at the collaborators request, supply of rHuPH20 API which is reimbursed at the Companys cost plus
a margin. A delivered item is considered a separate unit of accounting when the delivered item has
value to the collaborator on a standalone basis based on the consideration of the relevant facts
and circumstances for each arrangement. Factors considered in this determination include the
research capabilities of the partner and the availability of research expertise in this field in
the general marketplace. In addition, if the arrangement includes a general right of return
relative to the delivered item, delivery or performance of the undelivered item is considered
probable and substantially in the Companys control.
Arrangement consideration is allocated at the inception of the agreement to all identified
units of accounting based on their relative selling price. The relative selling price for each
deliverable is determined using vendor specific objective evidence (VSOE), of selling price or
third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party
evidence of selling price exists, the Company uses its best estimate of the selling price for the
deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed
or determinable. The consideration received is allocated among the separate units of accounting,
and the applicable revenue recognition criteria are applied to each of the separate units. Changes
in the allocation of the sales price between delivered and undelivered elements can impact revenue
recognition but do not change the total revenue recognized under any agreement.
Upfront license fee payments are recognized upon delivery of the license if facts and
circumstances dictate that the license has standalone value from the undelivered items, which
generally include research and development services and the manufacture of rHuPH20 API, the
relative selling price allocation of the license is equal to or exceeds the upfront license fee,
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persuasive evidence of an arrangement exists, the Companys price to the partner is fixed or
determinable, and collectability is reasonably assured. Upfront license fee payments are deferred
if facts and circumstances dictate that the license does not have standalone value. The
determination of the length of the period over which to defer revenue is subject to judgment and
estimation and can have an impact on the amount of revenue recognized in a given period.
The terms of the Companys collaborative agreements provide for milestone payments upon
achievement of certain development and regulatory events and/or specified sales volumes of
commercialized products by the collaborator. Prior to the Companys adoption of the Milestone
Method, the Company recognized milestone payments upon the achievement of specified
milestones if: (1) the milestone was substantive in nature and the achievement of the milestone was
not reasonably assured at the inception of the agreement, (2) the fees were nonrefundable and (3)
the Companys performance obligations after the milestone achievement would continue to be funded
by the Companys collaborator at a level comparable to the level before the milestone achievement.
Effective January 1, 2011, the Company adopted on a prospective basis the Milestone Method.
Under the Milestone Method, the Company recognizes consideration that is contingent upon the
achievement of a milestone in its entirety as revenue in the period in which the milestone is
achieved only if the milestone is substantive in its entirety. A milestone is considered
substantive when it meets all of the following criteria:
1. | The consideration is commensurate with either the entitys performance to achieve the
milestone or the enhancement of the value of the delivered item(s) as a result of a
specific outcome resulting from the entitys performance to achieve the milestone, |
||
2. | The consideration relates solely to past performance, and |
||
3. | The consideration is reasonable relative to all of the deliverables and payment terms
within the arrangement. |
A milestone is defined as an event (i) that can only be achieved based in whole or in part on
either the entitys performance or on the occurrence of a specific outcome resulting from the
entitys performance, (ii) for which there is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved and (iii) that would result in additional payments
being due to the Company.
Reimbursements of research and development services are recognized as revenue during the
period in which the services are performed as long as there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection of the related receivable is probable.
Revenue from the manufacture of rHuPH20 API is recognized when the API has met all specifications
required for the collaborator acceptance and title and risk of loss have transferred to the
collaborator. The Company does not directly control when any collaborator will request research and
development services or supply of rHuPH20 API; therefore, the Company cannot predict when it will
recognize revenues in connection with research and development services and supply of rHuPH20 API.
Royalties to be received based on sales of licensed products by the Companys collaborators
incorporating the Companys rHuPH20 API will be recognized as earned.
The collaborative agreements typically provide the partners the right to terminate such
agreement in whole or on a product-by-product or target-by-target basis at any time upon 90 days
prior written notice to the Company. There are no performance, cancellation, termination or refund
provisions in any of the Companys collaborative agreements that contain material financial
consequences to the Company.
See Note 5, Collaborative Agreements, and Note 9, Deferred Revenue, for further
discussion.
Cost of Sales
Cost of product sales consists primarily of raw materials, third-party manufacturing costs,
fill and finish costs and freight costs associated with the sales of API for ICSI Cumulase and API
for HYLENEX. Cost of sales also consists of the write-down of obsolete inventory.
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Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead
expenses, external clinical trials, research-related manufacturing services, contract services and
other outside expenses. Research and development expenses are charged to operations as incurred
when these expenditures relate to the Companys research and development efforts and have no
alternative future uses. Advance payments, including nonrefundable amounts, for goods or services
that will be used or rendered for future research and development activities are deferred and
capitalized. Such amounts will be recognized as an expense as the related goods are delivered or
the related services are performed or such time when the Company does not expect the goods to be
delivered or services to be performed.
Milestone payments that the Company makes in connection with in-licensed technology or product
candidates are expensed as incurred when there is uncertainty in receiving future economic benefits
from the licensed technology or product candidates. The Company considers the future economic
benefits from the licensed technology or product candidates to be uncertain until such licensed
technology or product candidates are approved for marketing by the U.S. Food and Drug
Administration or comparable regulatory agencies in foreign countries or when other significant
risk factors are abated. Management has viewed future economic benefits for all of the Companys
licensed technology or product candidates to be uncertain and has expensed these amounts for
accounting purposes.
Clinical Trial Expenses
Expenses related to clinical trials are accrued based on the Companys estimates and/or
representations from service providers regarding work performed, including actual level of patient
enrollment, completion of patient studies and clinical trials progress. Other incidental costs
related to patient enrollment or treatment are accrued when reasonably certain. If the contracted
amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope
of work to be performed), the Company modifies its accruals accordingly on a prospective basis.
Revisions in the scope of a contract are charged to expense in the period in which the facts that
give rise to the revision become reasonably certain. Historically, the Company has had no material
changes in its clinical trial expense accruals that would have had a material impact on its
consolidated results of operations or financial position.
Share-Based Compensation
Share-based compensation expense is measured at the grant date, based on the estimated fair
value of the award, and is recognized as expense, net of estimated forfeitures, over the employees
requisite service period. Total share-based compensation expense related to all of the Companys
share-based awards was allocated as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Research and development |
$ | 653,590 | $ | 671,667 | $ | 1,054,276 | $ | 1,357,868 | ||||||||
Selling, general and administrative |
574,308 | 519,834 | 1,104,694 | 1,062,418 | ||||||||||||
Share-based compensation expense |
$ | 1,227,898 | $ | 1,191,501 | $ | 2,158,970 | $ | 2,420,286 | ||||||||
Share-based compensation expense
per basic and diluted share |
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.03 | ||||||||
Share-based compensation expense from: |
||||||||||||||||
Stock options |
$ | 806,037 | $ | 1,037,626 | $ | 1,512,650 | $ | 2,096,392 | ||||||||
Restricted stock awards and
restricted stock units |
421,861 | 153,875 | 646,320 | 323,894 | ||||||||||||
$ | 1,227,898 | $ | 1,191,501 | $ | 2,158,970 | $ | 2,420,286 | |||||||||
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Since the Company has a net operating loss carryforward as of June 30, 2011, no excess tax
benefits for the tax deductions related to share-based awards were recognized in the interim
unaudited condensed consolidated statements of operations. For the three months ended June 30, 2011
and 2010, employees exercised stock options to purchase 1,222,420 and 8,728 shares of common stock,
respectively, for aggregate proceeds of approximately $2.2 million, of which approximately $616,000 was included in
the current prepaid expenses and other assets at June 30, 2011 and
was received in July 2011, and $34,000, respectively. For
the six months ended June 30, 2011 and 2010, employees exercised stock options to purchase
2,675,062 and 208,542 shares of common stock, respectively, for aggregate proceeds of approximately
$4.1 million, of which approximately $616,000 was included in
the current prepaid expenses and other assets at June 30, 2011 and
was received in July 2011, and $497,000, respectively.
As of June 30, 2011, total unrecognized estimated compensation cost related to non-vested
stock options and non-vested restricted stock awards and restricted stock units granted prior to
that date was approximately $7.0 million, and $2.2 million, respectively, which is expected to be
recognized over a weighted-average period of approximately 2.6 years and approximately eleven
months, respectively.
In May 2011, the Companys stockholders approved the Companys 2011 Stock Plan, which provides
for the granting of up to a total of 6,000,000 shares of common stock (subject to certain
limitations as described in the 2011 Stock Plan) to selected employees, consultants and
non-employee members of the Companys Board of Directors (Outside Directors) as stock options,
stock appreciation rights, restricted stock awards, restricted stock unit awards and performance
awards. The Company anticipates that the 2011 Stock Plan will be utilized for the initial
equity awards for new hires of the Company as well as for annual and performance equity awards for
existing employees. Options granted under the 2011 Stock Plan will generally have a
10-year term and vest at the rate of 1/4 of the shares on the first anniversary of the date of
grant and 1/48 of the shares monthly thereafter.
The 2011 Stock Plan replaced the Companys prior stock plans, consisting of the Companys 2008
Stock Plan, 2006 Stock Plan and 2004 Stock Plan (Prior Plan). The Prior Plans were terminated
such that no additional awards could be granted thereunder but the terms of the Prior Plans remain
in effect with respect to outstanding awards until they are exercised, settled, forfeited or
otherwise canceled in full.
Stock Options - During the three months ended June 30, 2011 and 2010, the Company granted
95,100 and 8,500 stock options, respectively, with an estimated weighted-average grant-date fair
value of $3.66 and $4.68 per share, respectively. During the six months ended June 30, 2011 and
2010, the Company granted 752,768 and 1,102,214 stock options, respectively, with an estimated
weighted-average grant-date fair value of $4.19 and $3.53 per share, respectively.
Restricted Stock Awards and Restricted Stock Units - During the three and six months ended
June 30, 2011, the Company granted to certain employees 233,508 restricted stock awards (RSAs)
and 148,000 restricted stock units (RSUs), with a grant-date fair
value of $6.67 per share (Employee Restricted Awards). The Employee Restricted Awards are subject
to percentage vesting based upon achievement of certain corporate goals and the employees
continuing services through May 2012. The Company also granted to its Outside Directors annual
grants totaling 120,000 RSAs, with a grant-date fair value of $6.21,
during the three and six months ended June 30, 2011. During the three and six months ended June 30,
2010, the Company granted to the Outside Directors annual grants totaling 120,000 RSAs, with a grant-date fair value of $7.67.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Comprehensive income (loss)
was the same as the Companys net income (loss).
Fair Value Measurements
The Company follows the authoritative guidance for fair value measurements and disclosures,
which among other things, defines fair value, establishes a consistent framework for measuring fair
value and expands disclosure for each major asset and liability category measured at fair value on
either a recurring or nonrecurring basis. Fair value is defined as an exit price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability.
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The framework for measuring fair value provides a hierarchy that prioritizes the inputs to
valuation techniques used in measuring fair value as follows:
Level 1
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities; | |
Level 2
|
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and | |
Level 3
|
Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
Cash equivalents of approximately $76.5 million and $79.8 million at June 30, 2011 and
December 31, 2010, respectively, are carried at fair value and are classified within Level 1 of the
fair value hierarchy because they are valued based on quoted market prices for identical
securities. The Company has no instruments that are classified within Level 2 or Level 3.
3. Collaborative Agreements
Roche Partnership
In December 2006, the Company and Roche entered into the Roche Partnership, under which Roche
obtained a worldwide, exclusive license to develop and commercialize
product combinations of rHuPH20 and up to thirteen Roche target
compounds resulting from the partnership. Under the terms of the Roche Partnership, Roche paid
$20.0 million as an initial upfront license fee for the application of rHuPH20 to three pre-defined
Roche biologic targets. Due to the Companys continuing involvement obligations (for example,
support activities associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive
designation fees and annual license maintenance fees were deferred and are being recognized over
the term of the Roche Partnership. Roche may pay the Company further payments which could
potentially reach a value of up to $111.0 million for the initial three exclusive targets dependent
upon the achievement of specified clinical, regulatory and sales-based milestones.
Under the terms of the Roche Partnership, Roche will also pay the Company royalties on product
sales for these first three targets. Through June 30, 2011, Roche has elected two additional
exclusive targets. In 2010, Roche did not pay the annual license maintenance fee on five target
slots. As a result, Roche has an option to select only three additional targets under the Roche
partnership agreement, provided that Roche continues to pay annual exclusivity maintenance fees to
the Company. For each of the additional five targets, Roche may pay the Company further upfront and
milestone payments of up to $47.0 million per target, as well as royalties on product sales for
each of these additional five targets. Additionally, Roche will obtain access to the Companys
expertise in developing and applying rHuPH20 to Roche targets. Under the terms of the Roche
Partnership, the Company was obligated to scale up the production of rHuPH20 and to identify a
second source manufacturer that would help meet anticipated production obligations arising from the
partnership.
The Company has determined that the clinical and regulatory milestones are substantive;
therefore, the Company expects to recognize such clinical and regulatory milestone payments as
revenue upon achievement of the milestones. Given the challenges inherent in developing and
obtaining approval for pharmaceutical and biologic products, there was substantive uncertainty
whether any of the clinical and regulatory milestones would be achieved at the time the Roche
Partnership was entered into. In addition, the Company evaluated whether the clinical and
regulatory milestones met the remaining criteria to be considered substantive. The Company has
determined that the sales-based milestone payments are similar to royalty payments; therefore, the
Company will recognize such sales-based milestone payments as revenue upon achievement of the
milestone. In the three and six months ended June 30, 2011, the Company recognized $0 and $5.0
million, respectively, as revenue under collaborative agreements in
accordance with the Milestone Method of revenue recognition related to the achievement of
certain clinical milestones pursuant to the terms of the Roche Partnership.
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Gammagard Partnership
In September 2007, the Company entered into the Gammagard Partnership with Baxter, under which
Baxter obtained a worldwide, exclusive license to develop and commercialize product combinations of
rHuPH20, with a current Baxter product, GAMMAGARD LIQUID. Under the terms of the Gammagard
Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. Due to the
Companys continuing involvement obligations (for example, support activities associated with
rHuPH20 enzyme), the $10.0 million upfront payment was deferred and is being recognized over the
term of the Gammagard Partnership. Baxter may make further milestone payments totaling $37.0
million to the Company upon the achievement of regulatory approval for the licensed product
candidate and specified sales volumes of commercialized product by Baxter. In addition, Baxter will
pay royalties on the sales, if any, of the product that result from the collaboration. The
Gammagard Partnership is applicable to both kit and formulation combinations. Baxter assumes all
development, manufacturing, clinical, regulatory, sales and marketing costs under the Gammagard
Partnership, while the Company is responsible for the supply of the rHuPH20 enzyme. The Company
performs research and development activities at the request of Baxter, which are reimbursed by
Baxter under the terms of the Gammagard Partnership. In addition, Baxter has certain product
development and commercialization obligations in major markets identified in the Gammagard
Partnership.
The Company has determined that the regulatory milestones are substantive; therefore, the
Company expects to recognize such regulatory milestone payments as revenue upon achievement. Given
the challenges inherent in developing and obtaining approval for pharmaceutical and biologic
products, there was substantive uncertainty whether any of the regulatory events would be achieved
at the time the Gammagard Partnership was entered into. In addition, the Company evaluated whether
the regulatory milestones met the remaining criteria to be considered substantive. The Company has
determined that sales-based milestone payments are similar to royalty payments and, therefore, will
be recognized as revenue upon achievement of the milestone. In the three and six months ended June
30, 2011, the Company recognized $3.0 million as revenue under collaborative agreement in
accordance with the Milestone Method of revenue recognition related to the achievement of a
regulatory milestone pursuant to the terms of the Gammagard Partnership.
ViroPharma and Intrexon Partnerships
Effective May 10, 2011, the Company and ViroPharma entered into a collaboration and license
agreement ViroPharma Partnership, under which ViroPharma obtained a worldwide exclusive license
for the use of rHuPH20 enzyme in the
development of a subcutaneous injectable formulation of ViroPharmas commercialized product,
Cinryze® (C1 esterase inhibitor [human]). In addition, the license provides ViroPharma with
exclusivity to C1 esterase inhibition and to the Hereditary Angioedema, along with three additional
orphan indications. Under the terms of the ViroPharma Partnership,
ViroPharma paid a nonrefundable license fee of $9.0 million. In addition, the Company is entitled
to receive an annual exclusivity fee of $1.0 million commencing on May 10, 2012 and on each anniversary of
the effective date of the agreement thereafter until a certain development event occurs. ViroPharma
is solely responsible for the development, manufacturing and marketing of any products resulting
from this partnership. The Company is entitled to receive payments for research and development
services and supply of rHuPH20 API if requested by ViroPharma. In addition, the Company is entitled
to receive additional cash payments potentially totaling $44.0 million for a product for treatment
of Hereditary Angioedema and $10.0 million for each product for treatment of each of the three additional orphan indications upon achievement of development and regulatory milestones. The Company is also entitled
to receive royalties on future product sales by ViroPharma. ViroPharma may terminate the agreement
prior to expiration for any reason on a product-by-product basis upon 90 days prior written notice
to the Company. Upon any such termination, the license granted to ViroPharma (in total or with
respect to the terminated product, as applicable) will terminate and revert to the Company.
Effective June 6, 2011, the Company and Intrexon entered into a collaboration and license
agreement Intrexon Partnership, under which Intrexon obtained a worldwide exclusive license for
the use of rHuPH20 enzyme in the development of a subcutaneous injectable formulation of Intrexons
recombinant human alpha 1-antitrypsin (rHuA1AT). Under the terms of the Intrexon Partnership,
Intrexon paid a nonrefundable upfront license
fee of $9.0 million. In addition, the Company is entitled to receive an annual exclusivity fee of
$1.0 million commencing on June 6, 2012 and on each anniversary of the effective date of the
agreement thereafter until a certain development event occurs. Intrexon is solely responsible for
the development, manufacturing and marketing of any products
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resulting from this partnership. The
Company is entitled to receive payments for research and development services and supply of rHuPH20
API if requested by Intrexon. In addition, the Company is entitled to receive additional cash
payments potentially totaling $44.0 million for each product for use in the exclusive field and $10
million for each product for use in the non-exclusive field upon achievement of development and
regulatory milestones. The Company is also entitled to receive escalating royalties on product
sales and a cash payment of $10.0 million upon achievement of a specified sales volume of product
sales by Intrexon. Intrexon may terminate the agreement prior to expiration for any reason on a
product-by-product basis upon 90 days prior written notice to the Company. Upon any such
termination, the license granted to Intrexon (in total or with respect to the terminated product,
as applicable) will terminate and revert to the Company. Intrexons chief executive officer and chairman of its board of directors is also a member of the Companys
board of directors.
In accordance with ASU No. 2009-13, the Company identified the deliverables at the inception
of the ViroPharma and Intrexon agreements which are the license, research and development services
and API supply. The Company has determined that the license, research and development services and
API supply individually represent separate units of accounting, because each deliverable has
standalone value. The estimated selling prices for these units of accounting was determined based
on market conditions, the terms of comparable collaborative arrangements for similar technology in
the pharmaceutical and biotech industry and entity-specific factors such as the terms of the
Companys previous collaborative agreements, the Companys pricing practices and pricing objectives
and the nature of the research and development services to be performed for the partners. The
arrangement consideration was allocated to the deliverables based on the relative selling price
method. Based on the results of the Companys analysis, the Company determines that the upfront payment was earned upon the
granting of the worldwide exclusive right to the Companys technology to the collaborator in both the ViroPharma
Partnership and Intrexon Partnership. However, the amount of allocable arrangement consideration is
limited to amounts that are fixed or determinable; therefore, the amount allocated to the license
at June 30, 2011 was only to the extent of cash received. As a result, the Company recognized
the $9.0 million upfront license fee received under the ViroPharma Partnership and the $9.0 million
upfront license fee received under the Intrexon Partnership as revenues under collaborative
agreements in the quarter ended June 30, 2011.
The Company will recognize the exclusivity fees as revenues under collaborative agreements
when they are
earned. The Company will recognize reimbursements for research and development services
as revenues under collaborative agreements as the related services are delivered. The Company will
recognize revenue from sales of API as revenues under collaborative agreements when such API has
met all required specifications by the partners and the related title and risk of loss and damages
have passed to the partners. The Company cannot predict the timing of delivery of research and
development services and API as they are at the partners requests.
The Company is eligible to receive additional cash payments upon the achievement by the
partners of specified development, regulatory and sales-based milestones. The Company has
determined that each of the development and regulatory milestones is substantive; therefore, the
Company expects to recognize such development and regulatory milestone payments as revenues under
collaborative agreements upon achievement in accordance to the milestone method of revenue
recognition. Given the challenges inherent in developing and obtaining approval for pharmaceutical
and biologic products, there was substantive uncertainty whether any of the development and
regulatory milestones would be met at the time these partnerships
were entered into, and the milestones
are based in part on the occurrence of a separate outcome resulting from the Companys performance.
In addition, the Company evaluated whether the development and regulatory milestones met the
remaining criteria to be considered substantive. The Company has determined that the sales-based
milestone payment is similar to a royalty payment; therefore, the Company will recognize the
sales-based milestone payment as revenue upon achievement of the milestone because the Company has
no future performance obligations associated with the milestone.
4. Inventory
Inventory at June 30, 2011 consists of raw materials used in the manufacture of ICSI Cumulase
products. Inventory at December 31, 2010 consists of raw materials used in the manufacture of the
Companys HYLENEX and ICSI Cumulase products. In connection with the termination of the HYLENEX
Partnership in January 2011, the Company had established a reserve for inventory obsolescence of
approximately $875,000 for HYLENEX API in
the three months ended December 31, 2010. As of June 30, 2011 and December 31, 2010, the
reserve for HYLENEX API inventory obsolescence was approximately $1.0 million and $875,000,
respectively.
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5. Property and Equipment
Property and equipment, net consists of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Research equipment |
$ | 4,526,427 | $ | 4,308,654 | ||||
Computer and office equipment |
1,238,280 | 1,215,894 | ||||||
Leasehold improvements |
1,002,912 | 998,368 | ||||||
6,767,619 | 6,522,916 | |||||||
Accumulated depreciation and amortization |
(5,271,980 | ) | (4,676,017 | ) | ||||
$ | 1,495,639 | $ | 1,846,899 | |||||
Depreciation and amortization expense totaled approximately $287,000 and $389,000 for the
three months ended June 30, 2011 and 2010, respectively, and approximately $613,000 and $800,000
for the six months ended June 30, 2011 and 2010, respectively.
6. Accrued Expenses
Accrued expenses consist of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Accrued outsourced research and development expenses |
$ | 6,444,891 | $ | 3,647,762 | ||||
Accrued compensation and payroll taxes |
1,935,700 | 3,045,950 | ||||||
Accrued expenses |
1,085,132 | 1,911,857 | ||||||
$ | 9,465,723 | $ | 8,605,569 | |||||
7. Deferred Revenue
Deferred revenue consists of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Collaborative agreements |
$ | 56,633,661 | $ | 48,761,361 | ||||
Product sales |
991,404 | 9,332,190 | ||||||
Total deferred revenue |
57,625,065 | 58,093,551 | ||||||
Less current portion |
20,345,671 | 2,917,129 | ||||||
Deferred revenue, net of current portion |
$ | 37,279,394 | $ | 55,176,422 | ||||
Roche Partnership - In December 2006, the Company and Roche entered into the Roche Partnership
under which Roche obtained a worldwide, exclusive license to develop and commercialize product
combinations of rHuPH20and up to thirteen Roche target compounds. Under the terms of the Roche
Partnership, Roche paid $20.0
million to the Company in December 2006 as an initial upfront payment for the application of
rHuPH20 to three pre-defined Roche biologic targets. Through June 30, 2011, Roche has paid an
aggregate of $19.25 million in connection with Roches election of two additional exclusive targets
and annual license maintenance fees for the right to designate the remaining targets as exclusive
targets. In 2010, Roche did not pay the annual license maintenance fees on five of the remaining
eight target slots. As a result, Roche currently retains the option to exclusively develop and
commercialize rHuPH20 with three additional targets through the payment of annual license
maintenance fees.
Due to the Companys continuing involvement obligations (for example, support activities
associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive designation fees and
annual license maintenance fees were deferred and are being
recognized over the term of the Roche
Partnership. The Company recognized
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revenue from the upfront payment, exclusive designation fees
and annual license maintenance fees under the Roche Partnership in the amounts of approximately
$491,000 and $530,000 for the three months ended June 30, 2011 and 2010, respectively, and
approximately $983,000 and $1.1 million for the six months ended June 30, 2011 and 2010,
respectively. Deferred revenue relating to the upfront payment, exclusive designation fees and
annual license maintenance fees under the Roche Partnership was $31.9 million and $32.9 million as
of June 30, 2011 and December 31, 2010, respectively.
Baxter Partnerships - In September 2007, the Company and Baxter entered into the Gammagard
Partnership, under which Baxter obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID. Under the terms of the
Gammagard Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million.
Due to the Companys continuing involvement obligations (for example, support activities associated
with rHuPh20 enzyme), the $10.0 million upfront payment was deferred and is being recognized over
the term of the Gammagard Partnership. The Company recognized revenue from the upfront payment
under the Gammagard Partnership in the amounts of approximately $121,000 and $140,000 for the three
months ended June 30, 2011 and 2010, respectively, and approximately $241,000 and $279,000 for the
six months ended June 30, 2011 and 2010. Deferred revenue relating to the upfront payment under the
Gammagard Partnership was $7.8 million and $8.1 million as of June 30, 2011 and December 31, 2010,
respectively.
In February 2007, the Company and Baxter amended certain existing agreements for HYLENEX and
entered into the HYLENEX Partnership for kits and formulations with rHuPH20. Under the terms of the
HYLENEX Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. In
addition, Baxter would make payments to the Company based on sales of the products covered under
the HYLENEX Partnership. Baxter had prepaid nonrefundable product-based payments totaling $10.0
million in connection with the execution of the HYLENEX Partnership. Due to the Companys
continuing involvement obligations (for example, support activities associated with rHuPh20
enzyme), the $10.0 million upfront payment was initially deferred and was being recognized over the
term of the HYLENEX Partnership. The prepaid product-based payments were also deferred and were
being recognized as product sales revenues as the Company earned such revenues from the sales of
HYLENEX by Baxter.
Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the HYLENEX
Partnership and the associated agreements. The termination of these agreements does not affect the
other relationships between the parties, including the application of Halozymes Enhanze Technology
to Baxters GAMMAGARD LIQUID. As a result, in the fourth quarter ended December 31, 2010 the
Company recharacterized deferred revenue of approximately $991,000 as a reserve for product returns
for HYLENEX API previously delivered to Baxter that could be returned (Delivered Products). For
the three months ended June 30, 2011 and 2010, the Company recognized revenues under the HYLENEX
Partnership from the upfront payment in the amounts of approximately $117,000 and $135,000,
respectively. No revenues were recognized from the product-based payments for the three months
ended June 30, 2011 and 2010. For the six months ended June 30, 2011 and 2010, the Company
recognized revenues under the HYLENEX Partnership from the upfront payment in the amounts of
approximately $233,000 and $270,000, respectively, and from the product-based payments in the
amounts of approximately zero and $332,000, respectively.
On July 18, 2011, the Company and Baxter entered into an agreement (the Transition
Agreement) setting forth certain rights, data and assets to be transferred by Baxter to the
Company during a transition period. In addition, in June 2011 the Company also entered into a
commercial manufacturing and supply agreement with
Baxter, under which Baxter will fill and finish HYLENEX for the Company. Effective July 18,
2011, the Company has no
future performance obligations in connection with the HYLENEX Partnership. Therefore, the Company
has classified the unamortized deferred revenue of approximately $9.3 million relating to the
prepaid product-based payments and the unamortized deferred revenue of approximately $7.6 million
relating to deferred upfront payment as current deferred revenue at June 30, 2011 and will
recognize such amounts as revenues under collaborative agreements in the quarter ending September
30, 2011. In addition, pursuant to the terms of the Transition Agreement, Baxter no longer has the
right to return the Delivered Products. Accordingly, the Company recharacterized the reserve for
product returns for the Delivered Products of approximately $991,000 to current deferred revenue at
June 30, 2011 and will recognize as product sales revenue in the quarter ending September 30, 2011.
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8. Net Income (Loss) Per Share
Basic net income (loss) per common share (EPS) is computed by dividing net income (loss) for
the period by the weighted-average number of common shares outstanding during the period, without
consideration for common stock equivalents. Diluted net income (loss) per common share is computed
by dividing net income (loss) for the period by the weighted-average number of common shares
outstanding and potentially dilutive common shares outstanding. Dilutive potential common shares
outstanding, determined using the treasury stock method, principally include: shares that may be
issued under the Companys stock option, restricted stock and restricted stock units. For the three
months ended June 30, 2011 and 2010, the Company has excluded approximately 2.0 million and 8.9
million shares, respectively, of stock options, unvested RSAs and RSUs from the computation of
diluted EPS because their impact would have been anti-dilutive. In the six months ended June 30,
2011 and 2010, the Company has excluded approximately 6.0 million and 8.9 million shares of stock
options, unvested RSAs and RSUs from the computation of diluted EPS as their impact would have been
anti-dilutive because of the Companys net loss in these reporting periods.. The following table
sets forth the computation for basic and diluted EPS:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Income (Loss) Numerator: |
||||||||||||||||
Net income (loss) for basic and
diluted EPS |
$ | 3,116,288 | $ | (12,150,923 | ) | $ | (6,519,430 | ) | $ | (23,938,400 | ) | |||||
Shares Denominator: |
||||||||||||||||
Weighted-average shares for
basic EPS |
102,671,410 | 91,766,799 | 101,804,887 | 91,689,909 | ||||||||||||
Effect of dilutive options, RSAs
and RSUs |
1,722,425 | - | - | - | ||||||||||||
Weighted-average shares for
diluted EPS |
104,393,835 | 91,766,799 | 101,804,887 | 91,689,909 | ||||||||||||
Basic and
diluted net income (loss) per share |
$ | 0.03 | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.26 | ) | |||||
9. Stockholders Equity
During the six months ended June 30, 2011 and 2010, the Company issued an aggregate of
2,675,062 and 208,542 shares of common stock, respectively, in connection with the exercises of
stock options at a weighted
average exercise price of $1.69 and $2.39 per share, respectively, for net proceeds of
approximately $4.1 million, of which approximately $616,000 was
included in current prepaid expenses and other assets at June 30,
2011 and was received in July 2011, and $497,000, respectively. In addition, the Company granted 353,508
shares of RSAs to employees and Outside Directors. Options to purchase approximately 5.4 million
and 8.0 million shares of the Companys common stock were outstanding as of June 30, 2011 and
December 31, 2010, respectively. RSUs to purchase 148,000 and zero shares of the Companys common
stock were outstanding as of June 30, 2011 and December 31, 2010, respectively.
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10. Restructuring Liability
In October 2010, the Company completed a corporate reorganization to focus its resources on
advancing its core proprietary programs and supporting strategic alliances with Roche and Baxter.
This reorganization resulted in a reduction in the workforce of approximately 25 percent primarily
in the discovery research and preclinical areas. The following table sets forth activities in the
restructuring liability:
Employee severance | ||||
and benefits | ||||
Balance, December 31, 2010 |
$ | 116,677 | ||
Accruals during the year |
- | |||
Cash payments |
(116,677 | ) | ||
Balance, June 30, 2011 |
$ | - | ||
11. Commitments and Contingencies
Operating
Leases - The Companys administrative offices and research facilities are located in
San Diego, California. The Company leases an aggregate of approximately 58,000 square feet of
office and research space.
In July 2007, the Company entered into a lease agreement (the Original Lease) with BC
Sorrento, LLC (BC Sorrento) for the facilities located at 11388 Sorrento Valley Road, San Diego,
California (11388 Property) for 27,575 square feet of office and research space commencing in
September 2008 through January 2013. Under the terms of the Original Lease, the initial monthly
rent payment was approximately $37,000 net of costs and property taxes associated with the
operation and maintenance of the leased facilities, commencing in September 2008 and increased to
approximately $73,000 starting in March 2009. Thereafter, the annual base rent was subject to
approximately 4% annual increases each year throughout the term of the Original Lease. In addition,
the Company received a certain tenant improvement allowance and free rent under the terms of the
Original Lease. Effective September 2010, BMR-11388 Sorrento Valley Road LLC (BMR-11388) acquired
the 11388 Property and became the new landlord of the 11388 Property.
In June 2011, the Company entered into an amended and restated lease (the 11388 Lease) with
BMR-11388 for the 11388 Property commencing from June 2011 through January 2018. The 11388 Lease
superseded the Original Lease. Under the terms of the 11388 Lease, the initial monthly rent payment
is approximately $38,000 net of costs and property taxes associated with the operation and
maintenance of the leased facilities, commencing in December 2011 and increasing to approximately
$65,000 starting in January 2013. Thereafter, the annual base rent is subject to approximately 2.5%
annual increases each year throughout the term of the 11388 Lease. In addition, the Company
received a cash incentive of approximately $98,000, a tenant improvement allowance of $300,000 and
free and reduced rent totaling approximately $744,000. Combining with the unamortized deferred rent
under the Original Lease, unamortized deferred rent associated with the 11388 Lease of $592,000 and
$545,000 was included in deferred rent as of June 30, 2011 and December 31, 2010, respectively.
In July 2007, the Company entered into a sublease agreement (the 11404 Sublease) with Avanir
Pharmaceuticals, Inc. (Avanir) for Avanirs excess leased facilities located at 11404 Sorrento
Valley Road, San Diego, California for 21,184 square feet of office and research space (11404
Property) for a monthly rent payment of approximately $54,000, net of costs and property taxes
associated with the operation and maintenance of the subleased facilities. The 11404 Sublease
expires in January 2013. The annual base rent is subject to approximately 4% annual increases each
year throughout the terms of the 11404 Sublease. In addition, the Company received free rent
totaling approximately $492,000, of which approximately $215,000 and $266,000 was included in
deferred rent as of June 30, 2011 and December 31, 2010, respectively.
In April 2009, the Company entered into a sublease agreement (the 11408 Sublease) with
Avanir for 9,187 square feet located at 11408 Sorrento Valley Road, San Diego, California for
office and research space (11408 Property), which expires in January 2013. The monthly rent
payments, which commenced in January
2010, were approximately $21,000 and are subject to an annual increase of approximately 3%.
Under terms of the 11408 Sublease, the Company received a tenant improvement allowance of $75,000,
of which approximately $39,000 and $49,000 was included in deferred rent at June 30, 2011 and
December 31, 2010, respectively.
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In June 2011, the Company entered into a lease agreement (the 11404/11408 Lease) with
BMR-Sorrento Plaza LLC (BMR-Sorrento) for the 11404 Property and 11408 Property commencing in
January 2013 through January 2018. Pursuant to the terms of the 11404/11408 Lease, the initial
monthly rent payment is approximately $71,000 net of costs and property taxes associated with the
operation and maintenance of the leased facilities, commencing in January 2013 and is subject to
approximately 2.5% annual increases each year throughout the term of the 11404/11408 Lease.
The Company pays a pro rata share of operating costs, insurance costs, utilities and real
property taxes incurred by the landlords for the subleased facilities.
Additionally, the Company leases certain office equipment under operating leases. Approximate
annual future minimum operating lease payments as of June 30, 2011 are as follows:
Operating Leases | ||||
Six months ending December 31, 2011 |
$ | 536,000 | ||
Twelve months ending December 31, 2012 |
1,470,000 | |||
Twelve months ending December 31, 2013 |
1,654,000 | |||
Twelve months ending December 31, 2014 |
1,677,000 | |||
Twelve months ending December 31, 2015 |
1,715,000 | |||
Twelve months ending December 31, 2016 |
1,758,000 | |||
Thereafter |
1,870,000 | |||
Total minimum lease payments |
$ | 10,680,000 | ||
Legal Contingencies - From time to time the Company is involved in legal actions arising in
the normal course of its business. The Company is not presently subject to any material litigation
nor, to managements knowledge, is any litigation threatened against the Company that collectively
is expected to have a material adverse effect on the Companys consolidated cash flows, financial
condition or results of operations.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
As used in this report, unless the context suggests otherwise, the terms we, our, ours,
and us refer to Halozyme Therapeutics, Inc., and its wholly owned subsidiary, Halozyme, Inc.,
which are sometimes collectively referred to herein as the Company.
The following information should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q. Past financial or operating performance is not necessarily a reliable indicator of
future performance, and our historical performance should not be used to anticipate results or
future period trends.
Except for the historical information contained herein, this report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements reflect managements current forecast of certain aspects of our future. Words such as
expect, anticipate, intend, plan, believe, seek, estimate, think, may, could,
will, would, should, continue, potential, likely, opportunity and similar expressions
or variations of such words are intended to identify forward-looking statements, but are not the
exclusive means of indentifying forward-looking statements in this report. Additionally, statements
concerning future matters such as the development or regulatory approval of new products,
enhancements of existing products or technologies, third party performance under key collaboration
agreements, revenue and expense levels and other statements regarding matters that are not
historical are forward-looking statements. Such statements are based on currently available
operating, financial and competitive information and are subject to various risks, uncertainties
and assumptions that could cause actual results to differ materially from those anticipated or
implied in our forward-looking statements due to a number of factors including, but not limited to,
those set forth below under the section entitled Risks Factors and elsewhere in this Quarterly
Report on Form 10-Q and our most recent Annual Report on Form 10-K.
Overview
We are a biopharmaceutical company dedicated to the development and commercialization of
recombinant human enzymes that either transiently modify tissue under the skin to facilitate
injection of other therapies or correct diseased tissue structures for clinical benefit. Our
existing products and our products under development are based primarily on intellectual property
covering the family of human enzymes known as hyaluronidases. Hyaluronidases are enzymes (proteins)
that break down hyaluronan, or HA, which is a naturally occurring space-filling, gel-like substance
that is a major component of both normal tissues throughout the body, such as skin and cartilage,
and abnormal tissues such as tumors. Our primary technology is based on our proprietary recombinant
human PH20 enzyme, or rHuPH20, a human synthetic version of hyaluronidase. The PH20 enzyme is a
naturally occurring enzyme that temporarily degrades HA, thereby facilitating the penetration and
diffusion of other drugs and fluids that are injected under the skin or in the muscle. Our
proprietary rHuPH20 technology is applicable to multiple therapeutic areas and may be used to both
expand existing markets and create new ones through the development of our own proprietary
products. The rHuPH20 technology may also be applied to existing and developmental products of
third parties through partnerships or other collaborations.
Our operations to date have involved: (i) organizing and staffing our operating subsidiary,
Halozyme, Inc.; (ii) acquiring, developing and securing our technology; (iii) undertaking product
development for our existing products and a limited number of product candidates; and (iv)
supporting the development of partnered product candidates. We continue to increase our focus on
our proprietary product pipeline and have expanded investments in our proprietary product
candidates. We currently have multiple proprietary programs in various stages of research and
development. In addition, we currently have collaborative partnerships with F. Hoffmann-La Roche,
Ltd and Hoffmann-La Roche, Inc., or Roche, Baxter Healthcare Corporation, or Baxter, ViroPharma
Incorporated, or ViroPharma, and Intrexon Corporation, or Intrexon, to apply
EnhanzeÔ Technology, our proprietary drug delivery enhancement platform using
rHuPH20, to the partners biological therapeutic compounds. We also had another partnership between
Baxter, under which Baxter had worldwide marketing rights for HYLENEX®, a registered
trademark of Baxter International, Inc., or HYLENEX Partnership. We and Baxter mutually agreed to
terminate the HYLENEX Partnership in January 2011. There are two marketed products that utilize our
technology: HYLENEX, a hyaluronidase human injection used as an adjuvant to enhance the dispersion
and absorption of other injected drugs and fluids, and ICSI Cumulase®, a product used
for in vitro fertilization, or IVF. Currently, we have received only limited revenue from the sales
of active pharmaceutical ingredients, or API, to the third party that produces ICSI Cumulase, in
addition to other revenues from our partnerships.
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In February 2007, we and Baxter amended certain existing agreements relating to HYLENEX and
entered into the HYLENEX Partnership for kits and formulations with rHuPH20. In October 2009,
Baxter commenced the commercial launch of HYLENEX recombinant (hyaluronidase human injection).
Because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements
of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. During the
second quarter of 2011, we submitted the data that the U.S. Food and Drug Administration, or FDA,
had requested to support the reintroduction of HYLENEX. The FDA has approved the submitted data and
has granted the reintroduction of HYLENEX. We expect to reintroduce HYLENEX by the end of 2011.
Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership
and the associated agreements. On July 18, 2011, we and Baxter entered into an agreement setting forth
certain rights, data and assets to be transferred by Baxter to us during a transition period, or
the Transition Agreement. In addition, in June 2011 we entered into a commercial manufacturing and
supply agreement with Baxter, under which Baxter will fill and finish
HYLENEX for us. The termination of these agreements does not affect the other
relationships between the parties, including the application of Halozymes Enhanze Technology to
Baxters GAMMAGARD LIQUID.
We and our partners have product candidates in the research, preclinical and clinical stages,
but future revenues from the sales and/or royalties of these product candidates will depend on our
partners abilities and ours to develop, manufacture, obtain regulatory approvals for and
successfully commercialize product candidates. It may be years, if ever, before we and our partners
are able to obtain regulatory approvals for these product candidates. We have incurred net
operating losses each year since inception, with an accumulated deficit of approximately $231.8
million as of June 30, 2011.
We currently have a shelf registration statement on Form S-3 (Registration No. 333-164215)
which allows us, from time to time, to offer and sell up to approximately $39.8 million of equity
or debt securities. We may utilize this universal shelf in the future to raise capital to fund the
continued development of our product candidates, the commercialization of our products or for other
general corporate purposes.
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Products and Product Candidates
We have two marketed products and multiple product candidates targeting several indications in
various stages of development. The following table summarizes our proprietary products and product
candidates as well as our partnered product candidates:
![(GRAPHIC)](https://www.sec.gov/Archives/edgar/data/0001159036/000095012311073693/a57348a5734801.gif)
Ultrafast Insulin Program
Our lead proprietary program focuses on the formulation of rHuPH20 with prandial (mealtime)
insulins for the treatment of diabetes mellitus. Diabetes mellitus is an increasingly prevalent,
costly condition associated with substantial morbidity and mortality. Attaining and maintaining
normal blood sugar levels to minimize the long-term clinical risks is a key treatment goal for
diabetic patients. Combining rHuPH20 with a rapid acting analog insulin,
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i.e., insulin lispro
(Humalog®), insulin aspart (Novolog®) and insulin glulisine
(Apidra®), facilitates faster insulin dispersion in, and absorption from, the
subcutaneous space into the vascular compartment leading to faster insulin response. By making
mealtime insulin onset faster, i.e., providing earlier insulin to the blood and thus earlier
glucose lowering activity, a combination of insulin with rHuPH20 may yield a better profile of
insulin effect, more like that found in healthy, non-diabetic people.
The primary goal of our ultrafast insulin program is to develop a best-in-class insulin
product, with demonstrated clinical benefits for type 1 and 2 diabetes mellitus patients, in
comparison to the current standard of care analog products. With a more rapidly absorbed, faster
acting insulin product, we seek to demonstrate one or more significant improvements relative to
existing treatment, such as improved glycemic control, less hypoglycemia, and less weight gain. A
number of Phase 1 and Phase 2 clinical pharmacology trials and registration trial-enabling
treatment studies in connection with our ultrafast insulin program have been completed and are
ongoing or planned, that will investigate the various attributes of our insulin product candidates.
The status of some of these trials is summarized below:
| In January 2011, we dosed our first patient in an insulin pump study that utilizes
rHuPH20 combined with two commercially available mealtime insulin analogs: insulin
aspart and insulin glulisine. Patients with type 1 diabetes enrolled in these pump
studies receive the insulin analog alone and, separately, insulin analog with rHuPH20.
These insulins are continuously infused via commercially available insulin infusion
pump systems for three days. The primary endpoint of the study is a comparison of the
early insulin exposure as measured by the area under the curve during the first 60
minutes following a bolus infusion of insulin delivered by a pump. In addition, various
pharmacokinetic and glucodynamic measures including Cmax, Tmax, glucose infusion rates
and glycemic response to standard meal challenges are being measured. An evaluation of
the safety and local tolerability of the analogs with and without rHuPH20 is also being
performed. The preliminary results from this study were presented at the American
Association of Clinical Endocrinologists (AACE) meeting in San Diego, California in
April 2011, demonstrating that rHuPH20 confers an ultrafast insulin profile to rapid
acting analog insulin when delivered by subcutaneous infusion. The full results from
the first stage of the study comparing insulin aspart with and without rHuPH20 were
presented at the Scientific Sessions of the American Diabetes Association also in San
Diego, California in June 2011, which demonstrated that aspart with rHuPH20 has PK/GD profiles
that were more consistent over infusion set life as compared to analog alone, and the combination also
provided a reduction of post meal
glycemic excursions relative to aspart alone. In June 2011, we initiated the second
stage of this study to investigate the administration of a single dose of rHuPH20 at
the catheter site before starting the insulin infusion with a pump for a three-day
treatment cycle. The presence of rHuPH20 used in this leading edge administration design may serve to
further reduce the variability of absorption associated with the aging of
an infusion set. |
| In January 2011, we completed patient enrollment for two randomized double-blind
Phase 2 clinical trials that utilize our rHuPH20 in combination with the two leading
commercially available mealtime analogs: insulin aspart and insulin lispro. Diabetes
patients enrolled in these cross-over design studies receive an insulin analog alone
and with rHuPH20 treatment for 12 weeks each delivered by conventional subcutaneous
injection using insulin syringes. These Phase 2 clinical trials, one in type 1 diabetes
patients and the other in type 2 patients, compare two ultrafast insulin analog
products formulated with rHuPH20 to an active comparator, Humalog. Each study enrolled
approximately 110 patients and began with a 4 to 6 week titration period where patients
optimized their basal insulin dosing. Patients were then randomized to receive either
the lispro with rHuPH20 or aspart with rHuPH20 investigational study drugs and the
active comparator three times daily for 12 weeks each in a random sequence. The primary
endpoint of each study is a comparison of improved glycemic control, as assessed by the
change in glycemic control from baseline. Data regarding postprandial glucose levels,
the proportion of patients that safely achieve glycemic control targets, rates of
hypoglycemia, weight change and additional endpoints will be collected. We
currently expect both studies to be completed by the end of the third quarter of 2011. |
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PEGPH20
We are investigating a PEGylated version of rHuPH20, or PEGPH20, a new molecular entity, as a
candidate for the systemic treatment of tumors rich in HA. PEGylation refers to the attachment of
polyethylene glycol to our rHuPH20 enzyme, which extends its half life in the blood from less than
one minute to approximately 48 to 72 hours. An estimated 20% to 30% of solid tumors, including
prostate, breast, pancreas and colon, accumulate significant amounts of HA that surrounds and
covers the surface of the tumor cells. The quantity of HA produced by the tumor correlates with
increased tumor growth and metastasis and has been linked with tumor progression and overall
survival in some studies.
In preclinical studies, PEGPH20 has been shown to deplete HA in cell culture and in animal
models of human cancer. The PEGPH20-mediated depletion of high levels of HA in tumor models results
in significant inhibition of tumor growth when used as a single agent, and it greatly enhances the
impact of chemotherapy. The increased efficacy of chemotherapy results from increased influx of
drug into tumor tissue as the HA is removed. This effect is specific for the tumor
microenvironment, and is not observed in normal tissues. Repeat dosing with PEGPH20 produced a
sustained depletion of HA in the tumor microenvironment. For tumor models that did not produce HA,
the presence of PEGPH20 had no therapeutic effect. Administration of the combination of PEGPH20
with docetaxel, liposomal doxorubicin and gemcitabine in HA-producing animal tumor models produced
a significant survival advantage for the combination relative to either chemotherapeutic agent
alone.
In the first quarter of 2009, we initiated a Phase 1 clinical trial for our PEGPH20 program.
This first in human trial with PEGPH20 is a dose-escalation, multicenter, pharmacokinetic and
pharmacodynamic, safety study, in which patients with advanced solid tumors are receiving
intravenous administration of PEGPH20 as a single agent. Based on initial data from this trial, and
after consultation with the FDA, lower doses of PEGPH20 are now employed at a lower dosing
frequency. The study was closed to further enrollment in March 2011. In July 2010, we initiated
a second Phase 1 clinical trial with PEGPH20 in the treatment of solid tumors. This trial
incorporates the use of oral dexamethasone as a pretreatment for all patients prior to receiving
intravenous administration of PEGPH20. The second Phase 1 study is ongoing and actively enrolling.
A Phase 1b/2 trial in pancreatic cancer patients is planned for initiation by the end of 2011.
This two-stage trial will compare chemotherapy alone versus chemotherapy with PEGPH20 with regard
to various clinical endpoints. The objective of the first stage is to identity a safe and
well-tolerated dose of the combination of chemotherapy plus PEGPH20 that will be selected for the
second stage. The second stage will be a randomized, double-blind, placebo-controlled study to
assess safety, tolerability, and efficacy of chemotherapy either with or without PEGPH20.
Enhanze Technology
Enhanze Technology, a proprietary drug delivery enhancement platform using rHuPH20, is a broad
technology that we have licensed to other pharmaceutical companies. When formulated with other
injectable drugs, Enhanze Technology can facilitate the subcutaneous dispersion and absorption of
these drugs. Molecules as large as 200 nanometers may pass freely through the extracellular matrix,
which recovers its normal density within approximately 24 hours, leading to a drug delivery
platform which does not permanently alter the architecture of the skin. The principal focus of our
Enhanze Technology platform is the use of rHuPH20 to facilitate subcutaneous route of
administration for large molecule biological therapeutics, some of which currently require
intravenous administration. Potential benefits of subcutaneous administration of these biologics
include life cycle management, patient convenience, reductions in infusion reactions and lower
administration costs.
We currently have Enhanze Technology partnerships with Roche, Baxter, ViroPharma and Intrexon.
We are currently pursuing additional partnerships with biopharmaceutical companies that market or
develop drugs that could benefit from injection via the subcutaneous route of administration.
Roche Partnership
In December 2006, we and Roche entered into the Roche Partnership, under which Roche obtained
a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with up
to thirteen Roche target compounds. Roche initially had the exclusive right to apply rHuPH20 to
only three pre-defined Roche biologic targets with the option to exclusively develop and
commercialize rHuPH20 with an additional ten targets. Roche elected to add a fourth exclusive
target in December 2008 and a fifth exclusive target in June 2009. In 2010,
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Roche did not pay the
annual license maintenance fee on five of the remaining eight additional target slots. As a result,
Roche currently retains the option to exclusively develop and commercialize rHuPH20 with an
additional three targets through the payment of annual license maintenance fees. Pending the
successful completion of various clinical, regulatory and sales events, Roche will be obligated to
make milestone payments to us, as well as royalty payments on the sales of products that result
from the partnership.
Compounds directed at three of the five Roche exclusive targets have previously commenced
clinical trials. Two compounds (subcutaneous Herceptin® and subcutaneous MabThera®) are in Phase 3
clinical trials and one compound (subcutaneous Actemra®) has completed a Phase 1 clinical trial.
In December 2010, Roche completed the enrollment for its first Phase 3 clinical trial for a
compound directed at an exclusive target. This Phase 3 clinical trial is for a subcutaneously
delivered version of Roches anticancer biologic, Herceptin (trastuzumab). The study will
investigate the pharmacokinetics, efficacy and safety of subcutaneous Herceptin in patients with
HER2-positive breast cancer as part of adjuvant treatment. Roche has disclosed that this trial will
be completed this year and expects to share results by the end of 2011. Herceptin is approved to
treat HER2-positive breast cancer and currently is given intravenously. Breast cancer is the most
common cancer among women worldwide. Each year, more than one million new cases of breast cancer
are diagnosed worldwide, and nearly 400,000 people will die of the disease annually. In
HER2-positive breast cancer, increased quantities of the HER2 protein are present on the surface of
the tumor cells. This is known as HER2 positivity and affects approximately 20-25% of women with
breast cancer. Roche has stated that they expect to file for regulatory approval of subcutaneous
Herceptin in 2012.
In February 2011, Roche began a Phase 3 clinical trial for a subcutaneous formulation of
MabThera (rituximab). The study will investigate pharmacokinetics, efficacy and safety of MabThera
SC. Intravenously administered MabThera is approved for the treatment of non-Hodgkins lymphoma
(NHL) and Chronic Lymphocytic Leukemia (CLL), types of cancer that affects lymphocytes, or white
blood cells. An estimated 66,000 new cases of NHL were diagnosed in the U.S. in 2009 with
approximately 125,000 new cases reported worldwide.
In 2009, Roche completed a Phase 1 clinical trial for a subcutaneous formulation of Actemra.
This trial investigated the safety and pharmacokinetics of subcutaneous Actemra in patients with
rheumatoid arthritis. The results from this Phase 1 trial suggest that further exploration may be
warranted. Actemra administered intravenously is approved for the treatment of rheumatoid
arthritis. Roche is separately developing a subcutaneous form of Actemra that does not use rHuPH20
and is being investigated for weekly or biweekly administration.
Additional information about the Phase 3 subcutaneous Herceptin and Phase 3 subcutaneous
MabThera clinical trials can be found at www.clinicaltrials.gov and www.roche-trials.com.
Baxter Gammagard Partnership
GAMMAGARD LIQUID is a current Baxter product that is indicated for the treatment of primary
immunodeficiency disorders associated with defects in the immune system. In September 2007,
Halozyme and Baxter entered into an Enhanze Technology partnership, or the Gammagard Partnership.
Under the terms of this partnership, Baxter obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID, or HyQ. Pending the successful
completion of various regulatory and sales milestones, Baxter will be obligated to make milestone
payments to us, as well as royalty payments on the sales of products that result from the
partnership. Baxter is responsible for all development, manufacturing, clinical, regulatory, sales
and marketing costs under the Gammagard Partnership, while we will be responsible for the supply of
the rHuPH20 enzyme. We perform research and development activities at the request of Baxter, which
are reimbursed by Baxter under the terms of the Gammagard Partnership. In addition, Baxter has
certain product development and commercialization obligations in major markets identified in the
Gammagard License. Baxter filed for regulatory approval of HyQ in the US in the second quarter of
2011.
ViroPharma Partnership
Effective May 10, 2011, we and ViroPharma entered into a collaboration and license agreement,
or ViroPharma Partnership, under which ViroPharma obtained a worldwide exclusive license for the
use of rHuPH20 enzyme in the development of a subcutaneous injectable formulation of ViroPharmas
commercialized product,
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Cinryze® (C1 esterase inhibitor [human]). In addition, the license provides
ViroPharma with exclusivity to C1 esterase inhibition and to the Hereditary Angioedema, along with
three additional orphan indications. Under the terms of the ViroPharma
Partnership, ViroPharma paid a nonrefundable upfront license fee of $9.0 million. In addition, we
are entitled to receive an annual exclusivity fee of $1.0 million commencing on May 10, 2012 and on each
anniversary of the effective date of the agreement thereafter until a certain development event
occurs. ViroPharma is solely responsible for the development, manufacturing and marketing of any
products resulting from this partnership. We are entitled to receive payments for research and
development services and supply of rHuPH20 API if requested by ViroPharma. In addition, we are
entitled to receive additional cash payments potentially totaling $44.0 million for a product for
treatment of Hereditary Angioedema and $10.0 million for each product for treatment of each
of the three additional orphan indications upon achievement of development and regulatory milestones. We are also
entitled to receive royalties on product sales by ViroPharma. ViroPharma may terminate the
agreement prior to expiration for any reason on a product-by-product basis upon 90 days prior
written notice to us. Upon any such termination, the license granted to ViroPharma (in total or
with respect to the terminated product, as applicable) will terminate and revert to us.
Intrexon Partnership
Effective June 6 2011, we and Intrexon entered into a collaboration and license agreement, or
Intrexon Partnership, under which Intrexon obtained a worldwide exclusive license for the use of
rHuPH20 enzyme in the development of a subcutaneous injectable formulation of Intrexons
recombinant human alpha 1-antitrypsin (rHuA1AT). Under the terms of the Intrexon Partnership,
Intrexon paid a nonrefundable upfront license fee of $9.0 million. In addition, we are entitled to
receive an annual exclusivity fee of $1.0 million commencing on June 6, 2012 and on each anniversary of
the effective date of the agreement thereafter until a certain development event occurs. Intrexon
is solely responsible for the development, manufacturing and marketing of any products resulting
from this partnership. We are entitled to receive payments for research and development services
and supply of rHuPH20 API if requested by Intrexon. In addition, we are entitled to receive
additional cash payments potentially totaling $44.0 million for each product for use in the
exclusive field and $10.0 million for each product for use in the non-exclusive field upon
achievement of development and regulatory milestones. We are also entitled to receive escalating
royalties on product sales and a cash payment of $10.0 million upon achievement of a specified
sales volume of product sales by Intrexon. Intrexon may terminate the agreement prior to expiration
for any reason on a product-by-product basis upon 90 days prior written notice to us. Upon any
such termination, the license granted to Intrexon (in total or with respect to the terminated
product, as applicable) will terminate and revert to us.
Intrexons chief executive officer and chairman of its board of
directors is also a member of the Companys board of directors.
HYLENEX
HYLENEX is a formulation of rHuPH20 that, when injected under the skin, enhances the
dispersion and absorption of other injected drugs or fluids. In February 2007, we and Baxter
amended certain existing agreements relating to HYLENEX and entered into the HYLENEX Partnership
for kits and formulations with rHuPH20. Pending the successful completion of a series of regulatory
and sales events, Baxter would have been obligated to make milestone payments to us, as well as
royalty payments on the sales of products that result from the partnership. Baxter was responsible
for development, manufacturing, clinical, regulatory, sales and marketing costs of the products
covered by the HYLENEX Partnership. We supplied Baxter with API for HYLENEX, and Baxter prepared,
filled, finished and packaged HYLENEX and held it for subsequent distribution.
In October 2009, Baxter commenced the commercial launch of HYLENEX recombinant (hyaluronidase
human injection) for use in pediatric rehydration at the 2009 American College of Emergency
Physicians (ACEP) scientific assembly. In addition, under the HYLENEX Partnership, Baxter had a
worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with
Baxter hydration fluids and generic small molecule drugs, with the exception of combinations with
(i) bisphosphonates, (ii) cytostatic and cytotoxic chemotherapeutic agents and (iii) proprietary
small molecule drugs, the rights to which had been retained by us.
Because a portion of the HYLENEX manufactured by Baxter was not in compliance with the
requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010.
During the second quarter of 2011, we submitted the data that the FDA had requested to support the
reintroduction of HYLENEX. The FDA has approved the submitted data and has granted the
reintroduction of HYLENEX. We expect to reintroduce HYLENEX by the end of 2011.
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Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership
and the associated agreements. On July 18, 2011, we and Baxter entered into the Transition Agreement setting
forth certain rights, data and assets to be transferred by Baxter to us during a transition period.
In addition, in June 2011 we also entered into a commercial manufacturing and supply agreement with
Baxter in June 2011, under which Baxter will fill and finish
HYLENEX for us. The termination of these agreements does not affect the other
relationships between the parties, including the application of our Enhanze Technology to Baxters
GAMMAGARD LIQUID.
API for ICSI Cumulase
API for ICSI Cumulase is an ex vivo (used outside of the body) formulation of rHuPH20 to
replace the bovine (bull) enzyme currently used for the preparation of oocytes (eggs) prior to IVF
during the process of intracytoplasmic sperm injection (ICSI), in which the enzyme is an essential
component. API for ICSI Cumulase strips away the HA that surrounds the oocyte, allowing the
clinician to then perform the ICSI procedure.
Revenues
We generate revenues from product sales and collaborative agreements. Revenue from product
sales depends on our ability to develop, manufacture, obtain regulatory approvals for and
successfully commercialize our products and product candidates. Payments received under
collaborative agreements may include nonrefundable payment at the inception of the arrangement,
license fees, exclusivity fees, payments based on achievement of specified milestones designated in
the collaborative agreements, reimbursements of research and development services, payments for the
manufacture of rHuPH20 API for the partner and/or royalties, as applicable, on sales of products
resulting from collaborative agreements. We analyze each element of our collaborative agreements
and consider a variety of factors in determining the appropriate method of revenue recognition. See
Critical Accounting Policies and Estimates Revenue Recognition Collaborative Agreements
below for our revenue recognition policies for payments received under collaborative agreements.
Costs and Expenses
Cost of Sales. Cost of sales consists primarily of raw materials, third-party manufacturing
costs, fill and finish costs, and freight costs associated with the sales of API for ICSI Cumulase
and API for HYLENEX. Cost of sales also consists of the write-down of obsolete inventory.
Research and Development. Our research and development expenses include salaries and
benefits, research-related manufacturing services, clinical trials, contract research services,
supplies and materials, facilities and other overhead costs and other outside expenses. We charge
all research and development expenses to operations as they are incurred. Our research and
development activities are primarily focused on the development of our various product candidates.
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Since our inception in 1998 through June 30, 2011, we have incurred research and development
expenses of $230.6 million. From January 1, 2008 through June 30, 2011, approximately 28% and 16%
of our research and development expenses were associated with the development of our ultrafast
insulin and PEGPH20 product candidates, respectively. Research and development expenses incurred in
the six months ended June 30, 2011 and 2010 are as follows:
Six Months Ended June 30, | ||||||||
Programs | 2011 | 2010 | ||||||
Product Candidates: |
||||||||
Ultrafast Insulin |
$ | 11,843,896 | $ | 6,041,965 | ||||
PEGPH20 |
3,489,351 | 3,658,532 | ||||||
HTI-501 |
2,332,595 | 1,928,126 | ||||||
HYLENEX |
1,699,223 | 750,718 | ||||||
Enhanze partnerships |
3,463,894 | 3,655,393 | ||||||
rHuPH20 platform (1) |
5,085,226 | 4,577,715 | ||||||
Other |
1,218,728 | 2,779,161 | ||||||
Total research and development expenses |
$ | 29,132,913 | $ | 23,391,610 | ||||
(1) | Includes research, development and manufacturing expenses related to rHuPH20
that were not allocated to a specific program at the time the expenses were incurred. |
Due to the uncertainty in obtaining the FDA and other regulatory approvals, our reliance on
third parties and competitive pressures, we are unable to estimate with any certainty the
additional costs we will incur in the continued development of our proprietary product candidates
for commercialization. However, we expect our research and development expenses to increase as our
product candidates advance into later stages of clinical development.
Clinical development timelines, likelihood of success and total costs vary widely. We
anticipate that we will make ongoing determinations as to which research and development projects
to pursue and how much funding to direct to each project on an ongoing basis in response to
existing resource levels, the scientific and clinical progress of each product candidate, and other
market and regulatory developments. We plan on focusing our resources on those proprietary and
partnered product candidates that represent the most valuable economic and strategic opportunities.
Product candidate completion dates and costs vary significantly for each product candidate and
are difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent
compliance with applicable regulations require the expenditure of substantial resources. Any
failure by us to obtain, or any delay in obtaining, regulatory approvals could cause our research
and development expenditures to increase and, in turn, have a material adverse effect on our
results of operations. We cannot be certain when, or if, our product candidates will receive
regulatory approval or whether any net cash inflow from our other product candidates, or
development projects, will commence.
Selling, General and Administrative. Selling, general and administrative, or SG&A, expenses
consist primarily of compensation and other expenses related to our corporate operations and
administrative employees,
accounting and legal fees, other professional services expenses, marketing expenses, as well
as other expenses associated with operating as a publicly traded company.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We
review our estimates on an ongoing basis. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or conditions. We
believe the following accounting policies to be critical to the judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition
We generate revenues from product sales and collaborative agreements. We recognize revenues in
accordance with the authoritative guidance for revenue recognition. Revenue is recognized when all
of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the sellers price to the buyer is fixed or
determinable; and (4) collectibility is reasonably assured.
Product Sales
Revenue from the sales of API for ICSI Cumulase is recognized when the transfer of ownership
occurs, which is upon shipment to our distributor. We are obligated to accept returns for product
that does not meet product specifications. Historically, we have not had any product returns as a
result of not meeting product specifications.
In accordance with the HYLENEX Partnership with Baxter, we supplied Baxter with API for
HYLENEX at our fully burdened cost plus a margin. Baxter filled and finished HYLENEX and held it
for subsequent distribution, at which time we ensured it met product specifications and released it
as available for sale. Because of our continued involvement in the development and production
process of HYLENEX, the earnings process was not considered to be complete. Accordingly, we
deferred the revenue and related product costs on the API for HYLENEX until the product was filled,
finished, packaged and released. Baxter might only return the API for HYLENEX to us if it did not
conform to the specified criteria set forth in the HYLENEX Partnership or upon termination of such
agreement.
Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership
and the associated agreements. As a result, in the quarter ended December 31, 2010 we had
established a reserve for inventory obsolescence of approximately $875,000 for HYLENEX API and a
reserve for product returns for HYLENEX API previously delivered to Baxter that could be returned
to us of approximately $991,000, or Delivered Products. On July 18, 2011, we and Baxter entered
into the Transition Agreement setting forth the transfer of certain rights, data and assets by
Baxter to us during a transition period. Pursuant to the terms of the Transition Agreement, Baxter no longer has the right to return the
Delivered Products. Accordingly, we recharacterized the reserve for product returns for the
Delivered Products of approximately $991,000 as current deferred revenue at June 30, 2011 and will
recognize product sales revenue related to these products in the quarter ending September 30, 2011.
As of June 30, 2011 and December 31, 2010, the reserve for inventory obsolescence for HYLENEX API
was approximately $1.0 million and $875,000, respectively. As of June 30, 2011 and December 31,
2010, the reserve for product returns for HYLENEX API was zero and $991,000.
Revenues under Collaborative Agreements
We entered into license and collaboration agreements under which the collaborative partners
obtained worldwide exclusive rights for the use of our proprietary rHuPH20 enzyme in the
development and
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commercialization of the partners biologic compounds. The collaborative agreements contain
multiple elements including nonrefundable payments at the inception of the arrangement, license
fees, exclusivity fees, payments based on achievement of specified milestones designated in the
collaborative agreements, reimbursements of research and development services, payments for supply
of rHuPH20 API for the partner and/or royalties on sales of products resulting from collaborative
agreements. We analyze each element of the collaborative agreements and consider a variety of
factors in determining the appropriate method of revenue recognition of each element.
Prior to the adoption of ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, on
January 1, 2011, in order for a delivered item to be accounted for separately from other
deliverables in a multiple-element arrangement, the following three criteria had to be met: (i) the
delivered item had standalone value to the customer, (ii) there was objective and reliable evidence
of fair value of the undelivered items and (iii) if the arrangement included a general right of
return relative to the delivered item, delivery or performance of the undelivered items was
considered probable and substantially in the control of the vendor. For the collaborative
agreements entered into prior to January 1, 2011, there was no objective and reliable evidence of
fair value of the undelivered items. Thus, the delivered licenses did not meet all of the required
criteria to be accounted for separately from undelivered items. Therefore, we recognize revenue on
nonrefundable upfront payments and license fees from these collaborative agreements over the period
of significant involvement under the related agreements.
For new collaborative agreements or material modifications of existing collaborative
agreements entered into after December 31, 2010, we follow the provisions of ASU No. 2009-13. In
order to account for the multiple-element arrangements, we identify the deliverables included
within the agreement and evaluate which deliverables represent units of accounting. Analyzing the
arrangement to identify deliverables requires the use of judgment, and each deliverable may be an
obligation to deliver services, a right or license to use an asset, or another performance
obligation. The deliverables under our collaborative agreements include (i) the license to rHuPH20
technology, (ii) at the collaborators request, research and development services which are
reimbursed at contractually determined rates, and (iii) at the collaborators request, supply of
rHuPH20 API which is reimbursed at our cost plus a margin. A delivered item is considered a
separate unit of accounting when the delivered item has value to the collaborator on a standalone
basis based on the consideration of the relevant facts and circumstances for each arrangement.
Factors considered in this determination include the research capabilities of the partner and the
availability of research expertise in this field in the general marketplace. In addition, if the
arrangement includes a general right of return relative to the delivered item, delivery or
performance of the undelivered item is considered probable and substantially in our control.
Arrangement consideration is allocated at the inception of the agreement to all identified
units of accounting based on their relative selling price. The relative selling price for each
deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or
third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party
evidence of selling price exists, we use our best estimate of the selling price for the
deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed
or determinable. The consideration received is allocated among the separate units of accounting,
and the applicable revenue recognition criteria are applied to each of the separate units. Changes
in the allocation of the sales price between delivered and undelivered elements can impact revenue
recognition but do not change the total revenue recognized under any agreement.
Upfront license fee payments are recognized upon delivery of the license if facts and
circumstances dictate that the license has standalone value from the undelivered items, which
generally include research and development services and the manufacture of rHuPH20 API, the
relative selling price allocation of the license is equal to or exceeds the upfront license fee, persuasive evidence of an
arrangement exists, our price to the partner is fixed or determinable, and collectability is
reasonably assured. Upfront license fee payments are deferred if facts and circumstances dictate
that the license does not have standalone value. The determination of the length of the period over
which to defer revenue is subject to judgment and estimation and can have an impact on the amount
of revenue recognized in a given period.
The terms of our collaborative agreements provide for milestone payments upon achievement of
certain development and regulatory events and/or specified sales volumes of commercialized products
by the collaborator. Prior to our adoption of the milestone method of revenue recognition, or
Milestone Method, we recognized milestone payments upon the achievement of specified milestones if:
(1) the milestone was substantive in nature and the achievement of the milestone was not reasonably
assured at the inception of the agreement, (2) the fees were nonrefundable and (3) our performance
obligations after the milestone achievement would continue to be funded by
our collaborator at a level comparable to the level before the milestone achievement.
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Effective January 1, 2011, we adopted on a prospective basis the Milestone Method. Under the
Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone
in its entirety as revenue in the period in which the milestone is achieved only if the milestone
is substantive in its entirety. A milestone is considered substantive when it meets all of the
following criteria:
1. | The consideration is commensurate with either the entitys performance to
achieve the milestone or the enhancement of the value of the delivered item(s) as a
result of a specific outcome resulting from the entitys performance to achieve the
milestone, |
2. | The consideration relates solely to past performance, and |
3. | The consideration is reasonable relative to all of the deliverables and payment
terms within the arrangement. |
A milestone is defined as an event (i) that can only be achieved based in whole or in part on
either the entitys performance or on the occurrence of a specific outcome resulting from the
vendors performance, (ii) for which there is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved and (iii) that would result in additional payments
being due to the vendor.
Reimbursements of research and development services are recognized as revenue during the
period in which the services are performed as long as there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection of the related receivable is probable.
Revenue from the manufacture of rHuPH20 API is recognized when the API has met all specifications
required for the collaborator acceptance and title and risk of loss have transferred to the
collaborator. We do not directly control when any collaborator will request research and
development services or supply of rHuPH20 API; therefore, we cannot predict when we will recognize
revenues in connection with research and development services and supply of rHuPH20 API. Royalties
to be received based on sales of licensed products by our collaborators incorporating rHuPH20 will
be recognized as earned.
The collaborative agreements typically provide the partners the right to terminate such
agreement in whole or on a product-by-product or target-by-target basis at any time upon 90 days
prior written notice to us. There are no performance, cancellation, termination or refund
provisions in any of our collaborative agreements that contain material financial consequences to
us.
Roche Partnership
In December 2006, we and Roche entered into the Roche Partnership, under which Roche obtained
a worldwide, exclusive license to develop and commercialize product combinations of our proprietary
rHuPH20 enzyme and up to thirteen Roche target compounds resulting from the partnership. Under the
terms of the Roche Partnership, Roche paid $20.0 million as an initial upfront license fee for the
application of rHuPH20 to three pre-defined Roche biologic targets. Due to our continuing
involvement obligations (for example, support activities associated with rHuPH20 enzyme), revenues
from the upfront payment, exclusive designation fees and annual license maintenance fees were
deferred and are being recognized over the term of the Roche Partnership. Roche may pay us further
payments which could potentially reach a value of up to $111.0 million for the initial three
exclusive targets upon achievement of specified clinical, regulatory and sales-based milestones
Under the terms of the Roche Partnership, Roche will also pay us royalties on product sales
for these first three targets. Through June 30, 2011, Roche has elected two additional exclusive
targets. In 2010, Roche did not pay the annual license maintenance fee on five target slots. As a
result, Roche has an option to select only three additional targets under the Roche partnership
agreement, provided that Roche continues to pay annual exclusivity maintenance fees to us. For each
of the additional five targets, Roche may pay us further upfront and milestone payments of up to
$47.0 million per target, as well as royalties on product sales for each of these additional five
targets. Additionally, Roche will obtain access to our expertise in developing and applying rHuPH20
to Roche targets.
We have determined that the clinical and regulatory milestones are substantive; therefore, we
expect to recognize such clinical and regulatory milestone payments as revenue upon achievement.
Given the challenges
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inherent in developing and obtaining approval for pharmaceutical and biologic products, there
was substantive uncertainty whether any of the clinical and regulatory milestones would be achieved
at the time the Roche Partnership was entered into. In addition, we evaluated whether the clinical
and regulatory milestones met the remaining criteria to be considered substantive. We have
determined that the sales-based milestone payments are similar to royalty payments; therefore, we
will recognize such sales-based milestone payments as revenue upon achievement of the milestone. In
the three and six months ended June 30, 2011, we recognized $0 and $5.0 million, respectively, as
revenue under collaborative agreements in accordance with the Milestone Method of revenue
recognition related to the achievement of certain clinical milestones pursuant to the terms of the
Roche Partnership.
Gammagard Partnership
In September 2007, we entered into the Gammagard Partnership with Baxter, under which Baxter
obtained a worldwide, exclusive license to develop and commercialize product combinations of
rHuPH20, with a current Baxter product, GAMMAGARD LIQUID. Under the terms of the Gammagard
Partnership, Baxter paid us a nonrefundable upfront payment of $10.0 million. Due to our continuing
involvement obligations (for example, support activities associated with rHuPH20 enzyme), the $10.0
million upfront payment was deferred and is being recognized over the term of the Gammagard
Partnership. Baxter may make further milestone payments totaling $37.0 million to us upon the
achievement of regulatory approval for the licensed product candidate and specified sales volumes
of commercialized product by Baxter. In addition, Baxter will pay royalties on the sales, if any,
of the product that result from the collaboration. The Gammagard Partnership is applicable to both
kit and formulation combinations. Baxter assumes all development, manufacturing, clinical,
regulatory, sales and marketing costs under the Gammagard Partnership, while we are responsible for
the supply of the rHuPH20 enzyme. We perform research and development activities at the request of
Baxter, which are reimbursed by Baxter under the terms of the Gammagard Partnership. In addition,
Baxter has certain product development and commercialization obligations in major markets
identified in the Gammagard Partnership.
We have determined that the regulatory milestones are substantive; therefore, we expect to
recognize such regulatory milestone payments as revenue upon achievement. Given the challenges
inherent in developing and obtaining approval for pharmaceutical and biologic products, there was
substantive uncertainty whether any of the regulatory events would be achieved at the time the
Gammagard Partnership was entered into. In addition, we evaluated whether the regulatory milestones
met the remaining criteria to be considered substantive. We have determined that sales-based
milestone payments are similar to royalty payments and, therefore, will be recognized as revenue
upon achievement of the milestone. In the three and six months ended June 30, 2011, we recognized a
$3.0 million payment as revenue in accordance with the Milestone Method of revenue recognition
related to the achievement of a regulatory milestone pursuant to the terms of the Gammagard
Partnership.
ViroPharma and Intrexon Partnerships
Effective May 10, 2011, we and ViroPharma entered into the ViroPharma Partnership, under which
ViroPharma obtained a worldwide exclusive license for the use of rHuPH20 enzyme in the development
of a subcutaneous injectable formulation of ViroPharmas commercialized product, Cinryze® (C1
esterase inhibitor [human]). In addition, the license provides ViroPharma with exclusivity to C1
esterase inhibition and to the Hereditary Angioedema, along with three additional orphan indications
Under the terms of the ViroPharma Partnership, ViroPharma paid a nonrefundable upfront license fee
of $9.0 million. In addition, we are entitled to receive an annual exclusivity fee of $1.0 million
commencing on May 10, 2012 and on each anniversary of the effective date of the agreement
thereafter until a certain development event occurs. ViroPharma is solely responsible for the
development, manufacturing and marketing of any products resulting from this partnership. We are
entitled to receive payments for research and development services and supply of rHuPH20 API if
requested by ViroPharma. In addition, we are entitled to receive additional cash payments
potentially totaling $44.0 million for a product for treatment of Hereditary Angioedema and $10.0
million for each product for treatment of each of the three additional orphan indications upon achievement of
development and regulatory milestones. We are also entitled to receive royalties on product sales
by ViroPharma. ViroPharma may terminate the agreement prior to expiration for any reason on a
product-by-product basis upon 90 days prior written notice to us. Upon any such termination, the
license granted to ViroPharma (in total or with respect to the terminated product, as applicable)
will terminate and revert to us.
Effective June 6, 2011, we and Intrexon entered into the Intrexon Partnership, under which
Intrexon obtained a worldwide exclusive license for the use of rHuPH20 enzyme in the development of
a subcutaneous
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injectable formulation of Intrexons recombinant human alpha 1-antitrypsin (rHuA1AT). Under
the terms of the Intrexon Partnership, Intrexon paid a nonrefundable upfront license fee of $9.0
million. In addition, we are entitled to receive an annual exclusivity fee of $1.0 million commencing on
June 6, 2012 and on each anniversary of the effective date of the agreement thereafter until a
certain development event occurs. Intrexon is solely responsible for the development, manufacturing
and marketing of any products resulting from this partnership. We are entitled to receive payments
for research and development services and supply of rHuPH20 API if requested by Intrexon. In
addition, we are entitled to receive additional cash payments potentially totaling $44.0 million
for each product for use in the exclusive field and $10.0 million for each product for use in the
non-exclusive field upon achievement of development and regulatory milestones. We are also entitled
to receive escalating royalties on product sales and a cash payment of $10.0 million upon
achievement of a specified sales volume of product sales by Intrexon. Intrexon may terminate the
agreement prior to expiration for any reason on a product-by-product basis upon 90 days prior
written notice to us. Upon any such termination, the license granted to Intrexon (in total or with
respect to the terminated product, as applicable) will terminate and revert to us.
Intrexons chief executive officer and chairman of its board of directors is also a member of the Companys board of directors.
In accordance with ASU No. 2009-13, we identified the deliverables at the inception of the
ViroPharma and Intrexon Partnerships which are the license, research and development services and
API supply. We have determined that the license, research and development services and API supply
individually represent separate units of accounting, because each deliverable has standalone value.
The estimated selling prices for these units of accounting was determined based on market
conditions, the terms of comparable collaborative arrangements for similar technology in the
pharmaceutical and biotech industry and entity-specific factors such as the terms of our previous
collaborative agreements, our pricing practices and pricing objectives and the nature of the
research and development services to be performed for the partners. The arrangement consideration
was allocated to the deliverables based on the relative selling price method. Based on the results
of our analysis, we determined that the upfront payment was earned
upon the granting of the worldwide exclusive right to our technology
to the collaborator in both the ViroPharma Partnership and Intrexon Partnership. However,
the amount of allocable arrangement consideration is limited to amounts that are fixed or
determinable; therefore, the amount allocated to the license at June 30, 2011 was only to the
extent of cash received. As a result, we recognized the $9.0 million upfront license fee
received under the ViroPharma Partnership and $9.0 million upfront license fee received under the
Intrexon Partnership as revenues under collaborative agreements in the quarter ended June 30, 2011.
We will recognize the exclusivity fees as revenue under collaborative agreements when they are
earned. We will recognize reimbursements for research and development services as revenue under
collaborative agreement as the related services are delivered. We will recognize payments from
sales of API as revenue under collaborative agreements when such API has met all required
specifications by the partners and the related title and risk of loss and damages have passed to
the partners. We cannot predict the timing of delivery of research and development services and API
as they are at the partners requests.
We are eligible to receive additional cash payments upon the achievement by the partners of
specified development, regulatory and sales-based milestones. We have determined that each of the
development and regulatory milestones is substantive; therefore, we expect to recognize such
development and regulatory milestone payments as revenue under collaborative agreements upon
achievement in accordance to the milestone method of revenue recognition. Given the challenges
inherent in developing and obtaining approval for pharmaceutical and biologic products, there was
substantive uncertainty whether any of the development and regulatory milestones would be met at
the time these partnerships were entered into, and the milestones are based in part on the occurrence of
a separate outcome resulting from our performance. In addition, we evaluated whether the
development and regulatory milestones met the remaining criteria to be considered substantive. We
have determined that the sales-based milestone payment is similar to a royalty payment; therefore,
we will recognize the sales-based milestone payment as revenue upon achievement of the milestone
because we have no future performance obligations associated with the milestone.
HYLENEX Partnership
Under the terms of the HYLENEX Partnership, Baxter paid us a nonrefundable upfront payment of
$10.0 million in 2007. Due to our continuing involvement obligations (for example, support
activities associated with rHuPh20 enzyme), the $10.0 million upfront payment was deferred and was
being recognized over the term of the HYLENEX Partnership. In addition, we received product-based
payments upon the sale of HYLENEX by Baxter, in
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accordance with the terms of the HYLENEX Partnership. Baxter had prepaid $10.0 million of
non-refundable product-based payments. Revenues from product-based payments were recognized based
on Baxters shipments of HYLENEX to its distributors when such amounts could be reasonably
estimated. The prepaid product-based payments were initially deferred and were being recognized as
product sales revenue as we earned such revenue from the sales of HYLENEX by Baxter.
On January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and
associated agreements. On July 18, 2011, we and Baxter entered into the Transition Agreement
setting forth the transfer of certain rights, data and assets by Baxter to us during a transition
period. In addition, in June 2011 we entered into a commercial manufacturing and supply agreement
with Baxter, under which Baxter will fill and finish HYLENEX for us.
Effective July 18, 2011, we have no future performance
obligations in connection with the HYLENEX Partnership. Therefore, we will recognize as revenues
under collaborative agreements approximately $7.6 million relating to the unamortized deferred
upfront payment and approximately $9.3 million relating to the unamortized deferred product-based
payments in the quarter ending September 30, 2011.
Share-Based Payments
We use the fair value method to account for share-based payments in accordance with the
authoritative guidance for stock compensation. The fair value of each option award is estimated on
the date of grant using a Black-Scholes-Merton option pricing model, or Black-Scholes model, that
uses assumptions regarding a number of complex and subjective variables. These variables include,
but are not limited to, our expected stock price volatility, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities
are based on the historical volatility of our common stock. The expected term of options granted is
based on analyses of historical employee termination rates and option exercises. The risk-free
interest rates are based on the U.S. Treasury yield in effect at the time of the grant. Since we do
not expect to pay dividends on our common stock in the foreseeable future, we estimated the
dividend yield to be 0%. Forfeitures are estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. We estimate pre-vesting
forfeitures based on our historical experience.
If factors change and we employ different assumptions for determination of fair value in
future periods, the share-based compensation expense that we record may differ significantly from
what we have recorded in the current period. There is a high degree of subjectivity involved when
using option pricing models to estimate share-based compensation. Certain share-based payments,
such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant date and reported in our consolidated
financial statements. Alternatively, values may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant date and reported in
our consolidated financial statements. There is currently no market-based mechanism or other
practical application to verify the reliability and accuracy of the estimates stemming from these
valuation models, nor is there a means to compare and adjust the estimates to actual values.
Although the fair value of employee share-based awards is determined in accordance with
authoritative guidance on stock compensation using an option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market transaction.
Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead
expenses, clinical trials, research-related manufacturing services, contract services and other
outside expenses. Research and development expenses are charged to operations as they are incurred.
Advance payments, including nonrefundable amounts, for goods or services that will be used or
rendered for future research and development activities are deferred and capitalized. Such amounts
will be recognized as an expense as the related goods are delivered or the related services are
performed or such time that we do not expect the goods to be delivered or services to be rendered.
Milestone payments that we make in connection with in-licensed technology or product
candidates are expensed as incurred when there is uncertainty in receiving future economic benefits
from the licensed technology or product candidates. We consider the future economic benefits from
the licensed technology or product candidates
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to be uncertain until such licensed technology or product candidates are approved for
marketing by regulatory bodies such as the FDA or when other significant risk factors are abated.
Management has viewed future economic benefits for all of our licensed technology or product
candidates to be uncertain and has expensed these amounts for accounting purposes.
Payments in connection with our clinical trials are often made under contracts with multiple
contract research organizations that conduct and manage clinical trials on our behalf. The
financial terms of these agreements are subject to negotiation and vary from contract to contract
and may result in uneven payment flows. Generally, these agreements set forth the scope of work to
be performed at a fixed fee, unit price or on a time-and-material basis. Payments under these
contracts depend on factors such as the successful enrollment or treatment of patients or the
completion of other clinical trial milestones. Expenses related to clinical trials are accrued
based on our estimates and/or representations from service providers regarding work performed,
including actual level of patient enrollment, completion of patient studies and clinical trials
progress. Other incidental costs related to patient enrollment or treatment are accrued when
reasonably certain. If the contracted amounts are modified (for instance, as a result of changes in
the clinical trial protocol or scope of work to be performed), we modify our accruals accordingly
on a prospective basis. Revisions in scope of contract are charged to expense in the period in
which the facts that give rise to the revision become reasonably certain. Because of the
uncertainty of possible future changes to the scope of work in clinical trials contracts, we are
unable to quantify an estimate of the reasonably likely effect of any such changes on our
consolidated results of operations or financial position. Historically, we have had no material
changes in our clinical trial expense accruals that would have had a material impact on our
consolidated results of operations or financial position.
Inventory
Inventory consists of raw materials used in production, work in process and finished goods
inventory on hand related to our HYLENEX and ICSI Cumulase products. Inventory is valued at lower
of cost or market (net realizable value) using the first-in, first-out method. Inventory is
reviewed periodically for slow-moving or obsolete status. To the extent that its net realizable
value is lower than cost, an impairment would be recorded. In connection with the termination of
the HYLENEX Partnership in January 2011, we had established a reserve for inventory obsolescence of
approximately $875,000 for HYLENEX API in the quarter ended December 31, 2010. As of June 30, 2011
and December 31, 2010, the reserve for HYLENEX API inventory obsolescence was approximately $1.0
million and $875,000, respectively.
The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by U.S. GAAP. There are also areas in which our managements judgment in selecting any
available alternative would not produce a materially different result. Please see our audited
consolidated financial statements and notes thereto included in Part II Item 8 of our Annual
Report on Form 10-K for the year ended December 31, 2010, which contain accounting policies and
other disclosures required by U.S. GAAP.
Results of Operations
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Product Sales Product sales were $165,000 for the three months ended June 30, 2011 compared
to $200,000 for the three months ended June 30, 2010. The decrease of $35,000, or 18%, was
primarily due to no HYLENEX product sales in the three months ended June 30, 2011. Pursuant to the
terms of the Transition Agreement between us and Baxter, signed on July 18, 2011, approximately
$991,000 of deferred revenue will be recognized as product sales revenue in the quarter ending
September 30, 2011 because the earnings process related to these product sales was complete in July
2011. Based on the termination of the HYLENEX Partnership in January 2011, we expect only product
sales of API for ICSI Cumulase in future periods until HYLENEX could be reintroduced to the market.
Revenues Under Collaborative Agreements Revenues under collaborative agreements were
approximately $23.0 million for the three months ended June 30, 2011 compared to $3.0 million for
the three months ended June 30, 2010. The increase of $20.0 million was primarily due to $18.0
million in upfront payments we received from the ViroPharma and Intrexon Partnerships which were
earned in the quarter ended June 30, 2011.
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Revenues under collaborative agreements also consisted of the amortization of license fees and
milestone payments received from Roche and Baxter of approximately $3.7 million and $804,000 for
the three months ended June 30, 2011 and 2010, respectively. The increase of $2.9 million was due
to a milestone payment which was earned upon the achievement of a regulatory milestone in the
quarter ended June 30, 2011.
Pursuant to the terms of the Transition Agreement between us and Baxter, signed on July 18, 2011,
we have no future performance obligations in connection
with the HYLENEX Partnership. Therefore, we will recognize as revenues under collaborative
agreements approximately $9.3 million relating to the deferred prepaid product-based payments and
approximately $7.6 million relating to the deferred upfront payment in the quarter ending September
30, 2011.
Revenues under collaborative agreements also included reimbursements for research and
development services from Roche of $882,000 and $1.2 million and Baxter of $409,000 and $894,000
for the three months ended June 30, 2011 and 2010, respectively. Research and development
services rendered by us on behalf of our partners are at the request of the partners; therefore,
the amount of future revenues related to reimbursable research and development services is
uncertain. We expect the non-reimbursement revenues under our collaborative agreements to continue
to fluctuate in future periods based on our partners abilities to meet various clinical and
regulatory milestones set forth in such agreements and our abilities to obtain new collaborative
agreements.
Cost of Product Sales Cost of sales were $178,000 for the three months ended June 30, 2011
compared to $84,000 for the three months ended June 30, 2010. The increase of $94,000 is primarily
due to a write-off of obsolete inventory for HYLENEX API. Based on the termination of the HYLENEX
Partnership in January 2011, we expect only cost of product sales of API for ICSI Cumulase in
future periods until HYLENEX could be reintroduced to the market.
Research and Development Research and development expenses were $15.3 million for the three
months ended June 30, 2011 compared to $11.9 million for the three months ended June 30, 2010. The
increase of $3.4 million, or 29%, was primarily due to a $4.2 million increase in clinical trial activities
mainly supporting our ultrafast insulin program and a $1.3 million increase in manufacturing activities. The increase was partially offset by a $1.5 million decrease in compensation costs mainly due to the reduction in force in October 2010. We expect research and development costs to
increase slightly in future periods as we continue with our clinical trial programs and continue to
develop and manufacture our product candidates.
Selling, General and Administrative SG&A expenses were $4.6 million for the three months
ended June 30, 2011 compared to $3.4 million for the three months ended June 30, 2010. The increase
of $1.2 million, or 35%, was primarily due to a $585,000
increase in market research expenses, a
$142,000 increase in marketing expenses and a $154,000 increase in legal expenses. We
expect SG&A expenses to increase in future periods as we plan to increase sales and marketing
activities.
Interest and Other Income, net Interest and other income, net consisted of interest income
of $20,000 for the three months ended June 30, 2011 compared to $6,000 for the three months ended
June 30, 2010. The increase in interest income was primarily due to higher interest rates and
higher average cash and cash equivalent balances in 2011 as compared to the same period in 2010.
Net Income (Loss) Net income (loss) for the three months ended June 30, 2011 was $3.1
million, or $0.03 per common share, compared to $(12.2) million, or $(0.13) per common share for
the three months ended June 30, 2010. The increase in net income was primarily due to $18.0 million
in upfront license fees we received from the ViroPharma and Intrexon Partnerships that were earned
in the three months ended June 30, 2011. The increase in net income was offset in part by an
increase in operating expenses.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Product Sales Product sales were $331,000 for the six months ended June 30, 2011 compared
to $597,000 for the six months ended June 30, 2010. The decrease
of $266,000, or 45%, was primarily due to
no revenues recognized from HYLENEX product sales in the six months ended June 30, 2011. Pursuant
to the terms of the Transition Agreement between us and Baxter, signed on July 18, 2011, we will
recognize $991,000 of deferred revenue as product sales revenue in the quarter ending September 30,
2011 because the earnings process related to these product sales was complete in July 2011. Based
on the termination of the HYLENEX Partnership in January
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2011, we expect only product sales of API for ICSI Cumulase in future periods until HYLENEX
could be reintroduced to the market.
Revenues Under Collaborative Agreements Revenues under collaborative agreements were
approximately $30.4 million for the six months ended June 30, 2011 compared to $6.1 million for the
six months ended June 30, 2010. The increase of $24.3 million was mainly due to $18.0 million in
upfront payments we received from the ViroPharma and Intrexon Partnerships which were earned in the
six months ended June 30, 2011. Revenues under collaborative agreements also consisted of the
amortization of license fees and milestone payments received from Roche and Baxter of approximately
$9.5 million and $1.6 million for the six months ended June 30, 2011 and 2010, respectively. The
increase of $7.9 million was due to $8.0 million in milestone payments from Roche and Baxter earned
upon achievement of the clinical and regulatory milestones in the six months ended June 30, 2011.
Pursuant
to the terms of the Transition Agreement between us and Baxter, signed on July 18, 2011,
we have no future performance obligations in connection
with the HYLENEX Partnership. Therefore, we will recognize approximately $9.3 million relating to
the deferred prepaid product-based payments and approximately $7.6 million relating to the deferred
upfront payment in the quarter ending September 30, 2011.
Revenues under collaborative agreements also included reimbursements for research and
development services from Roche of $2.4 million and $1.8 million and Baxter of $550,000 and $2.4
million for the six months ended June 30, 2011 and 2010, respectively. Research and
development services rendered by us on behalf of our partners are at the partners request;
therefore, the amount of future revenues related to reimbursable research and development services
is uncertain. We expect the non-reimbursement revenues under our collaborative agreements to
continue to fluctuate in future periods based on our partners abilities to meet various clinical
and regulatory milestones set forth in such agreements and our abilities to obtain new
collaborative agreements.
Cost of Product Sales Cost of sales were $190,000 for the six months ended June 30, 2011
compared to $89,000 for the six months ended June 30, 2010. The increase of $101,000 is mainly due
to the write-off of obsolete HYLENEX API inventory. Based on the termination of the HYLENEX
Partnership in January 2011, we expect only cost of product sales of API for ICSI Cumulase in
future periods until HYLENEX could be reintroduced to the market.
Research and Development Research and development expenses were $29.1 million for the six
months ended June 30, 2011 compared to $23.4 million for the six months ended June 30, 2010. The
increase of $5.7 million, or 24%, was primarily due to a $8.6 million increase in clinical trial activities
mainly supporting our ultrafast insulin program and a $1.9 million increase in manufacturing activities. The increase was offset in part by a $3.2 million
decrease in compensation costs mainly due to the reduction in force in October 2010. We expect
research and development costs to increase slightly in future periods as we continue with our
clinical trial programs and continue to develop and manufacture our product candidates.
Selling, General and Administrative SG&A expenses were $8.0 million for the six months
ended June 30, 2011 compared to $7.1 million for the six months ended June 30, 2010. The increase
of $859,000, or 12%, was primarily due to a $423,000 increase in
market research expenses and a
$158,000 increase in marketing expenses. We
expect SG&A expenses to increase in future periods as we plan to increase sales and marketing
activities.
Interest and Other Income, net Interest and other income, net consisted of interest income
of $44,000 for the six months ended June 30, 2011 compared to $9,000 for the six months ended June
30, 2010. The increase in interest income was primarily due to higher interest rates and higher
average cash and cash equivalent balances in 2011 as compared to the same period in 2010.
Net Loss Net loss for the six months ended June 30, 2011 was $6.5 million, or $0.06 per
common share, compared to $23.9 million, or $0.26 per common share for the six months ended June
30, 2010. The decrease in net loss was primarily due to an increase in revenues under collaborative
agreements resulting from $18.0 million of upfront license fees we received from the ViroPharma and
Intrexon Partnerships and $8.0 million in milestone payments from Roche and Baxter which were
earned in the six months ended June 30, 2011. The decrease in net loss was offset in part by an
increase in operating expenses.
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Liquidity and Capital Resources
Overview
Our principal sources of liquidity are our existing cash and cash equivalents. As of June 30,
2011, we had cash and cash equivalents of approximately $79.1 million. We will continue to have
significant cash requirements to support product development activities. The amount and timing of
cash requirements will depend on the success of our clinical development programs, regulatory and
market acceptance, and the resources we devote to research and other commercialization activities.
We believe that our current cash and cash equivalents will be sufficient to fund our
operations for at least the next twelve months. Currently, we anticipate total net cash burn of
approximately $30.0 to $35.0 million for the year ending December 31, 2011, depending on the
progress of various preclinical and clinical programs, the timing of our manufacturing scale up and
the achievement of various milestones under our existing collaborative agreements. We do not expect
our revenues to be sufficient to fund operations for several years. We expect to fund our
operations going forward with existing cash resources, anticipated revenues from our existing
collaborations and cash that we will raise through future transactions. We may finance future cash
needs through any one of the following financing vehicles: (i) the public offering of securities;
(ii) new collaborative agreements; (iii) expansions or revisions to existing collaborative
relationships; (iv) private financings; and/or (v) other equity or debt financings.
We currently have the ability to offer and sell up to $39.8 million of additional equity or
debt securities under an effective universal shelf registration statement. In January 2010, we
filed the shelf registration statement on Form S-3 (Registration No. 333-164215) which allows us,
from time to time, to offer and sell up to $100.0 million of equity or debt securities. In
September 2010, we sold approximately $60.2 million of our common stock in an underwritten public
offering at a net price of $7.25 per share. We may utilize this universal shelf in the future to
raise capital to fund the continued development of our product candidates, the commercialization of
our products or for other general corporate purposes.
Our existing cash and cash equivalents may not be adequate to fund our operations until we
become cash flow positive, if ever. We cannot be certain that additional financing will be
available when needed or, if available, financing will be obtained on favorable terms. If we are
unable to raise sufficient funds, we will need to delay, scale back or eliminate some or all of our
research and development programs, delay the launch of our product candidates, if approved, and/or
restructure our operations. If we raise additional funds by issuing equity securities, substantial
dilution to existing stockholders could result. If we raise additional funds by incurring debt
financing, the terms of the debt may involve significant cash payment obligations, the issuance of
warrants that may ultimately dilute existing stockholders when exercised, and covenants that may
restrict our ability to operate our business.
Cash Flows
Net
cash used in operations was $7.4 million during the six months ended June 30, 2011
compared to $26.4 million of net cash used in operations during the six months ended June 30, 2010.
This change was primarily due to the decrease in net loss of $17.4 million adjusted for non-cash
items including stock-based compensation and depreciation and amortization in addition to changes
in the working capital. The decrease in net loss was mainly due to the receipts of $18.0 million in
upfront license fees from the ViroPharma and Intrexon Partnerships and a $5.0 million milestone
payment from Roche; offset in part by an increase in R&D expenses.
Net cash used in investing activities was $233,000 during the six months ended June 30, 2011
compared to $255,000 during the six months ended June 30, 2010. This was primarily due to a
decrease in purchases of property and equipment during 2011.
Net
cash provided by financing activities was $3.4 million during the six months ended June
30, 2011 compared to $497,000 during the six months ended June 30, 2010. Net cash provided by
financing activities consisted of net proceeds from stock option exercises.
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Off-Balance Sheet Arrangements
As of June 30, 2011, we did not have any relationships with unconsolidated entities or
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. In addition, we did not engage in
trading activities involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in these
relationships.
Contractual Obligations
In July 2007, we entered into a lease agreement, or the Original Lease, with BC Sorrento, LLC,
or BC Sorrento for the facilities located at 11388 Sorrento Valley Road, San Diego, California, or
the 11388 Property, for 27,575 square feet of office and research space commencing in September
2008 through January 2013. Under the terms of the Lease, the initial monthly rent payment was
approximately $37,000 net of costs and property taxes associated with the operation and maintenance
of the leased facilities, commencing in September 2008 and increased to approximately $73,000
starting in March 2009. Thereafter, the annual base rent was subject to approximately 4% annual
increases each year throughout the term of the Lease. Effective September 2010, BMR-11388 Sorrento
Valley Road LLC, or BMR-11388, acquired the 11388 Property and became the new landlord of the 11388
Property.
In June 2011, we entered into an amended and restated lease, or the 11388 Lease, with
BMR-11388 for the 11388 Property commencing from June 2011 through January 2018. The 11388 Lease
superseded the Original Lease. Under the terms of the 11388 Lease, the initial monthly rent payment
is approximately $38,000 net of costs and property taxes associated with the operation and
maintenance of the leased facilities, commencing in December 2011 and increasing to approximately
$65,000 starting in January 2013. Thereafter, the annual base rent is subject to approximately 2.5%
annual increases each year throughout the term of the 11388 Lease. In addition, we received a cash
incentive of approximately $98,000, a tenant improvement allowance of $300,000 and free and reduced
rent totaling approximately $744,000.
In June 2011, we entered into a lease agreement, or the 11404/11408 Lease, with BMR-Sorrento
Plaza LLC, or BMR-Sorrento, for the 11404 Property and 11408 Property commencing in January 2013
through January 2018. Pursuant to the terms of the 11404/11408 Lease, the initial monthly rent
payment is approximately $71,000 net of costs and property taxes associated with the operation and
maintenance of the leased facilities, commencing in January 2013 and is subject to approximately
2.5% annual increases each year throughout the term of the 11404/11408 Lease.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies Adoption of Recent Accounting
Pronouncements and Pending Adoption of Accounting Pronouncements, in the Notes to Condensed
Consolidated Financial Statements for discussions of new accounting pronouncements and their
effect, if any on us.
Risk Factors
The following information sets forth factors that could cause our actual results to differ
materially from those contained in forward-looking statements we have made in this Quarterly Report
on Form 10-Q, our most recent Annual Report on Form 10-K and those we may make from time to time.
In addition to the risk factors discussed below, we are also subject to additional risks and
uncertainties not presently known to us or that we currently deem immaterial. If any of these known
or unknown risks or uncertainties actually occurs, our business, financial position and results of
operations could be materially and adversely affected and the value of our securities could decline
significantly.
Risks Related To Our Business
We have generated only minimal revenue from product sales to date; we have a history of net losses
and negative cash flow, and we may never achieve or maintain profitability.
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Relative to expenses incurred in our operations, we have generated only minimal revenue from
product sales, licensing fees and milestone payments to date and we may never generate sufficient
revenues from future product sales, licensing fees and milestone payments to offset expenses. Even
if we ultimately do achieve significant revenues from product sales, licensing fees and/or
milestone payments, we expect to incur significant operating losses over the next few years. We
have never been profitable, and we may never become profitable. Through June 30, 2011, we have
incurred aggregate net losses of approximately $231.8 million.
If our proprietary and partnered product candidates do not receive and maintain regulatory
approvals, or if approvals are not obtained in a timely manner, such failure or delay would
substantially impair our ability to generate revenues.
Approval from the FDA is necessary to manufacture and market pharmaceutical products in the
United States and the other countries in which we anticipate doing business have similar
requirements. The process for obtaining FDA and other regulatory approvals is extensive,
time-consuming and costly, and there is no guarantee that the FDA or other regulatory bodies will
approve any applications that may be filed with respect to any of our proprietary or partnered
product candidates, or that the timing of any such approval will be appropriate for the desired
product launch schedule for a product candidate. We, and our partners, attempt to provide guidance
as to the timing for the filing and acceptance of such regulatory approvals, but such filings and
approvals may not occur on the originally anticipated timeline, or at all. Only one of our
partnered product candidates is currently in the regulatory approval process and there are no
proprietary product candidates currently in the regulatory approval process. We and our partners
may not be successful in obtaining such approvals for any potential products in a timely manner, or
at all (please also refer to the risk factor titled Our proprietary and partnered product
candidates may not receive regulatory approvals for a variety of reasons, including unsuccessful
clinical trials. for additional information relating to the approval of product candidates).
Additionally, in order to continue to manufacture and market pharmaceutical products, we must
maintain our regulatory approvals. If we or any of our partners are unsuccessful in maintaining our
regulatory approvals our ability to generate revenues would be adversely affected.
If our contract manufacturers are unable to manufacture significant amounts of the API used in our
products and product candidates, our product development and commercialization efforts could be
delayed or stopped and our collaborative partnerships could be damaged.
We have existing supply agreements with contract manufacturing organizations Avid Bioservices,
Inc., or Avid, Cook Pharmica LLC, or Cook, and PacificGMP, Inc., or PacificGMP, to produce bulk
API. These manufacturers each produce API under current Good Manufacturing Practices, or cGMP, for
clinical uses. In addition, Avid currently produces API for commercialized products. Avid and Cook
will also provide support for the chemistry, manufacturing and controls sections for FDA and other
regulatory filings. We rely on their ability to successfully manufacture these batches according to
product specifications and Cook and PacificGMP have relatively limited experience manufacturing our
API. In addition, as a result of our contractual obligations to Roche, we will be required to
significantly scale up our commercial API production at Cook during the next two years. If Cook is
unable to obtain status as a cGMP-approved manufacturing facility, or if either Avid, Cook or
PacificGMP: (i) are unable to retain status as cGMP-approved manufacturing facilities; (ii) are
unable to otherwise successfully scale up our API production; or (iii) fail to manufacture the API
required by our proprietary and partnered products and product candidates for any other reason, our
business will be adversely affected. We have not established, and may not be able to establish,
favorable arrangements with additional API manufacturers and suppliers of the ingredients necessary
to manufacture the API should the existing manufacturers and suppliers become unavailable or in the
event that our existing manufacturers and suppliers are unable to adequately perform their
responsibilities. We have attempted to mitigate the impact of supply interruption through the
establishment of excess API inventory, but there can be no assurances that this safety stock will
be maintained or that it will be sufficient to address any delays, interruptions or other problems
experienced by Avid, Cook and/or PacificGMP. Any delays, interruptions or other problems regarding
the ability of Avid, Cook and/or PacificGMP to supply API on a timely basis could: (i) cause the
delay of clinical trials or otherwise delay or prevent the regulatory approval of proprietary or
partnered product candidates; (ii) delay or prevent the effective commercialization of proprietary
or partnered products and/or (iii) cause us to breach contractual obligations to deliver API to our
partners. Such delays would likely damage our relationship with our partners under our key
collaboration agreements and they would have a material adverse effect on our business and
financial condition.
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If any party to a key collaboration agreement, including us, fails to perform material obligations
under such agreement, or if a key collaboration agreement, or any other collaboration agreement, is
terminated for any reason, our business could significantly suffer.
We have entered into multiple collaboration agreements under which we may receive significant
future payments in the form of maintenance fees, milestone payments and royalties. In the event
that a party fails to perform under a key collaboration agreement, or if a key collaboration
agreement is terminated, the reduction in anticipated revenues could delay or suspend our product
development activities for some of our product candidates, as well as our commercialization efforts
for some or all of our products. In addition, the termination of a key collaboration agreement by
one of our partners could materially impact our ability to enter into additional collaboration
agreements with new partners on favorable terms, if at all. In certain circumstances, the
termination of a key collaboration agreement would require us to revise our corporate strategy
going forward and reevaluate the applications and value of our technology.
For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance
with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May
2010. In January 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and we
reacquired all rights to HYLENEX. During the second quarter of 2011, we submitted the data that the
FDA had requested to support the reintroduction of HYLENEX. The FDA has approved the submitted data
and has granted the reintroduction of HYLENEX. We expect to reintroduce HYLENEX by the end of 2011.
Most of our current proprietary and partnered products and product candidates rely on the rHuPH20
enzyme.
The rHuPH20 enzyme is a key technological component of Enhanze Technology, our ultrafast
insulin program, HYLENEX and other proprietary and partnered products and product candidates. An
adverse development for rHuPH20 (e.g., an adverse regulatory determination relating to rHuPH20, we
are unable to obtain sufficient quantities of rHuPH20, we are unable to obtain or maintain material
proprietary rights to rHuPH20 or we discover negative characteristics of rHuPH20) would
substantially impact multiple areas of our business, including current and potential partnerships,
as well as proprietary programs.
Our proprietary and partnered product candidates may not receive regulatory approvals for a variety
of reasons, including unsuccessful clinical trials.
Clinical testing of pharmaceutical products is a long, expensive and uncertain process and the
failure or delay of a clinical trial can occur at any stage. Even if initial results of preclinical
studies or clinical trial results are promising, we or our partners may obtain different results
that fail to show the desired levels of safety and efficacy, or we may not, or our partners may
not, obtain applicable regulatory approval for a variety of other reasons. Clinical trials for any
of our proprietary or partnered product candidates could be unsuccessful, which would delay or
prohibit regulatory approval and commercialization of the product candidates. In the United States
and other jurisdictions, regulatory approval can be delayed, limited or not granted for many
reasons, including, among others:
| regulatory review may not find a product candidate safe or effective
enough to merit either continued testing or final approval; |
||
| regulatory review may not find that the data from preclinical testing
and clinical trials justifies approval, or they may require additional
studies that would significantly delay or make continued pursuit of
approval commercially unattractive; |
||
| a regulatory agency may reject our trial data or disagree with our
interpretations of either clinical trial data or applicable
regulations; |
||
| the cost of a clinical trial may be greater than what we originally
anticipate, and we may decide to not pursue regulatory approval for
such a trial; |
||
| a regulatory agency may not approve our manufacturing processes or
facilities, or the processes or facilities of our partners, our
contract manufacturers or our raw material suppliers; |
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| a regulatory agency may identify problems or other deficiencies in our
existing manufacturing processes or facilities, or the existing
processes or facilities of our partners, our contract manufacturers or
our raw material suppliers; |
||
| a regulatory agency may change its formal or informal approval
requirements and policies, act contrary to previous guidance, adopt
new regulations or raise new issues or concerns late in the approval
process; or |
||
| a product candidate may be approved only for indications that are
narrow or under conditions that place the product at a competitive
disadvantage, which may limit the sales and marketing activities for
such product candidate or otherwise adversely impact the commercial
potential of a product. |
If a proprietary or partnered product candidate is not approved in a timely fashion on
commercially viable terms, or if development of any product candidate is terminated due to
difficulties or delays encountered in the regulatory approval process, it could have a material
adverse impact on our business and we will become more dependent on the development of other
proprietary or partnered product candidates and/or our ability to successfully acquire other
products and technologies. There can be no assurances that any proprietary or partnered product
candidate will receive regulatory approval in a timely manner, or at all.
We anticipate that certain proprietary and partnered products will be marketed, and perhaps
manufactured, in foreign countries. The process of obtaining regulatory approvals in foreign
countries is subject to delay and failure for the reasons set forth above, as well as for reasons
that vary from jurisdiction to jurisdiction. The approval process varies among countries and
jurisdictions and can involve additional testing. The time required to obtain approval may differ
from that required to obtain FDA approval. Foreign regulatory agencies may not provide approvals on
a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities
in other countries or jurisdictions, and approval by one foreign regulatory authority does not
ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the
FDA.
Our key partners are responsible for providing certain proprietary materials that are essential
components of our partnered product candidates, and any failure to supply these materials could
delay the development and commercialization efforts for these partnered product candidates and/or
damage our collaborative partnerships.
Our partners are responsible for providing certain proprietary materials that are essential
components of our partnered product candidates. For example, Roche is responsible for producing the
Herceptin and MabThera required for its subcutaneous product candidates and Baxter is responsible
for producing the GAMMAGARD LIQUID for its product candidate. If a partner, or any applicable third
party service provider of a partner, encounters difficulties in the manufacture, storage, delivery,
fill, finish or packaging of either components of the partnered product candidate or the partnered
product candidate itself, such difficulties could: (i) cause the delay of clinical trials or
otherwise delay or prevent the regulatory approval of partnered product candidates; and/or (ii)
delay or prevent the effective commercialization of partnered products. Such delays could have a
material adverse effect on our business and financial condition. For example, Baxter received a
Warning Letter from the FDA in January 2010 regarding Baxters GAMMAGARD LIQUID manufacturing
facility in Lessines, Belgium. The FDA indicated in March 2010 that the issues raised in the
Warning Letter had been addressed by Baxter and we do not expect these issues to impact the
development of the GAMMAGARD LIQUID product candidate.
If we have problems with third parties that either distribute API on our behalf or prepare, fill,
finish and package our products and product candidates for distribution, our commercialization and
development efforts for our products and product candidates could be delayed or stopped.
We rely on third parties to store and ship API on our behalf and to also prepare, fill, finish
and package our products and product candidates prior to their distribution. If we are unable to
locate third parties to perform these functions on terms that are acceptable to us, or if the third
parties we identify fail to perform their obligations, the progress of clinical trials could be
delayed or even suspended and the commercialization of approved product candidates could be delayed
or prevented. For example, because a portion of the HYLENEX manufactured by Baxter was not in
compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was
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voluntarily recalled in May 2010. During the second quarter of 2011, we submitted the data
that the FDA had requested to support the reintroduction of HYLENEX. The FDA has approved the
submitted data and has granted the reintroduction of HYLENEX. We expect to reintroduce HYLENEX by
the end of 2011. In June 2011, we entered into a commercial manufacturing and supply agreement with
Baxter, under which Baxter will fill, finish and package HYLENEX product for us. Any delay in
manufacturing HYLENEX by Baxter would likely delay our ability to reintroduce the product by the
end of 2011. Under our commercial manufacturing and supply agreement with Baxter, Baxter has agreed
to fill and finish HYLENEX product for us for a limited period of time. The initial term of the
commercial manufacturing and supply agreement with Baxter expires on December 31, 2012 and is
renewable for one additional year. In June 2011, we entered into a services agreement with a third
party manufacturer for the technology transfer of HYLENEX manufacture. While we expect to enter
into a commercial manufacturing and supply agreement with a new manufacturer of HYLENEX, if we are
unable to find a suitable manufacturer of HYLENEX prior to the expiration of the commercial
manufacturing and supply agreement with Baxter or if a new manufacturer encounters difficulties in
the manufacture, fill, finish or packaging of HYLENEX, our business and financial condition could
be adversely effected.
We may wish to raise additional capital in the next twelve months and there can be no assurance
that we will be able to obtain such funds.
During the next twelve months, we may wish to raise additional capital to continue the
development of our product candidates or for other current corporate purposes. Our current cash
position and expected revenues during the next few years may not constitute the amount of capital
necessary for us to continue the development of our proprietary product candidates and to fund
general operations. In addition, if we engage in acquisitions of companies, products or technology
in order to execute our business strategy, we may need to raise additional capital. We will need to
raise additional capital in the future through one or more financing vehicles that may be available
to us. Potential financing vehicles include: (i) the public or private issuance of securities; (ii)
new collaborative agreements; and/or (iii) expansions or revisions to existing collaborative
relationships.
Considering our stage of development, the nature of our capital structure and general market
conditions, if we are required to raise additional capital in the future, the additional financing
may not be available on favorable terms, or at all. If additional capital is not available on
favorable terms when needed, we will be required to significantly reduce operating expenses through
the restructuring of our operations. If we are successful in raising additional capital, a
substantial number of additional shares may be issued and these shares will dilute the ownership
interest of our current investors.
If we are unable to sufficiently develop our sales, marketing and distribution capabilities or
enter into successful agreements with third parties to perform these functions, we will not be able
to fully commercialize our products.
We may not be successful in marketing and promoting our existing product candidates or any
other products we develop or acquire in the future. Our sales, marketing and distribution
capabilities are very limited. In order to commercialize any products successfully, we must
internally develop substantial sales, marketing and distribution capabilities or establish
collaborations or other arrangements with third parties to perform these services. We do not have
extensive experience in these areas, and we may not be able to establish adequate in-house sales,
marketing and distribution capabilities or engage and effectively manage relationships with third
parties to perform any or all of such services. To the extent that we enter into co-promotion or
other licensing arrangements, our product revenues are likely to be lower than if we directly
marketed and sold our products, and any revenues we receive will depend upon the efforts of third
parties, whose efforts may not meet our expectations or be successful. These third parties would be
largely responsible for the speed and scope of sales and marketing efforts, and may not dedicate
the resources necessary to maximize product opportunities. Our ability to cause these third parties
to increase the speed and scope of their efforts may also be limited. In addition, sales and
marketing efforts could be negatively impacted by the delay or failure to obtain additional
supportive clinical trial data for our products. In some cases, third party partners are
responsible for conducting these additional clinical trials and our ability to increase the efforts
and resources allocated to these trials may be limited.
For example, in January 2011 we and Baxter mutually agreed to terminate the HYLENEX
Partnership and the associated agreements.
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If we or our partners fail to comply with regulatory requirements, regulatory agencies may take
action against us or them, which could significantly harm our business.
Any approved products, along with the manufacturing processes, post-approval clinical data,
labeling, advertising and promotional activities for these products, are subject to continual
requirements and review by the FDA and other regulatory bodies. Regulatory authorities subject a
marketed product, its manufacturer and the manufacturing facilities to continual review and
periodic inspections. We, and our partners, will be subject to ongoing regulatory requirements,
including required submissions of safety and other post-market information and reports,
registration requirements, cGMP regulations, requirements regarding the distribution of samples to
physicians and recordkeeping requirements. The cGMP regulations include requirements relating to
quality control and quality assurance, as well as the corresponding maintenance of records and
documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and
other regulatory requirements relating to the manufacture of our products. We and our partners are
also subject to state laws and registration requirements covering the distribution of our products.
Regulatory agencies may change existing requirements or adopt new requirements or policies. We or
our partners may be slow to adapt or may not be able to adapt to these changes or new requirements.
Regulatory requirements applicable to pharmaceutical products make the substitution of
suppliers and manufacturers costly and time consuming. We have minimal internal manufacturing
capabilities and are, and expect to be in the future, entirely dependent on contract manufacturers
and suppliers for the manufacture of our products and for their active and other ingredients. The
disqualification of these manufacturers and suppliers through their failure to comply with
regulatory requirements could negatively impact our business because the delays and costs in
obtaining and qualifying alternate suppliers (if such alternative suppliers are available, which we
cannot assure) could delay clinical trials or otherwise inhibit our ability to bring approved
products to market, which would have a material adverse effect on our business and financial
condition.
Later discovery of previously unknown problems with our proprietary or partnered products,
manufacturing processes or failure to comply with regulatory requirements, may result in any of the
following:
| restrictions on our products or manufacturing processes; |
||
| warning letters; |
||
| withdrawal of the products from the market; |
||
| voluntary or mandatory recall; |
||
| fines; |
||
| suspension or withdrawal of regulatory approvals; |
||
| suspension or termination of any of our ongoing clinical trials; |
||
| refusal to permit the import or export of our products; |
||
| refusal to approve pending applications or supplements to approved applications that we submit; |
||
| product seizure; or |
||
| injunctions or the imposition of civil or criminal penalties. |
For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance
with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May
2010. During the second quarter of 2011, we submitted the data that the FDA had requested to
support the reintroduction of HYLENEX. The FDA has approved the submitted data and has granted the
reintroduction of HYLENEX. We expect to reintroduce HYLENEX by the end of 2011.
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If proprietary or partnered product candidates are approved by regulatory bodies such as the FDA
but do not gain market acceptance, our business may suffer and we may not be able to fund future
operations.
Assuming that our proprietary or partnered product candidates obtain the necessary regulatory
approvals, a number of factors may affect the market acceptance of these existing product
candidates or any other products which are developed or acquired in the future, including, among
others:
| the price of products relative to other therapies for the same or similar treatments; |
||
| the perception by patients, physicians and other members of the health care community of
the effectiveness and safety of these products for their prescribed treatments; |
||
| our ability to fund our sales and marketing efforts and the ability and willingness of
our partners to fund sales and marketing efforts; |
||
| the degree to which the use of these products is restricted by the approved product label; |
||
| the effectiveness of our sales and marketing efforts and the effectiveness of the sales
and marketing efforts of our partners; |
||
| the introduction of generic competitors; and |
||
| the extent to which reimbursement for our products and related treatments will be
available from third party payors. |
If these products do not gain market acceptance, we may not be able to fund future operations,
including the development or acquisition of new product candidates and/or our sales and marketing
efforts for our approved products, which would cause our business to suffer.
In addition, our proprietary and partnered product candidates will be restricted to the labels
approved by applicable regulatory bodies such as the FDA, and these restrictions may limit the
marketing and promotion of the ultimate products. If the approved labels are restrictive, the sales
and marketing efforts for these products may be negatively affected.
Developing and marketing pharmaceutical products for human use involves product liability risks,
for which we currently have limited insurance coverage.
The testing, marketing and sale of pharmaceutical products involves the risk of product
liability claims by consumers and other third parties. Although we maintain product liability
insurance coverage, product liability claims can be high in the pharmaceutical industry and our
insurance may not sufficiently cover our actual liabilities. If product liability claims were to be
made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage
in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of
insurance coverage could materially and adversely affect our business and financial condition.
Furthermore, various distributors of pharmaceutical products require minimum product liability
insurance coverage before purchase or acceptance of products for distribution. Failure to satisfy
these insurance requirements could impede our ability to achieve broad distribution of our proposed
products and the imposition of higher insurance requirements could impose additional costs on us.
In addition, since many of our partnered product candidates include the pharmaceutical products of
a third party, we run the risk that problems with the third party pharmaceutical product will give
rise to liability claims against us.
Our inability to attract, hire and retain key management and scientific personnel could negatively
affect our business.
Our success depends on the performance of key management and scientific employees with
biotechnology experience. Given our relatively small staff size relative to the number of programs
currently under development, we depend substantially on our ability to hire, train, motivate and
retain high quality personnel, especially our scientists and management team. If we are unable to
retain existing personnel or identify or hire additional personnel, we may
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not be able to research, develop, commercialize or market our product candidates as expected
or on a timely basis and we may not be able to adequately support current and future alliances with
strategic partners.
Furthermore, if we were to lose key management personnel, such as Gregory Frost, Ph.D., our
President and Chief Executive Officer, we would likely lose some portion of our institutional
knowledge and technical know-how, potentially causing a substantial delay in one or more of our
development programs until adequate replacement personnel could be hired and trained. For example,
Dr. Frost has been with us from soon after our inception, and he possesses a substantial amount of
knowledge about our development efforts. If we were to lose his services, we would experience
delays in meeting our product development schedules. In 2008, we adopted a severance policy
applicable to all employees and a change in control policy applicable to senior executives. We have
not adopted any other policies or entered into any other agreements specifically designed to
motivate officers or other employees to remain with us.
We do not have key man life insurance policies on the lives of any of our employees, including
Dr. Frost.
Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic
event.
Our operations, including laboratories, offices and other research facilities, are located in
a three building campus in San Diego, California. We depend on our facilities and on our partners,
contractors and vendors for the continued operation of our business. Natural disasters or other
catastrophic events, interruptions in the supply of natural resources, political and governmental
changes, wildfires and other fires, floods, explosions, actions of animal rights activists,
earthquakes and civil unrest could disrupt our operations or those of our partners, contractors and
vendors. Even though we believe we carry commercially reasonable business interruption and
liability insurance, and our contractors may carry liability insurance that protect us in certain
events, we might suffer losses as a result of business interruptions that exceed the coverage
available under our and our contractors insurance policies or for which we or our contractors do
not have coverage. Any natural disaster or catastrophic event could have a significant negative
impact on our operations and financial results. Moreover, any such event could delay our research
and development programs.
If we or our partners do not achieve projected development goals in the timeframes we publicly
announce or otherwise expect, the commercialization of our products and the development of our
product candidates may be delayed and, as a result, our stock price may decline.
We publicly articulate the estimated timing for the accomplishment of certain scientific,
clinical, regulatory and other product development goals. The accomplishment of any goal is
typically based on numerous assumptions and the achievement of a particular goal may be delayed for
any number of reasons both within and outside of our control. If scientific, regulatory, strategic
or other factors cause us to not meet a goal, regardless of whether that goal has been publicly
articulated or not, the commercialization of our products and the development of our proprietary
and partnered product candidates may be delayed. In addition, the consistent failure to meet
publicly announced milestones may erode the credibility of our management team with respect to
future milestone estimates.
Future acquisitions could disrupt our business and harm our financial condition.
In order to augment our product pipeline or otherwise strengthen our business, we may decide
to acquire additional businesses, products and technologies. As we have limited experience in
evaluating and completing acquisitions, our ability as an organization to make such acquisitions is
unproven. Acquisitions could require significant capital infusions and could involve many risks,
including, but not limited to, the following:
| we may have to issue convertible debt or equity securities to complete
an acquisition, which would dilute our stockholders and could
adversely affect the market price of our common stock; |
||
| an acquisition may negatively impact our results of operations because
it may require us to amortize or write down amounts related to
goodwill and other intangible assets, or incur or assume substantial
debt or liabilities, or it may cause adverse tax consequences,
substantial depreciation or deferred compensation charges; |
||
| we may encounter difficulties in assimilating and integrating the
business, products, technologies, personnel |
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or operations of companies
that we acquire; |
| certain acquisitions may impact our relationship with existing or
potential partners who are competitive with the acquired business,
products or technologies; |
||
| acquisitions may require significant capital infusions and the
acquired businesses, products or technologies may not generate
sufficient value to justify acquisition costs; |
||
| an acquisition may disrupt our ongoing business, divert resources,
increase our expenses and distract our management; |
||
| acquisitions may involve the entry into a geographic or business
market in which we have little or no prior experience; and |
||
| key personnel of an acquired company may decide not to work for us. |
If any of these risks occurred, it could adversely affect our business, financial condition
and operating results. We cannot assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is
possible that we may not realize the anticipated benefits from such acquisitions or that the market
will not view such acquisitions positively.
Risks Related To Ownership of Our Common Stock
Our stock price is subject to significant volatility.
We participate in a highly dynamic industry which often results in significant volatility in
the market price of common stock irrespective of company performance. As a result, our high and low
sales prices of our common stock during the twelve months ended June 30, 2011 were $8.31 and $5.79,
respectively. We expect our stock price to continue to be subject to significant volatility and, in
addition to the other risks and uncertainties described elsewhere in this Quarterly Report on Form
10-Q, in the annual report on Form 10-K for the year ended December 31, 2010 and all other risks
and uncertainties that are either not known to us at this time or which we deem to be immaterial,
any of the following factors may lead to a significant drop in our stock price:
| a dispute regarding our failure, or the failure of one of our third party partners, to
comply with the terms of a collaboration agreement; |
||
| the termination, for any reason, of any of our collaboration agreements; |
||
| the sale of common stock by any significant stockholder, including, but not limited to,
direct or indirect sales by members of management or our Board of Directors; |
||
| the resignation, or other departure, of members of management or our Board of Directors; |
||
| general negative conditions in the healthcare industry; |
||
| general negative conditions in the financial markets; |
||
| the failure, for any reason, to obtain regulatory approval for any of our proprietary
or partnered product candidates; |
||
| the failure, for any reason, to secure or defend our intellectual property position; |
||
| for those products that are waiting to be approved by the FDA, the failure of the FDA
to approve such products in a timely manner consistent with the FDAs historical
approval process; |
||
| the suspension of any clinical trial due to safety or patient tolerability issues; |
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| the suspension of any clinical trial due to market and/or competitive conditions; |
||
| our failure, or the failure of our third party partners, to successfully commercialize
products approved by applicable regulatory bodies such as the FDA; |
||
| our failure, or the failure of our third party partners, to generate product revenues
anticipated by investors; |
||
| problems with an API contract manufacturer or a fill and finish manufacturer for any
product or product candidate; |
||
| the sale of additional debt and/or equity securities by us; |
||
| our failure to obtain financing on acceptable terms; or |
||
| a restructuring of our operations. |
Future sales of shares of our common stock pursuant to our universal shelf registration statement
may negatively affect our stock price.
We currently have the ability to offer and sell up to $39.8 million of additional equity or
debt securities under an effective universal shelf registration statement. Sales of substantial
amounts of shares of our common stock or other securities under our universal shelf registration
statement could lower the market price of our common stock and impair our ability to raise capital
through the sale of equity securities. In the future, we may issue additional options, warrants or
other derivative securities convertible into our common stock.
Trading in our stock has historically been limited, so investors may not be able to sell as much
stock as they want to at prevailing market prices.
Our stock has historically traded at a low daily trading volume. If low trading volume
continues, it may be difficult for stockholders to sell their shares in the public market at any
given time at prevailing prices.
Risks Related To Our Industry
Compliance with the extensive government regulations to which we are subject is expensive and time
consuming and may result in the delay or cancellation of product sales, introductions or
modifications.
Extensive industry regulation has had, and will continue to have, a significant impact on our
business. All pharmaceutical companies, including ours, are subject to extensive, complex, costly
and evolving regulation by the federal government, principally the FDA and, to a lesser extent, the
U.S. Drug Enforcement Administration, or DEA, and foreign and state government agencies. The
Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other domestic and foreign
statutes and regulations govern or influence the testing, manufacturing, packaging, labeling,
storing, recordkeeping, safety, approval, advertising, promotion, sale and distribution of our
products. Under certain of these regulations, we and our contract suppliers and manufacturers are
subject to periodic inspection of our or their respective facilities, procedures and operations
and/or the testing of products by the FDA, the DEA and other authorities, which conduct periodic
inspections to confirm that we and our contract suppliers and manufacturers are in compliance with
all applicable regulations. The FDA also conducts pre-approval and post-approval reviews and plant
inspections to determine whether our systems, or our contract suppliers and manufacturers
processes, are in compliance with cGMP and other FDA regulations. If we, or our contract supplier,
fail these inspections, we may not be able to commercialize our product in a timely manner without
incurring significant additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory requirements on entities that
advertise and promote pharmaceuticals including, but not limited to, standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities, and promotional activities involving the internet.
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We are dependent on receiving FDA and other governmental approvals prior to manufacturing,
marketing and shipping our products. Consequently, there is always a risk that the FDA or other
applicable governmental authorities will not approve our products, or will take post-approval
action limiting or revoking our ability to sell our products, or that the rate, timing and cost of
such approvals will adversely affect our product introduction plans or results of operations.
We may be required to initiate or defend against legal proceedings related to intellectual property
rights, which may result in substantial expense, delay and/or cessation of the development and
commercialization of our products.
We primarily rely on patents to protect our intellectual property rights. The strength of this
protection, however, is uncertain. For example, it is not certain that:
| our patents and pending patent applications cover products and/or technology that we invented first; |
||
| we were the first to file patent applications for these inventions; |
||
| others will not independently develop similar or alternative technologies or duplicate our technologies; |
||
| any of our pending patent applications will result in issued patents; and |
||
| any of our issued patents, or patent pending applications that result in issued patents, will be held
valid and infringed in the event the patents are asserted against others. |
We currently own or license several patents and also have pending patent applications
applicable to rHuPh20 and other proprietary materials. There can be no assurance that our existing
patents, or any patents issued to us as a result of our pending patent applications, will provide a
basis for commercially viable products, will provide us with any competitive advantages, or will
not face third party challenges or be the subject of further proceedings limiting their scope or
enforceability. For example, a European patent, EP1603541, claiming rHuPH20 was granted to us on
November 11, 2009. Claims to the human PH20 glycoprotein, PEGylated variants, the glycoprotein
produced by recombinant methods, and pharmaceutical compositions with other agents, including
antibodies, insulins, cytokines, anti-infectives and additional therapeutic classes were awarded in
this patent and additional claims are in prosecution. On August 13, 2010, however, we learned that
an opposition to this patent was filed with the European Patent Office. We have contested the
opposition with written submissions to the European Patent Office and we expect to obtain European
patent protection that is equal or superior to claims previously issued in a counterpart United
States patent (U.S. Patent No. 7,767,429). Any limitations in our patent portfolio could have a
material adverse effect on our business and financial condition. In addition, if any of our pending
patent applications do not result in issued patents, or result in issued patents with narrow or
limited claims, this could have a material adverse effect on our business and financial condition.
We may become involved in interference proceedings in the U.S. Patent and Trademark Office, or
other proceedings in other jurisdictions, to determine the priority, validity or enforceability of
our patents. In addition, costly litigation could be necessary to protect our patent position.
We also rely on trademarks to protect the names of our products. These trademarks may not be
acceptable to regulatory agencies. In addition, these trademarks may be challenged by others. If we
enforce our trademarks against third parties, such enforcement proceedings may be expensive. We
also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation
that we seek to protect with confidentiality agreements with employees, consultants and others with
whom we discuss our business. Disputes may arise concerning the ownership of intellectual property
or the applicability or enforceability of these agreements, and we might not be able to resolve
these disputes in our favor.
In addition to protecting our own intellectual property rights, third parties may assert
patent, trademark or copyright infringement or other intellectual property claims against us based
on what they believe are their own intellectual property rights. If we become involved in any
intellectual property litigation, we may be required to pay substantial damages, including but not
limited to treble damages, for past infringement if it is ultimately determined
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that our products infringe a third partys intellectual property rights. Even if infringement
claims against us are without merit, defending a lawsuit takes significant time, may be expensive
and may divert managements attention from other business concerns. Further, we may be stopped from
developing, manufacturing or selling our products until we obtain a license from the owner of the
relevant technology or other intellectual property rights. If such a license is available at all,
it may require us to pay substantial royalties or other fees.
Patent protection for protein-based therapeutic products and other biotechnology inventions is
subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws
change, our competitors may be able to develop and commercialize products based on our discoveries.
Patent protection for protein-based therapeutic products is highly uncertain and involves
complex legal and factual questions. In recent years, there have been significant changes in patent
law, including the legal standards that govern the scope of protein and biotechnology patents.
Standards for patentability of full-length and partial genes, and their corresponding proteins, are
changing. Recent court decisions have made it more difficult to obtain patents, by making it more
difficult to satisfy the requirement of non-obviousness, have decreased the availability of
injunctions against infringers, and have increased the likelihood of challenging the validity of a
patent through a declaratory judgment action. Taken together, these decisions could make it more
difficult and costly for us to obtain, license and enforce our patents. In addition, in recent
years, several members of the United States Congress have made numerous proposals to change the
patent statute. These proposals include measures that, among other things, would expand the ability
of third parties to oppose United States patents, introduce the first to file standard to the
United States patent system, and limit damages an infringer is required to pay. If the patent
statute is changed, the scope, validity and enforceability of our patents may be significantly
decreased.
There also have been, and continue to be, policy discussions concerning the scope of patent
protection awarded to biotechnology inventions. Social and political opposition to biotechnology
patents may lead to narrower patent protection within the biotechnology industry. Social and
political opposition to patents on genes and proteins may lead to narrower patent protection, or
narrower claim interpretation, for genes, their corresponding proteins and inventions related to
their use, formulation and manufacture. Patent protection relating to biotechnology products is
also subject to a great deal of uncertainty outside the United States, and patent laws are evolving
and undergoing revision in many countries. Changes in, or different interpretations of, patent laws
worldwide may result in our inability to obtain or enforce patents, and may allow others to use our
discoveries to develop and commercialize competitive products, which would impair our business.
If third party reimbursement and customer contracts are not available, our products may not be
accepted in the market.
Our ability to earn sufficient returns on our products will depend in part on the extent to
which reimbursement for our products and related treatments will be available from government
health administration authorities, private health insurers, managed care organizations and other
healthcare providers.
Third-party payors are increasingly attempting to limit both the coverage and the level of
reimbursement of new drug products to contain costs. Consequently, significant uncertainty exists
as to the reimbursement status of newly approved healthcare products. Third party payors may not
establish adequate levels of reimbursement for the products that we commercialize, which could
limit their market acceptance and result in a material adverse effect on our financial condition.
Customer contracts, such as with group purchasing organizations and hospital formularies, will
often not offer contract or formulary status without either the lowest price or substantial proven
clinical differentiation. If our products are compared to animal-derived hyaluronidases by these
entities, it is possible that neither of these conditions will be met, which could limit market
acceptance and result in a material adverse effect on our financial condition.
The rising cost of healthcare and related pharmaceutical product pricing has led to cost
containment pressures that could cause us to sell our products at lower prices, resulting in less
revenue to us.
Any of the proprietary or partnered products that have been, or in the future are, approved by
the FDA may be purchased or reimbursed by state and federal government authorities, private health
insurers and other organizations,
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such as health maintenance organizations and managed care organizations. Such third party
payors increasingly challenge pharmaceutical product pricing. The trend toward managed healthcare
in the United States, the growth of such organizations, and various legislative proposals and
enactments to reform healthcare and government insurance programs, including the Medicare
Prescription Drug Modernization Act of 2003, could significantly influence the manner in which
pharmaceutical products are prescribed and purchased, resulting in lower prices and/or a reduction
in demand. Such cost containment measures and healthcare reforms could adversely affect our ability
to sell our products.
In March 2010, the United States adopted the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Affordability Reconciliation Act, or the Healthcare Reform
Act. This law substantially changes the way health care is financed by both governmental and
private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act
contains a number of provisions that are expected to impact our business and operations, in some
cases in ways we cannot currently predict. Changes that may affect our business include those
governing enrollment in federal healthcare programs, reimbursement changes, fraud and abuse and
enforcement. These changes will impact existing government healthcare programs and will result in
the development of new programs, including Medicare payment for performance initiatives and
improvements to the physician quality reporting system and feedback program.
Additional provisions of the Healthcare Reform Act, some of which become effective in 2011,
may negatively affect our revenues in the future. For example, the Healthcare Reform Act imposes a
non-deductible excise tax on pharmaceutical manufacturers or importers that sell branded
prescription drugs to U.S. government programs that we believe will impact our revenues from our
products. In addition, as part of the Healthcare Reform Acts provisions closing a funding gap that
currently exists in the Medicare Part D prescription drug program (commonly known as the donut
hole), we will also be required to provide a 50% discount on branded prescription drugs dispensed
to beneficiaries within this donut hole. We expect that the Healthcare Reform Act and other
healthcare reform measures that may be adopted in the future could have a material adverse effect
on our industry generally and on our ability to maintain or increase our product sales or
successfully commercialize our product candidates or could limit or eliminate our future spending
on development projects.
Furthermore, individual states have become increasingly aggressive in passing legislation and
implementing regulations designed to control pharmaceutical product pricing, including price or
patient reimbursement constraints, discounts, restrictions on certain product access, importation
from other countries and bulk purchasing. Legally mandated price controls on payment amounts by
third party payors or other restrictions could negatively and materially impact our revenues and
financial condition. We anticipate that we will encounter similar regulatory and legislative issues
in most other countries outside the United States.
We face intense competition and rapid technological change that could result in the development of
products by others that are superior to our proprietary and partnered products under development.
Our proprietary and partnered products have numerous competitors in the United States and
abroad including, among others, major pharmaceutical and specialized biotechnology firms,
universities and other research institutions that have developed competing products. Pending the
reintroduction of HYLENEX, the competitors for HYLENEX will include, but are not limited to ISTA
Pharmaceuticals, Inc. and Amphastar Pharmaceuticals, Inc. among others. For our analog insulin with
rHuPH20 product candidates, such competitors may include Biodel Inc., Novo Nordisk Inc. and
Mannkind Corporation. These competitors may develop technologies and products that are more
effective, safer, or less costly than our current or future proprietary and partnered product
candidates or that could render our technologies and product candidates obsolete or noncompetitive.
Many of these competitors have substantially more resources and product development, manufacturing
and marketing experience and capabilities than we do. In addition, many of our competitors have
significantly greater experience than we do in undertaking preclinical testing and clinical trials
of pharmaceutical product candidates and obtaining FDA and other regulatory approvals of products
and therapies for use in healthcare.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our primary exposure to market risk is interest income sensitivity, which is affected by
changes in the general level of U.S. interest rates, particularly because the majority of our
investments are in short-term marketable securities. The primary objective of our investment
activities is to preserve principal while at the same time
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maximizing the income we receive from our investments without significantly increasing risk.
Some of the securities that we invest in may be subject to market risk. This means that a change in
prevailing interest rates may cause the value of the investment to fluctuate. For example, if we
purchase a security that was issued with a fixed interest rate and the prevailing interest rate
later rises, the value of our investment will probably decline. To minimize this risk, we typically
invest all, or substantially all, of our cash in money market funds that invest primarily in
government securities. Our investment policy also permits investments in a variety of securities
including commercial paper and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of June 30, 2011, we did not have any holdings of derivative
financial or commodity instruments, or any foreign currency denominated transactions, and all of
our cash and cash equivalents were in money market mutual funds and other investments that we
believe to be highly liquid.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the timelines specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance of achieving the desired control objectives, and in reaching
a reasonable level of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly
Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
In connection with entering two new
collaborative agreements in the quarter ended June 30, 2011, we have developed additional internal controls over our revenue recognition process. Except for the additional internal controls over revenue recognition, there were no significant changes in our internal control over financial reporting that
occurred during the three months ended June 30, 2011, that have materially affected, or are
reasonably likely to materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time, we may be involved in disputes, including litigation, relating to claims
arising out of operations in the normal course of our business. Any of these claims could subject
us to costly legal expenses and, while we generally believe that we have adequate insurance to
cover many different types of liabilities, our insurance carriers may deny coverage or our policy
limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen,
the payment of any such awards could have a material adverse effect on our consolidated results of
operations and financial position. Additionally, any such claims, whether or not successful, could
damage our reputation and business. We currently are not a party to any legal proceedings, the
adverse outcome of which, in managements opinion, individually or in the aggregate, would have a
material adverse effect on our consolidated results of operations or financial position.
Item 1A. | Risk Factors |
We have provided updated Risk Factors in the section labeled Risk Factors in Part I, Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations. The Risk
Factors
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section provides updated information in certain areas, particularly with respect to
uncertainties regarding the regulatory approval of proprietary and partnered product candidates. We
do not believe the updates have materially changed the type or magnitude of the risks we face in
comparison to the disclosure provided in our most recent Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
Not applicable.
Item 6. | Exhibits |
Exhibit | Title | |
10.1
|
Halozyme Therapeutics, Inc. 2011 Stock Plan(1) | |
10.2
|
Form of Stock Option Agreement (2011 Stock Plan)(1) | |
10.3
|
Form of Stock Option Agreement for Executive Officers (2011 Stock Plan)(1) | |
10.4
|
Form of Restricted Stock Units Agreement (2011 Stock Plan)(1) | |
10.5
|
Form of Restricted Stock Award Agreement (2011 Stock Plan)(1) | |
10.6
|
Amended and Restated Lease (11388 Sorrento Valley Road), effective as of June 10, 2011(2) | |
10.7
|
Lease (11404 and 11408 Sorrento Valley Road), effective as of June 10, 2011 (2) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101
|
The following materials from the Halozyme Therapeutics, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes, tagged as block of text*. |
(1) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed May 6,
2011. |
|
(2) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed June
16, 2011. |
|
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933,
as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are
not subject to liability under those sections. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Halozyme Therapeutics, Inc., a Delaware corporation |
||||
Dated: August 5, 2011 | /s/ Gregory I. Frost, Ph.D. | |||
Gregory I. Frost, Ph.D. | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Dated: August 5, 2011 | /s/ Kurt A. Gustafson | |||
Kurt A. Gustafson | ||||
Vice President, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) |
54